UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 

 

Commission file number: 1-14267

REPUBLIC SERVICES, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Registrant’s telephone number, including area code: (480) 627-2700

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of June 30, 2008, the aggregate market value of the shares of the Common Stock held by non-affiliates of the registrant was $5.4 billion.

 

As of February 19, 2009, the registrant had outstanding 378,785,623 shares of Common Stock (excluding treasury shares of 14,894,412)

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s Proxy Statement relative to the 2009 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

 

 

TABLE OF CONTENTS

 

Unless the context requires otherwise, all references in this Form 10-K to “Republic”, “the company,” “we,” “us” and “our” refer to Republic Services, Inc. and its consolidated subsidiaries including Allied Waste Industries, Inc. and its subsidiaries (Allied) for periods on or after December 5, 2008.

 

 

Overview

 

As of December 31, 2008, we are the second largest provider of services in the domestic non-hazardous solid waste industry. We provide non-hazardous solid waste collection services for commercial, industrial, municipal and residential customers through 400 collection companies in 40 states and Puerto Rico. We also own or operate 242 transfer stations, 213 active solid waste landfills and 78 recycling facilities. We were incorporated as a Delaware corporation in 1996.

 

Based on analysts’ reports and industry trade publications, we believe that the United States non-hazardous solid waste services industry generates annual revenue of approximately $52.0 billion, of which approximately 58% is generated by publicly owned waste companies. For 2008, and after giving effect to the merger described below, we and one other company generated a significant percentage of the publicly owned companies’ total revenue. Additionally, industry data indicates that the non-hazardous waste industry in the United States remains fragmented as privately held companies and municipal and other local governmental authorities generate approximately 16% and 26% respectively, of total industry revenue. In general, growth in the solid waste industry is linked to growth in the overall economy, including the level of new households and business formation and is subject to changes in residential and commercial construction activity.

 

On December 5, 2008, we completed our merger with Allied. On the effective date of the merger each share of Allied common stock outstanding was converted into .45 shares of our common stock. We issued approximately 195.8 million shares of common stock to Allied stockholders in the transaction. As a condition to the merger, we agreed to divest of certain assets as required by the Antitrust Division of the U.S. Department of Justice (DOJ) under the Hart-Scott-Rodino Antitrust Act (HSR Act). In February 2009, we announced an agreement to sell Waste Connections, Inc. the majority of the assets we are required to divest. The assets being divested include six municipal solid waste landfills, six collection operations and three transfer stations across seven markets. This transaction is subject to closing conditions regarding due diligence, regulatory approval and other customary matters. Closing is expected to occur in the second quarter of 2009. However, the timing and proceeds received from the divestiture to Waste Connections, and the divestiture of the remaining assets as required by the DOJ, cannot be predicted. In addition, the merger is expected to generate total annual run-rate integration synergies, primarily resulting from operating efficiencies, economies of scale, and leveraging corporate and overhead resources of approximately $150.0 million by the end of 2010. We have identified and are on track to realize in 2009 approximately $100.0 million, or 67% of the total expected annual run-rate synergies. Our financial results for 2008 include Allied’s operating results from the date of the merger, and have not been retroactively restated to include Allied’s historical financial position or results of operations.

 

Our operations are national in scope, but the physical collection and disposal of waste is very much a local business; therefore, the dynamics and opportunities differ in each of our markets. By combining local operating management with standardized business practices, we can drive greater overall operating efficiency across the company, while maintaining day-to-day operating decisions at the local level, closest to the customer. We facilitate the implementation of this strategy through an organizational structure that groups our operations within a corporate, region and area structure. We manage our operations through four geographic operating segments which are also our reportable segments: Eastern, Central, Southern and Western. Due to the timing of our acquisition of Allied, management reviewed and we have presented Allied as a separate operating segment in our consolidated financial statements. Additionally, during the first quarter of 2008, we realigned our reporting segments and consolidated our previous Southwestern

operations into our Western operations. The boundaries of our operating segments may change from time to time. Each of our regions is organized into several operating areas and each area contains multiple operating locations. Each of our regions and substantially all our areas provide collection, transfer, recycling and disposal services. We believe this structure facilitates the integration of our operations within each region, which is a critical component of our operating strategy, and allows us to maximize the growth opportunities in each of our markets and to operate the business efficiently, while maintaining effective controls and standards over operational and administrative matters, including financial reporting. See Note 14, Segment Reporting, to our consolidated financial statements in Item 8 of this Form 10-K for further discussion of our operating segments.

 

We had revenue of $3.7 billion and $3.2 billion and operating income of $283.2 million and $536.0 million for the years ended December 31, 2008 and 2007, respectively. In addition to our merger with Allied, there were a number of items that impacted our 2008 financial results. For a description of these items, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview of Our Business and Consolidated Results of Operations included elsewhere in this Annual Report on Form 10-K.

 

Our presence in markets with growing populations throughout the Sunbelt, including California, Arizona and Texas, and in other domestic markets that have experienced higher than average population growth during the past several years, supports our internal growth strategy. We believe that our presence in these markets positions us to experience growth at rates that are generally higher than the industry’s overall growth rate.

 

We continue to focus on enhancing shareholder value by implementing our financial, operating and growth strategies as described below.

 

Financial Strategy

 

Key components of our financial strategy include our ability to generate free cash flow and sustain or improve our return on invested capital. Our definition of free cash flow, which is not a measure determined in accordance with United States generally accepted accounting principles (GAAP), is cash provided by operating activities less purchases of property and equipment, plus proceeds from sales of property and equipment as presented in our consolidated statements of cash flows. We believe that free cash flow is a driver of shareholder value and provides useful information regarding the recurring cash provided by our operating activities after expenditures for property and equipment, net of proceeds from sales of property and equipment. It also demonstrates our ability to execute our financial strategy, which includes reinvesting in capital assets to ensure a high level of customer service, investing in capital assets to facilitate growth in our customer base and services provided, maintaining our investment grade ratings and minimizing debt, paying cash dividends and maintaining and improving our market position through business optimization. In addition, free cash flow is a key metric used to determine compensation.

 

Furthermore, we expect to generate total annual run-rate integration synergies, in connection with the merger with Allied, of approximately $150.0 million by the end of 2010, primarily by achieving greater operating efficiencies, capturing inherent economies of scale, and leveraging corporate and overhead resources. We have identified and are on track to realize $100.0 million of annual run-rate integration benefits by the end of 2009. We are confident that we will be able to realize the balance of the targeted $150.0 million in synergies in the second year following the merger despite the economic slowdown. Consequently, we have developed and implemented incentive programs that help focus our entire company on the realization of key financial metrics of increasing free cash flow, achieving targeted earnings, maintaining and improving returns on invested capital, as well as achieving integration synergies.

 

The presentation of free cash flow has material limitations. Free cash flow does not represent our cash flow available for discretionary expenditures because it excludes certain expenditures that are required or to which we have committed, such as debt service requirements and dividend payments. Our definition of free cash flow may not be comparable to similarly titled measures presented by other companies.

We manage our free cash flow primarily by ensuring that capital expenditures and operating asset levels are appropriate in light of our existing business and growth opportunities and by closely managing our working capital, which consists primarily of accounts receivable and accounts payable.

 

We have used and will continue to use our cash flow to maximize shareholder value as well as our return on investment. This includes the following:

 

 

Price Growth. Growth through price increases helps ensure that we obtain an adequate return on our substantial capital investment and the business risk associated with such investment. Price increases also allow us to recover historical and current year increases in operating costs, which ultimately enhances our operating margins.

 

Volume Growth. Growth through increases in our customer base and services provided is the most capital efficient means for us to build our business. This includes not only expanding landfill and transfer capacity and investing in trucks and containers, but also includes investing in information tools and training needed to ensure high productivity and quality service throughout all functional areas of our business. We work to increase collection and disposal volumes while insuring that prices charged for such services provide an appropriate return on our capital investment.

 

 

For certain risks related to our financial strategy, see Item 1A. Risk Factors.

Operating Strategy

 

We seek to leverage existing assets and revenue growth to increase operating margins and enhance shareholder value. Our operating strategy for accomplishing this goal includes the following:

 

 

 

James E. O’Connor, who has served as our Chief Executive Officer (CEO) since December 1998, also became our Chairman in January 2003. He worked at Waste Management, Inc. from 1972 to 1978 and from 1982 to 1998. During that time, he served in various management positions, including Senior Vice President in 1997 and 1998, and Area President of Waste Management of Florida, Inc. from 1992 to 1997. Mr. O’Connor has 34 years of experience in the solid waste industry.

 

Donald W. Slager became our President & Chief Operating Officer (COO) upon our merging with Allied in December 2008. Prior to the merger, Mr. Slager worked for Allied from 1992 through 2008 and served in various management positions, including President & COO from 2004 through 2008 and Executive Vice President and COO from 2003 to 2004. From 2001 to 2003, Mr. Slager served as Senior Vice President, Operations. He held various management positions at Allied from 1992 to 2003, and was previously General Manager at National Waste Services, where he served in various management positions since 1985. Mr. Slager has over 23 years of experience in the solid waste industry.

 

Tod C. Holmes has served as our Chief Financial Officer (CFO) since August 1998. Mr. Holmes served as our Vice President of Finance from June 1998 until August 1998 and as Vice President of Finance of our former parent company’s Solid Waste Group from January 1998 until June 1998. From 1987 to 1998, Mr. Holmes served in various management positions with Browning-Ferris Industries, Inc., including Vice President, Investor Relations from 1996 to 1998, Divisional Vice President, Collection Operations from 1995 to 1996, Divisional Vice President and Regional Controller — Northern Region from 1993 to 1995, and Divisional Vice President and Assistant Corporate Controller from 1991 to 1993. Mr. Holmes has over 21 years of experience in the solid waste industry.

 

Our regional senior vice presidents have an average of 21 years of experience in the industry.

 

 

 

 

 

 

For certain risks related to our operating strategy, see Item 1A. Risk Factors.

 

Growth Strategy

 

Our growth strategy focuses on increasing revenue, gaining market share and enhancing shareholder value through internal growth and acquisitions. We manage our growth strategy as follows:

 

 

Pricing Activities. We seek to secure price increases necessary to offset increased costs, to improve our operating margins and to obtain adequate returns on our substantial investments in assets such as our landfills. During 2008, we continued to secure broad-based price increases across all lines of our business to offset various escalating capital and operating costs. Price increases will remain a major component of our overall future operating strategy.

 

Long-Term Contracts. We seek to obtain long-term contracts for collecting solid waste in markets with growing populations. These include exclusive franchise agreements with municipalities as well as commercial and industrial contracts. By obtaining such long-term agreements, we have the opportunity to grow our contracted revenue base at the same rate as the underlying population growth in these markets. We believe it is important to have secured exclusive, long-term franchise agreements in market areas in some of the fastest growing states according to the U.S. Census Bureau, for example, Arizona, Texas and California. We believe that this positions us to experience internal growth rates that are generally higher than our industry’s overall growth rate. In addition, we believe that by securing a base of long-term recurring revenue in growing population markets, we are better able to protect our market position from competition and our business may be less susceptible to downturns in economic conditions.

 

Sales and Marketing Activities. We seek to manage our sales and marketing activities to enable us to capitalize on our leading position in many of the markets in which we operate. We provide a National Accounts program in response to the needs of our national clients, centralizing services to effectively manage their needs, such as minimizing their procurement costs. We currently have approximately 1,200 sales and marketing employees in the field who are compensated using a commission structure that is focused on generating high levels of quality revenue. For the most part, these employees directly solicit business from existing and prospective commercial, industrial, municipal and residential customers. We emphasize our rate and cost structures when we train new and existing sales personnel. In addition, we utilize a customer relationship management system that assists our sales people in tracking leads. It also tracks renewal periods for potential commercial, industrial and franchise contracts.

 

Development Activities. We seek to identify opportunities to further our position as an integrated service provider in markets where we provide services for a portion of the waste stream. Where appropriate, we seek to obtain permits to build transfer stations and landfills that would provide vertically integrated waste services or expand the service areas for our existing disposal sites. Development projects, while generally less capital intensive, typically require extensive permitting efforts that can take years to complete with no assurance of success. We undertake development projects when we believe there is a reasonable probability of success and where reasonably priced acquisition opportunities are not available.

 

 

 

We also seek to acquire landfills, transfer stations and collection companies that operate in markets that we are already servicing in order to fully integrate our operations from collection to disposal. In addition, we have in the past and may continue in the future to exchange businesses with other solid waste companies if by doing so there is a net benefit to our business platform. These activities allow us to increase our revenue and market share, lower our cost of operations as a percentage of revenue, and consolidate duplicative facilities and functions to maximize cost efficiencies and economies of scale.

 

On December 5, 2008, we completed our merger with Allied. We expect to achieve total annual run-rate integration synergies, primarily relating to operating efficiencies, inherent economies of scale, and leveraging corporate and overhead resources of approximately $150.0 million by the end of 2010. We have identified and are on track to realize in 2009 approximately $100.0 million, or 67%, of the total expected annual run-rate synergies.

 

For certain risks related to our growth strategy, see Item 1A. Risk Factors.

 

Operations

 

Our operations primarily consist of the collection, transfer and disposal of non-hazardous solid waste.

 

 

Our residential collection operations involve the curbside collection of refuse from small containers into collection vehicles for transport to transfer stations or directly to landfills. Residential solid waste collection services are typically performed under contracts with municipalities, which we generally secure by competitive bid and which give us exclusive rights to service all or a portion of the homes in their respective jurisdictions. These contracts or franchises usually range in duration from one to five years, although some of our exclusive franchises are for significantly longer periods. Residential solid waste collection services may also be performed on a subscription basis, in which individual households contract directly with us. The fees received for subscription residential collection are based primarily on market factors, frequency and type of service, the distance to the disposal facility and cost of disposal. In general, subscription residential collection fees are paid quarterly in advance by the residential customers receiving the service.

 

In our commercial and industrial collection operations, we supply our customers with waste containers of varying sizes. We also rent compactors to large waste generators. Commercial collection services are generally performed under one- to three-year service agreements, and fees are determined by considerations such as market factors, collection frequency, type of equipment furnished, the type and volume or weight of the waste collected, the distance to the disposal facility, and the cost of disposal.

 

We also provide waste collection services to industrial and construction facilities on a contractual basis with terms ranging from a single pickup to one year or longer. Our construction services are provided to the commercial construction and home building sectors. We collect the containers or compacted waste and transport the waste either to a landfill or a transfer station for disposal.

 

We also provide recycling services in certain markets in compliance with local laws or the terms of our franchise agreements. These services include the curbside collection of residential recyclable waste and the provision of a variety of recycling services to commercial and industrial customers.

 

 

As of December 31, 2008, we owned or operated 213 active landfills, which had approximately 36,900 permitted acres and total available permitted and probable expansion disposal capacity of approximately 4.9 billion in-place cubic yards. The in-place capacity of our landfills is subject to change based on engineering factors, requirements of regulatory authorities, our ability to continue to operate our landfills in compliance with applicable regulations, and our ability to successfully renew operating permits and obtain expansion permits at our sites. Some of our landfills accept non-hazardous special waste, including utility ash, asbestos and contaminated soils.

 

Most of our active landfill sites have the potential for expanded disposal capacity beyond the currently permitted acreage. We monitor the availability of permitted disposal capacity at each of our landfills and evaluate whether to pursue an expansion at a given landfill based on estimated future waste volumes and prices, market needs, remaining capacity and likelihood of obtaining an expansion. To satisfy future disposal demand, we are currently seeking to expand permitted capacity at certain of our landfills. However, no assurances can be made that all proposed or future expansions will be permitted as designed.

 

We also have responsibility for 126 closed landfills, for which we have associated closure and post-closure liabilities.

 

 

Sales and Marketing

 

We seek to provide quality services that will enable us to maintain high levels of customer satisfaction. We derive our business from a broad customer base, which we believe will enable us to experience stable growth. We focus our marketing efforts on continuing and expanding business with existing customers, as well as attracting new customers.

 

We employ approximately 1,200 sales and marketing employees. Our sales and marketing strategy is to provide high-quality, comprehensive solid waste collection, recycling, transfer and disposal services to our customers at competitive prices. We target potential customers of all sizes, from small quantity generators to large “Fortune 500” companies and municipalities.

 

Most of our marketing activity is local in nature. However, we also provide a National Accounts program in response to the needs of some of our national and regional customers. Our National Accounts program is designed to provide the best total solution to our customers’ evolving waste management needs in an environmentally responsible manner. We partner with our national clients to reach their sustainability goals, optimize waste streams, balance equipment and service intervals and provide customized reporting. The National Accounts program centralizes services to effectively manage customer needs, while helping minimize procurement costs. With our extended geographic reach, our national program

effectively serves 40 states and Puerto Rico. As industry leaders, our mission is to utilize our strengths and expertise to exceed customer expectations by consistently delivering the best national program available.

 

We generally do not change the tradenames of the local businesses we acquire, and therefore we do not operate nationally under any one mark or tradename.

 

Customers

 

We provide services to commercial, industrial, municipal and residential customers. No one customer has individually accounted for more than 10% of our consolidated revenue or of our reportable segment revenue in any of the last three years.

 

Competition

 

We operate in a highly competitive industry. Entry into our business and the ability to operate profitably in the industry requires substantial amounts of capital and managerial experience.

 

Competition in the non-hazardous solid waste industry comes from a few large, national publicly owned companies, including Waste Management, Inc. (Waste), several regional publicly and privately owned solid waste companies, and thousands of small privately owned companies. In any given market, competitors may have larger operations and greater resources. In addition to national and regional firms and numerous local companies, we compete with municipalities that maintain waste collection or disposal operations. These municipalities may have financial advantages due to the availability of tax revenue and tax-exempt financing.

 

We compete for collection accounts primarily on the basis of price and the quality of our services. From time to time, our competitors may reduce the price of their services in an effort to expand market share or to win a competitively bid municipal contract. Our ability to increase prices in certain markets may be impacted by the pricing policies of our competitors. This may have an impact on our future revenue and profitability.

 

Seasonality and Severe Weather

 

Our operations can be adversely affected by periods of inclement or severe weather which could increase the volume of waste collected under our existing contracts (without corresponding compensation), delay the collection and disposal of waste, reduce the volume of waste delivered to our disposal sites, or delay the construction or expansion of our landfill sites and other facilities.

 

Regulation

 

Our facilities and operations are subject to a variety of federal, state and local requirements that regulate the environment, public health, safety, zoning and land use. Operating and other permits, licenses and other approvals are generally required for landfills and transfer stations, certain solid waste collection vehicles, fuel storage tanks and other facilities that we own or operate, and these permits are subject to revocation, modification and renewal in certain circumstances. Federal, state and local laws and regulations vary, but generally govern wastewater or stormwater discharges, air emissions, the handling, transportation, treatment, storage and disposal of hazardous and non-hazardous waste, and the remediation of contamination associated with the release or threatened release of hazardous substances. These laws and regulations provide governmental authorities with strict powers of enforcement, which include the ability to revoke or decline to renew any of our operating permits, obtain injunctions, or impose fines or penalties in the case of violations, including criminal penalties. The U.S. Environmental Protection Agency (EPA) and various other federal, state and local environmental, public and occupational health and safety agencies and authorities administer these regulations.

 

We strive to conduct our operations in compliance with applicable laws and regulations. However, in the existing climate of heightened environmental concerns, from time to time, we have been issued citations or notices from governmental authorities that have resulted in the need to expend funds for remedial work

and related activities at various landfills and other facilities. There is no assurance that citations and notices will not be issued in the future despite our regulatory compliance efforts. We have established final capping, closure, post-closure and remediation liabilities that we believe, based on currently available information, will be adequate to cover our current estimates of regulatory costs. However, we cannot assure you that actual costs will not exceed our reserves.

 

Federal Regulation. The following summarizes the primary environmental, public and occupational health and safety-related statutes of the United States that affect our facilities and operations:

 

 

Subtitle D of RCRA establishes a framework for regulating the disposal of municipal solid waste. Regulations under Subtitle D currently include minimum comprehensive solid waste management criteria and guidelines, including location restrictions, facility design and operating criteria, final capping, closure and post-closure requirements, financial assurance standards, groundwater monitoring requirements and corrective action standards, many of which had not commonly been in effect or enforced in the past in connection with municipal solid waste landfills. Each state was required to submit to the EPA a permit program designed to implement Subtitle D regulations by April 9, 1993. All of the states in which we operate have implemented permit programs pursuant to RCRA and Subtitle D. These state permit programs may include landfill requirements which are more stringent than those of Subtitle D. Our failure to comply with the environmental requirements of federal, state and local authorities at any of our locations may lead to temporary or permanent loss of an operating permit.

 

All of our planned landfill expansions and new landfill development projects have been engineered to meet or exceed Subtitle D requirements. Operating and design criteria for existing operations have been modified to comply with these regulations. Compliance with Subtitle D regulations has resulted in increased costs and may in the future require substantial additional expenditures in addition to other costs normally associated with our waste management activities.

 

 

Among other things, CERCLA authorizes the federal government to investigate and remediate sites at which hazardous substances have been or are threatened to be released into the environment or to order (or offer an opportunity to) persons potentially liable for the cleanup of the hazardous substances to do so. In addition, the EPA has established a National Priorities List of sites at which hazardous substances have been or are threatened to be released and which require investigation or cleanup.

 

Liability under CERCLA is not dependent on the intentional disposal of hazardous waste. It can be founded upon the release or threatened release, even as a result of unintentional, non-negligent or lawful action, of thousands of hazardous substances, including very small quantities of such

substances. Thus, even if we have never knowingly transported or received hazardous waste as such, it is possible that one or more hazardous substances may have been deposited or “released” at landfills or other properties owned by third parties where we have transported to and disposed of waste or at our landfills or at other properties which we currently own or operate or may have owned or operated. Therefore, we could be liable under CERCLA for the cost of cleaning up such hazardous substances at such sites and for damages to natural resources, even if those substances were deposited at our facilities before we acquired or operated them. The costs of a CERCLA cleanup can be very expensive. Given the difficulty of obtaining insurance for environmental impairment liability, such liability could have a material impact on our business, financial condition or results of operations.

 

 

State and Local Regulation. Each state in which we operate has its own laws and regulations governing solid waste disposal, water and air pollution, and, in most cases, releases and cleanup of hazardous substances and liabilities for such matters. States also have adopted regulations governing the design, operation, maintenance and closure of landfills and transfer stations. Some counties, municipalities and other local governments have adopted similar laws and regulations. Our facilities and operations are likely to be subject to these types of requirements. In addition, our solid waste collection and landfill operations may be affected by the trend in many states toward requiring the development of solid waste reduction and recycling programs. For example, several states have enacted laws that require counties or municipalities to adopt comprehensive plans to reduce, through solid waste planning, composting, recycling or other programs, the volume of solid waste deposited in landfills. Additionally, laws and regulations restricting the disposal of certain waste in solid waste landfills, including yard waste, newspapers, beverage containers, unshredded tires, lead-acid batteries and household appliances, have been promulgated in several states and are being considered in others. Legislative and regulatory measures to mandate or encourage waste reduction at the source and waste recycling also are or have been under consideration by the U.S. Congress and the EPA, respectively.

In order to construct, expand and operate a landfill, one or more construction or operating permits, as well as zoning and land use approvals, must be obtained. These permits and approvals may be difficult and time-consuming to obtain and to operate in compliance with, are often opposed by neighboring landowners and citizens’ groups, may be subject to periodic renewal, and are subject to modification, non-renewal and revocation by the issuing agency. In connection with our acquisition of existing landfills, it may be and on occasion has been necessary for us to expend considerable time, effort and money to bring the acquired facilities into compliance with applicable requirements and to obtain the permits and approvals necessary to increase their capacity.

 

Many of our facilities own and operate underground storage tanks which are generally used to store petroleum-based products. These tanks are generally subject to federal, state and local laws and regulations that mandate their periodic testing, upgrading, closure and removal, and that, in the event of leaks, require that polluted groundwater and soils be remediated. We believe that all of our underground storage tanks currently meet all applicable regulations. If underground storage tanks we own or operate leak, we could be liable for response costs and, if the leakage migrates onto the property of others, we could be liable for damages to third parties. We are unaware of facts indicating that issues of compliance with regulations related to underground storage tanks will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

 

Finally, with regard to our solid waste transportation operations, we are subject to the jurisdiction of the Surface Transportation Board and are regulated by the Federal Highway Administration, Office of Motor Carriers, and by regulatory agencies in states that regulate such matters. Various states and local government authorities have enacted or promulgated, or are considering enacting or promulgating, laws and regulations that would restrict the transportation of solid waste across state, county, or other jurisdiction lines. In 1978, the U.S. Supreme Court ruled that a law that restricts the importation of out-of-state solid waste was unconstitutional; however, states have attempted to distinguish proposed laws from those involved in and implicated by that ruling. In 1994, the Supreme Court ruled that a flow control law, which attempted to restrict solid waste from leaving its place of generation, imposed an impermissible burden upon interstate commerce, and, therefore, was unconstitutional. In 2007, the Supreme Court upheld the right of a local government to direct the flow of solid waste to a publicly owned waste facility. A number of county and other local jurisdictions have enacted ordinances or other regulations restricting the free movement of solid waste across jurisdictional boundaries. Other governments may enact similar regulations in the future. These regulations may, in some cases, cause a decline in volumes of waste delivered to our landfills or transfer stations and may increase our costs of disposal, thereby adversely affecting our operations.

 

We have established liabilities for landfill and environmental costs, which include landfill site final capping, closure and post-closure costs. We periodically reassess such costs based on various methods and assumptions regarding landfill airspace and the technical requirements of Subtitle D of RCRA and adjust our rates used to expense final capping, closure and post-closure costs accordingly. Based on current information and regulatory requirements, we believe that our liabilities recorded for such landfill and environmental expenditures are adequate. However, environmental laws may change, and there can be no assurance that our recorded liabilities will be adequate to cover requirements under existing or new environmental laws and regulations, future changes or interpretations of existing laws and regulations, or the identification of adverse environmental conditions previously unknown to us.

 

Liability Insurance and Bonding

 

The nature of our business exposes us to the risk of liabilities arising out of our operations, including possible damages to the environment. Such potential liabilities could involve, for example, claims for remediation costs, personal injury, property damage and damage to the environment in cases where we may be held responsible for the escape of harmful materials; claims of employees, customers or third parties for personal injury or property damage occurring in the course of our operations; or claims alleging negligence or other wrongdoing in the planning or performance of work. We could also be subject to fines and civil and criminal penalties in connection with alleged violations of regulatory requirements. Because

of the nature and scope of the possible environmental damages, liabilities imposed in environmental litigation can be significant. Our solid waste operations have third party environmental liability insurance with limits in excess of those required by permit regulations, subject to certain limitations and exclusions. However, we cannot assure you that such environmental liability insurance would be adequate, in scope or amount, in the event of a major loss, nor can we assure you that we would continue to carry excess environmental liability insurance should market conditions in the insurance industry make such coverage costs prohibitive.

 

We have general liability, vehicle liability, employment practices liability, pollution liability, directors and officers liability, workers’ compensation and employer’s liability coverage, as well as umbrella liability policies to provide excess coverage over the underlying limits contained in these primary policies. We also carry property insurance. Although we try to operate safely and prudently and while we have, subject to limitations and exclusions, substantial liability insurance, no assurance can be given that we will not be exposed to uninsured liabilities which could have a material adverse effect on our consolidated financial condition, results of operations and cash flows.

 

Our insurance programs for workers’ compensation, general liability, vehicle liability and employee-related health care benefits are effectively self-insured. Claims in excess of self-insurance levels are fully insured subject to policy limits. Accruals are based on claims filed and actuarial estimates of claims development and claims incurred but not reported. Due to the variable condition of the insurance market, we have experienced, and may continue to experience in the future, increased self-insurance retention levels and increased premiums. As we assume more risk for self-insurance through higher retention levels, we may experience more variability in our self-insurance reserves and expense.

 

In the normal course of business, we may be required to post performance bonds, insurance policies, letters of credit, or cash or marketable securities deposits in connection with municipal residential collection contracts, the operation, closure or post-closure of landfills, environmental remediation, environmental permits, and business licenses and permits as a financial guarantee of our performance. To date, we have satisfied financial responsibility requirements by making cash or marketable securities deposits or by obtaining bank letters of credit, insurance policies or surety bonds.

 

Employees

 

As of December 31, 2008, we employed approximately 35,000 full-time employees, approximately 27% of whom were covered by collective bargaining agreements. From time to time, our operating locations may experience union organizing efforts. We have not historically experienced any significant work stoppages. We currently have no disputes or bargaining circumstances that we believe could cause significant disruptions in our business. Our management believes that we have good relations with our employees.

 

Compensation

 

We believe that our compensation program effectively aligns our field and corporate management team with our overall goal of generating increasing amounts of free cash flow while achieving targeted earnings and returns on invested capital. This is done by utilizing simple and measurable metrics on which incentive pay is based. At the field level, these metrics are based on free cash flow, earnings and return on invested capital for each manager’s geographic area of responsibility. Great effort is taken to ensure that these goals agree with our overall goals. Incentive compensation at the corporate level is based on the obtainment of our overall goals. Furthermore, in conjunction with the merger with Allied, we have developed integration metrics to be achieved by our executive management team and key employees based upon targeted annual run-rate synergies of approximately $150.0 million by the end of 2010. In addition, certain field and corporate employees also participate in a long-term incentive program. We believe this program aligns our short- and long-term goals and helps ensure that our long-term success is not sacrificed for the obtainment of short-term goals.

Availability of Reports and Other Information

 

Our corporate website is http://www.republicservices.com. We make available on this website, free of charge, access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as reasonably practicable after we electronically submit such material to the Securities and Exchange Commission (SEC). Our corporate website also contains our Corporate Governance Guidelines, Code of Ethics and Charters of the Nominating and Corporate Governance Committee, Audit Committee, Integration Committee and Compensation Committee of the Board of Directors. In addition, the SEC website is http://www.sec.gov. The SEC makes available on this website, free of charge, reports, proxy and information statements, and other information regarding issuers, such as us, that file electronically with the SEC. Information on our website or the SEC website is not part of this document. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K and applicable New York Stock Exchange (NYSE) rules regarding amendments to or waivers of our Code of Ethics by posting this information on our website at www.republicservices.com.

 

In 2008, our CEO provided to the NYSE the annual CEO certification regarding our compliance with the corporate governance listing standards of that exchange. In addition, our CEO and CFO filed with the SEC all required certifications regarding the quality of our disclosures in our fiscal 2008 SEC reports, including the certifications required to be filed with this Annual Report on Form 10-K. There were no qualifications to these certifications.

 

 

This Annual Report on Form 10-K contains certain forward-looking information about us that is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. Words such as “expect,” “will,” “may,” “anticipate,” “plan,” “estimate,” “intend,” “should,” “can,” “likely,” “could” and similar expressions are intended to identify forward-looking statements. These statements include statements about the expected benefits of the merger, our plans, strategies and prospects. Forward-looking statements are not guarantees of performance. These statements are based upon the current beliefs and expectations of our management and are subject to risk and uncertainties, including the risks set forth below in these risk factors, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.

 

In light of these risks, uncertainties, assumptions and factors, the results anticipated by the forward-looking statements discussed in this Annual Report on Form 10-K may not occur. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. Except to the extent required by applicable law or regulation, we undertake no obligation to update or publish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

We may experience difficulties integrating Allied’s business.

 

Achieving the anticipated benefits of the merger with Allied will depend significantly on whether we can integrate Allied’s business in an efficient and effective manner. Although Republic and Allied were able to conduct some planning regarding the integration of the two companies prior to the merger, we might not have determined the exact nature of how the businesses and operations of the two companies will be combined after the merger. The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. We may not be able to accomplish the integration process smoothly, successfully or on a timely basis. The necessity of coordinating geographically separated organizations, information systems and facilities, and addressing possible differences in business backgrounds, corporate cultures and management philosophies, may increase the difficulties of integration. We and Allied operate numerous systems and controls, including those

involving information management, purchasing, accounting and finance, sales, billing, employee benefits, payroll and regulatory compliance. The integration of operations following the merger will require the dedication of significant management and external resources, which may temporarily distract management’s attention from our day-to-day business and be costly. Employee uncertainty and lack of focus during the integration process may also disrupt our business. The inability of our management to successfully and timely integrate the operations of Republic and Allied could have a material adverse effect on the business and results of operations of the combined company.

 

We may not realize the anticipated synergies and related benefits from the merger with Allied fully or within the timing anticipated.

 

We entered into the merger agreement with Allied because we believe that the merger will be beneficial to our stockholders primarily as a result of the anticipated synergies resulting from the combined operations. We may not be able to achieve the anticipated operating and cost synergies or the long-term strategic benefits of the merger fully or within the timing anticipated. For example, elimination of duplicative costs may not be fully achieved or may take longer than anticipated. For at least the first year after an acquisition, and possibly longer, the benefits from the acquisition will be offset by the costs incurred in integrating the businesses and operations. The inability to realize the full extent of, or any of, the anticipated synergies or other benefits of the merger, or our encountering delays in the integration process (which may delay the timing of such synergies or other benefits), could have a material adverse effect on our business and results of operations.

 

Future expenses resulting from the application of the purchase method of accounting may adversely affect the market value of our common stock following the merger.

 

In accordance with GAAP, we are considered the acquirer of Allied for accounting purposes. We have accounted for the merger using the purchase method of accounting. There may be future expenses related to the acquisition that are required to be recorded in our earnings that could adversely affect the market value of our common stock following the completion of the merger. Under the purchase method of accounting, we have allocated the total purchase price to the assets (including identifiable intangible assets) and liabilities acquired from Allied based on their fair values as of the effective date of the merger, and we have recorded the excess of the purchase price over those fair values as goodwill. For certain tangible and intangible assets, and for our capping, closure and post-closure asset retirement obligations, revaluing them to their fair values as of the merger completion date will result in additional depreciation, depletion and amortization and accretion expense that will exceed the combined amounts recorded by Republic and Allied prior to the merger. Interest expense will increase significantly as a result of revaluing Allied’s debt and other long-term liabilities, including, for example, self-insurance reserves and environmental liabilities. In addition, as discussed in the following risk factor, to the extent the value of goodwill or other intangible assets were to become impaired after the merger, we may incur material non-cash charges to our results of operations.

 

Our goodwill and other intangible assets may become impaired, which could result in material non-cash charges to our results of operations.

 

We have a substantial amount of goodwill and other intangible assets resulting from the merger with Allied. At least annually, or whenever events or changes in circumstances indicate a potential impairment in the carrying value as defined by GAAP, we evaluate this goodwill for impairment based on the fair values of each of our operating segments. The estimated fair value of our operating segments could change if there are changes in our capital structure, cost of debt, interest rates, capital expenditure levels, operating cash flows or market capitalization, or in general economic conditions. Impairments of goodwill or other intangible assets could require material non-cash charges to our results of operations.

We may incur significant unexpected transaction- and integration-related costs in connection with the merger.

 

We have incurred and may continue to incur costs associated with combining the operations of Republic and Allied, including charges and payments to some employees pursuant to “change in control” contractual obligations. The substantial majority of these expenses resulting from the merger are comprised of transaction costs related to the merger, facilities and systems consolidation costs, and employee-related costs. Additional unanticipated costs may be incurred in the integration of the two companies’ businesses or may result from the application of purchase accounting used to effectuate the merger. The elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may not offset incremental transaction- and other integration-related costs in the near term.

 

The timing of and proceeds received from the mandatory divestiture of certain assets of the company may result in additional expenditures of money and resources or reduce the benefit of the merger.

 

Completion of the merger is predicated on divesting of certain assets as required by the Antitrust Division of the DOJ under the HSR Act. In February 2009, we announced an agreement with Waste Connections, Inc. to sell them a majority of the assets we are required to divest. The assets being divested to Waste Connections include six municipal solid waste landfills, six collection operations and three transfer stations across seven markets. This transaction is subject to closing conditions regarding due diligence, regulatory approval and other customary matters. Closing is expected to occur in the second quarter of 2009. However, the timing of and proceeds we will receive from the divestiture to Waste Connections and the divestiture of the remaining assets as required by the DOJ cannot be predicted. Delays in divesting of these assets may result in additional expenditures of money and resources which would reduce the financial benefit we expect from the merger. In addition, the amount of proceeds received from such divestitures cannot be guaranteed. An unanticipated shortfall in proceeds may limit our ability to execute our financial strategy, including repaying our debt.

 

We have substantial indebtedness as a result of the merger, which may limit our financial flexibility.

 

As of December 31, 2008, we have approximately $7.7 billion in total debt outstanding. This amount of indebtedness and our debt service requirements may limit our financial flexibility to access additional capital and make capital expenditures and other investments in our business, to withstand economic downturns and interest rate increases, to plan for or react to changes in our business and our industry, and to comply with the financial and other restrictive covenants of our debt instruments. Further, our ability to comply with the financial and other covenants contained in our debt instruments may be affected by changes in economic or business conditions or other events that are beyond our control. If we do not comply with these covenants and restrictions, we may be required to take actions such as reducing or delaying capital expenditures, reducing dividends, selling assets, restructuring or refinancing all or part of our existing debt, or seeking additional equity capital.

 

The downturn in the U.S. economy 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 U.S. economy has had a negative effect on our operating results, including decreases in revenue and operating cash flows. Previous economic slowdowns have negatively impacted the portion of our collection business servicing the manufacturing and construction industries and our proceeds from sales of recycled commodities. As a result of the global economic crisis, we may experience the negative effects of increased competitive pricing pressure and customer turnover as well. There can be no assurance that worsening economic conditions or a prolonged or recurring recession will not have a significant adverse impact on our results of operations or cash flows. Further, there can be no assurance that an improvement in economic conditions will result in an immediate, if at all positive, improvement in our results of operations or cash flows.

The downturn in the U.S. economy may expose us to credit risk for amounts due from governmental agencies, large national accounts and others.

 

The weak U.S. economy has reduced the amount of taxes collected by various governmental agencies. We provide services to a number of these agencies including numerous municipalities. These governmental agencies may suffer financial difficulties resulting from a decrease in tax revenue and may ultimately be unable or unwilling to pay amounts owed to us. In addition, the weak economy may cause other customers, including our large national accounts, to suffer financial difficulties and ultimately be unable or unwilling to pay amounts owed to us. This could have a negative impact on our results of operations and cash flows.

 

The downturn in the U.S. economy and in the financial markets could expose us to counter-party risk associated with our derivatives.

 

To reduce our exposure to fluctuations in various commodities and interest rates, we have entered into a number of derivative agreements. These derivative agreements require us or the counter-party to such agreements to make payments to the other party if the price of certain commodities or interest rates exceed a specified amount. A continued downturn in the U.S. economy or in the financial markets could adversely impact the financial stability of the counter-parties with which we do business, potentially limiting their ability to fulfill their obligations under our derivative agreements. This could have a negative impact on our results of operations and cash flows.

 

The waste industry is highly competitive and includes competitors 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, municipalities and numerous regional and local companies for collection and disposal accounts. Competition for collection accounts is primarily based on price and the quality of services. Competition for landfill business is primarily based on disposal costs, geographic location and quality of operations. Some of our competitors may have greater financial and operational resources than us. Many counties and municipalities that operate their own waste collection and disposal facilities have the benefits of tax revenue or tax-exempt financing. Our ability to obtain solid waste volume for our landfills may also be limited by the fact that some major collection companies also own or operate landfills to which they send their waste. In markets in which we do not own or operate a landfill, our collection operations may operate at a disadvantage to fully integrated competitors. As a result of these factors, we may have difficulty competing effectively from time to time or in certain markets. If we were to lower prices to address these competitive issues, it could negatively impact our revenue growth and profitability.

 

Price increases may not be adequate to offset the impact of increased costs and may cause us to lose volume.

 

We compete for collection accounts primarily on the basis of price and the quality of services. In addition, we seek to secure price increases necessary to offset increased costs (including fuel costs), to improve operating margins and to obtain adequate returns on our substantial investments in assets such as our landfills. From time to time, our competitors may reduce the price of their services in an effort to expand their market share. Contractual, general economic or market-specific conditions may also limit our ability to raise prices. As a result of these factors, we may be unable to offset increases in costs, improve our operating margins and obtain adequate investment returns through price increases. We may also lose volume to lower-cost competitors.

 

Increases in the cost of fuel or oil will increase our operating expenses, and there can be no assurance that we will be able to recover fuel or oil cost increases from our customers.

 

Our operations are dependent on fuel to run our collection and transfer trucks and other equipment used for collection, transfer, and disposal. We buy fuel in the open market. Fuel prices are unpredictable and can

fluctuate significantly based on events beyond our control, including geopolitical developments, actions by the Organization of the Petroleum Exporting Countries, and other oil and gas producers, supply and demand for oil and gas, war, terrorism and unrest in oil-producing countries, and regional production patterns. We may not be able to offset such volatility through fuel surcharges. For example, our fuel costs were $235.3 million in 2008, representing 9.7% of our cost of operations compared to $180.3 million in 2007, representing 9.0% of our cost of operations. This increase primarily reflects an increase in the price of fuel.

 

In addition, regulations affecting the type of fuel our trucks use are changing and could materially increase the cost and consumption of our fuel. Our operations also require the use of 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 and capital costs. We are also susceptible to increases in indirect fuel surcharges from our vendors.

 

Fluctuations in prices for recycled commodities that we sell to customers may adversely affect our revenue, operating income and cash flows.

 

We process recyclable materials such as paper, cardboard, plastics, aluminum and other metals for sale to third parties. Our results of operations may be affected by changing prices or market requirements for recyclable materials. The resale and purchase prices of, and market demand for, recyclable materials can be volatile due to changes in economic conditions and numerous other factors beyond our control. These fluctuations may affect our future revenue, operating income and cash flows.

 

Adverse weather conditions may limit our operations and increase the costs of collection and disposal.

 

Our collection and landfill operations could be adversely impacted by extended periods of inclement weather, which could increase the volume of waste collected under our existing contracts (without corresponding compensation), may interfere with collection and landfill operations, delay the development of landfill capacity 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 in the affected regions during those periods.

 

We currently have matters pending with the DOJ and Internal Revenue Service (IRS), which could result in large cash expenditures and could have a material adverse impact on our operating results and cash flows.

 

As a result of the merger with Allied, we are currently under examination by the IRS with regard to Allied’s federal income tax returns for tax years 2000 through 2006.

 

An Allied subsidiary, Browning-Ferris Industries, LLC (BFI, f/k/a Browning-Ferris Industries, Inc.), currently has a tax matter in litigation for the tax years ended September 30, 1997 through July 30, 1999 related to a capital loss deduction. A portion of this loss was subsequently carried forward to Allied’s 1999 through 2002 tax years. We are currently engaged in two refund suits related to this matter. The BFI tax years September 30, 1997 through July 30, 1999 are currently before the U.S. Court of Federal Claims, while the Allied tax year ended December 31, 1999 is currently before the U.S. District Court of Arizona. All future tax years impacted by the BFI capital loss deduction and subsequent carryforward by Allied are presently in various stages of the IRS examination or appeals process. Any resolution or final determination on the merits for an earlier tax year will also resolve the issue for all subsequent periods.

 

During its examination of Allied’s 2002 tax year, the IRS asserted that a 2002 redemption of four partnership interests in waste-to-energy businesses should have been recharacterized as disguised sale transactions. This issue is currently before the Appeals Division of the IRS.

 

For both of the matters described above, the potential tax and interest through December 31, 2008 (to the extent unpaid) has been fully reserved for in our consolidated balance sheet. A disallowance would not

materially affect our consolidated results of operations; however, a deficiency payment would adversely impact our cash flow in the period the payment was made. In addition, for the capital loss deduction matter described above, the potential penalty and penalty-related interest through December 31, 2008 has also been fully reserved for in our consolidated balance sheet. The successful assertion by the IRS of penalty and penalty-related interest in this matter would not materially affect our consolidated results of operations; however, a payment of penalty and penalty-related interest would adversely impact our cash flows in the period such payment was made. The accrual of additional interest charges through the time these matters are resolved will affect our consolidated results of operations. In addition, the successful assertion by the IRS of penalty and penalty-related interest in connection with Allied’s 2002 exchange of partnership interests could have a material adverse impact on our consolidated results of operations and cash flows.

 

Additionally, during its examination of Allied’s 2000 through 2003 tax years, the IRS proposed that certain landfill costs be allocated to the collection and control of methane gas that is naturally emitted from landfills. The IRS’ position is that the methane gas emitted by a landfill constitutes a joint product resulting from landfill operations and, therefore, associated costs should not be expensed until the methane gas is sold or otherwise disposed. We believe we have several meritorious defenses, including the fact that methane gas is not actively produced for sale by us but rather arises naturally in the context of providing disposal services. Therefore, we believe that the resolution of this issue will not have a material adverse impact on our consolidated financial position, results of operations or cash flows.

 

For additional information on these matters, see Note 10, Income Taxes, to our consolidated financial statements in Item 8 of this Form 10-K.

 

Other matters may also arise in the course of tax audits that could adversely impact our consolidated financial condition, results of operations or cash flows.

 

We may be unable to execute our financial strategy.

 

Our ability to execute our financial strategy is dependent on our ability to maintain investment grade ratings on our senior debt. The credit rating process is contingent upon a number of factors, many of which are beyond our control. There can be no assurance that we will be able to maintain our investment grade ratings in the future. Our interest expense would increase and our ability to obtain financing on favorable terms may be adversely affected should we fail to maintain investment grade ratings.

 

Our financial strategy is also dependent on our ability to generate sufficient cash flow to reinvest in our existing business, fund internal growth, acquire other solid waste businesses, pay dividends, reduce indebtedness and minimize borrowings, and take other actions to enhance shareholder value. There can be no assurance that we will be successful in executing our broad-based pricing program, that we will generate sufficient cash flow to execute our financial strategy, that we will be able to pay cash dividends at our present rate or that we will be able to increase the amount of such dividends.

 

A downgrade in our bond ratings could adversely affect our liquidity by increasing the cost of debt and financial assurance instruments.

 

While downgrades of our bond ratings may not have an immediate impact on our cost of debt or liquidity, they may impact our 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 to 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.

The solid waste industry is a capital-intensive industry and the amount we spend on capital expenditures may exceed current expectations, which could require us to obtain additional funding for our operations or impair our ability to grow our business.

 

Our ability to remain competitive and to grow and expand our operations largely depends on our cash flow from operations and access to capital. If our capital efficiency programs are unable to offset the impact of inflation and business growth, it may be necessary to increase the amount we spend. Additionally, if we make 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 capping, closure, post-closure and remediation activities increase above our current estimates, which may occur over a long period due to changes in federal, state or local government requirements and other factors beyond our control. Increases in expenditures would negatively impact our cash flows.

 

Further, federal regulations have tightened the emission standards on class A vehicles, which includes the collection vehicles we purchase. As a result, we could experience an increase in capital costs and a reduction in operating efficiency. This could also cause an increase in vehicle operating costs. We may reduce the number of vehicles we purchase until manufacturers adopt the new standards to increase efficiency.

 

We may be unable to obtain or maintain required permits or to expand existing permitted capacity of our landfills, which could decrease our revenue and increase our costs.

 

There can be no assurance that we will successfully obtain or maintain 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 more difficult and expensive to obtain and maintain. Permits often take years to obtain as a result of numerous hearings and compliance requirements with regard to zoning, environmental and other regulations. These permits are also often subject to resistance from citizen or other groups and other political pressures. Local communities and citizen groups, adjacent landowners or governmental agencies may oppose the issuance of a permit or approval we may need, allege violations of the permits under which we currently operate or laws or regulations to which we are subject, or seek to impose liability on us for environmental damage. Responding to these challenges has, at times, increased our costs and extended the time associated with establishing new facilities and expanding existing facilities. In addition, failure to receive regulatory and zoning approval may prohibit us from establishing new facilities, maintaining permits for our facilities or expanding existing facilities. Our failure to obtain the required permits to operate our non-hazardous solid waste landfills could have a material adverse impact on our future results of operations or cash flows. In addition, we may have to dispose collected waste at landfills operated by our competitors or haul the waste long distances at a higher cost to one of our landfills, either of which could significantly increase our waste disposal costs.

 

The waste industry is subject to extensive government regulation, and existing or future regulations may restrict our operations, increase our costs of operations or require us to make additional capital expenditures.

 

If we inadequately accrue for landfill capping, closure and post-closure costs, our financial condition and results of operations may be adversely affected.

 

A landfill must be closed and capped, and post-closure maintenance commenced once the permitted capacity of the landfill is reached and additional capacity is not authorized. We have significant financial obligations relating to capping, closure and post-closure costs at our existing owned or operated landfills, and will have material financial obligations with respect to any future owned or operated disposal facilities. We establish accruals for the estimated costs associated with capping, closure and post-closure financial obligations. We could underestimate such accruals, and our financial obligations for capping, closure or post-closure costs could exceed the amount accrued and reserved or amounts otherwise receivable pursuant to trust funds established for this purpose. Such a shortfall could result in significant

unanticipated charges to income. Additionally, if a landfill is required to be closed earlier than expected or its remaining airspace is reduced for any other reason, the accruals for capping, closure and post-closure could be required to be accelerated, which could have a material adverse impact our results of operations and cash flows.

 

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 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 waste, at landfills. Although such actions are useful in protecting our environment, these actions, as well as voluntary private initiatives by customers to reduce waste or seek disposal alternatives, have and may in the future reduce the volume of waste going to landfills in certain areas. If this occurs, there can be no assurance 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 such services.

 

The possibility of landfill and transfer station site development projects, expansion projects or pending acquisitions not being completed or certain other events could result in a material charge to income.

 

We capitalize certain expenditures relating to development, expansion and other projects. If a facility or operation is permanently shut down or determined to be impaired, or a development or expansion project is not completed or is determined to be impaired, we will charge any unamortized capitalized expenditures to income relating to such facility or project that we are unable to recover through sale, transfer or otherwise. In future periods, we may incur charges against earnings in accordance with this policy, or other events may cause impairments. Such charges could have a material adverse impact on our financial condition and results of operations.

 

We are subject to costly environmental regulations and flow-control regulations that may affect our operating margins, restrict our operations and subject us to additional liability.

 

Complying with laws and regulations governing the use, treatment, storage, transfer 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. Laws and regulations often require us to enhance or replace our equipment and to modify landfill operations or initiate final closure of a landfill. There can be no assurance that we will be able to implement price increases sufficient to offset the costs of complying with these laws and regulations. In addition, environmental regulatory changes could accelerate or increase expenditures for capping, closure and post-closure, and environmental and remediation activities at solid waste facilities and obligate us to spend sums in addition to those presently accrued for such purposes.

 

Our collection, transfer, and landfill operations are, and may in the future continue to be, affected by state or local laws or regulations that restrict the transportation of solid waste across state, county or other jurisdictional lines. Such laws and regulations could negatively affect our operations resulting in declines in landfill volumes and increased costs of alternate disposal.

 

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 or property damage. As a result, we may be required to pay fines or implement corrective measures, or we may have our permits and licenses modified or revoked. A significant judgment

against us, the loss of a significant permit or license, or the imposition of a significant fine could have a material adverse impact on our consolidated financial condition, results of operations and cash flows.

 

We establish accruals for our estimates of the costs associated with our environmental obligations. We could underestimate such accruals and remediation costs could exceed amounts accrued. Such shortfalls could result in significant unanticipated charges to income.

 

We may have potential environmental liabilities that are not covered by our insurance. Changes in insurance markets may also impact our financial results.

 

We may incur liabilities for the deterioration of the environment as a result of our operations. We maintain high deductibles for our environmental liability insurance coverage. If we were to incur substantial liability for environmental damage, our insurance coverage may be inadequate to cover such liability. This could have a material adverse impact on our consolidated financial condition, results of operations and cash flows.

 

Also, due to the variable condition of the insurance market, we may experience future increases in self-insurance levels as a result of increased retention levels and increased premiums. As we assume more risk for self-insurance through higher retention levels, we may experience more variability in our self-insurance reserves and expense.

 

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,” on parties who were site owners and operators at the time hazardous substance(s) was disposed of, and on persons who arrange for the disposal of such substances at the facility (i.e., generators 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 reserves 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 companies we have acquired. Actual costs for these liabilities could be significantly greater than amounts presently accrued for these purposes, which could have a material adverse impact on our consolidated financial position, results of operations and cash flows.

 

Currently pending or future litigation or governmental proceedings could result in material adverse consequences, including judgments or settlements.

 

We are, and from time to time become, involved in lawsuits, regulatory inquiries, and governmental and other legal proceedings arising out of the ordinary course of our business. Many of these matters raise difficult and complicated factual and legal issues and are subject to uncertainties and complexities. The timing of the final resolutions to these types of matters is often uncertain. Additionally, the possible outcomes or resolutions to these matters could include adverse judgments or settlements, either of which could require substantial payments, adversely affecting our results of operations and cash flows.

 

We may be unable to manage our growth effectively.

 

Our growth strategy places significant demands on our financial, operational and management resources. In order to continue our growth, we may need to add administrative and other personnel, and will need to make additional investments in operations and systems. There can be no assurance that we will be able to find and train qualified personnel, or do so on a timely basis, or expand our operations and systems to the extent, and in the time, required.

We may be unable to execute our acquisition growth strategy.

 

Our ability to execute our growth strategy depends in part on our ability to identify and acquire desirable acquisition candidates as well as our ability to successfully consolidate acquired operations into our business. The consolidation of our operations with those of acquired companies may present significant challenges to our management. In addition, competition among our competitors for acquisition candidates may prevent us from acquiring certain acquisition candidates. As such, we cannot assure you that:

 

 

If any of the aforementioned factors force us to alter our growth strategy, our growth prospects could be adversely affected.

 

Businesses we acquire may have undisclosed liabilities.

 

In pursuing our acquisition strategy, our investigations of the acquisition candidates may fail to discover certain undisclosed liabilities of the acquisition candidates. If we acquire a company having undisclosed liabilities such as environmental, remediation or contractual, as a successor owner we may be responsible for such undisclosed liabilities. We expect to try to minimize our exposure to such liabilities by obtaining indemnification from each of the sellers of the acquired companies, by deferring payment of a portion of the purchase price as security for the indemnification and by acquiring only specified assets. However, there can be no assurance that we will be able to obtain indemnifications or that they will be enforceable, collectible or sufficient in amount, scope or duration to fully offset any undisclosed liabilities arising from our acquisitions.

 

Our consolidated financial statements are based on estimates and assumptions that may differ from actual results.

 

Our consolidated financial statements have been prepared in accordance with GAAP and necessarily include amounts based on estimates and assumptions made by management. Actual results could differ from these amounts. Significant items requiring management to make subjective or complex judgements about matters that are inherently uncertain include the carrying value of long-lived assets, the depletion and amortization of landfill development costs, accruals for final capping, closure and post-closure costs, valuation allowances for accounts receivable and deferred tax assets, liabilities for potential litigation, claims and assessments, and liabilities for environmental remediation, employee benefit and pension plans, deferred taxes, uncertain tax positions and self-insurance.

 

There can be no assurance that the liabilities recorded for landfill and environmental costs will be adequate to cover the requirements of existing environmental regulations, future changes to or interpretations of existing regulations, or the identification of adverse environmental conditions previously unknown to management.

 

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 impact our financial condition, results of operations or funding requirements, or cause unanticipated fluctuations in our results of operations in future periods.

We may be subject to workforce influences, including work stoppages, which could increase our operating costs and disrupt our operations.

 

As of December 31, 2008, approximately 27% of our workforce was represented by various local labor unions. If, in the future, our unionized workers were to engage in a strike, work stoppage or other slowdown, we could experience a significant disruption of our operations and an increase in our operating costs, which could have an adverse impact on our results of operations and cash flows. In addition, if a greater percentage of our workforce becomes unionized, our business and financial results could be materially and adversely impacted due to the potential for increased operating costs.

 

Our obligation to fund multi-employer pension plans to which we contribute may have an adverse impact on us.

 

We contribute to at least 25 multi-employer pension plans covering at least 22% of our current employees. We do not administer these plans and generally are not represented on the boards of trustees of these plans. The Pension Protection Act enacted in 2006 requires under-funded pension plans to improve their funding ratios. We do not have current plan financial information for the multi-employer plans to which we contribute but, based on the information available to us, we believe that some of them are under-funded. We cannot determine at this time the amount of additional funding, if any, we may be required to make to these plans and, therefore, have not recorded any related liabilities. However, plan assessments could have an adverse impact on our results of operations or cash flows for a given period. Furthermore, under current law, upon the termination of a multi-employer pension plan, or in the event of a mass withdrawal of contributing employers, we would be required to make payments to the plan for our proportionate share of the plan’s unfunded vested liabilities. There can be no assurance that there will not be a termination of, or mass withdrawal of employers contributing to, any of the multi-employer pension plans to which we contribute or that, in the event of such a termination or mass withdrawal, the amounts we would be required to contribute would not have a material adverse impact on our results of operations or cash flows.

 

The costs of providing for pension benefits and related funding requirements are subject to changes in pension fund values and fluctuating actuarial assumptions, and may have a material adverse impact on our results of operations and cash flows.

 

We sponsor a defined benefit pension plan which is funded with trustee assets invested in a diversified portfolio of debt and equity securities. Our costs for providing such benefits and related funding requirements are subject to changes in the market value of plan assets. The recent significant decline in the markets resulted in our recording a value for the plan assets that significantly differed from the plan asset value Allied had recorded in its financial statements prior to the merger. A continuation or further decline in the value of these investments could increase our pension expenses and related funding requirements in the future. Additionally, our pension expenses and related funding requirements are also subject to various actuarial calculations and assumptions, which may differ materially from actual results due to changing market and economic conditions, interest rates and other factors. A significant increase in our pension obligations and funding requirements could have a material adverse impact on our results of operations and cash flows.

 

The loss of key personnel could have material adverse effect on our financial condition, results of operations and growth prospects.

 

Our future success depends on the continued contributions of several key employees and officers. The loss of the services of key employees and officers, whether such loss is through resignation or other causes, or the inability to attract additional qualified personnel, could have a material adverse effect on our financial condition, results of operations and growth prospects.

 

 

None.

 

Our corporate headquarters is located at 18500 North Allied Way, Phoenix, Arizona 85054 where we currently lease approximately 145,000 square feet of office space. We also maintain regional administrative offices in all of our regions.

 

Our principal property and equipment consists of land, landfills, buildings, vehicles and equipment. We own or lease real property in the states in which we conduct operations. At December 31, 2008, we owned or operated 400 collection companies, 242 transfer stations, 213 active solid waste landfills and 78 recycling facilities within 40 states and Puerto Rico. In aggregate, our active solid waste landfills total approximately 110,200 acres, including approximately 36,900 permitted acres. We also own or have responsibilities for 126 closed landfills. We believe that our property and equipment are adequate for our current needs.

 

 

We are involved in routine judicial and administrative proceedings that arise in the ordinary course of business and that relate to, among other things, personal injury or property damage claims, employment matters and commercial and contractual disputes. We are subject to federal, state and local environmental laws and regulations. Due to the nature of our business, we are also often routinely a party to judicial or administrative proceedings involving governmental authorities and other interested parties related to environmental regulations or liabilities. From time to time, we may also be subject to actions brought by citizens’ groups, adjacent landowners or others in connection with the permitting and licensing of our landfills or transfer stations, or alleging personal injury, environmental damage, or violations of the permits and licenses pursuant to which we operate.

 

We are subject to various federal, state and local tax rules and regulations. These rules are extensive and often complex, and we are required to interpret and apply them to our transactions. Positions taken in tax filings are subject to challenge by taxing authorities. Accordingly, we may have exposure for additional tax liabilities if, upon audit, any positions taken are disallowed by the taxing authorities.

 

The following is a discussion of certain proceedings against us. Although the ultimate outcome of any legal matter cannot be predicted with certainty, except as identified below, we do not believe that the outcome of our pending legal and administrative proceedings will have a material adverse impact on our consolidated, financial position, results of operations or cash flows.

 

Litigation Related to the Merger with Allied

 

On July 25, 2008, a putative class action was filed, and on August 15, 2008 was amended, in the Court of Chancery of the State of Delaware by the New Jersey Carpenters Pension and the New Jersey Carpenters Annuity Funds against us and the members of our Board of Directors, individually.

 

On August 21, 2008, a second putative class action was filed in the Court of Chancery of the State of Delaware by David Shade against us, the members of Republic’s Board of Directors, individually, and Allied. On September 22, 2008, the New Jersey Carpenters and the Shade cases were consolidated by the Court of Chancery, and on September 24, 2008, the plaintiffs in the Delaware case, now known as In Re: Republic Services Inc. Shareholders Litigation, filed a verified consolidated amended class action complaint in the Court of Chancery of the State of Delaware.

 

On September 5, 2008, a putative class action was filed in the Circuit Court in and for Broward County, Florida, by the Teamsters Local 456 Annuity Fund against us and the members of Republic’s Board of Directors, individually.

 

Both the Delaware consolidated action and the Florida action were brought on behalf of a purported class of our stockholders and primarily sought, among other things, to enjoin the proposed transaction between Republic and Allied, as well as damages and attorneys’ fees. The actions also sought to compel us to

accept the unsolicited proposals made by Waste, or at least compel our Board of Directors to further consider and evaluate the Waste proposals, which proposals were subsequently withdrawn.

 

On September 24, 2008, the defendants in the Florida litigation filed a Motion to Stay or to Dismiss the lawsuit in light of the consolidated Delaware class action.

 

On October 17, 2008, plaintiffs in the consolidated Delaware action filed a motion for a preliminary injunction seeking to require the defendants to make certain additional disclosures prior to the stockholder vote on the merger.

 

On October 29, 2008, the defendants entered into a memorandum of understanding with plaintiffs regarding the settlement of the Delaware and Florida actions. As part of this memorandum of understanding, we agreed to make certain additional disclosures to our stockholders and such disclosures were made by us in our Current Report on Form 8-K filed with the SEC on October 30, 2008. As of January 16, 2009, following completion of certain confirmatory discovery by counsel to plaintiffs, the parties executed a stipulation of settlement. The stipulation of settlement is subject to customary conditions, including court approval following notice to our stockholders. The stipulation of settlement provides that a hearing will be scheduled at which the court will consider the fairness, reasonableness and adequacy of the settlement which, if finally approved by the court, will resolve all of the claims that were or could have been brought in the actions being settled, including all claims relating to the merger transaction, the merger agreement, our rejections of the unsolicited Waste proposals, and any disclosures made in connection therewith. The stipulation of settlement also provides that plaintiffs’ counsel may petition the court for an award of attorneys’ fees and expenses to be paid by us. On February 20, 2009, the court preliminarily approved the settlement agreed to in the stipulation and set a final hearing to consider the fairness of the settlement for May 19, 2009. There can be no assurance that the court will approve the settlement agreed to in the stipulation of settlement. In such event, the settlement may be terminated.

 

On December 3, 2008, the DOJ and seven state attorneys general filed a complaint, Hold Separate Stipulation and Order, and competitive impact statement, together with a proposed final judgment, in the United States District Court for the District of Columbia, in connection with approval under the HSR Act of our merger with Allied. The court entered the Hold Separate Stipulation and Order on December 4, 2008, which terminated the waiting period under the HSR Act and allowed the parties to close the transaction subject to the conditions described in the Hold Separate Stipulation and Order. These conditions include the divestiture of certain assets. However, the final judgment can only be approved by the court after the DOJ publishes a notice in the Federal Register and considers comments it receives. During this period, if the DOJ believes that the final judgment is no longer in the public interest, the DOJ may withdraw its support of the final judgment and seek to prevent the final judgment from becoming final in its present form. Likewise, the court may, in its discretion, modify the divestitures or other relief sought by the DOJ if the court believes that such modification is in the public interest. The precise timing for the confirmation of the final judgment is not known. Management believes that the court will enter the final judgment and that modifications to the final judgment, if any, will not be material.

 

Landfill and Environmental

 

We have been notified that we are considered a potentially responsible party at a number of sites under CERCLA or other environmental laws. In all cases, such alleged responsibility is due to the actions of companies prior to the time we acquired them. We continually review our status with respect to each site, taking into account the alleged connection to the site and the extent of the contribution to the volume of waste at the site, the available evidence connecting the entity to that site, and the number and financial soundness of other potentially responsible parties at the site. The ultimate amounts for environmental liabilities at sites where we may be a potentially responsible party cannot be determined and estimates of such liabilities made by us require assumptions about future events subject to a number of uncertainties, including the extent of the contamination, the appropriate remedy, the financial viability of other potentially responsible parties and the final apportionment of responsibility among the potentially responsible parties.

Where we have concluded that our share of potential liabilities is probable and can be reasonably estimated, a provision has been made in the consolidated financial statements. Since the ultimate outcome of these matters may differ from the estimates used in our assessments to date, the recorded liabilities are periodically evaluated as additional information becomes available to ascertain that the accrued liabilities are adequate. We have liabilities recorded for environmental matters as of December 31, 2008 of approximately $389.9 million. It is reasonably possible that we could have adjustments to our estimates for these matters in the near term that could have a material effect on our consolidated financial position, results of operations or cash flows. For more information about our potential environmental liabilities see Note 8, Landfill and Environmental Costs, to our consolidated financial statements in Item 8 of this Form 10-K.

 

Countywide Matter

 

On March 26, 2007, the Ohio Environmental Protection Agency (OEPA) issued Final Findings and Orders (F&Os) to Republic Services of Ohio II, LLC (Republic-Ohio), an Ohio limited liability company and our wholly owned subsidiary. The F&Os relate to environmental conditions attributed to a chemical reaction resulting from the disposal of certain aluminum production waste at the Countywide Recycling and Disposal facility (Countywide) in East Sparta, Ohio. The F&Os, and certain other remedial actions Republic-Ohio agreed with the OEPA to undertake to address the environmental conditions, include, without limitation, the following actions: (a) prohibiting leachate recirculation, (b) refraining from the disposal of solid waste in certain portions of the site, (c) updating engineering plans and specifications and providing further information regarding the integrity of various engineered components at the site, (d) performing additional data collection, (e) taking additional measures to address emissions, (f) expanding the gas collection and control system, (g) installing a “fire” break, (h) removing liquids from gas extraction wells, and (i) submitting a plan to the OEPA to suppress the chemical reaction and, following approval by the OEPA, implementing such plan. We also paid approximately $.7 million in sanctions to comply with the F&Os during the three months ended March 31, 2007. Republic-Ohio has performed certain interim remedial actions required by the OEPA, but the OEPA has not approved Republic-Ohio’s plan to suppress the chemical reaction.

 

Republic-Ohio received additional orders from the OEPA requiring certain actions to be taken by Republic-Ohio, including additional air quality monitoring and the installation and continued maintenance of gas well dewatering systems. Republic-Ohio has also entered into an Agreed Order on Consent (AOC) with the EPA requiring the reimbursement of costs incurred by the EPA and requiring Republic-Ohio to (a) design and install a temperature and gas monitoring system, (b) design and install a composite cap or cover, and (c) develop and implement an air monitoring program. The AOC became effective on April 17, 2008 and Republic-Ohio has complied with the terms of the AOC. Republic-Ohio also is in the process of constructing an additional “fire” break under the authority and supervision of the EPA.

 

We had learned that the Commissioner of the Stark County Health Department (Commission) recommended that the Stark County Board of Health (Board of Health) suspend Countywide’s 2007 annual operating license. We had also learned that the Commissioner intended to recommend that the Board of Health deny Countywide’s license application for 2008. Republic-Ohio obtained a preliminary injunction on November 28, 2007 prohibiting the Board of Health from suspending its 2007 operating license. Republic-Ohio also obtained a preliminary injunction on February 15, 2008 prohibiting the Board of Health from denying its 2008 operating license application. The litigation with the Board of Health is pending in the Stark County Court of Common Pleas. We and the Board of Health have been participating in discussions regarding facility licensing that have resulted in an agreement whereby Republic-Ohio will secure its operating license and pay $10.0 million to resolve the issues at Countywide. The specific terms of the agreement are being finalized.

 

We believe that we have performed or are diligently performing all actions required under the F&Os and the AOC and that Countywide does not pose a threat to the environment. Additionally, we believe that we satisfy the rules and regulations that govern the operating license at Countywide.

We are vigorously pursuing financial contributions from third parties for our costs to comply with the F&Os and the other required remedial actions.

 

In a suit filed on October 8, 2008 in the Tuscarawas County Ohio Court of Common Pleas, approximately 700 plaintiffs have named Republic Services, Inc. and Republic-Ohio as defendants. The claims alleged are negligence and nuisance and arise from the operation of Countywide. Republic-Ohio has owned and operated Countywide since February 1, 1999. Waste Management, Inc. and Waste Management Ohio, Inc., previous owners and operators of Countywide, have been named as defendants as well. Plaintiffs are individuals and businesses located in the geographic area around Countywide. They claim that due to the acceptance of a specific waste stream and operational issues and conditions, the landfill has generated odors and other unsafe emissions which have allegedly impaired the use and value of their property. There are also allegations that the emissions from the landfill may have adverse health effects. The relief requested includes compensatory damages, punitive damages, costs for medical monitoring and screening, interest on damages, costs and disbursements, and reasonable attorney and expert witness fees. We intend to vigorously defend against the plaintiffs’ allegations.

 

Sunrise Matter

 

On August 1, 2008, Republic Services of Southern Nevada (RSSN), our wholly owned subsidiary, signed a Consent Decree with the EPA, the Bureau of Land Management and Clark County, Nevada related to the Sunrise Landfill. Under the Consent Decree, RSSN has agreed to perform certain remedial actions at the Sunrise Landfill for which RSSN and Clark County were otherwise jointly and severally liable. We were also assessed $1.0 million in sanctions related to the Consent Decree. RSSN is currently working with the Clark County Staff and Board of Commissioners to develop a mechanism to fund the costs to comply with the Consent Decree. However, we have not recorded any potential recoveries.

 

It is reasonably possible that we will need to adjust the remediation liabilities recorded to reflect the effects of new or additional information, to the extent that such information impacts the costs, timing or duration of the required actions. Future changes in our estimates of the costs, timing or duration of the required actions could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

Luri Matter

 

On August 17, 2007, a lawsuit was filed against us and certain of our subsidiaries relating to an alleged retaliation claim by a former employee, Ronald Luri v. Republic Services, Inc., Republic Services of Ohio Hauling LLC, Republic Services of Ohio I LLC, Jim Bowen and Ron Krall in the Cuyahoga County Common Pleas Court in Ohio. On July 3, 2008, a jury verdict was awarded against us in the amount of $46.6 million, including $43.1 million in punitive damages. On September 24, 2008, the Court awarded pre-judgement interest of $.3 million and attorney fees and litigation costs of $1.1 million. Post-judgement interest is presently accruing at a rate of 8% for 2008 and 5% for 2009. Management anticipates that post-judgement interest could accrue through the middle of 2010 for a total of $5.4 million. Post-judgment motions filed on our behalf and certain of our subsidiaries were denied, and on October 1, 2008, we filed a notice of appeal. It is reasonably possible that a final, non-appealable judgment of liability for compensatory and punitive damages may be assessed against us related to this matter. Although it is not possible to predict the ultimate outcome, management believes that the amount of any final, non-appealable judgment will not be material.

 

Forward Matter

 

On November 23, 2005, Allied received a letter from the San Joaquin District Attorney’s Office, Environmental Prosecutions Unit (the District Attorney), alleging violations of California permit and regulatory requirements relating to Forward, Inc. (Forward), its wholly owned subsidiary, and the operation of its landfill. The District Attorney is investigating whether Forward may have (i) mixed green waste with food waste as “alternative daily cover,” (ii) exceeded the daily and weekly tonnage

intake limits, (iii) allowed a concentration of methane gas well in excess of 5 percent, or (iv) accepted hazardous waste at a landfill which is not authorized to accept hazardous waste. Such conduct allegedly violates provisions of Business and Professions Code sections 17200, et seq, by virtue of violations of Public Resources Code Division 30, Part 4, Chapter 3, Article 1, sections 44004 and 44014(b); California Code of Regulations Title 27, Chapter 3, Subchapter 4, Article 6, sections 20690(11) and 20919.5; and Health and Safety Code sections 25200, 25100, et seq, and 25500, et seq. On December 7, 2006, Forward received a subpoena and interrogatories from the District Attorney and responded to both as of February 15, 2007. On October 1, 2008, the District Attorney served suit against Allied alleging violations of the California Business and Professional Code sections 17200, et seq. and is seeking monetary sanctions of up to $2,500 per violation and a permanent injunction to obey all applicable laws and regulations. We intend to vigorously defend the allegations.

 

Sycamore Matter

 

On July 10, 2008, the State of West Virginia Department of Environmental Protection filed suit against Allied’s subsidiary, Allied Waste Sycamore Landfill, LLC (Sycamore Landfill), in Putnam County Circuit Court alleging thirty-eight violations of the Solid Waste Management Act, W. Va. Code sec. 22-15-1 et seq, the Water Pollution Control Act, W. Va. Code Sec. 22-11-1 et seq and the Groundwater Protection Act, W. Va. Code sec. 22-12-1 et seq (collectively, the Applicable Statues) between January 2007 and August 2007. The State of West Virginia is seeking injunctive relief requiring the Sycamore Landfill to comply with the Applicable Statutes as well to eliminate all common law public nuisances, and is seeking monetary sanctions of up to $25,000 per day for each violation. We are currently negotiating a settlement with the State which we believe will include monetary sanctions below $200,000.

 

20 Atlantic Avenue Matter

 

On October 3, 2008, a jury in federal district court in Boston, Massachusetts, returned a verdict in favor of the plaintiff and against the defendant, Allied, in a breach of contract action. The jury concluded that, between 1997 and 2002, Allied had failed to deliver as much fiber recyclables as required under a contract and the jury stated that damages were approximately $10.4 million. Under applicable law, prejudgment interest of 12% per year (approximately $10.5 million through December 31, 2008) is automatically added to the verdict amount when judgment is entered by the court. The jury verdict did not address all the claims pending in the lawsuit. A hearing before the judge on some of the remaining claims was scheduled to begin January 6, 2009. On January 5, 2009, the parties reached a settlement in which all claims in the lawsuit will be dismissed in exchange for a payment of $18.0 million from us to the plaintiff, which we have recorded as a liability. The payment will be made in three installments during the first three quarters of 2009 and the second and third installments will bear interest at 3% per annum.

 

Carter Valley Matter

 

On April 12, 2006, federal agents executed a search warrant at BFI Waste Systems of Tennessee, LLC’s Carter Valley Landfill (the Landfill) and seized information regarding the Landfill’s receipt of special waste from one of its commercial customers. On the same date, the U.S. Attorney’s Office for the Eastern District of Tennessee served a grand jury subpoena on us seeking related documents (the 2006 Subpoena). Shortly thereafter, the government agreed to an indefinite extension of our time to respond to the subpoena, and there were no further communications between us and the federal government until 2008. In 2007, while the federal investigation was pending, the Tennessee Department of Environment and Conservation investigated the Landfill’s receipt of the same special waste, determined that there was not a sufficient basis to conclude that the Landfill had disposed of hazardous waste, and took no enforcement action. On April 2, 2008, the US Attorney’s Office issued a new grand jury subpoena seeking the same categories of documents requested in the 2006 Subpoena. We are currently producing documents in response to the 2008 subpoena. On January 21, 2009, the DOJ sent a letter to us stating that it believed, based on its initial investigation, that certain unnamed employees at the Landfill had violated the RCRA and that we were liable for these criminal violations under the theory of respondeat superior. If convicted, pursuant to applicable law, we could be subject to a wide range of criminal or civil

penalties. Criminal penalties may not be more than the greatest of a maximum of $50,000 for each day of violation, a calculation of twice the gross pecuniary gain from the offense or a maximum of $500,000. We could also be subject to civil penalties of $32,500 per day per violation. We intend to meet with the DOJ as soon as practicable to discuss the government’s investigation and understand the basis for the government’s belief that our employees violated RCRA.

 

Tax Matters

 

We and our subsidiaries are subject to income tax in the U.S. and Puerto Rico as well as income tax in multiple state jurisdictions. We acquired Allied’s open tax periods as part of the acquisition. Allied is currently under examination or administrative review by various state and federal taxing authorities for certain tax years, including federal income tax audits for calendar years 2000 through 2006. We are also engaged in tax litigation as a result of our risk management companies. These matters are further discussed below.

 

Risk Management Companies

 

Prior to Allied’s acquisition of BFI on July 30, 1999, BFI operating companies, as part of a risk management initiative to manage and reduce costs associated with certain liabilities, contributed assets and existing environmental and self-insurance liabilities to six fully consolidated BFI risk management companies (RMCs) in exchange for stock representing a minority ownership interest in the RMCs. Subsequently, the BFI operating companies sold that stock in the RMCs to third parties at fair market value which resulted in a capital loss of approximately $900.0 million for tax purposes, calculated as the excess of the tax basis of the stock over the cash proceeds received.

 

On January 18, 2001, the IRS designated this type of transaction and other similar transactions as a “potentially abusive tax shelter” under IRS regulations. During 2002, the IRS proposed the disallowance of all of this capital loss. At the time of the disallowance, the primary argument advanced by the IRS for disallowing the capital loss was that the tax basis of the stock of the RMCs received by the BFI operating companies was required to be reduced by the amount of liabilities assumed by the RMCs even though such liabilities were contingent and, therefore, not liabilities recognized for tax purposes. Under the IRS interpretation, there was no capital loss on the sale of the stock since the tax basis of the stock should have approximated the proceeds received. Allied protested the disallowance to the Appeals Office of the IRS in August 2002.

 

In April 2005, the Appeals Office of the IRS upheld the disallowance of the capital loss deduction. As a result, in late April 2005 Allied paid a deficiency to the IRS of $22.6 million for BFI tax years prior to the acquisition. Allied also received a notification from the IRS assessing a penalty of $5.4 million and interest of $12.8 million relating to the asserted $22.6 million deficiency. In July 2005, Allied filed a suit for refund in the United States Court of Federal Claims (CFC). The government thereafter filed a counterclaim in the case for the $5.4 million penalty and $12.8 million of interest claimed by the IRS. In December 2005, the IRS agreed to suspend the collection of this penalty and interest until a decision is rendered on Allied’s suit for refund.

 

In July 2006, while the CFC case was pending, Allied discovered what it construed to be a jurisdictional defect in the case that could have prevented its recovery of the refund amounts claimed even if Allied would have been successful on the underlying merits. Accordingly, in September 2006, Allied filed a motion to dismiss the case without prejudice on jurisdictional grounds. In March 2007, the CFC granted Allied’s motion dismissing the case. Thereafter, in July 2007, the government appealed the decision to the United States Court of Appeals for the Federal Circuit (Federal Circuit). In April 2008, the Federal Circuit reversed the lower court’s decision and remanded the case back to the CFC for further proceedings. In May 2008, Allied filed a petition for panel rehearing with the Federal Circuit, requesting that the court reconsider its ruling. In June 2008, the Federal Circuit denied Allied’s petition.

 

In December 2008, a hearing was held in the CFC. At this hearing, we informed the judge of our intention to withdraw our suit from the CFC in order to continue to litigate the merits of our position in the U.S. District

Court of Arizona. We believe the decisional law applicable to this matter is more favorable to taxpayers in the U.S. District Court of Arizona than in the CFC.

 

To expedite the withdrawal from the CFC, in January 2009, we paid the government’s counterclaim for penalty and penalty-related interest of approximately $11.0 million. Prior to December 31, 2008, Allied had already paid $51.0 million in tax and related interest relating to the 1997 through 1999 BFI tax years. As a result, we have paid all tax, interest, and penalty related to the 1997 through 1999 BFI tax years, which are the tax years under CFC jurisdiction. If, in response to our decision to withdraw our suit from the CFC, the court issues an order dismissing the case with prejudice, the tax, interest and penalty amounts paid by us will not be recoverable in any subsequent action. However, if the court issues an order dismissing the case without prejudice, we will not be entirely prevented from asserting a claim contesting the IRS tax adjustment applicable to the 1997 through 1999 BFI tax years and seeking the recovery of some or all of the tax, interest and penalty amounts previously paid, although some of our claim may be barred by the applicable statute of limitations.

 

In addition, Allied has a second refund suit currently pending in Arizona. In August 2008, Allied received from the IRS a Statutory Notice of Deficiency (Notice) related to its utilization of BFI’s capital loss carryforward on Allied’s 1999 tax return. Because of the high rate of interest associated with this matter, Allied previously paid all tax and interest related to this tax year. Consequently, the Notice related only to the IRS’ asserted penalty for Allied’s 1999 tax year. On October 30, 2008, Allied filed a suit for refund in the U.S. District Court of Arizona. We anticipate that the DOJ will file a counterclaim for the asserted penalty and consequently the IRS will suspend collection of the penalty, as occurred in connection with the CFC action. However, there can be no assurance that the IRS will suspend collection efforts.

 

If the capital loss deduction is fully disallowed for all applicable years, we estimate that it would have a total cash impact (including amounts already paid to the IRS as described below) of approximately $457.0 million related to federal taxes, state taxes and interest, and, approximately $164.0 million related to penalty and penalty-related interest. These amounts have been fully accrued on our consolidated balance sheet, and disallowance would not materially affect our consolidated results of operations; however, a payment beyond the amounts already paid would adversely impact our cash flows in the period such payment was made. The accrual of additional interest charges through the time these matters are resolved will affect our consolidated results of operations. Due to the high rate of interest associated with this matter, we have previously paid the IRS and various state tax authorities $369.0 million related to capital loss deductions taken on BFI’s 1997 through 1999 and Allied’s 1999 through 2002 tax returns. In addition, we have paid approximately $11.0 million of penalty and penalty-related interest for our refund suit in the CFC. Although we have fully accrued all tax, interest, penalty and penalty-related interest relating to this matter, we intend to vigorously pursue our claim for refund of the tax and interest and our defense to the IRS’ claims for penalties and penalty-related interest. While there can be no assurances, we anticipate that the final resolution of the dispute, through adjudication or settlement, may be more favorable than the full amount currently accrued for tax, interest, penalty and penalty-related interest.

 

Exchange of Partnership Interests

 

In April 2002, Allied exchanged minority partnership interests in four waste-to-energy facilities for majority partnership interests in equipment purchasing businesses, which are now wholly owned subsidiaries. In November 2008, the IRS issued a formal disallowance to Allied contending that the exchange was instead a sale on which a corresponding gain should have been recognized. Although we intend to vigorously defend our position on this matter, if the exchange is treated as a sale, we estimate it could have a potential federal and state cash tax impact of approximately $156.0 million plus accrued interest through December 31, 2008 of approximately $48.0 million. In addition, the IRS has asserted a penalty of 20% of the additional income tax due. The potential tax and interest (but not penalties or penalty-related interest) of a full adjustment for this matter have been fully reserved on our consolidated balance sheet at December 31, 2008. The successful assertion by the IRS of penalty and penalty-related interest in

connection with this matter could have a material adverse impact on our consolidated cash flows and results of operations.

 

 

On November 14, 2008, our stockholders voted to approve our merger with Allied Waste Industries, Inc. at a special meeting held for that purpose.

 

Results of the voting at that meeting are as follows:

 

 

 

Market Information, Holders and Dividends

 

Our common stock trades on the New York Stock Exchange.

 

In January 2007, our Board of Directors approved a 3-for-2 stock split effective on March 16, 2007 for stockholders of record on March 5, 2007. Our share and per share amounts have been retroactively restated to reflect the stock split.

 

The following table sets forth the range of the high and low sale prices of our common stock and the cash dividends declared per share of common stock for the periods indicated:

 

 

There were approximately 930 record holders of our common stock at February 19, 2009, which does not include beneficial owners for whom Cede & Co. or others act as nominees.

 

In February 2009, our Board of Directors declared a regular quarterly dividend of $.19 per share for stockholders of record on April 1, 2009. We expect to continue to pay quarterly cash dividends, and we may consider increasing our quarterly cash dividends if we believe it will enhance shareholder value.

 

We have the ability under our credit facilities to pay dividends and repurchase our common stock subject to our compliance with the financial covenants in our credit facilities. As of December 31, 2008, we were in compliance with the financial covenants of our credit facilities.

 

Issuer Purchases of Equity Securities

 

From 2000 through 2008, our Board of Directors authorized the repurchase of up to $2.6 billion of our common stock. As of December 31, 2008, we had paid $2.3 billion to repurchase 82.6 million shares of our common stock, of which 4.6 million shares were acquired during 2008 for $138.4 million. We suspended our share repurchase program in the second quarter of 2008 due to the pending merger with Allied. We expect that our share repurchase program will continue to be suspended until our credit statistics return to pre-merger levels.

 

Recent Sales of Unregistered Securities

 

None

Performance Graph

 

The following performance graph compares the performance of our common stock to the Standard & Poor’s 500 Stock Index (S&P 500 Index), the Dow Jones Waste & Disposal Services Index (DJW&DS Index) and to an index of peer companies as described below.

 

The merger with Allied in December 2008 resulted in the following changes to our performance comparison:

 

 

The graph covers the period from December 31, 2003 to December 31, 2008 and assumes that the value of the investment in our common stock and in each index was $100 at December 31, 2003 and that all dividends were reinvested.

 

Comparison of Five Year Cumulative Total Return
Assumes Initial Investment of $100
December 2008

 

 

Indexed Returns For Years Ending

 

 

 

 

 

The following Selected Financial Data should be read in conjunction with our consolidated financial statements and notes thereto as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008 and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K.

 

Our merger with Allied was effective December 5, 2008 and has been accounted for as an acquisition of Allied by Republic. The consolidated financial statements include the operating results of Allied from the date of the acquisition, and have not been retroactively restated to include Allied’s historical financial position or results of operations. In accordance with the purchase method of accounting, the purchase price paid has been allocated to the assets and liabilities acquired based upon their estimated fair values as of the acquisition date, with the excess of the purchase price over the net assets acquired being recorded as goodwill.

 

Our shares, per share data and weighted average common and common equivalent shares outstanding have been retroactively adjusted for all periods prior to 2007 to reflect a 3-for-2 stock split in the form of a stock dividend that was effective on March 16, 2007.

 

See Notes 1, 2, 3, 8, 9, 10 and 11 of the notes to our consolidated financial statements in Item 8 of this Form 10-K for a discussion of basis of presentation, significant accounting policies, business acquisitions and divestitures, assets held for sale, restructuring charges, landfill and environmental costs, debt, income taxes and stockholders’ equity and their effect on comparability of year-to-year data. These historical results are not necessarily indicative of the results to be expected in the future (in millions, except per share amounts).

 

 

The following discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto, included elsewhere herein. This discussion may contain forward-looking statements that anticipate results based on management’s plans that are subject to uncertainty. We discuss in more detail various factors that could cause actual results to differ from expectations in Item 1A. Risk Factors.

 

Overview of Our Business

 

As of December 31, 2008, we are the second largest provider of services in the domestic non-hazardous solid waste industry. We provide non-hazardous solid waste collection services for commercial, industrial, municipal and residential customers through 400 collection companies in 40 states and Puerto Rico. We also own or operate 242 transfer stations, 213 active solid waste landfills and 78 recycling facilities.

 

In early 2008, we began to experience the impact of the economic slowdown on our operations. This slowdown intensified during 2008 which, combined with a tightening of the credit markets, resulted in unprecedented changes in the U.S. and global economies. Against this backdrop, consumption in the U.S. slowed dramatically. New housing construction, a primary driver of our temporary industrial collection business, declined in excess of 40% compared to 2007. More recently we are seeing a slowdown in commercial construction. A slowdown in manufacturing has resulted in a decrease in our permanent industrial collection business. Furthermore, volumes in our commercial collection business began to decline in the second half of 2008 as consumers decreased discretionary spending. We are also beginning to see lower commercial volumes due to store closures and increased commercial vacancies. Fuel prices, which reached historic highs in the summer, dropped quickly in the fall of 2008. This decrease in fuel prices was offset by corresponding declines in fuel surcharges and, therefore, did not significantly improve our profitability. In addition, prices for recycling commodities declined in response to a decline in global demand. Although we hedged a portion of our commodity sales, declines in commodity prices have had, and will continue to have, a significant impact on our profitability.

 

Despite the challenging economic environment, our business performed well during 2008 due in large part to the indispensible nature of our services and the scalability of our business. Our internal revenue growth during 2008 was 2.5%. Increases in core price and fuel recovery fees offset volume declines. This increase in price and fuel recovery fees, together with cost control steps taken by our operations management to scale the business down for lower volumes, also served to moderate profit margin declines associated with rising costs and declining revenue due to decreases in service volumes.

 

During December 2008, we completed our merger with Allied, forming the second largest waste management company in the U.S. We believe that this merger creates a strong operating platform that will allow us to continue to provide quality service to our customers and superior returns to our stockholders.

 

We expect that the economic challenges we experienced during the latter part of 2008 will continue throughout 2009. We anticipate a decrease in volumes in all lines of our business. We also anticipate that prices for recycling commodities will remain depressed. However, we believe that we will benefit from our cost control and pricing initiatives. Ours is a capital intensive business. Slower growth allows us to reduce capital spending, thus maintaining strong free cash flow despite a weaker economy. In addition, we intend to focus our attention on integrating our newly merged company and achieving cost synergies as a result of the merger.

 

Business Acquisitions and Divestitures

 

We make decisions to acquire, invest in or divest of businesses based on financial and strategic considerations. Businesses acquired are accounted for under the purchase method of accounting and are included in our consolidated financial statements from the date of acquisition.

Merger with Allied Waste Industries, Inc.

 

On June 22, 2008, Republic entered into an Agreement and Plan of Merger with Allied. Prior to the merger, Allied was the second largest provider of non-hazardous solid waste collection, transfer, recycling and disposal services in the United States, as measured by revenue. The completion of the merger was subject to certain terms and conditions, including, but not limited to, approval of the transaction by the stockholders of both Republic and Allied, regulatory approval from the DOJ, and receipt of credit ratings for the combined company classifying our senior unsecured debt as investment grade. Having met those terms and conditions on December 5, 2008, we completed the merger.

 

As of the effective date of the merger, each share of Allied common stock outstanding was converted into .45 shares of our common stock. We issued approximately 195.8 million shares of common stock to Allied stockholders in the merger. Allied stockholders received approximately 52% of the outstanding common stock of the combined company in respect of their Allied shares on a diluted basis as a result of the merger, and Republic stockholders retained approximately 48% of the outstanding common stock of the combined company on a diluted basis. The total purchase price paid for Allied, including the value of common stock issued (based on the average closing prices of Republic’s common stock for the five-day period around June 23, 2008 (the announcement date)) totaled approximately $11.5 billion.

 

Republic has been determined to be the acquiring company for accounting purposes in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations (SFAS 141). Therefore, we have accounted for the merger as an acquisition of Allied by Republic, using the purchase method of accounting in accordance with GAAP. Our consolidated financial statements include the operating results of Allied from the date of the acquisition, and have not been retroactively restated to include Allied’s historical financial position or results of operations. In accordance with the purchase method of accounting, the purchase price paid has been allocated to the assets and liabilities acquired based upon their estimated fair values as of the acquisition date, with the excess of the purchase price over the net assets acquired being recorded as goodwill. Republic is in the process of valuing all of the assets and liabilities acquired in the acquisition, and, until we have completed our valuation process, there may be adjustments to our estimates of fair values and the resulting preliminary purchase price allocation.

 

Cost in excess of fair value of net assets acquired (goodwill) associated with the acquisition of Allied totaled $9.0 billion. In addition, when we acquire landfills as part of a group of assets, we allocate part of the purchase price to airspace based on the estimated fair value of the landfills relative to the fair value of other assets within the acquired group. We allocated $2.6 billion of the total purchase price paid for the acquisition of Allied to landfill airspace. Landfill purchase price is amortized using the units-of-consumption method over total available airspace, which includes probable expansion airspace where appropriate.

 

As a condition of the merger with Allied, we reached a settlement with the DOJ requiring us to divest of assets serving fifteen metropolitan areas, including Los Angeles and San Francisco, CA; Denver, CO; Atlanta, GA; Northwestern Indiana; Lexington, KY; Flint, MI; Cape Girardeau, MO; Charlotte, NC; Cleveland, OH; Philadelphia, PA; Greenville-Spartanburg, SC; and Fort Worth, Houston and Lubbock, TX. The settlement requires us to divest of 87 commercial waste collection routes, nine municipal solid waste landfills and ten transfer stations, together with ancillary assets and, in three cases, access to landfill disposal capacity. In February 2009, we entered into an agreement to divest certain assets to Waste Connections, Inc. The assets that are being divested under this agreement include six municipal solid waste landfills, six collection operations and three transfer stations across the following seven markets: Los Angeles, CA; Denver, CO; Houston, TX; Lubbock, TX; Greenville-Spartanburg, SC; Charlotte, NC; and Flint, MI. The transaction with Waste Connections is subject to closing conditions regarding due diligence, regulatory approval and other customary matters. Closing is expected to occur in the second quarter of 2009. Combined revenue of the assets being sold is approximately $110.0 million.

 

During December 2008, we incurred $82.7 million of restructuring charges associated with integrating our operations with Allied. These charges primarily consist of severance and other employee termination and relocation benefits and consulting fees paid to outside parties.

Other Business Acquisitions and Divestitures

 

In addition to the acquisition of Allied in December 2008, we acquired various other solid waste businesses during the years ended December 31, 2008, 2007 and 2006. The aggregate purchase price we paid for these transactions was $13.4 million, $4.4 million and $4.9 million, respectively.

 

Cost in excess of fair value of net assets acquired (goodwill) associated with these acquisitions during 2008, 2007 and 2006 totaled $2.2 million, $1.0 million and $1.0 million, respectively.

 

In November 2007, we divested of our Texas-based compost, mulch and soil business and received proceeds of $36.5 million. A gain of $12.5 million was recorded in 2007 on this divestiture.

 

Revenue

 

We generate revenue primarily from our solid waste collection operations. Our remaining revenue is from other services including landfill disposal and recycling.

 

The following table reflects our revenue by service line for the respective years ended December 31 (in millions):

 

 

Our revenue from collection operations consists of fees we receive from commercial, industrial, municipal and residential customers. Our residential and commercial collection operations in some markets are based on long-term contracts with municipalities. We generally provide industrial and commercial collection services to individual customers under contracts with terms up to three years. Our revenue from landfill operations is from disposal or tipping fees charged to third parties. In general, we integrate our recycling operations with our collection operations and obtain revenue from the sale of recyclable materials. No one customer has individually accounted for more than 10% of our consolidated revenue or of our reportable segment revenue in any of the last three years.

 

The cost of our collection operations is primarily variable and includes disposal, labor, self-insurance, fuel and equipment maintenance costs. It also includes capital costs for equipment and facilities. We seek operating efficiencies by controlling the movement of waste from the point of collection through disposal. During December 2008, subsequent to our acquisition of Allied, approximately 67% of the total volume of waste we collected was disposed of at landfills that we own or operate.

 

Our landfill costs include daily operating expenses, costs of capital for cell development, costs for final capping, closure and post-closure, and the legal and administrative costs of ongoing environmental compliance. Daily operating expenses include leachate treatment and disposal, methane gas and groundwater monitoring and system maintenance, interim cap maintenance, and costs associated with the application of daily cover materials. We expense all indirect landfill development costs as they are incurred. We use life cycle accounting and the units-of-consumption method to recognize certain direct landfill costs related to cell development. In life cycle accounting, certain direct costs are capitalized, and charged to expense based on the consumption of cubic yards of available airspace. These costs include all

costs to acquire and construct a site including excavation, natural and synthetic liners, construction of leachate collection systems, installation of methane gas collection and monitoring systems, installation of groundwater monitoring wells, and other costs associated with the acquisition and development of the site. Obligations associated with final capping, closure and post-closure are capitalized, and amortized on a units-of-consumption basis as airspace is consumed.

 

Cost and airspace estimates are developed at least annually by engineers. These estimates are used by our operating and accounting personnel to adjust the rates we use to expense capitalized costs. Changes in these estimates primarily relate to changes in costs, available airspace, inflation and applicable regulations. Changes in available airspace include changes in engineering estimates, changes in design and changes due to the addition of airspace lying in expansion areas that we believe have a probable likelihood of being permitted.

 

Summarized financial information concerning our reportable segments for the years ended December 31, 2008, 2007 and 2006 is shown in the following table (in millions, except percentages):

 

 

 

 

 

Our operations are managed and reviewed through four geographic regions that we designate as our reportable segments. We acquired Allied on December 5, 2008, and, due to the timing of the acquisition, management reviewed and we have presented Allied as a separate reportable segment in our

consolidated financial statements. In addition, during the first quarter of 2008, we consolidated our Southwestern operations into our Western Region and, accordingly, the historical operating results of our Southwestern operations have been consolidated into our Western Region.

 

2008 compared to 2007:

 

 

The operating loss in 2008 includes remediation charges of $99.9 million related to estimated costs to comply with the F&Os issued by the OEPA and the AOC issued by the EPA related to our Countywide facility and an impairment charge of $75.9 million related to the anticipated loss of permitted airspace at Countywide based upon recent negotiations with the OEPA and EPA. It also includes $11.0 million of settlement reserves for certain legal matters.

 

Operating income for 2007 includes a $44.6 million charge to operating expenses associated with environmental conditions at Countywide.

 

 

Operating margins decreased during 2008 compared to 2007 due to an adjustment to landfill amortization expense associated with SFAS 143 during 2007.

 

 

Operating margins decreased during 2008 compared to 2007 due to higher fuel costs partially offset by higher revenue, lower disposal costs and lower insurance costs.

 

 

Operating income in 2008 includes a $34.0 million charge related to estimated costs to comply with a Consent Decree and Settlement Agreement signed with the EPA, the Bureau of Land Management and Clark County, Nevada related to the Sunrise Landfill. It also includes a $21.9 million charge recorded during 2008 associated with environmental conditions at our closed disposal facility in Contra Costa County, California.

 

Operating income in 2007 includes an $8.1 million increase in landfill operating costs and a $5.2 million increase in SFAS 143 amortization expense associated with environmental conditions at our closed disposal facility in Contra Costa County, California.

 

 

 

2007 compared to 2006:

 

 

Operating margins decreased from 16.2% to 11.5% primarily because of a $44.6 million charge to operating income associated with environmental conditions at our Countywide facility.

 

 

Operating margins increased due to higher revenue, lower disposal costs and adjustments to landfill amortization expense associated with SFAS 143. This increase in operating margins was partially offset by increases in risk insurance and landfill operating costs.

 

 

Operating margins increased primarily due to higher revenue, lower disposal costs due to drier weather, lower truck and equipment maintenance costs, and lower labor costs.

 

 

Operating margins decreased because of an $8.1 million increase in landfill operating costs and a $5.2 million increase in SFAS 143 amortization expense associated with environmental conditions at our closed disposal facility in Contra Costa County, California.

 

 

2008 Business Performance

 

During 2008, our internal revenue growth was 2.5% with a 4.0% increase in core price offset by a 3.9% decrease in core volume. During 2008, we experienced lower volumes in all of our lines of business due to the economic slowdown. Revenue growth from fuel surcharges and environmental fees was 1.8% and .4%, respectively. In addition, our merger with Allied in December 2008 resulted in a 13.4% increase in revenue.

The cost of fuel increased significantly during the summer and fall of 2008. The economic slowdown helped to moderate fuel prices in the later part of the year. Fuel ended the year at levels consistent with those experienced during 2007. This decrease in fuel prices was offset by corresponding declines in fuel surcharges and, therefore, did not significantly improve our profitability.

 

Also during 2008, prices for recycling commodities declined in response to a decline in global demand. Although we hedged a portion of our commodity sales, declines in commodity prices have had, and will continue to have, a significant impact on our profitability.

 

2009 Business Initiatives

 

Our business initiatives for 2009 focus on the timely integration of our operations with Allied’s, while remaining focused on the aspects of our operations that have made us successful. Our initiatives include:

 

 

Consolidated Results of Operations

 

Years Ended December 31, 2008, 2007 and 2006

 

Our net income was $73.8 million for the year ended December 31, 2008, or $.37 per diluted share, compared to $290.2 million, or $1.51 per diluted share, in 2007 and $279.6 million, or $1.39 per diluted share, in 2006.

 

In January 2007, our Board of Directors approved a 3-for-2 stock split in the form of a stock dividend, effective on March 16, 2007, to stockholders of record as of March 5, 2007. We distributed approximately 64.5 million shares from treasury stock to effect the stock split. Our shares, per share data and weighted average common and common equivalent shares outstanding have been retroactively adjusted for all periods to reflect the stock split.

During the year ended December 31, 2008, we recorded a number of charges and other expenses that impacted our pre-tax income, net income and diluted earnings per share. These items primarily consist of the following (in millions, except per share data):

 

 

 

 

The following table summarizes our operating revenue, costs and expenses in millions of dollars and as a percentage of our revenue for the years ended December 31, 2008, 2007 and 2006:

 

 

Revenue. Revenue was $3.7 billion, $3.2 billion and $3.1 billion for the years ended December 31, 2008, 2007 and 2006, respectively. Revenue increased $508.9 million, or 16.0%, from 2007 to 2008. Our acquisition of Allied in December 2008 contributed $463.7 million to this increase in revenue. Revenue

increased by $105.6 million, or 3.4%, from 2006 to 2007. The following table reflects the components of our revenue growth for the years ended December 31, 2008, 2007 and 2006:

 

 

 

 

 

Cost of Operations. Cost of operations was $2.4 billion, $2.0 billion and $1.9 billion, or, as a percentage of revenue, 65.6%, 63.1% and 62.7%, for the years ended December 31, 2008, 2007 and 2006, respectively.

 

The increase in cost of operations in aggregate dollars for the year ended December 31, 2008 versus the comparable 2007 period is primarily a result of our acquisition of Allied in December 2008. The remaining increase in cost of operations in aggregate dollars and the increase as a percentage of revenue is primarily due to charges we recorded during 2008 of $98.0 million related to estimated costs to comply with F&Os issued by the OEPA and the AOC issued by the EPA in response to environmental conditions at our Countywide facility in Ohio, $21.9 million related to environmental conditions at our closed disposal facility

in Contra Costa County, California and $34.0 million related to environmental conditions at the Sunrise Landfill. The increase in cost of operations and as a percentage of our revenue for the year ended December 31, 2007 versus the comparable 2006 period is primarily a result of the $41.0 million charge we recorded in cost of operations related to environmental conditions at our Countywide facility and an $8.1 million charge related to our closed disposal facility in Contra Costa County, California.

 

The following table summarizes the major components of our cost of operations for the years ended December 31, 2008, 2007 and 2006 in millions of dollars and as a percentage of our revenue:

 

 

A description of our cost categories is as follows:

 

 

 

The cost categories shown above may change from time to time and may not be comparable to similarly titled categories used by other companies. As such, care should be taken when comparing our cost of operations by cost component to that of other companies.

 

Depreciation, Amortization and Depletion of Property and Equipment. Depreciation, amortization and depletion expenses for property and equipment were $342.3 million, $299.0 million and $289.0 million, or, as a percentage of revenue, 9.3%, 9.4% and 9.4%, for the years ended December 31, 2008, 2007 and 2006, respectively. The increase in such expenses in aggregate dollars for the year ended December 31, 2008 versus the comparable 2007 is primarily due to our acquisition of Allied in December 2008. The decrease in such expenses as a percentage of revenue for the year ended December 31, 2008 versus the comparable 2007 period is primarily due to a reduction of amortization expense associated with lower landfill volumes. The increase in such expenses in aggregate dollars for the year ended December 31, 2007 versus the comparable 2006 period is partially due to $3.3 million of adjustments to landfill amortization expense for changes in estimates and assumptions related to our reviews of landfill asset retirement obligations under SFAS 143. In addition, during the year ended December 31, 2007, we incurred approximately $3.3 million of additional depletion and amortization expense associated with a reduction of estimated remaining available airspace at our Countywide facility. Depreciation expense during 2007 was also slightly higher due to our ongoing truck and equipment replacement program.

 

Amortization of Intangible Assets. Intangible assets that have a finite life and are amortized generally consist of customer relationships, long-term contracts and covenants not to compete. Expenses for amortization of intangible assets were $11.8 million, $6.5 million and $7.0 million, or, as a percentage of revenue, .3%, .2% and .2% for the years ended December 31, 2008, 2007 and 2006, respectively. The increase in such expenses in aggregate dollars and as a percentage of revenue for the year ended December 31, 2008 versus the comparable 2007 and 2006 periods is due to the amortization of intangible assets recorded as a result of our acquisition of Allied. We expect this acquisition will increase our intangible asset amortization expense by approximately $65.0 million in 2009.

 

Accretion Expense. Accretion expense was $23.9 million, $17.1 million and $15.7 million, or, as a percentage of revenue, .7%, .5% and .5% for the years ended December 31, 2008, 2007 and 2006, respectively. The increase in such expenses in aggregate dollars in 2008 versus the comparable 2007 and 2006 periods is primarily due to an increase in asset retirement obligations associated with our acquisition of Allied. The asset retirement obligations acquired from Allied are recorded using a discount rate of 9.75%, which is higher than the credit-adjusted, risk-free rate we have used historically to record such obligations. Our accretion expense in 2009 will reflect the increase in asset retirement obligations recorded in the acquisition of Allied and the impact of using a higher overall average discount rate for recording these liabilities.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $434.7 million, $313.7 million and $315.0 million, or, as a percentage of revenue, 11.8%, 9.9% and 10.3%, for the years ended December 31, 2008, 2007 and 2006, respectively.

 

The increase in such expenses both in aggregate dollars and as a percentage of revenue for the year ended December 31, 2008 versus the comparable 2007 period is primarily due to $14.2 million of bad debt expense related to conforming Allied’s methodology for recording the allowance for doubtful accounts on accounts receivable with ours and $5.4 million to provide for specific bankruptcy exposures. This increase is also due to $24.3 million of settlement charges related to our estimates of the outcome of various legal matters.

 

Excluding these costs, selling, general and administrative expenses for the year ended December 31, 2008 would have been $390.8 million, or 10.6% as a percentage of revenue. The increase in selling,

general and administrative expenses (excluding the costs mentioned above) in aggregate dollars during 2008 versus the comparable 2007 period is primarily due to our merger with Allied. The increase in such expenses as a percentage of revenue for 2008 versus the comparable 2007 period is primarily due to our merger with Allied and a $4.3 million reduction in our allowance for doubtful accounts which we recorded during the year ended December 31, 2007 as a result of refining our estimate for our allowance based on our historical collection experience.

 

The increase in such expenses in aggregate dollars for the year ended December 31, 2007 versus the comparable 2006 period is primarily due to the expansion of our business. The decrease in such expenses as a percentage of revenue for 2007 versus 2006 is primarily due to a reduction in incentive compensation costs and the $4.3 million reduction to our allowance for doubtful accounts recorded during 2007.

 

Upon the completion of the integration of Allied, our goal is to maintain our selling, general and administrative costs at no more than 10.0% of revenue, which we believe is appropriate given our existing business platform.

 

Asset Impairments. During the year ended December 31, 2008, we recorded a $75.9 million charge related to the impairment of our Countywide facility. This impairment relates to the anticipated loss of permitted airspace associated with complying with F&Os issued by the OEPA and the AOC issued by the EPA based upon recent negotiations with the OEPA and the EPA. During the year ended December 31, 2008, we recorded a loss of $6.1 million for expected losses on asset divestitures mandated by the DOJ. Also during the year ended December 31, 2008, we recorded $7.8 million of other impairment charges, consisting primarily of charges related to our former corporate headquarters in South Florida.

 

Restructuring Charges. During the year ended December 31, 2008, we incurred $82.7 million of restructuring charges associated with integrating our operations with Allied. These charges primarily consist of severance and other employee termination and relocation benefits and consulting fees paid to outside parties.

 

Operating Income. Operating income was $283.2 million, $536.0 million and $519.5 million, or, as a percentage of revenue, 7.7%, 16.9% and 16.9%, for the years ended December 31, 2008, 2007 and 2006, respectively. The reduction in operating income as a percentage of revenue for 2008 versus the comparable 2007 and 2006 periods is primarily due to the remediation, asset impairment and restructuring charges noted above.

 

Interest Expense. We incurred interest expense primarily on our credit facilities, senior notes and tax-exempt bonds. Interest expense was $131.9 million, $94.8 million and $95.8 million for the years ended December 31, 2008, 2007 and 2006, respectively. The increase in interest expense during the year ended December 31, 2008 versus the comparable 2007 period is primarily due to the additional debt we acquired as a result of our acquisition of Allied. In addition, during December 2008, we incurred approximately $10.1 million of non-cash interest expense. This expense relates primarily to a $624.3 million discount we recorded to fair value the debt we acquired from Allied that is being amortized generally over the term of the related debt. It also relates to accretion expenses associated with discounted environmental and risk insurance reserves.

 

Capitalized interest was $2.6 million, $3.0 million and $2.7 million for the years ended December 31, 2008, 2007 and 2006, respectively.

 

Interest Income and Other Income (Expense), Net. Interest income and other income, net of other expense, was $8.0 million, $26.9 million and $20.0 million for the years ended December 31, 2008, 2007 and 2006, respectively. The amount in 2007 is primarily due to a $12.5 million gain related to the sale of our compost, mulch and soil business in Texas.

 

Income Taxes. Our provision for income taxes was $85.4 million, $177.9 million and $164.1 million for the years ended December 31, 2008, 2007 and 2006, respectively. Our effective income tax rate was 53.6%, 38.0% and 37.0% for the years ended December 31, 2008, 2007 and 2006, respectively. During the year ended December 31, 2008, we incurred several expenses that were not tax deductible as a result of the

merger with Allied. In addition, lower pre-tax earnings contributed to the increase in the effective tax rate. During the year ended December 31, 2007, we recorded a net tax benefit of $4.8 million in our provision for income taxes related to the resolution of various income tax matters, including the effective completion of Internal Revenue Service audits of our consolidated tax returns for fiscal years 2001 through 2004. Income tax expense for the year ended December 31, 2006 includes a $5.1 million benefit related to the resolution of various income tax matters, including the effective completion of Internal Revenue Service audits for the years 1998 through 2000.

 

Landfill and Environmental Matters

 

Available Airspace

 

The following tables reflect landfill airspace activity for active landfills owned or operated by us for the years ended December 31, 2008, 2007 and 2006: