GFL Environmental Inc 6-K, filed Aug 6, 2020
GFL Environmental Inc. (GFL)
About this 6-K
GFL Environmental Inc filed this 6-K on August 6, 2020.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16
OF THE SECURITIES EXCHANGE ACT OF 1934
For the month of August 2020
Commission File Number: 001-39240
GFL Environmental Inc.
(Translation of registrant’s name into English)
100 New Park Place, Suite 500
Vaughan, Ontario, Canada L4K 0H9
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
| Form 20-F x | Form 40-F ¨ |
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨
EXHIBIT INDEX
Exhibits 99.1 and 99.2 to this report of a Foreign Private Issuer on Form 6-K are deemed filed for all purposes under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.
| Exhibit Number |
Description | |
| 99.1 | Unaudited Interim Condensed Consolidated Financial Statements as at and for the Three and Six Months Ended June 30, 2020 | |
| 99.2 | Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three and Six Months Ended June 30, 2020 | |
| 99.3 | Certification of the Chief Executive Officer | |
| 99.4 | Certification of the Chief Financial Officer | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GFL Environmental Inc. | ||
| By: | ||
| /s/ Mindy Gilbert | ||
| Name: | Mindy Gilbert | |
| Date: August 6, 2020 | Title: | Executive Vice President and General Counsel |
Exhibit 99.1
GFL Environmental Inc.
Unaudited Interim Condensed
Consolidated Financial Statements
For the three and six months ended June 30, 2020
F-1
GFL Environmental Inc.
Unaudited Interim Condensed Consolidated Statements of Operations and Comprehensive Loss
(In millions of dollars except per share amounts)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||
| Notes | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||
| Revenue | 12 | $ | 993.3 | $ | 831.4 | $ | 1,924.6 | $ | 1,552.3 | |||||||||||
| Expenses | ||||||||||||||||||||
| Cost of sales | 881.3 | 739.5 | 1,733.6 | 1,393.0 | ||||||||||||||||
| Selling, general and administrative expenses | 104.1 | 81.4 | 259.2 | 163.6 | ||||||||||||||||
| Interest and other finance costs | 95.4 | 126.9 | 364.8 | 250.9 | ||||||||||||||||
| Deferred purchase consideration | — | — | 1.0 | 1.0 | ||||||||||||||||
| Loss on sale of property, plant and equipment | 0.5 | 1.8 | 2.1 | 1.5 | ||||||||||||||||
| (Gain) loss on foreign exchange | (8.4 | ) | (28.1 | ) | 97.6 | (44.8 | ) | |||||||||||||
| Mark-to-market loss (gain) on TEU derivative purchase contract | 10 | 74.2 | — | (14.2 | ) | — | ||||||||||||||
| 1,147.1 | 921.5 | 2,444.1 | 1,765.2 | |||||||||||||||||
| Loss before income taxes | (153.8 | ) | (90.1 | ) | (519.5 | ) | (212.9 | ) | ||||||||||||
| Current income tax expense | 2.0 | 0.4 | 3.7 | 0.2 | ||||||||||||||||
| Deferred tax recovery | (40.3 | ) | (22.5 | ) | (129.7 | ) | (51.7 | ) | ||||||||||||
| Income tax recovery | (38.3 | ) | (22.1 | ) | (126.0 | ) | (51.5 | ) | ||||||||||||
| Net loss | (115.5 | ) | (68.0 | ) | (393.5 | ) | (161.4 | ) | ||||||||||||
| Items that may be subsequently reclassified to net loss | ||||||||||||||||||||
| Currency translation adjustment | (205.7 | ) | (48.4 | ) | 72.1 | (84.2 | ) | |||||||||||||
| Fair value movements on cash flow hedges, net of tax | 10.9 | 38.8 | 25.2 | 36.7 | ||||||||||||||||
| Other comprehensive (loss) income | (194.8 | ) | (9.6 | ) | 97.3 | (47.5 | ) | |||||||||||||
| Total comprehensive loss | $ | (310.3 | ) | $ | (77.6 | ) | $ | (296.2 | ) | $ | (208.9 | ) | ||||||||
| Loss per share | ||||||||||||||||||||
| Basic | 11 | $ | (0.32 | ) | $ | (0.38 | ) | $ | (1.09 | ) | $ | (0.91 | ) | |||||||
| Diluted | 11 | (0.32 | ) | (0.38 | ) | (1.09 | ) | (0.91 | ) | |||||||||||
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
F-2
GFL Environmental Inc.
Unaudited Interim Condensed Consolidated Statements of Financial Position
(In millions of dollars)
| Notes | June 30, 2020 | December 31, 2019 | ||||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Cash | $ | 723.9 | $ | 574.8 | ||||||||
| Trade and other receivables, net of allowance | 744.0 | 713.4 | ||||||||||
| Prepaid expenses and other assets | 150.6 | 132.1 | ||||||||||
| 1,618.5 | 1,420.3 | |||||||||||
| Non-current assets | ||||||||||||
| Property, plant, and equipment, net | 4 | 3,301.3 | 2,850.1 | |||||||||
| Intangible assets, net | 5 | 3,121.1 | 2,848.0 | |||||||||
| Other long-term assets | 33.5 | 31.6 | ||||||||||
| Goodwill | 6 | 5,823.3 | 5,173.8 | |||||||||
| 13,897.7 | 12,323.8 | |||||||||||
| Liabilities | ||||||||||||
| Current liabilities | ||||||||||||
| Accounts payable and accrued liabilities | 701.5 | 732.0 | ||||||||||
| Income taxes payable | 2.6 | 2.9 | ||||||||||
| Current portion of long term debt | 8 | 3.9 | 64.4 | |||||||||
| Current portion of lease obligations | 9 | 38.7 | 33.2 | |||||||||
| Current portion of due to related party | 18 | 12.8 | 7.0 | |||||||||
| Current portion of tangible equity units | 10 | 63.4 | — | |||||||||
| Current portion of landfill closure and post-closure obligations | 7 | 18.6 | 25.6 | |||||||||
| 841.5 | 865.1 | |||||||||||
| Non-current liabilities | ||||||||||||
| Long-term debt | 8 | 5,084.3 | 7,560.7 | |||||||||
| Lease obligations | 9 | 151.4 | 158.9 | |||||||||
| Other long-term liabilities | 9.0 | 12.4 | ||||||||||
| Due to related party | 18 | 37.2 | 14.0 | |||||||||
| Deferred income tax liabilities | 746.8 | 733.8 | ||||||||||
| Tangible equity units | 10 | 959.0 | — | |||||||||
| Landfill closure and post-closure obligations | 7 | 241.7 | 211.0 | |||||||||
| 8,070.9 | 9,555.9 | |||||||||||
| Shareholders’ equity | ||||||||||||
| Share capital | 14 | 6,859.7 | 3,524.5 | |||||||||
| Contributed surplus | 14 | 36.3 | 16.4 | |||||||||
| Deficit | (1,163.8 | ) | (770.3 | ) | ||||||||
| Accumulated other comprehensive income (loss) | 94.6 | (2.7 | ) | |||||||||
| 5,826.8 | 2,767.9 | |||||||||||
| $ | 13,897.7 | $ | 12,323.8 | |||||||||
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
F-3
GFL Environmental Inc.
Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity
(In millions of dollars except per share amounts)
| Accumulated other comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||
| Notes | Share capital - # of shares(1) | Share capital | Contributed surplus | Deficit | Cash
flow hedges, net of tax | Currency translation | Total | Total
shareholder equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 177,893,748 | $ | 3,470.4 | $ | 2.0 | $ | (318.7 | ) | $ | (33.5 | ) | $ | 72.4 | $ | 38.9 | $ | 3,192.6 | |||||||||||||||||||
| Net loss and comprehensive loss | — | — | (161.4 | ) | 36.7 | (84.2 | ) | (47.5 | ) | (208.9 | ) | |||||||||||||||||||||||||
| Return of capital | (0.8 | ) | — | — | — | — | — | (0.8 | ) | |||||||||||||||||||||||||||
| Share-based payments | 14 | — | 7.2 | — | — | — | — | 7.2 | ||||||||||||||||||||||||||||
| Balance, June 30, 2019 | 177,893,748 | $ | 3,469.6 | $ | 9.2 | $ | (480.1 | ) | $ | 3.2 | $ | (11.8 | ) | $ | (8.6 | ) | $ | 2,990.1 | ||||||||||||||||||
| Balance, December 31, 2019 | 180,794,203 | $ | 3,524.5 | $ | 16.4 | $ | (770.3 | ) | $ | 27.6 | $ | (30.4 | ) | $ | (2.7 | ) | $ | 2,767.9 | ||||||||||||||||||
| Net loss and comprehensive loss | — | — | — | (393.5 | ) | 25.2 | 72.1 | 97.3 | (296.2 | ) | ||||||||||||||||||||||||||
| Return of capital | — | (0.8 | ) | — | — | — | — | — | (0.8 | ) | ||||||||||||||||||||||||||
| Share capital issued upon acquisition of subsidiary | 3 | 3,092,118 | 78.4 | — | — | — | — | — | 78.4 | |||||||||||||||||||||||||||
| Share capital issued, net of cancelled shares | 14 | 142,489,153 | 3,303.1 | — | — | — | — | — | 3,303.1 | |||||||||||||||||||||||||||
| Share issuance costs | 14 | — | (45.5 | ) | — | — | — | — | — | (45.5 | ) | |||||||||||||||||||||||||
| Share-based payments | 14 | — | — | 19.9 | — | — | — | — | 19.9 | |||||||||||||||||||||||||||
| Balance, June 30, 2020 | 326,375,474 | $ | 6,859.7 | $ | 36.3 | $ | (1,163.8 | ) | $ | 52.8 | $ | 41.7 | $ | 94.6 | $ | 5,826.8 | ||||||||||||||||||||
(1) Number of shares have been retrospectively adjusted for share split completed in conjunction with the pre-capital closing changes implemented as part of our IPO.
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
F-4
GFL Environmental Inc.
Unaudited Interim Condensed Consolidated Statements of Cash Flows
(In millions of dollars)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||
| Notes | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||
| Operating activities | ||||||||||||||||||||
| Net loss | $ | (115.5 | ) | $ | (68.0 | ) | $ | (393.5 | ) | $ | (161.4 | ) | ||||||||
| Adjustments for non-cash items | ||||||||||||||||||||
| Depreciation and amortization of property, plant and equipment | 4 | 123.6 | 101.3 | 246.3 | 195.5 | |||||||||||||||
| Amortization of intangible assets | 5 | 111.1 | 80.3 | 210.2 | 161.0 | |||||||||||||||
| Interest and other finance costs | 95.4 | 126.9 | 364.8 | 250.9 | ||||||||||||||||
| Share based payments | 14 | 4.2 | 3.6 | 19.9 | 7.2 | |||||||||||||||
| (Gain) loss on unrealized foreign exchange on long-term debt | (7.5 | ) | (23.2 | ) | 104.8 | (44.2 | ) | |||||||||||||
| Loss on sale of property, plant and equipment | 0.5 | 1.8 | 2.1 | 1.5 | ||||||||||||||||
| Mark-to-market loss (gain) on TEU purchase contract | 10 | 74.2 | — | (14.2 | ) | — | ||||||||||||||
| Mark-to-market loss on fuel hedge | 0.6 | 0.3 | 1.8 | 0.3 | ||||||||||||||||
| Current income tax expense | 2.0 | 0.4 | 3.7 | 0.2 | ||||||||||||||||
| Deferred tax recovery | (40.3 | ) | (22.5 | ) | (129.7 | ) | (51.7 | ) | ||||||||||||
| Interest paid in cash, net | (84.9 | ) | (86.8 | ) | (244.6 | ) | (164.0 | ) | ||||||||||||
| Income taxes paid in cash, net | (0.8 | ) | (1.8 | ) | (4.0 | ) | (1.8 | ) | ||||||||||||
| Changes in non-cash working capital items | 15 | (28.5 | ) | (54.2 | ) | (82.5 | ) | (154.0 | ) | |||||||||||
| Landfill closure and post-closure expenditures | 7 | (1.9 | ) | (2.4 | ) | (3.1 | ) | (3.2 | ) | |||||||||||
| 132.2 | 55.7 | 82.0 | 36.3 | |||||||||||||||||
| Investing activities | ||||||||||||||||||||
| Proceeds on sale of property, plant and equipment | 4.0 | 14.3 | 4.4 | 15.3 | ||||||||||||||||
| Purchase of property, plant and equipment and intangible assets | (119.8 | ) | (107.3 | ) | (220.0 | ) | (206.9 | ) | ||||||||||||
| Business acquisitions, net of cash acquired | 3 | (12.3 | ) | (73.3 | ) | (1,138.3 | ) | (187.2 | ) | |||||||||||
| (128.1 | ) | (166.3 | ) | (1,353.9 | ) | (378.8 | ) | |||||||||||||
| Financing activities | ||||||||||||||||||||
| Repayment of lease obligations | (16.1 | ) | (25.7 | ) | (47.4 | ) | (33.5 | ) | ||||||||||||
| Issuance of long-term debt | 785.2 | 803.8 | 1,600.9 | 1,024.9 | ||||||||||||||||
| Repayment of long-term debt | (80.7 | ) | (425.8 | ) | (4,397.8 | ) | (435.2 | ) | ||||||||||||
| Issuance of share capital, net of issuance costs | — | — | 3,257.6 | — | ||||||||||||||||
| Issuance of tangible equity units, net of issuance costs | 10 | — | — | 1,006.9 | — | |||||||||||||||
| Repayment of tangible equity unit amortizing note | (15.8 | ) | — | (15.8 | ) | — | ||||||||||||||
| Return of capital | — | — | (0.8 | ) | (0.8 | ) | ||||||||||||||
| Payment of financing costs | (10.2 | ) | (9.0 | ) | (10.5 | ) | (11.8 | ) | ||||||||||||
| Issuance of loan from related party | 18 | — | — | 29.0 | — | |||||||||||||||
| Repayment of loan to related party | — | — | — | (3.5 | ) | |||||||||||||||
| Cheques issued in excess of cash on hand | — | (19.0 | ) | — | — | |||||||||||||||
| 662.4 | 324.3 | 1,422.1 | 540.1 | |||||||||||||||||
| Increase in cash | 666.5 | 213.7 | 150.2 | 197.6 | ||||||||||||||||
| Changes due to foreign exchange revaluation of cash | (34.0 | ) | (4.4 | ) | (1.1 | ) | 4.3 | |||||||||||||
| Cash, beginning of period | 91.4 | — | 574.8 | 7.4 | ||||||||||||||||
| Cash, end of period | $ | 723.9 | $ | 209.3 | $ | 723.9 | $ | 209.3 | ||||||||||||
| Supplementary information | ||||||||||||||||||||
| Business acquisitions financed through issuance of share capital | $ | — | $ | — | $ | 78.4 | $ | — | ||||||||||||
| Asset additions financed through leases | 0.8 | 25.7 | 31.4 | 25.7 | ||||||||||||||||
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
F-5
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
| 1. | DESCRIPTION OF THE BUSINESS |
GFL Environmental Inc. (GFL or the Company) was formed on March 5, 2020 under the laws of the Province of Ontario as a result of the amalgamation of GFL Environmental Inc. and its parent company GFL Environmental Holdings Inc. (Holdings). The amalgamation was accounted for as a transaction between entities under common control and the net assets are recorded at historical cost retrospectively. Upon amalgamation, GFL became the financial reporting entity.
GFL is in the business of providing non-hazardous solid waste management, infrastructure and soil remediation services and liquid waste management services. These services are provided through wholly owned subsidiaries of GFL and a network of facilities across Canada and in 23 states in the United States. GFL’s registered office is Suite 500, 100 New Park Place, Vaughan, ON, L4K 0H9.
On March 5, 2020, GFL completed an initial public offering of 75,000,000 subordinate voting shares and a concurrent public offering of 15,500,000 tangible equity units (TEUs) for total gross proceeds of $2,888.8 million (US$2,168.8 million) (collectively, the IPO). GFL’s subordinate voting shares trade on the New York Stock Exchange and the Toronto Stock Exchange under the symbol “GFL” and the TEUs trade on the New York Stock Exchange under the symbol “GFLU”.
The interim condensed consolidated financial statements (unaudited) (interim financial statements) include the accounts of GFL and its subsidiaries as of June 30, 2020.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Statement of compliance
These interim financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”) and include the accounts of the Company.
These interim financial statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the Company’s annual consolidated financial statements for the year ended December 31, 2019 (the Annual Consolidated Financial Statements).
Basis of measurement
GFL’s interim financial statements were prepared on the historical cost basis except for certain financial instruments that are measured at fair value at the end of the reporting period as detailed in the Annual Consolidated Financial Statements.
Presentation and functional currency
These interim financial statements are presented in Canadian dollars which is GFL’s functional currency.
Use of Estimates and Judgments
The preparation of GFL’s interim financial statements requires management to make estimates and use judgment that affect the reported amounts of revenue, expenses, assets, liabilities and accompanying disclosures. Accordingly, actual results may differ from estimated amounts as future confirming events occur. Significant estimates and judgments used in the preparation of the interim financial statements are described in GFL’s Annual Consolidated Financial Statements.
Accounting policies
The accounting policies adopted in the preparation of the interim financial statements are consistent with those followed in the preparation of the Annual Consolidated Financial Statements, except as described below.
F-6
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
Changes in Accounting Policies
IFRS 9/IAS 39 and IFRS 7 Amendments, Interest rate benchmark reform
The IASB issued amendments to IFRS 9, IAS 39 and IFRS 7 — Financial Instruments: Disclosures. The amendments are effective for annual reporting periods beginning on or after January 1, 2020. GFL has assessed the impact of the amendments and concluded that they had no impact on the interim financial statements.
IFRS 3 Amendments, Definition of a business
The IASB issued amendments to IFRS 3 — Business combinations to revise the definition of a business. The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020 and to asset acquisitions that occur on or after the beginning of that period. GFL has assessed the impact of the amendments and concluded that they had no impact on the interim financial statements.
IAS 1 and IAS 8 Amendments, Definition of material
The IASB issued amendments to IAS 1 — Presentation of financial statements and IAS 8 — Accounting policies, changes in accounting estimates and errors to revise the definition of material. The amendments are effective for annual reporting periods beginning on or after January 1, 2020. GFL has assessed the impact of the amendments and concluded that they had no impact on the interim financial statements.
Conceptual framework
The IASB issued the revised conceptual framework for financial reporting to replace its 2010 conceptual framework. The revised conceptual framework is effective for annual periods beginning on or after January 1, 2020, with earlier application permitted. GFL assessed the revised conceptual framework and concluded that there is no impact on the interim financial statements.
| 3. | BUSINESS COMBINATIONS |
Acquisitions during 2020
For the three and six months ended June 30, 2020, acquisitions, in the table below, include the aggregate net assets acquired and consideration given for all acquisitions made during the period, which GFL considers to be individually immaterial. GFL acquired seven solid waste management businesses and three liquid waste management businesses during the six months ended June 30, 2020.
The preliminary fair values of the aggregate identifiable assets acquired and liabilities assumed, and any goodwill recognized, as well as the purchase consideration transferred are presented below. GFL expects to finalize these amounts no later than one year from the acquisition dates and will reflect these adjustments retrospectively. There may be differences between these provisional estimates and the final acquisition accounting.
Contingent consideration, if any, is contingent on the acquired business meeting certain earnings and performance targets by specified dates.
F-7
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
| Three months ended June 30, 2020 | Six months ended June 30, 2020 | |||||||
| Net assets acquired | ||||||||
| Working capital | $ | (0.9 | ) | $ | 2.6 | |||
| Assumption of lease obligations | — | (6.6 | ) | |||||
| Right-of-use assets | — | 6.6 | ||||||
| Property, plant and equipment | 12.4 | 250.6 | ||||||
| Landfill | — | 119.1 | ||||||
| Intangible assets | ||||||||
| Certificate of approval licenses | — | 3.5 | ||||||
| Municipal and other commercial contracts | — | 81.5 | ||||||
| Customer lists | 7.2 | 165.2 | ||||||
| Non-compete agreement | 2.4 | 201.5 | ||||||
| Goodwill | (8.8 | ) | 546.7 | |||||
| Assumption of landfill closure and post-closure expenditures | — | (7.7 | ) | |||||
| Deferred tax liabilities | — | (138.0 | ) | |||||
| $ | 12.3 | $ | 1,225.0 | |||||
| Consideration | ||||||||
| Accrued contingent consideration | $ | — | $ | 8.3 | ||||
| Shares consideration issued | — | 78.4 | ||||||
| Cash | 12.3 | 1,138.3 | ||||||
| $ | 12.3 | $ | 1,225.0 | |||||
| 4. | PROPERTY, PLANT AND EQUIPMENT |
| Land | Land- fills |
Building and leaseholds |
Trans- portation equipment |
Furniture, machinery and equipment |
Assets under develop-ment |
Computer software and equipment |
Containers | Right-of- use assets |
Total | |||||||||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 256.6 | $ | 765.9 | $ | 357.2 | $ | 1,061.2 | $ | 450.5 | $ | 121.5 | $ | 50.4 | $ | 207.0 | $ | 161.5 | $ | 3,431.8 | ||||||||||||||||||||
| Additions | 8.4 | 22.5 | 38.5 | 62.9 | 28.7 | 15.0 | 17.1 | 36.6 | 31.4 | 261.1 | ||||||||||||||||||||||||||||||
| Acquisitions via business combinations | 11.6 | 119.1 | 26.7 | 165.9 | 29.1 | — | — | 17.3 | 6.6 | 376.3 | ||||||||||||||||||||||||||||||
| Disposals | (0.7 | ) | — | — | (4.9 | ) | (1.2 | ) | — | — | (1.1 | ) | (20.6 | ) | (28.5 | ) | ||||||||||||||||||||||||
| Transfers | 0.7 | 0.6 | (0.6 | ) | 0.5 | (1.0 | ) | — | — | (0.2 | ) | — | — | |||||||||||||||||||||||||||
| Changes in foreign exchange | 6.0 | 38.8 | 7.2 | 33.4 | 7.4 | 0.3 | 0.3 | 9.4 | 2.2 | 105.0 | ||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | 282.6 | 946.9 | 429.0 | 1,319.0 | 513.5 | 136.8 | 67.8 | 269.0 | 181.1 | 4,145.7 | ||||||||||||||||||||||||||||||
| Accumulated depreciation | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | — | 162.2 | 26.8 | 206.6 | 88.8 | — | 20.8 | 55.2 | 21.3 | 581.7 | ||||||||||||||||||||||||||||||
| Depreciation and amortization | — | 41.8 | 12.6 | 98.9 | 48.6 | — | 10.4 | 18.5 | 15.5 | 246.3 | ||||||||||||||||||||||||||||||
| Disposals | — | (0.1 | ) | — | (2.7 | ) | (0.2 | ) | — | — | (0.8 | ) | (4.1 | ) | (7.9 | ) | ||||||||||||||||||||||||
| Changes in foreign exchange | — | 12.1 | 0.8 | 5.8 | 2.2 | — | 0.1 | 3.6 | (0.3 | ) | 24.3 | |||||||||||||||||||||||||||||
| Balance, June 30, 2020 | — | 216.0 | 40.2 | 308.6 | 139.4 | — | 31.3 | 76.5 | 32.4 | 844.4 | ||||||||||||||||||||||||||||||
| Carrying amounts | ||||||||||||||||||||||||||||||||||||||||
| At December 31, 2019 | $ | 256.6 | $ | 603.7 | $ | 330.4 | $ | 854.6 | $ | 361.7 | $ | 121.5 | $ | 29.6 | $ | 151.8 | $ | 140.2 | $ | 2,850.1 | ||||||||||||||||||||
| At June 30, 2020 | $ | 282.6 | $ | 730.9 | $ | 388.8 | $ | 1,010.4 | $ | 374.1 | $ | 136.8 | $ | 36.5 | $ | 192.5 | $ | 148.7 | $ | 3,301.3 | ||||||||||||||||||||
F -8
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
Depreciation of property, plant and equipment expense included in cost of sales for the three and six months ended June 30, 2020 was $117.7 million and $234.5 million, respectively ($98.3 million and $185.0 million for the three and six months ended June 30, 2019).
Depreciation of property, plant and equipment expense included in selling, general and administrative expense for the three and six months ended June 30, 2020 was $5.9 million and $11.8 million respectively ($3.0 million and $10.5 million for the three and six months ended June 30, 2019).
| 5. | INTANGIBLE ASSETS |
| June 30, 2020 | December 31, 2019 | |||||||
| Carrying amounts | ||||||||
| Indefinite life | $ | 613.3 | $ | 612.1 | ||||
| Definite life | 2,507.8 | 2,235.9 | ||||||
| $ | 3,121.1 | $ | 2,848.0 | |||||
Indefinite life intangible assets include certificate of approval licenses that do not expire. GFL expects these assets to generate economic benefit in perpetuity. As such, GFL assessed these intangibles to have indefinite useful lives.
The following table presents the changes in cost and accumulated amortization of the Company’s intangible assets:
| Customer lists | Municipal contracts | Non-compete agreements | Trade name certificates of approval and other licenses | Total | ||||||||||||||||
| Cost | ||||||||||||||||||||
| Balance, December 31, 2019 | $ | 1,839.9 | $ | 586.2 | $ | 187.8 | $ | 695.6 | $ | 3,309.5 | ||||||||||
| Acquisitions via business combinations | 165.2 | 81.5 | 201.5 | 3.5 | 451.7 | |||||||||||||||
| Changes in foreign exchange | 20.5 | 14.0 | (4.3 | ) | 5.1 | 35.3 | ||||||||||||||
| Balance, June 30, 2020 | 2,025.6 | 681.7 | 385.0 | 704.2 | 3,796.5 | |||||||||||||||
| Accumulated depreciation | ||||||||||||||||||||
| Balance, December 31, 2019 | 257.9 | 150.7 | 48.1 | 4.8 | 461.5 | |||||||||||||||
| Amortization | 98.1 | 64.0 | 39.5 | 8.6 | 210.2 | |||||||||||||||
| Changes in foreign exchange | 1.7 | 2.3 | (0.2 | ) | (0.1 | ) | 3.7 | |||||||||||||
| Balance, June 30, 2020 | 357.7 | 217.0 | 87.4 | 13.3 | 675.4 | |||||||||||||||
| Carrying amounts | ||||||||||||||||||||
| At December 31, 2019 | $ | 1,582.0 | $ | 435.5 | $ | 139.7 | $ | 690.8 | $ | 2,848.0 | ||||||||||
| At June 30, 2020 | $ | 1,667.9 | $ | 464.7 | $ | 297.6 | $ | 690.9 | $ | 3,121.1 | ||||||||||
Amortization expense included as part of cost of sales for the three and six months ended June 30, 2020 was $111.1 million and $210.2 million respectively ($80.3 million and $161.0 million for the three and six months ended June 30, 2019).
| 6. | GOODWILL |
| June 30, 2020 | ||||
| Balance, Beginning of period | $ | 5,173.8 | ||
| Acquisitions | 546.7 | |||
| Foreign exchange revaluation | 102.8 | |||
| $ | 5,823.3 | |||
F -9
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
During the six months ended June 30, 2020, GFL revised the preliminary purchase price allocation for an acquisition that closed on January 1, 2020. This adjustment resulted in a decrease of goodwill of $8.8 million and corresponding increase in property, plant, and equipment applied retrospectively to the acquisition date. GFL expects to finalize these amounts no later than one year from the acquisition date.
| 7. | LANDFILL CLOSURE AND POST-CLOSURE OBLIGATIONS |
| June 30, 2020 | ||||
| Balance, Beginning of period | $ | 236.6 | ||
| Acquisitions via business combinations | 7.7 | |||
| Provisions | 7.6 | |||
| Accretion | 3.2 | |||
| Expenditures | (3.1 | ) | ||
| Changes in foreign exchange | 8.3 | |||
| Balance, End of period | 260.3 | |||
| Less: Current portion | (18.6 | ) | ||
| $ | 241.7 | |||
Funded landfill post-closure assets
GFL is required to deposit monies into a social utility trust for the purpose of settling post closure costs at the landfills it owns in Quebec. The funding amount is established by the Quebec Government based on each cubic meter of waste accepted and payment is due quarterly. At June 30, 2020, included in other long-term assets are funded landfill post closure obligations, representing the fair value of legally restricted assets, totaling $18.8 million ($17.7 million as at December 31, 2019).
F -10
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
| 8. | LONG-TERM DEBT |
The Company’s long-term debt is comprised of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| Revolving credit and swingline facility | ||||||||
| Revolving credit facility, monthly interest only, principal maturing on August 2, 2023 | $ | — | $ | — | ||||
| Term loan | ||||||||
| Term loan, interest rate of LIBOR plus 3.00% or US prime rate plus 2.00%, principal and interest payable quarterly, maturing on May 31, 2025 | 2,803.6 | 3,351.2 | ||||||
| Bonds | ||||||||
| 5.625% USD senior unsecured notes, semi-annual interest only commencing May 12, 2017, principal maturing on May 1, 2022 (2022 Notes) | — | 454.6 | ||||||
| 5.375% USD senior unsecured notes, semi-annual interest only commencing September 1, 2018, principal maturing on March 1, 2023 (2023 Notes) | — | 519.5 | ||||||
| 4.250% USD senior secured notes, semi-annual interest only commencing December 1, 2020, principal maturing on June 1, 2025 (2025 Secured Notes) | 681.4 | — | ||||||
| 7.000% USD senior unsecured notes, semi-annual interest only commencing December 1, 2018, principal maturing on June 1, 2026 (2026 Notes) | 551.9 | 876.7 | ||||||
| 5.125% USD senior secured notes, semi-annual interest only commencing December 15, 2019, principal maturing on December 15, 2026 (2026 Secured Notes) | 681.4 | 649.4 | ||||||
| 8.500% USD senior unsecured notes, semi-annual interest only commencing May 1, 2019, principal maturing on May 1, 2027 (2027 Notes) | 490.6 | 779.3 | ||||||
| Paid in Kind notes | ||||||||
| 11.000% Paid in Kind notes (PIK Notes), semi-annual interest commencing December 1, 2018, principal maturing on May 31, 2028 | — | 1,008.0 | ||||||
| Promissory notes | 27.5 | |||||||
| Equipment loans and other | ||||||||
| At interest rates ranging from 3.020% to 4.370% | 8.0 | 9.5 | ||||||
| 5,216.9 | 7,675.7 | |||||||
| Fair value adjustment on bonds | (5.1 | ) | (34.2 | ) | ||||
| Net derivative instruments on bonds | (84.7 | ) | 31.1 | |||||
| Premium on 5.125% Secured Notes | 2.1 | 4.1 | ||||||
| Deferred finance costs | (41.0 | ) | (51.6 | ) | ||||
| 5,088.2 | 7,625.1 | |||||||
| Less: Current portion | (3.9 | ) | (64.4 | ) | ||||
| $ | 5,084.3 | $ | 7,560.7 | |||||
F -11
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
Revolving credit and swingline facility
GFL has a revolving credit and swingline facility (the Revolving Credit Facility) totaling $628.0 million and US$40.0 million of which $nil was drawn as of June 30, 2020 ($nil at December 31, 2019). This credit facility bears interest at either the bank’s prime rate plus 1.75% per annum or LIBOR plus 2.75% per annum depending on the mechanism used to draw the funds.
The revolving credit and swingline facilities are secured by mortgages on certain properties, a general security agreement over all the assets of GFL and certain material subsidiaries and a pledge of shares of all subsidiaries.
Under the Revolving Credit Facility, GFL must satisfy the following financial covenant:
If the Revolving Credit Facility is more than 35% utilized, then GFL’s maximum total net funded debt to Adjusted EBITDA, as defined in the Revolving Credit Facility, must be equal to or less than 8.00:1.
As at June 30, 2020 and December 31, 2019, GFL was in compliance with this covenant.
On March 5, 2020, GFL used a portion of the net proceeds of the IPO to repay $392.9 million of the Revolving Credit Facility.
Term loan facility
GFL has a Term Loan facility (Term Loan Facility) totaling US$2,615.0 million. The Term Loan Facility matures in 2025 and bears interest at a rate of LIBOR plus 3.00% or US prime plus 2.00%.
The Term Loan Facility is secured by mortgages on certain properties, a general security agreement over all the assets of GFL and certain material subsidiaries and a pledge of the shares of such subsidiaries.
On March 5, 2020, GFL used a portion of the net proceeds of the IPO to repay US$523.0 million of the term loan.
Bonds
On March 5, 2020, GFL used a portion of the net proceeds of the IPO to fund the redemption of the following (i) the entire US$350.0 million outstanding aggregate principal amount of the 2022 Notes, (ii) the entire US$400.0 million outstanding aggregate principal amount of the 2023 Notes, (iii) US$270.0 million outstanding aggregate principal amount of the 2026 Notes, (iv) US$240.0 million of the aggregate principal amount of the 2027 Notes, and (v) related fees, premiums and accrued and unpaid interest on the 2022 Notes, the 2023 Notes, the 2026 Notes and the 2027 Notes. A loss on extinguishment of the bonds of $91.2 million was recognized in interest and other finance costs.
On April 22, 2020, GFL issued the 2025 Secured Notes. Concurrently with the offering, GFL entered into cross-currency swaps to manage its currency risk.
Paid In Kind Notes
On March 5, 2020, in connection with the pre-closing capital changes implemented as part of the IPO, certain existing shareholders of Holdings subscribed for additional non-voting shares at a fair market value price per share of US$19.00, the proceeds of which, together with a loan in an aggregate principal amount of $29.0 million from Sejosa Holdings Inc., an entity controlled by Patrick Dovigi, Founder, Chairman, President and Chief Executive Officer, were used to redeem in full the PIK Notes in an aggregate amount of $1,049.9 million plus redemption premiums and penalties. A loss on extinguishment of $59.4 million was recognized in interest and other finance costs.
Letter of credit facility
GFL has a combined committed letter of credit facility to a maximum of $160.0 million. At June 30, 2020, GFL had $128.1 million ($104.3 million as at December 31, 2019) outstanding against this facility which are not recognized in the interim financial statements. Interest expense in connection with these letters of credit was $1.9 million for the six months ended June 30, 2020 ($1.4 million in the six months ended June 30, 2019).
F -12
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
Commitments related to long-term debt
Principal future payments on long term debt in each of the next five years are as follows:
| Long-term debt | |||||
| 2020 | $ | 0.6 | |||
| 2021 | 3.0 | ||||
| 2022 | 0.5 | ||||
| 2023 | 0.2 | ||||
| 2024 | 3.6 | ||||
| Thereafter | 5,209.0 | ||||
| $ | 5,216.9 | ||||
| 9. | LEASE OBLIGATIONS |
GFL leases several assets including buildings, plants and equipment. The average lease term is five years.
GFL has options to purchase certain equipment for a nominal amount at the end of the lease term. The Company’s obligations are secured by the lessors’ title to the leased assets for such leases.
Future minimum payments under lease obligations are as follows:
| June 30, 2020 | December 31, 2019 | |||||||
| Lease obligations | $ | 234.6 | $ | 246.4 | ||||
| Less: Interest | 44.5 | 54.3 | ||||||
| 190.1 | 192.1 | |||||||
| Less: Current portion | 38.7 | 33.2 | ||||||
| $ | 151.4 | $ | 158.9 | |||||
Leases includes $79.0 million of secured lease obligations as at June 30, 2020 ($58.7 million as at December 31, 2019).
Interest expense in connection with lease obligations was $2.2 million and $5.0 million for the three and six months ended June 30, 2020 respectively ($3.2 million and $5.3 million for the three and six months ended June 30, 2019). Leases are secured by the related asset.
Principal and interest payments on future minimum lease payments under the lease obligations required in each of the following five years are as follows:
| Lease liabilities | |||||
| 2020 | $ | 20.5 | |||
| 2021 | 34.5 | ||||
| 2022 | 32.2 | ||||
| 2023 | 26.4 | ||||
| 2024 | 30.2 | ||||
| Thereafter | 90.8 | ||||
| $ | 234.6 | ||||
F -13
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
| 10. | TANGIBLE EQUITY UNITS (TEUs) |
On March 5, 2020, GFL completed its offering of 15,500,000 6.000% TEUs for total gross proceeds of $1,040.7 million (US$775.0 million). Each TEU, which has a stated amount of US$50.00, is comprised of a prepaid stock purchase contract (a Purchase Contract) and a senior amortizing note (an Amortizing Note) due March 15, 2023, both of which are freestanding instruments and separate units of account. The Amortizing Notes are classified as a financial liability held at amortized cost. The Purchase Contract is accounted for as prepaid forward contracts to deliver a variable number of equity instruments equal to a fixed dollar amount, subject to a cap and floor. Accordingly, the Purchase Contract meets the definition of a financial liability with embedded derivative features, which GFL has elected to measure at fair value through profit or loss.
GFL allocated the proceeds from the issuance of the TEUs to notes and other derivative financial liabilities based on the relative fair values of the respective components of each TEU. The value allocated to the Amortizing Note is reflected as TEU Amortizing Notes with issuance costs reflected as a reduction of the face amount of the Amortizing Notes. The issuance costs are accreted to the face amount of the note using the effective interest method.
The value allocated to the Purchase Contract is reflected in TEU purchase contract and is subsequently measured at fair value through profit or loss. The fair value of the Purchase Contract of the TEU is based on the trading price of the purchase contract to the extent an active market exists, otherwise a valuation model is used. The fair value of the Purchase Contract was estimated using a Monte-Carlo simulation to simulate GFL’s stock price using inputs such as USD risk-free interest rate curve, GFL’s spot stock price in USD on the New York Stock Exchange, dividend forecasts, volatility of GFL’s stock, and credit spread. This resulted in a loss of $74.2 million and gain of $14.2 million on the market value of the Purchase Contracts for the three and six months ended June 30, 2020 ($nil for the three and six months ended June 30, 2019).
The aggregate values assigned upon issuance of the TEUs, based on the relative fair values of the respective components of each TEU, were as follows:
| Purchase Contract | Amortizing Note | Total | |||||||||||
| Fair value price per TEU on issuance | $ | 55.71 | $ | 11.43 | $ | 67.14 | |||||||
| Gross proceeds | 863.5 | 177.2 | 1,040.7 | ||||||||||
| Issuance costs | (28.1 | ) | (5.7 | ) | (33.8) | ||||||||
| Net proceeds on issuance | $ | 835.4 | $ | 171.5 | $ | 1,006.9 | |||||||
Each Amortizing Note has an initial principal amount of US$8.51 and bears interest at 4.000% per year. On each of March 15, June 15, September 15, and December 15, GFL will pay equal quarterly cash instalments of US$0.75 per Amortizing Note (except for the June 15, 2020 installment payment, which was US$0.83 per Amortizing Note), which cash payment in the aggregate will be the equivalent of 6.000% per year with respect to each US$50.00 stated amount of the TEUs. Each instalment constitutes a payment of interest and a partial payment of principal.
Unless settled earlier, on March 15, 2023 each Purchase Contract will automatically settle for subordinate voting shares. Upon settlement of a Purchase Contract, GFL will deliver not more than 2.6316 subordinate voting shares and not less than 2.1930 subordinate voting shares, subject to adjustment, based on the Applicable Market Value of GFL’s subordinate voting shares as described below:
• If the Applicable Market Value is greater than the threshold appreciation price, which is US$22.80, holders will receive 2.1930 subordinate voting share per purchase contract;
• If the Applicable Market Value is less than or equal to the threshold appreciation price but greater than or equal to the reference price, which is US$19.00, the holder will receive a number of subordinate voting shares per purchase contract equal to US$50.00, divided by the Applicable Market Value; and
• If the Applicable Market Value is less than the reference price, the holder will receive 2.6316 subordinate voting shares per purchase contract.
The Applicable Market Value is defined as the arithmetic average of the volume weighted average price per share of GFL’s subordinate voting shares over the twenty consecutive trading day period immediately preceding March 15, 2023.
F -14
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
The tangible equity units are comprised of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| Tangible equity units amortizing notes | $ | 156.8 | $ | — | ||||
| Tangible equity units purchase contract | 865.6 | — | ||||||
| 1,022.4 | — | |||||||
| Less: Current portion of tangible equity units amortizing notes | (63.4 | ) | — | |||||
| $ | 959.0 | $ | — | |||||
The 33,991,500 minimum shares to be issued are included in the calculation of basic net loss per share. The TEUs have a potentially dilutive effect on the calculation of net income per share. The difference between the minimum shares and the maximum shares are dilutive securities, and accordingly, are included in GFL’s diluted net loss per share on a pro-rata basis to the extent the Applicable Market Value is higher than US$22.80 but is less than US$19.00 at period end. See note 11 for additional information regarding the calculation of net loss per share.
Principal future payments on the Amortizing Notes are as follows:
| Amortizing Note | ||||
| 2020 | $ | 31.7 | ||
| 2021 | 63.4 | |||
| 2022 | 63.4 | |||
| 2023 | 15.8 | |||
| $ | 174.3 | |||
| 11. | LOSS PER SHARE |
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net loss | $ | (115.5 | ) | $ | (68.0 | ) | $ | (393.5 | ) | $ | (161.4 | ) | ||||
| Weighted average shares outstanding(1),(2) | 360,400,612 | 177,720,742 | 360,400,612 | 177,720,742 | ||||||||||||
| Weighted average number of shares on exercise of stock options | — | — | — | — | ||||||||||||
| Weighted average number of shares on tangible equity units | — | — | — | — | ||||||||||||
| Diluted weighted average number of shares outstanding | 360,400,612 | 177,720,742 | 360,400,612 | 177,720,742 | ||||||||||||
| Loss per share | ||||||||||||||||
| Basic | $ | (0.32 | ) | $ | (0.38 | ) | $ | (1.09 | ) | $ | (0.91 | ) | ||||
| Diluted | (0.32 | ) | (0.38 | ) | (1.09 | ) | (0.91 | ) | ||||||||
| (1) | Weighted average shares at June 30, 2020 adjusted for share split completed in conjunction with the pre-capital closing changes implemented as part of the IPO. |
| (2) | Weighted average shares at June 30, 2020 includes the 33,991,500 minimum share conversion of the TEUs. |
Diluted loss per share excludes the effects of time-based and performance-based share options and TEUs that are anti-dilutive.
F-15
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
| 12. | SALES AND OPERATING REVENUE |
The following table presents GFL’s revenue disaggregated by service type and segment.
|
Three months ended June 30, |
Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Residential | $ | 262.4 | $ | 210.6 | $ | 501.2 | $ | 392.7 | ||||||||
| Commercial | 298.2 | 283.6 | 605.4 | 533.1 | ||||||||||||
| Total collection | 560.6 | 494.2 | 1,106.6 | 925.8 | ||||||||||||
| Landfill | 68.4 | 66.8 | 131.2 | 123.3 | ||||||||||||
| Transfer | 96.8 | 89.6 | 185.2 | 156.1 | ||||||||||||
| Material Recovery | 66.2 | 16.6 | 112.5 | 32.2 | ||||||||||||
| Other | 69.0 | 45.3 | 122.5 | 78.3 | ||||||||||||
| Solid waste | 861.0 | 712.5 | 1,658.0 | 1,315.7 | ||||||||||||
| Infrastructure and solid remediation | 133.4 | 115.7 | 265.2 | 227.1 | ||||||||||||
| Liquid waste | 105.9 | 97.9 | 210.6 | 179.6 | ||||||||||||
| Intercompany revenue | (107.0) | (94.7) | (209.2) | (170.1) | ||||||||||||
| Revenue | $ | 993.3 | $ | 831.4 | $ | 1,924.6 | $ | 1,552.3 | ||||||||
F-16
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
| 13. | SEGMENT REPORTING |
GFL’s main lines of business are the transporting, managing, and recycling of solid and liquid waste and infrastructure and soil remediation services. GFL is divided into operating segments corresponding to the following lines of business: Solid Waste, which includes hauling, landfill transfers and material recycling facilities; Infrastructure and Soil Remediation; and Liquid Waste. Financial reporting by each operating segment follows the same accounting policies as those used to prepare the interim financial statements. Inter-segment transfers are made at market prices.
The operating segments are presented in accordance with the same criteria used for the internal report prepared for the chief operating decision-maker who is responsible for allocating the resources and assessing the performance of the operating segments. The chief operating decision-maker assesses the performance of the segments on several factors, including reported revenue and adjusted EBITDA. GFL’s chief operating decision-maker is the Chief Executive Officer.
The Solid Waste segment follows a national internal reporting structure, and each county is considered a separate operating segment by the chief operating decision-maker.
The following is an analysis of GFL’s revenue and results from continuing operations by reportable segment. “Adjusted EBITDA” represents GFL’s earnings before taxes, interest and other finance costs, depreciation and amortization, deferred purchase consideration, loss (gain) on the sale of property, plant and equipment, mark-to-market gain on TEU derivative purchase contract, mark-to-market on fuel hedge, share-based payments and certain acquisition costs.
|
Three months ended June 30, 2020 |
Three months ended June 30, 2019 | |||||||||||||||
| Revenue | Adjusted EBITDA |
Revenue | Adjusted EBITDA | |||||||||||||
| Solid Waste | ||||||||||||||||
| Canada | $ | 307.7 | $ | 88.1 | $ | 254.7 | $ | 71.5 | ||||||||
| USA | 457.5 | 146.2 | 372.7 | 109.0 | ||||||||||||
| Solid Waste | 765.2 | 234.3 | 627.4 | 180.5 | ||||||||||||
| Infrastructure and soil remediation | 131.2 | 26.7 | 114.3 | 23.4 | ||||||||||||
| Liquid waste | 96.9 | 22.6 | 89.7 | 23.2 | ||||||||||||
| Corporate | — | (22.1) | — | (15.2) | ||||||||||||
| $ | 993.3 | $ | 261.5 | $ | 831.4 | $ | 211.9 | |||||||||
|
Six months ended June 30, 2020 |
Six months ended June 30, 2019 | |||||||||||||||
| Revenue | Adjusted EBITDA |
Revenue | Adjusted EBITDA | |||||||||||||
| Solid Waste | ||||||||||||||||
| Canada | $ | 580.8 | $ | 154.1 | $ | 450.6 | $ | 121.3 | ||||||||
| USA | 892.4 | 282.0 | 713.6 | 214.5 | ||||||||||||
| Solid Waste | 1,473.2 | 436.1 | 1,164.2 | 335.8 | ||||||||||||
| Infrastructure and soil remediation | 261.9 | 48.2 | 225.4 | 44.6 | ||||||||||||
| Liquid waste | 189.5 | 39.4 | 162.7 | 39.9 | ||||||||||||
| Corporate | — | (39.4) | — | (29.3) | ||||||||||||
| $ | 1,924.6 | $ | 484.3 | $ | 1,552.3 | $ | 391.0 | |||||||||
F-17
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
Adjusted EBITDA reconciles to net loss for the periods presented as follows:
|
Three months ended June 30, |
Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Total segment adjusted EBITDA | $ | 261.5 | $ | 211.9 | $ | 484.3 | $ | 391.0 | ||||||||
| Less: | ||||||||||||||||
| Depreciation and amortization | 123.6 | 101.3 | 246.3 | 195.5 | ||||||||||||
| Amortization of intangible assets | 111.1 | 80.3 | 210.2 | 161.0 | ||||||||||||
| Interest and other finance costs | 95.4 | 126.9 | 364.8 | 250.9 | ||||||||||||
| (Gain) loss on foreign exchange | (8.4) | (28.1) | 97.6 | (44.8) | ||||||||||||
| Loss on sale of property, plant and equipment | 0.5 | 1.8 | 2.1 | 1.5 | ||||||||||||
| Mark-to-market loss on fuel hedge | 0.6 | 0.3 | 1.8 | 0.3 | ||||||||||||
| Mark-to-market loss (gain) on TEU derivative purchase contract | 74.2 | — | (14.2) | — | ||||||||||||
| Share-based payments | 4.2 | 3.6 | 19.9 | 7.2 | ||||||||||||
| Transaction costs | 7.7 | 9.1 | 18.9 | 18.6 | ||||||||||||
| IPO transaction costs | 4.9 | — | 46.2 | — | ||||||||||||
| Acquisition, rebranding and other integration costs | 1.5 | 6.8 | 9.2 | 12.8 | ||||||||||||
| Deferred purchase consideration | — | — | 1.0 | 1.0 | ||||||||||||
| Income tax recovery | (38.3) | (22.1) | (126.0) | (51.5) | ||||||||||||
| Net loss | $ | (115.5) | $ | (68.0) | $ | (393.5) | $ | (161.4) | ||||||||
Goodwill and indefinite life intangible assets by operating segment
The carrying amount of goodwill and indefinite life intangible assets allocated to the operating segments for impairment testing purposes is as follows:
| June 30, 2020 | December 31, 2019 | |||||||
| Solid waste | ||||||||
| Canada | $ | 1,731.6 | $ | 1,707.6 | ||||
| USA | 4,036.9 | 3,383.0 | ||||||
| Infrastructure and soil remediation | 239.8 | 237.8 | ||||||
| Liquid waste | 428.3 | 457.5 | ||||||
| $ | 6,436.6 | $ | 5,785.9 | |||||
| 14. | SHAREHOLDER'S CAPITAL |
a) Authorized capital
GFL’s authorized share capital consists of (i) an unlimited number of subordinate voting shares, (ii) an unlimited number of multiple voting shares, and (iii) an unlimited number of preferred shares.
Subordinate and multiple voting shares
The rights of the holders of the subordinate voting shares and the multiple voting shares are substantially identical, except for voting and conversion. The holders of outstanding subordinate voting shares are entitled to one vote per subordinate voting share and the holders of multiple voting shares are entitled to ten votes per multiple voting share. The subordinate voting shares are not convertible into any other classes of shares. Each outstanding multiple voting share may at any time, at the option of the holder, be converted into one subordinate voting share.
F-18
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
In addition, all multiple voting shares will convert automatically into subordinate voting shares at such time that is the earlier of the following: (i) Patrick Dovigi and/or his affiliates no longer beneficially own, directly or indirectly, at least 2.0% of the aggregate of the issued and outstanding subordinate voting shares and multiple voting shares; (ii) Patrick Dovigi is no longer serving as a director or in a senior management position at GFL; or (iii) the twentieth anniversary of the closing of the IPO.
The subordinate voting shares and multiple voting shares rank pari passu with respect to the payment of dividends, return or capital and distribution of assets in the event of liquidation, dissolution or winding up of GFL.
Preferred shares
The preferred shares are issuable at any time and from time to time in series. Each series of preferred shares shall consist of such number of preferred shares and having such rights, privileges, restrictions and conditions as determined by the Board of Directors prior to the issuance thereof.
Amalgamation
Effective March 5, 2020, immediately prior to the completion of GFL’s IPO, GFL amalgamated with Holdings. In connection with the amalgamation, all of the issued and outstanding shares of Holdings were exchanged for subordinate voting shares and multiple voting shares of GFL at an exchange ratio of 20.363259-for-one, other than the Class F shares of Holdings which were converted to multiple voting shares on an exchange ratio of 26.343032-for-one. As a result, the historical share and per share amounts presented in these interim financial statements have been retroactively adjusted to reflect this change.
Share issuances
On January 1, 2020, GFL issued 2,056,331 subordinate voting shares as partial consideration for an acquisition.
On February 1, 2020, GFL issued 1,035,787 subordinate voting shares as partial consideration for an acquisition.
On February 1, 2020, in connection with his resignation as an officer of GFL, the Company issued Ven Poole a separation payment of 73,947 subordinate voting shares issued at the initial public offering price US$19.00.
Between January 1, 2020 and March 5, 2020, GFL issued 17,694,685 subordinate voting shares to its existing shareholders for aggregate cash consideration of $348.9 million and made a return of capital of $0.8 million.
On March 5, 2020, in connection with the pre-closing capital changes implemented as part of the IPO, certain existing shareholders of Holdings subscribed for 47,496,202 subordinate voting shares for aggregate cash consideration of $1,064.6 million. Also on this date, 704,800 subordinate voting shares were issued at the IPO price in partial consideration for the redemption of the PIK Notes.
On March 5, 2020 in conjunction with the IPO, GFL issued 73,361,842 subordinate voting shares for total gross proceeds received by GFL of $1,871.8 million (US$1,393.9 million). Share issuance costs, net of deferred tax, amounted to $45.5 million (US$33.9 million).
As at June 30, 2020 there was a total of 314,312,510 subordinate voting shares and 12,062,964 multiple voting shares outstanding.
Contributed surplus
The contributed surplus consists of the following:
| Balance, December 31, 2019 | $ | 16.4 | ||
| Share-based compensation expense | 19.9 | |||
| Balance, June 30, 2020 | $ | 36.3 |
F-19
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
b) Share options, performance share units, restricted share units, and deferred share units
Holdings established a stock option plan dated May 31, 2018, as amended on November 14, 2018 (the Legacy Stock Option Plan). In connection with the IPO, 159,468,329 options issued and outstanding under the Legacy Stock Option Plan (before exchange ratio restatement) with an exercise price of $1.00 (both of which are on a pre-converted basis) vested in accordance with the terms of the Legacy Stock Option Plan. After giving effect to the IPO, the options exercised on a net basis, less applicable withholding taxes, into 3,203,925 subordinate voting shares (the Legacy Option Shares). At completion of the IPO, there were no options outstanding under the Legacy Stock Option Plan and such plan was terminated.
Unless otherwise determined by the Board of Directors, the Legacy Option Shares will be held by a trustee in trust or in escrow on behalf of the legacy option holders. One-third of the Legacy Option Shares will vest and be released from escrow on each of the first three anniversaries of the IPO. Unless otherwise determined by the Board of Directors, if prior to the third anniversary of the IPO a legacy option holder’s employment with GFL is terminated without cause, such legacy option holder’s Legacy Option Shares held in trust at such time will continue to vest. Unless otherwise determined by the Board of Directors, if a legacy option holder’s employment is otherwise terminated prior to the third anniversary of the closing of the IPO, the legacy option holder’s Legacy Option Shares held in trust at such time will be cancelled for no consideration.
In connection with the IPO, a long-term incentive plan (LTIP) was adopted by the Board of Directors which allowed GFL to grant long-term equity-based incentives, including options, performance stock units (PSUs), and restricted stock units (RSUs), to eligible participants. Each award represents the right to receive subordinate voting shares, or in the case of PSUs and RSUs, subordinate voting shares and/or cash, in accordance with the terms of the LTIP. Additionally, a director deferred share unit plan was adopted by the Board of Directors, to provide non-employee directors the opportunity to receive a portion of their compensation in the form of deferred share units (DSUs). Each DSU represents a unit equivalent in value to a subordinate voting share based on the closing price of the subordinate voting shares on the day prior to the grant.
The maximum number of subordinate voting shares reserved for issuance under the LTIP, the DSU Plan, and any other security-based compensation arrangement is 32,642,076. During the six months ended June 30, 2020, 19,643,184 options were granted to eligible participants.
The stock option activity and the weighted average exercise price are summarized as follows:
| June 30, 2020 | |||||||
| Number of options | Weighted average exercise price US$ | ||||||
| Options outstanding, January 1, 2020 | — | $ | — | ||||
| Options granted | 19,643,184 | 19.00 | |||||
| Options exercised | — | — | |||||
| Options expired | — | — | |||||
| Options forfeited | — | — | |||||
| Options cancelled | — | — | |||||
| Options outstanding, June 30, 2020 | 19,643,184 | $ | 19.00 | ||||
The fair value of the stock options granted during the six months ended June 30, 2020 was estimated at the grant date using the Black Scholes Model. The following weighted average assumptions are used:
• Expected life of options: 4.2 years
• Grant date fair value: $23.6 million
• Grade date share value: US$19.00
• Expected volatility: 23.51%
• Expected dividend yield: nil%
• Risk-free interest rate: 0.65%
F-20
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
The fair value of the options is recognized as compensation expense over the vesting period. For the three and six months ended June 30, 2020, the total compensation expense related to share options amounted to $4.2 million and $19.9 million respectively, which represents an expense under the LTIP of $15.8 million and an expense under the Legacy Plan of $4.1 million ($3.6 million and $7.2 million in the three and six months ended June 30, 2019).
| 15. | SUPPLEMENTAL CASH FLOW INFORMATION |
Net change in non-cash working capital
|
Three months ended June 30, |
Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Effects of changes in | ||||||||||||||||
| Accounts payable and accrued liabilities | $ | (41.0) | $ | 17.6 | $ | (52.7) | $ | (85.7) | ||||||||
| Trade and other receivables — net of allowance | 18.3 | (63.3) | (4.5) | (50.0) | ||||||||||||
| Prepaid expenses and other assets | (6.0) | (7.8) | (25.5) | (16.8) | ||||||||||||
| Income taxes payable | 0.2 | (0.7) | 0.2 | (1.5) | ||||||||||||
| $ | (28.5) | $ | (54.2) | $ | (82.5) | $ | (154.0) | |||||||||
| 16. | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT |
GFL’s financial instruments consist of cash and cash equivalent, trade accounts receivable, trade accounts payable, long-term debt, and tangible equity units.
Fair value measurement
The carrying value of GFL’s financial assets are equal to their fair values. The carrying value of GFL’s financial liabilities approximate their fair values with the exception of GFL’s Bonds and TEU Amortizing Note. The fair value hierarchy for GFL’s financial assets and liabilities not measured at fair value are as follows:
| June 30, 2020 | ||||||||||||||||||||
| Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Bonds | $ | 2,400.2 | $ | 2,505.8 | $ | — | $ | 2,505.8 | $ | — | ||||||||||
| TEU Amortizing Note | 156.8 | 130.5 | — | 130.5 | — | |||||||||||||||
| Total debt | $ | 2,557.0 | $ | 2,636.3 | $ | — | $ | 2,636.3 | $ | — | ||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Bonds | $ | 3,245.2 | $ | 3,092.3 | $ | — | $ | 3,092.3 | $ | — | ||||||||||
| Total debt | $ | 3,245.2 | $ | 3,092.3 | $ | — | $ | 3,092.3 | $ | — | ||||||||||
GFL uses a discounted cash flow model incorporating observable market data, such as foreign currency forward rates, to estimate the fair value of its bonds. Certain of the mortgages, finance leases, equipment loans and amount due to related party do not bear interest or bear interest at an amount that is not stated at fair value.
F-21
GFL Environmental Inc. - Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In millions of dollars except per share amounts or otherwise stated)
Foreign currency risk
GFL manages its currency risk in respect of its outstanding U.S. dollar senior unsecured notes with certain cross-currency interest rate swaps. Concurrently with the offering of the 2022 Notes, the 2023 Notes, the 2025 Secured Notes, the 2027 Notes and the 2026 Secured Notes, GFL entered into cross-currency swaps for the full offering amount to receive and pay interest semi-annually. A cross-currency swap was entered into for a portion of the 2026 Notes.
On March 5, 2020, GFL fully redeemed the 2022 Notes and 2023 Notes as well as a portion of the 2026 Notes and the 2027 Notes and terminated the cross-currency interest rate swaps associated with the 2022 Notes and 2023 Notes and the redeemed portion of the 2026 Notes and 2027 Notes.
| 17. | COMMITMENTS AND CONTINGENT LIABILITIES |
a) Performance bonds
In the normal course of business, GFL is required to provide performance bonds in respect of certain contracts which guarantee payment for labour, material and services in the event of a default by GFL.
GFL has executed indemnity agreements in favour of the surety of these bonds. As at June 30, 2020 the aggregate contract limit for the bonds totaled $881.1 million (December 31, 2019 — $778.6 million).
b) Contingent liabilities
In the normal course of business activities, GFL is subject to a number of claims and legal actions that may be made by customers, suppliers or others. Though the final outcome of actions outstanding or pending at the end of the period is not determinable, management believes the resolutions will not have a material effect on the financial position, statement of operations or cash flow of GFL.
| 18. | RELATED PARTY TRANSACTIONS |
Included in due to related party is a non-interest bearing unsecured promissory note payable to Josaud Holdings Inc., an entity controlled by Patrick Dovigi, in an initial aggregate principal amount of $35.0 million, which is scheduled to mature on January 1, 2023. The note is being repaid in equal semi-annual instalments of $3.5 million. As at June 30, 2020, $21.0 million principal amount was outstanding on the note ($21.0 million as at December 31, 2019).
Also included in due to related party is an interest bearing unsecured promissory note issued on March 5, 2020 payable to Sejosa Holdings Inc., an entity controlled by Patrick Dovigi, in an aggregate principal amount of $29.0 million and bearing market interest. The note is payable in equal semi-annual instalments of $2.9 million.. The loan is scheduled to mature on March 5, 2025. As at June 30, 2020, $29.0 million principal amount was outstanding on the note.
These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
F-22
Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Basis of Presentation
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) for GFL Environmental Inc. dated August 6, 2020 should be read in conjunction with our unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2020 (“Interim Financial Statements”) and the audited annual consolidated financial statements (“Annual Financial Statements”) and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“Annual MD&A”) included in our prospectus dated March 2, 2020 (“IPO Prospectus”) relating to our initial public offering of subordinate voting shares. Information contained within the Annual MD&A is not discussed in this MD&A if it remains substantially unchanged.
GFL Environmental Inc. (“GFL”, “the Company”, “we”, “us” and “our”) was formed on March 5, 2020 under the laws of the Province of Ontario as a result of the amalgamation of GFL Environmental Inc. and its parent company GFL Environmental Holdings Inc. (“Holdings”). The amalgamation was accounted for as a transaction between entities under common control and the net assets are recorded at historical cost retrospectively. Upon amalgamation, GFL became the financial reporting entity.
This MD&A contains forward-looking information, which is based on management’s reasonable assumptions and beliefs in light of the information currently available to us and is made as of the date of this MD&A. However, we do not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise, except as required under applicable securities laws. Actual results and the timing of events may differ materially from those anticipated in the forward-looking information as a result of various factors, including those described in sections 7 and 11 and elsewhere in this MD&A as well as the IPO Prospectus and the Annual MD&A.
Our Interim Financial Statements and our Annual Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). This MD&A is presented in millions of Canadian dollars unless otherwise indicated.
Measures and key performance indicators
To evaluate our performance, we monitor a number of key indicators. As appropriate, we supplement our results of operations determined in accordance with IFRS with certain non-IFRS financial measurements that we believe are useful to management, investors, lenders and others in assessing our performance. These non-IFRS measurements should not be considered in isolation or as a substitute for reported IFRS results because they may include or exclude certain items as compared to similar IFRS-based measurements, and such measurements may not be comparable to similarly-titled measurements reported by other companies. Rather, these measurements should be considered as an additional way of viewing aspects of our operations that provide a more complete understanding of our business. Refer to our Annual MD&A for a list of our IFRS key performance indicators and to section 10 of this MD&A for a list of defined non-IFRS performance indicators.
1
Impact of and response to COVID-19
The spread of the novel coronavirus (“COVID-19”) has created a global health crisis that has resulted in widespread disruption to economic activity in the United States and Canada. The U.S. and Canadian governments as well as numerous state, provincial and local governments have implemented certain measures to attempt to slow and limit the spread of COVID-19, including shelter-in-place and physical distancing orders. In certain jurisdictions in the U.S. and Canada, governments have begun to reopen businesses in stages of recovery while other jurisdictions are reinstating restrictions.
We have been classified as an “Essential Critical Infrastructure Workforce” by the Government of Canada and the U.S. Department of Homeland Security and as an “Essential Service Provider” by Canadian provinces and the U.S. states in which we operate. As a result, we have continued to provide our essential services during these unprecedented and challenging times.
Our financial results for the three and six months ended June 30, 2020 were impacted by the reduction in commercial activity as a result of the various measures taken by the Canadian and U.S. governments in response to COVID-19. Our overall revenue is heavily weighted to our solid waste business, which is our most resilient business line and is also diversified across geographies and customers. The majority of the revenue we generate in our solid waste business is from secondary markets. The solid waste revenue we generate in major metropolitan centres or primary markets is predominately derived from municipal residential contracts. In the three months ended June 30, 2020, we experienced lower volumes in our solid and liquid waste commercial and industrial collection and post collection businesses due to a decrease in service levels attributable to COVID-19, primarily in the major metropolitan centres that we serve. Our liquid waste business also had lower sales volume of used motor oil (“UMO”) which we believe is a result of the temporary suspension of certain customers’ operations in response to COVID-19. The volume in our infrastructure business has remained resilient due to construction projects in certain jurisdictions being deemed essential services although the change in revenue mix resulting from fewer low volume high frequency projects has impacted margins. Due to the rapidly evolving and highly uncertain nature of the COVID-19 pandemic, we are unable to estimate the extent of its impact on our on-going business at this time.
In response to the spread of COVID-19 and resulting governmental measures, we have implemented business continuity initiatives focused on prioritizing the health and safety of our workforce. We have implemented physical distancing protocols, reinforced proper hygiene practices and increased communications to employees reinforcing these practices. As safety is one of our core values, we continue to support and protect the health and well-being of our workforce and customers through ongoing sanitization of equipment and facilities as well as providing personal protection equipment to employees to ensure our ability to continue to safely deliver our services to our communities and customers. We have a flexible cost structure which allows us to manage our operating expenses and capital expenditures. We have deferred certain non-essential capital expenditures originally planned for 2020 and reduced or eliminated certain discretionary costs such as travel and entertainment.
1. Overview
GFL is the fourth largest diversified environmental services company in North America, with operations throughout Canada and in 23 states in the United States. GFL had more than 13,500 employees as of June 30, 2020.
Our diversified service offerings include non-hazardous solid waste management, infrastructure & soil remediation and liquid waste management services. These comprehensive service offerings across our business lines position us to be a “one-stop” provider of environmental services to our customers and differentiate us from those of our competitors that do not offer the same breadth of services as we do. Our business is well-diversified not only across business lines but also across geographies and customers. We serve our customers through a strategically-located network of facilities in many major metropolitan centres and secondary markets across Canada and primarily in secondary markets in the United States. The majority of the revenue we generate in our solid waste business is derived from secondary markets, with revenue derived from major metropolitan centres representing the majority of our residential solid waste revenue. The revenue generated in our solid and liquid waste management operations is predictable and recurring in nature as a result of the stability of waste generation and the contractual nature of these lines of business.
Through a combination of organic growth and acquisitions, we have built a leading platform with broad geographic reach and scalable capabilities. We intend to leverage this platform to pursue new business opportunities and generate network efficiencies by extending our geographic footprint and increasing regional density across our business lines.
2
We are led by a team of highly experienced and entrepreneurial executives. Patrick Dovigi, our Founder, Chairman, President and Chief Executive Officer has led our operations since inception in 2007 and has instilled a results-oriented, entrepreneurial culture that emphasizes the importance of safety for our employees and customers.
We expect to continue to grow our business by:
| • | generating strong, stable organic growth by continuing to serve our existing customer base and by attracting new customers, realizing cross-selling opportunities, renewing or extending existing contracts and winning new contracts, and extending our geographical market reach; |
| • | executing strategic, accretive acquisitions; and |
| • | driving operating cost efficiencies across our platform. |
We believe that our diversified business model positions us well to continue to capitalize on the attractive growth opportunities in the stable, highly fragmented North American environmental services industry.
Initial Public Offering
On March 5, 2020, GFL completed its initial public offering of 75,000,000 subordinate voting shares and a concurrent public offering of 15,500,000 tangible equity units (“TEUs”) for total gross proceeds to us of $2,888.8 million (US$2,168.8 million) (“IPO”). Our subordinate voting shares trade on the New York Stock Exchange and the Toronto Stock Exchange under the symbol “GFL” and the TEUs trade on the New York Stock Exchange under the symbol “GFLU”.
Each TEU, which has a stated amount of US$50.00, is comprised of a prepaid stock purchase contract (a "Purchase Contract") and a senior amortizing note (an "Amortizing Note") due March 15, 2023. We used the net proceeds from the IPO to redeem our 5.625% USD senior unsecured notes due May 1, 2022 ("2022 Notes") and our 5.735% USD senior unsecured notes due March 1, 2023 ("2023 Notes") and a portion of our 7.000% USD senior unsecured notes due June 1, 2026 ("2026 Notes") and our 8.500% senior unsecured notes due May 1, 2027 ("2027 Notes") and to repay certain indebtedness outstanding under our Revolving Credit Facility and our Term Facility.
Summary of Factors Affecting Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us. These factors are also subject to a number of inherent risks and challenges discussed elsewhere in this MD&A.
Our ability to continue to grow our business and generate improvements in our financial performance depend on our ability to continue to expand our environmental services platform by leveraging our diversified business model to broaden our geographic reach and scalable capabilities. Our success in achieving this growth and improvements is dependent on our ability to execute on our three-pronged strategy of: (i) continuing to generate strong, stable organic revenue growth; (ii) successfully executing strategic, accretive acquisitions; and (iii) continuing to drive operating cost efficiencies across our platform.
Strong, Stable Organic Revenue Growth
Our ability to generate strong, stable organic revenue growth across macroeconomic cycles depends on our ability to increase the breadth and depth of services that we provide to our existing customers, realize on cross-selling opportunities between our complementary service capabilities, win new contracts, and renewals or extensions of existing contracts and expand into new or adjacent markets. We believe that executing on this strategy will continue to drive our organic revenue growth and free cash flow generation.
Our business is well-diversified across business lines, geographies and customers. We believe that our continued success depends on our ability to further enhance and leverage this diversification, a key component of which is our ability to offer our customers a comprehensive service offering across our three business lines backed by an extensive geography across Canada and in 23 states in the United States. The majority of the revenue we generate in our solid waste business is derived from secondary markets, with revenue derived from major metropolitan centres representing the majority of our residential solid waste revenue.
3
We also believe we are well positioned to respond to changing customer needs and regulatory demands in order to maintain our success. This includes being able to respond to legal requirements and customer demands to divert waste away from landfill disposal by continuing to expand our ability to collect and process multiple streams of material.
Our diversified business model also complements our acquisition strategy. Multiple business lines allow us to source acquisitions from a broader pool of potential targets. Maintaining a diversified model is therefore critical to capitalizing on accretive acquisition opportunities and helping to reduce execution and business risk inherent in single-market and single-service offering strategies.
Executing Strategic, Accretive Acquisitions
Our ability to identify, execute and integrate accretive acquisitions is a key driver of our growth. Given the significant fragmentation that exists in the North American environmental services industry, our growth and success depend on our ability to realize on consolidation opportunities in all three of our business lines.
Since 2007, we have completed over 125 acquisitions across each of our lines of business. We focus on selectively acquiring premier independent regional operators to create platforms in new markets, followed by tuck-in acquisitions to help increase density and scale. Integration of these acquisitions with our existing platform is a key factor to our success, along with continuing to be able to identify and act upon these attractive consolidation opportunities.
In addition, successful execution of acquisitions opens new markets to us, provides us with new opportunities to realize cross-selling opportunities, and drives procurement and cost synergies across our operations.
Driving Operating Cost Efficiencies
We provide our services through a strategically-located network of facilities in Canada and in the United States. In each of our geographic markets, our strong competitive position is supported by and depends on the significant capital investment required to replicate our network infrastructure and asset base, as well as by stringent permitting and regulatory compliance requirements. Our continued success also depends on our ability to leverage our scalable network to attract and retain customers across multiple service lines, realize operational efficiencies, and extract procurement and cost synergies.
It is also key that we continue to leverage our scalable capabilities to drive operating margin expansion and realize cost synergies. This includes using the capacity of our existing facilities, technology processes and people to support future growth and provide economies of scale, as well as increasing route density and servicing new contract wins with our existing network of assets and fleet to enhance the profitability of each of our business lines.
Our success also depends on our ability to continue to make strategic investments in our business, including substantial capital investments in our facilities, technology processes and administrative capabilities to support our future growth. Our ability to improve our operating margins and our selling, general and administrative expense margins by maintaining strong discipline in our cost structure and regularly reviewing our practices to manage expenses and increase efficiency will also impact our operating results.
4
2. Financial Results
Analysis of results for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019
The following tables summarize certain operating results and other financial data for the periods indicated, which have been derived from our Interim Financial Statements and related notes.
| ($ millions except per share amounts) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Change | % | ||||||||||||
| Revenue | $ | 993.3 | $ | 831.4 | $ | 161.9 | 19.5 | % | ||||||||
| Expense | ||||||||||||||||
| Cost of sales | 881.3 | 739.5 | 141.8 | 19.2 | ||||||||||||
| Selling, general & administrative expense | 104.1 | 81.4 | 22.7 | 27.9 | ||||||||||||
| Interest and other finance costs | 95.4 | 126.9 | (31.5 | ) | (24.8 | ) | ||||||||||
| Other expenses (income) | 66.3 | (26.3 | ) | 92.6 | (352.1 | ) | ||||||||||
| Loss before income taxes | (153.8 | ) | (90.1 | ) | (63.7 | ) | 70.7 | |||||||||
| Income tax recovery | (38.3 | ) | (22.1 | ) | (16.2 | ) | 73.3 | |||||||||
| Net loss | (115.5 | ) | (68.0 | ) | (47.5 | ) | 69.9 | |||||||||
| Loss per share, basic and diluted ($) | (0.32 | ) | (0.38 | ) | (0.06 | ) | (15.8 | ) | ||||||||
| Adjusted EBITDA | $ | 261.5 | $ | 211.9 | $ | 49.6 | 23.4 | % | ||||||||
| ($ millions except per share amounts) | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Change | % | ||||||||||||
| Revenue | $ | 1,924.6 | $ | 1,552.3 | $ | 372.3 | 24.0 | % | ||||||||
| Expense | ||||||||||||||||
| Cost of sales | 1,733.6 | 1,393.0 | 340.6 | 24.5 | ||||||||||||
| Selling, general & administrative expense | 259.2 | 163.6 | 95.6 | 58.4 | ||||||||||||
| Interest and other finance costs | 364.8 | 250.9 | 113.9 | 45.4 | ||||||||||||
| Other expenses (income) | 86.5 | (42.3 | ) | 128.8 | (304.5 | ) | ||||||||||
| Loss before income taxes | (519.5 | ) | (212.9 | ) | (306.6 | ) | 143.9 | |||||||||
| Income tax recovery | (126.0 | ) | (51.5 | ) | (74.5 | ) | 144.7 | |||||||||
| Net loss | (393.5 | ) | (161.4 | ) | (232.1 | ) | 143.8 | |||||||||
| Loss per share, basic and diluted ($) | (1.09 | ) | (0.91 | ) | (0.18 | ) | 19.8 | |||||||||
| Adjusted EBITDA | 484.3 | 391.0 | 93.3 | 23.9 | ||||||||||||
| Total assets | 13,897.7 | 11,380.5 | 2,517.2 | 22.1 | ||||||||||||
| Total cash and cash equivalents | 723.9 | 209.3 | 514.6 | 245.9 | ||||||||||||
| Total long-term debt, including current portion | 5,088.2 | 6,679.8 | (1,591.6 | ) | (23.8 | ) | ||||||||||
| Total liabilities | 8,070.9 | 8,390.4 | (319.5 | ) | (3.8 | ) | ||||||||||
| Shareholder equity | $ | 5,826.8 | $ | 2,990.1 | $ | 2,836.7 | 94.9 | % | ||||||||
5
Revenue
The following tables summarize revenue by service line for the periods indicated.
Three months ended June 30, 2020 | Three months ended June 30, 2019 | Revenue Change | ||||||||||||||||||||||
| ($ millions) | Revenue | % | Revenue | % | $ | % | ||||||||||||||||||
| Residential | $ | 262.4 | 26.4 | % | $ | 210.6 | 25.3 | % | $ | 51.8 | 24.6 | % | ||||||||||||
| Commercial/Industrial | 298.2 | 30.0 | 283.6 | 34.1 | 14.6 | 5.1 | ||||||||||||||||||
| Collection | 560.6 | 56.4 | 494.2 | 59.4 | 66.4 | 13.4 | ||||||||||||||||||
| Landfill | 68.4 | 6.9 | 66.8 | 7.5 | 1.6 | 2.4 | ||||||||||||||||||
| Transfer | 96.8 | 9.7 | 89.6 | 9.9 | 7.2 | 8.0 | ||||||||||||||||||
| Material Recovery | 66.2 | 6.7 | 16.6 | 1.9 | 49.6 | 298.8 | ||||||||||||||||||
| Other | 69.0 | 6.9 | 45.3 | 5.5 | 23.7 | 52.5 | ||||||||||||||||||
| Solid Waste | 861.0 | 86.6 | 712.5 | 84.2 | 148.5 | 20.9 | ||||||||||||||||||
| Infrastructure and Soil Remediation | 133.4 | 13.4 | 115.7 | 13.9 | 17.7 | 15.3 | ||||||||||||||||||
| Liquid Waste | 105.9 | 10.7 | 97.9 | 11.8 | 8.0 | 8.2 | ||||||||||||||||||
| Intercompany Revenue | (107.0 | ) | (10.7 | ) | (94.7 | ) | (9.9 | ) | (12.3 | ) | 13.0 | |||||||||||||
| Revenue | $ | 993.3 | 100.0 | % | $ | 831.4 | 100.0 | % | $ | 161.9 | 19.5 | % | ||||||||||||
Six months ended June 30, 2020 | Six months ended June 30, 2019 | Revenue Change | ||||||||||||||||||||||
| ($ millions) | Revenue | % | Revenue | % | $ | % | ||||||||||||||||||
| Residential | $ | 501.2 | 26.0 | % | $ | 392.7 | 25.3 | % | $ | 108.5 | 27.6 | % | ||||||||||||
| Commercial/Industrial | 605.4 | 31.5 | 533.1 | 34.3 | 72.3 | 13.6 | ||||||||||||||||||
| Collection | 1,106.6 | 57.5 | 925.8 | 59.6 | 180.8 | 19.5 | ||||||||||||||||||
| Landfill | 131.2 | 6.8 | 123.3 | 6.7 | 7.9 | 6.4 | ||||||||||||||||||
| Transfer | 185.2 | 9.6 | 156.1 | 8.4 | 29.1 | 18.6 | ||||||||||||||||||
| Material Recovery | 112.5 | 5.8 | 32.2 | 2.0 | 80.3 | 249.4 | ||||||||||||||||||
| Other | 122.5 | 6.4 | 78.3 | 5.1 | 44.2 | 56.4 | ||||||||||||||||||
| Solid Waste | 1,658.0 | 86.1 | 1,315.7 | 81.8 | 342.3 | 26.0 | ||||||||||||||||||
| Infrastructure and Soil Remediation | 265.2 | 13.8 | 227.1 | 14.6 | 38.1 | 16.8 | ||||||||||||||||||
| Liquid Waste | 210.6 | 10.9 | 179.6 | 11.6 | 31.0 | 17.3 | ||||||||||||||||||
| Intercompany Revenue | (209.2 | ) | (10.8 | ) | (170.1 | ) | (8.0 | ) | (39.1 | ) | 23.0 | |||||||||||||
| Revenue | $ | 1,924.6 | 100.0 | % | $ | 1,552.3 | 100.0 | % | $ | 372.3 | 24.0 | % | ||||||||||||
On a consolidated basis, revenue for the three months ended June 30, 2020 increased by $161.9 million to $993.3 million compared to the three months ended June 30, 2019. The increase is primarily attributable to the impact of acquisitions. Revenue from acquisitions completed since April 1, 2019 accounted for approximately $195.7 million of the increase, the majority of which was in our solid waste business. Partially offsetting this increase was reduced volumes in the majority of our businesses attributable to COVID-19, primarily in the major metropolitan centres that we serve. Highlights of the changes in revenue during the three months ended June 30, 2020, excluding the impact of acquisitions include:
| • | Approximately 4.1% pricing and surcharge increases in our solid waste business. Offsetting these increases were 8.3% reduced volumes, predominately from the reduction of commercial and industrial activity and post collection activity, as a result of the various measures implemented by the Canadian and U.S. governments in an effort to limit the spread of COVID-19. Changes in foreign exchange rates increased revenue by 2.1%. |
6
| • | Infrastructure & soil remediation revenue increased by 3.7% from organic price and volume growth as we continued to execute on our organic expansion strategy of this line of business. While the substantial majority of our larger active projects were deemed essential and continued to progress, we realized lower volumes from many of the small volume high frequency soil remediation customers that we typically service resulting from the temporary suspension of those customers’ soil remediation activities in response to COVID-19. |
| • | Liquid waste revenue decreased organically by 27.9%, due to a combination of lower sales volume of UMO and reduced industrial collection and processing activity resulting from the temporary suspension of certain customers’ operations in response to COVID-19. Despite the lower gross selling prices for UMO attributable to the declines in the indices on which our selling prices are based that begin at the end of the first quarter, net selling prices were relatively comparable to the prior year period as a result of adjusting the amounts that are paid or charged to the UMO generators at the time of collection. |
On a consolidated basis, revenue for the six months ended June 30, 2020 increased by approximately $372.3 million to $1,924.6 million compared to the six months ended June 30, 2019. The increase is primarily attributable to the impact of acquisitions. Revenue from acquisitions completed since January 1, 2019 accounted for approximately $375.9 million of the increase, the majority of which were in our solid waste business. Highlights of the changes in revenue during the six months ended June 30, 2020 excluding the impact of acquisitions include:
| • | Approximately 4.4% pricing and surcharge increases in our solid waste business. Offsetting these increases were 4.6% reduced volumes, predominately from the reduction of commercial and industrial activity and post collection activity as a result of the various measures implemented by the Canadian and U.S. governments in an effort to limit the spread of COVID-19. Changes in foreign exchange rates increased revenue by 1.5%. |
| • | Infrastructure & soil remediation revenue increased by 4.8% for organic price and volume growth as we continued to execute on our organic expansion strategy of this line of business. While the substantial majority of our larger active projects were deemed essential and continued during the six months ended June 30, 2020, we realized lower volumes from many of the small volume high frequency soil remediation customers that we typically service resulting from the temporary suspension of those customers’ soil remediation activities in response to COVID-19. |
| • | Liquid waste revenues decreased by 18.7% due to a combination of lower sales volume of UMO and reduced industrial collection and processing activity resulting from the temporary suspension of certain customers’ operations in response to COVID-19. Despite the lower gross selling prices for UMO attributable to the declines in the indices on which our selling prices are based that begin at the end of the first quarter, net selling prices were relatively comparable to the prior year period as a result of adjusting the amounts that are paid or charged to the UMO generators at the time of collection. |
7
Cost of Sales
Three months ended June 30, 2020 | Three months ended June 30, 2019 | Cost Change | ||||||||||||||||||||||
| ($ millions) | Cost | % of Revenue | Cost | % of Revenue | $ | % | ||||||||||||||||||
| Transfer and disposal costs | $ | 225.0 | 22.7 | % | $ | 200.7 | 24.1 | % | $ | 24.3 | 12.1 | % | ||||||||||||
| Labour and benefits | 242.8 | 24.4 | 203.1 | 24.4 | 39.7 | 19.5 | ||||||||||||||||||
| Maintenance and repairs | 80.0 | 8.1 | 62.7 | 7.5 | 17.3 | 27.7 | ||||||||||||||||||
| Fuel | 33.4 | 3.4 | 41.1 | 4.9 | (7.7 | ) | (18.8 | ) | ||||||||||||||||
| Mark-to-market loss on fuel hedge | 0.6 | 0.1 | 0.3 | — | 0.3 | 140.0 | ||||||||||||||||||
| Other cost of sales | 69.2 | 6.7 | 46.2 | 5.7 | 23.0 | 49.8 | ||||||||||||||||||
| Subtotal | 651.0 | 65.4 | 554.1 | 66.6 | 96.9 | 17.5 | ||||||||||||||||||
| Depreciation expense | 117.7 | 11.9 | 98.3 | 11.8 | 19.4 | 19.8 | ||||||||||||||||||
| Amortization of intangible assets | 111.1 | 11.2 | 80.3 | 9.7 | 30.8 | 38.3 | ||||||||||||||||||
| Acquisition rebranding and other integration costs | 1.5 | 0.2 | 6.8 | 0.8 | (5.3 | ) | (77.9 | ) | ||||||||||||||||
| Cost of sales | $ | 881.3 | 88.7 | % | $ | 739.5 | 88.9 | % | $ | 141.8 | 19.2 | % | ||||||||||||
Six months ended June 30, 2020 | Six months ended June 30, 2019 | Cost Change | ||||||||||||||||||||||
| ($ millions) | Cost | % of Revenue | Cost | % of Revenue | $ | % | ||||||||||||||||||
| Transfer and disposal costs | $ | 431.5 | 22.4 | % | $ | 361.0 | 23.3 | % | $ | 70.5 | 19.5 | % | ||||||||||||
| Labour and benefits | 476.0 | 24.7 | 380.3 | 24.5 | 95.7 | 25.2 | % | |||||||||||||||||
| Maintenance and repairs | 161.8 | 8.4 | 124.9 | 8.0 | 36.9 | 29.5 | % | |||||||||||||||||
| Fuel | 75.2 | 3.9 | 76.9 | 5.0 | (1.7 | ) | (2.2 | )% | ||||||||||||||||
| Mark-to-market loss on fuel hedge | 1.8 | 0.1 | 0.3 | — | 1.5 | 620.0 | % | |||||||||||||||||
| Other cost of sales | 133.4 | 7.0 | 90.8 | 5.8 | 42.6 | 46.9 | % | |||||||||||||||||
| Subtotal | 1,279.7 | 66.5 | 1,034.2 | 66.6 | 245.5 | 23.7 | % | |||||||||||||||||
| Depreciation expense | 234.5 | 12.2 | 185.0 | 11.9 | 49.5 | 26.8 | % | |||||||||||||||||
| Amortization of intangible assets | 210.2 | 10.9 | 161.0 | 10.4 | 49.2 | 30.5 | % | |||||||||||||||||
| Acquisition rebranding and other integration costs | 9.2 | 0.5 | 12.8 | 0.8 | (3.6 | ) | (28.1 | )% | ||||||||||||||||
| Cost of sales | $ | 1,733.6 | 90.1 | % | $ | 1,393.0 | 89.7 | % | $ | 340.6 | 24.5 | % | ||||||||||||
Cost of sales increased by $141.8 million to $881.3 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. Acquisitions completed since April 1, 2019 were the primary driver of the increase in total costs. Changes in the individual cost categories as a percentage of revenue were the result of the impact of business mix. Fuel costs as a percentage of revenue decreased due to the change in business mix as well as a decline in fuel costs compared to the three months ended June 30, 2019. The cost of additional safety equipment, hygiene products and cleaning services purchased in the three months ended June 30, 2020 in response to COVID-19 contributed to the increase in cost of sales as compared to the three months ended June 30, 2019. Partially offsetting this increase was our continued focus on cost management and enhancing efficiency. Cost of sales as a percentage of total revenue for the three months ended June 30, 2020 decreased by 20 basis points to 88.7% compared to the three months ended June 30, 2019. Cost of sales excluding depreciation expenses, amortization of intangible assets, and acquisition rebranding and other integration costs as a percentage of total revenue for the three months ended June 30, 2020 decreased by 120 basis points to 65.5% compared to the three months ended June 30, 2019.
8
Cost of sales increased by $340.6 million to $1,733.6 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. Acquisitions completed since January 1, 2019 were the primary driver of the increase in total costs. Changes in the individual cost categories as a percentage of revenue were the result of the impact of business mix. Higher headcount related to the organic growth of our business and an increase in insurance costs resulted in higher cost of sales for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, partially offset by lower transfer and disposal costs in facilities purchased in recent acquisitions and utilized to support new contracts. The cost of additional safety equipment, hygiene products and cleaning services purchased in the six months ended June 30, 2020 in response to COVID-19 also contributed to the increase in cost of sales as compared to the six months ended June 30, 2019. Cost of sales as a percentage of total revenue for the six months ended June 30, 2020 increased by 40 basis points to 90.1% compared to the three months ended June 30, 2019. Cost of sales excluding depreciation expenses, amortization of intangible assets, and acquisition rebranding and other integration costs as a percentage of total revenue for the six months ended June 30, 2020 decreased by 10 basis points to 66.5% compared to the six months ended June 30, 2019.
Selling, General and Administrative Expenses (“SG&A”)
| ($ millions) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Change | % | ||||||||||||
| Salaries and benefits | $ | 51.2 | $ | 42.2 | $ | 9.0 | 21.3 | % | ||||||||
| Share-based payments | 4.2 | 3.6 | 0.6 | 16.7 | ||||||||||||
| Other | 30.2 | 23.5 | 6.7 | 28.5 | ||||||||||||
| Subtotal | 85.6 | 69.3 | 16.3 | 23.7 | ||||||||||||
| Depreciation expenses | 5.9 | 3.0 | 2.9 | 93.7 | ||||||||||||
| Transaction costs | 7.7 | 9.1 | (1.4 | ) | (15.4 | ) | ||||||||||
| IPO transaction costs | 4.9 | — | 4.9 | 100.0 | ||||||||||||
| Selling, general & administrative expenses | $ | 104.1 | $ | 81.4 | $ | 22.7 | 27.9 | % | ||||||||
| ($ millions) | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Change | % | ||||||||||||
| Salaries and benefits | $ | 104.4 | $ | 83.4 | $ | 21.0 | 25.2 | % | ||||||||
| Share-based payments | 19.9 | 7.2 | 12.7 | 174.9 | ||||||||||||
| Other | 58.0 | 43.9 | 14.1 | 32.1 | ||||||||||||
| Subtotal | 182.3 | 134.5 | 47.8 | 35.5 | ||||||||||||
| Depreciation expenses | 11.8 | 10.5 | 1.3 | 12.2 | ||||||||||||
| Transaction costs | 18.9 | 18.6 | 0.3 | 1.6 | ||||||||||||
| IPO transaction costs | 46.2 | — | 46.2 | 100.0 | ||||||||||||
| Selling, general & administrative expenses | $ | 259.2 | $ | 163.6 | $ | 95.6 | 58.4 | % | ||||||||
For the three months ended June 30, 2020, SG&A increased by $22.7 million to $104.1 million compared to the three months ended June 30, 2019. The increase was primarily attributable to incremental salaries, benefits, information technology infrastructure investments and other costs related to the number and size of businesses acquired since April 1, 2019. SG&A as a percentage of revenue was 10.5% for the three months ended June 30, 2020 compared to 9.8% for the three months ended June 30, 2019. SG&A, excluding depreciation expenses, transaction and IPO costs, as a percentage of revenue was 8.6% for the three months ended June 30, 2020 compared to 8.3% for the three months ended June 30, 2019.
For the six months ended June 30, 2020, SG&A increased by $95.6 million to $259.2 million compared to the six months ended June 30, 2019. The increase was primarily attributable to the recognition of costs incurred in preparation of the IPO, an increase in share-based payments primarily related to options issued in connection with the IPO, and to incremental salaries, benefits, information technology infrastructure investments and other costs related to the number and size of businesses acquired since January 1, 2019. SG&A as a percentage of revenue was 13.5% for the six months ended June 30, 2020 compared to 10.5% for the six months ended June 30, 2019. Excluding depreciation expenses and transaction and IPO costs, SG&A as a percentage of revenue was 9.5% for the six months ended June 30, 2020 compared to 8.7% for the six months ended June 30, 2019.
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Interest and Other Finance Costs
| ($ millions) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Change | % | ||||||||||||
| Interest | $ | 87.6 | $ | 116.5 | $ | (28.9 | ) | (24.8 | )% | |||||||
| Amortization of deferred financing costs | 2.9 | 2.4 | 0.5 | 20.8 | ||||||||||||
| Accretion of landfill closure and post-closure obligations | 1.6 | 1.4 | 0.2 | 14.3 | ||||||||||||
| Other financing costs | 3.3 | 6.6 | (3.3 | ) | (50.0 | ) | ||||||||||
| Interest and other finance costs | $ | 95.4 | $ | 126.9 | $ | (31.5 | ) | (24.8 | )% | |||||||
| ($ millions) | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Change | % | ||||||||||||
| Interest | $ | 199.8 | $ | 225.1 | $ | (25.3 | ) | (11.2 | )% | |||||||
| Loss on extinguishment of debt | 133.2 | — | 133.2 | 100.0 | % | |||||||||||
| Amortization of deferred financing costs | 22.6 | 4.7 | 17.90 | 380.9 | % | |||||||||||
| Accretion of landfill closure and post-closure obligations | 3.2 | 2.8 | 0.4 | 12.6 | % | |||||||||||
| Other financing costs | 6.0 | 18.3 | (12.3 | ) | (67.2 | )% | ||||||||||
| Interest and other finance costs | $ | 364.8 | $ | 250.9 | $ | 113.9 | 45.4 | % | ||||||||
Interest and other finance costs decreased by $31.5 million to $95.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. This decrease was predominately due to a reduction in borrowings as a result of the redemption of the 2022 Notes and the 2023 Notes and partial redemption of the 2026 Notes and the 2027 Notes with proceeds from the IPO.
Interest and other finance costs increased by $113.9 million to $364.8 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. This increase was predominantly due to interest and premium costs of which $133.2 million was related to premium and loss on extinguishment of the PIK Notes and prepayment penalties related to the redemption of the 2022 Notes and the 2023 Notes in their entirety and partial early repayment of the 2026 Notes and the 2027 Notes. Additionally, lower interest expense of $199.8 million was driven by less long-term debt as we de-levered our balance sheet as a result of the IPO.
Other Income and Expense
| ($ millions) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Change | % | ||||||||||||
| Gain on foreign exchange | $ | (8.4 | ) | $ | (28.1 | ) | $ | 19.7 | (70.1 | )% | ||||||
| Mark-to-market loss on TEU derivative purchase contract | 74.2 | — | 74.2 | 100.0 | ||||||||||||
| Loss on sale of property, plant and equipment | 0.5 | 1.8 | (1.3 | ) | (72.2 | ) | ||||||||||
| Other expenses (income) | $ | 66.3 | $ | (26.3 | ) | $ | 92.6 | (352.1 | )% | |||||||
| ($ millions) | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Change | % | ||||||||||||
| Loss (gain) on foreign exchange | $ | 97.6 | $ | (44.8 | ) | $ | 142.4 | (317.9 | )% | |||||||
| Mark-to-market gain on TEU derivative purchase contract | (14.2 | ) | — | (14.2 | ) | (100.0 | ) | |||||||||
| Loss on sale of property, plant and equipment | 2.1 | 1.5 | 0.6 | 40.0 | ||||||||||||
| Deferred purchase consideration | 1.0 | 1.0 | — | — | ||||||||||||
| Other expenses (income) | $ | 86.5 | $ | (42.3 | ) | $ | 128.8 | (304.5 | )% | |||||||
10
For the three months ended June 30, 2020, we had $66.3 million of other expenses compared to other income of $26.3 million for the three months ended June 30, 2019. This change was predominately due to a non-cash loss on the TEU Purchase Contract in the three months ended June 30, 2020. This was partly offset by a non-cash foreign exchange gain of $8.4 million predominately arising from the revaluation of the unhedged portion of our U.S. denominated debt to Canadian dollars based on the foreign exchange rate as at June 30, 2020.
For the six months ended June 30, 2020, we had $86.5 million of other expenses compared to other income of $42.3 million for the six months ended June 30, 2019. This change was predominately due to a non-cash foreign exchange loss of $97.6 million predominately arising from the revaluation of the unhedged portion of our U.S. denominated long-term debt based on strengthening of the U.S. dollar against the Canadian dollar for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 and the settlement of the PIK Notes.
On March 5, 2020 we issued 15,500,000 6.0% TEUs at a stated value of US$50.00 per TEU. Each TEU is comprised of a Purchase Contract and an Amortizing Note due March 15, 2023, both of which are freestanding instruments and separate units of account. Each Purchase Contract is measured at fair value through profit or loss each period based on a valuation model. The fair value of the Purchase Contract is based on the trading price of the Purchase Contract to the extent an active market exists or absent an active market, a valuation model is used, which is how we valued the TEUs at June 30, 2020. This resulted in a non-cash loss of $74.2 million and a non-cash gain of $14.2 million on the market value of the TEUs for the three and six months ended June 30, 2020, respectively, partially offset by foreign exchange losses. For a more detailed discussion of the TEUs see Section 4.
Income Tax Recovery
Net income tax recovery increased by $16.2 million to $38.3 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase was predominately due to incremental tax losses attributable to increased depreciation expense from acquisitions compared to the three months ended June 30, 2019. Our basis for recording income tax recoveries is due to the offsetting of deferred tax liabilities on our balance sheet.
Net income tax recovery increased by $74.5 million to $126.0 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase was predominately due to incremental tax losses related to expenses incurred in connection with the IPO. Our basis for recording income tax recoveries is due to the offsetting of deferred tax liabilities on our balance sheet.
3. Segment Results
Our main lines of business are the transporting, managing and recycling of solid and liquid waste and infrastructure & soil remediation services. We are divided into operating segments corresponding to the following lines of business: Solid Waste, which includes hauling, landfill, transfers and material recovery facilities; Infrastructure & Soil Remediation; and Liquid Waste.
The operating segments are presented in accordance with the same criteria used for the internal report prepared for the chief operating decision-maker (“CODM”) who is responsible for allocating the resources and assessing the performance of the operating segments. The CODM assesses the performance of the segments on several factors, including revenue and Adjusted EBITDA.
Analysis of results for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019
The following tables provide a breakdown by operating segment of our revenue, Adjusted EBITDA and Adjusted EBITDA Margin for the periods indicated.
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| Three months ended June 30, 2020 | Three months ended June 30, 2019 | |||||||||||||||||||||||
| ($ millions) | Revenue | Adjusted EBITDA | Adjusted EBITDA as a % of Revenue | Revenue | Adjusted EBITDA | Adjusted EBITDA as a % of Revenue | ||||||||||||||||||
| Solid Waste | ||||||||||||||||||||||||
| Canada | $ | 307.7 | $ | 88.1 | 28.6 | % | $ | 254.7 | $ | 71.5 | 28.1 | % | ||||||||||||
| USA | 457.5 | 146.2 | 32.0 | 372.7 | 109.0 | 29.2 | ||||||||||||||||||
| Solid Waste | 765.2 | 234.3 | 30.6 | 627.4 | 180.5 | 28.8 | ||||||||||||||||||
| Infrastructure and soil remediation | 131.2 | 26.7 | 20.4 | 114.3 | 23.4 | 20.5 | ||||||||||||||||||
| Liquid waste | 96.9 | 22.6 | 23.3 | 89.7 | 23.2 | 25.9 | ||||||||||||||||||
| Corporate | — | (22.1 | ) | — | — | (15.2 | ) | — | ||||||||||||||||
| $ | 993.3 | $ | 261.5 | 26.3 | % | $ | 831.4 | $ | 211.9 | 25.5 | % | |||||||||||||
| Six months ended June 30, 2020 | Six months ended June 30, 2019 | |||||||||||||||||||||||
| ($ millions) | Revenue | Adjusted EBITDA | Adjusted EBITDA as a % of Revenue | Revenue | Adjusted EBITDA | Adjusted EBITDA as a % of Revenue | ||||||||||||||||||
| Solid Waste | ||||||||||||||||||||||||
| Canada | $ | 580.8 | $ | 154.1 | 26.5 | % | $ | 450.6 | $ | 121.3 | 26.9 | % | ||||||||||||
| USA | 892.4 | 282.0 | 31.6 | 713.6 | 214.5 | 30.1 | ||||||||||||||||||
| Solid Waste | 1,473.2 | 436.1 | 29.6 | 1,164.2 | 335.8 | 28.8 | ||||||||||||||||||
| Infrastructure and soil remediation | 261.9 | 48.2 | 18.4 | 225.4 | 44.6 | 19.8 | ||||||||||||||||||
| Liquid waste | 189.5 | 39.4 | 20.8 | 162.7 | 39.9 | 24.5 | ||||||||||||||||||
| Corporate | — | (39.4 | ) | — | — | (29.3 | ) | — | ||||||||||||||||
| $ | 1,924.6 | $ | 484.3 | 25.2 | % | $ | 1,552.3 | $ | 391.0 | 25.2 | % | |||||||||||||
Solid Waste — Canada Segment
Revenue increased by $53.0 million to $307.7 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase was predominately due to acquisitions completed since April 1, 2019 which contributed approximately $71.4 million of revenue. For the three months ended June 30, 2020, core price and surcharge increases were 3.3%, a reduction from the three months ended June 30, 2019, attributable to a temporary suspension of the majority of our price increase initiatives in many of our markets during the period combined with the effect of negative consumer price index (“CPI”) adjustments on certain municipal collection contracts. Volume decreased by 10.5% for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily from lower volumes in our commercial and industrial collection businesses and our post collection business, due to a decrease in service levels attributable to COVID-19. The volume decreases were greatest in our primary markets. Partially offsetting these volume decreases was higher volume in MRF operations as a result of a new processing contract in Western Canada.
Revenue increased by $130.2 million to $580.8 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase was predominately due to acquisitions completed since January 1, 2019 which contributed approximately $140.5 million of revenue. For the six months ended June 30, 2020, core price and surcharge increases were 3.9%. Volume decreased by 6.2% for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily from lower volumes in our commercial and industrial collection businesses and our post collection business, due to a decrease in service levels attributable to COVID-19. The volume decreases were greatest in our primary markets. Partially offsetting these volume decreases was higher volume in our MRF operations as a result of a new processing contract in Western Canada.
Adjusted EBITDA increased by $16.6 million to $88.1 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, which is predominately attributable to the previously described change in revenues. Adjusted EBITDA margin was 28.6% for the three month period ended June 30, 2020, an increase of 50 basis points as compared to the three months ended June 30, 2019. The incremental revenue from acquisitions, primarily attributable to the recent acquisitions of Canada Fibers and solid waste collection businesses, contributed Adjusted EBITDA margins less than the existing base business, negatively impacting the overall Adjusted EBITDA margin. Incremental health and safety costs of $0.7 million, incremental provision for bad debts of $2.3 million and volume declines, all attributable to COVID-19, also negatively impacted the Adjusted EBITDA margin during the three months ended June 30, 2020. Offsetting the impact of these items was a $5.0 million decrease in fuel and oil costs as a result of lower diesel prices and organic margin expansion attributable to pricing initiatives, cost controls and overall operating leverage.
12
Adjusted EBITDA increased by $32.8 million to $154.1 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, which is predominately attributable to the previously described change in revenues. Adjusted EBITDA margin realized for the six months ended June 30, 2020, a decrease of 40 basis points as compared to the six months ended June 30, 2019. The incremental revenue from acquisitions, primarily attributable to the recent acquisitions of Canada Fibers and solid waste collection businesses, contributed Adjusted EBITDA margins less than the existing base business, negatively impacting the overall Adjusted EBITDA margin. Incremental health and safety costs of $0.7 million, incremental provision for bad debts of $2.3 million and volume declines, all attributable to COVID-19, also negatively impacted the Adjusted EBITDA margin for the six months ended June 30, 2020. Offsetting the impact of these items was a $5.8 million decrease in fuel and oil costs as a result of lower diesel prices and organic margin expansion attributable to pricing initiatives, cost controls and overall operating leverage.
Solid Waste — USA Segment
Revenue increased by $84.8 million to $457.5 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase was predominately due to acquisitions completed since April 1, 2019 which contributed approximately $80.1 million of revenue. For the three months ended June 30, 2020, core price and surcharge increases were 4.6%, driven by continued pricing initiatives in the majority of our markets and incremental subscription residential price increases. Volume decreased by 6.9% for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily from lower commercial and industrial collection businesses and post collection business, due to a decrease in service levels attributable to COVID-19. The volume decreases were greatest in our primary markets. Strengthening of the U.S. dollar against the Canadian dollar for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, contributed $13.3 million to revenue.
Revenue increased by $178.8 million to $892.4 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase was predominately due to acquisitions completed since January 1, 2019 which contributed approximately $153.2 million of revenue. For the six months ended June 30, 2020, core price and surcharge increases were 4.8%, driven by continued pricing initiatives in the majority of our markets. Volume decreased by 3.6% for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily from lower volumes in our commercial and industrial collection businesses and post collection business, due to a decrease in service levels attributable to COVID-19. The volume decreases were greatest in our primary markets. Strengthening of the U.S. dollar against the Canadian dollar for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, contributed $17.5 million to revenue.
Adjusted EBITDA increased by $37.2 million to $146.2 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, predominately attributable to the previously described change in revenues. Adjusted EBITDA margin was 32.0% for the three months ended June 30, 2020, an increase of 280 basis points as compared to the three months ended June 30, 2019. The incremental revenue from acquisitions contributed Adjusted EBITDA margins greater than the existing base business, positively impacting the overall Adjusted EBITDA margin. Organic margin expansion attributable to pricing initiates, cost controls and overall operating leverage, as well as a $2.6 million impact from reduced fuel costs and $2.5 million of incremental revenues tied to increased commodity prices also positively impacted Adjusted EBITDA margins. Partially offsetting these increases were incremental health and safety costs of $0.5 million and volume declines, both attributable to COVID-19, which negatively impacted the Adjusted EBITDA margin during the three months ended June 30, 2020.
Adjusted EBITDA increased by $67.5 million to $282.0 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, predominately attributable to the previously described change in revenues. Adjusted EBITDA margin was 31.6% for the six months ended June 30, 2020, an increase of 150 basis points compared to the six months ended June 30, 2019. The incremental revenue from acquisitions contributed Adjusted EBITDA margins greater than the existing base business, positively impacting the overall Adjusted EBITDA margin. Organic margin expansion attributable to pricing initiates, cost controls and overall operating leverage, as well as a $3.3 million impact from reduced fuel costs also positively impacted Adjusted EBITDA margins. Partially offsetting these increases was a net incremental negative impact of $0.7 million tied to change in commodity prices, incremental health and safety costs of $0.5 million and volume declines, all attributable to COVID-19, which negatively impacted the Adjusted EBITDA margin for the three months ended June 30, 2020, compared to the six months ended June 30, 2019.
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Infrastructure & Soil Remediation Segment
Revenue increased by $16.9 million to $131.2 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 predominately driven by acquisitions completed since April 1, 2019 which contributed approximately $12.5 million of the increase in revenue in this segment. While the substantial majority of our larger active projects were deemed essential and continued during the quarter, we realized lower volumes from many of the small volume high frequency soil remediation customers that we typically service resulting from the temporary suspension of those customers’ soil remediation activities in response to COVID-19.
Revenue increased by $36.5 million to $261.9 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, predominately driven by acquisitions completed since January 1, 2019 which contributed approximately $25.7 million of the increase in revenue in this segment. The 5.9% organic revenue growth realized in the first quarter was tempered by the impact of COVID-19 shut downs that began in late March. While the substantial majority of our larger active projects were deemed essential and continued during the second quarter, we realized lower volumes from many of the small volume high frequency soil remediation customers that we typically service resulting from the temporary suspension of those customers’ soil remediation activities in response to COVID-19.
Adjusted EBITDA increased by $3.3 million to $26.7 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 predominately attributable to the previously described change in revenue. Adjusted EBITDA margin was 20.4% for the three months ended June 30, 2020 which was consistent with the Adjusted EBITDA margin realized for the three months ended June 30, 2019 and the result of a combination of accretive margin contribution from acquisitions offset by the impact of the change in revenue mix described above.
Adjusted EBITDA increased by $3.6 million to $48.2 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 predominately attributable to the previously described change in revenue. Adjusted EBITDA margin was 18.4% for the six months ended June 30, 2020, a decrease of 140 basis points from 19.8% Adjusted EBITDA margin realized for the six months ended June 30, 2019. The first quarter of the prior year benefited from several high margin specialty projects that did not repeat in the current year. Also, delays in the acquisition of planned equipment purchases to support the growth of the infrastructure and soil remediation business resulted in increased equipment rental costs in the first quarter of the current year as compared to the prior year. The Adjusted EBITDA margin contraction compared to the prior period was primarily attributable to these items partially offset by the impact of margin accretive acquisitions.
Liquid Waste Segment
Revenue increased by $7.2 million to $96.9 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. Acquisitions completed since April 1, 2019 drove approximately $31.8 million in increased revenue. Offsetting the contribution from acquisitions was an organic revenue decline of 27.9%, due primarily to a combination of lower sales volume of UMO and reduced industrial collection and processing activity resulting from the temporary suspension of certain customers’ operations in response to COVID-19. Despite the lower gross selling prices for UMO attributed to the declines in the indices on which our selling prices are based that begin at the end of the first quarter, net selling prices were relatively comparable to the prior year period as a result of adjusting the amounts that are paid or charged to the UMO generators at the time of collection.
Revenue increased by $26.8 million to $189.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. Acquisitions completed since January 1, 2019 drove approximately $56.6 million in increased revenue. Offsetting the contribution from acquisitions was an organic revenue decline of 18.7%, due primarily to a combination of lower sales volume of UMO and reduced industrial collection and processing activity resulting from the temporary suspension of certain customers’ operations in response to COVID-19.
Adjusted EBITDA decreased by $0.6 million to $22.6 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 predominately attributable to the previously described change in revenue. Adjusted EBITDA margin was 23.3% for the three months ended June 30, 2020, a decrease of 260 basis points from the Adjusted EBITDA margin realized for the three months ended June 30, 2019. The margin contraction period over period is primarily attributable to lower sales volumes of UMO and the relatively higher decremental margin impact of COVID-19 related volume decreases in the liquid waste segment, partially offset by the impact of margin accretive acquisitions.
Adjusted EBITDA decreased by $0.5 million to $39.4 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 predominately attributable to the previously described change in revenue. Adjusted EBITDA margin was 20.8% for the three months ended June 30, 2020, a decrease of 370 basis points from the Adjusted EBITDA margin realized for the six months ended June 30, 2019. The margin contraction period over period is primarily attributable to lower UMO selling prices and volumes, a non-recurring high margin bulk sale of UMO in the prior year and the relatively higher decremental margin impact of COVID-19 related volume decreases in the liquid waste segment, partially offset by the impact of margin accretive acquisitions.
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Corporate
Corporate costs increased by $6.9 million to $22.1 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase was predominately attributable to additional headcount and overhead costs to support the growth in the business, including additional insurance costs associated with being a public company. Corporate costs as a percentage of total revenue were 2.2% for the three months ended June 30, 2020, an increase of 40 basis points compared to corporate costs as a percentage of total revenue for the three months ended June 30, 2019.
Corporate costs increased by $10.1 million to $39.4 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase was attributable to additional headcount and overhead costs to support the growth in the business, including additional insurance costs associated with being a public company. Corporate costs as a percentage of total revenue were 2.0% for the six months ended June 30, 2020, and increase of 10 basis points compared to corporate costs as a percentage of total revenue for the six months ended June 30, 2019.
4. Tangible Equity Units
On March 5, 2020, we completed our offering of 15,500,000 6% TEUs for total gross proceeds of $1,040.7 million (US$775.0 million). Each TEU, which has a stated amount of US$50.00, is comprised of a Purchase Contract and an Amortizing Note due March 15, 2023, both of which are freestanding instruments and separate units of account. The Amortizing Notes are classified as a financial liability held at cost. The Purchase Contracts are accounted for as prepaid forward contracts to deliver a variable number of equity instruments equal to a fixed dollar amount, subject to a cap and floor.
The value allocated to the Amortizing Notes are reflected in debt in the Interim Financial Statements with payments expected in the next twelve months reflected in current portion of long-term debt.
The value allocated to the Purchase Contracts are reflected in other derivative financial liabilities and is subsequently measured at fair value through profit or loss. The fair value of the Purchase Contracts of the TEU is based on the trading price of the Purchase Contracts to the extent an active market exists. It will otherwise be determined using a valuation model.
Each Amortizing Note has an initial principal amount of US$8.5143 and bears interest at 4.0% per year. On each of March 15, June 15, September 15, and December 15, the Company will pay equal quarterly cash instalments of US$0.7500 per Amortizing Note (except for the June 15, 2020 instalment payment, which was US$0.8333 per Amortizing Note), which cash payment in aggregate will be the equivalent of 6.0% per year with respect to each US$50.00 stated amount of the TEUs. Each instalment constitutes a payment of interest and a partial payment of principal.
Unless settled earlier, on March 15, 2023 each Purchase Contract will automatically settle for subordinate voting shares. Upon settlement of a Purchase Contract, the Company will deliver not more than 2.6316 subordinate voting shares and not less than 2.1930 subordinate voting shares, subject to adjustment, based on the Applicable Market Value (as defined below) of the Company’s subordinate voting shares as described below:
| • | If the Applicable Market Value is greater than the threshold appreciation price, which is US$22.80, holders will receive 2.1930 subordinate voting share per Purchase Contract; |
| • | If the Applicable Market Value is less than or equal to the threshold appreciation price but greater than or equal to the reference price, which is US$19.00, the holder will receive a number of subordinate voting shares per Purchase Contract equal to US$50.00, divided by the Applicable Market Value; and |
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| • | If the Applicable Market Value is less than the reference price, the holder will receive 2.6316 subordinate voting shares per Purchase Contract. |
| • | The Applicable Market Value is defined as the arithmetic average of the volume weighted average price per share of the Company’s subordinate voting shares over the twenty consecutive trading day period immediately preceding March 15, 2023. |
5. Liquidity and Capital Resources
We intend to meet our currently anticipated capital requirements through cash flow from operations and borrowing capacity under our Revolving Credit Facility. We expect that these sources will be sufficient to meet our current operating capital needs, pay our dividend and fund certain tuck in acquisitions consistent with our strategy. As a result of our IPO on March 5, 2020, we have significantly de-levered our balance sheet and have no material debt maturities until May 31, 2025.
Our ability to fund operating expenses, capital expenditures and future debt service requirements will depend on, among other things, our future operating performance, which will be affected by general economic, financial and other factors including COVID-19, including factors beyond our control.
As of June 30, 2020, we had $723.9 million in cash and $nil outstanding under our Revolving Credit Facility. We had the following outstanding as at June 30, 2020:
| • | $2,803.6 million under the Term Facility, maturing May 31, 2025; |
| • | $681.4 million of 4.25% USD senior secured notes, principal maturing on June 1, 2025 (“2025 Secured Notes”); |
| • | $551.9 million of the 2026 Notes; |
| • | $681.4 million of 5.125% USD senior secured notes, principal maturing on December 15, 2026 (“2026 Secured Notes”); |
| • | $490.6 million of the 2027 Notes; and |
| • | $8.0 million equipment loans and other. |
The 2025 Secured Notes, the 2026 Notes, the 2026 Secured Notes and the 2027 Notes are collectively referred to as the Notes.
Cash Flows
Cash Flows for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019
| ($ millions) |
Three months ended June 30, 2020 |
Three months ended June 30, 2019 |
Change | % | ||||||||
| Cash flows from operating activities | $ | 132.2 | $ | 55.7 | $ | 76.5 | 137.3 | % | ||||
| Cash flows used in investing activities | (128.1 | ) | (166.3 | ) | 38.2 | (23.0 | ) | |||||
| Cash flows from financing activities | 662.4 | 324.3 | 338.1 | 104.3 | ||||||||
| Increase in cash | 666.5 | 213.7 | ||||||||||
| Changes due to foreign exchange | (34.0 | ) | (4.4 | ) | ||||||||
| Cash, beginning of period | 91.4 | — | ||||||||||
| Cash, end of period | $ | 723.9 | $ | 209.3 | ||||||||
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| ($ millions) |
Six months ended June 30, 2020 |
Six months ended June 30, 2019 |
Change | % | ||||||||||
| Cash flows from operating activities | $ | 82.0 | $ | 36.3 | $ | 45.7 | 125.9 | % | ||||||
| Cash flows used in investing activities | (1,353.9 | ) | (378.8 | ) | (975.1 | ) | 257.4 | |||||||
| Cash flows from financing activities | 1,422.1 | 540.1 | 882.0 | 163.3 | ||||||||||
| Increase in cash | 150.2 | 197.6 | ||||||||||||
| Changes due to foreign exchange | (1.1 | ) | 4.3 | |||||||||||
| Cash, beginning of period | 574.8 | 7.4 | ||||||||||||
| Cash, end of period | $ | 723.9 | $ | 209.3 | ||||||||||
Operating Activities
Cash from operating activities increased by $76.5 million to $132.2 million compared to $55.7 million for the three months ended June 30, 2019. This increase was predominantly attributable to operating activities during the three months ended June 30, 2020.
Changes in non-cash working capital items resulted in a use of cash of $28.5 million for the three months ended June 30, 2020, as compared to a $54.2 million use of cash for the three months ended June 30, 2019. The current period change was primarily the result of a $18.3 million decrease in accounts receivable, a $6.0 million increase in prepaid expenses and other assets and a $41.0 million decrease in accounts payable and accrued liabilities, which included $13.9 million of acquisition related payables.
Cash from operating activities increased by $45.7 million to $82.0 million compared to $36.3 million for the six months ended June 30, 2019. Included in the current year is $109.1 million of IPO related transaction costs (comprised of $73.8 million prepayment penalties, $46.2 million IPO transaction costs, $30.2 million prepayment premium and a $41.1 million gain on settlement of extinguished swap arrangements). Excluding these IPO related payments, operating activities were a source of $191.1 million of cash during the six months ended June 30, 2020, a $154.8 million increase compared to the six months ended June 30, 2019.
Changes in non-cash working capital items resulted in a $82.5 million use of cash for the six months ended June 30, 2020 as compared to a $154.0 million use of cash in the six months ended June 30, 2019. The current period change was primarily the result of a $4.5 million increase in accounts receivable, a $25.5 million increase in prepaid and other assets and a $52.7 million decrease in accounts payable and accrued liabilities.
Investing Activities
Cash used in investing activities decreased by $38.2 million, to $128.1 million for the three months ended June 30, 2020, compared to the three months ended June 30, 2019. The decrease is predominately related to acquisition expenditures of $12.3 million for the three months ended June 30, 2020, as compared to acquisition expenditures of $73.3 million for the three months ended June 30, 2019.
Cash used in investing activities increased by $975.1 million, to $1,353.9 million for the six months ended June 30, 2020, compared to the six months ended June 30, 2019. The increase is predominately related to acquisition expenditures of $1,138.3 million for the six months ended June 30, 2020 as compared to acquisition expenditures of $187.2 million for the six months ended June 30, 2019.
Financing Activities
Cash from financing activities increased by $338.1 million to $662.4 million for the three months ended June 30, 2020, compared to the three months ended June 30, 2019. The increased is predominately related to the issuance of long-term debt of $785.2 million, including the issuance of the 2025 Secured Notes, offset by net draws and repayments on our revolving credit facility and a repayment of the Amortizing Notes of $80.7 million and $15.8 million, respectively.
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Cash from financing activities increased by $882.0 million to $1,422.1 million for the six months ended June 30, 2020, compared to the six months ended June 30, 2019. The increase is predominately related to the issuance of share capital and TEUs of $3,257.6 million and $1,006.9 million, respectively, issuance of the 2025 Secured Notes and draw down of $891.0 million on our revolving credit facility, partially offset by repayment of debt and Amortizing Notes of $3,962.6 million and $15.8 million, respectively.
Available sources of liquidity
Revolving Credit Facility
General
We entered into the Fifth Amended and Restated Credit Agreement, dated as of February 26, 2019, with a syndicate of lenders (the “Revolving Credit Agreement”), which provided additional commitments under our revolving credit and swing line facility to include total commitments under (i) a US$40.0 million revolving facility (available in US dollars), (ii) a $628.0 million revolving facility (available in Canadian and US dollars) and (iii) an $80.0 million letter of credit facility.
Interest Rates, Fees, and Payments
Under the terms of the facilities under the Revolving Credit Agreement (the Revolving Credit Facility), interest rates and margins charged on advances and standby fees for letters of credit are as follows: margins on Bankers’ Acceptances, Bankers’ Acceptance Equivalent Advance, LIBOR rate advances and standby fees on letters of credit are charged at 2.75% and margins on Canadian Rate and US Base Rate loans are charged at 1.75%. In the event that the London interbank offered rate is no longer available or used for determining the interest rate of loans, then the administrative agent under the Revolving Credit Facility and the Company will negotiate to replace the rate of interest applying to LIBOR rate advances with loans using an alternate benchmark rate, giving due consideration to the then prevailing market convention for determining a rate of interest for syndicated loans in the United States at such time. The commitment fee for undrawn availability under the Revolving Credit Facility is 0.50%.
Covenants
Our Revolving Credit Facility contains a financial maintenance covenant. The covenant (which applies only when the Revolving Credit Facility is drawn at or above 35% of the Revolving Credit Facility limit) is a ratio of Total Net Funded Debt to Adjusted EBITDA (each, as defined in the Revolving Credit Agreement) equal to or less than 8.00:1.00.
Term Facility
General
We are party to the Term Facility Credit Agreement, dated as of September 30, 2016 (as amended as of May 31, 2018 and November 14, 2018, the “Term Facility Credit Agreement”), among us, each of our subsidiaries party thereto, Barclays Bank PLC, as administrative agent, the lenders party thereto and each other party thereto. In connection with the acquisition of Waste Industries, on November 14, 2018, we entered into an amendment of the Term Facility Credit Agreement (the “Incremental Term Facility Amendment”) to provide for US$1,710.0 million of incremental Term Facilities (the “Incremental Term Facility”). Prior to our entrance into the Incremental Term Facility Amendment, the Term Facility Credit Agreement provided for a US dollar denominated Term Facility tranche of US$805.0 million, a US dollar denominated delayed draw Term Facility tranche of US$100.0 million (which was available to us until October 31, 2018 to fund acquisitions meeting certain criteria) — (collectively, the “Term Facility)” and an accordion option, pursuant to which we may incur an incremental tranche of indebtedness in an amount not to exceed (x) the greater of $400.0 million or 100% of consolidated EBITDA for the immediately preceding four consecutive fiscal quarters, plus (y) additional amounts based on the maintenance of certain leverage ratios, plus (z) the aggregate principal amount of all voluntary prepayments of any loans, except to the extent financed with the proceeds of long-term indebtedness (other than revolving indebtedness).
On March 5, 2020, we used a portion of the net proceeds of the IPO to repay US$523 million of the Term Facility.
As of June 30, 2020, we had $2,803.6 million principal amount outstanding under the Term Facility. Our Term Facility matures on May 31, 2025.
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Interest Rates, Payments and Prepayments
Our Term Facility bears interest rates based on our election, which can be either the Eurocurrency Rate (as defined in the Term Facility Credit Agreement) plus 2.75% or the Base Rate (as defined in the Term Facility Credit Agreement) plus 1.75%.
Our Term Facility amortizes in equal quarterly instalments in an amount equal to 1.00% per annum of the original principal amount thereof, with the remaining balance due at final maturity.
We must prepay our Term Facility with 100% of the net cash proceeds of certain asset sales (such percentage to be subject to reduction to 50% and 0%, respectively, based on the achievement of a Total Net Leverage Ratio (as defined in the Term Facility Credit Agreement) of less than or equal to 5.50 to 1.00 and 4.75 to 1.00, respectively), the incurrence or issuance of specified indebtedness and 50% of excess cash flow (such percentage to be subject to reduction to 25% and 0%, respectively, based on the achievement of Total Net First Lien Leverage Ratio (as defined in the Term Facility Credit Agreement) of less than or equal to 3.00 to 1.00 and 2.50 to 1.00, respectively), in each case, subject to certain exceptions and, in the case of the net cash proceeds of certain asset sales, reinvestment rights.
Notes
On March 5, 2020, we used a portion of the net proceeds of the IPO to fund the redemption of the following:
| • | the entire US$350.0 million outstanding aggregate principal amount of the 2022 Notes; |
| • | the entire US$400.0 million outstanding aggregate principal amount of the 2023 Notes; |
| • | US$270.0 million of the outstanding aggregate principal amount of the 2026 Notes; |
| • | US$240.0 million of the outstanding aggregate principal amount of the 2027 Notes; and |
| • | related fees, premiums and accrued and unpaid interest on the 2022 Notes, the 2023 Notes, the 2026 Notes and the 2027 Notes. |
On April 22, 2020, we issued US$500,0 million of 2025 Secured Notes. Concurrently with the offering, we entered into cross-currency swaps to manage our currency risk.
As of June 30, 2020, we had outstanding: (i) $681.4 million in aggregate principal amount of the 2025 Secured Notes, (ii) $551.9 million in aggregate principal amount of the 2026 Notes, (iii) $681.4 million in aggregate principal amount of the 2026 Secured Notes, and (iv) $490.6 million in aggregate principal amount of 2027 Notes.
The 2026 Notes and 2027 Notes are guaranteed by our material subsidiaries that, together with other entities, guarantee the Term Facility. The 2025 Secured Notes and the 2026 Secured Notes are guaranteed by each of our subsidiaries that guarantee the Term Facility and the Revolving Credit Facility.
Covenants
As at June 30, 2020 we were in compliance with all debt covenants under the indentures governing the Notes.
Paid In Kind (“PIK”) Notes
On March 5, 2020, in connection with the pre-closing capital changes implemented as part of the IPO, certain existing shareholders of Holdings subscribed for additional non-voting shares at a fair market value price per share of US$19.00, the proceeds of which, together with a loan in an aggregate principal amount of $29.0 million from Sejosa Holdings Inc., an entity controlled by Patrick Dovigi, were used to redeem in full the PIK Notes in an aggregate amount of $1,049.9 million plus redemption premiums and penalties. A loss on extinguishment of $59.4 million was recognized in interest expense and other finance costs in the six months ended June 30, 2020.
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Included in this interest expense for the six months ended June 30, 2020 is a 3% premium of $31.0 million for the early repayment of the PIK Notes as well as a loss on extinguishment of $28.4 million.
Equipment Loans and Promissory Notes
We have various equipment loan agreements which are secured by the specific assets under such loan. The interest rates for these obligations range from 3.02% to 4.37% per annum, while the respective maturity dates of such obligations extend into 2024.
Hedging Arrangements
We have entered into cross-currency swap contracts to fully hedge our exposure of the servicing of the 2025 Secured Notes, the 2027 Notes and the 2026 Secured Notes all of which are denominated in US dollars. Our US dollar denominated Term Facility is hedged in the amount of $439.9 million. We have entered into cross-currency swap contracts to partially hedge the 2026 Notes.
In May 2020, we entered into a series of swap contracts to partially hedge our exposure of diesel fuel purchases in Canada and certain areas in the U.S.
Contractual Commitments
Our contractual obligations consist of principal repayments and interest on long-term debt, equipment loans, lease obligations and Amortizing Notes. Our contractual obligations and commitments as of June 30, 2020 are shown in the following table.
| ($ millions) | Total | Less than 1 year |
1-3 year | 4-5 year | Thereafter | ||||||||||
| Long-term debt | $ | 5,209.0 | $ | — | $ | — | $ | 3,485.0 | $ | 1,724.0 | |||||
| Interest on long-term debt | 1.4 | 0.1 | 0.5 | 0.5 | 0.3 | ||||||||||
| Equipment loans | 8.0 | 0.6 | 3.6 | 3.8 | — | ||||||||||
| Lease obligations | 234.6 | 20.5 | 66.7 | 56.6 | 90.8 | ||||||||||
| Amortizing Notes | 174.3 | 31.7 | 126.8 | 15.8 | — | ||||||||||
| $ | 5,627.3 | $ | 52.9 | $ | 197.6 | $ | 3,561.7 | $ | 1,815.1 | ||||||
Other Commitments
We had letters of credit totaling approximately $128.1 million outstanding as of June 30, 2020 ($104.3 million as of December 31, 2019). These letters of credit primarily relate to performance-based requirements under our municipal contracts and financial assurances issued to government agencies for our operating permits.
6. Summary of Quarterly Results
The following table summarizes the results of our operations for the last eight most recently completed quarters.
| ($ millions except per share amounts) | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | ||||||||||||||||
| 2020 | 2020 | 2019 | 2019 | 2019 | 2019 | 2018 | 2018 | |||||||||||||||||
| Financial Summary | ||||||||||||||||||||||||
| Revenue | $ | 993.3 | $ | 931.3 | $ | 896.5 | $ | 898.0 | $ | 831.4 | $ | 720.9 | $ | 618.0 | $ | 450.6 | ||||||||
| Adjusted EBITDA | 261.5 | 222.8 | 208.9 | 225.7 | 211.9 | 179.1 | 134.6 | 108.1 | ||||||||||||||||
| Net loss | (115.5) | (278.0) | (182.0) | (108.2) | (68.0 | ) | (93.4 | ) | (178.5 | ) | (52.4) | |||||||||||||
| Net loss per share, basic & diluted | (0.32) | (0.77) | (1.01) | (0.61) | (0.38 | ) | (0.64 | ) | (1.20 | ) | (0.45) | |||||||||||||
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Over the last eight quarters our results were primarily impacted by acquisitions and associated financing activities. Additionally, our results are influenced by seasonality which is more pronounced in Canada. The third quarter of the year historically has the highest level of activity due to the favourable summer weather. For each prior quarter net loss per share, basic and diluted has been recalculated to reflect the number of shares after the exchange associated with the amalgamation.
7. Key Risk Factors
GFL is exposed to a number of risk factors through the pursuit of strategic objectives and the nature of our operations which are outlined in the “Risk Factors” section of the Company’s IPO Prospectus. These risk factors have not materially changed since the date of the IPO Prospectus except as noted below.
Key Business Risks
Public health outbreaks, epidemics or pandemics, such as the COVID-19 pandemic, could adversely impact our business.
Public health outbreaks, epidemics or pandemics, such as the COVID-19 pandemic, could adversely impact our business, financial condition, liquidity, results of operations, and cash flows. The spread of COVID-19 has created a global health crisis that has resulted in widespread disruption to economic activity, both in the U.S. and Canada. The U.S. and Canadian governments as well as numerous state, provincial, local and foreign governments have implemented certain measures to attempt to slow and limit the spread of COVID-19, including increased border and port controls and closures, shelter-in-place and physical distancing orders. There is considerable uncertainty regarding such measures and potential future measures, all of which could limit our ability to meet customer demand, as well as reduce customer demand.
Due to the rapidly evolving and highly uncertain nature of the COVID-19 pandemic, we are unable to estimate the extent of its impact on our business at this time. Factors that will influence the impact include the economic consequences and duration of the outbreak, new information that emerges concerning the severity and duration of the COVID-19 pandemic and actions taken to contain the outbreak or treat its impact, among others. 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. While disruption to operations may occur in the coming months, currently there is no indication of additional credit risk associated with our customers, nor is there an indication of a change in liquidity risk.
Financial Instruments and Financial Risk
GFL’s financial instruments consist of cash and cash equivalents, trade accounts receivable, trade accounts payable, long-term debt, and TEUs. The carrying value of GFL’s financial assets are equal to their fair values.
The carrying value of our financial liabilities approximate their fair values with the exception of our Notes and debt component of TEUs. The fair value hierarchy for our financial assets and liabilities not measured at fair value are as follows:
| Fair Value as at June 30, 2020 | Fair Value as at December 31, 2019 | |||||||||||||
| ($ millions) | Quoted prices in active market (Level 1) | Significant observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Quoted prices in active market (Level 1) | Significant observable inputs (Level 2) |
Significant unobservable inputs (Level 3) | ||||||||
| Notes | $ | 2,505.8 | $ | 3,092.3 | ||||||||||
| TEU Amortizing Note | 130.5 | — | ||||||||||||
| Total debt | $ | 2,636.3 | $ | 3,092.3 | ||||||||||
For more information on GFL’s financial instruments and related financial risk factors, see the Interim Financial Statements, the Annual Financial Statements, and the Annual MD&A.
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8. Other
Related Party Transactions
On May 31, 2018, as part of the investment in GFL by a group of investors including affiliates of BC Partners Advisors L.P., Ontario Teachers’ Pension Plan Board, and Patrick Dovigi (the Recapitalization), we issued a non-interest bearing unsecured promissory note payable to Josaud Holdings Inc., an entity controlled by our Chief Executive Officer and Founder, Patrick Dovigi, in an aggregate principal amount of $35.0 million, which is scheduled to mature on January 1, 2023. The note is being repaid in equal semi-annual instalments of $3.5 million. As of June 30, 2020, $21.0 million principal amount was outstanding on the note.
During the six months ended June 30, 2020, in connection with the IPO, we issued a total of 360,321,456 of non-voting shares of Holdings to certain existing shareholders. The non-voting shares were converted for subordinate voting shares and multiple voting shares as part of the IPO.
In connection with the IPO, we issued an unsecured promissory note payable to Sejosa Holdings Inc., an entity controlled by Patrick Dovigi, in an aggregate principal amount of $29.0 million and bearing market interest. The note is payable in equal semi-annual instalments of $2.9 million. The loan is scheduled to mature on March 5, 2025. As of June 30, 2020, $29.0 million principal amount was outstanding on the note.
Off-Balance Sheet Arrangements
Performance Bonds
We post performance bonds in favour of applicable governmental authorities as a condition of issuing some of our environmental compliance approvals for our permitted facilities. In addition, some municipal solid waste contracts and infrastructure & soil remediation projects may require us to post performance or surety bonds to secure our contractual performance. As of June 30, 2020, we had issued surety bonds totaling $881.1 million ($778.6 million as of December 31, 2019), of which approximately $108.5 million ($112.6 million as of December 31, 2019) is secured by a charge on the assets of certain subsidiaries.
These performance and surety bonds are issued in the ordinary course of business and are not considered company indebtedness. Because we currently have no liability for these financial assurance instruments, they are not reflected in our consolidated statement of financial position.
Share Information Prior to the Initial Public Offering
Prior to the completion of the IPO, our share capital consisted of an unlimited number of Voting Common shares, Class A Non-Voting Common shares, Class B Non-Voting Common shares, Class C Non-Voting Common shares, Class D Non-Voting Common shares, Class E Non-Voting Common shares, Class F Non-Voting Common shares, Class H Non-Voting Common shares, Class I Non-Voting Common shares, Class J Non-Voting Common shares and Class K Non-Voting Common shares. The Voting Common shares carried one vote per share.
Immediately prior to the completion of the IPO, we had 100 Voting Common shares, 2,645,194,628 Class A Non-Voting Common shares, 1,034,959,042 Class B Non-Voting Common shares, 144,330,329 Class C Non-Voting Common shares, 7,000,000 Class D Non-Voting Common shares, 159,468,329 Class F Non-Voting Common shares, 621,597,135 Class H Non-Voting Common shares, 159,016,639 Class I Non-Voting Common shares, 339,608,745 Class J Non-Voting Common shares and 11,399,544 Class K Non-Voting Common shares issued and outstanding. In addition, there were 159,468,329 options issued and outstanding under the Company’s legacy stock option plan.
Current Share Information
GFL’s current authorized share capital consists of (i) an unlimited number of subordinate voting shares, (ii) an unlimited number of multiple voting shares, and (iii) an unlimited number of preferred shares.
As of June 30, 2020, we have 314,312,510 subordinate voting shares, 12,062,964 multiple voting shares and no preferred shares issued and outstanding. All of the issued and outstanding multiple voting shares are, directly or indirectly, held or controlled by entities controlled by Patrick Dovigi.
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Additional Information
Additional information relating to the Company, including the Company’s most recent annual and quarterly reports filed with the IPO Prospectus is available on SEDAR at www.sedar.com and on Edgar at www.sec.gov/edgar. The Company’s subordinate voting shares are listed for trading on the NYSE and on the TSX under the symbol “GFL”. The TEUs are listed for trading on the NYSE under the symbol “GFLU”.
9. Accounting Policies, Critical Accounting Estimates and Judgements
We prepare our consolidated financial statements in accordance with IFRS. Our significant accounting policies and significant accounting estimates, assumptions and judgements are contained in the Annual Financial Statements. Refer to the Annual Financial Statements and the Interim Financial Statements for a summary of significant accounting policies.
Significant accounting estimates, assumptions and judgements
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the Interim Financial Statements and the reported amounts of revenue and expenses during the reporting period. Key components of the Interim Financial Statements requiring management to make estimates include the allowance for doubtful accounts in respect of receivables, the valuation of inventories, the useful lives of long-lived assets, the potential impairment of goodwill and indefinite life intangible assets, the valuation of property, plant and equipment, the fair value of the net assets acquired in business combinations, stock-based compensation, asset retirement obligations, liabilities under legal contingencies, insurance related liabilities and TEU Purchase Contract market valuation.
Management continually evaluates the estimates and assumptions it uses. These estimates and assumptions are based on management’s historical experience, best knowledge of current events including COVID-19 and conditions and activities that we may undertake in the future. Actual results could differ from these estimates. While disruption to operations may occur in the coming months, currently there is no indication of business impact that would warrant GFL modifying its estimates, assumptions or judgement at this time. GFL continues to monitor the ongoing situation resulting from COVID-19. See Risk Factors.
Landfill Asset
The original costs of landfill assets, together with incurred and projected landfill construction and development costs are amortized on a per unit basis as landfill airspace is consumed. We amortize landfill assets over their total available disposal capacity representing the sum of estimated permitted airspace capacity, plus future permitted airspace capacity which represents an estimate of airspace capacity that management believes is probable of being permitted based on certain criteria. We have been successful in receiving approvals for expansions pursued; however, there can be no assurance that the Company will be successful in obtaining approvals for landfill expansions in the future.
The following table summarizes landfill amortization expense on a per tonne basis for the periods indicated:
|
Six months ended June 30, 2020 |
Three months ended June 30, 2020 |
Year ended December 31, 2019 | |||||||
| Amortization of landfill airspace ($ millions) | $ | 41.8 | $ | 21.8 | $ | 126.9 | |||
| Tonnes received (millions of tonnes) | 3.0 | 1.6 | 6.1 | ||||||
| Average landfill amortization per tonne ($) | $ | 13.9 | $ | 13.6 | $ | 20.8 | |||
The amortization of landfill airspace for the twelve months ending December 31, 2019 has a $35.0 million one-time adjustment which if excluded, would result in an average landfill amortization per tonne of $15.1. Unique per-tonne amortization rates are calculated for each of our landfills and the rates can vary significantly due to regional differences in construction costs and regulatory requirements for landfill development, capping, closure and post closure activities.
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Landfill Development Costs
Landfill development costs include costs of acquisition, construction associated with excavation, liners, site berms, groundwater monitoring wells, gas recovery systems and leachate collection systems. We estimate the total costs associated with developing each landfill site to its final capacity. Total landfill costs include the development costs associated with expansion airspace as described below. Landfill development costs depend on future events and thus actual costs could vary significantly from our estimates. Material differences between estimated and actual development costs may affect our cash flows by increasing our capital expenditures and thus affect our results of operations by increasing our landfill amortization expense.
Landfill Closure and Post-Closure Obligations
We recognize the estimated liability for final capping, closure and post-closure maintenance obligations that results from acquisition, construction, development or normal operations as airspace is consumed. Costs associated with capping, closing and monitoring a landfill or portions thereof after it ceases to accept waste, are initially measured at the discounted future value of the estimated cash flows over the landfill’s operating life, representing the period over which the site receives waste. This value is capitalized as part of the cost of the related asset and amortized over the asset’s useful life.
Estimates are reviewed at least once annually and consider, amongst other things, regulations that govern each site. We estimate the fair value of landfill closure and post-closure costs using present value techniques that consider and incorporate assumptions and considerations marketplace participants would use in the determination of those estimates, including inflation, markups, inherent uncertainties due to the timing of work performed, information obtained from third parties, quoted and actual prices paid for similar work and engineering estimates. Inflation assumptions are based on evaluation of current and future economic conditions and the expected timing of these expenditures. Fair value estimates are discounted applying the risk-free rate, which is a rate that is essentially free of default risk. In determining the risk-free rate, consideration is given to both current and future economic conditions and the expected timing of expenditures.
Significant reductions in our estimates of remaining lives of our landfills or significant increases in our estimates of landfill final capping, closure and post-closure maintenance costs could have a material adverse effect on our financial condition and results of operations. Additionally, changes in regulatory or legislative requirements could increase our costs related to our landfills, resulting in a material adverse effect on our financial condition and results of operations.
Landfill Capacity
Our internal and third-party engineers perform surveys at least annually to estimate the remaining disposal capacity at our landfills. Our landfill depletion rates are based on the total available disposal capacity, considering both permitted and probable future permitted airspace. Future permitted airspace capacity, represents an estimate of airspace capacity that is probable of being permitted based on the following criteria:
| • | Personnel are actively working to obtain the permit or permit modifications necessary for expansion of an existing landfill, and progress is being made on the project; |
| • | It is probable that the required approvals will be received within the normal application and processing periods for approvals in the jurisdiction in which the landfill is located; |
| • | We have a legal right to use or obtain land associated with the expansion plan; |
| • | There are no significant known political, technical, legal or business restrictions or issues that could impair the success of the expansion effort; |
| • | Management is committed to pursuing the expansion; and |
| • | Additional airspace capacity and related costs have been estimated based on the conceptual design of the proposed expansion. |
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As of June 30, 2020 we had 122.5 million tonnes (December 31, 2019: 113.5 million tonnes) of remaining permitted capacity at the landfills we own and at the landfill in Quebec where we have designated access to a fixed level of capacity over the next 9.6 years. As of June 30, 2020, 2 of our landfills satisfied the criteria for inclusion of probable expansion capacity, resulting in additional expansion capacity of 2.9 million tonnes, and together with remaining permitted capacity, our total remaining capacity is 125.4 million tonnes (December 31, 2019: 116.4 million tonnes). Based on total capacity as of June 30, 2020 and projected annual disposal volumes, the weighted average remaining life of the landfills we own and at the landfill in Quebec where we have designated access to a fixed level of capacity is approximately 19.7 years (December 31, 2019: 19.0 years). We have other expansion opportunities that could extend the weighted average remaining life of our landfills.
We may be unsuccessful in obtaining permits for future airspace capacity at our landfills. In such cases, we will charge the previously capitalized development costs to expense. This will adversely affect our operating results and cash flows and could result in greater landfill amortization expense being recognized on a prospective basis.
We periodically evaluate our landfill sites for potential impairment indicators. Our judgements regarding the existence of impairment indicators are based on regulatory factors, market conditions and operational performance of our landfills. Future events could cause us to conclude that impairment indicators exist and that our landfill carrying costs are impaired. Any resulting impairment loss could have a material adverse effect on our financial condition and results of operations.
10. Non-IFRS Financial Measures and Key Performance Indicators
Non-IFRS Measures
This MD&A makes reference to certain non-IFRS measures, including EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin. These measures are not recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS. Rather, these non-IFRS measures are used to provide investors with supplemental measures of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. We also believe that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers. Our management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine components of management compensation.
EBITDA
EBITDA represents, for the applicable period, net income (loss) plus (a) interest and other finance costs, plus (b) depreciation and amortization of property, plant and equipment, landfill assets and intangible assets, less (c) the provision for income taxes, in each case to the extent deducted or added to/from net income (loss). We present EBITDA to assist readers in understanding the mathematical development of Adjusted EBITDA. Management does not use EBITDA as a financial performance metric.
Adjusted EBITDA
Adjusted EBITDA is a supplemental measure used by management and other users of our financial statements including our lenders and investors, to assess the financial performance of our business without regard to financing methods or capital structure. Adjusted EBITDA is also a key metric that management uses prior to execution of any strategic investing or financing opportunity. For example, management uses Adjusted EBITDA as a measure in determining the value of acquisitions, expansion opportunities, and dispositions. In addition, Adjusted EBITDA is utilized by financial institutions to measure borrowing capacity. Adjusted EBITDA is calculated by adding and deducting, as applicable, certain expenses, costs, charges or benefits incurred in such period which in management’s view are either not indicative of underlying business performance or impact the ability to assess the operating performance of our business, including: (a) loss (gain) on foreign exchange, (b) loss (gain) on sale of property, plant and equipment, (c) mark-to-market loss (gain) on fuel hedge, (d) mark-to-market loss (gain) on TEU purchase contract, (d) share-based payments, (e) acquisition, integration and other costs (included in selling, general and administrative expenses related to acquisition activity), (f) costs associated with the IPO (g) acquisition, rebranding and other integration costs (included in cost of sales related to acquisition activity), and (h) deferred purchase consideration. We use Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis reflecting factors and trends affecting our business.
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Adjusted EBITDA Margin
Adjusted EBITDA margin represents Adjusted EBITDA divided by revenue. We use Adjusted EBITDA Margin to facilitate a comparison of the operating performance of each of our operating segments on a consistent basis reflecting factors and trends affecting our business.
Adjusted EBITDA to Net Loss Reconciliation
The following tables provide a reconciliation of our net loss to EBITDA and Adjusted EBITDA for the periods presented:
| ($ millions) |
Three months ended June 30, 2020 |
Three months ended June 30, 2019 | ||||
| Net loss | $ | (115.5) | $ | (68.0) | ||
| Add: | ||||||
| Interest and other finance costs | 95.4 | 126.9 | ||||
| Depreciation and amortization | 123.6 | 101.3 | ||||
| Amortization of intangible assets | 111.1 | 80.3 | ||||
| Income tax recovery | (38.3) | (22.1) | ||||
| EBITDA | 176.3 | 218.4 | ||||
| Add: | ||||||
| Gain on foreign exchange(1) | (8.4) | (28.1) | ||||
| Loss on sale of property, plant and equipment | 0.5 | 1.8 | ||||
| Mark-to-market loss on fuel hedge | 0.6 | 0.3 | ||||
| Mark-to-market loss on TEU purchase contract(2) | 74.2 | — | ||||
| Share-based payments(3) | 4.2 | 3.6 | ||||
| Transaction costs(4) | 7.7 | 9.1 | ||||
| IPO transaction costs(5) | 4.9 | — | ||||
| Acquisition, rebranding and other integration costs(6) | 1.5 | 6.8 | ||||
| Adjusted EBITDA | $ | 261.5 | $ | 211.9 | ||
| ($ millions) |
Six months ended June 30, 2020 |
Six months ended June 30, 2019 | ||||
| Net loss | $ | (393.5) | $ | (161.4) | ||
| Add: | ||||||
| Interest and other finance costs | 364.8 | 250.9 | ||||
| Depreciation and amortization | 246.3 | 195.5 | ||||
| Amortization of intangible assets | 210.2 | 161.0 | ||||
| Income tax recovery | (126.0) | (51.5) | ||||
| EBITDA | 301.8 | 394.5 | ||||
| Add: | ||||||
| Loss (gain) on foreign exchange(1) | 97.6 | (44.8) | ||||
| Loss on sale of property, plant and equipment | 2.1 | 1.5 | ||||
| Mark-to-market loss on fuel hedge | 1.8 | 0.2 | ||||
| Mark-to-market gain on TEU purchase contract(2) | (14.2) | — | ||||
| Share-based payments(3) | 19.9 | 7.2 | ||||
| Transaction costs(4) | 18.9 | 18.6 | ||||
| IPO transaction costs(5) | 46.2 | — | ||||
| Acquisition, rebranding and other integration costs(6) | 9.2 | 12.8 | ||||
| Deferred purchase consideration | 1.0 | 1.0 | ||||
| Adjusted EBITDA | $ | 484.3 | $ | 391.0 | ||
| (1) | Consists of (i) non-cash gains and losses on foreign exchange and interest rate swaps entered into in connection with our debt instruments, (ii) and gains and losses attributable to foreign exchange rate fluctuations. |
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| (2) | This is a non-cash item that consists of the fair value “mark to market” adjustment on the TEU Purchase Contract. |
| (3) | This is a non-cash item and consists of the amortization of the estimated fair market value of share-based options granted to certain members of management under share-based option plans. |
| (4) | Consists of acquisition, integration and other costs such as legal, consulting and other fees and expenses incurred in respect of acquisitions and financing activities completed during the applicable period. We expect to incur similar costs in connection with other acquisitions in the future and, under IFRS, such costs relating to acquisitions are expensed as incurred and not capitalized. This is part of SG&A. |
| (5) | Consists of costs associated with the IPO, such as legal, audit, regulatory and other fees and expenses incurred in connection with the IPO, as well as underwriting fees related to the TEUs that were expensed as incurred. |
| (6) | Consists of costs related to the rebranding of equipment acquired through business acquisitions. We may incur similar expenditures in the future in connection with other acquisitions. This is part of cost of goods sold. |
11. Forward-Looking Information
This MD&A, including, in particular, the sections above entitled “Factors Affecting Our Results of Operations”, “Liquidity and Capital Resources” and “Risk Factors”, contains forward-looking information and forward-looking statements which reflect the current view of management with respect to the our objectives, plans, goals, strategies, outlook, results of operations, financial and operating performance, prospects and opportunities. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as “plans”, “targets”, “expects” or “does not expect”, “is expected”, “an opportunity exists”, “budget”, “scheduled”, “estimates”, “outlook”, “forecasts”, “projection”, “prospects”, “strategy”, “intends”, “anticipates”, “does not anticipate”, “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might”, “will”, “will be taken”, “occur” or “be achieved”. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts nor assurances of future performance but instead represent management’s expectations, estimates and projections regarding future events or circumstances.
These forward-looking statements and other forward-looking information are based on our opinions, estimates and assumptions in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we currently believe are appropriate and reasonable in the circumstances. Despite a careful process to prepare and review the forward-looking information, there can be no assurance that the underlying opinions, estimates and assumptions will prove to be correct. Factors that could cause actual results to differ from those projected include, but are not limited to, those listed below and elsewhere in this report. There may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change, except where we are expressly required to do so by law.
Our business and operations are subject to a variety of risks and uncertainties and, consequently, actual results may differ materially from those projected by any forward-looking statements. Factors that could cause actual results to differ from those projected include, but are not limited to, the following risk factors which are described in greater detail under the heading entitled “Risk Factors” in the IPO Prospectus and elsewhere in this MD&A: our ability to build our market share; our ability to retain key personnel; our ability to maintain and expand geographic scope; our ability to maintain good relationships with our customers; our ability to execute on our expansion plans; our ability to execute on additional acquisition opportunities; adverse effects of acquisitions on our operations; potential liabilities from past and future acquisitions; dependence on the integration and success of acquired businesses; our ability to continue investing in infrastructure to support our growth; our ability to obtain and maintain existing financing on acceptable terms; our ability to implement price increases or offset increasing costs; currency exchange and interest rates; the impact of competition; the changes and trends in our industry or the global economy; the changes in laws, rules, regulations, and global standards; changing governmental regulation, and risks associated with failure to comply; liabilities in connection with environmental matters; loss of municipal and other contracts; potential inability to renew or obtain new landfill or organic waste facility permits and agreements, and the cost of operation and/or future construction of existing landfills or organic waste facilities; our dependence on third party landfills and transfer stations; our access to equity or debt capital markets is not assured; increases in labour, disposal, and related transportation costs; fuel supply and fuel price fluctuations; we require sufficient cash flow to reinvest in our business; our potential inability to obtain performance or surety bonds, letters of credit, other financial assurances or insurance; operational, health and safety and environmental risks; natural disasters, weather conditions and seasonality; loss of existing customers or inability to obtain new contracts; economic downturn may adversely impact our operating results and cause exposure to credit risks; increasing dependence on technology and risk of technology failure; cybersecurity incidents or issues; damage to our reputation or our brand; introduction of new tax or accounting rules, laws or regulations; increases in insurance costs; climate change regulations that could increase cost to operate; risks associated with failing to comply with U.S., Canadian or foreign anti-bribery or anti-corruption laws or regulations; landfill site closure and post-closure costs and contamination-related costs; changing competitive dynamics for excess landfill capacity; litigation or regulatory or activist action; and health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic.
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Exhibit 99.3
CERTIFICATION
I, Patrick Dovigi, certify that:
| 1. | I have reviewed the financial statements and MD&A for the three and six months ended June 30, 2020 of GFL Environmental Inc. |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
| 4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d- 15(e)) for the company and we have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| c) | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent function): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
Date: August 6, 2020
| By: | /s/ Patrick Dovigi | |
| Patrick Dovigi | ||
| Chief Executive Officer |
Exhibit 99.4
CERTIFICATION
I, Luke Pelosi, certify that:
| 1. | I have reviewed the financial statements and MD&A for the three and six months ended June 30, 2020 of GFL Environmental Inc. |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
| 4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d- 15(e)) for the company and we have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| c) | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent function): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
Date: August 6, 2020
| By: | /s/ Luke Pelosi | |
| Luke Pelosi | ||
| Chief Financial Officer |