ADVANCED DISPOSAL SERVICES, INC. You should read the following discussion in conjunction with the unaudited condensed consolidated financial statements and notes thereto included under Item 1. In addition, you should refer to our audited consolidated financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in our 2019 Annual Report on Form 10-K. All dollar amounts are presented in millions, unless otherwise stated. Overview We are a leading integrated provider of non-hazardous solid waste collection, transfer, recycling and disposal services, operating primarily in secondary markets or under exclusive arrangements. We have a presence in 16 states across the South, East and Midwest regions ofthe United States , serving approximately 2.7 million residential and over 200,000 commercial and industrial (C&I) customers through our extensive network of 95 collection operations, 73 transfer stations, 3 owned or operated material recycling facilities, 19 locations where we receive and bale recyclable material and 41 owned or operated landfills. We have 18 active landfill gas operations at solid waste landfills where landfill gas is captured and utilized for its renewable energy value rather than flared. We also have post-closure responsibility for seven closed landfills. We seek to drive financial performance in markets in which we own or operate a disposal facility or in certain disposal-neutral markets, where the disposal facility is owned by our municipal customer. In markets in which we own or operate a disposal facility, we aim to create and maintain vertically integrated operations through which we manage a majority of our customers' waste from the point of collection through the point of disposal, a process we refer to as internalization. By internalizing a majority of the waste in these markets, we are able to deliver high quality customer service while also ensuring a stable revenue stream and maximizing profitability and cash flow from operations. In disposal-neutral markets, we focus selectively on opportunities where we can negotiate exclusive arrangements with our municipal customers, facilitating highly efficient and profitable collection operations with lower capital requirements. Geographically, we focus our business principally in secondary, or less densely populated non-urban, markets where the presence of large national providers is generally more limited. We also compete selectively in primary, or densely populated urban, markets where we can capitalize on opportunities for vertical integration through our high-quality transfer and disposal infrastructure and where we can benefit from highly efficient collection route density. We maintain an attractive mix of revenue from varying sources, including residential collections, C&I collections, landfill gas and special waste streams, and fees charged to third parties for disposal in our network of transfer stations and landfills. Merger OnApril 14, 2019 , we entered into an Agreement and Plan of Merger with Waste Management, Inc., aDelaware corporation ("Parent"), andEverglades Merger Sub Inc. , aDelaware corporation and a wholly-owned indirect subsidiary of Parent. OnJune 24, 2020 , the Company entered into Amendment No. 1 to the previously announced Agreement and Plan of Merger, dated as ofApril 14, 2019 . Further details can be found in the Company's Form 8-K related to this matter, filed with theSecurities and Exchange Commission onApril 15, 2019 , in the Company's Form 8-K, filed with theSecurities and Exchange Commission onJune 24, 2020 and the Company's definitive proxy statement, filed with theSecurities and Exchange Commission onJuly 24, 2020 . COVID-19 We are experiencing volume declines in all of our lines of business except residential due to deteriorating macroeconomic conditions and stay-at-home orders resulting from the COVID-19 pandemic. We are taking a number of steps to respond to this challenge including the following:
• Reducing or eliminating face-to-face interactions with our 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
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• Maintaining higher target cash balances and as of
access
facility supported by a diverse group of lenders.
Results of Operations
The following table sets forth for the periods indicated our consolidated
results of operations and the percentage relationship that certain items from
our condensed consolidated financial statements bear to revenue (in millions and
as a percentage of our revenue).
Three Months Ended June 30 ,
Six Months Ended
2020 2019 2020 2019
Service revenues
100.0 %$ 803.1 100.0 % Operating costs and expenses Operating 237.9 62.6 % 272.8 65.1 % 490.8 64.0 % 517.9 64.5 % Accretion of landfill retirement obligations 4.4 1.1 % 4.4 1.0 % 8.9 1.1 % 8.7 1.1 % Operating expenses 242.3 63.7 % 277.2 66.1 % 499.7 65.1 % 526.6 65.6 % Selling, general and administrative 45.7 12.0 % 62.2 14.8 % 96.7 12.6 % 112.0 13.9 % Depreciation and amortization 64.1 16.9 % 70.3 16.8 % 128.7 16.8 % 136.2 17.0 % Acquisition and development costs - - % 0.2 0.1 % - - % 1.0 0.1 % Loss on disposal of assets and asset impairments 0.5 0.1 % 0.5 0.1 % 0.6 - % 0.7 0.1 % Total operating costs and expenses 352.6 92.7 % 410.4 97.9 % 725.7 94.6 % 776.5 96.7 % Operating income$ 27.7 7.3 %$ 8.7 2.1 %$ 41.3 5.4 %$ 26.6 3.3 % Revenue Through our subsidiaries, we generate revenue primarily by providing collection and disposal services to commercial, industrial, municipal and residential customers. Our remaining revenue is generated from recycling, fuel and environmental charges, landfill gas-to-energy operations and other ancillary revenue-generating activities. Revenues from our collection operations consist of fees we receive from municipal, subscription, residential and C&I customers and are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the recycling, transfer station or disposal facilities and our disposal costs. Standard C&I service agreements are typically three to five years, and we have historically maintained strong relationships with our C&I customers. Our municipal customer relationships are generally supported by exclusive contracts ranging from three to ten years in initial duration with subsequent renewal periods. Certain municipal contracts have annual price escalation clauses that are tied to changes in an underlying base index such as the consumer price index (CPI). We provide commercial front load and temporary and permanent rolloff service offerings to our commercial customers. While the majority of our rolloff services are provided to customers under long-term service agreements, we generally do not enter into written contracts with our temporary rolloff customers due to the relatively short-term nature of most construction and demolition (C&D) projects. Our transfer stations and landfills generate revenue from disposal or tipping fees. Revenues from our landfill operations consist of fees which are generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Recycling revenue consists of disposal or tipping fees and proceeds from the sale of recyclable commodities to third parties. The amounts charged for collection, disposal and recycling services may include fuel charges and environmental charges. Fuel charges and environmental charges are not designed to be specific to the direct costs and expenses to service an individual customer's account, but rather are designed to address and to help recover changes in our overall cost structure and to achieve an operating margin acceptable to us. 22
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Other revenue is comprised of ancillary revenue-generating activities, such as
trucking, landfill gas-to-energy operations at municipal solid waste (MSW)
landfills, management of third-party owned landfills, customer service charges
relating to overdue payments, customer administrative charges relating to
customers who request paper copies of invoices rather than opting for electronic
invoices and compliance and business impact charges.
The following table sets forth our consolidated revenues by line of business for
the periods indicated (in millions and as a percentage of total service
revenues).
Three Months Ended June 30 ,
Six Months Ended
2020 2019 2020 2019
Collection $ 259.9 68.3 % $ 279.4 66.7 % $ 528.7 68.9 % $ 547.6 68.2 %
Disposal 129.0 33.9 % 152.5 36.4 % 252.1 32.9 % 279.6 34.8 %
Sale of recyclables 3.8 1.0 % 2.7 0.6 % 6.6 0.9 % 6.3 0.8 %
Fuel and
environmental charges 24.2 6.4 % 30.3 7.2 % 51.7 6.7 % 59.2 7.4 %
Other revenue 35.7 9.4 % 34.6 8.3 % 71.2 9.3 % 62.0 7.7 %
Intercompany
eliminations (72.3 ) (19.0 )% (80.4 ) (19.2 )% (143.3 ) (18.7 )% (151.6 ) (18.9 )%
Total service
revenues $ 380.3 100.0 % $ 419.1 100.0 % $ 767.0 100.0 % $ 803.1 100.0 %
The following table reflects changes in components of our revenue, as a
percentage of total revenue, for the three and six months ended June 30, 2020
and 2019:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Average yield 3.8 % 3.2 % 3.7 % 3.6 %
Recycling 0.2 % (0.2 )% - % (0.2 )%
Fuel surcharge revenue (1.0 )% - % (0.6 )% 0.2 %
Total yield 3.0 % 3.0 % 3.1 % 3.6 %
Organic volume (12.2 )% 0.8 % (7.8 )% 0.2 %
Acquisitions - % 1.5 % 0.2 % 1.5 %
Total revenue growth (9.2 )% 5.3 % (4.5 )% 5.3 %
Average yield is defined as aggregate contribution of price changes excluding
recycled commodities and fuel surcharge revenue.
During the three months ended June 30, 2020 , we experienced the following
changes in components of our revenue as compared to the same period in fiscal
2019:
• Average yield increased revenue by 3.8% driven by higher open market price
yield as we continue to focus on disciplined pricing and higher price yield
in our municipal residential collection business due to the positive impact
of higher CPI contract resets;
• Recycling revenue increased revenue by 0.2% due to a moderate increase in
recycling commodity prices;
• Fuel surcharge revenue decreased revenue by 1.0% due to a decrease in diesel
fuel prices. These charges fluctuate in response to changes in prices for
diesel fuel on which the surcharge is based and, consequently, any decrease
in fuel prices results in a decrease in our revenue. Our fuel surcharges
reset on a monthly basis therefore a decrease in our fuel surcharge revenue
is delayed in comparison to the decrease in our fuel expense when diesel fuel
prices decrease;
• Organic volume decreased revenue by 12.2% or
lower revenue of
of
cycling of strong prior year special waste and construction and demolition
volumes; and lower commercial and rolloff collection volumes of
the loss of certain contracts and lower special waste volume in the South
region. The decrease was partially offset by higher residential collection
volume of $2.0 .
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During the six months ended
yield as we continue to focus on disciplined pricing and higher price yield
in our municipal residential collection business due to the positive impact
of higher CPI contract resets;
• Fuel surcharge revenue decreased revenue by 0.6% due to a decrease in diesel
fuel prices. These charges fluctuate in response to changes in prices for
diesel fuel on which the surcharge is based and, consequently, any decrease
in fuel prices results in a decrease in our revenue. Our fuel surcharges
reset on a monthly basis therefore a decrease in our fuel surcharge revenue
is delayed in comparison to the decrease in our fuel expense when diesel fuel
prices decrease;
• Organic volume decreased revenue by 7.8% or
revenue of
cycling of strong prior year special waste and construction and demolition
volumes; lower commercial and rolloff collection volumes of
loss of certain contracts and lower special waste volume in the South region.
The decrease was partially offset by higher residential collection volume of
six months ended
2019;
• Acquisitions increased revenue by 0.2% due to the completion of acquisitions
during the six months ended
integration strategy.
Operating Expenses
Our operating expenses include the following:
• Labor and related benefits, which consist of salaries and wages, health and
welfare benefits, incentive compensation and payroll taxes;
• Transfer and disposal costs which include tipping fees paid to third-party
disposal facilities and transfer stations as well as transportation and
subcontractor costs (which include costs for independent haulers who transport
waste from transfer stations to our disposal facilities and costs for local
operators who provide waste handling services associated with markets outside
our standard operating areas);
• Maintenance and repairs expenses which include labor, maintenance and repairs
to our vehicles, equipment and containers;
• Fuel costs which include the direct cost of fuel used by our vehicles, net of
fuel tax credits;
• Franchise and host fees which consist of municipal franchise fees not paid to
customers, host community fees and royalties;
• Risk management expenses which include casualty insurance premiums, claims
payments, estimates for claims incurred but not reported and casualty losses;
• Other expenses which include expenses such as facility operating costs,
equipment rent, leachate and sulfate treatment and disposal and other landfill
maintenance costs;
• Accretion expense related to landfill capping, closure and post-closure is
included in operating expenses in our condensed consolidated statement of
operations, but it is excluded from the table below (refer to "Accretion of
Landfill Retirement Obligations" below for a detailed discussion of the
changes in amounts).
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The following table summarizes the major components of our operating expenses,
excluding accretion expense on our landfill retirement obligations (in millions
and as a percentage of our revenue):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Labor and related benefits$ 83.6 22.0 %$ 88.2 21.0 %$ 173.7 22.6 %$ 173.9 21.7 % Transfer and disposal costs 49.6 13.0 % 57.7 13.8 % 102.0 13.3 % 107.9 13.4 % Maintenance and repairs 40.3 10.6 % 41.7 9.9 % 80.8 10.5 % 81.6 10.2 % Fuel 11.2 2.9 % 19.9 4.7 % 27.7 3.6 % 38.9 4.8 % Franchise and host fees 9.2 2.4 % 11.3 2.7 % 17.9 2.3 % 20.6 2.6 % Risk management 9.6 2.5 % 9.2 2.2 % 19.8 2.6 % 18.6 2.3 % Other 34.4 9.2 % 35.2 8.5 % 68.9 9.1 % 66.8 8.3 % Subtotal$ 237.9 62.6 %$ 263.2 62.8 %$ 490.8 64.0 %$ 508.3 63.3 % Landfill remediation expenses - - % 9.6 2.3 % - - % 9.6 1.2 % Total operating expenses, excluding accretion expense$ 237.9 62.6 %$ 272.8 65.1 %$ 490.8 64.0 %$ 517.9 64.5 % The cost categories shown above may not be comparable to similarly titled categories used by other companies. Thus, you should exercise caution when comparing our operating expenses by cost component to that of other companies. Three months endedJune 30, 2020 compared to 2019 Operating expenses decreased by$34.9 to$237.9 for the three months endedJune 30, 2020 from$272.8 for the three months endedJune 30, 2019 . Operating expenses, excluding landfill remediation expenses, decreased by$25.3 to$237.9 for the three months endedJune 30, 2020 from$263.2 for the three months endedJune 30, 2019 . The change was due to the following:
• Labor and related benefits decreased by
primarily attributable to lower overtime wages as a result of COVID-19 and a
decrease in medical claims activity;
• Transfer and disposal costs decreased by
to lower third party disposal costs as a result of reduced container weights
resulting from the impact of COVID-19 and a decrease in third-party
transportation costs due to the impacts of COVID-19. The decrease was
partially offset by an increase in processing costs associated with single
stream recycling;
• Maintenance and repairs expense decreased by
due to lower overtime wages as a result of COVID-19 and a reduction in the
overall level of repairs needed by our collection fleet due to lower collection volumes as a result of COVID-19;
• Fuel costs decreased
costs per gallon and a reduction in fuel consumption due to COVID-19;
• Franchise and host fees decreased
landfill host fees due to the loss of certain disposal volumes in the Midwest,
the cycling of strong prior year special waste and construction and demolition
volumes and lower disposal weights resulting from the impact of COVID-19;
• Risk management expense increased
loss experience associated with automobile and property liability claims;
• Other operating costs decreased
material purchases to support our previously acquired asphalt business and
lower site maintenance costs at several facilities. The decrease was partially
offset by higher leachate and gas treatment costs at several of our landfills
partially due to weather related impacts.
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Six months endedJune 30, 2020 compared to 2019 Operating expenses decreased by$27.1 to$490.8 for the six months endedJune 30, 2020 from$517.9 for the six months endedJune 30, 2019 . Operating expenses, excluding landfill remediation expenses, decreased by$17.5 to$490.8 for the six months endedJune 30, 2020 from$508.3 for the six months endedJune 30, 2019 . The change was due to the following:
• Labor and related benefits decreased by
attributable to lower overtime wages as a result of COVID-19. The decrease was
largely offset by higher labor costs as a result of merit increases, increased
medical insurance claims, increased labor demands associated with a new
municipal contract win in the South region and the impact of one extra workday
during the six months ended
June 30, 2019 ;
• Transfer and disposal costs decreased by
to lower third party disposal costs as a result of reduced container weights
resulting from the impact of COVID-19 and a decrease in third-party
transportation costs due to the impacts of COVID-19. The decrease was
partially offset by an increase in processing costs associated with single
stream recycling;
• Maintenance and repairs expense decreased by
due to a reduction in the cost of truck and container repairs as a result of
lower collection volumes as a result of COVID-19. The decrease was partially
offset by the impact of one extra workday during the six months ended
2020 compared to the six months ended
• Fuel costs decreased
costs per gallon and a reduction in productivity due to COVID-19 partially
offset by the impact of one extra workday during the six months ended
2020 compared to the six months ended
• Franchise and host fees decreased
lower landfill host fees due to the loss of certain disposal volumes in the
Midwest, the cycling of strong prior year special waste and construction and
demolition volumes and lower disposal weights resulting from the impact of
COVID-19;
• Risk management expense increased
lower discount rate (rates significantly declined in March, due to the impacts
of COVID-19), used in the automobile and property liability actuarial analysis
and due to higher loss experience associated with automobile and property
liability claims;
• Other operating costs increased
leachate and gas treatment costs at several of our landfills partially due to
weather related impacts and higher site maintenance costs at several
facilities.
Accretion of Landfill Retirement Obligations Accretion expense was$4.4 and$4.4 for the three months endedJune 30, 2020 and 2019, respectively and was relatively consistent as a percentage of revenue. Accretion expense was$8.9 and$8.7 for the six months endedJune 30, 2020 and 2019, respectively and was relatively consistent as a percentage of revenue. Selling, General and Administrative Selling, general and administrative expenses include salaries, legal and professional fees and other expenses. Salaries expenses include salaries and wages, health and welfare benefits and incentive compensation for corporate and field general management, field support functions, sales force, accounting and finance, legal, management information systems, and clerical and administrative departments. Other expenses include rent and office costs, fees for professional services provided by third parties, marketing, directors' and officers' insurance, general employee relocation, travel, entertainment and bank charges, but exclude any such amounts recorded as restructuring charges. 26
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The following table provides the components of our selling, general and
administrative expenses for the periods indicated (in millions and as a
percentage of our revenue):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Salaries $ 29.1 7.7 % $ 30.6 7.3 % $ 59.7 7.8 % $ 62.4 7.8 %
Legal and
professional 5.6 1.5 % 15.8 3.8 % 10.7 1.4 % 20.1 2.5 %
Other 11.0 2.8 % 15.8 3.7 % 26.3 3.4 % 29.5 3.6 %
Total selling,
general and
administrative
expenses $ 45.7 12.0 % $ 62.2 14.8 % $ 96.7 12.6 % $ 112.0 13.9 %
Three months ended
following: the timing of bonus accruals associated with our guaranteed bonus
program adopted as part of the merger as further described in Note 12 to the
unaudited consolidated financial statements; and lower stock based
compensation expense. The decrease was partially offset by higher temporary
labor costs needed to replace employees that are no longer with the Company
in part due to the proposed merger;
• Legal and professional fees decreased
settlement in the prior year as further described in Note 9 to the unaudited
consolidated financial statements;
• Other selling, general and administrative expenses decreased
various company costs due the impacts of COVID-19.
Six months ended
lower stock based compensation expense partially offset by higher temporary
labor costs needed to replace employees that are no longer with the Company
in part due to the proposed merger;
• Legal and professional fees decreased
settlement in the prior year as further described in Note 9 to the unaudited
consolidated financial statements;
• Other selling, general and administrative expenses decreased
various company costs due the impacts of COVID-19.
Depreciation and Amortization
The following table summarizes the components of depreciation and amortization
expense by asset type (in millions and as a percentage of our revenue). For a
detailed discussion of depreciation and amortization by asset type refer to the
discussion included in the following two sections herein.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Depreciation,
amortization and
depletion of
property and
equipment $ 56.3 14.8 % $ 62.5 14.9 % $ 113.2 14.8 % $ 120.6 15.0 %
Amortization of
other intangible
assets 7.8 2.1 % 7.8 1.9 % 15.5 1.9 % 15.6 2.0 %
Depreciation and
amortization $ 64.1 16.9 % $ 70.3 16.8 % $ 128.7 16.8 % $ 136.2 17.0 %
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Depreciation, Amortization and Depletion of Property and Equipment
Depreciation, amortization and depletion expense includes depreciation of fixed
assets over the estimated useful life of the assets using the straight-line
method, and amortization and depletion of landfill airspace assets under the
units-of-consumption method. Refer to the footnotes to the consolidated
financial statements in our 2019 Annual Report on Form 10-K for a further
discussion of our accounting policies.
The following table summarizes depreciation, amortization and depletion of
property and equipment for the periods indicated (in millions and as a
percentage of our revenue):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Depreciation
and
amortization
of property
and equipment $ 34.6 9.1 % $ 34.5 8.2 % $ 69.7 9.1 % $ 70.1 8.7 %
Landfill
depletion and
amortization 21.7 5.7 % 28.0 6.7 % 43.5 5.7 % 50.5 6.3 %
Depreciation,
amortization
and depletion
of property
and equipment $ 56.3 14.8 % $ 62.5 14.9 % $ 113.2 14.8 % $ 120.6 15.0 %
Three months ended
0.3% to
• Landfill depletion and amortization decreased
lower disposal weights resulting from the impact of COVID-19; the loss of
certain disposal volumes in the Midwest; and the cycling of strong prior year
special waste and construction and demolition volumes;
Six months ended
0.6% to
• Landfill depletion and amortization decreased
lower disposal weights resulting from the impact of COVID-19; the loss of
certain disposal volumes in the Midwest; and the cycling of strong prior year
special waste and construction and demolition volumes;
Amortization of Other Intangible Assets Amortization of other intangible assets was$7.8 and$7.8 , or as a percentage of revenue, 2.1% and 1.9%, for the three months endedJune 30, 2020 and 2019, respectively. Amortization of other intangible assets was$15.5 and$15.6 , or as a percentage of revenue, 1.9% and 2.0%, for the six months endedJune 30, 2020 and 2019, respectively. Acquisitions and Divestitures In the ordinary course of our business, we regularly evaluate and pursue acquisition opportunities that further enhance our vertical integration strategy. We also regularly evaluate our current operations and consider divesting of those operations that do not provide us with an acceptable profit margin. No acquisitions were completed during the six months endedJune 30, 2020 . We completed two acquisitions during the six months endedJune 30, 2019 for a cash purchase price of$24.9 . Additionally, we made a$2.2 deferred purchase price payment during the six months endedJune 30, 2019 related to an acquisition completed during the fourth quarter of fiscal 2018. The 28
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results of operations of each acquisition are included in our condensed consolidated statements of operations subsequent to the closing date of each acquisition. Other income, net Changes in the fair value and settlements of derivative instruments that do not qualify for hedge accounting are recorded in other income, net in the condensed consolidated statements of operations and amounted to no gain or loss and a loss of$0.4 for the three months endedJune 30, 2020 and 2019, respectively. Changes in the fair value and settlements of derivative instruments that do not qualify for hedge accounting amounted to no gain or loss and a loss of$0.9 for the six months endedJune 30, 2020 and 2019, respectively. Income from equity investee for the three months endedJune 30, 2020 and 2019, respectively, was$0.0 and$0.3 . Income from equity investee for the six months endedJune 30, 2020 and 2019, respectively, was$0.4 and$1.1 . During the three and six months endedJune 30, 2019 , theIRS closed audits of our previously acquired Veolia subsidiaries for tax years 2004-2012 therefore the Company recorded a charge to other expense of$3.9 to write off an indemnification receivable that was recorded as part of the 2012 purchase accounting. Interest Expense Interest expense decreased by$6.4 or 24.4% to$19.8 for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . Interest expense decreased by$9.8 or 18.8% to$42.4 for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The decrease was due to the impact of decreasing interest rates on our variable rate debt and the benefit from lower debt balances. Cash paid for interest was$23.7 and 30.0 for the three months endedJune 30, 2020 and 2019, respectively. Cash paid for interest was$38.7 and 48.3 for the six months endedJune 30, 2020 and 2019, respectively. Income Taxes Our effective income tax rate for the three months endedJune 30, 2020 and 2019 was 23.5% and 95.3%, respectively. We evaluate our effective income tax rate at each interim period and adjust it accordingly as facts and circumstances warrant. The difference between income taxes computed at the federal statutory rate of 21% and reported income taxes for the three months endedJune 30, 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 endedJune 30, 2019 was primarily due to the favorable impact of the settlement of theIRS audit of the Veolia subsidiaries for tax years 2004 - 2012. Our effective income tax rate for the six months endedJune 30, 2020 and 2019 was 50.0% and 75.4%, respectively. Our effective income tax rate for the six months endedJune 30, 2020 differs from the federal statutory rate of 21% as a result of income taxes on near break even pre tax loss. The difference between income taxes computed at the federal statutory rate of 21% and reported income tax benefit for the six months endedJune 30, 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 tax benefit for the six months endedJune 30, 2019 was primarily due to the favorable impact of the settlement of theIRS audit of the Veolia subsidiaries for tax years 2004 - 2012. Cash paid for income taxes (net of refunds) was$0.8 and$0.4 for the three months endedJune 30, 2020 and 2019, respectively. Cash paid for income taxes (net of refunds) was$0.9 and$1.5 for the six months endedJune 30, 2020 and 2019, respectively. 29
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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:
Operating Depreciation
Service Income and
Revenues (Loss) Amortization
Three Months Ended June 30, 2020
South $ 155.2 $ 24.3 $ 21.5
East 93.3 5.4 19.1
Midwest 131.8 16.1 22.2
Corporate - (18.1 ) 1.3
$ 380.3 $ 27.7 $ 64.1
Three Months Ended June 30, 2019
South $ 162.0 $ 14.3 $ 21.7
East 109.5 6.8 21.6
Midwest 147.6 19.2 25.7
Corporate - (31.6 ) 1.3
$ 419.1 $ 8.7 $ 70.3
Six Months Ended June 30, 2020
South $ 317.4 $ 46.0 $ 44.0
East 187.2 6.7 37.9
Midwest 262.4 26.5 44.1
Corporate - (37.9 ) 2.7
$ 767.0 $ 41.3 $ 128.7
Six Months Ended June 30, 2019
South $ 321.9 $ 38.3 $ 44.4
East 204.4 8.5 40.7
Midwest 276.8 33.1 48.6
Corporate - (53.3 ) 2.5
$ 803.1 $ 26.6 $ 136.2
Comparison of Reportable Segments-Three Months Ended June 30, 2020 compared to
Three Months Ended June 30, 2019
South Segment
Revenue decreased $6.8 or 4.2% for the three months ended June 30, 2020 compared
to the three months ended June 30, 2019 . The decrease was primarily due to the
following: a decrease in rolloff and commercial collection volumes of $9.3
primarily due to the impacts of COVID-19; a decrease in disposal volumes of $5.7
primarily due to the cycling of strong prior year special waste and construction
and demolition volumes and the impacts of COVID-19; and a decrease in fuel
surcharge revenue of $1.0 due to the decline in diesel fuel prices. The decrease
was partially offset by an increase in price yield from our collection and
disposal operations of $6.2 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 of $3.5 in residential volume
primarily due to a new municipal contract that commenced in the fourth quarter
of 2019.
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Operating income from our South Segment increased by$10.0 for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The increase was primarily due to the following: a reduction in landfill remediation expenses of$9.6 as further described in Note 9 to the unaudited consolidated financial statements; a reduction in MSW disposal costs of$3.6 due to the impacts of COVID-19; a decrease in fuel costs of$2.8 due to the decrease in diesel fuel prices and a reduction in fuel consumption due to COVID-19; and a reduction of$1.5 in third party transportation costs due to the impacts of COVID-19. The increase was partially offset by the revenue decrease of$6.8 as described above. East Segment Revenue decreased by$16.2 , or 14.8% for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The decrease was primarily due to the following: a decrease in disposal volumes of$12.1 primarily due to the impacts of COVID-19; a decrease in rolloff, commercial and residential collection volumes of$8.0 primarily due to the impacts of COVID-19; a decrease in trucking revenue of$1.6 primarily due to the impact of COVID-19; and a decrease in fuel surcharge revenue of$1.3 due to the decrease in diesel fuel prices. The decrease was partially offset by an increase in price yield from our collection and disposal operations of$7.4 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. Operating income from our East Segment decreased$1.4 for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The decrease was primarily due to the revenue decrease of$16.2 as described above. The decrease to operating income was largely offset by the following: a decrease in third party transportation costs of$2.5 due to the impacts of COVID-19; a decrease in labor costs of$2.3 which was primarily attributable lower overtime wages as a result of COVID-19 and a decrease in medical claims activity; a decrease in fuel costs of$2.3 due to the decrease in diesel fuel prices and a reduction in fuel consumption due to COVID-19; a decrease in maintenance and repairs expense of$1.4 due to lower overtime wages as a result of COVID-19 and a reduction in the overall level of repairs needed by our collection fleet due to lower collection volumes as a result of COVID-19; lower disposal costs of$0.9 primarily due to lower MSW disposal volumes as a result of COVID-19; lower material purchases of$0.7 to support our previously acquired asphalt business and a decrease in host and franchise fees of$0.6 primarily due to lower landfill volumes as a result of COVID-19. Additionally, depreciation and amortization decreased$2.5 primarily due to lower disposal volumes as a result of COVID-19. Midwest Segment Revenue decreased$15.8 or 10.7% for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The decrease was primarily due to the following: a decrease in disposal volumes of$10.1 primarily due to the impacts of COVID-19; a decrease in commercial, rolloff and residential collection volumes of$9.6 primarily due to the impacts of COVID-19; and a decrease in fuel surcharge revenue of$1.9 due to the decrease in diesel fuel prices. The decrease was partially offset by an increase in price yield from our collection and disposal operations of$4.0 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. Operating income from our Midwest Segment decreased$3.1 for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The decrease was primarily due to the$15.8 revenue decrease as described above. The decrease to operating income was partially offset by the following: a decrease in fuel costs of$3.0 due to the decrease in diesel fuel prices and a reduction in fuel consumption due to COVID-19; a decrease in labor costs of$2.2 which was primarily attributable lower overtime wages as a result of COVID-19 and a decrease in medical claims activity; a decrease in host and franchise fees of$1.6 primarily due to lower landfill volumes as a result of COVID-19 and the loss of certain disposal volumes; lower disposal costs of$0.9 primarily due to lower MSW disposal volumes as a result of COVID 19 and the loss of certain disposal volumes; and a decrease in third party transportation costs of$0.9 due to the impacts of COVID-19 and the loss of certain disposal volumes;. Additionally, depreciation and amortization decreased$3.4 primarily due to lower disposal volumes as a result of COVID-19. Corporate Operating loss decreased$13.5 for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 primarily due to the following: a$10.4 reduction in merger related expenses and a reduction of stock based compensation expense of$1.0 . 31
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Comparison of Reportable Segments-Six Months EndedJune 30, 2020 compared to Six Months EndedJune 30, 2019 South Segment Revenue decreased$4.5 or 1.4% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The decrease was primarily due to the following: a decrease in rolloff and commercial collection volumes of$13.7 primarily due to the impacts of COVID-19; a decrease in disposal volumes of$9.6 primarily due to the cycling of strong prior year special waste and construction and demolition volumes and the impacts of COVID-19; and a decrease in fuel surcharge revenue of$1.3 due to the decline in diesel fuel prices. The decrease was partially offset by an increase in price yield from our collection and disposal operations of$12.2 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 of$7.0 in residential volume primarily due to a new municipal contract that commenced in the fourth quarter of 2019. Operating income from our South Segment increased by$7.7 for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The increase was primarily due to the following: a reduction in landfill remediation expenses of$9.6 as further described in Note 9 to the unaudited consolidated financial statements; a reduction in MSW disposal costs of$3.6 due to the impacts of COVID-19; a decrease in fuel costs of$3.5 due to the decrease in diesel fuel prices and a reduction in fuel consumption due to COVID-19; and a reduction of$2.2 in third party transportation costs due to the impacts of COVID-19. The increase was partially offset by the following: the revenue decrease of$4.5 as described above; higher labor costs of$2.8 as a result of merit increases, increased medical insurance claims, increased labor demands associated with a new municipal contract that commenced in the fourth quarter of 2019 and the impact of one extra workday during the first quarter 2020 compared to the first quarter 2019; and higher transfer station and recycling processing costs of$1.9 primarily due to a new municipal contract that commenced in the fourth quarter of 2019. East Segment Revenue decreased by$17.2 , or 8.4% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The decrease was primarily due to the following: a decrease in disposal volumes of$14.3 primarily due to the impacts of COVID-19; a decrease in rolloff, commercial and residential collection volumes of$10.7 primarily due to the impacts of COVID-19; a decrease in trucking revenue of$2.8 primarily due to the impact of COVID-19; and a decrease in fuel surcharge revenue of$1.7 due to the decrease in diesel fuel prices. The decrease was partially offset by an increase in price yield from our collection and disposal operations of$11.7 as we continue to focus on disciplined open market pricing and receive the positive benefit from higher CPI contract resets in our municipal collection business. Operating income from our East Segment decreased$1.8 for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The decrease was primarily due to the revenue decrease of$17.2 as described above. The decrease to operating income was partially offset by the following: a decrease in third party transportation costs of$3.4 due to the impacts of COVID-19; a decrease in labor costs of$2.3 which was primarily attributable to lower overtime wages as a result of COVID-19; a decrease in fuel costs of$2.9 due to the decrease in diesel fuel prices and a reduction in fuel consumption due to COVID-19; a decrease in maintenance and repairs expense of$1.6 due to lower overtime wages as a result of COVID-19 and a reduction in the overall level of repairs needed by our collection fleet due to lower collection volumes as a result of COVID-19; lower disposal costs of$1.1 primarily due to lower MSW disposal volumes as a result of COVID-19; lower material purchases of$0.7 to support our previously acquired asphalt business and a decrease in host and franchise fees of$0.6 primarily due to lower landfill volumes as a result of COVID-19. Additionally, depreciation and amortization decreased$2.8 primarily due to lower disposal volumes as a result of COVID-19. Midwest Segment Revenue decreased$14.4 or 5.2% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The decrease was primarily due to the following: a decrease in commercial, rolloff and residential collection volumes of$12.2 primarily due to the impacts of COVID-19; a decrease in disposal volumes of$10.3 primarily due to the impacts of COVID-19 and the loss of certain disposal volumes; and a decrease in fuel surcharge revenue of$2.2 due to the decrease in diesel fuel prices. The decrease was partially offset by an increase in price yield from our collection and disposal operations of$8.9 as we continue to focus on disciplined open market pricing and receive the positive benefit from higher CPI contract resets in our municipal collection business and an increase in acquisition related revenue of$1.5 . Operating income from our Midwest Segment decreased$6.6 for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The decrease was primarily due to the following: the decrease in revenue of$14.4 as described 32
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above and an increase in processing costs of$2.3 related to single stream recycling. The decrease to operating income was partially offset by the following: a decrease in fuel costs of$3.8 due to the decrease in diesel fuel prices and a reduction in fuel consumption due to COVID-19; a decrease in host and franchise fees of$2.2 primarily due to lower landfill volumes as a result of COVID-19; and a decrease in third party transportation costs of$0.9 due to the impacts of COVID-19. Additionally, depreciation and amortization decreased$4.3 primarily due to lower disposal volumes as a result of COVID-19. Corporate Operating loss decreased$15.5 for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 primarily due to a$7.9 reduction in merger related expenses and a reduction of stock based compensation expense of$3.5 . The remaining variance is related to a decrease in various general and administrative costs. Liquidity and Capital Resources Our primary sources of cash are cash flows from operations, bank borrowings, debt offerings and equity offerings. We intend to use excess cash on hand and cash from operating activities, together with bank borrowings, to fund purchases of property and equipment, working capital, acquisitions and debt repayments. For this reason and since we efficiently manage our working capital requirements, it is common for us to have negative working capital. Actual debt repayments may include purchases of our outstanding indebtedness in the secondary market or otherwise. We believe that our current cash balances, cash from operating activities and funds available under our Revolver will provide us with sufficient financial resources to meet our anticipated capital requirements and maturing obligations as they come due. AtJune 30, 2020 andDecember 31, 2019 , we had negative working capital which was driven by purchases of property and equipment and landfill construction and development as well as the use of our cash to fund debt repayments.
Summary of Cash and Cash Equivalents and Debt Obligations The table below presents a summary of our cash and cash equivalents and debt balances (in millions):
June 30 ,December 31, 2020 2019
Cash and cash equivalents
Debt:
Current portion 41.3 76.1 Long-term portion 1,762.7 1,792.1 Total debt$ 1,804.0 $ 1,868.2
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