REPUBLIC SERVICES, INC. You should read the following discussion in conjunction with the unaudited consolidated financial statements and notes thereto included under Part I, Item 1, and the risk factors in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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 Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Disclosure Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains certain forward-looking information about us that is intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. Words such as "guidance," "expect," "will," "may," "anticipate," "plan," "estimate," "project," "intend," "should," "can," "likely," "could," "outlook" and similar expressions are intended to identify forward-looking statements. In particular, information appearing under "Updated 2020 Financial Guidance" and elsewhere in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements. These statements include information about our plans, strategies, expectations of future financial performance and prospects. Forward-looking statements are not guarantees of performance. These statements are based upon the current beliefs and expectations of our management and are subject to significant risk and uncertainties that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot assure you that the expectations will prove to be correct. Among the factors that could cause actual results to differ materially from the expectations expressed in the forward-looking statements are the effects of the COVID-19 pandemic and actions taken in response thereto, as well as acts of war, riots or terrorism, and the impact of these acts on economic, financial and social conditions inthe United States as well as our dependence on large, long-term collection, transfer and disposal contracts. More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with theSecurities and Exchange Commission , including our Annual Report on Form 10-K for the year endedDecember 31, 2019 , particularly under Part I, Item 1A - Risk Factors, and in Part II, Item 1A of this Quarterly Report on Form 10-Q. Additionally, new risk factors emerge from time to time and it is not possible for us to predict all such risk factors, or to assess the impact such risk factors might have on our business. We undertake no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Recent Developments InMarch 2020 , theWorld Health Organization declared the outbreak of a new strain of coronavirus (COVID-19) a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The extent of the impact of the COVID-19 pandemic on our operations and financial performance will depend on future developments, including the duration and spread of the pandemic, all of which are uncertain and cannot be predicted at this time. An extended period of economic disruption associated with the COVID-19 pandemic could materially and adversely affect our business, results of operations, access to sources of liquidity and financial condition. As a direct result of COVID-19, we have experienced an increase in certain costs of doing business, including costs for additional safety equipment and hygiene products, increased facility and equipment cleaning, and meals for our frontline employees. These costs, which we refer to as business resumption costs, are intended to assist in protecting the safety of our frontline employees as we continue to provide an essential service to our customers. We expect to incur similar costs throughout 2020, and potentially into future years. The magnitude of the costs we expect to incur throughout the remainder of the year cannot be predicted at this time due to the various uncertainties surrounding the pandemic (e.g., the duration and spread of the pandemic). Refer to Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q for a discussion of certain risk factors related to this pandemic. Business Update In light of the COVID-19 pandemic, the Company is suspending its full-year 2020 detailed financial guidance. At this time, the full impact of the COVID-19 pandemic on theU.S. economy remains uncertain, and we have limited visibility into the timing and sequencing of increases in economic activity in the markets where we operate. 28
-------------------------------------------------------------------------------- Table of Contents Overview Republic is the second largest provider of non-hazardous solid waste collection, transfer, disposal, recycling, and environmental services inthe United States , as measured by revenue. As ofMarch 31, 2020 , we operated facilities in 41 states andPuerto Rico through 340 collection operations, 213 transfer stations, 190 active landfills, 79 recycling processing centers, 7 treatment, recovery and disposal facilities, 15 salt water disposal wells and 4 deep injection wells. We are engaged in 75 landfill gas to energy and renewable energy projects and had post-closure responsibility for 130 closed landfills as ofMarch 31, 2020 . Revenue for the three months endedMarch 31, 2020 increased by 3.4% to$2,553.9 million compared to$2,470.6 million for the same period in 2019. This change in revenue is due to increases in average yield of 2.9%, volumes of 0.4%, and acquisitions, net of divestitures of 1.0%, partially offset by the impact of decreased fuel recovery fees of (0.2)%, recycling processing and commodity sales of (0.2)%, and environmental services of (0.5)%. The following table summarizes our revenue, expenses and operating income for the three months endedMarch 31, 2020 and 2019 (in millions of dollars and as a percentage of revenue):
Three Months Ended
2020 2019
Revenue $ 2,553.9 100.0 % $ 2,470.6 100.0 %
Expenses:
Cost of operations 1,550.1 60.7 1,506.1 61.0Depreciation, amortization and depletion of property and equipment
253.8 9.9 238.8 9.7
Amortization of other intangible assets 5.3 0.2 4.6 0.2
Amortization of other assets 9.5 0.4 8.1 0.3
Accretion 20.9 0.8 20.5 0.8
Selling, general and administrative 277.1 10.9 266.4 10.8
Withdrawal costs - multiemployer pension funds 4.3 0.2 - -
(Gain) loss on business divestitures and impairments, net (3.9)
(0.2) 0.3 -
Restructuring charges 3.8 0.1 3.0 0.1
Operating income $ 433.0 17.0 % $ 422.8 17.1 %
Our pre-tax income was $322.6 million for the three months ended March 31, 2020
compared to $312.8 million for the same respective period in 2019. Our net
income attributable to Republic Services, Inc. was $246.3 million for the three
months ended March 31, 2020 , or $0.77 per diluted share, compared to $234.2
million , or $0.72 per diluted share, for the same period in 2019.
During each of the three months ended March 31, 2020 and 2019, we recorded a
number of charges, other expenses and benefits that impacted our pre-tax income,
net income attributable to Republic Services, Inc. (net income - Republic) and
diluted earnings per share as noted in the following table (in millions, except
per share data). Additionally, see the Results of Operations discussion of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations for a discussion of other items that impacted our earnings during the
three months ended March 31, 2020 and 2019.
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Three Months Ended March 31,
Three Months Ended March 31, 2020 2019
Net Diluted Net Diluted
Pre-tax Income - Earnings Pre-tax Income - Earnings
Income Republic per Share Income Republic per Share
As reported $ 322.6 $ 246.3 $ 0.77 $ 312.8 $ 234.2 $ 0.72
Restructuring charges 3.8 2.8 0.01 3.0 2.3 0.01
Business resumption costs
(COVID-19) 3.1 2.3 0.01 - - -
(Gain) loss on business
divestitures and impairments,
net (1) (3.9) (2.9) (0.01) 0.3 0.2 -
Acquisition integration and deal
costs 3.8 2.8 0.01 - - -
Withdrawal costs - multiemployer
pension funds 4.3 3.2 0.01 - - -
Bridgeton insurance recovery (10.8) (8.2) (0.03) - - -
Incremental contract startup
costs - large municipal contract
(1) - - - 0.7 0.5 -
Total adjustments 0.3 - - 4.0 3.0 0.01
As adjusted $ 322.9 $ 246.3 $ 0.77 $ 316.8 $ 237.2 $ 0.73
(1) The aggregate impact to adjusted diluted earnings per share totals to less
than $0.01 for the three months ended March 31, 2019 .
We believe that presenting adjusted pre-tax income, adjusted net income -
Republic, and adjusted diluted earnings per share, which are not measures
determined in accordance with U.S. GAAP, provides an understanding of
operational activities before the financial impact of certain items. We use
these measures, and believe investors will find them helpful, in understanding
the ongoing performance of our operations separate from items that have a
disproportionate impact on our results for a particular period. We have incurred
comparable charges, costs and recoveries in prior periods, and similar types of
adjustments can reasonably be expected to be recorded in future periods. Our
definitions of adjusted pre-tax income, adjusted net income - Republic, and
adjusted diluted earnings per share may not be comparable to similarly titled
measures presented by other companies. Further information on each of these
adjustments is included below.
Restructuring charges. In 2019, we incurred costs related to the redesign of
certain back-office software systems, which continued into 2020. During the
three months ended March 31, 2020 and 2019, we incurred restructuring charges of
$3.8 million and $3.0 million , respectively, that primarily related to these
restructuring efforts. During the three months ended March 31, 2020 and 2019, we
paid $3.8 million and $4.6 million , respectively, related to these restructuring
efforts.
In 2020, we expect to incur additional restructuring charges of approximately
$10 million primarily related to the redesign of certain of our back-office
software systems. Substantially all of these restructuring charges will be
recorded in our corporate segment.
Business resumption costs. During the three months ended March 31, 2020 , we
incurred $3.1 million of incremental business resumption costs related to the
COVID-19 pandemic, including costs for additional safety equipment and hygiene
products, increased facility and equipment cleaning, and meals for our frontline
employees. These costs are intended to assist in protecting the safety of our
frontline employees as we continue to provide an essential service to our
customers. Although we regularly incur costs of this nature, we identify these
costs in the table above due to the unusual nature of the pandemic and the
magnitude of the costs incurred. We expect to incur similar costs throughout
2020, and potentially into future years. The magnitude of the costs we expect to
incur throughout the remainder of the year cannot be predicted at this time due
to the various uncertainties surrounding the pandemic (e.g., the duration and
spread of the pandemic).
(Gain) loss on business divestitures and impairments, net. During the three
months ended March 31, 2020 and 2019, we recorded a net (gain) loss on business
divestitures and impairments of $(3.9) million and $0.3 million , respectively.
Acquisition integration and deal costs. Although our business regularly incurs
costs related to acquisitions, we specifically identify in the table above
integration and deal costs of $3.8 million incurred during the three months
ended March 31, 2020 . We do this because of the magnitude of the costs
associated with the particular acquisition and integration activity during this
time period.
Withdrawal costs - multiemployer pension funds. During the three months ended
March 31, 2020 , we recorded charges to earnings of $4.3 million for withdrawal
events at multiemployer pension funds to which we contribute. As we obtain
updated information regarding multiemployer pension funds, the factors used in
deriving our estimated withdrawal liabilities will be subject to change, which
may adversely impact our reserves for withdrawal costs.
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Bridgeton insurance recovery. During the three months ended March 31, 2020 , we
recognized an insurance recovery of $10.8 million related to our closed
Bridgeton Landfill in Missouri as a reduction of remediation expenses in our
cost of operations.
Incremental contract startup costs - large municipal contract. Although our
business regularly incurs startup costs under municipal contracts, we
specifically identify in the table above the startup costs with respect to an
individual municipal contract (and do not adjust for other startup costs under
other contracts). We do this because of the magnitude of the costs involved with
this particular municipal contract and the unusual nature for the time period in
which they were incurred. During the three months ended March 31, 2019 , we
incurred costs of $0.7 million related to the implementation of this large
municipal contract. These costs did not meet the capitalization criteria
prescribed by Accounting Standards Update 2014-09, Revenue from Contracts with
Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with
Customers (Subtopic 340-40).
Results of Operations
Revenue
We generate revenue primarily from our solid waste collection operations. Our
remaining revenue is from other services, including transfer station, landfill
disposal, recycling, and environmental services. Our residential,
small-container and large-container collection operations in some markets are
based on long-term contracts with municipalities. Certain of our municipal
contracts have annual price escalation clauses that are tied to changes in an
underlying base index such as a consumer price index. We generally provide
small-container and large-container collection services to customers under
contracts with terms up to three years. Our transfer stations and landfills
generate revenue from disposal or tipping fees charged to third parties. Our
recycling processing facilities generate revenue from tipping fees charged to
third parties and the sale of recycled commodities. Our revenue from
environmental services consists mainly of fees we charge for disposal of
non-hazardous solid and liquid waste and in-plant services, such as
transportation and logistics. Environmental services waste is generated from the
by-product of oil and natural gas exploration and production activity.
Additionally, it is generated by the daily operations of industrial,
petrochemical and refining facilities, including maintenance, plant turnarounds
and capital projects. Other non-core revenue consists primarily of revenue from
National Accounts, which represents the portion of revenue generated from
nationwide or regional contracts in markets outside our operating areas where
the associated waste handling services are subcontracted to local operators.
Consequently, substantially all of this revenue is offset with related
subcontract costs, which are recorded in cost of operations.
The following table reflects our revenue by service line for the three months
ended March 31, 2020 and 2019 (in millions of dollars and as a percentage of
revenue):
Three Months Ended March 31,
2020 2019
Collection:
Residential $ 568.5 22.3 % $ 557.4 22.6 %
Small-container 805.7 31.5 777.9 31.5
Large-container 552.4 21.6 530.7 21.5
Other 12.3 0.5 10.8 0.4
Total collection 1,938.9 75.9 1,876.8 76.0
Transfer 323.0 294.9
Less: intercompany (186.0) (172.0)
Transfer, net 137.0 5.4 122.9 5.0
Landfill 558.3 536.4
Less: intercompany (252.3) (239.6)
Landfill, net 306.0 12.0 296.8 12.0
Environmental services 46.8 1.8 45.0 1.8
Other:
Recycling processing and commodity sales 67.1 2.6 72.9 3.0
Other non-core 58.1 2.3 56.2 2.2
Total other 125.2 4.9 129.1 5.2
Total revenue $ 2,553.9 100.0 % $ 2,470.6 100.0 %
31--------------------------------------------------------------------------------
Table of Contents The following table reflects changes in components of our revenue, as a percentage of total revenue, for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 Average yield 2.9 % 2.9 % Fuel recovery fees (0.2) 0.2 Total price 2.7 3.1 Volume (1) 0.4 (1.5) Recycling processing and commodity sales (0.2) (0.2) Environmental services (0.5) (0.1) Total internal growth 2.4 1.3 Acquisitions / divestitures, net 1.0 0.5 Total 3.4 % 1.8 % Core price 5.2 % 4.7 % (1) The increase in volume of 0.4% during the three months endedMarch 31, 2020 includes an increase of 0.5% due to one additional work day as compared to the three months endedMarch 31, 2019 . Average yield is defined as revenue growth from the change in average price per unit of service, expressed as a percentage. Core price is defined as price increases to our customers and fees, excluding fuel recovery fees, net of price decreases to retain customers. We also measure changes in average yield and core price as a percentage of related-business revenue, defined as total revenue excluding recycled commodities and fuel recovery fees, to determine the effectiveness of our pricing strategies. Average yield as a percentage of related-business revenue was 3.0% for the three months endedMarch 31, 2020 and 3.1% for the same respective period in 2019. Core price as a percentage of related-business revenue was 5.5% for the three months endedMarch 31, 2020 and 5.1% for the same respective period in 2019. During the three months endedMarch 31, 2020 , we experienced the following changes in our revenue as compared to the same period in 2019: •Average yield increased revenue by 2.9% during the three months endedMarch 31, 2020 due to price increases in all lines of business. •The fuel recovery fee program, which mitigates our exposure to increases in fuel prices, decreased revenue by (0.2)% during the three months endedMarch 31, 2020 , primarily due to a decrease in fuel prices compared to the same period in 2019 combined with a decrease in the total revenue subject to the fuel recovery fees. •Volume increased revenue by 0.4% primarily due to one additional workday during the three months endedMarch 31, 2020 as compared to the same period in 2019 along with volume growth in our transfer and landfill lines of business. The volume increase in our landfill line of business was primarily attributable to increased construction and demolition volume, which was partially offset by a decline in special waste volume. These increases were partially offset by volume declines in our residential collection line of business primarily due to certain non-regrettable losses during the three months endedMarch 31, 2020 as compared to the same period in 2019. Additionally, we experienced volume declines in our small-container and large-container collection lines of business due to a decrease in service levels attributable to the COVID-19 pandemic. •Recycling processing and commodity sales decreased revenue by (0.2)% during the three months endedMarch 31, 2020 , primarily due to a decline in overall commodity prices as compared to the same period in 2019. The average price for recycled commodities, excluding glass and organics, for the three months endedMarch 31, 2020 was$76 per ton, compared to$93 per ton for the same period in 2019. Changing market demand for recycled commodities causes volatility in commodity prices. At current volumes and mix of materials, we believe a$10 per ton change in the price of recycled commodities will change both annual revenue and operating income by approximately$13 million . •Environmental services decreased revenue by (0.5)% during the three months endedMarch 31, 2020 , primarily due to a decline in drilling activity. •Acquisitions, net of divestitures, increased revenue by 1.0% during the three months endedMarch 31, 2020 , due to our continued growth strategy of acquiring privately held solid waste, recycling and environmental services companies that complement our existing business platform. 32 -------------------------------------------------------------------------------- Table of Contents Cost of Operations Cost of operations includes labor and related benefits, which consists of salaries and wages, health and welfare benefits, incentive compensation and payroll taxes. It also includes transfer and disposal costs representing tipping fees paid to third party disposal facilities and transfer stations; maintenance and repairs relating to our vehicles, equipment and containers, including related labor and benefit costs; transportation and subcontractor costs, which include costs for independent haulers that transport our waste to disposal facilities and costs for local operators who provide waste handling services associated with our National Accounts in markets outside our standard operating areas; fuel, which includes the direct cost of fuel used by our vehicles, net of fuel tax credits; disposal fees and taxes, consisting of landfill taxes, host community fees and royalties; landfill operating costs, which includes financial assurance, leachate disposal, remediation charges and other landfill maintenance costs; risk management costs, which include insurance premiums and claims; cost of goods sold, which includes material costs paid to suppliers; and other, which includes expenses such as facility operating costs, equipment rent and gains or losses on sale of assets used in our operations. The following table summarizes the major components of our cost of operations for the three months endedMarch 31, 2020 and 2019 (in millions of dollars and as a percentage of revenue):
Three Months Ended
2020 2019
Labor and related benefits $ 556.9 21.8 % $ 537.2 21.7 %
Transfer and disposal costs 198.5 7.8 197.3 8.0
Maintenance and repairs 247.3 9.7 241.8 9.8
Transportation and subcontract costs 167.3 6.6 153.8 6.2
Fuel 79.6 3.1 92.2 3.7
Disposal fees and taxes 77.4 3.0 73.1 3.0
Landfill operating costs 64.7 2.5 53.7 2.2
Risk management 61.9 2.4 52.5 2.1
Other 104.5 4.1 104.5 4.3
Subtotal 1,558.1 61.0 1,506.1 61.0
Business resumption costs 2.8 0.1 - -
Bridgeton insurance recovery (10.8) (0.4) - -
Total cost of operations $ 1,550.1 60.7 % $ 1,506.1 61.0 %
These cost categories may change from time to time and may not be comparable to
similarly titled categories presented by other companies. As such, you should
take care when comparing our cost of operations by component to that of other
companies.
Our cost of operations increased in aggregate dollars for the three months ended
March 31, 2020 compared to the same period in 2019 as a result of the following:
•Labor and related benefits increased due to higher hourly and salaried wages as
a result of annual merit increases along with an additional workday during the
three months ended March 31, 2020 as compared to the same period in 2019.
•Transfer and disposal costs increased in aggregate dollars as a result of
acquisition-related activity and an increase in third party disposal rates. This
increase was partially offset by a decrease in container weights.
During the three months ended March 31, 2020 and 2019, we internalized
approximately 69% and 68%, respectively,
of the total waste volume we collected.
•Maintenance and repairs expense increased in aggregate dollars due to the
complexity of trucks, including the cost of parts and internal labor.
•Transportation and subcontract costs increased due to acquisition-related
activity along with an additional workday during the three months ended March
31, 2020 as compared to the same period in 2019.
•Fuel costs decreased during the three months ended March 31, 2020 due to a
decline in both fuel prices and collection volumes as well as compressed natural
gas (CNG) tax credits that were enacted in December 2019 and recognized during
the three months ended March 31, 2020 . The national average diesel fuel cost per
gallon for the three months ended March 31, 2020 was $2.88 as compared to $3.02
for the same period in 2019.
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At current consumption levels, we believe a twenty-cent per gallon change in the
price of diesel fuel would change our fuel costs by approximately $26 million
per year. Offsetting these changes in fuel expense would be changes in our fuel
recovery fee charged to our customers. At current participation rates, a
twenty-cent per gallon change in the price of diesel fuel changes our fuel
recovery fee by approximately $26 million per year.
•Landfill operating costs increased due to certain favorable remediation
adjustments recorded during the three months ended March 31, 2019 , which did not
recur in 2020.
•Risk management expenses increased during the three months ended March 31, 2020
primarily due to an increase in premiums for our current year programs combined
with favorable actuarial development in our workers' compensation programs
recorded during the three months ended March 31, 2019 that did not recur for the
same period in 2020.
•During the three months ended March 31, 2020 , we recognized $2.8 million of
incremental business resumption costs related to the COVID-19 pandemic,
including costs for additional safety equipment and hygiene products, increased
facility and equipment cleaning, and meals for our frontline employees.
•During the three months ended March 31, 2020 , we recognized a favorable
insurance recovery of $10.8 million related to our closed Bridgeton Landfill as
a reduction of remediation expenses in our consolidated statement of income for
the applicable period.
Depreciation, Amortization and Depletion of Property and Equipment
The following table summarizes depreciation, amortization and depletion of
property and equipment for the three months ended March 31, 2020 and 2019 (in
millions of dollars and as a percentage of revenue):
Three Months Ended
2020 2019
Depreciation and amortization of property and equipment
6.7 %$ 159.3 6.5 % Landfill depletion and amortization 83.0 3.2 79.5 3.2 Depreciation, amortization and depletion expense$ 253.8 9.9 %$ 238.8 9.7 % Depreciation and amortization of property and equipment for the three months endedMarch 31, 2020 increased primarily due to additional assets acquired with our acquisitions. During the three months endedMarch 31, 2020 , landfill depletion and amortization expense increased in aggregate dollars due to an increase in our overall average depletion rate combined with overall volume growth in our landfill line of business. Amortization of Other Intangible Assets Expenses for amortization of other intangible assets were$5.3 million , or 0.2% of revenue, for the three months endedMarch 31, 2020 , compared to$4.6 million , or 0.2% of revenue, for the same period in 2019. Our other intangible assets primarily relate to customer relationships and, to a lesser extent, non-compete agreements. Amortization expense increased due to additional assets acquired with our acquisitions. Amortization of Other Assets Expenses for amortization of other assets were$9.5 million , or 0.4% of revenue, for the three months endedMarch 31, 2020 , compared to$8.1 million , or 0.3% of revenue, for the same period in 2019. Our other assets primarily relate to the prepayment of fees and capitalized implementation costs associated with cloud-based hosting arrangements. Accretion Expense Accretion expense was$20.9 million , or 0.8% of revenue, for the three months endedMarch 31, 2020 , compared to$20.5 million , or 0.8% of revenue, for the same period in 2019. Accretion expense has remained relatively unchanged as our asset retirement obligations have remained relatively consistent period over period. Selling, General and Administrative Expenses Selling, general and administrative expenses include salaries, 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, legal settlements, marketing, investor and community relations services, directors' and officers' insurance, general employee relocation, travel, entertainment and bank charges. Restructuring charges are excluded from selling, general and administrative expenses and are discussed separately. 34 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our selling, general and administrative expenses for the three months endedMarch 31, 2020 and 2019 (in millions of dollars and as a percentage of revenue):
Three Months Ended
2020 2019
Salaries and related benefits $ 191.3 7.5 % $ 184.2 7.5 %
Provision for doubtful accounts 4.9 0.2 7.5 0.3
Other 76.8 3.0 74.7 3.0
Subtotal 273.0 10.7 266.4 10.8
Acquisition integration and deal costs 3.8 0.2 - -
Business resumption costs 0.3 - - -
Total selling, general and administrative expenses
10.9 %$ 266.4 10.8 % These cost categories may change from time to time and may not be comparable to similarly titled categories presented by other companies. As such, you should take care when comparing our selling, general and administrative expenses by cost component to those of other companies. The most significant items affecting our selling, general and administrative expenses during the three months endedMarch 31, 2020 and 2019 are summarized below: •Salaries and related benefits increased in aggregate dollars primarily due to higher wages, benefits, and other payroll related items resulting from annual merit increases. •Other selling, general and administrative expenses increased in aggregate dollars for the three months endedMarch 31, 2020 , primarily due to an increase in consulting fees, partially offset by a one-time favorable legal settlement recognized during the three months endedMarch 31, 2020 . •During the three months endedMarch 31, 2020 , we recognized$3.8 million of acquisition integration and deal costs as well as$0.3 million of incremental business resumption costs related to the COVID-19 pandemic as selling, general and administrative expenses. Our business resumption costs included costs for additional safety equipment and hygiene products as well as increased facility and equipment cleaning. Withdrawal Costs - Multiemployer Pension Funds During the three months endedMarch 31, 2020 , we recorded charges to earnings of$4.3 million for withdrawal events at multiemployer pension funds to which we contribute. As we obtain updated information regarding multiemployer pension funds, the factors used in deriving our estimated withdrawal liabilities will be subject to change, which may adversely impact our reserves for withdrawal costs. (Gain) Loss on Business Divestitures and Impairments, Net We strive to have a number one or number two market position in each of the markets we serve, or have a clear path on how we will achieve a leading market position over time. Where we cannot establish a leading market position, or where operations are not generating acceptable returns, we may decide to divest certain assets and reallocate resources to other markets. Business divestitures could result in gains, losses or impairment charges that may be material to our results of operations in a given period. During the three months endedMarch 31, 2020 and 2019, we recorded a net (gain) loss on business divestitures and impairments of$(3.9) million and$0.3 million , respectively. Restructuring Charges In 2019, we incurred costs related to the redesign of certain back-office software systems, which continued into 2020. During the three months endedMarch 31, 2020 and 2019, we incurred restructuring charges of$3.8 million and$3.0 million , respectively, that primarily related to these restructuring efforts. During the three months endedMarch 31, 2020 and 2019, we paid$3.8 million and$4.6 million , respectively, related to these restructuring efforts. 35 -------------------------------------------------------------------------------- Table of Contents Interest Expense The following table provides the components of interest expense, including accretion of debt discounts and accretion of discounts primarily associated with environmental and risk insurance liabilities assumed in acquisitions, for the three months endedMarch 31, 2020 and 2019 (in millions of dollars): Three Months Ended March 31, 2020 2019 Interest expense on debt$ 82.5 $ 90.0 Non-cash interest 14.9 11.0 Less: capitalized interest (0.8) (0.6) Total interest expense$ 96.6 $ 100.4 Total interest expense for the three months endedMarch 31, 2020 decreased primarily due to lower interest rates associated with our variable rate debt. This decrease was partially offset by the change in fair value of certain derivative contracts which was recorded as an adjustment to interest expense. For additional discussion and detail regarding our derivative contracts, see the Financial Condition discussion of this Management's Discussion and Analysis of Financial Condition and Results of Operations. Cash paid for interest, excluding net swap settlements for our fixed-to-floating interest rate swaps, was$78.1 million and$78.9 million for the three months endedMarch 31, 2020 and 2019, respectively. Income Taxes Our effective tax rate, exclusive of non-controlling interests, for the three months endedMarch 31, 2020 and 2019 was 23.5% and 25.0%, respectively. Cash paid for income taxes was$1.4 million for the three months endedMarch 31, 2020 and a net refund of$32.2 million for the same period in 2019. The net refund received for the three months endedMarch 31, 2019 was due to the receipt of funds from amended tax returns. For additional discussion and detail regarding our income taxes, see Note 8, Income Taxes, to our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Reportable Segments Our senior management evaluates, oversees and manages the financial performance of our operations through two field groups, referred to as Group 1 and Group 2. Group 1 primarily consists of geographic areas located in the westernUnited States , and Group 2 primarily consists of geographic areas located in the southeastern and mid-westernUnited States , and the eastern seaboard ofthe United States . 36 -------------------------------------------------------------------------------- Table of Contents The two field groups, Group 1 and Group 2, are presented below as our reportable segments, which provide integrated waste management services consisting of non-hazardous solid waste collection, transfer, recycling, disposal and environmental services. Summarized financial information concerning our reportable segments for the three months endedMarch 31, 2020 and 2019 is shown in the following tables (in millions of dollars and as a percentage of revenue in the case of operating margin): Depreciation, Amortization, Depletion and Accretion Adjustments to (Gain) Loss on Before Amortization Business Adjustments for Expense for Depreciation, Divestitures Asset Asset Amortization, and Retirement Retirement Depletion and Impairments, Operating Net Revenue Obligations Obligations Accretion Net Income
(Loss) Operating Margin
Three Months EndedMarch 31, 2020 Group 1$ 1,254.6 $ 128.7 $ (0.2) $ 128.5 $ -$ 311.7 24.8 % Group 2 1,258.5 134.7 (0.2) 134.5 - 234.5 18.6 % Corporate entities 40.8 26.5 - 26.5 (3.9) (113.2) - Total$ 2,553.9 $ 289.9 $ (0.4) $ 289.5$ (3.9) $ 433.0 17.0 % Three Months EndedMarch 31, 2019 Group 1$ 1,193.2 $ 121.6 $ (0.1) $ 121.5 $ -$ 288.3 24.2 % Group 2 1,239.7 126 - 126.0 - 223.3 18.0 % Corporate entities 37.7 24.5 - 24.5 0.3 (88.8) - Total$ 2,470.6 $ 272.1 $ (0.1) $ 272.0$ 0.3 $ 422.8 17.1 % Corporate entities include legal, tax, treasury, information technology, risk management, human resources, closed landfills and other administrative functions. National Accounts revenue included in corporate entities represents the portion of revenue generated from nationwide and regional contracts in markets outside our operating areas where the associated waste handling services are subcontracted to local operators. Consequently, substantially all of this revenue is offset with related subcontract costs, which are recorded in cost of operations. Significant changes in the revenue and operating margins of our reportable segments comparing the three months endedMarch 31, 2020 with the same period in 2019 are discussed below: Group 1 Revenue for the three months endedMarch 31, 2020 increased 5.1% due to an increase in average yield in all lines of business and an increase in volume in our collection and transfer lines of business as well as an increase in construction and demolition volumes in our landfill line of business. These increases were partially offset by a decline in solid and special waste volumes in our landfill line of business. Operating income in Group 1 increased from$288.3 million for the three months endedMarch 31, 2019 , or a 24.2% operating income margin, to$311.7 million for the three months endedMarch 31, 2020 , or a 24.8% operating income margin. The following cost categories impacted operating income margin: •Cost of operations favorably impacted operating income margin for the three months endedMarch 31, 2020 , primarily due to a decrease in fuel costs as a result of a decline in diesel fuel prices combined with CNG tax credits that were enacted inDecember 2019 and recognized during the three months endedMarch 31, 2020 . These decreases were partially offset by an increase in transportation and subcontract costs as a percentage of revenue. •Depreciation unfavorably impacted operating income margin for the three months endedMarch 31, 2020 , primarily due to additional assets acquired with our acquisitions. Group 2 Revenue for the three months endedMarch 31, 2020 increased 1.5% due primarily to increases in average yield in all lines of business and increased volumes in our landfill line of business, partially offset by a decline in volume in our collection lines of business. 37 -------------------------------------------------------------------------------- Table of Contents Operating income in Group 2 increased from$223.3 million for the three months endedMarch 31, 2019 , or an 18.0% operating income margin, to$234.5 million for the three months endedMarch 31, 2020 , or an 18.6% operating income margin. The following cost categories impacted operating income margin: •Cost of operations favorably impacted operating income margin for the three months endedMarch 31, 2020 , primarily due to a decrease in fuel costs as a result of a decline in diesel fuel prices combined with CNG tax credits that were enacted inDecember 2019 and recognized during the three months endedMarch 31, 2020 along with a decrease in maintenance and repairs costs as a percentage of revenue. These decreases were partially offset by an increase in disposal fees as well as transportation and subcontract costs as a percentage of revenue. •Landfill depletion and amortization unfavorably impacted operating income margin as a result of an increase in our overall average depletion rate combined with overall volume growth in our landfill line of business. Depreciation unfavorably impacted operating income margin during the three months endedMarch 31, 2020 , primarily due to additional assets acquired with our acquisitions. Corporate Entities Operating loss in our Corporate Entities increased from$88.8 million for the three months endedMarch 31, 2019 to$113.2 million for the three months endedMarch 31, 2020 . The operating loss for the three months endedMarch 31, 2020 was unfavorably impacted by favorable actuarial development in our workers' compensation programs recorded during the three months endedMarch 31, 2019 that did not recur for the same period in 2020. This was partially offset by favorable legal settlements and a net gain on business divestitures and impairments recognized during the three months endedMarch 31, 2020 . Landfill and Environmental Matters Available Airspace As ofMarch 31, 2020 we owned or operated 190 active solid waste landfills with total available disposal capacity estimated to be 5.0 billion in-place cubic yards. For these landfills, the following table reflects changes in capacity and remaining capacity, as measured in cubic yards of airspace: Permits Granted / Changes in Balance as of New Expansions New Sites, Airspace Engineering Balance as of December 31, 2019 Undertaken Net of Closures Consumed Estimates March 31, 2020 Cubic yards (in millions): Permitted airspace 4,673.0 - 55.5 (18.8) (0.2) 4,709.5 Probable expansion airspace 321.7 30.0 (52.2) - - 299.5 Total cubic yards (in millions) 4,994.7 30.0 3.3 (18.8) (0.2) 5,009.0 Number of sites: Permitted airspace 189 - 1 190 Probable expansion airspace 12 2 (1) 13 Total available disposal capacity represents the sum of estimated permitted airspace plus an estimate of probable expansion airspace. Engineers develop these estimates at least annually using information provided by annual aerial surveys. Before airspace included in an expansion area is determined to be probable expansion airspace and, therefore, included in our calculation of total available disposal capacity, it must meet all of our expansion criteria. As ofMarch 31, 2020 , 13 of our landfills met all of our criteria for including their probable expansion airspace in their total available disposal capacity. At projected annual volumes, these landfills have an estimated remaining average site life of 127 years, including probable expansion airspace. The average estimated remaining life of all of our landfills is 62 years. We have other expansion opportunities that are not included in our total available airspace because they do not meet all of our criteria for treatment as probable expansion airspace. Final Capping, Closure and Post-Closure Costs As ofMarch 31, 2020 , accrued final capping, closure and post-closure costs were$1,358.9 million , of which$74.4 million were current, as reflected in our unaudited consolidated balance sheet in accrued landfill and environmental costs included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 38
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Table of Contents Remediation and Other Charges for Landfill Matters It is reasonably possible that we will need to adjust our accrued landfill and environmental liabilities to reflect the effects of new or additional information, to the extent that such information impacts the costs, timing or duration of the required actions. Future changes in our estimates of the costs, timing or duration of the required actions could have a material adverse effect on our consolidated financial position, results of operations and cash flows. During the three months endedMarch 31, 2020 , we recognized a favorable insurance recovery of$10.8 million related to our closedBridgeton Landfill as a reduction of remediation expenses in our consolidated statement of income for the applicable period. For a description of our significant remediation matters, see Note 6, Landfill and Environmental Costs, of the notes to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Selected Balance Sheet Accounts The following table reflects the activity in our allowance for doubtful accounts and other, final capping, closure, post-closure costs, remediation liabilities, and accrued insurance during the three months endedMarch 31, 2020 (in millions of dollars):
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