| ALLIED WASTE INDUSTRIES INC Item 1A Risk Factors All phases of our operations are subject to a number of uncertainties, risks and other influences, many of which are outside of our control and any one of which, or a combination of which, could materially affect the results of our operations |
| Important factors that could cause actual results to differ materially from our expectations are discussed below |
| You should carefully consider these factors before investing in our securities |
| These risks and uncertainties include, without limitation: We compete with large companies and municipalities that may have greater financial and operational resources, flexibility to reduce prices and other competitive advantages that could make it difficult for us to compete effectively |
| We principally compete with large national waste management companies, such as Waste Management, Inc |
| and Republic Services, Inc, municipalities and numerous regional and local companies for collection accounts |
| We compete primarily on the basis of price and the quality of services |
| Some of the national waste management companies and municipalities may have greater financial and operational resources than us, which may allow them to reduce prices in order to expand sales volume or win competitive bid projects |
| Many counties and municipalities that operate their own waste collection and disposal facilities may have the benefits of tax revenues, tax-exempt financing and the ability to control the disposal of waste collected within their jurisdictions, which also would give them a competitive advantage |
| As a result of these factors, we may have difficulty competing effectively from time to time or in certain markets |
| Price increases may not be adequate to offset the impact of inflation on our costs and/or may cause us to lose volume |
| Where appropriate, we expect to raise prices for our services sufficient to offset cost increases from inflation and to improve our return on invested capital |
| However, competitive factors have and may continue to require us to absorb cost increases resulting from inflation, or may cause us to lose volume to competitors willing to service customers at a lower price |
| Consistent with industry practice, most of our contracts provide for a pass through of certain costs, including increases in landfill tipping fees and, in some cases, fuel costs |
| Downturns in the US economy have had and may have an adverse impact on our operating results |
| A weak economy generally results in decreases in the volumes of waste generated |
| In the past, weakness in the US economy has had a negative effect on our operating results, including decreases in revenues and operating cash flows |
| Additionally, in a down-cycle economic environment, we may experience the negative effects of increased competitive pricing pressure and customer turnover |
| There can be no assurance that worsening economic conditions or a prolonged or recurring recession will not have a significant adverse impact on our operating results |
| Additionally, there can be no assurance that an improvement in economic conditions will result in an immediate, if at all positive, improvement in our operating results |
| 11 _________________________________________________________________ [48]Table of Contents Our goodwill may become impaired, which could result in a material non-cash charge to our results of operations |
| We have a substantial amount of goodwill resulting from our acquisitions, including Browning-Ferris Industries, Inc |
| (BFI) and Laidlaw |
| At least annually, we evaluate this goodwill for impairment based on the fair value of each reporting unit |
| This estimated fair value could change if there were future changes in our capital structure, cost of debt, interest rates, capital expenditure levels, ability to perform at levels that were forecasted or a permanent change to the market capitalization of our company |
| These changes could result in an impairment that could require a material non-cash charge to our results of operations |
| Increases in the cost of fuel for any extended period of time will increase our operating expenses |
| Our operations are dependent on fuel as we use fuel to run our collection and transfer trucks and equipment used in our landfill operations |
| We buy fuel in the open market and the price of fuel is unpredictable and can fluctuate significantly based on political and economic factors |
| For example, our operating fuel costs were dlra241dtta7 million in 2005 compared to dlra168dtta5 million in 2004 |
| We may be unable to pass through further increases in the cost of fuel to our customers through fuel recovery fees, which will have a negative impact on our operating income and cash flows |
| In addition, new regulations affecting the type of fuel our trucks use are changing in 2007 and could materially increase the cost of our fuel |
| Our operations also require certain petroleum-based products (such as liners at our landfills) whose costs may vary with the price of oil |
| An increase in the price of oil could increase the cost of those products, which would increase our operating costs |
| Adverse weather conditions may limit our operations and increase the costs of collection and disposal |
| Our collection and landfill operations could be adversely affected by long periods of inclement weather which interfere with collection and landfill operations, delay the development of landfill capacity and/or reduce the volume of waste generated by our customers |
| In addition, weather conditions may result in the temporary suspension of our operations, which can significantly affect our operating results during those periods |
| Fluctuations in commodity prices could affect our revenues, operating income and cash flows |
| As part of our recycling services, we process recyclable materials such as paper, cardboard, plastics, aluminum and other metals for sale to third parties, generally at current market prices |
| All of these materials are subject to significant price fluctuations, which are driven by general market conditions, global economic conditions and seasonality |
| These price fluctuations may affect our future revenues, operating income and cash flows |
| We may be subject to work stoppages, which could increase our operating costs and disrupt our operations |
| As of December 31, 2005, 29prca of our workforce was represented by various local labor unions |
| If our unionized workers were to engage in a strike, work stoppage or other slowdown in the future, we could experience a significant disruption of our operations and an increase in our operating costs, which could have a material adverse effect on us |
| In addition, if a greater percentage of our work force becomes unionized, our business and financial results could be materially adversely affected due to the potential increased operating expenses and lower net income |
| We may not realize all of the expected benefits from our significant investment in the development and implementation of our best practices program |
| During 2004 and 2005, we invested in the identification, development and implementation of a best practices program intended to improve productivity, enhance the quality of our revenue collections 12 _________________________________________________________________ [49]Table of Contents and reduce costs |
| We cannot guarantee that all expected improvements will materialize or have a positive effect on operating results |
| For example, even if we improve productivity and enhance revenues, we may not be able to control variable costs or increases to our fixed costs in the future |
| If we are unable to control costs, we may not be able to improve or maintain operating margins |
| We may not realize all of the expected benefits from our market rationalization plan |
| As part of a market rationalization plan, we are performing detailed analysis of our underperforming markets and are considering disposition in some cases |
| There can be no assurance that we will ultimately sell assets, and if we do, there is no assurance the asset sales will improve margins, profits or operating cash flows |
| Further, there can be no assurance these sales will not result in a loss on disposition at the time of the sale |
| We are subject to costly environmental regulations that may affect our operating margins, restrict our operations and subject us to additional liability |
| Our compliance with laws and regulations governing the use, treatment, storage, and disposal of solid and hazardous wastes and materials, air quality, water quality and the remediation of contamination associated with the release of hazardous substances is costly |
| Government laws and regulations often require us to enhance or replace our equipment and to modify landfill operations or initiate final closure of a landfill |
| We cannot assure you that we will be able to implement price increases sufficient to offset the cost of complying with these laws and regulations |
| In addition, environmental regulatory changes could accelerate or increase expenditures for closure and post-closure monitoring at solid waste facilities and obligate us to spend sums in addition to those presently accrued for such purposes |
| In the future, our collection, transfer and landfill operations may also be affected by proposed federal and state legislation that may allow individual states to prohibit the disposal of out-of-state waste or to limit the amount of out-of-state waste that can be imported for disposal and may require states, under some circumstances, to reduce the amount of waste exported to other states |
| If this or similar legislation is enacted in states in which we operate landfills that receive a significant portion of waste from out-of-state, our operations could be negatively affected due to a decline in landfill volumes and increased cost of alternate disposal |
| The United States Congress could also propose “flow control” legislation, which may allow states and local governments to direct waste generated within their jurisdiction to a specific facility for disposal or processing |
| If this or similar legislation is enacted, state or local governments with jurisdiction over our landfills could act to limit or prohibit disposal or processing of waste in our landfills |
| In addition to the costs of complying with environmental regulations, we incur costs to defend against litigation brought by government agencies and private parties who may allege we are in violation of our permits and applicable environmental laws and regulations, or who assert claims alleging environmental damage, personal injury and/or property damage |
| A significant judgment against us, the loss of a significant permit or license or the imposition of a significant fine could have a material negative effect on our results of operations and financial condition |
| We may have potential environmental liabilities that are not covered by our insurance coverage |
| We may incur liabilities for the deterioration of the environment as a result of our operations |
| Due to the limited nature of our insurance coverage for environmental liability, if we were to incur substantial financial liability for environmental damage, our insurance coverage may be inadequate to cover such liability |
| This may have a negative effect on our liquidity and there could be a material adverse effect on our business, operating results and financial condition |
| 13 _________________________________________________________________ [50]Table of Contents Despite our efforts, we may incur additional hazardous substances liability in excess of amounts presently known and accrued |
| We are a potentially responsible party at many sites under CERCLA, which provides for the remediation of contaminated facilities and imposes strict, joint and several liability, for the cost of remediation on current owners and operators of a facility at which there has been a release or a threatened release of a “hazardous substance,” former site owners and operators at the time of disposal of the hazardous substance(s) and on persons who arrange for the disposal of such substances at the facility (ie, generator of the waste and transporters who selected the disposal site) |
| Hundreds of substances are defined as “hazardous” under CERCLA and their presence, even in minute amounts, can result in substantial liability |
| Notwithstanding our efforts to comply with applicable regulations and to avoid transporting and receiving hazardous substances, we may have additional liability under CERCLA or similar laws in excess of our current liability because such substances may be present in waste collected by us or disposed of in our landfills, or in waste collected, transported or disposed of in the past by acquired companies |
| In addition, actual costs for these liabilities could be significantly greater than amounts presently accrued for these purposes |
| We cannot assure you that we will continue to operate our landfills at currently estimated volumes due to the use of alternatives to landfill disposal caused by state requirements or voluntary initiatives |
| Most of the states or municipalities in which we operate landfills require counties and municipalities to formulate comprehensive plans to reduce the volume of solid waste deposited in landfills through waste planning, composting and recycling or other programs |
| Some state and local governments mandate waste reduction at the source and prohibit the disposal of certain types of wastes, such as yard wastes, at landfills |
| These actions, as well as voluntary private initiatives by customers to reduce waste or seek disposal alternatives, may reduce the volume of waste going to landfills in certain areas |
| If this occurs, there can be no assurances that we will be able to operate our landfills at their current estimated volumes or charge current prices for landfill disposal services due to the decrease in demand for services |
| If we are unable to execute our business strategy, our waste disposal expenses could increase significantly |
| Over the long term, our ability to continue to sustain our vertical integration strategy will depend on our ability to maintain appropriate landfill capacity, collection operations and transfer stations |
| We cannot assure you that we will be able to replace such assets either timely or cost effectively or integrate acquisition candidates effectively or profitably |
| Further, we cannot assure you that we will be successful in expanding the permitted capacity of our current landfills once our landfill capacity is full |
| In such event, we may have to dispose of collected waste at landfills operated by our competitors or haul the waste long distances at a higher cost to another of our landfills, either of which could significantly increase our waste disposal expenses |
| We may be unable to obtain required permits or to expand existing permitted capacity of our landfills, which could decrease our revenues and increase our costs |
| There can be no assurance that we will successfully obtain the permits we require to operate our business because permits to operate non-hazardous solid waste landfills and to expand the permitted capacity of existing landfills have become increasingly difficult and expensive to obtain |
| Permits often take years to obtain as a result of numerous hearings and compliance with zoning, environmental and other regulatory measures |
| These permits are also often subject to resistance from citizen or other groups and other political pressures |
| Our failure to obtain the required permits to operate non-hazardous solid waste landfills could hinder our ability to implement our vertical integration strategy and have a material negative effect on our future results of operations as 14dtta6prca of our third-party revenues in 2005 were generated from our landfills |
| Additionally, landfills typically operate at a higher margin than our other operations |
| We also could incur higher costs due to the fact that we would be required to dispose of our waste in landfills owned by other waste companies or municipalities |
| 14 _________________________________________________________________ [51]Table of Contents The solid waste industry is a capital-intensive industry and the amount we spend on capital expenditures may increase, which could require us to incur additional equity or debt to fund our operations or impair our ability to grow our business |
| Our ability to remain competitive, grow and expand operations largely depends on our cash flow from operations and access to capital |
| In addition, we spent approximately dlra91dtta4 million on landfill capping, closure and post-closure and environmental remediation during 2005, with a similar amount expected in 2006 |
| If we undertake more acquisitions or further expand our operations, the amount we expend on capital, capping, closure, post-closure and environmental remediation expenditures will increase |
| Our cash needs will also increase if the expenditures for closure and post closure monitoring increase above our current estimates, which may occur due to changes in federal, state, or local government requirements |
| Increases in expenditures will result in low levels of working capital or require us to finance working capital deficits |
| We may be required to obtain additional equity and/or debt financing for debt repayment obligations, to fund our operations and/or to grow our business |
| These factors could substantially increase our operating costs and debt and therefore impair our ability to invest in our existing property and equipment |
| Our significant leverage may make it difficult for us to service our debt and operate our business |
| We have had and will continue to have a substantial amount of outstanding indebtedness with significant debt service requirements |
| At December 31, 2005, our consolidated debt was approximately dlra7dtta1 billion and our debt to total capitalization ratio was 67dtta3prca |
| The degree to which we are leveraged could have negative consequences to our business |
| For example, it could: • make it more difficult for us to service our debt obligations; • limit cash flow available for working capital and capital expenditures to fund organic growth and cash flow for other general corporate purposes because a substantial portion of our cash flow from operations must be dedicated to servicing debt; • increase our vulnerability to economic downturns in our industry; • increase our vulnerability to interest rate increases to the extent any of our variable rate debt is not hedged, which could result in higher interest expense; • place us at a competitive disadvantage compared to our competitors that have less debt in relation to cash flow; • limit our flexibility in planning for or reacting to changes in our business and our industry; • limit, among other things, our ability to borrow additional funds or obtain other financing capacity in the future for working capital, capital expenditures or acquisitions; and • subject us to a greater risk of noncompliance with financial and other restrictive covenants in our indebtedness |
| The failure to comply with these covenants could result in an event of default which, if not cured or waived, could have a material negative effect on us |
| We and our subsidiaries may be able to incur substantial additional indebtedness in the future |
| As of December 31, 2005, our debt agreements permitted us to incur substantial additional indebtedness under various financial ratio tests |
| At December 31, 2005, we had dlra3dtta7 million of borrowings outstanding under our dlra1dtta575 billion Revolving Credit Facility (2005 Revolver) |
| As of such date, we had dlra398dtta8 million in letters of credit drawn on the 2005 Revolver that support financial assurance purposes, leaving dlra1dtta173 billion of availability |
| To the extent we incur additional debt, the substantial leverage risks described above would increase |
| 15 _________________________________________________________________ [52]Table of Contents We may not generate a sufficient amount of cash to service our indebtedness and alternatives to service our indebtedness may not be effective |
| Our ability to make payments on our indebtedness will depend on our ability to generate cash flow from operations, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control |
| We cannot assure you that our business will generate enough cash flow from operations |
| If we do not have enough cash to service our debt, meet other obligations and fund other liquidity needs, we may be required to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing all or part of our existing debt or seeking additional equity capital |
| We cannot assure you that any of these alternatives will be effective, including that any refinancings or restructurings would be available on commercially reasonable terms or at all |
| In addition, the terms of existing or future debt agreements may restrict us from adopting these alternatives |
| We may be unable to refinance or repay our debt at maturity, which would cause us to default under our debt instruments |
| We may need to refinance our senior notes, our senior subordinated notes and/or other indebtedness to pay the principal amounts due at maturity |
| There can be no assurance that we will be able to refinance our debt obligations at maturity on commercially reasonable terms or at all |
| If we are unable to refinance or repay our debt obligations at maturity, it would constitute an event of default under our debt instruments and our lenders could proceed against the collateral securing that indebtedness |
| We have also refinanced our debt in the past to extend our maturities and reduce higher cost debt and cannot assure you that we will be able to refinance any of our indebtedness before maturity on commercially reasonable terms or at all in the future |
| Covenants in our debt instruments may limit our ability to operate our business and any failure by us to comply with such covenants may accelerate our obligation to repay the underlying debt |
| Our senior credit facility, our indentures and certain of the agreements governing our other indebtedness contain covenants that may limit our ability to operate our business, including covenants that restrict our ability to make distributions or other payments to our investors and creditors unless we satisfy certain financial tests, financial ratios or other criteria |
| For example, our senior credit facility requires us to maintain certain Debt/EBITDA and EBITDA/Interest ratios as described in Note 4 to our Consolidated Financial Statements |
| In some cases, our subsidiaries are subject to similar restrictions, which may restrict their ability to make distributions to us |
| Our senior credit facility, our indentures and other debt agreements also contain affirmative and negative covenants that, among other items, limit our ability to: incur additional indebtedness, make acquisitions and capital expenditures, sell assets, create liens or other encumbrances, and merge or consolidate |
| All of these restrictions could affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise |
| Our ability to comply with the covenants contained in our debt instruments may be affected by changes in economic or business conditions or other events beyond our control |
| If we do not comply with these covenants and restrictions, we could be in default under our senior credit facility, our indentures and other debt agreements and the debt, together with accrued interest, could then be declared immediately due and payable |
| If we default under our senior credit facility, the lenders could cause all of our outstanding debt obligations under such senior credit facility to become due and payable, require us to apply all of our cash to repay the indebtedness under the facility or prevent us from making debt service payments on any other indebtedness we owe |
| If we are unable to repay any borrowings when due, the lenders under our senior credit facility could proceed against their collateral, which includes most of the assets we own, including the collateral securing the senior notes and the guarantees |
| In addition, any default under our senior credit facility or other debt agreements could lead to an acceleration of debt under our other debt instruments that contain cross acceleration or cross-default provisions |
| If the indebtedness under any of our debt instruments is accelerated, we may not have sufficient assets to repay amounts due |
| 16 _________________________________________________________________ [53]Table of Contents A downgrade in our bond ratings could adversely affect our liquidity by increasing the cost of debt and financial assurance instruments |
| Although downgrades of our bond ratings may not have an immediate impact on the cost of debt or our liquidity, they may impact the cost of debt and liquidity over the near to medium term |
| If the rating agencies downgrade our debt, this may increase the interest rate we must pay if we issue new debt, and it may even make it prohibitively expensive for us to issue new debt |
| If our debt ratings are downgraded, future access to financial assurance markets at a reasonable cost, or at all, also may be adversely impacted |
| Changes in interest rates may negatively affect our results of operations |
| At December 31, 2005, approximately 78prca of our debt was fixed and 22prca was floating |
| At this level of floating rate debt, if interest rates increased by 100 basis points, annualized interest expense would increase by approximately dlra15dtta9 million (dlra9dtta6 million after tax) |
| Therefore, any increase in interest rates could significantly increase our interest expense and may have a material adverse effect on our results of operations |
| If we are unable to obtain necessary financial assurances, it could negatively impact our liquidity and capital resources |
| We are required to provide financial assurances to governmental agencies and a variety of other entities under applicable environmental regulations relating to our landfill operations and collection contracts |
| In addition, we are required to provide financial assurances for our self-insurance program |
| We satisfy the financial assurances requirements by providing performance bonds, letters of credit, insurance policies or trust deposits |
| As of December 31, 2005, we have total financial assurance requirements of approximately dlra2dtta6 billion |
| Should we experience rating agency downgrades, the mix of financial assurance instruments we can obtain may change and we may be required to obtain additional letters of credit |
| This could negatively impact our liquidity and capital resources |
| We currently have a material disagreement with the Internal Revenue Service (IRS), which could result in large cash expenditures and adversely affect our operating results, liquidity and financial condition |
| We are currently under examination or administrative review by various federal and state taxing authorities for certain tax years including federal income tax audits for calendar years 1998 through 2003 |
| Any material disagreement with a taxing authority could result in large cash expenditures and adversely affect our operating results, liquidity and financial condition |
| For example, a federal income tax audit for BFI’s tax years ended September 30, 1996 through July 30, 1999 is completed except for one matter |
| If the outstanding matter is decided against us, we estimate it could have a potential total cash impact of up to dlra310 million for federal and state taxes, of which approximately dlra33 million has been paid, plus accrued interest through December 31, 2005 of approximately dlra103 million (dlra62 million net of tax benefit) |
| In addition, the IRS could attempt to impose a penalty of up to 40prca of the additional income tax due |
| For additional information on this matter, see Note 13 to our Consolidated Financial Statements in Item 8 of this Form 10-K There may be undisclosed liabilities associated with our acquisitions |
| In connection with any acquisition made by us, there may be liabilities that we fail to discover or are unable to discover, including liabilities arising from non-compliance with environmental laws by prior owners and for which we, as successor owner, may be responsible |
| Similarly, we incur capitalized costs associated with acquisitions, which may never be consummated, resulting in a potential charge to earnings |
| 17 _________________________________________________________________ [54]Table of Contents We are required to make accounting and tax-related estimates and judgments in the ordinary course of business |
| The accounting and tax-related estimates and judgments we must make in the ordinary course of business affect the reported amounts of our assets and liabilities at the date of the financial statements and the reported amounts of our operating results during the periods presented as described under “Critical Accounting Judgments and Estimates” in Item 7 |
| Additionally, we are required to interpret the rules and tax law in existence as of the date of the financial statements when the rules are not specific to a particular event or transaction |
| If the underlying estimates or judgments are ultimately proved to be incorrect, or if auditors or regulators subsequently interpret our application of the rules differently, subsequent corrections could have a material adverse effect on our operating results for the period or periods in which the change is identified |
| The introduction of new accounting rules, laws or regulations could adversely impact our results of operations |
| Complying with new accounting rules, laws or regulations could adversely affect our balance sheet, results of operations or funding requirements, or cause unanticipated fluctuations in our results of operations in future periods |