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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 June 30, 2014
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: 333-191109
 
ADS Waste Holdings, 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
ý  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
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 August 14, 2014 was 1,000 shares.
*
Registrant has only been subject to such filing requirements since November 8, 2013.
 



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 quarterly report on Form 10-Q, 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” and “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 the “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, that 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 under the heading "Risk Factors" in our Annual Report on Form 10-K dated December 31, 2013, filed with the Securities and Exchange Commission. Examples of these risks, uncertainties and other factors include, but are not limited to: risks relating to our ability to compete; risks relating to our substantial indebtedness, our ability to service such debt and our ability to comply with debt covenants; risks relating to our ability to meet liquidity needs; risks relating to our ability to implement our growth strategy as and when planned; risks associated with acquisitions; risks relating to our ability to realize operating efficiencies in the integration of the Veolia ES Solid Waste division acquisition or other business combinations; risks relating to the seasonality of our business and fluctuations in quarterly operating results; risks relating to the timing, renewal and exclusivity of contracts; risks relating to possible impairment of goodwill and other intangible assets; risks relating to our dependence on senior, regional and local management; risks associated with technology; risks relating to litigation, regulatory investigations and tax examinations; risks relating to weather conditions or natural disasters; the risk that we will not be able to improve margins; risks relating to the availability of qualified employees, particularly in new or more cost-effective locations; risks relating to the supply and price of fuel; risks relating to the pricing of commodities; risks relating to the shifting view of traditional waste streams as renewable resources in our industry; risks relating to the possible loss of key customers or loss of significant volumes from key customers; risks relating to government regulations; risks relating to the instability in the financial markets; risks relating to adverse capital and credit market conditions; and risks relating to the domestic and international economies.
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.

2


ADS Waste Holdings, Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 2014
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.
 
 
 


3


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADS Waste Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
 
(in millions, except share data)
June 30,
2014
 
December 31,
2013
 
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
$
4.8

 
$
12.0

 
Accounts receivable, net of allowance for doubtful accounts of $7.3 and $8.4, respectively
194.7

 
193.1

 
Prepaid expenses and other current assets
27.9

 
35.2

 
Deferred income taxes
7.2

 
7.2

 
Assets of businesses held for sale

 
3.1

 
Total current assets
234.6

 
250.6

 
Restricted cash
2.3

 
2.4

 
Other assets, net
111.2

 
121.2

 
Property and equipment, net
1,657.7

 
1,667.4

 
Goodwill
1,167.1

 
1,166.4

 
Other intangible assets, net
400.1

 
418.8

 
Total assets
$
3,573.0

 
$
3,626.8

 
Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
$
74.0

 
$
83.5

 
Accrued expenses
110.3

 
117.8

 
Deferred revenue
58.7

 
60.3

 
Current maturities of landfill retirement obligations
33.8

 
28.7

 
Current maturities of long-term debt
36.2

 
29.1

 
Liabilities of businesses held for sale

 
1.7

 
Total current liabilities
313.0

 
321.1

 
Other long-term liabilities, less current maturities
49.7

 
48.2

 
Long-term debt, less current maturities
2,299.4

 
2,302.8

 
Accrued landfill retirement obligations, less current maturities
160.2

 
155.6

 
Deferred income taxes
235.1

 
247.6

 
Total liabilities
3,057.4

 
3,075.3

 
Commitments and contingencies

 

 
Equity
 
 
 
 
Common stock: $.01 par value, 1,000 shares authorized, issued and outstanding

 

 
Additional paid-in capital
1,109.0

 
1,109.5

 
Accumulated other comprehensive income
1.8

 
2.5

 
Accumulated deficit
(595.2
)
 
(560.5
)
 
Total stockholders’ equity
515.6

 
551.5

 
Total liabilities and stockholders’ equity
$
3,573.0

 
$
3,626.8

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

4


ADS Waste Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
 
(in millions)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
Service revenues
$
359.9

 
$
333.6

 
$
681.1

 
$
640.9

 
Operating costs and expenses
 
 
 
 

 
 
 
Operating
230.8

 
208.0

 
441.3

 
404.8

 
Selling, general and administrative
41.4

 
48.0

 
80.1

 
84.3

 
Depreciation and amortization
70.7

 
70.1

 
132.9

 
136.8

 
Acquisition and development costs

 
0.1

 

 
0.2

 
Loss (gain) on disposal of assets
0.5

 
(0.3
)
 
0.8

 
(0.2
)
 
Restructuring charges
0.5

 
0.7

 
2.0

 
1.9

 
Total operating costs and expenses
343.9

 
326.6

 
657.1

 
627.8

 
Operating income
16.0

 
7.0

 
24.0

 
13.1

 
Other income (expense)
 
 
 
 
 
 
 
 
Interest expense
(35.0
)
 
(37.4
)
 
(70.4
)
 
(83.6
)
 
Other, net
0.5

 
0.7

 
1.4

 
1.2

 
Total other expense
(34.5
)
 
(36.7
)
 
(69.0
)
 
(82.4
)
 
Loss from continuing operations before income taxes
(18.5
)
 
(29.7
)
 
(45.0
)
 
(69.3
)
 
Income tax benefit
(3.3
)
 
(11.0
)
 
(10.8
)
 
(25.2
)
 
Loss from continuing operations
(15.2
)
 
(18.7
)
 
(34.2
)
 
(44.1
)
 
Discontinued operations
 
 
 
 
 
 
 
 
Loss from discontinued operations
(0.2
)
 
(7.3
)
 
(0.7
)
 
(6.7
)
 
Income tax benefit

 
(0.9
)
 
(0.2
)
 
(1.4
)
 
Discontinued operations, net
(0.2
)
 
(6.4
)
 
(0.5
)
 
(5.3
)
 
Net loss
$
(15.4
)
 
$
(25.1
)
 
$
(34.7
)
 
$
(49.4
)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


5


ADS Waste Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
(in millions)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net loss
$
(15.4
)
 
$
(25.1
)
 
$
(34.7
)
 
$
(49.4
)
Other comprehensive (loss) income, net of tax
(0.6
)
 
2.5

 
(0.7
)
 
3.4

Comprehensive loss
$
(16.0
)
 
$
(22.6
)
 
$
(35.4
)
 
$
(46.0
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


6


ADS Waste Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
 
 
 
 
 
 
Additional Paid-In Capital
 
Accumulated
Other Comprehensive Loss
 
Accumulated Deficit
 
Total Stockholders' Equity
 
(in millions, except share data)
Common Stock
 
 
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
1,000

 
$

 
$
1,109.5

 
$
2.5

 
$
(560.5
)
 
$
551.5

 
Net loss

 

 

 

 
(34.7
)
 
(34.7
)
 
Unrealized loss resulting from change in fair value of derivative instruments, net of tax

 

 

 
(0.7
)
 

 
(0.7
)
 
Stock-based compensation expense

 

 
1.4

 

 

 
1.4

 
Return of capital to parent company

 

 
(1.9
)
 

 

 
(1.9
)
 
Balance at June 30, 2014
1,000

 
$

 
$
1,109.0

 
$
1.8

 
$
(595.2
)
 
$
515.6

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


7


ADS Waste Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in millions)
Six Months Ended June 30,
 
 
2014
 
2013
 
Cash flows from operating activities
 
 
 
 
Net loss
$
(34.7
)
 
$
(49.4
)
 
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
 
Depreciation and amortization
133.2

 
139.0

 
Amortization of terminated derivative contracts

 
3.0

 
Amortization of interest rate cap premium
1.5

 
0.3

 
Amortization of debt issuance costs
6.3

 
5.4

 
Accretion of original issue discount
2.4

 
2.4

 
Accretion on landfill retirement obligations
6.2

 
7.7

 
Accretion on capital leases and long-term debt
0.7

 
0.7

 
Accretion on loss contracts and other long-term liabilities
0.5

 
0.2

 
Provision for doubtful accounts
2.5

 
2.2

 
Loss (gain) on sale of property and equipment
0.6

 
(0.2
)
 
(Gain) loss on disposition of business
(0.2
)
 
7.6

 
Stock option vesting
1.4

 
2.4

 
Deferred tax provision
(12.0
)
 
(25.8
)
 
Earnings in equity investee
0.3

 
(0.6
)
 
Changes in operating assets and liabilities, net of business acquired
 
 
 
 
Increase in accounts receivable
(3.5
)
 
(11.5
)
 
Decrease in prepaid expenses and other current assets
7.8

 
1.3

 
Decrease in other assets
1.4

 
0.6

 
(Decrease) increase in accounts payable
(1.7
)
 
5.6

 
Decrease in accrued expenses
(6.4
)
 
(4.0
)
 
Decrease in unearned revenue
(2.2
)
 

 
Increase (decrease) in other long-term liabilities
1.1

 
(3.4
)
 
Capping, closure and post-closure expenditures
(3.8
)
 
(2.0
)
 
Net cash provided by operating activities
101.4

 
81.5

 
Cash flows from investing activities
 
 
 
 
Purchases of property and equipment and construction and development
(102.9
)
 
(65.8
)
 
Proceeds from sale of property and equipment
1.2

 
0.4

 
Acquisition of business, net of cash acquired
(4.9
)
 
(6.0
)
 
Proceeds from sale of business
2.1

 

 
Net cash used in investing activities
(104.5
)
 
(71.4
)
 
Cash flows from financing activities
 
 
 
 
Proceeds from borrowings of debt
60.0

 
105.0

 
Repayment on debt
(64.4
)
 
(114.7
)
 
Deferred financing charges
(1.2
)
 
(21.5
)
 
Bank overdraft
3.3

 
14.9

 
Other financing activities
0.1

 
0.1

 
Return of capital to parent
(1.9
)
 

 
Net cash used in financing activities
(4.1
)
 
(16.2
)
 
Net decrease in cash and cash equivalents
(7.2
)
 
(6.1
)
 
Cash and cash equivalents, beginning of period
12.0

 
18.8

 
Cash and cash equivalents, end of period
$
4.8

 
$
12.7

 

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

8

ADS Waste Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in millions, except share data)



1.
Business Operations
ADS Waste Holdings, Inc. (the “Company”, “ADS Waste” or “ADS”) together with its consolidated subsidiaries, as a combined consolidated entity, is a regional environmental services company providing nonhazardous solid waste collection, transfer, recycling and disposal services to customers in the Southeast, Midwest and Eastern regions of the United States, as well as in the Commonwealth of the Bahamas.
The Company currently manages and evaluates our 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, disposal, recycling services and billing services. Additional information related to our segments can be found in Note 9.
The Company is a Delaware corporation that was formed to be the parent company for purposes of reorganizing several holding companies that is ultimately controlled by Star Atlantic Waste Holdings II, L.P. On September 19, 2012, in a series of transactions (the “Reorganization”), Star Atlantic Waste Holdings II, L.P., which is indirectly majority owned by funds sponsored and managed by Highstar Capital, L.P., contributed to Advanced Disposal Waste Holdings Corp. (parent company of ADS Waste Holdings, Inc.) (i) all of the stock of HWStar Holdings Corp., the parent company of Highstar Waste Holding Corp. and Subsidiaries, doing business as Interstate Waste Services (“IWS”) and (ii) its rights under a Share Purchase Agreement, dated as of July 18, 2012, to purchase all of the stock of Veolia ES Solid Waste, Inc. from Veolia Environnment. Advanced Disposal Waste Holdings Corp. contributed to ADS Waste all of the stock of ADStar Waste Holdings Corp. and of HWStar Holdings Corp., as well as the rights under the aforementioned Share Purchase Agreement to purchase the stock of Veolia ES Solid Waste, Inc. The Company is wholly owned by ADS Waste Holdings Corp. (the “Parent”).
The Company is the parent holding company of the historical businesses of ADStar Waste Holdings Corp. and HW Star Holdings Corp., which through their ownership include the operating businesses of ADS and IWS, and has combined the results of these businesses. The historical financial information is derived from the historical consolidated financial statements of ADStar Waste Holdings Corp and the consolidated financial statements of HW Star Holdings Corp. The Reorganization was accounted for as a transaction between entities under common control as we have been and continue to be under common control of Highstar Capital, L.P. since 2006. The financial statements have been consolidated subsequent to the Reorganization date as described above.
On November 20, 2012, ADS Waste purchased Veolia ES Solid Waste, Inc. from Veolia Environnment S.A. for $1,900 and changed the name to MWStar Holdings Corp (“Veolia ES Solid Waste division”). The consolidated company does business as ADS Waste Holdings, Inc.
 
2.
Basis of Presentation
The Company’s condensed consolidated financial statements include its wholly-owned subsidiaries of Advanced Disposal Services South, Inc., Advanced Disposal Services East, Inc. and MW Star Waste Holdings, Corp. and their respective subsidiaries.

As required by accounting principles generally accepted in the United States of America for common control transactions, all assets and liabilities transferred to the Company as part of the Reorganization were recorded in the financial statements at carryover basis. For periods prior to the Reorganization, the consolidated financial statements and related notes reflect the Reorganization as if it had occurred in 2006, the date that ADStar Waste Holdings, Corp. came under common control of Highstar Capital, L.P.
All significant intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 are unaudited. In the opinion of management, these financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, comprehensive 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 financial statements for the year ended December 31, 2013.
In preparing its financial statements, the Company makes numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. The Company must make these

9



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. In some cases, these estimates are particularly difficult to determine and the Company must exercise significant judgment. In preparing its financial statements, the most difficult, subjective and complex estimates and the assumptions that present the greatest amount of uncertainty relate to the Company’s accounting for landfills, environmental remediation liabilities, asset impairments, deferred income taxes and reserves associated with its insured and self-insured claims. Actual results could differ materially from the estimates and assumptions that the Company uses in the preparation of its financial statements.
In May 2014, the Financial Accounting Standards Board ("FASB") issued authoritative guidance regarding revenue recognition from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. The guidance is effective for the interim and annual periods beginning or or after December 15, 2016. The guidance permits the use of either a retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the impact of the amended guidance on its consolidated financial position, results of operations and related disclosure. Furthermore, the FASB issued guidance governing classification of discontinued operations. Upon adoption in 2015, certain future business dispositions may no longer meet the criteria for classification as discontinued operations.



10

ADS Waste Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in millions, except share data)


3.
Landfill Liabilities
Liabilities for final closure and post-closure costs for the year ended December 31, 2013 and for the six months ended June 30, 2014 are shown in the table below:
 
Balance at December 31, 2012
$
191.5

 
Increase in retirement obligation
10.8

 
Accretion of closure and post-closure costs
15.0

 
Disposition
(6.5
)
 
Change in estimate
(14.5
)
 
Costs incurred
(12.0
)
 
Balance at December 31, 2013
184.3

 
Increase in retirement obligation
7.3

 
Accretion of closure and post-closure costs
6.2

 
Costs incurred
(3.8
)
 
Balance at June 30, 2014
194.0

 
Less: Current portion
(33.8
)
 
 
$
160.2

 
At two landfills, the Company provides financial assurance by depositing cash into restricted funds or escrow accounts for purposes of settling final capping, closure, post-closure and environmental remediation obligations.
The fair value of funds and escrow accounts for which the Company is the sole beneficiary was $2.3 at June 30, 2014.
 
4.
Discontinued Operations
The Company completed the sale of certain assets and liabilities in Oxford, MA in December 2013 and the results of operations have been included in discontinued operations in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2013.

The Company entered into a letter of intent in December 2013, to sell certain assets in Panama City, FL for approximately $2.0 and completed the sale in January 2014. The assets are classified as held for sale in the accompanying condensed consolidated balance sheets as of December 31, 2013 and the results of those operations have been included in discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented.
In connection with the acquisition of Veolia ES Solid Waste division, the Company was required by the United States Department of Justice to divest certain businesses in Georgia and New Jersey. The Company completed the divestitures in 2013 and the results of those operations have been included in discontinued operations in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2013.
The Company completed the sale of certain assets and liabilities in New York and New Jersey from the IWS and Veolia ES Solid Waste division businesses for approximately $45.0, of which $25.0 was received in cash on the date of closing, $5.0 was received in December 2013 and the remainder in the form of a mandatorily redeemable preferred security due 2017. The results of those operations have been included in discontinued operations in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2013. The Company also reacquired the outstanding IWS minority interest of $2.5 previously held by the minority shareholder in August 2013.
The following table summarizes the assets and liabilities of those businesses that are presented as held for sale in the accompanying condensed consolidated balance sheets at June 30, 2014 and December 31, 2013, respectively.
 

11

ADS Waste Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in millions, except share data)


 
June 30,
2014
 
December 31,
2013
 
ASSETS
 
 
 
 
Accounts receivable, net
$

 
$
0.7

 
Prepaid expenses and other current assets

 
0.3

 
Property and equipment, net

 
2.1

 
Total assets
$

 
$
3.1

 
LIABILITIES
 
 
 
 
Accounts payable
$

 
$
1.0

 
Accrued expenses

 
0.4

 
Deferred revenue

 
0.3

 
Total liabilities
$

 
$
1.7

 

The following table summarizes the revenues and expenses of those businesses that are presented as discontinued operations prior to impairment charges in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Service revenues
$

 
$
38.9

 
$
0.4

 
$
73.5

Operating costs and expenses
 
 
 
 
 
 
 
Operating

 
35.2

 
0.9

 
66.0

Selling, general and administrative
0.2

 
1.8

 
0.3

 
3.6

Depreciation and amortization

 
1.5

 
0.3

 
2.8

Loss (gain) on disposal of assets

 
7.6

 
(0.4
)
 
7.6

Total operating costs and expenses
0.2

 
46.1

 
1.1

 
80.0

Other expense
 
 
 
 
 
 
 
Interest expense

 
(0.1
)
 

 
(0.2
)
Total other expense

 
(0.1
)
 

 
(0.2
)
Loss from discontinued operations before income tax
(0.2
)
 
(7.3
)
 
(0.7
)
 
(6.7
)
Tax benefit

 
(0.9
)
 
(0.2
)
 
(1.4
)
Loss from discontinued operations, net of taxes
$
(0.2
)
 
$
(6.4
)
 
$
(0.5
)
 
$
(5.3
)


12

ADS Waste Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in millions, except share data)


5.
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:
 
 
June 30,
2014
 
December 31,
2013
 
 
 
 
 
 
Revolving line of credit with lenders, interest at base rate plus margin, as defined (4.15% and 4.17% at June 30, 2014 and December 31, 2013, respectively) due quarterly; balance due at maturity in October 2017
$
15.0

 
$
8.0

 
Note payable; discounted at 7.3%, annual payments varied; balance due 2029
3.6

 
3.5

 
Note payable; discounted at 8.5%, annual payments of $0.2; balance due February 2018; collateralized by real property
0.5

 
0.6

 
Term loans; quarterly payments of $4.5 commencing March 31, 2013 through June 30, 2019 with final payment due October 9, 2019; interest at LIBOR floor of 0.75% and 1.25% at June 30, 2014 and December 31, 2013, respectively, plus an applicable margin of 300 basis points at June 30, 2014 and December 31, 2013
1,773.0

 
1,782.0

 
Senior notes payable; interest at 8.25% payable in arrears semi-annually commencing April 1, 2013; maturing on October 1, 2020
550.0

 
550.0

 
Capital lease obligations, maturing through 2024
19.2

 
15.4

 
Other debt
0.5

 
1.1

 
 
2,361.8

 
2,360.6

 
Less: Original issue discount
(26.2
)
 
(28.7
)
 
Less: Current portion
(36.2
)
 
(29.1
)
 
 
$
2,299.4

 
$
2,302.8

 
All borrowings under the Term B loan and the Revolver are guaranteed by each of the Company’s current and future U.S. subsidiaries (which also guarantee the 8.25% bonds), subject to certain agreed-upon exemptions. The Company has one non-guarantor foreign subsidiary that is minor, as its assets, revenue, income from continuing operations and cash flows from operating activities are less than 3% of the Company’s consolidated amounts. All guarantors are jointly and severally and fully and unconditionally liable. The parent company has no independent assets or operations and each subsidiary guarantor is 100% owned by the Company. There are no significant restrictions on the Company or any guarantor to obtain funds from its subsidiaries by dividend or loan.

Revolving Credit and Letter of Credit Facilities
As of June 30, 2014, the Company had an aggregate committed capacity of $300.0, of which $100.0 was available for letters of credit under various credit facilities. The Company’s revolving credit facility is its primary source of letter of credit capacity and expires in October, 2017. As of June 30, 2014, the Company had an aggregate of approximately $67.4 of letters of credit outstanding under various credit facilities.
Debt Borrowings and Repayments
The Company repaid $53.0 under its revolving credit facilities, $9.0 on its Term B loan and $2.4 on various other obligations in cash during the six months ended June 30, 2014. The Company had $60.0 of borrowings in cash during the six months ended June 30, 2014.
In February 2014, the Company refinanced its Term B loan in an amount equal to the outstanding principal at December 31, 2013 bearing interest at a LIBOR floor of 0.75% plus 300 basis points or the base rate as defined plus 200 basis points. No gain or loss was recorded upon the modification and total costs deferred and amortized over the remaining term of the loan in connection with the transaction were approximately $1.2 for the period ended June 30, 2014. In February 2013, the Company refinanced its Term B loan in an amount equal to the outstanding principal at December 31, 2012 bearing interest at a LIBOR floor of 1.25% plus 300 basis points or the base rate, as defined, plus 200 basis points. No gain or loss was recorded upon the modification and total costs deferred and amortized over the remaining term of the loan in connection with the transaction were approximately $19.5. The covenants remained unchanged from the previous debt and the Company was in compliance with the covenants.

13

ADS Waste Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in millions, except share data)


 
6.
Derivative Instruments and Hedging Activities
The following table summarizes the fair values of derivative instruments recorded in the Company’s condensed consolidated balance sheets:
 
Derivatives Designated as Hedging Instruments
Balance Sheet Location
 
June 30,
2014
 
December 31,
2013
 
Fuel commodity derivatives
Other current assets
 
$
0.3

 
$
0.1

 
Interest rate caps
Other assets
 
3.3

 
6.1

 
Total derivative assets
 
 
$
3.6

 
$
6.2

 
We have not offset fair value of assets and liabilities recognized for our derivative instruments.
Interest Rate Cap
In December 2012, the Company entered into four interest rate cap agreements to hedge the risk of a rise in interest rates and associated cash flows on the variable rate debt. The Company recorded the premium of $5.0 in other assets in the condensed consolidated balance sheets and amortizes the premium to interest expense based upon decreases in time value of the caps. Amortization expense was approximately $0.6 and $0.3 for the three month period ending June 30, 2014 and 2013, respectively and $1.5 and $0.3 for the six months ended June 30, 2014 and 2013, respectively. The original notional amounts of the contracts aggregated are approximately $1,212.0 at December 31, 2013 and expire in tranches through 2016.
 
Interest Rate Swaps
The Company has used interest rate swaps to maintain a portion of its debt obligations at fixed market interest rates. These interest rate derivatives qualify for hedge accounting. In November 2012, the Company terminated these interest rate swaps in connection with its debt refinancing and paid approximately $7.0 upon termination. The amounts were deferred in accumulated other comprehensive income upon termination and are being amortized to interest expense over the remaining term.
The following table summarizes the impacts of periodic settlements of terminated swap agreements on the Company’s results of operations:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
Terminated swap agreements
$

 
$
1.5

 
$

 
$
3.0

 
Commodity Derivatives
The market prices of diesel fuel and natural gas are unpredictable and can fluctuate significantly. A significant increase in the price of fuel or natural gas could adversely affect the business and reduce the Company’s operating margins. To manage a portion of that risk, the Company entered into commodity swap agreements related to the Company’s collection and transfer assets. The Company hedged a total of approximately 7.5 million gallons of fuel with strike prices ranging from $2.84 to $2.92 per gallon. The hedges expire in various periods through December 31, 2015. Further, the Company entered into put options to reduce the exposure of a decrease in natural gas prices. The Company hedged approximately 0.5 BTUs of natural gas with strike price of $5.10 which expired in December, 2013.
There was no significant ineffectiveness associated with the Company’s cash flow hedges for the three and six month periods ended June 30, 2014 and 2013.
 
7.
Income Taxes

14

ADS Waste Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in millions, except share data)


The Company’s effective income tax rate for continuing operations for the three months ended June 30, 2014 and 2013 was 17.8% and 37.0%, respectively. The Company’s effective income tax rate for continuing operations for the six months ended June 30, 2014 and 2013 was 24% and 36.4%, 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 34% and reported income taxes from continuing operations for the three months ended June 30, 2014 was primarily due to recording additional valuation allowance against certain deferred tax assets. The difference between income taxes computed at the federal statutory rate of 34% and reported income taxes from continuing operations for the three months ended June 30, 2013 was not significant. The difference between income taxes computed at the federal statutory rate of 34% and reported income taxes from continuing operations for the six months ended June 30, 2014 was primarily due to a permanent difference from an employee stock option plan and the effect of recording additional valuation allowance against certain deferred tax assets. The difference between income taxes computed at the federal statutory rate of 34% and reported income taxes from continuing operations for the six months ended June 30, 2013 was not significant.

The Company’s effective income tax rate from discontinued operations for the three months ended June 30, 2014 and 2013 was 0% and 12.3%, respectively. The Company's effective income tax rate from discontinued operations for the six months ended June 30, 2014 and 2013 was 28.6% and 20.9%, respectively. The difference between income taxes computed at the federal statutory rate of 34% and reported income taxes from discontinued operations for the three and six months ended June 30, 2014 was not significant. The difference between income taxes computed at the federal statutory rate of 34% and reported income taxes from discontinued operations for the three and six months ended June 30, 2013 was primarily due to the impact of the release in the recorded valuation allowance due to the projected use of net operating losses in certain legal entities.


8.
Commitments and Contingencies
Financial Instruments—The Company has obtained letters of credit, performance bonds and insurance policies and has established funds for performance of landfill final capping, closure and post-closure requirements, environmental remediation, and other obligations. Letters of credit generally are supported by the Company’s revolving credit facility and other credit facilities established for that purpose.
Management does not expect that any claims against or draws on these instruments would have a material adverse effect on the Company’s 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 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.
 
Litigation—In February 2009, the Company and certain of its subsidiaries were named as defendants in a purported class action suit in 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 Chester County, Pennsylvania in 2014. The Georgia case was dismissed in March 2014. The plaintiffs in those cases primarily allege that the defendants charged improper fees (fuel, administrative and environmental fees) that were in breach of the plaintiff’s contract 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.

15

ADS Waste Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in millions, except share data)


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.
The Company is involved in other legal proceedings and regulatory investigations from time to time in the ordinary course of business. Management believes that none of these other legal proceedings or regulatory investigations will have a material adverse effect on our financial condition, results of operations or cash flows.
The Company is subject to various other proceedings, lawsuits, disputes and claims 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, including purported class action lawsuits related to its sales and marketing practices and its customer service agreements and purported class actions involving federal and state wage and hour and other laws. 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. The Company currently does not believe that the eventual outcome of any such actions could have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.
Multiemployer Defined Benefit Pension Plans—Approximately 12% of the Company’s workforce is covered by collective bargaining agreements with various union locals across our 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. 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 we contribute could have a material adverse effect on our business, financial condition or liquidity. However, such withdrawals could have a material adverse effect on our 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 consolidated company ADS Waste Holdings, Inc. is currently under audit for the 2012 tax year. The company has open tax years that cover the periods from 2012 through 2013. The company was formed through a series of transactions including the contribution of equity of Advanced Disposal Services, Inc. and Subsidiaries (“ADS”) and HWStar Holdings Corp. and Subsidiaries. Neither ADS nor HWStar Holdings Corp. are currently under audit by the IRS. ADS has an open tax year for the 2011 period. IWS has open tax years that cover the periods from 1998 through 2010, and 2012.
On November 20, 2012, the Company acquired Veolia ES Solid Waste, Inc. in a stock acquisition. Prior to the acquisition, the Veolia ES Solid Waste division was part of the Veolia Environmental 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’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 its results of operations or cash flows.
 
9.
Segment and Related Information
The Company currently 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, industrial, and municipal customers throughout our operating regions. Summarized financial information concerning its reportable segments for the three and six months ended June 30, 2014 and 2013 are shown in the table below:
 

16

ADS Waste Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in millions, except share data)


 
Services
Revenue
 
Operating
Income
(Loss)
 
Depreciation
and
Amortization
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2014
 
 
 
 
 
 
South
$
124.8

 
$
17.8

 
$
18.6

 
East
92.6

 
1.5

 
21.7

 
Midwest
142.5

 
14.6

 
28.4

 
Corporate

 
(17.9
)
 
2.0

 
 
$
359.9

 
$
16.0

 
$
70.7

 
 
 
 
 
 
 
 
Three Months Ended June 30, 2013
 
 
 
 
 
 
South
$
119.0

 
$
18.4

 
$
19.7

 
East
82.4

 
4.8

 
18.0

 
Midwest
132.2

 
10.1

 
30.1

 
Corporate

 
(26.3
)
 
2.3

 
 
$
333.6

 
$
7.0

 
$
70.1

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014


 


 


 
South
$
246.2

 
$
35.5

 
$
37.2

 
East
171.0

 
0.5

 
39.0

 
Midwest
263.9

 
21.8

 
52.7

 
Corporate

 
(33.8
)
 
4.0

 
 
$
681.1

 
$
24.0

 
$
132.9

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013


 


 


 
South
$
235.0

 
$
35.8

 
$
38.3

 
East
161.4

 
5.9

 
36.9

 
Midwest
244.5

 
12.5

 
57.2

 
Corporate

 
(41.1
)
 
4.4

 
 
$
640.9

 
$
13.1

 
$
136.8

 
 
Fluctuations in the Company 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’s operating revenues normally tend to be somewhat higher in the summer months, primarily due to the traditional seasonal increase in the volume of construction and demolition waste. Historically, the volumes of industrial and residential waste in certain regions in which it operates have tended to increase during the summer months. The Company’s second and third quarter revenues and results of operations typically reflect these seasonal trends.
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 actually increase the Company’s revenues in the areas affected. While weather-related and other “one-time” occurrences can boost revenues through additional work, as a result of significant start-up costs and other factors, such revenue sometimes generates earnings at comparatively lower margins. 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.

10.
Restructuring
In September 2012, the Company announced a reorganization of its operations, designed to consolidate management and staff in connection with the merging of the operations of IWS and ADS. Subsequent to the closing of Veolia ES Solid Waste division, further organizational changes were announced and implemented. Principal changes included consolidation

17



and elimination of management, relocation of staff to new regional headquarter locations and divesting of certain locations. Through this reorganization, the Company eliminated approximately 80 positions throughout the Company and offered voluntary separation agreements to those impacted.
During the three months ended June 30, 2014 and 2013, we recognized $0.5 and $0.7 of pre-tax restructuring charges, respectively. For three months ended June 30, 2014, $0.4 was related to relocation and $0.1 was related to employee severance and benefits cost and for the three months ended June 30, 2013, $0.1 was related to employee severance and benefits costs, $0.2 was related to relocation and $0.4 was related to lease termination costs.
During the six months ended June 30, 2014 and 2013, we recognized $2.0 and $1.9 of pre-tax restructuring charges, respectively. For the six months ended June 30, 2014, $1.4 of relocation costs, $0.1 of employee severance and benefits costs and $0.5 of lease termination costs. For the six months ended June 30, 2013, $1.2 was related to relocation costs, $0.3 was related to employee severance and benefits costs and $0.4 was related to lease termination costs.
Since inception of the reorganization program through June 30, 2014, the Company had recognized $21.9 of restructuring charges, of which $12.9 related to employee severance and benefits, $4.5 associated with lease termination costs and the remainder was associated with relocation costs. Of the total amount recognized since inception of the program in 2012, the Company has paid $17.6 of these costs. At June 30, 2014, the Company had approximately $2.3 of accrued employee severance and $2.0 of lease termination costs, which will be paid through November 2020.
 

18

ADS Waste Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in millions, except share data)


11.
Fair Value Measurements
Assets and Liabilities Accounted for at Fair Value
The Company’s assets and liabilities that are measured at fair value on a recurring basis include the following:
 
 
 
 
Fair Value Measurement at June 30, 2014
Reporting Date Using
 
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Gains
(Losses)
 
Carrying
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4.8

 
$
4.8

 
$

 
$

 
$

 
$
4.8

 
Restricted cash
2.3

 
2.3

 

 

 

 
2.3

 
Derivative instruments - Asset position
3.6

 

 
3.6

 

 

 
3.6

 
Total recurring fair value measurements
$
10.7

 
$
7.1

 
$
3.6

 
$

 
$

 
$
10.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement at December 31, 2013
Reporting Date Using
 
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Gains
(Losses)
 
Carrying
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
12.0

 
$
12.0

 
$

 
$

 
$

 
$
12.0

 
Restricted cash
2.4

 
2.4

 

 

 

 
2.4

 
Derivative instruments - Asset position
6.2

 

 
6.2

 

 

 
6.2

 
Total recurring fair value measurements
$
20.6

 
$
14.4

 
$
6.2

 
$

 
$

 
$
20.6

 
Fair Value of Debt
The fair value of the Company’s debt (Level 2) is estimated using discounted cash flow analyses, based on rates the Company would currently pay for similar types of instruments except for variable rate debt 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 available market information and commonly accepted valuation methodologies, 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 June 30, 2014 and December 31, 2013, respectively.

The estimated fair value of the Company’s debt is as follows at June 30, 2014 and December 31, 2013:
 

19

ADS Waste Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in millions, except share data)


 
June 30,
2014
 
December 31,
2013
 
 
 
 
 
 
Senior notes
$
598.8

 
$
596.1

 
Term loan B
1,767.5

 
1,788.1

 
 
$
2,366.3

 
$
2,384.2

 
The carrying value of the Company’s debt at June 30, 2014 and December 31, 2013 was approximately $2,323.0 and $2,332.0, respectively.
 
12.
Stock-Based Compensation
During the six months ended June 30, 2014, there were 4,265 grant issuances under its stock option plan. For the six months ended June 30, 2014, 6,605 annual and senior management options were forfeited and 7,642 strategic options were forfeited. The weighted average exercise price of its annual and strategic stock options were $608 and $630, respectively.
The weighted average remaining contractual term for both the annual and strategic stock option plans were 6.6 years. Total unrecognized compensation expense was approximately $4.9, which will be recognized over the next 2.9 years. For the three months ended June 30, 2014 and 2013, compensation expense was approximately $1.1 and $1.3. For the six months ended June 30, 2014 and 2013, compensation expense was approximately $1.4 and $2.4.
 
13.
Accumulated Other Comprehensive Income
The changes in the balances of each component of accumulated other comprehensive income, net of tax, which is included as a component of stockholders’ equity, are as follows:
 
 
Six Months Ended 
 June 30, 2014
 
Gains and Losses on
Derivative Instruments (a)
 
 
Balance, December 31, 2013
$
2.5

Other comprehensive loss before reclassifications, net of tax
(0.7
)
Amounts reclassified from accumulated other comprehensive income

Net current period other comprehensive loss
(0.7
)
Balance, June 30, 2014
$
1.8

 
(a)Amounts in parentheses represent debits to accumulated other comprehensive income.
 
The significant amounts reclassified out of each component of accumulated other comprehensive income are as follows:
 

20

ADS Waste Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in millions, except share data)


 
 
Amount of Derivative Gain (Loss)
Recognized in OCI Effective
Three Months Ended June 30,
 
Amount of Derivative Gain (Loss)
Recognized in OCI Effective
Six Months Ended June 30,
Derivatives Designated as Cash Flow Hedges
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Fuel commodity derivatives
 
$
0.4

 
$
(0.9
)
 
$
0.2

 
$
(0.4
)
Natural gas commodity derivatives
 

 
0.1

 

 
(0.1
)
Interest rate caps
 
(1.3
)
 
3.8

 
(1.3
)
 
4.3

Total before tax
 
(0.9
)
 
3.0

 
(1.1
)
 
3.8

Tax expense
 
(0.3
)
 
1.0

 
(0.4
)
 
1.5

Net of tax
 
$
(0.6
)
 
$
2.0

 
$
(0.7
)
 
$
2.3

The amounts reclassified out of each component of accumulated other comprehensive income are as follows:
 
 
 
Statement of Operations Classification
 
Amount Reclassified from
Accumulated Other
Comprehensive Income (Loss) (a)
Three Months Ended
June 30,
 
Amount Reclassified from
Accumulated Other
Comprehensive Income (Loss) (a)
Six Months Ended
June 30,
Derivatives Designated as Cash Flow Hedges
 
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
Gains and losses on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$

 
$
(1.5
)
 
$

 
$
(3.0
)
Fuel commodity derivatives
 
Operating expenses
 

 
0.1

 

 
0.5

Natural gas commodity derivatives
 
Service revenues
 

 
0.1

 

 
0.3

Total reclassifications for the period, before tax
 
 
 

 
(1.3
)
 

 
(2.2
)
Tax impact
 
 
 

 
(0.4
)
 

 
(0.5
)
Total reclassifications for the period, net of tax
 
 
 
$

 
$
(0.9
)
 
$

 
$
(1.7
)
 
(a)
Amounts in parentheses represent debits to the statement of operations classification.


21


Item 2. Management’s Discussion and Analysis 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 on Form 10-K for the year ended December 31, 2013.
Overview
We are the largest privately owned non-hazardous solid waste management company in the United States, as measured by revenue and provide non-hazardous solid waste collection, transfer, recycling and disposal services for residential, commercial and industrial customers across the Southeast, Midwest and Eastern regions of the United States as well as in the Commonwealth of the Bahamas. We service over 2.5 million residential customers, approximately 302,000 commercial and industrial (“C&I”) customers and 732 municipalities. We are vertically integrated with approximately 5,400 employees and we own or operate a network of 91 collection operations, 73 transfer stations, 23 recycling facilities and 42 active landfills with a fleet of approximately 3,200 vehicles.

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 consolidated financial statements bear to revenue (in millions and as percentage of our revenue).
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service revenues
$
359.9

 
100.0
%
 
$
333.6

 
100.0
 %
 
$
681.1

 
100.0
%
 
$
640.9

 
100.0
 %
Operating costs and expenses
 
 
 
 
 
 
 
 

 
 
 

 
 
Operating
230.8

 
64.1
%
 
208.0

 
62.4
 %
 
441.3

 
64.8
%
 
404.8

 
63.2
 %
Selling, general and administrative
41.4

 
11.5
%
 
48.0

 
14.4
 %
 
80.1

 
11.8
%
 
84.3

 
13.2
 %
Depreciation and amortization
70.7

 
19.6
%
 
70.1

 
21.0
 %
 
132.9

 
19.5
%
 
136.8

 
21.3
 %
Acquisition and development charges

 
%
 
0.1

 
 %
 

 
%
 
0.2

 
 %
Loss on disposition of assets
0.5

 
0.1
%
 
(0.3
)
 
(0.1
)%
 
0.8

 
0.1
%
 
(0.2
)
 
 %
Restructuring
0.5

 
0.1
%
 
0.7

 
0.2
 %
 
2.0

 
0.3
%
 
1.9

 
0.3
 %
Total operating costs and expenses
343.9

 
95.4
%
 
326.6

 
97.9
 %
 
657.1

 
96.5
%
 
627.8

 
98.0
 %
Operating income
$
16.0

 
4.6
%
 
$
7.0

 
2.1
 %
 
$
24.0

 
3.5
%
 
$
13.1

 
2.0
 %
Overall, operating income increased $9.0 or 128.6% to $16.0 for the three months ended June 30, 2014 as a result of core business growth in special waste, rolloff and lower selling, general and administrative costs due to substantial completion of the rebranding and integration efforts associated with the Veolia ES Solid Waste division acquisition. For the six months ended June 30, 2014, operating income increased $10.9 or 83.2% to $24.0 as a result of price and volume growth, seasonal increases, lower depreciation costs and substantial completion of the rebranding and integration efforts.
Revenue
Our revenue base is distributed across several markets and business lines, with the primary business lines being our solid waste collection, transfer and landfill disposal operations. Our remaining revenue is generated from recycling, fuel fees and environmental fees, landfill gas-to-energy operations and other ancillary revenue-generating activities. In general, we integrate our recycling operations with our collection operations and obtain revenue from the sale of recyclable materials.
Revenues from our collection operations consists of fees we receive from commercial, industrial, municipal and residential customers and are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume

22


or weight of the waste collected, distance to the recycling facilities, transfer station or disposal facility and our disposal costs. Our residential and commercial collection operations in some markets are based on long-term contracts with municipalities with terms typically of three to five years or longer. We provide front load and temporary and permanent roll-off service offerings to our customers. While the majority of our roll-off services are provided to customers under long-term contracts, we generally do not enter into contracts with our temporary roll-off customers due to the relatively short-term nature of most construction and demolition (“C&D”) projects.
Our transfer stations, landfills and, to a lesser extent, our recycling facilities generate revenue from disposal or tipping fees. Revenues from our landfill operations consists 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 the sale of recyclable commodities to third parties.
The amounts charged for collection, disposal, transfer, and recycling services may include fees and environmental fees. Fuel fees and environmental fees are not designed to be specific to the direct costs and expenses to service an individual customer’s account, but rather are designed to address and to help recover for changes in ADS’ overall cost structure and to achieve an operating margin acceptable to ADS.
Other revenue is comprised of ancillary revenue-generating activities, such as landfill gas-to-energy operations at municipal solid waste landfills, management of three third-party owned landfills, customer service charges relating to overdue payments and customer administrative fees relating to customers who request paper copies of invoices rather than opting for electronic invoices and broker revenue, which is earned by managing waste services for our customers.
The following table sets forth our consolidated revenues for the periods indicated (in millions).
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collection
$
239.8

 
66.6
 %
 
$
223.9

 
67.1
 %
 
$
465.1

 
68.3
 %
 
$
439.7

 
68.6
 %
Disposal
132.7

 
36.9
 %
 
119.2

 
35.7
 %
 
232.6

 
34.2
 %
 
214.8

 
33.5
 %
Sale of recyclables
8.9

 
2.5
 %
 
9.2

 
2.8
 %
 
17.5

 
2.6
 %
 
18.0

 
2.8
 %
Fuel fees and environmental fees
24.2

 
6.7
 %
 
21.9

 
6.6
 %
 
45.1

 
6.6
 %
 
38.3

 
6.0
 %
Other revenue
23.8

 
6.6
 %
 
23.4

 
7.0
 %
 
46.6

 
6.8
 %
 
47.2

 
7.4
 %
Intercompany eliminations
(69.5
)
 
(19.3
)%
 
(64.0
)
 
(19.2
)%
 
(125.8
)
 
(18.5
)%
 
(117.1
)
 
(18.3
)%
Total service revenues
$
359.9

 
100.0
 %
 
$
333.6

 
100.0
 %
 
$
681.1

 
100.0
 %
 
$
640.9

 
100.0
 %
Three months ended June 30, 2014 compared to 2013
Revenue for the 2014 quarter was $359.9, an increase of $26.3, or 7.9%, from revenue of $333.6 in the 2013 quarter. The increase was due to the following:
 
Collection revenue increased by $15.9, or 7.1%, of which $9.9 was driven by increases in volume primarily in the rolloff, commercial and residential lines of business, $5.7 was driven by the impact of acquisitions in the current and prior years and price increases contributed $0.5 driven primarily by rolloff business.

Disposal revenue increased by $13.5 or 11.3%, of which $9.8 was driven by volume generally from strong special waste projects in the Midwest and East regions, as well as increases in MSW and C&D volumes.

Sale of recyclables decreased by $0.3 or 3.3% primarily resulting from decreases in pricing as a result of overall lower average commodity pricing.


23


Fuel fees and environmental fees increased by $2.3 or 10.5% due to the harmonization of the policies and increased participation of fees charged to customers.

Other revenue increased by $0.4 or 1.7%, mainly due to an increase in the management fee revenue. The major components of other revenue are the revenues generated from the operation of three managed landfills located in Florida and Alabama, landfill gas-to-energy projects and the brokerage business.
Six months ended June 30, 2014 compared to 2013
Revenue for the six month period in 2014 was $681.1, an increase of $40.2, or 6.3%, from revenue of $640.9 in the comparable 2013 period. The increase was due to the following:

Collection revenue increased by $25.4, or 5.8%, of which $13.9 was driven by increases in volume primarily in the residential, rolloff and commercial lines of business and $11.4 was driven by acquisitions.

Disposal revenue increased by $17.8 or 8.3%, of which $10.6 was driven by volume increases due to large special waste projects and increases in MSW volumes and the remainder was due to pricing.

Sale of recyclables decreased by $0.5 or 2.8% primarily resulting from lower commodity pricing.

Fuel fees and environmental fees increased by $6.8 or 17.8% due to the harmonization of the policies and increasing participation of the fees charged to customers.

Other revenue decreased by $0.6 or 1.3%, which was mainly due to a decrease in landfill gas revenue sales. The major components of other revenue are the revenues generated from the operation of three managed landfills located in Florida and Alabama, landfill gas-to-energy projects and the brokerage business.
Operating Expenses
The following table summarizes our operating expenses (in millions and as a percentage of our revenue).
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
$
227.7

 
63.3
%
 
$
204.2

 
61.2
%
 
$
435.1

 
63.9
%
 
$
397.1

 
62.0
%
Accretion of landfill retirement obligations
3.1

 
0.9
%
 
3.8

 
1.1
%
 
6.2

 
0.9
%
 
7.7

 
1.2
%
Operating expenses
$
230.8

 
64.1
%
 
$
208.0

 
62.4
%
 
$
441.3

 
64.8
%
 
$
404.8

 
63.2
%

Our operating expenses include the following:
 
Labor and related benefits consist of salaries and wages, health and welfare benefits, incentive compensation and payroll taxes.

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

Maintenance and repairs expenses include maintenance and repairs to our vehicles, equipment and containers.

Fuel costs include the direct cost of fuel used by our vehicles, net of fuel tax credits and any ineffectiveness on our fuel hedges. We also incur certain indirect fuel costs in our operations that are not taken into account in the above analysis.

Franchise fees and taxes consist of municipal franchise fees, host community fees and royalties.


24


Risk management expenses include casualty insurance premiums and claims payments and estimates for claims incurred but not reported.

Other expenses include expenses such as facility operating costs, equipment rent, leachate 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 consolidated income statements, however, it is excluded from the table below (refer to discussion below “Accretion of landfill retirement obligations” for a detailed discussion of the changes in amounts).

The following table summarizes the major components of our operating expenses, excluding accretion expense on our landfill retirement obligations (in millions and as a percentage of our revenue):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor and related benefits
$
70.7

 
19.6
%
 
$
63.9

 
19.2
%
 
$
138.4

 
20.3
%
 
$
127.2

 
19.8
%
Transfer and disposal costs
55.3

 
15.4
%
 
48.6

 
14.6
%
 
100.6

 
14.8
%
 
91.8

 
14.3
%
Maintenance and repairs
28.9

 
8.0
%
 
25.0

 
7.5
%
 
55.5

 
8.1
%
 
49.1

 
7.7
%
Fuel
27.0

 
7.5
%
 
24.8

 
7.4
%
 
53.4

 
7.8
%
 
49.2

 
7.7
%
Franchise fees and taxes
17.4

 
4.8
%
 
14.9

 
4.5
%
 
30.1

 
4.4
%
 
27.0

 
4.2
%
Risk management
6.9

 
1.9
%
 
6.0

 
1.8
%
 
14.2

 
2.1
%
 
11.9

 
1.9
%
Other
21.5

 
6.0
%
 
21.0

 
6.3
%
 
42.9

 
6.3
%
 
40.9

 
6.4
%
Total operating expenses
$
227.7

 
63.3
%
 
$
204.2

 
61.2
%
 
$
435.1

 
63.9
%
 
$
397.1

 
62.0
%
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 June 30, 2014 compared to 2013
Operating expenses increased by $23.5, or 11.5%, to $227.7 for the 2014 quarter from $204.2 in the 2013 quarter.
 
Labor and related benefits increased by $6.8 or 10.6% to $70.7, of which approximately $1.6 was attributable to merit increases and the remainder was due to acquisition activity and tech and driver shortages resulting in increased overtime costs.

Transfer and disposal costs increased by $6.7 or 13.8% to $55.3, which was primarily attributable to increases in volume from organic growth, acquisition activity and new contract activity. Further contributing to the increase was the impact of timing of special waste projects in the Midwest region that were delayed from the first quarter of 2014 into the second quarter of 2014 due to weather that did not occur in the prior year and higher fuel surcharges related to transportation of waste from the companies transfer station to the landfills.

Maintenance and repairs expense increased by $3.9, or 15.6% to $28.9, which was attributable to outsourcing a higher volume of repair work to outside third parties in certain marketplaces due to a shortage of mechanics. Furthermore, as rolloff demand increased, containers were repaired in order to meet the growing demand.

Fuel costs increased $2.2, or 8.9% to $27.0, primarily resulting from increased fuel consumption due to acquisition activity and increased volumes and price per gallon. As a percentage of revenue, fuel expense remained relatively flat quarter to quarter.

Franchise fees and taxes increased $2.5 or 16.8% to $17.4 primarily due to increased in disposal volumes.

25



Risk management expenses increased $0.9 or 15.0% to $6.9 primarily due to adverse development of existing claims compared to the same period in the prior year.

Other operating costs increased $0.5 or 2.4% to $21.5 in 2014, but remained relatively flat as a percentage of revenue.
Six months ended June 30, 2014 compared to 2013
Operating expenses increased by $38.0, or 9.6%, to $435.1 for the six month period in 2014 from $397.1 in the comparable 2013 period, of which $3.2 was attributable to severe winter weather experienced in most of our marketplaces.
 
Labor and related benefits increased by $11.2 or 8.8% to $138.4, of which approximately $3.2 was attributable to merit increases, $1.3 was attributable to weather related overtime costs and reduced productivity and the remainder was due to acquisition activity and tech and driver shortages resulting in increased overtime costs.

Transfer and disposal costs increased by $6.7 or 13.8% to $100.6, which was primarily attributable to increases in volume from organic growth, acquisitions and new contract activity, as well as higher fuel surcharges related to transportation of waste from the companies transfer station to the landfills.

Maintenance and repairs expense increased by $6.4, or 13.0% to $55.5 of which $0.9 was attributable to severe winter weather. The remainder was primarily attributable to outsourcing a higher volume of work to third parties in certain marketplaces due to a shortage of mechanics. Furthermore, as rolloff demand increased, containers were repaired in order to meet the growing demand.

Fuel costs increased $4.2, or 8.5% to $53.4, of which $0.4 was due to higher cost fuel blends that were required in certain geographic areas during the severe weather and the remainder was due to an increased price per gallon, as well as increased fuel consumption due to acquisition activity and increased volumes. As a percentage of revenue, fuel expense remained relatively flat quarter to quarter.

Franchise fees and taxes increased $3.1 or 11.5% to $30.1 primarily due to increases in disposal volumes.

Risk management expenses increased $2.3 or 19.3% to $14.2 primarily due to adverse development of existing claims compared to the same period in the prior year.

Other operating costs increased $2.0 or 4.9% to $42.9 in 2014, of which $0.6 was due to the impacts of the severe winter weather, $0.5 due to additional slope repairs, $0.6 due to increased leachate costs as a result of higher volume of leachate due to extremely wet weather and $1.0 due to higher facility repairs and maintenance as a result of acquisition activity and increased repairs on certain facilities.
Accretion of landfill retirement obligations
Accretion expense was $3.1 and $3.8 for the three months ended June 30, 2014 and 2013, respectively and $6.2 and $7.7 for the six months ended June 30, 2014 and 2013, respectively. The decrease of $0.7 for the three months ended June 30, 2014 compared to 2013 and $1.5 for the six months ended June 30, 2014 compared to 2013 was primarily attributable to settlement of certain capping obligations, as well as a decrease in the interest rate on landfill retirement obligations.

Selling, General and Administrative
Selling, general and administrative expenses include salaries, legal and professional fees, rebranding and integration costs and other expenses. Salaries expenses include salaries and wages, health and welfare benefits and incentive compensation for corporate and field general management, field support functions, sales force, accounting and finance, legal, management information systems, and clerical and administrative departments. Rebranding and integration costs are those costs associated with rebranding all of the acquired and merged businesses’ trucks and containers and those costs expended to align the corporate and strategic operations of the acquired and merged businesses. Other expenses include rent and office costs, fees for professional services provided by third parties, marketing, directors’ and officers’ insurance, general employee relocation, travel, entertainment and bank charges, but excludes any such amounts recorded as restructuring charges.

26


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
$
23.2

 
6.4
%
 
$
23.1

 
6.9
%
 
$
47.2

 
6.9
%
 
$
46.3

 
7.2
%
Legal and professional
3.1

 
0.9
%
 
2.9

 
0.9
%
 
5.6

 
0.8
%
 
5.2

 
0.8
%
Rebranding and integration costs
3.2

 
0.9
%
 
10.9

 
3.3
%
 
3.5

 
0.5
%