ADVANCED DISPOSAL SERVICES, INC. The following discussion should be read in conjunction with the "Selected Financial Data" included in Item 6 of this Annual Report on Form 10-K, our consolidated financial statements and the related notes included elsewhere in this report. Overview We are a leading integrated provider of non-hazardous solid waste collection, transfer, recycling and disposal services, operating primarily in secondary markets or under exclusive municipal arrangements. We have a presence in 16 states across the Midwest, South and East regions ofthe United States , serving approximately 2.7 million residential customers and over 200,000 C&I customers through our extensive network of 95 collection operations, 73 transfer stations, 3 MRFs, 19 locations where we receive and bale recyclable material and 41 owned or operated active landfills. We seek to drive financial performance in markets in which we own or operate a landfill or in certain disposal-neutral markets, where the landfill is owned by our municipal customer. In markets in which we own or operate a landfill, we aim to create and maintain vertically integrated operations through which we manage a majority of our customers' waste from the point of collection through the point of disposal, a process we refer to as internalization. By internalizing a majority of the waste in these markets, we are able to deliver high quality customer service while also ensuring a stable revenue stream and maximizing profitability and cash flow from operations. In disposal-neutral markets, we focus selectively on opportunities where we can negotiate exclusive arrangements with our municipal customers, facilitating highly-efficient and profitable collection operations with lower capital requirements. Geographically, we focus our business principally in secondary, or less densely populated non-urban, markets where the presence of large national providers is generally more limited. We also compete selectively in primary, or densely populated urban, markets where we can capitalize on opportunities for vertical integration through our high-quality transfer and disposal infrastructure and where we can benefit from highly-efficient collection route density. We maintain an attractive mix of revenue from varying sources, including residential collections, C&I collections, landfill gas and special waste streams, and fees charged to third parties for disposal in our network of transfer stations and landfills, with limited exposure to commodity sales. We also benefit from a high degree of customer diversification, with no single customer accounting for more than 2% of revenue for the year endedDecember 31, 2019 . Our business mix and large and diverse customer base, combined with our long term contracts and historically high renewal rates, provide us with significant revenue and earnings stability and visibility. We intend to grow our business and expand the scope of our operations by adding new C&I customers, securing additional exclusive municipal contracts and executing value enhancing, tuck-in acquisitions, while maintaining a relentless focus on prudent cost management and pricing discipline. To this end, we are committed to investing in strategic infrastructure including the development and enhancement of our landfills, the conversion of our residential collection fleet to automated vehicles and the conversion of our collection fleet to CNG-fueled vehicles in certain markets in which we can achieve an attractive return on our investment. In addition to our focus on growing revenues and enhancing profitability, we remain financially disciplined through our careful management of returns on equity and capital deployed. Our fiscal year endsDecember 31 of each year and we refer to the fiscal year endedDecember 31, 2019 as "fiscal 2019," the fiscal year endedDecember 31, 2018 as "fiscal 2018" and the fiscal year endedDecember 31, 2017 as "fiscal 2017". How We Generate Revenue Through our subsidiaries, we generate revenue primarily by providing collection and disposal services to commercial, industrial, municipal and residential customers. Our remaining revenue is generated from recycling, fuel surcharges and environmental charges, landfill gas-to-energy operations and other ancillary revenue-generating activities. Revenues from our collection operations consist of fees we receive from municipal, subscription, residential and C&I customers and are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the recycling, transfer station or disposal facilities and our disposal costs. Our standard C&I service agreement is a five-year renewable agreement. Management believes we maintain strong relationships with our C&I customers. Our municipal customer relationships are generally supported by exclusive contracts ranging from three to ten years in initial duration, with subsequent renewal periods, and we have historically achieved a renewal rate of approximately 80% to 85% with these customers. Certain of our municipal contracts have annual price escalation clauses that are tied to changes in an underlying base index such as the consumer price index. We provide commercial front load and temporary and permanent rolloff service offerings to our customers. While the majority of our rolloff services are provided to customers under long-term service agreements, we generally do not enter into contracts with our temporary rolloff customers due to the relatively short-term nature of most C&D projects. 31
--------------------------------------------------------------------------------
Table of Contents
Our transfer stations and landfills generate revenue from disposal or tipping fees. Revenues from our landfill operations consist of fees which are generally based on the type and weight or volume of waste being disposed at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Recycling facility revenue consists of disposal or tipping fees and proceeds from the sale of recyclable commodities to third parties. The amounts charged for collection, disposal, and recycling services may include fuel charges and environmental charges. Fuel charges and environmental charges are not designed to be specific to the direct costs and expenses to service an individual customer's account, but rather are designed to address and to help recover for changes in our overall cost structure and to achieve an operating margin acceptable to us. Other revenue is comprised of ancillary revenue-generating activities, such as trucking, landfill gas-to-energy operations at MSW landfills, management of third-party owned landfills, brokerage revenue, customer service charges relating to overdue payments, compliance fees and customer administrative fees relating to customers who request paper copies of invoices rather than opting for electronic invoices.
Key Factors Affecting Our Results of Operations
Our results of operations are affected by our ability to complete tuck-in acquisitions and retain existing and win new municipal contracts at favorable margins. When we determine to pursue a new acquisition or contract, we focus particularly on operational efficiencies, including route optimization and our ability to leverage our network of landfills and transfer stations. We also seek to divest lower margin businesses that do not conform to our strategic operations model which may result in impairment charges in the period of sale but benefit us by allowing us to redeploy capital to higher margin businesses. Our results of operations are also affected by the strength of the economy and the level of C&I activity near our collection operations. Economic conditions have a direct effect on construction, demolition, new business formations and roll-off activity which impacts volumes of C&I waste. Residential waste volumes are also impacted by economic conditions, although to a lesser extent. Special waste volume, such as coal ash, energy waste, soil projects and other industrial process waste, which is driven by C&I projects and other general economic conditions, can vary substantially year to year based on economic and industrial conditions as well as the timing and size of projects in proximity to our collection or disposal operations. During periods of strong GDP growth, our business is fueled by increases in the C&D business, new business formations and new residential housing. Our ability to maintain or increase the price of our services has a significant effect on our results of operations. Our focus on secondary markets enhances our ability to maintain or increase prices. We also intend to enter into contracts or service agreements that permit rate increases and contain favorable pricing structures. We maintain a focus on prudent cost management and efficiency. We have implemented programs to increase sales productivity and pricing effectiveness, driver productivity, route optimization, maintenance efficiency and effective purchasing. Our ability to manage costs is a significant driver of our results. Fuel costs represent a significant operating expense. When available, we implement a fuel surcharge that is designed to recover a portion of our direct and indirect increases in fuel costs. Furthermore, we seek to minimize fuel costs through route optimization and the adoption of more CNG vehicles in our fleet. See "Quantitative and Qualitative Disclosures About Market Risk-Fuel Price Risk." Seasonality and Severe Weather Based on historic trends, we expect our operating results to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters, and lower in the fourth quarter than in the second and third quarters. This seasonality reflects the lower volume of solid waste generated during the late fall, winter and early spring because of decreased construction and demolition activities during the winter months in theU.S. , and lower volumes of energy waste due to reduced drilling activity during harsh weather conditions. Conversely, mild winter weather conditions may reduce demand for oil and natural gas, which may cause some of our mining and exploration customers to curtail their drilling programs, which could result in production of lower volumes of waste. 32
--------------------------------------------------------------------------------
Table of Contents
Results of Operations Refer to Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" section contained in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 for the results of operations discussion for the fiscal year endedDecember 31, 2018 compared to the fiscal year endedDecember 31, 2017 . The following table sets forth for the periods indicated our consolidated results of operations and the percentage relationship that certain items from our consolidated financial statements bear to revenue (in millions and as a percentage of our revenue). Year ended December 31, 2019 2018 2017 Service revenues$ 1,623.0 100.0 %$ 1,558.2 100.0 %$ 1,507.6 100.0 % Operating costs and expenses Operating 1,040.6 64.1 % 989.1 63.5 % 946.7 62.8 % Accretion of landfill retirement obligations 18.0 1.1 % 17.0 1.1 % 15.4 1.0 % Operating expenses 1,058.6 65.2 % 1,006.1 64.6 % 962.1 63.8 % Selling, general and administrative 207.7 12.8 % 181.5 11.6 % 169.5 11.2 % Depreciation and amortization 278.8 17.2 % 270.5 17.4 % 269.8 17.9 % Acquisition and development costs 1.1 0.1 % 0.8 0.1 % 1.3 0.1 % Loss (gain) on disposal of assets and asset impairments 1.7 0.1 % (2.5 ) (0.2 )% 11.4 0.8 % Restructuring charges 0.6 - % 0.1 - % 3.4 0.2 % Total operating costs and expenses 1,548.5 95.4 % 1,456.5 93.5 % 1,417.5 94.0 % Operating income$ 74.5 4.6 %$ 101.7 6.5 %$ 90.1 6.0 % Revenue
The following table sets forth our consolidated revenues for the periods indicated (in millions and as a percentage of our total revenue).
Year ended December 31,
2019 2018 2017
Collection $ 1,073.6 66.1 % $ 1,035.8 66.5 % $ 1,017.4 67.5 %
Disposal 569.2 35.1 % 558.8 35.9 % 542.5 36.0 %
Sale of recyclables 10.3 0.6 % 18.1 1.2 % 33.2 2.2 %
Fuel and environmental charges 116.9 7.2 % 120.7 7.7 % 103.9 6.9 %
Other 160.0 9.9 % 132.5 8.5 % 104.4 6.9 %
Intercompany eliminations (307.0 ) (18.9 )% (307.7 ) (19.8 )% (293.8 ) (19.5 )%
Total $ 1,623.0 100.0 % $ 1,558.2 100.0 % $ 1,507.6 100.0 %
33
--------------------------------------------------------------------------------
Table of Contents
The following table reflects changes in components of our revenue, as a percentage of total revenue, for fiscal 2019, 2018 and 2017:
Year Ended December 31,
2019 2018 2017
Average yield 3.3 % 3.4 % 1.2 %
Recycling (0.4 )% (0.9 )% 0.8 %
Fuel surcharge revenue (0.1 )% 1.0 % 0.4 %
Total yield 2.8 % 3.5 % 2.4 %
Organic volume - % 0.5 % 1.4 %
Acquisitions 1.4 % 1.9 % 3.9 %
Divestitures - % (0.3 )% (0.4 )%
Impact of revenue recognition standard adoption - % (2.2 )% - %
Total revenue change 4.2 % 3.4 % 7.3 %
Average yield is defined as aggregate contribution of price changes excluding
recycled commodities and fuel surcharge revenue.
Fiscal Year Ended December 31, 2019 compared to 2018
During fiscal 2019, we experienced the following changes in components of our
revenue as compared to the same period in fiscal 2018:
• Average yield increased revenue by 3.3% driven by higher price yield in our
collection and disposal operations as we continue to focus on disciplined
open market pricing and receive the positive benefit from higher CPI contract
resets in our municipal collection business;
• Recycling revenue decreased revenue by 0.4% due to a continued decrease in
recycling commodity prices;
• Fuel surcharge revenue decreased revenue by 0.1% due to a decrease in diesel
fuel prices. These charges fluctuate in response to changes in prices for
diesel fuel on which the surcharge is based and, consequently, any decrease
in fuel prices results in a decrease in our revenue. Our fuel surcharges
reset on a monthly basis, therefore a decrease in our fuel surcharge revenue
is delayed in comparison to the decrease in our fuel expense when diesel fuel
prices decrease;
• 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 consist of salaries and wages, health and welfare
benefits, incentive compensation and payroll taxes;
• Transfer and disposal costs include tipping fees paid to third-party disposal
facilities and transfer stations and transportation and subcontractor costs
(which include costs for independent haulers who transport waste from
transfer stations to our disposal facilities);
• Maintenance and repairs expenses 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. We also incur certain indirect fuel costs in our
operations;
• Franchise and host fees, which consist of municipal franchise fees, host
community fees and royalties;
• Risk management expenses, which include casualty insurance premiums and claim
payments and estimates for claims incurred but not reported;
• Other expenses, which include expenses such as facility operating costs,
equipment rent, leachate treatment and disposal and other landfill
maintenance costs;
34
--------------------------------------------------------------------------------
Table of Contents
• Accretion expense related to landfill capping, closure and post-closure is
included in "Operating Expenses" in our consolidated income statements,
however, it is excluded from the table below (refer to discussion below
"Accretion of Landfill Retirement Obligations" for a detailed discussion of
the changes in amounts).
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):
Year ended December 31,
2019 2018 2017
Labor and related benefits $ 351.7 21.7 % $ 333.5 21.4 % $ 313.2 20.8 %
Transfer and disposal costs 223.4 13.8 % 208.2 13.4 % 205.0 13.6 %
Maintenance and repairs 165.6 10.2 % 154.0 9.9 % 139.3 9.2 %
Fuel 72.8 4.5 % 81.0 5.2 % 68.3 4.5 %
Franchise and host fees 42.6 2.6 % 41.4 2.7 % 67.8 4.5 %
Risk management 36.7 2.3 % 35.6 2.3 % 33.8 2.2 %
Other 138.2 8.4 % 111.9 7.1 % 108.2 7.3 %
Subtotal 1,031.0 63.5 % 965.6 62.0 % 935.6 62.1 %
Greentree expenses, net of
insurance recoveries and
landfill remediation
expenses 9.6 0.6 % 23.5 1.5 % 11.1 0.7 %
Total operating expenses,
excluding accretion expense $ 1,040.6 64.1 % $ 989.1 63.5 % $ 946.7 62.8 %
The cost categories shown above may not be comparable to similarly titled
categories used by other companies.
Fiscal Year Ended December 31, 2019 compared to 2018
Operating expenses increased by $51.5 , or 5.2%, to $1,040.6 for fiscal 2019 from
$989.1 in fiscal 2018. The change was due to the following:
• Labor and related benefits increased by
primarily attributable to the following: higher labor costs as a result of
merit increases, acquisition activity and one additional company paid
holiday; higher temporary labor costs primarily as a result of new
municipal contract wins and a driver shortage; and an increase in
healthcare costs due to increased frequency and severity of claims
activity;
• Transfer and disposal costs increased by $15.2 , or 7.3%, to $223.4 primarily due to the following: a significant increase in processing costs
related to single stream recycling; an increase in disposal costs related
to higher disposal volumes processed through our transfer stations
particularly in our South segment; an increase in costs due to higher
reliance on sub-contractors primarily in our South segment; and an increase
in transportation costs in our Midwest segment primarily due to diverting
waste from one landfill to another;
• Maintenance and repairs expense increased by
primarily due to the following: higher labor costs as a result of merit
increases, acquisition activity and a mechanic shortage; and an increase in
the cost of maintenance and repair parts due to inflation;
• Fuel costs decreased
diesel fuel prices and further offset by an increase in the benefit
associated with CNG fuel tax credits in fiscal 2019 compared to fiscal
2018;
• Franchise and host fees increased
the acquisition of a landfill in our South segment during the fourth
quarter of 2018;
• Risk management expenses increased
a slight increase in the frequency and severity of automobile and property
liability claims;
• Other operating costs increased
an increase in the following: higher leachate and gas treatment costs at
several of our landfills partially due to weather related impacts; higher
site maintenance costs and other facility costs; an increase in vehicle
operating costs primarily due to higher reliance on rental equipment and
higher vehicle maintenance costs; a loss contract purchase accounting
liability reversal in fiscal 2018 that did not recur in fiscal 2019; and
higher material costs to support an increase in revenue related to our
asphalt operation;
• We recorded landfill remediation expenses of
2019 and 2018, respectively, as further described in Note 20 to the audited
consolidated financial statements.
35
--------------------------------------------------------------------------------
Table of Contents
Accretion of Landfill Retirement Obligations Accretion expense was$18.0 ,$17.0 and$15.4 for fiscal 2019, 2018 and 2017, respectively. Accretion expense increased by$1.0 in fiscal 2019 from fiscal 2018 which was primarily attributable to the acquisition of a landfill during the fourth quarter of fiscal 2018. Selling, General and Administrative Selling, general and administrative expenses include salaries, legal and professional fees, rebranding and integration costs and other expenses. Salaries expenses include salaries and wages, health and welfare benefits and incentive compensation for corporate and field general management, field support functions, sales force, accounting and finance, legal, management information systems, and clerical and administrative departments. Other expenses include rent and office costs, fees for professional services provided by third parties, marketing, directors' and officers' insurance, general employee relocation, travel, entertainment and bank charges, but excludes any such amounts recorded as restructuring charges. The following table provides the components of our selling, general and administrative expenses for the periods indicated (in millions and as a percentage of our revenue): Year ended December 31, 2019 2018 2017 Salaries$ 117.5 7.2 %$ 112.6 7.2 %$ 105.5 7.0 % Legal and professional 31.9 2.0 % 14.8 0.9 % 13.9 0.9 % Other 58.3 3.6 % 54.1 3.5 % 50.1 3.3 % Total selling, general and administrative expenses$ 207.7 12.8 %$ 181.5 11.6 %$ 169.5 11.2 %
Fiscal Year Ended
expense due to the guaranteed bonus program adopted as part of the merger
as further described in Note 1 to the audited consolidated financial
statements, merit increases and increased temporary labor needs partially
offset by a decrease to our vacation accrual due to a policy change, lower
stock based compensation expense and a one time multi employer pension
plan withdrawal fee in fiscal 2018 that did not recur in fiscal 2019;
• Legal and professional fees increased by$17.1 due to a legal case settlement of$9.0 as further discussed in Note 20 to the audited consolidated financial statements and related legal fees of$0.9 and an
increase in merger related expenses of
as further described in Note 1 to the audited consolidated financial
statements;
• Other selling, general and administrative expenses increased by
7.8% primarily due to an increase in computer hardware and software
maintenance costs and an increase in bad debt expense primarily associated
with our brokerage business.
Depreciation and Amortization
The following table summarizes the components of depreciation and amortization
expense by asset type (in millions and as a percentage of our revenue):
Year ended December 31,
2019 2018 2017
Depreciation, amortization
and depletion of property
and equipment $ 247.6 15.3 % $ 231.2 14.9 % $ 228.2 15.1 %
Amortization of other
intangible assets and other
assets 31.2 1.9 % 39.3 2.5 % 41.6 2.8 %
Depreciation and
amortization $ 278.8 17.2 % $ 270.5 17.4 % $ 269.8 17.9 %
36
--------------------------------------------------------------------------------
Table of Contents
Depreciation, Amortization and Depletion of Property and Equipment
Depreciation, amortization and depletion expense includes depreciation of fixed
assets over the estimated useful life of the assets using the straight-line
method, and amortization and depletion of landfill airspace assets under the
units-of-consumption method. We depreciate all fixed assets to a zero net book
value, and do not apply salvage values.
The following table summarizes depreciation, amortization and depletion of
property and equipment for the periods indicated (in millions and as a
percentage of our revenue):
Year ended December 31,
2019 2018 2017
Depreciation and
amortization of property and
equipment $ 141.7 8.7 % $ 138.4 8.9 % $ 135.6 9.0 %
Landfill depletion and
amortization 105.9 6.5 % 92.8 6.0 % 92.6 6.1 %
Depreciation, amortization
and depletion of property
and equipment $ 247.6 15.2 % $ 231.2 14.9
%
Fiscal Year Ended
or 2.4%, to
contract wins which increased our capital needs;
• Landfill depletion and amortization increased by $13.1 , or 14.1%,
primarily due to changes in our landfill estimates and acquisition
activity.
Amortization of Other Intangible Assets and Other Assets
Amortization of other intangibles and other assets was $31.2 , $39.3 and $41.6
for fiscal 2019, 2018 and 2017, respectively, or as a percentage of revenue,
1.9% to 2.8% for all years presented. The decrease in amortization expense in
fiscal 2019 compared to fiscal 2018 is attributable to certain intangible assets
becoming fully amortized partially offset by the impact of acquisition activity.
Our other intangible assets and other assets primarily relate to customer lists,
municipal and customer contracts, operating permits and non-compete agreements.
Acquisitions
We completed the acquisitions of two businesses during fiscal 2019. Consideration paid amounted to$24.9 for these acquisitions. Additionally, we made a$2.2 deferred purchase price payment during fiscal 2019 related to an acquisition completed during the fourth quarter of fiscal 2018. We completed twelve acquisitions during fiscal 2018. Consideration paid amounted to$30.1 for these acquisitions. The results of operations of each acquisition are included in our consolidated statements of operations subsequent to the closing date of each acquisition. Interest Expense The following table provides the components of interest expense for the periods indicated (in millions and as a percentage of our revenue): Year ended December
31,
2019 2018 2017
Interest expense on debt and
capital lease obligations $ 95.8 5.9 % $ 90.6 5.8 % $ 87.5 5.8 %
Accretion of original issue
discounts and loan costs 5.7 0.4 % 6.1 0.4 % 6.3 0.4 %
Less: Capitalized interest (0.6 ) - % (0.8 ) (0.1 )% (0.8 ) (0.1 )%
Total Interest Expense $ 100.9 6.3 % $ 95.9 6.1
%
Interest expense increased in fiscal 2019 from fiscal 2018 due to the impact of higher average interest rates on our variable rate debt.
37--------------------------------------------------------------------------------
Table of Contents
Other (expense) income, Net Changes in the fair value and settlements of our 2016 interest rate caps are recorded in other (expense) income, net in the audited consolidated statements of operations and amounted to expense of$0.8 and income of$5.7 for fiscal 2019 and 2018, respectively. The expense in fiscal 2019 was driven by the impact of decreasing interest rates on the 2016 interest rate caps. The income in fiscal 2018 was driven by the impact of increasing interest rates on the 2016 interest rate caps. Income from equity investee for fiscal 2019 and 2018 was$2.4 and$1.2 , respectively. During fiscal 2019, theIRS closed audits of our previously acquired Veolia subsidiaries for tax years 2004-2012 therefore we recorded a charge to other expense of$3.9 to write off an indemnification receivable that was recorded as part of the 2012 purchase accounting. Income Taxes Our benefit from income taxes was$20.4 for fiscal 2019, our expense from income taxes was$4.6 for fiscal 2018 and our benefit from income taxes was$41.2 for fiscal 2017. Our tax rate is affected by recurring items, such as differences in tax rates in state jurisdictions and the relative amount of income we earn in each jurisdiction, which we expect to be fairly consistent in the near term. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. In addition to state income taxes, the following items had the most significant impact on the difference between our statutoryU.S. federal income tax rate and our effective tax rate: Fiscal 2019 Our effective income tax rate for fiscal 2019 was a beneficial rate of 75.6%. Our rate is higher than the enacted statutory rate of 21%, primarily due to the favorable impact of the closure of theVeolia IRS audit for years 2004-2012. With the closure of the Veolia audit, we recognized$28.1 of tax benefits which were previously derecognized under ASC 740. This benefit was partially offset by the recording of valuation allowances against certain state tax NOLs, including NOLs which were newly recognized as part of the audit settlement. Fiscal 2018 Our effective income tax rate for fiscal 2018 was 32.9%. Our rate is higher than the enacted statutory rate of 21%, primarily due to the unfavorable impact of an increase to our valuation allowance for certain state tax NOLs. 38
--------------------------------------------------------------------------------
Table of Contents
Reportable Segments
Our operations are managed through three geographic regions (South, East and
Midwest) that we designate as our reportable segments. Service revenues,
operating income (loss) and depreciation and amortization for our reportable
segments for the periods indicated are shown in the following tables (in
millions):
Depreciation
Services Operating and
Revenues Income (Loss) Amortization
For the Year Ended December 31,
2019
South $ 645.6 $ 77.6 $ 93.9
East 415.0 21.6 82.4
Midwest 562.4 66.4 97.2
Corporate - (91.1 ) 5.3
$ 1,623.0 $ 74.5 $ 278.8
For the Year Ended December 31,
2018
South $ 609.2 $ 77.9 $ 85.1
East 400.5 22.5 79.8
Midwest 548.5 72.7 101.1
Corporate - (71.4 ) 4.5
$ 1,558.2 $ 101.7 $ 270.5
For the Year Ended December 31,
2017
South $ 570.5 $ 89.8 $ 85.0
East 380.2 (1.5 ) 76.8
Midwest 556.9 71.7 98.9
Corporate - (69.9 ) 9.1
$ 1,507.6 $ 90.1 $ 269.8
Comparison of Reportable Segments-Fiscal 2019 compared to Fiscal 2018
South Segment
Revenue for fiscal 2019 increased $36.4 or 6.0% from fiscal 2018. The increase
in revenue was due to the following: an increase in price yield from our
collection and disposal operations of $21.3 as we continue to focus on
disciplined open market pricing and receive the positive benefit from higher CPI
contract resets in our municipal collection business; an increase in acquisition
related revenue of $12.5 ; an increase in residential collection volumes of $4.7
due to new municipal contract wins; and an increase in MSW disposal volumes of
$3.4 . The increases were partially offset by a decrease in commercial and
rolloff collection volumes of $6.0 and a reduction in recycled commodity prices
of $1.1 .
Operating income for fiscal 2019 decreased by $0.3 or 0.4% from fiscal 2018. The
decrease was primarily due to the following: an increase in salaries and wages
of $10.2 due to higher labor costs primarily attributable to merit increases,
acquisition activity, one additional company paid holiday, higher healthcare
costs due to increased claims activity and increased temporary labor needs as a
result of new municipal contract wins and a driver shortage; an increase of $7.9
in disposal facility costs primarily due to higher leachate and gas treatment
costs partially due to weather related impacts, an increase in site maintenance
costs and an increase in other facility costs; an increase in maintenance and
repair costs of $6.5 primarily due to higher labor costs as a result of merit
increases, acquisition activity and a mechanic shortage and an increase in the
cost of maintenance and repair parts due to inflation; an increase of $5.9 in
various general and administrative expenses including higher bonus expense and
higher wages due to the merit increases; an increase in disposal and
transportation costs of of $4.8 primarily related to higher volumes processed
through our transfer stations, higher reliance on sub-contractors and an
increase in third party transportation costs; an increase in vehicle operating
costs of $1.5 primarily due to higher reliance on rental equipment and higher
vehicle maintenance costs; and an increase of $0.9 due to higher frequency and
severity of automobile and property liability claims. We also had an increase in
depreciation and amortization of $9.6 due to changes in our landfill estimates,
acquisition activity and increased disposal volumes at our landfills partially
offset by a reduction in amortization for intangible assets that became fully
39--------------------------------------------------------------------------------
Table of Contents
amortized. Additionally, we had an unfavorable impact related to gains on sales of fixed assets of$3.8 primarily due to the timing of equipment sales. The increases were largely offset by the revenue increase of$36.4 as described above, a decrease in landfill remediation expenses of$13.8 as further described in Note 20 to the audited consolidated financial statements and a decrease in fuel expense of$2.6 primarily due to a higher benefit associated with fuel tax credits in fiscal 2019 compared to fiscal 2018. East Segment Revenue for fiscal 2019 increased$14.5 , or 3.6% from fiscal 2018. The increase was primarily due to the following: an increase in disposal volumes of$14.1 ; an increase in price yield from our collection and disposal operations of$5.8 as we continue to focus on disciplined open market pricing; and an increase in revenue associated with our asphalt operations of$2.2 . The increases were partially offset by a decrease in collection volumes of$7.2 . Operating income for fiscal 2019 decreased by$0.9 for fiscal 2019 compared to fiscal 2018. The decrease in operating income was primarily due to the following: an increase in salaries and wages of$3.1 due to higher labor costs primarily attributable to merit increases, higher bonus expense, acquisition activity, one additional company paid holiday, a driver shortage and higher healthcare costs due to increased claims activity; an increase in depreciation and amortization of$2.9 due to changes in our landfill estimates and increased disposal volumes at our landfills partially offset by a reduction in amortization for intangible assets that became fully amortized; an increase in various general and administrative costs of$2.8 including higher bonus expense and higher bad debt expense primarily associated with our brokerage business; an increase in maintenance and repair costs of$2.2 primarily due to higher labor costs as a result of merit increases, acquisition activity and a mechanic shortage and an increase in the cost of maintenance and repair parts due to inflation; an increase of$2.2 in leachate and gas treatment costs partially due to weather related impacts; an increase in site maintenance costs and other facility costs of$1.7 ; a significant increase in processing costs of$1.4 related to single stream recycling; an increase in material costs of$0.9 to support an increase in revenue related to our asphalt operation; and an increase in vehicle operating costs of$0.8 primarily due to higher reliance on rental equipment and higher vehicle maintenance costs. The decrease was largely offset by the revenue increase of$14.5 described above and a decrease in fuel expense of$3.1 due to a reduction in diesel fuel prices and a higher benefit associated with fuel tax credits in fiscal 2019 compared to fiscal 2018. Midwest Segment Revenue for fiscal 2019 increased$13.9 or 2.5% from fiscal 2018. The increase was primarily due to an increase in price yield from our collection and disposal operations of$15.2 as we continue to focus on disciplined open market pricing and receive the positive benefit from higher CPI contract resets in our municipal collection business and an increase in acquisition related revenue of$8.9 . The increase was partially offset by a decrease in residential and rolloff collection volumes of$9.9 , a reduction in recycled commodity prices of$3.8 and a decrease in disposal volumes of$3.4 . Operating income for fiscal 2019 decreased$6.3 from fiscal 2018. The decrease was primarily due to the following: a significant increase in disposal costs of$6.6 primarily due to higher single stream recycling processing costs; an increase in salaries and wages of$4.8 due to higher labor costs primarily attributable to merit increases, acquisition activity, one additional company paid holiday, a driver shortage and higher healthcare costs due to increased claims activity; an increase of$3.8 due to leachate and gas treatment costs as a result of weather related impacts and mix of disposal volumes; an increase in maintenance and repair costs of$3.0 primarily due to higher labor costs as a result of merit increases, acquisition activity and a mechanic shortage and an increase in the cost of maintenance and repair parts due to inflation; an increase in various general and administrative costs of$1.5 ; a loss contract purchase accounting liability reversal of$1.4 in fiscal 2018 that did not recur in fiscal 2019; an increase in transportation costs of$1.0 primarily due to diverting waste from one landfill to another and an increase in vehicle operating costs of$0.8 primarily due to higher reliance on rental equipment and higher vehicle maintenance costs. The decrease was partially offset by the$13.9 revenue increase as described above, a$3.0 decrease in amortization expense as certain intangible assets became fully amortized and a decrease in fuel expense of$2.6 due to a reduction in diesel fuel prices and a higher benefit associated with fuel tax credits in fiscal 2019 compared to fiscal 2018. Corporate Segment Operating loss increased by$19.7 to a loss of$91.1 in fiscal 2019 primarily due to the following: a legal case settlement of$9.0 as further discussed in Note 20 to the audited consolidated financial statements and related legal fees of$0.9 ; an increase in merger related expenses of$9.4 related to our proposed merger as further described in Note 1 to the audited consolidated financial statements; and an increase in salaries and wages of$6.2 due to merit increases, higher projected bonus expense due to the guaranteed bonus program adopted as part of the merger as further described in Note 1 to the audited consolidated 40
--------------------------------------------------------------------------------
Table of Contents
financial statements and increased temporary labor needs. The increase in operating loss was partially offset by a reduction in our vacation accrual due to a policy change of$3.7 . Liquidity and Capital Resources Our primary sources of cash are cash flows from operations, bank borrowings, debt offerings and equity offerings. We intend to use excess cash on hand and cash from operating activities, together with bank borrowings, to fund purchases of equipment, working capital, acquisitions and debt prepayments. For this reason and since we efficiently manage our working capital requirements, it is common for us to have negative working capital. We believe that our excess cash, cash from operating activities and funds available under our Revolving Credit Facility will provide us with sufficient financial resources to meet our anticipated capital requirements and maturing obligations as they come due. AtDecember 31, 2019 , we had negative working capital which was driven by purchases of property and equipment and landfill construction and development as well as the use of our cash to fund scheduled debt repayments and acquisitions. AtDecember 31, 2018 , we had negative working capital which was driven by cash used to fund scheduled debt repayments, debt prepayments and acquisitions during fiscal 2018. We have more than adequate availability under our Revolving Credit Facility, which was$241.5 ,$231.7 and$257.9 atDecember 31, 2019 , 2018 and 2017, respectively, to fund short term working capital requirements.
Summary of Cash and Cash Equivalents and Debt Obligations
The table below presents a summary of our cash and cash equivalents and debt
balances as of
December 31,
2019 2018
Cash and cash equivalents $ 12.5 $ 6.8
Debt:
Current portion $ 76.1 $ 85.9
Long-term portion 1,792.1 1,817.1
Total debt $ 1,868.2 $ 1,903.0
The current portion of debt decreased primarily due to a decrease in borrowings
on the Revolving Credit Facility of $7.0 and a reduction of $2.9 related to
finance/capital leases. Long-term debt decreased due to a reduction of $13.8
related to finance/capital leases and $15.0 in principal payments made on the
Term Loan B partially offset by amortization of deferred financing fees of $5.2 .
Summary of Cash Flow Activity
The following table sets forth for the periods indicated a summary of our cash
flows (in millions):
For the Years Ended December 31,
2019 2018 2017
Net cash provided by operating activities
306.5
Net cash used in investing activities
(15.6 )
Cash Flows Provided by Operating Activities
Fiscal Year EndedDecember 31, 2019 compared to 2018 We generated$280.2 of cash flows from operating activities during fiscal 2019, compared with$308.3 during fiscal 2018. The decrease was primarily due to the following: • An increase of$0.4 in accounts payable during fiscal 2019 compared to an
increase of
during the fourth quarter of fiscal 2018 that did not recur in fiscal 2019;
41
--------------------------------------------------------------------------------
Table of Contents
• A decrease of
compared to an increase of
variance of
release of unrecognized tax benefits associated with the Veolia audit closure
which had no impact on cash provided by operating activities. The remaining
negative variance of
activities was primarily due to operating lease payments and the reduction of
various long term reserves;
• An increase in cash expenditures of
and related expenses;
• An increase of
• An increase in cash interest expense of
The decrease was partially offset by the following:
• A increase of
increase of
invoices as well as higher average balances due to price increases when
compared to fiscal 2017. Fiscal 2019 timing of quarterly invoices and price
increases were in line with fiscal 2018.
• A decrease of
an increase of
prepaid balances. The increase in fiscal 2018 was primarily due to higher
long-term insurance receivable balances.
• A decrease in cash expenditures of
waste slide and landfill remediation expenses;
• A decrease in capping, closure and post closure expenditures of
Cash flows from operating activities are used to fund capital expenditures, acquisitions, interest payments and debt. Cash Flows Used in Investing Activities We used$226.1 of cash in fiscal 2019 for investing activities, of which$203.8 was utilized to acquire property and equipment and for landfill cell construction and development and$27.1 was utilized for acquisitions. We received$4.8 in proceeds from the sale of property and equipment and insurance recoveries. We used$206.8 of cash in fiscal 2018 for investing activities, of which$188.6 was utilized to acquire property and equipment and for landfill cell construction and development and$26.3 was utilized for acquisitions. We received$8.1 in proceeds from the sale of property and equipment and businesses. A breakdown of our capital expenditures to acquire property and equipment and for landfill cell construction and development are as follows (in millions): For the Years Ended December 31, 2019 2018 2017 Infrastructure$ 22.9 $ 30.9 $ 39.1 Replacement 135.2 140.5 122.1 Growth 45.7 17.2 25.4 Total Capital Expenditures$ 203.8 $ 188.6 $ 186.6 Cash Flows Used in Financing Activities Cash flows used in financing activities in fiscal 2019 were$48.4 , as compared to$101.5 in fiscal 2018. We made payments on our Revolving Credit Facility and long-term debt obligations in the amount of$261.3 and borrowed approximately$201.0 in fiscal 2019. We received proceeds from the exercise of stock options of$11.9 net of tax related stock repurchases. Cash flows used in financing activities in fiscal 2018 were$101.5 , as compared to$15.6 in fiscal 2017. We made payments on our Revolving Credit Facility and long-term debt obligations in the amount of$240.6 and borrowed approximately$136.0 in fiscal 2018. We received proceeds from the exercise of stock options of$3.1 . 42
--------------------------------------------------------------------------------
Table of Contents
Senior Secured Credit Facilities
OnNovember 21, 2017 , we entered into Amendment No. 1 (the "Amendment") to our Credit Agreement, dated as ofOctober 9, 2012 (as amended and restated as ofNovember 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. OnNovember 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 ofOctober 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 ofDecember 31, 2019 and 2018, we had$30.0 and$37.0 in borrowings outstanding under our Revolving Credit Facility. As ofDecember 31, 2019 and 2018, we had an aggregate of approximately$28.5 and$32.3 of letters of credit outstanding under our Senior Secured Credit Facilities. As ofDecember 31, 2019 and 2018, we had remaining capacity under our Revolving Credit Facility of$241.5 and$230.7 , respectively. As ofDecember 31, 2019 , we were in 43
--------------------------------------------------------------------------------
Table of Contents
compliance with the covenants under the Senior Secured Credit Facilities. Our ability to maintain compliance with our covenants will be highly dependent on our results of operations and, to the extent necessary, our ability to implement remedial measures such as reductions in operating costs. The Revolving Credit Facility has an annual commitment fee equal to 0.50% per annum if the total net leverage ratio is greater than 4.0:1.0, or if otherwise, 0.375% per annum. The amount of commitment fees for 2019, 2018 and 2017 were not significant. We are subject to a maximum total net leverage ratio of 6.8:1.0. The actual total net leverage ratio atDecember 31, 2019 and 2018 was 4.3:1.0 and 4.4:1.0, respectively. 5.625% Senior Notes due 2024 OnNovember 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 datedNovember 10, 2016 (the "Indenture") among the Company, the guarantors party thereto, andWells Fargo Bank, National Association , as trustee (the "Trustee"). The Notes will bear interest at the rate of 5.625% per year. Interest on the Notes is payable onMay 15 andNovember 15 of each year, beginning onMay 15, 2017 . The Notes will mature onNovember 15, 2024 . At any time on or afterNovember 15, 2019 , we may redeem the Notes, in whole or in part, at the applicable redemption prices set forth in the Indenture, plus accrued interest.
The redemption prices set forth in the indenture for the twelve month periods
beginning on
Percentage
2019 104.219 %
2020 102.813 %
2021 101.406 %
2022 and thereafter 100.000 %
The Indenture contains covenants that, among other things, restrict our ability
to incur additional debt or issue certain preferred stock; pay dividends
(subject to certain exceptions) or make certain redemptions, repurchases or
distributions or make certain other restricted payments or investments; create
liens; enter into transactions with affiliates; merge, consolidate or sell,
transfer or otherwise dispose of all or substantially all of our assets;
transfer and sell assets; and create restrictions on dividends or other payments
by our restricted subsidiaries. Certain covenants will cease to apply to the
Notes for so long as the Notes have investment grade ratings. The Notes are
unconditionally guaranteed, jointly and severally, on a senior unsecured basis
by all of our current and future U.S. subsidiaries that guarantee the Amended
and Restated Credit Agreement. As of December 31, 2019 , we were in compliance
with the covenants under the Indenture.
Off-Balance Sheet Arrangements
As of December 31, 2019 , we had no off-balance sheet debt or similar
obligations, other than financial assurance instruments which are not classified
as debt. We do not guarantee any third-party debt.
Changes made by the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act, signed into law in fiscal 2017, makes significant
changes to the U.S. federal income tax rules. These changes include reducing the
U.S. corporate income tax rate from 35% to 21%, allowing an immediate expensing
of certain tangible assets placed in service before 2023, limiting the deduction
for net interest expense, limiting the use of newly-generated net operating
losses to offset 80% of future taxable income and substantial changes to the
U.S. taxation of foreign operations.
Financial Assurance
We must provide financial assurance to governmental agencies and a variety of
other entities under applicable environmental regulations relating to our
landfill operations for capping, closure and post-closure costs, and related to
our performance under certain collection, landfill and transfer station
contracts. We satisfy these financial assurance requirements by providing surety
44--------------------------------------------------------------------------------
Table of Contents
bonds, letters of credit or trust deposits, which are included in restricted cash and marketable securities. The amount of the financial assurance requirements for capping, closure and post-closure costs is determined by applicable state environmental regulations. The financial assurance requirements for capping, closure and post-closure costs may be associated with a portion of the landfill or the entire landfill. Generally, states require a third-party engineering specialist to determine the estimated capping, closure and post-closure costs that are used to determine the required amount of financial assurance for a landfill. The amount of financial assurance required can, and generally will, differ from the obligation determined and recorded under GAAP. The amount of the financial assurance requirements related to contract performance varies by contract. Additionally, we must provide financial assurance for our insurance program and collateral for certain performance obligations. We do not expect a material increase in financial assurance requirements in the foreseeable future, although the mix of financial assurance instruments may change. These financial instruments are issued in the normal course of business and are not considered company indebtedness. Because we currently have no liability for these financial assurance instruments, they are not reflected in our consolidated balance sheets. However, we record capping, closure and post-closure liabilities and self-insurance liabilities as they are incurred. The underlying obligations of the financial assurance instruments, in excess of those already reflected in our consolidated balance sheets, would be recorded if it is probable that we would be unable to fulfill our related obligations. We do not expect this to occur. Contractual Commitments We have various contractual obligations in the normal course of our operations and financing activities. The following table summarizes our contractual cash obligations as ofDecember 31, 2019 (in millions): Final Capping, Unconditional Closure and Debt Scheduled Interest Purchase Operating Post-Closure Payments Payment
Obligations Commitments
Leases (a) (b) (c) (d) (e) Total
2020 $ 5.6 $ 28.1 $ 46.1 $ 80.2 $ 41.3 $ 201.3
2021 5.0 28.4 63.1 78.2 13.7 188.4
2022 3.3 26.3 21.7 75.6 11.8 138.7
2023 2.5 20.3 1,329.9 66.5 10.0 1,429.2
2024 2.0 27.4 426.8 12.1 5.1 473.4
Thereafter 21.5 343.2 0.6 0.2 53.4 418.9
Total $ 39.9 $ 473.7 $ 1,888.2 $ 312.8 $ 135.3 $ 2,849.9 (a) The estimated remaining final capping, closure and post-closure
expenditures presented above are not inflated or discounted and reflect the
estimated future payments for liabilities incurred and recorded as of
December 31, 2019 .
(b) Debt payments include principal payments on debt and finance lease
obligations.
(c) Our recorded debt obligations include non-cash adjustments associated withdiscounts and deferred loan costs. These amounts have been excluded as they
will not impact our liquidity in future periods.
(d) Interest on variable rate debt was calculated at 3.9%, which is the 1 week
LIBOR rate plus applicable margin in effect as of December 31, 2019 .
(e) Unconditional purchase commitments consist of disposal related agreements
that include fixed or minimum royalty payments, disposal related host
agreements, capital expenditure commitments, payments for premiums on
interest rate caps, waste relocation obligations and landfill remediation
expenses.
45
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates General The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe the following accounting policies and estimates are the most critical and could have the most impact on our results of operations. For a discussion of these and other accounting policies, see the notes to the consolidated financial statements included elsewhere in this Form 10-K. We have noted examples of the residual accounting and business risks inherent in the accounting for these areas. Residual accounting and business risks are defined as the inherent risks that we face after the application of our policies and processes that are generally outside of our control or ability to forecast. Revenue Recognition Revenues are generally recognized as the services are provided. Revenue is recognized as waste is collected, as tons are received at the landfill or transfer stations, as recycled commodities are delivered to a customer or as services are rendered to customers. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. Recycling rebates paid to customers, franchise fees paid to customers and state landfill taxes are excluded from revenues. No single customer individually accounted for more than 2% of our consolidated revenue for the year endingDecember 31, 2019 . See Note 3, Revenue Recognition, to the audited consolidated financial statements for further details. Landfill Accounting Costs Basis of Landfill Assets Landfills are typically developed in a series of cells, each of which is constructed, filled and capped in sequence over the operating life of the landfill. When the final cell is filled and the operating life of the landfill is completed, the cell must be capped and then closed and post-closure care and monitoring activities begin. Capitalized landfill costs include expenditures for land (which includes the land of the landfill footprint and landfill buffer property and setbacks) and related airspace associated with the permitting, development and construction of new landfills, expansions at existing landfills, landfill gas systems and landfill cell development. Landfill permitting, development and construction costs represent direct costs related to these activities, including land acquisition, engineering, legal and construction. These costs are deferred until all permits are obtained and operations have commenced at which point they are capitalized and amortized. If necessary permits are not obtained, costs are charged to operations. The cost basis of our landfill assets also includes asset retirement costs, which represent estimates of future costs associated with landfill final capping, closure and post-closure activities. Final Capping, Closure and Post-Closure Costs The following is a description of our asset retirement activities and related accounting: Final Capping Includes installing flexible membrane and geosynthetic clay liners, drainage and compact soil layers, and topsoil, and is constructed over an area of the landfill where total airspace capacity has been consumed and waste disposal operations have ceased. These final capping activities occur in phases as needed throughout the operating life of a landfill as specific areas are filled to capacity and the final elevation for that specific area is reached in accordance with the provisions of the operating permit. Final capping asset retirement obligations are recorded on a units-of-consumption basis as airspace is consumed related to the specific final capping event with a corresponding increase in the landfill asset. Each final capping event is accounted for as a discrete obligation and recorded as an asset and a liability based on estimates of the discounted cash flows and capacity associated with each final capping event. Closure and post-closure These activities involve methane gas control, leachate management and groundwater monitoring, surface water monitoring and control, and other operational and maintenance activities that occur after the site ceases to accept waste. The post-closure period generally runs for 30 years after final site closure for landfills. Landfill costs related to closure and post-closure are recorded as 46
--------------------------------------------------------------------------------
Table of Contents
an asset retirement obligation as airspace is consumed over the life of the landfill with a corresponding increase in the landfill asset. Obligations are recorded over the life of the landfill based on estimates of the discounted cash flows associated with performing closing and post-closure activities. Annually we update our estimates for these obligations considering the respective State regulatory requirements, input from our internal engineers, operations, and accounting personnel and external consulting engineers. The closure and post-closure requirements are established under the standards of theEPA's Subtitle D regulations as implemented and applied on a state-by-state basis. These estimates involve projections of costs that will be incurred as portions of the landfill are closed and during the post-closure monitoring period. Capping, closure and post-closure costs are estimated assuming such costs would be incurred by a third party contractor in present day dollars and are inflated by 2.5% (an estimate based on the 25-year average change in the historical Consumer Price Index from 1994 to 2019) to the time periods within which it is estimated the capping, closure and post-closure costs will be expended. We discount these costs to present value using the credit-adjusted, risk-free rate effective at the time an obligation is incurred, consistent with the expected cash flow approach. Any change that results in an upward revision to the estimated cash flows are treated as a new liability and discounted at the current rate while downward revisions are discounted at the historical weighted-average rate of the recorded obligation. As a result, the credit-adjusted, risk-free discount rate used to calculate the present value of an obligation is specific to each individual asset retirement obligation. The range of rates utilized within the calculation of our asset retirement obligations atDecember 31, 2019 is between 4.2% and 7.7%. We record the estimated fair value of the final capping, closure and post-closure liabilities for our landfills based on the capacity consumed in the current period. The fair value of the final capping obligations is developed based on our estimates of the airspace consumed to date for each final capping event and the expected timing of each final capping event. The fair value of closure and post-closure obligations is developed based on our estimates of the airspace consumed to date for the entire landfill and the expected timing of each closure and post-closure activity. Because these obligations are measured at estimated fair value using present value techniques, changes in the estimated cost or timing of future final capping, closure and post-closure activities could result in a material change in these liabilities, related assets and results of operations. We assess the appropriateness of the estimates used to develop our recorded balances annually, or more often if significant facts change. Changes in inflation rates or the estimated costs, timing or extent of future final capping, closure and post-closure activities typically result in both (i) a current adjustment to the recorded liability and landfill asset; and (ii) a change in liability and asset amounts to be recorded prospectively over either the remaining capacity of the related discrete final capping event or the remaining permitted and expansion airspace (as defined below) of the landfill. Any changes related to the capitalized and future cost of the landfill assets are then recognized in accordance with our amortization policy, which would generally result in amortization expense being recognized prospectively over the remaining capacity of the final capping event or the remaining permitted and expansion airspace of the landfill, as appropriate. Changes in such estimates associated with airspace that has been fully utilized result in an adjustment to the recorded liability and landfill assets with an immediate corresponding adjustment to landfill airspace amortization expense. Interest accretion on final capping, closure and post-closure liabilities is recorded using the effective interest method and is recorded in operating expenses in the consolidated statements of operations. Amortization of Landfill Assets The amortizable basis of a landfill includes (i) amounts previously expended and capitalized; (ii) capitalized and projected landfill final capping, closure and post-closure costs; (iii) projections of future acquisition and development costs required to develop the landfill site to its remaining permitted and expansion capacity; and (iv) land underlying both the footprint of the landfill and the surrounding required setbacks and buffer land. Amortization is recorded on a units-of-consumption basis, applying expense at a rate per ton. The rate per ton is calculated by dividing each component of the amortizable basis of a landfill by the number of tons needed to fill the corresponding asset's airspace. For landfills that we do not own, but operate through a management operating agreement, the rate per ton is calculated based on expected capacity to be utilized over the lesser of the contractual term of the underlying agreement or the life of the landfill. Landfill site costs are depleted to zero upon final closure of a landfill. We develop our estimates of the obligations using input from our operations personnel, engineers and accountants and the obligations are based upon interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value. The estimate of fair value is based 47
--------------------------------------------------------------------------------
Table of Contents
upon present value techniques using historical experience and, where available, quoted or actual market prices paid for similar work. The determination of airspace usage and remaining airspace is an essential component in the calculation of landfill asset depletion. This estimation is performed by conducting periodic topographic surveys, using aerial survey techniques, of our landfill facilities to determine remaining airspace in each landfill. The surveys are reviewed by our external consulting engineers, internal operating staff, management, and financial and accounting staff. Remaining airspace includes additional "deemed permitted" or unpermitted expansion airspace if the following criteria are met:
(1) The company must either own the property for the expansion or have a legal
right to use or obtain property to be included in the expansion plan;
(2) Conceptual design of the expansion must have been completed;
(3) Personnel are actively working to obtain land use and local and state
approvals for an expansion of an existing landfill and the application for
expansion must reasonably be expected to be received within the normal
application and processing time periods for approvals in the jurisdiction
in which the landfill is located;
(4) There are no known significant technical, community, business, or political
restrictions or similar issues that would likely impair the success of the
expansion; and
(5) Financial analysis has been completed and the results demonstrate that the
expansion has a positive financial and operational impact.
Senior management must have reviewed and approved all of the above. Of our 41 active landfills, 16 included deemed permitted airspace atDecember 31, 2019 . Upon successfully meeting the preceding criteria, the costs associated with developing, constructing, closing and monitoring the total additional future capacity are considered in the calculation of the amortization and closure and post-closure rates. Once expansion airspace meets these criteria for inclusion in our calculation of total available disposal capacity, management continuously monitors each site's progress in obtaining the expansion permit. If at any point it is determined that an expansion area no longer meets the required criteria, the probable expansion airspace is removed from the landfill's total available capacity, and the rates used at the landfill to amortize costs to acquire, construct, close and monitor the site during the post-closure period are adjusted prospectively. In addition, any amounts related to the probable expansion are charged to expense in the period in which it is determined that the criteria are no longer met. Once the remaining permitted and expansion airspace is determined in cubic yards, an airspace utilization factor ("AUF") is established to calculate the remaining permitted and expansion capacity in tons. The AUF is established using the measured density obtained from previous annual surveys and is then adjusted to account for future settlement. The amount of settlement that is forecasted will take into account several site-specific factors including: current and projected mix of waste type, initial and projected waste density, estimated number of years of life remaining, depth of underlying waste, anticipated access to moisture through precipitation or recirculation of landfill leachate and operating practices. In addition, the initial selection of the AUF is subject to a subsequent multi-level review by our engineering group, and the AUF used is reviewed on a periodic basis and revised as necessary. Our historical experience generally indicates that the impact of settlement at a landfill is greater later in the life of the landfill when the waste placed at the landfill approaches its highest point under the permit requirements. After determining the costs and remaining permitted and expansion capacity at each of our landfills, we determine the per ton rates that will be expensed as waste is received and deposited at the landfill by dividing the costs by the corresponding number of tons. We calculate per ton amortization rates for each landfill for assets associated with each final capping event, for assets related to closure and post-closure activities and for all other costs capitalized or to be capitalized in the future. These rates per ton are updated annually, or more often, as significant facts change. It is possible that our estimates or assumptions could ultimately be significantly different from actual results. In some cases we may be unsuccessful in obtaining an expansion permit or we may determine that an expansion permit that we previously thought was probable has become unlikely. To the extent that such estimates, or the assumptions used to make those estimates, prove to be significantly different than actual results, or the belief that we will receive an expansion permit changes adversely in a significant manner, the costs of the landfill, including the costs incurred in the pursuit of the expansion, may be subject to impairment testing and lower profitability may be experienced due to higher amortization rates, higher capping, closure and post-closure rates, and higher expenses or asset impairments related to the removal of previously included expansion airspace. 48
--------------------------------------------------------------------------------
Table of Contents
The assessment of impairment indicators and the recoverability of our capitalized costs associated with landfills and related expansion projects require significant judgment due to the unique nature of the waste industry, the highly regulated permitting process and the estimates involved. During the review of a landfill expansion application, a regulator may initially deny the expansion application although the permit is ultimately granted. In addition, management may periodically divert waste from one landfill to another to conserve remaining permitted landfill airspace, or a landfill may be required to cease accepting waste, prior to receipt of the expansion permit. However, such events occur in the ordinary course of business in the waste industry and do not necessarily result in an impairment of our landfill assets because, after consideration of all facts, such events may not affect our belief that we will ultimately obtain the expansion permit. As a result, our tests of recoverability, which generally make use of a cash flow estimation approach, may indicate that no impairment loss should be recorded. No landfill impairments were recorded for fiscal 2019, 2018 and 2017. Landfill Remediation Liabilities We are subject to various laws and regulations relating to our landfill operations. Our landfill remediation liabilities primarily include costs associated with remediating surface anomalies, groundwater, surface water and soil contamination, as well as controlling and containing methane gas migration. To estimate our ultimate liability at these sites, we evaluate several factors, including the required remediation efforts and related costs, required remediation methods and timing of expenditures. We accrue for costs associated with landfill remediation obligations when such costs are probable and reasonably estimable in accordance with accounting for loss contingencies. We periodically review the status of all environmental matters and update our estimates of the likelihood of and future expenditures for remediation as necessary. Changes in the liabilities resulting from these reviews are recognized currently in earnings in the period in which the adjustment is known. Self-Insurance Reserves and Related Costs Our insurance programs for workers' compensation, general liability, vehicle liability and employee-related health care benefits are effectively self-insured. Accruals for self-insurance reserves are based on claims filed and estimates of claims incurred but not reported. We maintain self-insured retentions and/or high deductibles for commercial general liability, vehicle liability and workers' compensation coverage at$0.5 ,$1.0 and$0.8 , respectively as ofDecember 31, 2019 . Accruals for self-insurance reserves are based on claims filed and estimate of claims incurred but not reported and are recorded gross of expected recoveries. The accruals for these liabilities could be revised if future occurrences of loss development differ significantly from our assumptions. Loss Contingencies We are subject to various legal proceedings, claims and regulatory matters, the outcomes of which are subject to significant uncertainty. We determine whether to disclose or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable, and whether it can be reasonably estimated. We analyze our litigation and regulatory matters based on available information to assess the potential liabilities. Management's assessment is developed based on an analysis of possible outcomes under various strategies. We record and disclose loss contingencies pursuant to the applicable accounting guidance for such matters. We record losses related to contingencies in cost of operations or selling, general and administrative expenses, depending on the nature of the underlying transaction leading to the loss contingency. Asset Impairment We monitor the carrying value of our long-lived assets for potential impairment and test the recoverability of such assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. These events or changes in circumstances, including management decisions pertaining to such assets, are referred to as impairment indicators. Typical indicators that an asset may be impaired include (i) a significant adverse change in legal factors in the business climate, (ii) an adverse action or assessment by a regulator, and (iii) a significant adverse change in the extent or manner in which a long-lived asset is being utilized or in its physical condition. If an impairment indicator occurs, we perform a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the asset group for which we can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset or asset group to its carrying value. Fair value is generally determined by considering: (i) an internally developed discounted projected cash flow 49
--------------------------------------------------------------------------------
Table of Contents
analysis of the asset or asset group; (ii) third-party valuations; and/or (iii) information available regarding the current market for similar assets. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value exceeds the fair value of the asset.Goodwill Goodwill is the excess of the purchase price over the fair value of the net identifiable assets of acquired businesses. We do not amortize goodwill. We assess whether a goodwill impairment exists using both qualitative and quantitative assessments. Our reporting units are equivalent to our operating segments and when an individual business within an integrated operating segment is divested, goodwill is allocated to that business based on its fair value relative to the fair value of its operating segment. During fiscal 2017,$0.9 of goodwill was disposed of related to the divestiture of ourCharlotte, North Carolina operations in the East segment. Our qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, we will not perform a quantitative assessment. Regardless of the results of our qualitative assessments, we perform a quantitative assessment at least every three years. Our last quantitative assessment was completed as ofOctober 1, 2018 . When we perform a quantitative assessment, we determine whether goodwill is impaired at the reporting unit level. We compare the fair value with its carrying amount to determine if there is an impairment of goodwill. Fair value is estimated using the combination of a market approach and an income approach based on forecasted cash flows. Fair value computed via these methods are arrived at using a number of factors, including projected future operating results, economic projections, anticipated future cash flows and comparable marketplace data. There are inherent uncertainties related to these factors and to our judgment in applying them to this analysis. However, we believe that this method provides a reasonable approach to estimating the fair value of its reporting units. During the fourth quarter of 2018, we voluntarily changed the date of our annual goodwill impairment testing fromDecember 31 , the last day of the fiscal year, toOctober 1 , the first day of the fourth quarter. This change provides us with additional time to complete our annual goodwill impairment testing in advance of our year-end reporting and results in better alignment with our strategic planning and forecasting process. The voluntary change in accounting principle related to the annual testing date did not delay, accelerate or cause an impairment charge. This change was applied retrospectively, as it would have required application of significant estimates and assumptions with the use of hindsight. Accordingly, the change was applied prospectively. The Company performed a qualitative assessment in fiscal 2019. The impairment test as ofOctober 1, 2019 determined that no events or circumstances existed that indicated it was more likely than not that the fair value of any reporting unit was less than its carrying amount. If we do not achieve our anticipated disposal volumes in future periods, our collection or disposal rates decline, our costs or capital expenditures exceed our forecasts, costs of capital increase, or we do not receive landfill expansions, the estimated fair value could decrease and potentially result in an impairment charge. We recorded no goodwill impairment charges for fiscal 2019, 2018 and 2017 in connection with our assessments. Income Taxes Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax basis of assets (other than non-deductible goodwill) and liabilities. Deferred tax assets and liabilities are measured using the income tax rate in effect during the year in which the differences are expected to reverse. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making this determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In the event we determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we will make an adjustment to the valuation allowance which would reduce our provision for income taxes. Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management's best assessment of estimated future taxes to be paid. We are subject toU.S. federal income taxes and numerous state jurisdictions. Significant judgments and estimates are required in determining the combined income tax expense. 50
--------------------------------------------------------------------------------
Table of Contents
Regarding the accounting for uncertainty in income taxes recognized in the financial statements, we record a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. We recognize interest and penalties related to uncertain tax positions within the provision for income taxes in our consolidated statements of operations. Accrued interest and penalties are included within other accrued liabilities and deferred income taxes and other long-term tax liabilities in our consolidated balance sheets. Refer to Note 18, Income Taxes, for details regarding adjustments to our valuation allowance. InJanuary 2018 , the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provision of the Tax Cuts and Jobs Act. The GILTI provision imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicated that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period costs were both acceptable methods subject to an accounting policy election. Effective the first quarter of 2018, we elected to treat any potential GILTI inclusions as a period cost as we are not projecting any material impact from GILTI inclusions and any deferred taxes related to any inclusion are expected to be immaterial. Recently Issued and Proposed Accounting Standards
For a description of new accounting standards that may affect us, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements in Item 8 of this Form 10-K.
51--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
