10-Q 1 a93018ads10-q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  
 
FORM 10-Q
 
(Mark One)                    
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
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
 
 

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 ý     No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes ý    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
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
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  ý
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at October 19, 2018 was 88,661,365 shares.
 

1


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 2017 Annual Report on Form 10-K.

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

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;

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


2


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 2017 Annual Report on Form 10-K.
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.


3


Advanced Disposal Services, Inc. and Subsidiaries
Form 10-Q
For the Quarterly Period Ended September 30, 2018
Table of Contents
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1a.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 


4


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
 
(in millions, except share data)
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
8.3

 
$
6.8

Accounts receivable, net of allowance for doubtful accounts of $4.7 and $5.4, respectively
216.8

 
199.9

Prepaid expenses and other current assets
39.1

 
37.9

Total current assets
264.2

 
244.6

Other assets
39.2

 
23.0

Property and equipment, net of accumulated depreciation of $1,503.2 and $1,355.5, respectively
1,722.9

 
1,728.8

Goodwill
1,210.2

 
1,208.2

Other intangible assets, net of accumulated amortization of $278.1 and $247.6, respectively
261.6

 
288.7

Total assets
$
3,498.1

 
$
3,493.3

Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
108.7

 
$
92.3

Accrued expenses
120.2

 
113.0

Deferred revenue
69.4

 
69.1

Current maturities of landfill retirement obligations
20.2

 
20.2

Current maturities of long-term debt
52.1

 
74.1

Total current liabilities
370.6

 
368.7

Other long-term liabilities
77.3

 
61.5

Long-term debt, less current maturities
1,837.9

 
1,884.2

Accrued landfill retirement obligations, less current maturities
211.3

 
205.7

Deferred income taxes
91.8

 
88.6

Total liabilities
2,588.9

 
2,608.7

Commitments and contingencies

 

Equity
 
 
 
Common stock: $.01 par value, 1,000,000,000 shares authorized, 88,654,572 and 88,491,194 shares outstanding, respectively
0.9

 
0.9

Treasury stock at cost, 2,274 and 2,274 shares, respectively



Additional paid-in capital
1,498.4

 
1,487.4

Accumulated deficit
(593.6
)
 
(603.3
)
Accumulated other comprehensive income (loss)
3.5

 
(0.4
)
Total stockholders' equity
909.2

 
884.6

Total liabilities and stockholders' equity
$
3,498.1

 
$
3,493.3

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

5


Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
 
(in millions, except share and per share data)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Service revenues
$
400.6

 
$
392.7

 
$
1,163.4

 
$
1,123.2

Operating costs and expenses
 
 
 
 

 
 
Operating
268.2

 
248.0

 
755.1

 
717.1

Selling, general and administrative
45.4

 
41.8

 
135.3

 
127.4

Depreciation and amortization
68.9

 
68.9

 
202.8

 
197.9

Acquisition and development costs
0.1

 
0.4

 
0.4

 
1.2

Loss (gain) on disposal of assets and asset impairments
0.5

 
0.5

 
(2.8
)
 
11.1

Restructuring charges

 
3.4

 
0.1

 
3.4

Total operating costs and expenses
383.1

 
363.0

 
1,090.9

 
1,058.1

Operating income
17.5

 
29.7

 
72.5

 
65.1

Other (expense) income
 
 
 
 
 
 
 
Interest expense
(24.4
)
 
(24.1
)
 
(71.0
)
 
(69.7
)
Other income (expense), net
0.8

 
1.3

 
8.7

 
(0.5
)
Total other expense
(23.6
)
 
(22.8
)
 
(62.3
)
 
(70.2
)
(Loss) income before income taxes
(6.1
)
 
6.9

 
10.2

 
(5.1
)
Income tax (benefit) expense
(1.2
)
 
3.4

 
3.3

 
(1.4
)
              Net (loss) income
$
(4.9
)
 
$
3.5

 
$
6.9

 
$
(3.7
)
 
 
 
 
 
 
 
 
Net (loss) income attributable to common stockholders per share
 
 
 
 
 
 
 
Basic (loss) income per share
$
(0.06
)
 
$
0.04

 
$
0.08

 
$
(0.04
)
Diluted (loss) income per share
$
(0.06
)
 
$
0.04

 
$
0.08

 
$
(0.04
)
Basic average shares outstanding
88,614,747

 
88,398,924

 
88,562,445

 
88,271,406

Diluted average shares outstanding
88,614,747

 
89,083,558

 
89,326,755

 
88,271,406

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


6


Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)
 
(in millions)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net (loss) income
$
(4.9
)
 
$
3.5

 
$
6.9

 
$
(3.7
)
Change in fair value of interest rate caps, net of tax of $0.3 and $1.4 for the three and nine months ended September 30, 2018, respectively
0.7

 

 
3.9

 

Comprehensive (loss) income
$
(4.2
)
 
$
3.5

 
$
10.8

 
$
(3.7
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


7


Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)




 
 
 
 

Additional Paid-In Capital

Accumulated Deficit
 
Accumulated
Other Comprehensive (Loss) Income

Total Stockholders' Equity
(in millions, except share data)
Common Stock
 
Treasury Stock


 

 
Shares

Amount
 
Shares

Amount


 

Balance at December 31, 2017
88,493,468


$
0.9

 
2,274




$
1,487.4


$
(603.3
)
 
$
(0.4
)

$
884.6

Net income



 






6.9

 


6.9

Stock-based compensation
22,565



 




8.5



 


8.5

Stock option exercises
140,813



 




2.5



 


2.5

Unrealized gain resulting from change in fair value of derivative instruments, net of tax of $1.4



 



 

 

 
3.9

 
3.9

Impact of implementing new revenue recognition standard, net of tax of $1.1



 



 

 
2.8

 

 
2.8

Balance at September 30, 2018
88,656,846


$
0.9

 
2,274




$
1,498.4


$
(593.6
)
 
$
3.5


$
909.2


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


8


Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in millions)
Nine Months Ended September 30,
 
2018

2017
Cash flows from operating activities



Net income (loss)
$
6.9


$
(3.7
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities



Depreciation and amortization
202.8


197.9

Change in fair value of derivative instruments
(4.8
)

1.7

Amortization of debt issuance costs and original issue discount
5.0


4.8

Accretion on landfill retirement obligations
11.4


11.1

Other accretion and amortization
3.2


2.9

Provision for doubtful accounts
3.6


3.6

(Gain) loss on disposition of property and equipment
(2.6
)

1.3

Impairment of assets


13.0

Gain on disposition of businesses and assets


(2.8
)
Stock based compensation
8.5


8.3

Deferred tax expense (benefit)
3.2


(2.7
)
Earnings in equity investee
(1.0
)

(1.2
)
Changes in operating assets and liabilities, net of businesses acquired



Increase in accounts receivable
(20.5
)

(22.0
)
Decrease in prepaid expenses and other current assets
6.3


1.5

(Increase) decrease in other assets
(9.0
)

0.2

Increase in accounts payable
16.7


9.9

Increase in accrued expenses
8.1


5.2

(Decrease) increase in deferred revenue
(0.4
)

1.1

Increase (decrease) in other long-term liabilities
12.3


(0.7
)
Capping, closure and post-closure obligations
(15.3
)

(8.3
)
Assumption of long term care and closure reserve


24.0

Net cash provided by operating activities
234.4


245.1

Cash flows from investing activities



Purchases of property and equipment and landfill construction and development
(133.3
)

(140.5
)
Proceeds from sale of property and equipment and insurance recoveries
7.3


4.1

Acquisition of businesses, net of cash acquired
(6.1
)

(112.2
)
Proceeds from sale of businesses


8.7

Net cash used in investing activities
(132.1
)

(239.9
)
Cash flows from financing activities



Proceeds from borrowings on debt instruments
84.0


195.0

Repayment on debt instruments, including capital leases
(187.3
)

(200.3
)
Proceeds from issuance of common stock
2.5


6.1

Net cash (used in) provided by financing activities
(100.8
)

0.8

Net increase in cash and cash equivalents
1.5


6.0

Cash and cash equivalents, beginning of period
6.8


1.2

Cash and cash equivalents, end of period
$
8.3


$
7.2


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

9

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)



1.
Business Operations
Advanced Disposal Services, Inc. together with its consolidated subsidiaries (the "Company"), as a consolidated entity, is a non-hazardous solid waste services company providing collection, transfer, recycling and disposal services to customers in the South, Eastern and Midwest regions of the United States.
The Company manages and evaluates its principal operations through three reportable operating segments on a regional basis. Those operating segments are the South, East and Midwest regions which provide collection, transfer, recycling and disposal services. Additional information related to segments can be found in Note 10.
Nine acquisitions were completed during the nine months ended September 30, 2018 for aggregate consideration consisting of a cash purchase price of $6.1 and notes payable of $0.7 subject to net working capital adjustments and other commitments, which are expected to be completed within approximately one year. Fourteen acquisitions were completed during the nine months ended September 30, 2017 for a cash purchase price, net of cash acquired, of $112.2 and notes payable of $4.4. The results of operations of each acquisition are included in the Company's unaudited condensed consolidated statements of operations subsequent to the closing date of each acquisition. Our acquisition accounting and valuation processes with respect to property and equipment, intangible assets, current liabilities and long-term liabilities related to acquisitions completed subsequent to January 1, 2018 are preliminary and subject to adjustments.
During the nine months ended September 30, 2017, the Company entered into an Asset Transfer and Liability Assumption Agreement with BFI Waste Systems of North America, LLC. The Company received a cash payment of $24.0 which was recorded as an operating cash flow. In exchange for this payment, the Company assumed certain post-closure liabilities of a closed portion of a landfill and became responsible for expenditures related to a gas infrastructure system. The present value of the assumed post-closure liabilities and expenditures related to the gas infrastructure system over the life of the landfill approximate the amount of the cash received.
During the nine months ended September 30, 2017, the Company divested of its collection operation in Charlotte, North Carolina for consideration received of $8.7. A $1.4 gain on the sale of that business is included in the Company's unaudited condensed consolidated statements of operations for the nine months ended September 30, 2017.

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 September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 are unaudited. In the opinion of management, these condensed consolidated financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for a fair statement of the balance sheet, results of operations, comprehensive (loss) income, cash flows, and changes in equity for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The financial statements presented herein should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
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.
Intangible Asset Impairment
The Company has collection operations in South Carolina which operate in a competitor-owned disposal market that does not align with the Company's long-term market strategy of vertically integrated operations with Company-owned disposal sites or marketplace neutral disposal sites. During April of 2017, changes in facts and circumstances led the Company to evaluate the long-term market for South Carolina collection operations and re-evaluate the expected cash flows provided by this market. The Company determined it appropriate to impair certain intangible assets that were recorded as part of the purchase accounting when these entities were acquired. Based on the Company's evaluation, the Company recorded an intangible asset impairment of $13.0 during the nine months ended September 30, 2017.
Restructuring Charges
During the three and nine months ended September 30, 2017, the Company incurred restructuring charges of $3.4 due to the elimination of positions at the Company's corporate office. Of the $3.4 of restructuring charges, $2.1 relates to the acceleration of stock based compensation expense and $1.3 relates to severance expense.
Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Topic 605 "Revenue Recognition" (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 and applicable technical updates as of January 1, 2018 using the modified retrospective transition method. See Note 3 for further details.

In August 2016, the FASB issued ASU 2016‑15 associated with the classification of certain cash receipts and cash payments in the statement of cash flows. In November 2016, the FASB issued ASU 2016‑18 associated with the presentation of restricted cash and cash equivalents in the statement of cash flows. The objective of both amendments was to reduce existing diversity in practice. The Company's adoption of these ASUs in fiscal 2018 did not have a material impact on the Company's Statement of Cash Flows.
Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases, and in July 2018 the FASB issued ASU 2018-11, Leases: Targeted Improvements. Lessees will be required to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability, and lessors will be required to recognize a net lease investment. Additional qualitative and quantitative disclosures will also be required to increase transparency and comparability among organizations. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the standard is permitted; however, the Company will not early adopt the standard. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented or as of the adoption date with a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company expects to adopt the standard by recognizing and measuring leases as of the adoption date with a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is assessing the provisions of this amended guidance and has (i) formed an implementation team made up of internal personnel and third party consultants (ii) acquired a software solution to manage and account for leases under the new standard (iii) obtained feedback on the population of leases from business unit personnel and (iv) analyzed payment activity and general ledger accounts to further identify leases under the new standard. The Company is currently evaluating the impact of this amended guidance on its consolidated financial statements but does not anticipate any material changes to operating results or liquidity.

3.
Revenue Recognition
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 605.
The Company recorded a net reduction to opening accumulated deficit of $2.8 as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to capitalization of sales commissions. The impact to service revenues for the three and nine months ended September 30, 2018 was a decrease of $8.6 and $25.4, respectively, as a result of applying Topic 606 and an associated policy election to treat applicable state landfill tax payments as a reduction of revenue

10

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

(historically recorded as an operating expense). Recycling rebates paid to customers, franchise fees paid to customers and state landfill tax payments are now recognized as a reduction of revenue.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Further discussion of revenue for each major line of business is provided below.
Residential Collection Revenue
The Company's residential collection operations consist of curbside collection of residential refuse from small carts or containers into collection vehicles for transport to a disposal/recycling site. These services are typically performed either under long-term contracts with local government entities or on a subscription basis, whereby individual households contract directly with the Company for collection services. The Company's residential collection service fees are typically quoted in its contracts on a weekly or monthly basis and revenue is recognized as the services are provided each month. The Company's residential contracts generally allow for annual rate increases and the number of households serviced under the Company's municipal contracts change throughout the contract period. For these reasons, revenue associated with the Company's residential collection service contracts is accounted for as variable consideration and the amounts recorded represent the value of the performance obligations completed.
Commercial Collection Revenue
The Company's commercial collection operations consist of collection of commercial refuse from Company supplied waste containers for transport to a disposal/recycling site. Standard service agreements with commercial customers are typically three to five years in length with pricing based on estimated disposal weight and time required to service the account. The Company's commercial collection service fees are typically quoted in its service agreements on a weekly or monthly basis and revenue is recognized as the services are provided each month. The Company's commercial service agreements generally allow for rate increases and it is not uncommon for the collection needs of the customer to change throughout the contract period. For these reasons, revenue associated with the Company's commercial collection service agreements is accounted for as variable consideration and the amounts recorded represent the value of the performance obligations completed.

Rolloff Collection Revenue
The Company's rolloff collection operations consist of providing construction and demolition sites with rolloff containers and collecting, transporting and disposing of the customers' waste at a disposal site. Rolloff services are typically provided pursuant to arrangements in which the customer provides 24-hour advance notice of its disposal needs and is billed on a "per pull" plus disposal basis. The Company typically has written service agreements with permanent rolloff customers but does not enter into written service agreements with customers that utilize temporary rolloff containers due to the relatively short-term nature of their needs. The Company's permanent rolloff service agreements generally allow for rate increases and number of pulls plus disposal weight vary throughout the contract period. For these reasons, revenue associated with the Company's rolloff collection service agreements is accounted for as variable consideration and the amounts recorded represent the value of the performance obligations completed.
Disposal Revenue
Transfer stations provide collection operations with a cost-effective means to consolidate waste and reduce transportation costs while providing the Company's landfill sites with an additional “gate” to extend the geographic reach of its landfills. Disposal revenue at transfer stations is primarily generated by charging tipping or disposal fees to third party customers.
Landfill disposal services represent the final stage in the Company's vertically integrated waste collection and disposal services solution. The Company generates disposal revenue at its landfills by charging tipping or disposal fees to third party customers.
The Company's landfill and transfer station tipping fees are quoted to customers on a per ton basis and disposal weight varies each time the customer disposes of waste at a Company facility. For these reasons, revenue associated with the Company's disposal services is accounted for as variable consideration and the amounts recorded represent the value of the performance obligations completed.

11

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

Sale of Recyclables
The Company has a network of 22 recycling facilities that it manages or operates. These facilities generate revenue through the collection, processing and sale of old corrugated cardboard, old newspaper, mixed paper, aluminum, glass and other materials. These recyclable materials are internally collected by the Company's residential, commercial and industrial collection operations as well as third-party haulers. The Company's sale of recyclables are quoted to customers on a per ton basis and recyclable weight varies each time the Company sells recyclables to its customers. For these reasons, revenue associated with the Company's sale of recyclables is accounted for as variable consideration and the amounts recorded represent the value of the performance obligations completed.
Fuel and Environmental Charges
The amounts charged for collection, disposal and recycling services may include fuel and environmental charges. These charges are not designed to be specific to the direct costs to service an individual customer’s account, but rather are designed to help recover changes in the Company's overall cost structure and to achieve an acceptable operating margin. Fuel and environmental charges vary each month in relation to the variable consideration of collection, disposal and recycling services. For this reason, fuel and environmental charges are accounted for as variable consideration.
Other Revenue
Other revenue is comprised of the following:
Trucking revenue;
Landfill management fee revenue;
Sale of landfill gas revenue;
Sale of asphalt revenue;
Brokerage revenue; and
Service charges, administrative charges and other charges.
Other revenue typically varies based on volume of the related service therefore the Company accounts for this revenue as variable consideration.
Revenue by Segment
See Note 10 for additional information related to revenue by reportable segment and major line of business.
Variable Consideration
As described above, the Company accounts for revenue for each line of business as variable consideration. The Company believes that there will not be significant changes to its estimates of variable consideration as revenue recognized is recorded in accordance with the terms of the related contracts or verbal agreements.
Capitalized Sales Commissions
Under Topic 606, 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 September 30, 2018 and January 1, 2018 were $4.1 and $3.8, respectively. The Company recorded amortization expense of $0.3 and $1.0 related to capitalized sales commissions for the three and nine months ended September 30, 2018, respectively.
Deferred Revenues
The Company records deferred revenue when cash payments are received in advance of the Company's performance. The increase in the deferred revenue balance from December 31, 2017 to September 30, 2018 is primarily driven by cash payments received or due in advance of the Company satisfying its performance obligations, offset by $68.8 of revenues recognized that were included in the deferred revenue balance at December 31, 2017.





12

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

Topic 606 Practical Expedients
As allowed by Topic 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, 2017 and for the nine months ended September 30, 2018 are shown in the table below:
Balance at December 31, 2016
$
191.1

Increase in retirement obligation
9.7

Accretion of closure and post-closure costs
15.4

Acquisition
28.3

Change in estimate
2.1

Costs incurred
(20.7
)
Balance at December 31, 2017
225.9

Increase in retirement obligation
7.3

Accretion of closure and post-closure costs
11.4

Costs incurred
(13.1
)
Balance at September 30, 2018
231.5

Less: Current portion
(20.2
)

$
211.3


5. (Loss) Earnings Per Share

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

 
Three Months Ended September 30,

Nine Months Ended September 30,

 
2018

2017

2018

2017
Numerator:











Net (loss) income
$
(4.9
)

$
3.5


$
6.9


$
(3.7
)
Denominator:









Average common shares outstanding
88,614,747


88,398,924


88,562,445


88,271,406


Other potentially dilutive common shares


684,634


764,310




Average common shares outstanding, assuming dilution
88,614,747


89,083,558


89,326,755


88,271,406















Basic net (loss) income per share
$
(0.06
)

$
0.04


$
0.08


$
(0.04
)

Diluted net (loss) income per share
$
(0.06
)

$
0.04


$
0.08


$
(0.04
)
Basic net (loss) income per share is based on the weighted-average number of shares of common stock outstanding for each of the periods presented. Diluted net (loss) income per share is based on the weighted-average number of shares of common stock equivalents outstanding adjusted for the effects of common stock that may be issued as a result of potentially dilutive instruments. The Company's potentially dilutive instruments are made up of equity awards, which include stock options, restricted stock units and performance stock units.
Pursuant to the FASB’s Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share, the Company includes additional shares in the computation of diluted net income per share. The additional shares included in diluted net income per

13

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

share represent the number of shares that would be issued if all of the above potentially dilutive instruments were converted into common stock. When calculating diluted net income per share, the ASC requires the Company to include the potential shares that would be outstanding if dilutive outstanding stock options were exercised. This number is different from outstanding stock options because it is offset by shares the Company could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent.
Approximately 4.9 million and 1.7 million of outstanding stock awards were excluded from the diluted net (loss) income per share calculation for the three months ended September 30, 2018 and September 30, 2017, respectively, because their effect was antidilutive. Approximately 1.8 million and 3.4 million of outstanding stock awards were excluded from the diluted net (loss) income per share calculation for the nine months ended September 30, 2018 and September 30, 2017, 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:
 
September 30,
2018
 
December 31,
2017
Revolving line of credit with lenders (Revolver), interest at applicable rate plus margin, as defined (7.0% and 6.25% at September 30, 2018 and December 31, 2017, respectively) due quarterly; balance due at maturity in November 2021
$
5.0

 
$
29.0

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
1,411.3

 
1,460.0

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

Capital lease obligations, maturing through 2024
66.0

 
63.9

Other debt
9.5

 
11.8

 
1,916.8

 
1,989.7

Less: Original issue discount and debt issuance costs classified as a reduction to long-term debt
(26.8
)
 
(31.4
)
Less: Current portion
(52.1
)
 
(74.1
)
 
$
1,837.9

 
$
1,884.2


All borrowings under the Term Loan B, Revolver and Senior Notes are guaranteed by each of the Company's current and future domestic subsidiaries, subject to certain agreed-upon exemptions. All guarantors are jointly and severally and fully and unconditionally liable. There are no significant restrictions on the Company or any guarantor to obtain funds from its subsidiaries by dividend or loan.

Revolver and Letter of Credit Facilities

As of September 30, 2018, 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 September 30, 2018 and December 31, 2017, the Company had $5.0 and $29.0 of borrowings outstanding on the Revolver, respectively. As of September 30, 2018 and December 31, 2017, the Company had an aggregate of $32.3 and $39.3, respectively, of letters of credit outstanding under its credit facilities.










14

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

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

September 30, 2018

December 31,
2017
Derivatives Designated as Hedging Instruments








2017 Interest rate caps

Other assets

$
5.5


$

2017 Interest rate caps

Other long-term liabilities



(0.4
)
Derivatives Not Designated as Hedging Instruments








2016 Interest rate caps

Prepaid expenses and other current assets

7.9


0.9

2016 Interest rate caps

Other assets



2.8

Total derivatives



$
13.4


$
3.3

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

In November 2017, the Company entered into two interest rate cap agreements as cash flow hedges (the "2017 interest rate caps") to hedge the risk of a rise in interest rates and associated cash flows on its variable rate debt. The Company has applied hedge accounting to the 2017 interest rate caps; therefore, changes in the fair value of the 2017 interest rate caps, to the extent they are effective, are recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statements of comprehensive (loss) income. The 2017 interest rate caps commence in 2019 and expire in 2021. The Company will pay the $4.9 premium on the 2017 interest rate caps in monthly installments beginning in October 2019. The Company recorded a gain related to the 2017 interest rate caps of $0.7 for the three months ended September 30, 2018 which was recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statements of comprehensive (loss) income. The Company recorded a gain related to the 2017 interest rate caps of $4.5 for the nine months ended September 30, 2018 of which the effective portion of $3.9 was recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statements of comprehensive (loss) income and the ineffective portion of $0.6 was recorded in other income (expense), net in the condensed consolidated statement of operations. The notional value of the 2017 interest rate cap contracts aggregated were $600.0 as of September 30, 2018 and will remain constant through maturity in 2021.
In May 2016, the Company entered into three interest rate cap agreements (the "2016 interest rate caps") as economic hedges against the risk of a rise in interest rates and the associated cash flows on its variable rate debt. The Company is paying the $5.5 premium of the 2016 interest rate caps equally over eleven quarters beginning on March 31, 2017. The Company elected not to apply hedge accounting to the 2016 interest rate caps, therefore, changes in the fair value of the 2016 interest rate caps are recorded in other income (expense), net in the condensed consolidated statements of operations. The Company recorded a gain related to the 2016 interest rate caps of $0.4 and $0.1 for the three months ended September 30, 2018 and 2017, respectively. The Company recorded a gain related to the 2016 interest rate caps of $6.4 and a loss of $3.2 for the nine months ended September 30, 2018 and 2017, respectively. The notional value of the 2016 interest rate cap contracts aggregated were $800.0 as of September 30, 2018 and will remain constant through maturity in September 2019.

8. Income Taxes

The Company’s effective income tax rate for the three months ended September 30, 2018 and 2017 was 19.7% and 49.3%, respectively. The Company evaluates its effective income tax rate at each interim period and adjusts it accordingly as facts and circumstances warrant. The difference between income taxes computed at the federal statutory rate of 21% and reported income taxes for the three months ended September 30, 2018 was primarily due to the unfavorable impact of the change in recorded valuation allowance and permanently non-deductible expenses. The difference between income taxes computed at the federal statutory rate of 35% and reported income taxes for the three months ended September 30, 2017 was primarily due to the unfavorable impact of the change in recorded valuation allowance and permanently non-deductible expenses.

15

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

The Company’s effective income tax rate for the nine months ended September 30, 2018 and 2017 was 32.4% and 27.5%, respectively. The difference between income taxes computed at the federal statutory rate of 21% and reported income taxes for the nine months ended September 30, 2018 was primarily due to the unfavorable impact of the change in recorded valuation allowance. The difference between income taxes computed at the federal statutory rate of 35% and reported income taxes for the nine months ended September 30, 2017 was primarily due to the unfavorable impact of the change in recorded valuation allowance and permanently non-deductible expenses.
As of September 30, 2018, the Company had $31.1 of liabilities associated with unrecognized tax benefits and related interest. These liabilities are included as components of other long-term liabilities and deferred income taxes in the Company’s consolidated balance sheet. The Company does not anticipate that settlement of the liabilities will require payment of cash within the next twelve months. The Company is not able to reasonably estimate when it would make any cash payments required to settle these liabilities, but does not believe that the ultimate settlement of its obligations will materially affect its liquidity.
On December 22, 2017, the Tax Cut and Jobs Act (the “Act”) was signed into law. In accordance with Staff Accounting Bulletin (“SAB”) 118, the Company recognized the estimated impact of this legislation as a component of the benefit for income taxes in its audited financial statements for the year ended December 31, 2017. SAB 118 allows for a measurement period, not to extend beyond one year from the enactment date, for companies to complete their accounting for the provisions of the Act under ASC 740. As of September 30, 2018, no subsequent adjustments have been made to the provisional amounts recorded with the financial statements for the year ended December 31, 2017. The Company is still analyzing certain aspects of the Act and is refining its calculations, which could potentially affect the provisional measurement of these balances but no material adjustments are expected to occur. The Company's estimate of the impacts of the Act may change due to future guidance issued by the U.S. Treasury Department, Internal Revenue Services, Financial Standards Accounting Board and other standard setting bodies. The Company continues to analyze its estimate of a $0.1 tax related to the Act’s taxation of deemed repatriation on foreign earnings related to the Company’s Bahamas operations. The completion of the Company's 2017 income tax returns by the fourth quarter 2018 may also impact the provisional amounts that have been recorded.

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.
 



16

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

Landfill Remediation
In May 2018, the Company observed surface anomalies in specific areas of a landfill. Based on our estimates at that point, the required engineering enhancements related to the leachate and gas infrastructure and reconstruction of specific storm and surface water control systems was accrued in the consolidated balance sheet as of June 30, 2018.

In September 2018, the Company received a proposed consent order, from a state environmental regulatory agency, outlining further conditions required to be met. The Company has reviewed the conditions required per the proposed consent order and based on the Company’s best estimates, has accrued, in the consolidated balance sheet, cost for an enhanced de-watering system and the removal, treatment, and disposal of leachate at the site. Further, for the three and nine months ended September 30, 2018, the company recorded operating expenses to redirect waste to third-party sites, that the Company was contractually obligated to accept at its site, resulting in additional disposal and transportation costs incurred. The waste redirection is expected to cease by December 31, 2018, due to the expiration of these contractual obligations. See the table below for an outline of the expenses incurred by period.

September 30, 2018
 


Three Months Ended
 
Nine Months Ended
 
Financial Statement Presentation
Remediation Accrual Estimates
$
13.1

 
$
15.6

 
Operating Expense and Consolidated Balance Sheet
Third Party Waste Redirection
3.2

 
6.1

 
Operating Expense

$
16.3

 
$
21.7

 


As of September 30, 2018, $1.9 of expenditures related to the remediation accrual estimates have been incurred and $13.7 remains on the consolidated balance sheet.

Litigation and Other Matters
In February 2009, the Company and certain of its subsidiaries were named as defendants in a purported class action suit in the Circuit Court of Macon County, Alabama. Similar class action complaints were brought against the Company and certain of its subsidiaries in 2011 in Duval County, Florida and in 2013 in Quitman County, Georgia and Barbour County, Alabama, and in 2014 in Chester County, Pennsylvania. The 2013 Georgia complaint was dismissed in March 2014. In late 2015 in Gwinnett County, Georgia, another purported class action suit was filed. The plaintiffs in those cases primarily allege that the defendants charged improper charges (fuel, administrative and environmental charges) that were in breach of the plaintiffs' service agreements with the Company and seek damages in an unspecified amount. The Company believes that it has meritorious defenses against these purported class actions, which it will vigorously pursue. Given the inherent uncertainties of litigation, including the early stage of these cases, the unknown size of any potential class, and legal and factual issues in dispute, the outcome of these cases cannot be predicted and a range of loss, if any, cannot currently be estimated.

In February 2017, a waste slide occurred in one cell at the Company’s Greentree Landfill in Kersey, Pennsylvania. No benefit or charge was recorded in operating expenses during three months ended September 30, 2018 and a $2.4 charge was recorded in operating expenses during the three months ended September 30, 2017. During the nine months ended September 30, 2018 and 2017, the Company recorded a charge in operating expenses of $0.1 and $7.8, respectively. These charges were recorded to adjust the reserve related to this matter to the remaining probable costs to relocate displaced material and restore infrastructure, net of insurance recoveries; this amount could increase or decrease as a result of actual costs incurred to completion. The Company has incurred expenditures of $8.0, net of insurance recoveries, as of September 30, 2018 related to this matter.
The Company is subject to various other proceedings, lawsuits, disputes and claims and regulatory investigations arising in the ordinary course of its business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against the Company include commercial, customer, and employment-related claims. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. These actions are in various procedural stages, and some are covered in part by insurance. Although the Company cannot predict the ultimate outcome and the range of loss cannot be currently estimated, the Company does not believe that the eventual outcome of any such action could have a material adverse effect on its business, financial condition, results of operations, or cash flows.     



17

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

Multiemployer Defined Benefit Pension Plans
Approximately 14.4% 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.
In connection with its ongoing renegotiation of various collective bargaining agreements, the Company may discuss and negotiate for the complete or partial withdrawal from one or more of these pension plans. As of September 30, 2018, the Southwest Pennsylvania & Western Maryland Area Teamsters & Employers Pension Fund agreed to use September 30, 2018 as the termination date for the Company's contribution obligation to this multiemployer pension plan and the Company estimated and recorded a withdrawal liability of $0.8.
A complete or partial withdrawal from a multiemployer pension plan may also 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 discontinued operations, the Company is potentially exposed to certain withdrawal liabilities.
The Company does not believe that any future withdrawals, individually or in the aggregate, from the multiemployer plans to which it contributes could have a material adverse effect on the Company's business, financial condition or liquidity. However, such withdrawals could have a material adverse effect on the Company's results of operations for a particular reporting period, depending on the number of employees withdrawn in any future period and the financial condition of the multiemployer plan(s) at the time of such withdrawal(s).

Tax Matters

The Company has open tax years dating back to 2003. Prior to the acquisition in fiscal 2012, Veolia ES Solid Waste division was part of a consolidated group and is still subject to IRS and state examinations dating back to 2004. Pursuant to the terms of the acquisition of Veolia ES Solid Waste, Inc., the Company is entitled to certain indemnifications for Veolia ES Solid Waste Division's pre-acquisition tax liabilities.
The Company maintains a liability for uncertain tax positions, the balance of which management believes is adequate. Results of audit assessments by taxing authorities are not currently expected to have a material adverse impact on the Company's results of operations or cash flows.



























18

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

10. Segment and Related Information
The Company manages and evaluates its operations primarily through its South, East and Midwest regional segments. These three groups are presented below as the Company’s reportable segments. The Company’s three geographic operating segments provide collection, transfer, disposal and recycling services. The Company serves residential, commercial and industrial, and municipal customers throughout its operating segments.
Service revenues, operating income/(loss) and depreciation and amortization for the Company's reportable segments for the periods indicated are shown in the following tables:
 
Service
Revenues
 
Operating
Income
(Loss)
 
Depreciation
and
Amortization
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
 
 
 
South
$
154.0

 
$
7.3

 
$
21.0

East
104.8

 
6.1

 
20.4

Midwest
141.8

 
20.2

 
26.4

Corporate

 
(16.1
)
 
1.1

 
$
400.6

 
$
17.5

 
$
68.9

 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
 
 
South
$
145.5

 
$
22.8

 
$
20.3

East
97.8

 
4.2

 
19.7

Midwest
149.4

 
22.4

 
26.7

Corporate

 
(19.7
)
 
2.2

 
$
392.7

 
$
29.7

 
$
68.9

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
South
455.5


54.6


64.2

East
298.3


17.0


58.8

Midwest
409.6


52.7


76.4

Corporate


(51.8
)

3.4

 
$
1,163.4


$
72.5


$
202.8

 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
South
$
420.6

 
$
69.1

 
$
59.1

East
284.0

 
(3.7
)
 
57.4

Midwest
418.6

 
54.2

 
74.5

Corporate

 
(54.5
)
 
6.9

 
$
1,123.2

 
$
65.1

 
$
197.9

 





19

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

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


Three Months Ended September 30,
 
Nine Months Ended September 30,


2018

2017 (1)
 
2018

2017 (1)
Residential Collection Revenue

$
100.3


$
99.9

 
$
301.5


$
290.9

Commercial Collection Revenue

95.4


94.0

 
281.5


276.6

Rolloff Collection Revenue

66.7


65.0

 
192.7


185.2

Disposal Revenue

72.9


74.0

 
203.4


202.8

Fuel and Environmental Charges

30.3


25.7

 
86.3


72.5

Sale of Recyclables

3.7


9.2

 
13.0


25.6

Other Revenue

31.3


24.9

 
85.0


69.6



$
400.6


$
392.7

 
$
1,163.4


$
1,123.2

(1) Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 605.
Fluctuations in the Company's operating results may be caused by many factors, including period-to-period changes in the relative contribution of revenue by each line of business and operating segment and by general economic conditions. In addition, its revenues and income from operations typically reflect seasonal patterns. The Company expects its operating results to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters and lower in the fourth quarter than in the second and third quarters. This seasonality reflects the lower volume of solid waste generated during the late fall, winter and early spring in the East and Midwest segments because of decreased construction and demolition activities during winter months in these regions of the United States. In addition, some of the Company's operating costs may be higher in the winter months. Adverse winter weather conditions slow waste collection activities, resulting in higher labor and operational costs. Greater precipitation in the winter increases the weight of collected municipal solid waste, resulting in higher disposal costs, which are calculated on a per ton basis.
Additionally, certain destructive weather conditions that tend to occur during the second half of the year, such as hurricanes that most often impact the South region, can increase the Company’s revenues in the areas affected. While weather-related and other occurrences can boost revenues through additional work, the earnings generated can be moderated as a result of significant start-up costs and other factors, resulting in earnings at comparatively lower margins. These destructive weather conditions can result in higher fuel costs, higher labor costs, reduced municipal contract productivity and higher disposal costs in disposal neutral markets. Certain weather conditions, including severe winter storms, may result in the temporary suspension of the Company’s operations, which can significantly affect the operating results of the affected regions.





















20

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

11. Fair Value Measurements
Assets and Liabilities Accounted for at Fair Value
In measuring fair values of assets and liabilities, the Company uses valuation techniques that maximize the use of observable inputs (Level 1) and minimize the use of unobservable inputs (Level 3). The Company does not have any assets or liabilities measured using unobservable Level 3 inputs. The Company also uses market data or assumptions that it believes market participants would use in pricing an asset or liability, including assumptions about risk when appropriate. The carrying value for certain of the Company's financial instruments approximate fair value because of their short-term nature. The Company’s assets and liabilities that are measured at fair value on a recurring basis include the following:
 
 
 
Fair Value Measurement at September 30, 2018
Reporting Date Using
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Carrying
Value
 
 
 
 
 
 
 
 
Recurring fair value measurements
 
 
 
 
 
 
 
Cash and cash equivalents
$
8.3

 
$
8.3

 
$

 
$
8.3

Interest rate caps - asset position
13.4

 

 
13.4

 
13.4

Total recurring fair value measurements
$
21.7

 
$
8.3

 
$
13.4

 
$
21.7

 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement at December 31, 2017
Reporting Date Using
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Carrying
Value
 
 
 
 
 
 
 
 
Recurring fair value measurements
 
 
 
 
 
 
 
Cash and cash equivalents
$
6.8

 
$
6.8

 
$

 
$
6.8

Interest rate caps - asset position
3.7




3.7


3.7

Interest rate caps - liability position
(0.4
)

$


(0.4
)

(0.4
)
Total recurring fair value measurements
$
10.1


$
6.8


$
3.3


$
10.1

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 September 30, 2018 and December 31, 2017, respectively.





21

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:
 
September 30,
2018
 
December 31,
2017
Revolver
$
5.0


$
29.0

Senior Notes
430.3


435.1

Term Loan B
1,418.3


1,467.3


$
1,853.6


$
1,931.4

The carrying value of the Company’s debt at September 30, 2018 and December 31, 2017 was $1,841.3 and $1,914.0, respectively.

12. Subsequent Events

Subsequent to September 30, 2018, the Company made a $20.0 voluntary prepayment on its Term Loan B and a $5.0 payment on its Revolver.

22



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 2017 Annual Report on Form 10-K. All dollar amounts are presented in millions, unless otherwise stated.
Overview
We are a leading integrated provider of non-hazardous solid waste collection, transfer, recycling and disposal services, operating primarily in secondary markets or under exclusive arrangements. We have a presence in 16 states across the South, East and Midwest regions of the United States, serving approximately 2.8 million residential and over 200,000 commercial and industrial (C&I) customers through our extensive network of 93 collection operations, 73 transfer stations, 22 owned or operated recycling facilities and 40 owned or operated landfills. We operate six landfill gas and renewable energy projects and have an additional 12 third party owned landfill gas and renewable energy projects. We also have post-closure responsibility for five 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.












23


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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Service revenues
$
400.6

 
100.0
%
 
$
392.7

 
100.0
%
 
$
1,163.4

 
100.0
 %
 
$
1,123.2

 
100.0
%
Operating costs and expenses
 
 
 
 
 
 
 
 

 
 
 

 
 
Operating
264.4


66.0
%

244.2


62.2
%

743.7


63.9
 %

706.0


62.9
%
Accretion of landfill retirement obligations
3.8


0.9
%

3.8


1.0
%

11.4


1.0
 %

11.1


1.0
%
       Operating expenses
268.2


66.9
%

248.0


63.2
%

755.1


64.9
 %

717.1


63.8
%
Selling, general and administrative
45.4

 
11.3
%
 
41.8

 
10.6
%
 
135.3

 
11.6
 %
 
127.4

 
11.3
%
Depreciation and amortization
68.9

 
17.2
%
 
68.9

 
17.5
%
 
202.8

 
17.4
 %
 
197.9

 
17.6
%
Acquisition and development costs
0.1

 
%
 
0.4

 
0.1
%
 
0.4

 
 %
 
1.2

 
0.1
%
Loss (gain) on disposal of assets and asset impairments
0.5

 
0.1
%
 
0.5

 
0.1
%
 
(2.8
)
 
(0.2
)%
 
11.1

 
1.0
%
Restructuring charges

 
%
 
3.4

 
0.9
%
 
0.1

 
 %
 
3.4

 
0.3
%
Total operating costs and expenses
383.1

 
95.6
%
 
363.0

 
92.4
%
 
1,090.9

 
93.8
 %
 
1,058.1

 
94.2
%
Operating income
$
17.5

 
4.4
%
 
$
29.7

 
7.6
%
 
$
72.5

 
6.2
 %
 
$
65.1

 
5.8
%
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

24


overdue payments, customer administrative charges relating to customers who request paper copies of invoices rather than opting for electronic invoices and compliance and business impact charges.
The following table sets forth our consolidated revenues by line of business for the periods indicated (in millions and as a percentage of total service revenues).
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Collection
$
262.7

 
65.6
 %
 
$
259.1

 
66.0
 %
 
$
776.2

 
66.7
 %
 
$
753.1

 
67.0
 %
Disposal
146.8

 
36.6
 %
 
145.3

 
37.0
 %
 
418.9

 
36.0
 %
 
407.8

 
36.3
 %
Sale of recyclables
4.0

 
1.0
 %
 
10.0

 
2.5
 %
 
13.9

 
1.2
 %
 
27.6

 
2.5
 %
Fuel charges and environmental charges
31.6

 
7.9
 %
 
26.9

 
6.9
 %
 
90.1

 
7.7
 %
 
76.0

 
6.8
 %
Other revenue
34.5

 
8.6
 %
 
28.0

 
7.1
 %
 
94.9

 
8.2
 %
 
78.8

 
7.0
 %
Intercompany eliminations
(79.0
)
 
(19.7
)%
 
(76.6
)
 
(19.5
)%
 
(230.6
)
 
(19.8
)%
 
(220.1
)
 
(19.6
)%
Total service revenues
$
400.6

 
100.0
 %
 
$
392.7

 
100.0
 %
 
$
1,163.4

 
100.0
 %
 
$
1,123.2

 
100.0
 %
The following table reflects changes in components of our revenue, as a percentage of total revenue, for the three and nine months ended September 30, 2018 and 2017:

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017
Average yield
4.3
 %

0.2
 %

3.2
 %

1.4
 %
Recycling
(1.3
)%

0.9
 %

(1.1
)%

1.0
 %
Fuel surcharge revenue
1.2
 %

0.2
 %

1.0
 %

0.4
 %
Total yield
4.2
 %

1.3
 %

3.1
 %

2.8
 %
Organic volume
(1.1
)%

3.4
 %

0.8
 %

0.8
 %
Acquisitions
1.1
 %

4.8
 %

2.4
 %

3.4
 %
Divestitures
 %

(0.6
)%

(0.4
)%

(0.3
)%
Impact of revenue recognition standard adoption
(2.2
)%

 %
 
(2.3
)%

 %
Total revenue growth
2.0
 %

8.9
 %

3.6
 %

6.7
 %
Average yield is defined as aggregate contribution of price changes excluding recycled commodities and fuel surcharge revenue.
During the three months ended September 30, 2018, we experienced the following changes in components of our revenue as compared to the same period in fiscal 2017:
Average yield increased revenue by 4.3% 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 1.3% due to a decrease in recycling commodity prices;
Fuel surcharge revenue increased revenue by 1.2% due to an increase in diesel fuel prices. These charges fluctuate in response to changes in prices for diesel fuel on which the surcharge is based and, consequently, any increase in fuel prices results in an increase in our revenue. Our fuel surcharges reset on a monthly basis therefore an increase in our fuel surcharge revenue is delayed in comparison to the increase in our fuel expense when diesel fuel prices increase;
Organic volume decreased revenue by 1.1% primarily due to a decrease in MSW, C&D and special waste disposal volumes and a decrease in pass through revenue related to special waste trucking volumes. The decreases were partially offset by an increase in volumes in our residential and rolloff collection lines of business and an increase in other revenue including broker revenue and service and administrative fees;
Acquisitions increased revenue by 1.1% due to the completion of tuck-in acquisitions that further enhance our vertical integration strategy;

25


The adoption of the new revenue recognition standard and an associated policy election to record revenues net of applicable state landfill taxes decreased revenue by 2.2%.

During the nine months ended September 30, 2018, we experienced the following changes in components of our revenue as compared to the same period in fiscal 2017:
Average yield increased revenue by 3.2% 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 1.1% due to a decrease in recycling commodity prices;
Fuel surcharge revenue increased revenue by 1.0% due to an increase in diesel fuel prices;
Organic volume increased revenue by 0.8% primarily due to an increase in volumes in our residential and rolloff collection lines of business and an increase in other revenue including broker revenue and service and administrative fees. These increases were partially offset by a decrease in MSW and C&D disposal volumes and lower pass through revenue related to special waste trucking volumes;
Acquisitions increased revenue by 2.4% due to the completion of acquisitions that further enhance our vertical integration strategy;
Divestitures decreased revenue by 0.4% due to our strategic decision to divest our non-integrated Charlotte collection operations in the second quarter of fiscal 2017;
The adoption of the new revenue recognition standard and an associated policy election to record revenues net of applicable state landfill taxes decreased revenue by 2.3%.

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 fees and taxes 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).


26


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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor and related benefits
$
84.0

 
21.0
%
 
$
80.2

 
20.4
%
 
$
249.2

 
21.4
%
 
$
233.2

 
20.8
%
Transfer and disposal costs
52.9

 
13.2
%
 
53.1

 
13.5
%
 
155.0

 
13.3
%
 
154.8

 
13.8
%
Maintenance and repairs
40.8

 
10.2
%
 
36.7

 
9.3
%
 
116.5

 
10.0
%
 
104.5

 
9.3
%
Fuel
20.7

 
5.2
%
 
17.0

 
4.3
%
 
60.1

 
5.2
%
 
49.0

 
4.4
%
Franchise fees and taxes
11.0

 
2.7
%
 
18.2

 
4.6
%
 
30.7

 
2.6
%
 
50.7

 
4.5
%
Risk management
10.4

 
2.6
%
 
7.8

 
2.1
%
 
27.0

 
2.3
%
 
24.6

 
2.2
%
Other
28.3

 
7.0
%
 
28.8

 
7.4
%
 
83.4

 
7.3
%
 
81.4

 
7.2
%
Subtotal
$
248.1

 
61.9
%
 
$
241.8

 
61.6
%
 
$
721.9

 
62.1
%
 
$
698.2

 
62.2
%
Greentree expenses, net of insurance recoveries


%

2.4


0.6
%
 
0.1


%

7.8


0.7
%
Landfill remediation expenses
16.3


4.1
%



%
 
21.7


1.8
%



%
       Total operating expenses, excluding accretion expense
$
264.4


66.0
%

$
244.2


62.2
%
 
$
743.7


63.9
%

$
706.0


62.9
%
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 September 30, 2018 compared to 2017
Operating expenses increased by $20.2 or 8.3% to $264.4 for the three months ended September 30, 2018 from $244.2 for the three months ended September 30, 2017. Operating expenses, excluding the Greentree expenses and landfill remediation expenses, increased $6.3 or 2.6% to $248.1 for the three months ended September 30, 2018 from $241.8 for the three months ended September 30, 2017. The change was due to the following:

Labor and related benefits increased by $3.8 or 4.7% to $84.0 which was primarily attributable to a driver shortage resulting in higher labor costs, merit increases, acquisition activity, the start of new municipal contracts and an increase in the frequency and severity of workers compensation claims partially offset by lower healthcare costs as a result of re-designed benefit plans for fiscal 2018;

Transfer and disposal costs decreased by $0.2 or 0.4% to $52.9. These costs were impacted by increased third party trucking costs due to labor and fuel cost increases but were offset by a reduction in recycling rebates due to the impact of adopting the new revenue recognition standard as these rebates are recorded as a reduction of revenue beginning in the first quarter of fiscal 2018;

Maintenance and repairs expense increased by $4.1 or 11.2% to $40.8 primarily due to a mechanic shortage resulting in higher labor costs, acquisition activity and the start of new municipal contracts;

Fuel costs increased $3.7 or 21.8% to $20.7 impacted by an increase in diesel fuel prices;

Franchise fees and taxes decreased $7.2 or 39.6% to $11.0 primarily due to the impact of adopting the new revenue recognition standard as a portion of these fees and taxes are recorded as a reduction of revenue beginning in the first quarter of fiscal 2018;

Risk management expense increased $2.6 or 33.3% to $10.4 primarily due to higher frequency and severity of automobile and property liability claims in the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017 including the unfavorable impact to actuarial development;

Other operating costs decreased $0.5 or 1.7% to $28.3 primarily due to a decrease in disposal facility maintenance costs;

27


Greentree expenses, net of insurance recoveries, decreased $2.4. No additional costs were recorded related to this matter during the three months ended September 30, 2018. The costs recorded during the three months ended September 30, 2017 related to our estimate of remaining expenses necessary to remediate the damage caused by the waste slide in the first quarter of fiscal 2017 offset by estimated insurance recoveries related to the matter;
We recorded a charge in operating expenses of $16.3 during the three months ended September 30, 2018 at one of our landfills as further described in Note 9 to the unaudited consolidated financial statements.
Nine months ended September 30, 2018 compared to 2017
Operating expenses increased by $37.7 or 5.3% to $743.7 for the nine months ended September 30, 2018 from $706.0 for the nine months ended September 30, 2017. Operating expenses, excluding the Greentree expenses and landfill remediation expenses, increased by $23.7 or 3.4% to $721.9 for the nine months ended September 30, 2018 from $698.2 for the nine months ended September 30, 2017. The change was due to the following:

Labor and related benefits increased by $16.0 or 6.9% to $249.2 which was primarily attributable to a driver shortage resulting in higher labor costs, merit increases, acquisition activity, the start of new municipal contracts and an increase in the frequency and severity of workers compensation claims partially offset by lower healthcare costs as a result of re-designed benefit plans for fiscal 2018;

Transfer and disposal costs increased by $0.2 or 0.1% to $155.0 as a result of increased third party trucking costs due to labor and fuel cost increases, but were offset by a reduction in recycling rebates due to the impact of adopting the new revenue recognition standard as these rebates are recorded as a reduction of revenue beginning in the first quarter of fiscal 2018;

Maintenance and repairs expense increased by $12.0 or 11.5% to $116.5 primarily due to a mechanic shortage resulting in higher labor costs, acquisition activity and the start of new municipal contracts;

Fuel costs increased $11.1 or 22.7% to $60.1 impacted by an increase in diesel fuel prices partially offset by a benefit of $1.8 realized in the nine months ended September 30, 2018 from CNG tax credits that were enacted in the first quarter of fiscal 2018 related to fiscal 2017 CNG purchases;

Franchise fees and taxes decreased $20.0 or 39.4% to $30.7 primarily due to the impact of adopting the new revenue recognition standard as a portion of these fees and taxes are recorded as a reduction of revenue beginning in the first quarter of fiscal 2018;

Risk management expense increased $2.4 or 9.8% to $27.0 primarily due to higher frequency and severity of automobile and property liability claims in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 including the unfavorable impact to actuarial development;

Other operating costs increased $2.0 or 2.5% to $83.4 due to increases in vehicle and equipment operating expenses and higher cost of materials, that are tied to the increase in oil prices, associated with an asphalt operation that was acquired in fiscal 2017;
Greentree expenses, net of insurance recoveries, decreased $7.7 or to $0.1. The costs recorded in each period related to our estimate of remaining expenses necessary to remediate the damage caused by the waste slide in the first quarter of fiscal 2017 offset by estimated insurance recoveries related to the matter;
We recorded a charge in operating expenses of $21.7 during the nine months ended September 30, 2018 at one of our landfills as further described in Note 9 to the unaudited consolidated financial statements.
Accretion of Landfill Retirement Obligations
Accretion expense was $3.8 and $3.8 for the three months ended September 30, 2018 and 2017, respectively. Accretion expense was $11.4 and $11.1 for the nine months ended September 30, 2018 and 2017, respectively. The increase of $0.3 was primarily

28


attributable to the assumption of post-closure responsibility at one of our landfills during the first quarter of fiscal 2017 and the acquisition of a landfill during the first quarter of fiscal 2017.
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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
$
27.6

 
6.9
%
 
$
26.4

 
6.7
%
 
$
84.9

 
7.3
%
 
$
81.3

 
7.2
%
Legal and professional
3.4

 
0.8
%
 
2.8

 
0.7
%
 
10.6

 
0.9
%
 
8.7

 
0.8
%
Other
14.4

 
3.6
%
 
12.6

 
3.2
%
 
39.8

 
3.4
%
 
37.4

 
3.3
%
Total selling, general and administrative expenses
$
45.4

 
11.3
%
 
$
41.8

 
10.6
%
 
$
135.3

 
11.6
%
 
$
127.4

 
11.3
%
Three months ended September 30, 2018 compared to 2017
Our salaries expense increased by $1.2 or 4.5% to $27.6 primarily due to an increase in stock based compensation expense, an increase in salaries due to merit increases and a one time multi-employer pension plan withdrawal fee. These increases were partially offset by lower bonus accruals.
Legal and professional fees increased $0.6 or 21.4% to $3.4 due to an increase in litigation fees and an increase in consulting fees associated with information technology projects.
Other selling, general and administrative expenses increased $1.8 or 14.3% to $14.4 primarily due to an increase in computer hardware and software maintenance costs and various other administrative expenses.
Nine months ended September 30, 2018 compared to 2017
Our salaries expense increased by $3.6 or 4.4% to $84.9 primarily due to an increase in salaries due to merit increases, an increase in bonus accruals, a one time multi-employer pension plan withdrawal fee and an increase in stock based compensation expense. These increases were partially offset by lower severance expense.
Legal and professional fees increased $1.9 or 21.8% to $10.6 due to higher consulting fees associated with information technology projects and an increase in litigation fees.
Other selling, general and administrative expenses increased $2.4 or 6.4% to $39.8 primarily due to an increase in computer hardware and software maintenance costs and various other administrative expenses.







29


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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018

2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation, amortization and depletion of property and equipment
$
59.1

 
14.8
%
 
$
58.6

 
14.9
%
 
$
172.3

 
14.8
%
 
$
166.6

 
14.8
%
Amortization of other intangible assets
9.8

 
2.4
%
 
10.3

 
2.6
%
 
30.5

 
2.8
%
 
31.3

 
2.8
%
Depreciation and amortization
$
68.9

 
17.2
%
 
$
68.9

 
17.5
%
 
$
202.8

 
17.4
%
 
$
197.9

 
17.6
%

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 2017 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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization of property and equipment
$
34.7

 
8.7
%
 
$
34.1

 
8.7
%
 
$
103.6

 
8.9
%
 
$
100.0

 
8.9
%
Landfill depletion and amortization
24.4

 
6.1
%
 
24.5

 
6.2
%
 
68.7

 
5.9
%
 
66.6

 
5.9
%
Depreciation, amortization and depletion of property and equipment
$
59.1

 
14.8
%
 
$
58.6

 
14.9
%
 
$
172.3

 
14.8
%
 
$
166.6

 
14.8
%
Three months ended September 30, 2018 compared to 2017
Depreciation and amortization of property and equipment increased $0.6 or 1.8% to $34.7 due mainly to acquisition activity and equipment purchased related to the start of new municipal contracts.
Landfill depletion and amortization decreased $0.1 or 0.4% to $24.4 due to the mix of disposal volumes.

Nine months ended September 30, 2018 compared to 2017
Depreciation and amortization of property and equipment increased $3.6 or 3.6% to $103.6 due mainly to acquisition activity and equipment purchased related to the start of new municipal contracts.
Landfill depletion and amortization increased $2.1 or 3.2% to $68.7 due to acquisition activity and the mix of disposal volumes.
Amortization of Other Intangible Assets
Amortization of other intangible assets was $9.8 and $10.3, or as a percentage of revenue, 2.4% and 2.6%, for the three months ended September 30, 2018 and 2017, respectively. Amortization of other intangible assets was $30.5 and $31.3 or as a percentage of revenue, 2.6% and 2.8%, for the nine months ended September 30, 2018 and 2017, respectively. The decreases for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 was due to certain intangible assets becoming fully amortized partially offset by the impact of acquisition activity.

30


Acquisitions and Divestitures
In the ordinary course of our business, we regularly evaluate and pursue acquisition opportunities that further enhance our vertical integration strategy. We also regularly evaluate our current operations and consider divesting of those operations that do not provide us with an acceptable profit margin.

We completed nine tuck-in acquisitions during the nine months ended September 30, 2018 for a cash purchase price of $6.1 and notes payable of $0.7, subject to net working capital adjustments, which we expect to be completed within approximately one year. Thirteen tuck-in acquisitions and one platform acquisition were completed during the nine months ended September 30, 2017 for a cash purchase price, net of cash acquired, of $112.2 and notes payable of $4.4. The results of operations of each acquisition are included in our condensed consolidated statements of operations subsequent to the closing date of each acquisition.
Gain/Loss on Disposal of Assets and Asset Impairments
We had losses on disposal of assets of $0.5 and $0.5 during the three months ended September 30, 2018 and 2017, respectively. We had a gain on disposal of assets of $2.8 and a loss on disposal of assets and asset impairments of $11.1 during the nine months ended September 30, 2018 and 2017, respectively. The gain for the nine months ended September 30, 2018 was primarily related to the sale of a property in Clay County, Florida and the loss for the nine months ended September 30, 2017 was primarily related to the South Carolina intangible asset impairment.
Restructuring Charges
During the three and nine months ended September 30, 2017, we incurred restructuring charges of $3.4 due to the elimination of positions at the corporate office. Of the $3.4 of restructuring charges, $2.1 relates to the acceleration of stock based compensation expense and $1.3 relates to severance expense.
Other, Net
Changes in the fair value and settlements of derivative instruments that do not qualify for hedge accounting are recorded in other income (expense), net in the condensed consolidated statements of operations and amounted to income of $0.4 and losses of $0.1 for the three months ended September 30, 2018 and 2017, respectively. Changes in the fair value and settlements of derivative instruments that do not qualify for hedge accounting and ineffectiveness for derivative instruments that qualify for hedge accounting amounted to income of $7.0 and losses of $3.2 for the nine months ended September 30, 2018 and 2017, respectively. Income from equity investee for the three months ended September 30, 2018 and 2017, respectively, was $0.1 and $0.6. Income from equity investee for the nine months ended September 30, 2018 and 2017, respectively, was $1.0 and $1.2.

Interest Expense
Interest expense increased by $0.3 or 1.2% to $24.4 for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. Interest expense increased by $1.3 or 1.9% to $71.0 for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increases were primarily due to the impact of increasing interest rates on our variable rate debt partially offset by the impact of our Term Loan B repricing in the fourth quarter of fiscal 2017 and lower debt levels during the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017.
Cash paid for interest was $16.7 and $16.2 for the three months ended September 30, 2018 and 2017, respectively. Cash paid for interest was $60.0 and $58.6 for the nine months ended September 30, 2018 and 2017, respectively.
Income Taxes
Our effective income tax rate for the three months ended September 30, 2018 and 2017 was 19.7% and 49.3%, respectively. We evaluate our effective income tax rate at each interim period and adjust it accordingly as facts and circumstances warrant. The difference between income taxes computed at the federal statutory rate of 21% and reported income taxes for the three months ended September 30, 2018 was primarily due to the unfavorable impact of the change in recorded valuation allowance and permanently non-deductible expenses. The difference between income taxes computed at the federal statutory rate of 35% and reported income taxes for the three months ended September 30, 2017 was primarily due to the unfavorable impact of the change in recorded valuation allowance and permanently non-deductible expenses.

31


Our effective income tax rate for the nine months ended September 30, 2018 and 2017 was 32.4% and 27.5%, respectively. The difference between income taxes computed at the federal statutory rate of 21% and reported income taxes for the nine months ended September 30, 2018 was primarily due to the unfavorable impact of the change in recorded valuation allowance. The difference between income taxes computed at the federal statutory rate of 35% and reported income taxes for the nine months ended September 30, 2017 was primarily due to the unfavorable impact of the change in recorded valuation allowance and permanently non-deductible expenses.
Cash paid for income taxes (net of refunds) was $1.0 and $0.4 for the three months ended September 30, 2018 and 2017, respectively. Cash paid for income taxes (net of refunds) was $2.0 and $1.0 for the nine months ended September 30, 2018 and 2017, 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 September 30, 2018

 

 

South
$
154.0

 
$
7.3

 
$
21.0

East
104.8

 
6.1

 
20.4

Midwest
141.8

 
20.2

 
26.4

Corporate

 
(16.1
)
 
1.1
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