Advanced Disposal Services 10Q 2020 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file no: 001-37904

Advanced Disposal Services, Inc.

(Exact name of registrant as specified in its charter)



Delaware		90-0875845
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

90 Fort Wade Road

Ponte Vedra, Florida 32081

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (904) 737-7900

Securities registered pursuant to Section 12 (b) of the Act:



Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, $0.01 par value	ADSW	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at April 17, 2020 was 90,182,699 shares.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the U.S. federal securities laws. All statements other than statements of historical facts in this document, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects and objectives of management for future operations (including development plans and objectives relating to our activities), are forward-looking statements. Many, but not all, of these statements can be found by looking for words like “expect,” “anticipate,” “goal,” “project,” “plan,” “believe,” “seek,” “will,” “may,” “forecast,” “estimate,” “intend,” “future” and similar words. Statements that address activities, events or developments that we intend, expect or believe may occur in the future are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and are subject to safe harbor created by those sections. Forward-looking statements do not guarantee future performance and may involve risks, uncertainties and other factors which could cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in those forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, which could cause actual results to differ materially from the forward-looking statements contained in this report. Such risks, uncertainties and factors include those set forth in "Risk Factors" in our 2019 Annual Report on Form 10-K and in Part II Item 1A, of this quarterly report on Form 10-Q.

Examples of these risks, uncertainties and other factors include, but are not limited to:


•	Significant public health crises, epidemics or pandemics, including the novel strain of coronavirus (“COVID-19”), may adversely affect our business, results of operations and financial condition;


•	our ability to achieve future profitability will depend on us executing our strategy and controlling costs;


•	future results may be impacted by the expiration of net operating losses (NOLs);


•	our tax position may be affected by recent changes in U.S. tax law;


•	operating in a highly competitive industry and the inability to compete effectively with larger and better capitalized companies and governmental service providers;


•	our results are vulnerable to economic conditions;


•	we may lose contracts through competitive bidding, early termination or governmental action;


•	some of our customers, including governmental entities, have suffered financial difficulties affecting their credit risk, which could negatively impact our operating results;


•	our financial and operating performance may be affected by the inability, in some instances, to renew or expand existing landfill permits or acquire new landfills. Further, the cost of operation and/or future construction of our existing landfills may become economically unfeasible causing us to abandon or cease operations;


•	we could be precluded from maintaining permits or entering into certain contracts if we are unable to obtain sufficient third-party financial assurance or adequate insurance coverage;


•	our accruals for our landfill site closure, post-closure and contamination related costs may be inadequate;


•	our cash flow may not be sufficient to finance our high level of capital expenditures;


•	our acquisitions, including our ability to integrate acquired businesses, or that acquired businesses may have unexpected risks or liabilities;


•	the seasonal nature of our business and "event-driven" waste projects that could cause our results to fluctuate;

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•	adverse and destructive weather conditions that could result in higher fuel costs, higher labor costs, reduced municipal contract productivity and higher disposal costs;


•	we may be subject in the normal course of business to judicial, administrative or other third-party proceedings that could interrupt or limit our operations, result in adverse judgments, settlements or fines and create negative publicity;


•	fuel supply and prices may fluctuate significantly and we may not be able to pass on cost increases to our customers;


•	fluctuations in the prices of commodities may adversely affect our financial condition, results of operations and cash flows;


•	increases in labor and disposal costs and related transportation costs could adversely impact our financial results;


•	efforts by labor unions could divert management attention and adversely affect operating results;


•	we depend significantly on the services of the members of our senior, regional and local management teams, and the departure of any of those persons could cause our operating results to suffer;


•	we are increasingly dependent on technology in our operations and, if our technology fails, our business could be adversely affected;


•	a cybersecurity incident could negatively impact our business and our relationships with customers;


•	operational and safety risks, including the risk of personal injury to employees and others;


•	we are subject to substantial governmental regulation and failure to comply with these requirements, as well as enforcement actions and litigation arising from an actual or perceived breach of such requirements, could subject us to fines, penalties and judgments, and impose limits on our ability to operate and expand;


•	our operations being subject to environmental, health and safety laws and regulations, as well as contractual obligations that may result in significant liabilities;


•	future changes in laws or renewed enforcement of laws regulating the flow of solid waste in interstate commerce could adversely affect our operating results;


•	fundamental change in the waste management industry as traditional waste streams are increasingly viewed as renewable resources and changes in laws and environmental policies may limit the items that enter the waste stream, any of which may adversely impact volumes and tipping fees at our landfills. Alternatives to landfill disposal may cause our revenues and operating results to decline;


•	risks associated with our substantial indebtedness and working capital deficit;


•	risks associated with our ability to implement our growth strategy as and when planned; and


•	the other risks described in the "Risk Factors" section of our 2019 Annual Report on Form 10-K and in Part II Item 1A, of this quarterly report on Form 10-Q.

In addition, actual results may vary materially from those expressed or implied by forward-looking statements based on a number of factors related to the pending acquisition of Advanced Disposal, including, without limitation (1) risks related to the consummation of the merger, including the risks that (a) the merger may not be consummated within the anticipated time period, or at all, (b) the parties may fail to secure the termination or expiration of any waiting period applicable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (c) other conditions to the consummation of the merger under the merger agreement may not be satisfied; (2) the effects that any termination of the merger agreement may have on Advanced Disposal or its business, including the risks that (a) Advanced Disposal’s stock price may decline significantly if the merger is not completed, (b) the merger agreement may be terminated in circumstances requiring Advanced Disposal to pay Waste Management a termination fee, or (c) the circumstances of the termination, including the possible imposition of a 12-

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month tail period during which the termination fee could be payable upon certain subsequent transactions, may have a chilling effect on alternatives to the merger; (3) the effects that the announcement or pendency of the merger may have on Advanced Disposal and its business, including the risks that as a result (a) Advanced Disposal’s business, operating results or stock price may suffer, (b) Advanced Disposal’s current plans and operations may be disrupted, (c) Advanced Disposal’s ability to retain or recruit key employees may be adversely affected, (d) Advanced Disposal’s business relationships (including, customers and suppliers) may be adversely affected, or (e) Advanced Disposal’s management’s or employees’ attention may be diverted from other important matters; (4) the effect of limitations that the merger agreement places on Advanced Disposal’s ability to operate its business, return capital to stockholders or engage in alternative transactions; (5) the nature, cost and outcome of pending and future litigation and other legal proceedings, including any such proceedings related to the merger and instituted against Advanced Disposal and others; (6) the risk that the merger and related transactions may involve unexpected costs, liabilities or delays; and (7) other economic, business, competitive, legal, regulatory, and/or tax factors.

The above examples are not exhaustive and new risks may emerge from time to time. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking statements are based on our current beliefs, assumptions, expectations, estimates and projections regarding our present and future business strategies and the environment in which we will operate in the future. These forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in our expectations with regard thereto or any change of events, conditions or circumstances on which any such statement was based.

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Advanced Disposal Services, Inc. and Subsidiaries

Form 10-Q

For the Quarterly Period Ended March 31, 2020

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PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	6

	Condensed Consolidated Balance Sheets	6

	Condensed Consolidated Statements of Operations	7

	Condensed Consolidated Statements of Comprehensive Loss	8

	Condensed Consolidated Statement of Stockholders' Equity	9

	Condensed Consolidated Statements of Cash Flows	10

	Notes to Unaudited Condensed Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults upon Senior Securities	32

Item 4.	Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	33

Signature

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Advanced Disposal Services, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)



(in millions, except share data)	March 31, 2020			December 31, 2019
Assets
Current assets
Cash and cash equivalents	$	31.0		$	12.5
Accounts receivable, net of allowance for doubtful accounts of $5.0 and $4.5, respectively	192.8			208.3
Prepaid expenses and other current assets	43.0			44.0
Total current assets	266.8			264.8
Other assets	52.3			53.3
Property and equipment, net of accumulated depreciation of $1,771.6 and $1,720.7, respectively	1,753.2			1,767.6
Goodwill	1,224.8			1,224.8
Other intangible assets, net of accumulated amortization of $325.8 and $318.1, respectively	225.2			233.0
Total assets	$	3,522.3		$	3,543.5
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	101.3		$	120.7
Accrued expenses	123.9			124.5
Deferred revenue	67.7			71.3
Current maturities of landfill retirement obligations	16.6			28.0
Current maturities of long-term debt	87.4			76.1
Total current liabilities	396.9			420.6
Other long-term liabilities	81.1			82.7
Long-term debt, less current maturities	1,779.8			1,792.1
Accrued landfill retirement obligations, less current maturities	253.1			236.2
Deferred income taxes	87.4			88.5
Total liabilities	2,598.3			2,620.1
Equity
Common stock: $.01 par value, 1,000,000,000 shares authorized, 90,277,701 and 89,836,069 issued including shares held in treasury, respectively	0.9			0.9
Treasury stock at cost, 178,540 and 132,930 shares, respectively	(5.6		)	(4.1		)
Additional paid-in capital	1,535.7			1,527.7
Accumulated deficit	(604.4		)	(598.1		)
Accumulated other comprehensive loss	(2.6		)	(3.0		)
Total stockholders' equity	924.0			923.4
Total liabilities and stockholders' equity	$	3,522.3		$	3,543.5

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Advanced Disposal Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)



(in millions, except share and per share data)	Three Months Ended March 31,
	2020			2019

Service revenues	$	386.7		$	384.0
Operating costs and expenses
Operating (exclusive of items shown separately below)	257.3			249.6
Selling, general and administrative	51.0			49.7
Depreciation and amortization	64.6			65.9
Acquisition and development costs	—			0.7
Loss on disposal of assets and asset impairments	0.1			0.2
Total operating costs and expenses	373.0			366.1
Operating income	13.7			17.9
Other (expense) income
Interest expense	(22.6		)	(26.0		)
Other income, net	0.6			0.7
Total other expense	(22.0		)	(25.3		)
Loss before income taxes	(8.3		)	(7.4		)
Income tax benefit	(2.0		)	(1.4		)
Net loss	$	(6.3	)	$	(6.0	)

Net loss attributable to common stockholders per share
Basic loss per share	$	(0.07	)	$	(0.07	)
Diluted loss per share	$	(0.07	)	$	(0.07	)
Basic average shares outstanding	90,059,917			88,721,612
Diluted average shares outstanding	90,059,917			88,721,612

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Advanced Disposal Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)



(in millions)	Three Months Ended March 31,
	2020			2019

Net loss	$	(6.3	)	$	(6.0	)
Change in fair value of interest rate caps, net of tax for the three months ended March 31, 2020 and 2019 of ($0.1) and 0.8, respectively	0.4			(2.0		)
Comprehensive loss	$	(5.9	)	$	(8.0	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Advanced Disposal Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)



							Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Total Stockholders' Equity
(in millions, except share data)	Common Stock			Treasury Stock
	Shares	Amount		Shares	Amount
Balance at December 31, 2018	88,685,920	$	0.9	2,274	$	—	$	1,501.7	$	(591.1	)	$	—		$	911.5
Net loss	—	—		—	—		—		(6.0		)	—			(6.0		)
Stock-based compensation	18,735	—		—	—		4.1		—			—			4.1
Stock option exercises	90,807	—		—	—		1.9		—			—			1.9
Unrealized loss resulting from change in fair value of derivative instruments, net of tax of $0.8	—	—		—	—		—		—			(2.0		)	$	(2.0	)
Impact of implementing new derivatives standard, net of tax of ($0.2)	—	—		—	—		—		(0.4		)	0.4			$	—
Balance at March 31, 2019	88,795,462	$	0.9	2,274	$	—	$	1,507.7	$	(597.5	)	$	(1.6	)	$	909.5



								Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Total Stockholders' Equity
(in millions, except share data)	Common Stock			Treasury Stock
	Shares	Amount		Shares	Amount
Balance at December 31, 2019	89,836,069	$	0.9	132,930	$	(4.1	)	$	1,527.7	$	(598.1	)	$	(3.0	)	$	923.4
Net loss	—	—		—	—			—		(6.3		)	—			(6.3		)
Stock-based compensation	—	—		—	—			1.6		—			—			1.6
Stock option exercises, restricted stock unit vesting and performance stock unit vesting	441,632	—		—	—			6.4		—			—			6.4
Stock repurchases (a)	—	—		45,610	(1.5		)	—		—			—			(1.5		)
Unrealized gain resulting from change in fair value of derivative instruments, net of tax of ($0.1)	—	—		—	—			—		—			0.4			0.4
Balance at March 31, 2020	90,277,701	$	0.9	178,540	$	(5.6	)	$	1,535.7	$	(604.4	)	$	(2.6	)	$	924.0

(a) Stock repurchases represent shares withheld by the Company to pay employee taxes associated with restricted stock unit vesting and performance stock unit vesting.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Advanced Disposal Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)



(in millions)	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net loss	$	(6.3	)	$	(6.0	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization	64.6			65.9
Change in fair value of derivative instruments	—			2.5
Amortization of debt issuance costs and original issue discount	1.5			1.3
Accretion on landfill retirement obligations	4.5			4.4
Other accretion and amortization	1.8			1.5
Provision for doubtful accounts	2.2			1.1
Loss on disposition of property and equipment	0.1			0.2
Stock based compensation	1.6			4.1
Deferred tax benefit	(1.3		)	(1.6		)
Earnings in equity investee	(0.5		)	(0.8		)
Changes in operating assets and liabilities, net of businesses acquired
Decrease in accounts receivable	13.4			5.9
Decrease (increase) in prepaid expenses and other current assets	1.1			(0.1		)
Decrease in other assets	0.6			1.9
(Decrease) increase in accounts payable	(7.1		)	2.9
Decrease in accrued expenses	(2.1		)	(1.0		)
Decrease in deferred revenue	(3.6		)	(1.2		)
Decrease in other long-term liabilities	(2.1		)	(4.8		)
Capping, closure and post-closure obligations	(3.7		)	(3.7		)
Net cash provided by operating activities	64.7			72.5
Cash flows from investing activities
Purchases of property and equipment and construction and development	(47.1		)	(32.5		)
Proceeds from sale of property and equipment and insurance recoveries	0.3			1.0
Acquisition of businesses, net of cash acquired	—			(26.1		)
Net cash used in investing activities	(46.8		)	(57.6		)
Cash flows from financing activities
Proceeds from borrowings on debt instruments	65.0			58.0
Repayment on debt instruments, including finance leases	(70.8		)	(74.0		)
Proceeds from stock option exercises net of stock repurchases	6.4			1.9
Net cash provided by (used in) financing activities	0.6			(14.1		)
Net increase in cash and cash equivalents	18.5			0.8
Cash and cash equivalents, beginning of period	12.5			6.8
Cash and cash equivalents, end of period	$	31.0		$	7.6

The accompanying notes are an integral part of these condensed consolidated financial statements.

Advanced Disposal Services, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(in millions, except share data)


1.	Business Operations

Operations

Advanced Disposal Services, Inc. together with its consolidated subsidiaries (the "Company"), as a consolidated entity, is a non-hazardous solid waste services company which provides collection, transfer, recycling and disposal services. The Company manages and evaluates its principal operations through 3 reportable operating segments on a regional basis. Those operating segments are the South, East and Midwest regions. Additional information related to segments can be found in Note 10.

Acquisitions

No acquisitions were completed during the three months ended March 31, 2020. NaN acquisitions were completed during the three months ended March 31, 2019 for aggregate consideration consisting of a cash purchase price of $24.9. Additionally, the Company made a $2.2 deferred purchase price payment during the three months ended March 31, 2019 related to an acquisition completed during the fourth quarter of fiscal 2018. The results of operations of each acquisition are included in the Company's unaudited condensed consolidated statements of operations subsequent to the closing date of each acquisition.

COVID-19

The Company is experiencing volume declines in all of its lines of business except residential due to deteriorating macroeconomic conditions and stay-at-home orders resulting from the COVID-19 pandemic. The Company is taking a number of steps to respond to this challenge including the following:


•	Reducing or eliminating face-to-face interactions with its employees;


•	Executing on enhanced protocols to keep vehicles, common areas, and offices extra clean;


•	Procuring additional personal protective equipment including masks, gloves, hand sanitizer, and cleaning solutions;


•	Reallocating resources, reducing overtime, and parking surplus equipment to reduce operating costs;


•	Rerouting where needed to maximize productivity and meet customer needs;


•	Flexing capital spending while still meeting business needs;


•	Significantly reducing travel and discretionary spending; and


•	Maintaining higher target cash balances and as of March 31, 2020 able to access $227.7 million of additional liquidity from its revolving credit facility supported by a diverse group of lenders.


2.	Basis of Presentation

The Company’s condensed consolidated financial statements include its wholly-owned subsidiaries and their respective subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The condensed consolidated financial statements as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 are unaudited. In the opinion of management, these condensed consolidated financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for a fair statement of the balance sheet, results of operations, comprehensive loss, cash flows, and changes in equity for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The financial statements presented herein should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

In conformity with accounting principles generally accepted in the United States of America, the Company uses estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. The Company must make these estimates and assumptions because certain information that it uses is dependent on future events, cannot be calculated with a high degree of precision from data available or simply cannot be readily calculated based on generally accepted methodologies. In preparing the Company's financial statements, the more subjective areas that deal with the greatest amount of uncertainty relate to: accounting for long-lived assets, including recoverability; landfill development costs; final capping, closure and post-closure costs; valuation allowances for accounts receivable and deferred tax assets; liabilities for potential litigation, claims and assessments; liabilities for environmental remediation; stock compensation; accounting for goodwill and intangible asset impairments; deferred taxes; uncertain tax positions; self-insurance reserves; and estimates of the fair value of assets acquired and liabilities assumed in any acquisition. Actual results could differ materially from the estimates and assumptions that the Company uses in preparation of its financial statements.

Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13 associated with the measurement of credit losses on financial instruments. The amended guidance replaces the previous incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. The amended guidance was effective for the Company on January 1, 2020. Based on the amended guidance, the Company estimates credit losses for uncollectible accounts based on an evaluation of the aged accounts receivable and the likelihood of collection of the receivable based on historical collection data adjusted for forward-looking economic conditions. The Company's adoption of this guidance on January 1, 2020 did not have a material impact on its consolidated financial statements.


3.	Revenue Recognition

Revenue by Segment

See Note 10 for information related to revenue by reportable segment and major line of business.

Capitalized Sales Commissions

Under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, the Company capitalizes sales commissions as contract assets related to commercial and permanent rolloff collection customers and amortizes those sales commissions over the estimated customer life. The balance of capitalized sales commissions as of March 31, 2020 and December 31, 2019 were $4.6 and $4.7, respectively. The Company recorded amortization expense of $0.4 and $0.4 related to capitalized sales commissions for the three months ended March 31, 2020 and 2019, respectively.

Deferred Revenues

The Company records deferred revenue when cash payments are received or are due in advance of the Company's performance. The decrease in the deferred revenue balance from December 31, 2019 to March 31, 2020 is primarily driven by $68.3 of revenues recognized that were included in the deferred revenue balance at December 31, 2019, offset by cash payments received or due in advance of the Company satisfying its performance obligations.

Practical Expedients

As allowed by ASC 606, the Company does not disclose the value of unsatisfied performance obligations related to its contracts and service agreements as the Company accounts for its revenue as variable consideration and has the right to invoice for services performed each period.


4.	Landfill Liabilities

Liabilities for final closure and post-closure costs for the year ended December 31, 2019 and for the three months ended March 31, 2020 are shown in the table below:



Balance at December 31, 2018	$	248.0
Increase in retirement obligation	11.0
Accretion of closure and post-closure costs	18.0
Asset retirement obligation adjustments	6.9
Costs incurred	(19.7		)
Balance at December 31, 2019	264.2
Increase in retirement obligation	2.5
Accretion of closure and post-closure costs	4.5
Costs incurred	(1.5		)
Balance at March 31, 2020	269.7
Less: Current portion	(16.6		)
	$	253.1

Advanced Disposal Services, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(in millions, except share data)

5. Loss Per Share

The following table sets forth the computation of basic loss per share and loss per share, assuming dilution:



		Three Months Ended March 31,
		2020			2019
Numerator:
	Net loss	$	(6.3	)	$	(6.0	)
Denominator:
	Average common shares outstanding	90,059,917			88,721,612
	Other potentially dilutive common shares	—			—
	Average common shares outstanding, assuming dilution	90,059,917			88,721,612

	Basic net loss per share	$	(0.07	)	$	(0.07	)
	Diluted net loss per share	$	(0.07	)	$	(0.07	)

Basic net loss per share is based on the weighted-average number of shares of common stock outstanding for each of the periods presented. Diluted net loss per share is based on the weighted-average number of shares of common stock equivalents outstanding adjusted for the effects of common stock that may be issued as a result of potentially dilutive instruments. The Company's potentially dilutive instruments are made up of equity awards, which include stock options, restricted stock units and performance stock units. Since the Company is in a loss position for each period presented, no potentially dilutive common shares are included in the average common shares outstanding, assuming dilution.

Approximately 4.0 million and 5.5 million of outstanding stock awards were excluded from the diluted net loss per share calculation for the three months ended March 31, 2020 and March 31, 2019, respectively, because their effect was antidilutive.


6.	Debt

The following table summarizes the major components of debt at each balance sheet date and provides the maturities and interest rate ranges of each major category of debt:



	March 31, 2020			December 31, 2019
Revolving line of credit with lenders (Revolver), interest at applicable rate plus margin, as defined (4.27% and 5.43% at March 31, 2020 and December 31, 2019, respectively) due quarterly; balance due at maturity in November 2021	$	44.0		$	30.0
Term loans (Term Loan B); quarterly payments of $3.75 commencing March 31, 2017 through September 30, 2023 with final payment due November 10, 2023; interest at an alternate base rate or adjusted LIBOR rate with a 0.75% floor plus an applicable margin	1,361.7			1,372.5
Senior notes (Senior Notes) payable; interest at 5.625% payable in arrears semi-annually commencing May 15, 2017; maturing on November 15, 2024	425.0			425.0
Finance lease obligations, maturing through 2024	47.4			52.6
Other debt	7.8			8.1
	1,885.9			1,888.2
Less: Original issue discount and debt issuance costs classified as a reduction to long-term debt	(18.7		)	(20.0		)
Less: Current portion	(87.4		)	(76.1		)
	$	1,779.8		$	1,792.1

All borrowings under the Term Loan B, Revolver and Senior Notes are guaranteed by each of the Company's current and future domestic subsidiaries, subject to certain agreed-upon exemptions. All guarantors are jointly, severally, fully and unconditionally

Advanced Disposal Services, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(in millions, except share data)

liable. There are no significant restrictions on the Company or any guarantor to obtain funds from its subsidiaries by dividend or loan.

Revolver and Letter of Credit Facilities

As of March 31, 2020, the Company had an aggregate committed capacity of $300.0, of which $100.0 was available for letters of credit under its credit facilities. The Company’s Revolver is its primary source of letter of credit capacity and expires in 2021. As of March 31, 2020 and December 31, 2019, the Company had $44.0 and $30.0 of borrowings outstanding on the Revolver, respectively. As of March 31, 2020 and December 31, 2019, the Company had an aggregate of $28.3 and $28.5, respectively, of letters of credit outstanding under its credit facilities. The Company has ample liquidity available through its Revolver which is supported by a diverse group of lenders.

7. Derivative Instruments and Hedging Activities

The following table summarizes the fair values of derivative instruments recorded in the Company’s condensed consolidated balance sheets:



	Balance Sheet Location	March 31, 2020			December 31, 2019
Derivatives Designated as Hedging Instruments
2017 Interest rate caps	Accrued expenses	(2.4		)	(2.4		)
2017 Interest rate caps	Other long-term liabilities	(1.2		)	(1.7		)
Total derivatives		$	(3.6	)	$	(4.1	)

The Company has not offset fair value of assets and liabilities recognized for its derivative instruments.

Interest Rate Caps

In November 2017, the Company entered into 2 interest rate cap agreements as cash flow hedges (the "2017 interest rate caps") to hedge the risk of a rise in interest rates and associated cash flows on its variable rate debt. The Company has applied hedge accounting to the 2017 interest rate caps; therefore, changes in the fair value of the 2017 interest rate caps are recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statements of comprehensive loss. The 2017 interest rate caps commenced in 2019 and expire in 2021. The Company is paying the $4.9 premium on the 2017 interest rate caps in monthly installments beginning in October 2019. The Company recorded a loss of $0.2 related to the 2017 interest rate caps for the three months ended March 31, 2020 of which a $0.6 loss was recorded to interest expense in the consolidated statement of operations and a $0.4 gain was recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statement of comprehensive loss. The Company recorded a loss of $2.8 related to the 2017 interest rate caps for the three months ended March 31, 2019 which was recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statement of comprehensive loss. The notional value of the 2017 interest rate cap contracts aggregated were $600.0 as of March 31, 2020 and will remain constant through maturity in 2021.

In May 2016, the Company entered into 3 interest rate cap agreements (the "2016 interest rate caps") as economic hedges against the risk of a rise in interest rates and the associated cash flows on its variable rate debt. The Company paid the $5.5 premium of the 2016 interest rate caps equally over eleven quarters beginning on March 31, 2017. The Company elected not to apply hedge accounting to the 2016 interest rate caps; therefore, changes in the fair value of the 2016 interest rate caps were recorded in other (expense) income, net in the condensed consolidated statements of operations. The Company recorded 0 gain or loss related to the 2016 interest rate caps and a loss of $0.5 for the three months ended March 31, 2020 and 2019, respectively. The notional value of the 2016 interest rate cap contracts aggregated were constant at $800.0 over their term and matured on September 30, 2019.

8. Income Taxes

The Company’s effective income tax rate for the three months ended March 31, 2020 and 2019 was 24.1% and 18.9%, respectively. The Company evaluates its effective income tax rate at each interim period and adjusts it accordingly as facts and circumstances warrant. The difference between income taxes computed at the federal statutory rate of 21% and reported income

Advanced Disposal Services, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(in millions, except share data)

taxes for the three months ended March 31, 2020 was primarily due to state and local taxes. The difference between income taxes computed at the federal statutory rate of 21% and reported income taxes for the three months ended March 31, 2019 was primarily due to costs not deductible for income tax purposes.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. The CARES Act is designed to bring economic and fiscal relief to companies, small businesses, and individuals due to the COVID-19 health crisis. In accordance, with ASC 740 the income tax effects of the CARES Act should be reflected in the period of enactment. The CARES Act, enacts changes to net operating losses limitations, carry back of net operating losses, changes to depreciation of certain property, the acceleration of refunds for Alternative Minimum Tax (“AMT”), changes to the deductibility of interest expense, the deferral of certain payroll taxes and the allowance of certain employment tax credits. The enactment of the CARES Act resulted in an additional acceleration of $1.5 of the minimum tax credit carryforward to the Company. The current assets of the Company now has a receivable of $3.0 for the refund of AMT credit. The additional provisions of the CARES Act did not have a material impact on the first quarter unaudited consolidated financial statements.

9. Commitments and Contingencies

Financial Instruments

The Company has obtained letters of credit, performance bonds and insurance policies for the performance of the following: landfill final capping, closure and post-closure requirements; certain collection, landfill and transfer station contracts; environmental remediation; and other obligations. Letters of credit are supported by the Company’s Revolver (Note 6).

The Company does not expect that any claims against or draws on these instruments would have a material adverse effect on the Company’s condensed consolidated financial statements. The Company has not experienced any unmanageable difficulty in obtaining the required financial assurance instruments for its current operations. In an ongoing effort to mitigate risks of future cost increases and reductions in available capacity, the Company continues to evaluate various options to access cost-effective sources of financial assurance.

Insurance

The Company carries insurance coverage for protection of its assets and operations from certain risks including automobile liability, general liability, real and personal property, workers' compensation, directors' and officers' liability, pollution, legal liability and other coverages the Company believes are customary to the industry. The Company's exposure to loss for insurance claims is generally limited to the per incident deductible, or self-insured retention, under the related insurance policy. Its exposure, however, could increase if its insurers are unable to meet their commitments on a timely basis.

The Company has retained a significant portion of the risks related to its automobile, general liability, workers' compensation and health claims programs. For its self-insured retentions, the exposure for unpaid claims and associated expenses, including incurred but not reported losses, is based on an actuarial valuation and internal estimates. The accruals for these liabilities could be revised if future occurrences or loss development significantly differ from the Company's assumptions used. The Company does not expect the impact of any known casualty, property, environmental or other contingency to have a material impact on its financial condition, results of operations or cash flows.

Landfill Remediation

In fiscal 2018, the Company observed surface anomalies in specific areas of a landfill and received a proposed consent order, from a state environmental regulatory agency, outlining conditions required to be met at the landfill. As of March 31, 2020, $14.8 of expenditures related to the remediation accrual estimates have been incurred and $11.8 remains on the consolidated balance sheet which are expected to be incurred through 2023. These accruals include costs for an enhanced de-watering system and the associated removal, treatment, and disposal of leachate at the landfill. This amount could increase or decrease as a result of actual costs incurred to completion. Although it is reasonably possible this amount could change as a result of actual cost incurred to completion, the Company is unable to estimate a range of potential exposure due to the uncertainty of the remediation efforts required due to the nature of the process being undertaken.

Advanced Disposal Services, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(in millions, except share data)

Litigation and Other Matters

The Company and certain of its subsidiaries have been named as defendants in various class action suits. Past suits have alleged the Company charged improper charges (fuel, administrative and environmental charges) that were in breach of the Company's service agreements. The Company reached a settlement for $9.0 (inclusive of plaintiff attorneys’ fees and costs), resolving 4 of these cases in fiscal 2019. One of these cases (the "Flaccus" suit) has not been settled and is still pending. Given the inherent uncertainties of litigation, including the early stage of the Flaccus case, the unknown size of any potential class, and legal and factual issues in dispute, the outcome of this case cannot be predicted and a range of loss, if any, cannot currently be estimated.

The Company is subject to various other proceedings, lawsuits, disputes and claims and regulatory investigations arising in the ordinary course of its business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against the Company include commercial, customer, and employment-related claims. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. These actions are in various procedural stages, and some are covered in part by insurance. Although the Company cannot predict the ultimate outcome and the range of loss cannot be currently estimated, the Company does not believe that the eventual outcome of any such action could have a material adverse effect on its business, financial condition, results of operations, or cash flows.

Multiemployer Defined Benefit Pension Plans

Approximately 13.6% of the Company’s workforce is covered by collective bargaining agreements with various local unions across its operating regions. As a result of some of these agreements, certain of the Company’s subsidiaries are participating employers in a number of trustee-managed multiemployer, defined benefit pension plans for the affected employees.

A complete or partial withdrawal from a multiemployer pension plan may occur if employees covered by a collective bargaining agreement vote to decertify a union from continuing to represent them. The Company is not aware of any such actions in connection with continuing operations. As a result of certain prior discontinued operations, the Company is potentially exposed to certain withdrawal liabilities.

The Company does not believe that any future withdrawals, individually or in the aggregate, from the multiemployer plans to which it contributes could have a material adverse effect on the Company's business, financial condition or liquidity. However, such withdrawals could have a material adverse effect on the Company's results of operations for a particular reporting period, depending on the number of employees withdrawn in any future period and the financial condition of the multiemployer plan(s) at the time of such withdrawal(s).

10. Segment and Related Information

The Company manages and evaluates its operations primarily through its South, East and Midwest regional segments. These 3 groups are presented below as the Company’s reportable segments. The Company’s 3 geographic operating segments provide collection, transfer, disposal and recycling services. The Company serves residential, commercial and industrial, and municipal customers throughout its operating segments.

Advanced Disposal Services, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(in millions, except share data)

Service revenues, operating income/(loss) and depreciation and amortization for the Company's reportable segments for the periods indicated are shown in the following tables:



	Service Revenues		Operating Income (Loss)			Depreciation and Amortization

Three Months Ended March 31, 2020
South	$	162.2	$	21.7		$	22.5
East	93.8		1.2			18.8
Midwest	130.7		10.4			21.9
Corporate	—		(19.6		)	1.4
	$	386.7	$	13.7		$	64.6

Three Months Ended March 31, 2019
South	$	159.9	$	24.0		$	22.7
East	94.9		1.7			19.2
Midwest	129.2		13.9			22.9
Corporate	—		(21.7		)	1.1
	$	384.0	$	17.9		$	65.9

The following table presents the Company's revenues disaggregated by major line of business. Recycling rebates paid to customers, franchise fees paid to customers and state landfill taxes are excluded from revenues.



	Three Months Ended March 31,
	2020		2019
Residential Collection Revenue	$	105.9	$	100.7
Commercial Collection Revenue	100.3		97.9
Rolloff Collection Revenue	62.3		62.3
Disposal Revenue	58.0		60.8
Fuel and Environmental Charges	26.2		27.6
Sale of Recyclables	2.1		3.1
Other Revenue	31.9		31.6
	$	386.7	$	384.0

Fluctuations in the Company's operating results may be caused by many factors, including period-to-period changes in the relative contribution of revenue by each line of business and operating segment and by general economic conditions. In addition, its revenues and income from operations typically reflect seasonal patterns. The Company expects its operating results to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters and lower in the fourth quarter than in the second and third quarters. This seasonality reflects the lower volume of solid waste generated during the late fall, winter and early spring in the East and Midwest segments because of decreased construction and demolition activities during winter months in these regions of the United States. In addition, some of the Company's operating costs may be higher in the winter months. Adverse winter weather conditions slow waste collection activities, resulting in higher labor and operational costs. Greater precipitation in the winter increases the weight of collected municipal solid waste, resulting in higher disposal costs, which are calculated on a per ton basis.

Additionally, certain destructive weather conditions that tend to occur during the second half of the year, such as hurricanes that most often impact the South region, can increase the Company’s revenues in the areas affected. While weather-related and other occurrences can boost revenues through additional work, the earnings generated can be moderated as a result of significant start-up costs and other factors, resulting in earnings at comparatively lower margins. These destructive weather conditions can result in higher fuel costs, higher labor costs, reduced municipal contract productivity and higher disposal costs in disposal

Advanced Disposal Services, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(in millions, except share data)

neutral markets. Certain weather conditions, including severe winter storms, may result in the temporary suspension of the Company’s operations, which can significantly affect the operating results of the affected regions.

11. Fair Value Measurements

Assets and Liabilities Accounted for at Fair Value

In measuring fair values of assets and liabilities, the Company uses valuation techniques that maximize the use of observable inputs (Level 1) and minimize the use of unobservable inputs (Level 3). The Company does not have any assets or liabilities measured using unobservable Level 3 inputs. The Company also uses market data or assumptions that it believes market participants would use in pricing an asset or liability, including assumptions about risk when appropriate. The carrying value for certain of the Company's financial instruments approximate fair value because of their short-term nature. The Company’s assets and liabilities that are measured at fair value on a recurring basis include the following:



				Fair Value Measurement at March 31, 2020 Reporting Date Using
	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Carrying Value

Recurring fair value measurements
Cash and cash equivalents	$	31.0		$	31.0	$	—		$	31.0
Interest rate caps - liability position	(3.6		)	—		(3.6		)	(3.6		)
Total recurring fair value measurements	$	27.4		$	31.0	$	(3.6	)	$	27.4

				Fair Value Measurement at December 31, 2019 Reporting Date Using
	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Carrying Value

Recurring fair value measurements
Cash and cash equivalents	$	12.5		$	12.5	$	—		$	12.5
Interest rate caps - liability position	(4.1		)	$	—	(4.1		)	(4.1		)
Total recurring fair value measurements	$	8.4		$	12.5	$	(4.1	)	$	8.4

The fair value of the interest rate caps are determined using standard option valuation models with assumptions about interest rates based on those observed in underlying markets (Level 2 in fair value hierarchy).

Fair Value of Debt

The fair value of the Company’s debt (Level 2) is estimated using indirectly observable market inputs, except for the Revolver for which cost approximates fair value due to the short-term nature of the interest rate. Although the Company has determined the estimated fair value amounts using quoted market prices, considerable judgment is required in interpreting the information and in developing the estimated fair values. Therefore, these estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. The fair value estimates are based on information available as of March 31, 2020 and December 31, 2019, respectively.

Advanced Disposal Services, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(in millions, except share data)

The estimated fair value of the Company’s debt is as follows:



	March 31, 2020		December 31, 2019
Revolver	$	44.0	$	30.0
Senior Notes	431.4		443.4
Term Loan B	1,348.1		1,379.4
	$	1,823.5	$	1,852.8

The carrying value of the Company’s debt at March 31, 2020 and December 31, 2019 was $1,830.7 and $1,827.5, respectively.

12. Merger

Agreement and Plan of Merger

On April 14, 2019, the Company entered into an Agreement and Plan of Merger with Waste Management, Inc., a Delaware corporation (“Parent”), and Everglades Merger Sub Inc., a Delaware corporation and a wholly-owned indirect subsidiary of Parent.

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Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations

You should read the following discussion in conjunction with the unaudited condensed consolidated financial statements and notes thereto included under Item 1. In addition, you should refer to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in our 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 of the 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

On April 14, 2019, we entered into an Agreement and Plan of Merger with Waste Management, Inc., a Delaware corporation (“Parent”), and Everglades Merger Sub Inc., a Delaware corporation and a wholly-owned indirect subsidiary of Parent. Further details can be found in the Company's Form 8-K related to this matter, filed with the Securities and Exchange Commission on March 19, 2020, in the Company's Form 8-K, filed with the Securities and Exchange Commission on April 15, 2019 and the Company's definitive proxy statement, filed with the Securities and Exchange Commission on May 23, 2019.

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


•	Maintaining higher target cash balances and as of March 31, 2020 able to access $227.7 million of additional liquidity from our revolving credit facility supported by a diverse group of lenders.

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Results of Operations

The following table sets forth for the periods indicated our consolidated results of operations and the percentage relationship that certain items from our condensed consolidated financial statements bear to revenue (in millions and as a percentage of our revenue).



	Three Months Ended March 31,
	2020				2019
Service revenues	$	386.7	100.0	%	$	384.0	100.0	%
Operating costs and expenses
Operating	252.8		65.4	%	245.2		63.9	%
Accretion of landfill retirement obligations	4.5		1.1	%	4.4		1.1	%
Operating expenses	257.3		66.5	%	249.6		65.0	%
Selling, general and administrative	51.0		13.2	%	49.7		12.9	%
Depreciation and amortization	64.6		16.7	%	65.9		17.2	%
Acquisition and development costs	—		—	%	0.7		0.1	%
Loss on disposal of assets and asset impairments	0.1		0.1	%	0.2		0.1	%
Total operating costs and expenses	373.0		96.5	%	366.1		95.3	%
Operating income	$	13.7	3.5	%	$	17.9	4.7	%

Revenue

Through our subsidiaries, we generate revenue primarily by providing collection and disposal services to commercial, industrial, municipal and residential customers. Our remaining revenue is generated from recycling, fuel and environmental charges, landfill gas-to-energy operations and other ancillary revenue-generating activities. Revenues from our collection operations consist of fees we receive from municipal, subscription, residential and C&I customers and are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the recycling, transfer station or disposal facilities and our disposal costs. Standard C&I service agreements are typically three to five years, and we have historically maintained strong relationships with our C&I customers. Our municipal customer relationships are generally supported by exclusive contracts ranging from three to ten years in initial duration with subsequent renewal periods. Certain municipal contracts have annual price escalation clauses that are tied to changes in an underlying base index such as the consumer price index (CPI). We provide commercial front load and temporary and permanent rolloff service offerings to our commercial customers. While the majority of our rolloff services are provided to customers under long-term service agreements, we generally do not enter into written contracts with our temporary rolloff customers due to the relatively short-term nature of most construction and demolition (C&D) projects.

Our transfer stations and landfills generate revenue from disposal or tipping fees. Revenues from our landfill operations consist of fees which are generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Recycling revenue consists of disposal or tipping fees and proceeds from the sale of recyclable commodities to third parties.

The amounts charged for collection, disposal and recycling services may include fuel charges and environmental charges. Fuel charges and environmental charges are not designed to be specific to the direct costs and expenses to service an individual customer's account, but rather are designed to address and to help recover changes in our overall cost structure and to achieve an operating margin acceptable to us.

Other revenue is comprised of ancillary revenue-generating activities, such as trucking, landfill gas-to-energy operations at municipal solid waste (MSW) landfills, management of third-party owned landfills, customer service charges relating to overdue payments, customer administrative charges relating to customers who request paper copies of invoices rather than opting for electronic invoices and compliance and business impact charges.

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The following table sets forth our consolidated revenues by line of business for the periods indicated (in millions and as a percentage of total service revenues).



	Three Months Ended March 31,
	2020					2019
Collection	$	268.4		69.4	%	$	268.1		69.8	%
Disposal	123.2			31.9	%	127.0			33.1	%
Sale of recyclables	2.8			0.7	%	3.5			0.9	%
Fuel and environmental charges	27.5			7.1	%	28.9			7.5	%
Other revenue	35.8			9.3	%	27.8			7.2	%
Intercompany eliminations	(71.0		)	(18.4	)%	(71.3		)	(18.5	)%
Total service revenues	$	386.7		100.0	%	$	384.0		100.0	%

The following table reflects changes in components of our revenue, as a percentage of total revenue, for the three months ended March 31, 2020 and 2019:



	Three Months Ended March 31,
	2020		2019
Average yield	3.6	%	4.1	%
Recycling	(0.2	)%	(0.2	)%
Fuel surcharge revenue	(0.3	)%	0.3	%
Total yield	3.1	%	4.2	%
Organic volume	(2.9	)%	(0.3	)%
Acquisitions	0.5	%	1.4	%
Total revenue growth	0.7	%	5.3	%

Average yield is defined as aggregate contribution of price changes excluding recycled commodities and fuel surcharge revenue.

During the three months ended March 31, 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 3.6% or $13.8 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 decreased revenue by 0.2% or $0.8 due to a continued decrease in recycling commodity prices;

•

Fuel surcharge revenue decreased revenue by 0.3% or $1.2 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 2.9% or $11.1 due to the following: lower disposal revenue of $5.8 due to the loss of certain disposal volumes in the Midwest and the cycling of strong prior year special waste and construction and demolition volumes; lower rolloff collection, commercial collection and disposal volumes of $5.0 due to the impacts of COVID-19 across all regions; lower rolloff collection volume of $2.0 due to the loss of industrial contracts and lower special waste volumes in the South region; lower commercial collection volume of $1.3 due to the loss of certain contracts; and lower third party trucking revenue of $1.1 in the East region. The decrease was partially offset by an increase in residential volumes of $2.7 primarily due to a new contract win in the South and the impact of $2.0 related to one extra company workday during the three months ended March 31, 2020 compared to the three months ended March 31, 2019;


•	Acquisitions increased revenue by 0.5% or $1.9 due to the completion of acquisitions during the three months ended March 31, 2019 that further enhance our vertical integration strategy.

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Operating Expenses

Our operating expenses include the following:


•	Labor and related benefits, which consist of salaries and wages, health and welfare benefits, incentive compensation and payroll taxes;

•

Transfer and disposal costs which include tipping fees paid to third-party disposal facilities and transfer stations as well as transportation and subcontractor costs (which include costs for independent haulers who transport waste from transfer stations to our disposal facilities and costs for local operators who provide waste handling services associated with markets outside our standard operating areas);


•	Maintenance and repairs expenses which include labor, maintenance and repairs to our vehicles, equipment and containers;


•	Fuel costs which include the direct cost of fuel used by our vehicles, net of fuel tax credits;


•	Franchise and host fees which consist of municipal franchise fees not paid to customers, host community fees and royalties;


•	Risk management expenses which include casualty insurance premiums, claims payments, estimates for claims incurred but not reported and casualty losses;


•	Other expenses which include expenses such as facility operating costs, equipment rent, leachate and sulfate treatment and disposal and other landfill maintenance costs;


•	Accretion expense related to landfill capping, closure and post-closure is included in operating expenses in our condensed consolidated statement of operations, but it is excluded from the table below (refer to “Accretion of Landfill Retirement Obligations” below for a detailed discussion of the changes in amounts).

The following table summarizes the major components of our operating expenses, excluding accretion expense on our landfill retirement obligations (in millions and as a percentage of our revenue):



	Three Months Ended March 31,
	2020				2019

Labor and related benefits	$	90.1	23.3	%	$	85.7	22.3	%
Transfer and disposal costs	52.4		13.6	%	50.2		13.1	%
Maintenance and repairs	40.5		10.5	%	39.8		10.4	%
Fuel	16.5		4.3	%	18.9		4.9	%
Franchise and host fees	8.8		2.3	%	9.3		2.4	%
Risk management	10.3		2.7	%	9.4		2.4	%
Other	34.2		8.7	%	31.9		8.4	%
Total operating expenses, excluding accretion expense	$	252.8	65.4	%	$	245.2	63.9	%

The cost categories shown above may not be comparable to similarly titled categories used by other companies. Thus, you should exercise caution when comparing our operating expenses by cost component to that of other companies.

Three months ended March 31, 2020 compared to 2019

Operating expenses increased by $7.6 to $252.8 for the three months ended March 31, 2020 from $245.2 for the three months ended March 31, 2019. The change was due to the following:


•	Labor and related benefits increased by $4.4 or 5.1% to $90.1 which was primarily attributable to 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 first quarter 2020 compared to the first quarter 2019;

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•

Transfer and disposal costs increased by $2.2 or 4.4% to $52.4 primarily due to a significant increase in processing costs related to single stream recycling, an increase in third-party transportation costs in our Midwest segment as a result of diverting waste from one of our landfills that is currently building a new cell and the impact of one extra workday during the first quarter 2020 compared to the first quarter 2019. The increase was partially offset by lower third party disposal costs as a result of reduced container weights resulting from the impact of COVID-19;


•	Maintenance and repairs expense increased by $0.7 or 1.8% to $40.5 primarily due to merit increases and the impact of one extra workday during the first quarter 2020 compared to the first quarter 2019;


•	Fuel costs decreased $2.4 or 12.7% to $16.5 as a result of lower diesel fuel costs per gallon partially offset by the impact of one extra workday during the first quarter 2020 compared to the first quarter 2019;


•	Franchise and host fees decreased $0.5 or 5.4% to $8.8 primarily due to 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 $0.9 or 9.6% to $10.3 primarily due to a 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 $2.3 or 7.2% to $34.2 primarily due to higher 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 $4.5 and $4.4 for the three months ended March 31, 2020 and 2019, respectively and was 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.

The following table provides the components of our selling, general and administrative expenses for the periods indicated (in millions and as a percentage of our revenue):



	Three Months Ended March 31,
	2020				2019

Salaries	$	30.7	7.9	%	$	31.8	8.3	%
Legal and professional	5.0		1.3	%	4.2		1.1	%
Other	15.3		4.0	%	13.7		3.5	%
Total selling, general and administrative expenses	$	51.0	13.2	%	$	49.7	12.9	%

Three months ended March 31, 2020 compared to 2019


•	Our salaries expense decreased by $1.1 or 3.5% to $30.7 primarily due to lower stock based compensation expense partially offset by the impact of merit increases and higher bonus accruals due to the guaranteed bonus program adopted as part of the merger as further described in Note 12 to the unaudited consolidated financial statements.


•	Legal and professional fees increased $0.8 to $5.0 due to fees associated with the proposed merger as further described in Note 12 to the unaudited consolidated financial statements.

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•	Other selling, general and administrative expenses increased $1.6 or 11.7% to $15.3 primarily due to higher bad debt expense as a result of anticipated write-offs due to 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 March 31,
	2020				2019

Depreciation, amortization and depletion of property and equipment	$	56.9	14.7	%	$	58.1	15.1	%
Amortization of other intangible assets	7.7		2.0	%	7.8		2.1	%
Depreciation and amortization	$	64.6	16.7	%	$	65.9	17.2	%

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 March 31,
	2020				2019

Depreciation and amortization of property and equipment	$	35.1	9.1	%	$	35.6	9.3	%
Landfill depletion and amortization	21.8		5.6	%	22.5		5.9	%
Depreciation, amortization and depletion of property and equipment	$	56.9	14.7	%	$	58.1	15.1	%

Three months ended March 31, 2020 compared to 2019


•	Depreciation and amortization of property and equipment decreased $0.5 or 1.4% to $35.1 due mainly to certain assets becoming fully depreciated;


•	Landfill depletion and amortization decreased $0.7 or 3.1% to $21.8 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;

Amortization of Other Intangible Assets

Amortization of other intangible assets was $7.7 and $7.8, or as a percentage of revenue, 2.0% and 2.1%, for the three months ended March 31, 2020 and 2019, respectively. The decrease was due to certain intangible assets becoming fully amortized partially offset by the impact of acquisition activity during the first quarter of fiscal 2019.

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.

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No acquisitions were completed during the three months ended March 31, 2020. We completed two acquisitions during the three months ended March 31, 2019 for a cash purchase price of $24.9. Additionally, we made a $2.2 deferred purchase price payment during the three months ended March 31, 2019 related to an acquisition completed during the fourth quarter of fiscal 2018. The results of operations of each acquisition are included in our condensed consolidated statements of operations subsequent to the closing date of each acquisition.

Other 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 $0.7 for the three months ended March 31, 2020 and 2019, respectively. Income from equity investee for the three months ended March 31, 2020 and 2019, respectively, was $0.5 and $0.8.

Interest Expense

Interest expense decreased by $3.4 or 13.1% to $22.6 for the three months ended March 31, 2020 compared to the three months ended March 31, 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 $15.1 and $18.3 for the three months ended March 31, 2020 and 2019, respectively.

Income Taxes

Our effective income tax rate for the three months ended March 31, 2020 and 2019 was 24.1% and 18.9%, respectively. We evaluate our effective income tax rate at each interim period and adjust it accordingly as facts and circumstances warrant. The difference between income taxes computed at the federal statutory rate of 21% and reported income taxes for the three months ended March 31, 2020 was primarily due to state and local taxes. The difference between income taxes computed at the federal statutory rate of 21% and reported income taxes for the three months ended March 31, 2019 was primarily due to costs not deductible for income tax purposes.

Cash paid for income taxes (net of refunds) was $0.1 and 1.1 for the three months ended March 31, 2020 and 2019, respectively.

Reportable Segments

Our operations are managed through three geographic regions (South, East and Midwest) that we designate as our reportable segments. Service revenues, operating income/(loss) and depreciation and amortization for our reportable segments for the periods indicated are shown in the following tables:



	Service Revenues		Operating Income (Loss)			Depreciation and Amortization

Three Months Ended March 31, 2020
South	$	162.2	$	21.7		$	22.5
East	93.8		1.2			18.8
Midwest	130.7		10.4			21.9
Corporate	—		(19.6		)	1.4
	$	386.7	$	13.7		$	64.6

Three Months Ended March 31, 2019
South	$	159.9	$	24.0		$	22.7
East	94.9		1.7			19.2
Midwest	129.2		13.9			22.9
Corporate	—		(21.7		)	1.1
	$	384.0	$	17.9		$	65.9

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Comparison of Reportable Segments—Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

South Segment

Revenue increased $2.3 or 1.4% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase in revenue was due to the following: 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; an increase of $3.5 in residential volume primarily due to a new municipal contract that commenced in the fourth quarter of 2019; and an increase in revenue of $0.8 from one more workday in the first quarter of 2020 compared to the first quarter of 2019. The increases were partially offset by a decrease in rolloff and commercial collection volumes of $4.3 primarily due to the impacts of COVID-19 and a decrease in disposal volumes of $4.1 primarily due to the cycling of strong prior year special waste and construction and demolition volumes and the impacts of COVID-19.

Operating income from our South Segment decreased by $2.3 for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The decrease was primarily due to the following: higher labor costs of $2.7 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; an increase in general and administrative costs of $1.2 primarily due to merit increases for administrative employees and higher bad debt expense as a result of anticipated write-offs due to COVID-19; an increase in disposal facility costs of $0.6 primarily due to higher leachate and gas treatment costs partially due to weather related impacts and higher site maintenance costs; and an increase in insurance costs due to higher loss experience associated with automobile and property liability claims and a lower discount rate used in the automobile and property liability actuarial analysis. The decrease above was partially offset by the $2.3 revenue increase as described above.

East Segment

Revenue decreased by $1.1, or 1.2% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The decrease was primarily due to the following: a decrease in MSW and special waste disposal volumes of $2.9 primarily due to the impacts of COVID-19; a decrease in residential, commercial and rolloff collection volumes of $2.5 primarily due to the impacts of COVID-19; and a decrease in trucking revenue of $1.2 primarily due to the impact of COVID-19. The decrease was partially offset by an increase in price yield from our collection and disposal operations of $4.1 as we continue to focus on disciplined open market pricing and receive the positive benefit from higher CPI contract resets in our municipal collection business and an increase in revenue of $0.6 from one more workday in the first quarter of 2020 compared to the first quarter of 2019.

Operating income from our East Segment decreased $0.5 for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The decrease was primarily due to the following: the revenue decrease of $1.1 as described above and an increase in disposal facility costs of $1.0 primarily due to higher leachate and gas treatment costs partially due to weather related impacts and higher site maintenance costs. The decrease was partially offset by lower third party transportation costs primarily as a result of COVID-19 and a decrease in fuel expense of $0.5 as a result of the decline in diesel fuel prices.

Midwest Segment

Revenue increased $1.5 or 1.2% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase was primarily due to the following: an increase in price yield from our collection and disposal operations of $4.9 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; an increase in acquisition related revenue of $1.5; and an increase of $0.6 from one more workday in the first quarter of 2020 compared to the first quarter of 2019. The increase was partially offset by a decrease of $3.5 in C&D and MSW disposal volumes primarily due to the loss of certain disposal volumes and the impacts of COVID-19 and a decrease in rolloff, residential and commercial collection volumes of $2.6 primarily due to the impacts of COVID-19.

Operating income from our Midwest Segment decreased $3.5 for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The decrease was primarily due to the following: a significant increase in processing costs of $2.0 related to single stream recycling; an increase in labor costs of $1.6 as a result of merit increases, increased medical insurance claims and the impact of one extra workday during the first quarter 2020 compared to the first quarter 2019; an increase in general and administrative costs of $1.0 primarily due to merit increases for administrative employees and higher bad debt expense as a result of anticipated write-offs due to COVID-19; an increase in maintenance and repair costs of $0.8 primarily due to higher labor costs as a result of merit increases and acquisition activity and an increase in the cost of

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maintenance and repair parts due to inflation. The decrease was partially offset by the $1.5 revenue increase as described above and a decrease in fuel expense of $0.8 as a result of the decline in diesel fuel prices.

Corporate

Operating loss decreased $2.1 for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to a reduction in stock based compensation expense.

Liquidity and Capital Resources

Our primary sources of cash are cash flows from operations, bank borrowings, debt offerings and equity offerings. We intend to use excess cash on hand and cash from operating activities, together with bank borrowings, to fund purchases of property and equipment, working capital, acquisitions and debt repayments. For this reason and since we efficiently manage our working capital requirements, it is common for us to have negative working capital. Actual debt repayments may include purchases of our outstanding indebtedness in the secondary market or otherwise. We believe that our current cash balances, cash from operating activities and funds available under our Revolver will provide us with sufficient financial resources to meet our anticipated capital requirements and maturing obligations as they come due. At March 31, 2020 and December 31, 2019, we had negative working capital which was driven by purchases of property and equipment and landfill construction and development as well as the use of our cash to fund 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):



	March 31, 2020		December 31, 2019

Cash and cash equivalents	$	31.0	$	12.5

Debt:
Current portion	87.4		76.1
Long-term portion	1,779.8		1,792.1
Total debt	$	1,867.2	$	1,868.2

Summary of Cash Flow Activity

The following table sets forth for the periods indicated a summary of our cash flows (in millions):



	Three months ended March 31,
	2020			2019
Net cash provided by operating activities	$	64.7		$	72.5
Net cash used in investing activities	$	(46.8	)	$	(57.6	)
Net cash provided by (used in) financing activities	$	0.6		$	(14.1	)

Cash Flows Provided by Operating Activities

We generated $64.7 of cash flows from operating activities during the three months ended March 31, 2020, compared with $72.5 during the three months ended March 31, 2019. The decrease was primarily due to the following:


•	A decrease of $7.1 in accounts payable during the three months ended March 31, 2020 compared to an increase of $2.9 during the three months ended March 31, 2019, resulting in a negative variance of $10.0. The variance is primarily due to the timing of capital expenditure payments;


•	A decrease in net income of $4.4, after adjusting for non cash items;

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The decrease was partially offset by the following:


•	A decrease of $13.4 in accounts receivable during the three months ended March 31, 2020 compared to a decrease of $5.9 during the three months ended March 31, 2019, resulting in a positive variance of $7.5. Days Sales Outstanding was 45 during the three months ended March 31, 2020 compared to 48 during the three months ended March 31. 2019.

Cash Flows Used in Investing Activities

We used $46.8 of cash in investing activities during the three months ended March 31, 2020 compared with $57.6 during the three months ended March 31, 2019, a decrease of $10.8. The variance was due to the following:


•	A decrease of $26.1 in cash expenditures used to fund acquisitions;


•	Higher cash expenditures of $14.6 used to fund the purchase of previously committed property and equipment and landfill construction and development;


•	Lower proceeds of $0.7 from sale of property and equipment and insurance proceeds.

Cash Flows Used In Financing Activities

During the three months ended March 31, 2020, net cash provided by financing activities was $0.6 compared to net cash used in financing activities of $14.1 during the three months ended March 31, 2019. The variance was primarily due to the following:


•	A decrease in net payments on debt instruments of $10.2 as we used excess cash to make debt prepayments during the three months ended March 31, 2020 compared to using the majority of our excess cash for acquisitions during the three months ended March 31, 2019;


•	An increase in proceeds from stock option exercises of $4.5.

Senior Secured Credit Facilities

On November 21, 2017, we entered into Amendment No. 1 (the “Amendment”) to our Credit Agreement, dated as of October 9, 2012 (as amended and restated as of November 10, 2016, the “Amended and Restated Credit Agreement”) among the Company, the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent and as collateral agent. The Amendment reduces our applicable margin on the Term Loan B by 0.50% per annum.

On November 10, 2016, we entered into the Amended and Restated Credit Agreement by and among the Company, the guarantors party thereto, the lenders party thereto (the “Lenders”) and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (respectively, the “Administrative Agent” and the “Collateral Agent”), to the Credit Agreement, by and among the Company, the lenders party thereto, the Administrative Agent and the Collateral Agent, dated as of October 9, 2012 (as amended, supplemented or modified from time to time prior to the date hereof, the “Existing Credit Agreement” and as amended and restated in accordance with the Amended and Restated Credit Agreement).

The Amended and Restated Credit Agreement includes a $1.5 billion Term Loan B facility maturing 2023, and a $300.0 Revolving Credit Facility maturing 2021 (together our "Senior Secured Credit Facilities"). The Revolving Credit Facility allows for up to $100.0 million of letters of credit outstanding. The proceeds were used to repay borrowings under the Existing Credit Agreement and to call a portion of our 8.25% Senior Notes due 2020. All outstanding borrowings under the Existing Credit Agreement were either repaid in full or converted to the new Senior Secured Credit Facility. At the Company’s option, borrowings under the Amended and Restated Credit Agreement will bear interest at an alternate base rate or adjusted LIBOR rate in each case plus an applicable margin. The alternate base rate is defined as the greater of the prime rate, the federal funds rate plus 50 basis points, or the adjusted LIBOR rate plus 100 basis points. The LIBOR base rate is subject to a 0.75% floor.

In the case of the Term Loan B, the applicable margin, as amended, is 1.25% per annum for ABR Loans and 2.25% per annum for Eurodollar Loans. In the case of the Revolving Credit Facility, the applicable margin is 1.75% per annum for ABR Loans and 2.75% per annum for Eurodollar Loans if our total net leverage ratio is greater than 4.0:1.0. If our total net leverage ratio is less than 4.0:1.0, the applicable margin on the Revolving Credit Facility is 1.25% per annum for ABR Loans and 2.25% per annum for Eurodollar Loans.

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Obligations under the Amended and Restated Credit Agreement are guaranteed by our existing and future domestic restricted subsidiaries (subject to certain exceptions) and are secured by a first-priority security interest in substantially all our personal property assets, and certain real property assets, including all or a portion of the equity interests of certain of our domestic subsidiaries (in each cases, subject to certain limited exceptions).

Borrowings under the Amended and Restated Credit Agreement may be prepaid at any time without premium. The Amended and Restated Credit Agreement contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as a total net leverage ratio financial covenant (for the benefit of lenders under the revolving credit facility only). The Amended and Restated Credit Agreement also contains usual and customary events of default, including non-payment of principal, interest, fees and other amounts, material breach of a representation or warranty, nonperformance of covenants and obligations, default on other material debt, bankruptcy or insolvency, material judgments, incurrence of certain material ERISA liabilities, impairment of loan documentation or security and change of control. Compliance with these covenants is a condition to any incremental borrowings under our Senior Secured Credit Facilities and failure to meet these covenants would enable the lenders to require repayment of any outstanding loans (which would adversely affect our liquidity).

The Term Loan B has payments due quarterly of $3.75 with mandatory prepayments due to the extent net cash proceeds from the sale of assets exceed $25.0 in any fiscal year and are not reinvested in the business within 365 days from the date of sale, upon notification of our intent to take such action or in accordance with excess cash flow, as defined. Further prepayments are due when there is excess cash flow, as defined.

Borrowings under our Senior Secured Credit Facilities can be used for working capital, capital expenditures, acquisitions and other general corporate purposes. As of March 31, 2020 and December 31, 2019, we had $44.0 and $30.0 in borrowings outstanding under our Revolving Credit Facility. As of March 31, 2020 and December 31, 2019, we had an aggregate of approximately $28.3 and $28.5 of letters of credit outstanding under our Senior Secured Credit Facilities. As of March 31, 2020 and December 31, 2019, we had remaining capacity under our Revolving Credit Facility of $227.7 and $241.5, respectively. As of March 31, 2020, we were in compliance with the covenants under the Senior Secured Credit Facilities. Our ability to maintain compliance with our covenants will be highly dependent on our results of operations and, to the extent necessary, our ability to implement remedial measures such as reductions in operating costs. The Revolving Credit Facility has an annual commitment fee equal to 0.50% per annum if the total net leverage ratio is greater than 4.0:1.0, or if otherwise, 0.375% per annum. The amount of commitment fees for the three months ended March 31, 2020 and 2019 were not significant.

We are subject to a maximum total net leverage ratio of 6.8:1.0. The actual total net leverage ratio at March 31, 2020 and December 31, 2019 was 4.4:1.0 and 4.3:1.0, respectively.

5.625% Senior Notes due 2024

On November 10, 2016, we closed a 144A offering (the “Notes Offering”) exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), of $425.0 aggregate principal amount of 5.625% senior notes due 2024 (the “Notes”).

We issued the Notes under an indenture dated November 10, 2016 (the “Indenture”) among the Company, the guarantors party thereto, and Wells Fargo Bank, National Association, as trustee (the “Trustee”). The Notes bear interest at the rate of 5.625% per year. Interest on the Notes is payable on May 15 and November 15 of each year, beginning on May 15, 2017. The Notes will mature on November 15, 2024. At any time on or after November 15, 2019, we may redeem the Notes, in whole or in part, at the applicable redemption prices set forth in the Indenture, plus accrued interest.

The redemption prices set forth in the indenture for the twelve month periods beginning on November 15 of the years indicated below are as follows:



Year	Percentage
2019	104.219	%
2020	102.813	%
2021	101.406	%
2022 and thereafter	100.000	%

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The Indenture contains covenants that, among other things, restrict our ability to incur additional debt or issue certain preferred stock; pay dividends (subject to certain exceptions) or make certain redemptions, repurchases or distributions or make certain other restricted payments or investments; create liens; enter into transactions with affiliates; merge, consolidate or sell, transfer or otherwise dispose of all or substantially all of our assets; transfer and sell assets; and create restrictions on dividends or other payments by our restricted subsidiaries. Certain covenants will cease to apply to the Notes for so long as the Notes have investment grade ratings. The Notes will be unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of our current and future U.S. subsidiaries that guarantee the Amended and Restated Credit Agreement. As of March 31, 2020, we were in compliance with the covenants under the Indenture.

Off-Balance Sheet Arrangements

As of March 31, 2020 and 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.

Seasonality

We expect our operating results to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters and lower in the fourth quarter than in the second and third quarters. This seasonality reflects the lower volume of solid waste generated during the late fall, winter and early spring in the East and Midwest segments because of decreased construction and demolition activities during winter months in these regions of the U.S. In addition, some of our operating costs may be higher in the winter months. Adverse winter weather conditions slow waste collection activities, resulting in higher labor and operational costs. Greater precipitation in the winter increases the weight of collected municipal solid waste, resulting in higher disposal costs, which are calculated on a per ton basis.

Financial Assurance

We must provide financial assurance to governmental agencies and a variety of other entities under applicable environmental regulations relating to our landfill operations for capping, closure and post-closure costs, and related to our performance under certain collection, landfill and transfer station contracts. We satisfy these financial assurance requirements by providing surety bonds and letters of credit. The amount of the financial assurance requirements for capping, closure and post-closure costs is determined by applicable state environmental regulations. The financial assurance requirements for capping, closure and post-closure costs may be associated with a portion of the landfill or the entire landfill. Generally, states require a third-party engineering specialist to determine the estimated capping, closure and post-closure costs that are used to determine the required amount of financial assurance for a landfill. The amount of financial assurance required can, and generally will, differ from the obligation determined and recorded under U.S. GAAP. The amount of the financial assurance requirements related to contract performance varies by contract. Additionally, we must provide financial assurance for our insurance program and collateral for certain performance obligations. We do not expect a material increase in financial assurance requirements in the foreseeable future, although the mix of financial assurance instruments may change.

These financial instruments are issued in the normal course of business and are not considered company indebtedness. Because we currently have no liability for these financial assurance instruments, they are not reflected in our condensed consolidated balance sheets. However, we record capping, closure and post-closure liabilities and self-insurance liabilities as they are incurred. The underlying obligations of the financial assurance instruments, in excess of those already reflected in our condensed consolidated balance sheets, would be recorded if it is probable that we would be unable to fulfill our related obligations. We do not expect this to occur.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of financial statements in accordance with GAAP requires our management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Our estimates and assumptions are based on historical experience and changes in the business environment. However, actual results may differ from estimates under different conditions, sometimes materially.

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Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management’s most subjective judgments. A summary of significant accounting policies is disclosed in Note 1 to the Consolidated Financial Statements included in our 2019 Annual Report on Form 10-K. Our critical accounting policies are further described under the caption “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K.

Recently Issued and Proposed Accounting Standards

For a description of new accounting standards that may affect us, see Note 2, Basis of Presentation, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information about market risks as of March 31, 2020 does not differ materially from that included in our 2019 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, including ensuring that such information is accumulated and communicated to management (including the principal executive and financial officers) as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were not effective as of March 31, 2020 (the end of the period covered by this Quarterly Report on Form 10-Q), due to a material weakness in internal control over financial reporting, as described further in our 2019 Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15f of the

Securities Exchange Act of 1934) during the first quarter of 2020 that have materially affected or are reasonably likely to

materially affect the Company’s internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding our legal proceedings can be found under the Litigation and Other Matters section of Note 9 to the unaudited condensed consolidated financial statements.

Item 1A. Risk Factors

The following risk factor should be considered in addition to the risk factors previously disclosed in our 2019 Annual Report on

Form 10-K in response to Item 1A to Part I of Form 10-K.

The COVID-19 Pandemic Poses a Threat to Our Workplace, Our Customers’ Operations and Our Financial Results

A public health epidemic or pandemic can significantly impact our business or those of our core customers, particularly if located in geographies in which we have significant operations. For instance, the recent outbreak of the global COVID-19 pandemic is resulting in governmental authorities in many locations where we operate, and in which our customers are present, imposing mandatory closures, seeking voluntary closures and imposing restrictions on, or advisories with respect to, travel, business operations and public gatherings or interactions.

Consistent with our belief that we qualify as an “essential industry” in the United States, we believe we will continue to be able to provide our services and operate our business in this uncertain environment subject to precautionary measures. We have taken actions to protect our workforce and workplaces from the virus. We have restricted travel, implemented continuous disinfecting of our workplaces, and implemented remote working for employees where feasible. We have advised all of our employees on proper care and hygiene to prevent the spread of the virus. While these measures serve to reduce the possibility of transmission of the virus within our workplaces, they do not assure that our employees will not contract the virus or bring it into the workplace.

The COVID-19 pandemic could cause our customers to reduce service provided under contracts, reduce productivity or cancel service if such customers go out of business, thus impacting our financial results. The COVID-19 pandemic could result in lower disposal volumes at our landfills and transfer stations due to reduced business activity, thus impacting our financial results. We may also experience difficulty collecting for services previously provided to customers financially impacted by the COVID-19 pandemic.

The COVID-19 pandemic could impact the multiemployer pension plans in which we participate, noting that the current economic environment may impact certain contributing employers' ability to fulfill their obligations under the plans. In the event that other contributing employers default on their obligations under the plans, we could be required to compensate for their inability to fulfill their obligations, thus impacting our financial results.

The extent to which the COVID-19 pandemic impacts our operations or financial results is uncertain and will depend on future developments, including new information that may emerge on the severity of the disease, the extent of the outbreak, and federal, state and local government responses, among others.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits




Exhibit 31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101		Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.

Exhibit 101.INS		XBRL Instance Document

Exhibit 101.SCH		XBRL Extension Schema Document

Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

Exhibit 101.LAB		XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 104		The cover page from this Report on Form 10-Q, formatted as Inline XBRL.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



May 7, 2020	Advanced Disposal Services, Inc.

	By:	/s/ Steven R. Carn
		Steven R. Carn
		Chief Financial Officer

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Advanced Disposal Services (ADSW) 10-Q2020 Q1 Quarterly report

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