Item 1A. Risk Factors
Risk Factors
Our consolidated results of operations, financial position, cash flows and reputation can be adversely affected by various risks. These risks include the principal factors listed below and the other matters set forth in this Form 10-K. There may be additional risks of which we are not presently aware or that we currently believe are immaterial that could have an adverse impact on our business.
BUSINESS, STRATEGY AND MARKET RISKS
Fluctuations in the commodity market related to the demand and price for recycled paper affects our business, financial condition and results of operations.
We sell nearly all of the shredded paper from our secure information destruction business to paper companies and recycled paper brokers. SOP is marketed as a commodity and is subject to significant demand and price fluctuations beyond our control. Additionally, the market demand for recycled paper can be volatile due to factors beyond our control. Historically, economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates have created cyclical changes in prices, volume, revenues, and margins for pulp and paper products. The length and magnitude of industry cycles have varied over time and by product, but generally reflect changes in macroeconomic conditions and levels of industry capacity. The overall levels of demand for the pulp and paper products reflect fluctuations in levels of end-user demand, which depend in part on general macroeconomic conditions in North America and worldwide. We have experienced a decline in paper tonnage collected over the past several years which we believe is a reduction in the consumption of paper due to an increase in the use of computers and digital technology and pandemic related impacts, such as a shift to remote work and virtual learning, and it remains unclear what the future long-term impact will be on the paper volume we collect. Lack of demand for our shredded paper material or increasing uses of substitutes for SOP could adversely affect our business, our results of operations and financial condition.
Unfavorable market conditions, including those driven by economic or social trends, may impact the volume of regulated wastes or personal and confidential information we collect from customers.
The compliance-based services we provide rely on the generation of regulated wastes or personal and confidential information by our customers. The volume of material collected from our customers may be impacted by macro-economic trends associated with manufacturing and industrial markets, healthcare market dynamics, and trends associated with an increase in work-from-home arrangements and electronic and digital record keeping. Some of our services are provided on a subscription basis with a monthly fee to minimize short-term or cyclical variability associated with these factors. However, certain of our services are provided on a transactional basis, and long-term trends resulting from these factors could reduce the demand for our services, whether we provide them on a subscription or transactional basis. It can also negatively impact our ability to adequately forecast the demand for our services, which can negatively impact our results of operations and financial condition. In addition, an economic recession would likely impact the general business environment and the capital markets, which could, in turn, affect the Company.
Changing market conditions in the healthcare industry, healthcare consolidation and healthcare reform, could adversely affect our results of operations.
In the U.S. and elsewhere, the healthcare industry is evolving to meet competing demands for increased healthcare coverage of a growing and aging population and economic pressures to reduce healthcare costs. As a result of these dynamics, hospital networks are consolidating physician practices into their networks, independent practices are consolidating together, and healthcare providers are focused on cutting costs within their businesses. These changes exert downward pricing pressure, including the impact of GPO rebates and administrative fees, on services that we provide to healthcare customers, which could adversely affect our results of operations. The consolidation of this customer base also increases the competitive nature of the healthcare waste industry, which could significantly and adversely affect our results of operations and financial condition
Aggressive pricing by existing competitors and the entrance of new competitors could significantly and adversely affect our results of operations.
The industries in which we participate are highly competitive. Some of our competitors may have lower financial expectations, allowing them to reduce their prices to expand sales volume or to win competitively bid contracts. Some of our competitors may also have large national accounts and/or exclusive waste franchise agreements with
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municipalities. This competition has required us in the past to reduce our prices to our customers, may require us to reduce our prices in the future or may affect our ability to increase prices in the future. We may also lose customers or be unable to execute our pricing strategy. We may elect to exit or not participate in certain markets or to disengage with low margin customer relationships. Price reductions or our inability to increase prices due to competition or regulation could significantly and adversely affect our results of operations and financial condition.
Some of our larger competitors in the markets that we serve are national companies with substantial resources, or companies funded by private equity firms. In addition to our larger competitors, there are many regional and local companies in the regulated waste and secure information destruction industries. We face direct competition from a large number of small, local competitors. Competition from regional or local companies is likely to exist in new locations to which we may expand in the future or may limit our ability to extend into those markets at all. We may also face competition from competitors employing new or alternative technologies which may include technologies intended to reduce the carbon emissions attributable to the services offered by the Company and its competitors. For example, competitors may outpace our ability to adopt alternative vehicle technology or alternative technology to treat medical waste.
Our business is subject to risks arising from infectious disease outbreaks and pandemics.
A significant outbreak, epidemic or pandemic of contagious diseases in any geographic area in which we operate could result in a health crisis adversely affecting the economies, financial markets and overall demand for our services in such areas. Increased needs for regulated waste collection, treatment and disposal can have a positive effect on our business and may increase the demand for our services. However, any preventative or protective actions that governments implement or that we take in response to a health crisis, such as travel restrictions, quarantines, or facility closures, may interfere with the ability of our employees and vendors to perform their responsibilities. Such results could have a material adverse effect on our results of operations.
The extent to which disease outbreaks, such as the coronavirus pandemic, mpox (formerly monkeypox), Ebola virus and Disease X, impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the outbreak; governmental, business and individuals’ actions, vaccination and quarantine requirements, waste treatment and disposal requirements, economic activity that effects our customers’ demand for our services; our ability to provide our services; the ability of our customers to pay for our services; any closures of our and our customers’ facilities; staffing levels at medical facilities; and the need for enhanced health and hygiene requirements or other measures taken in an attempt to counteract future outbreaks in our or our customers’ facilities.
OPERATIONAL RISKS
Complications could occur with the implementation of system modernization that could adversely impact our business and operations.
We rely on information systems and technology to manage our business and summarize operating results. We intend to continue to modernize our systems and associated infrastructure. Integrated systems are designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely information to the Company’s management team related to the operation of our business. The system modernization process has required, and will continue to require, the investment of personnel and financial resources. We may not be able to successfully complete any system modernization without experiencing increased costs and other difficulties and our planned timeline to implement the system modernization may be delayed. If we are unable to successfully implement system modernization as planned, our business, results of operations, and financial condition could be negatively impacted. The SID North America ERP deployment in 2021 impacted earnings in the third quarter of 2021 and the timing of billing and collections also impacted bad debt reserves in 2021 and 2022. The RWCS North America deployment in 2023 impacted timing of billing and collections in Q4 2023. These impacts were due to typical ERP start-up , which included team members learning new processes and technology across every aspect of the business and onboarding and tuning the flow of data elements through the system. To the extent we experience billing and collections , lower levels of revenue or higher levels of debt expense or customer concessions may result. Additionally, if we do not effectively implement systems modernization as planned or system modernizations do not operate as intended, we may experience higher levels of customer and , savings from systems may not be , or the effectiveness of our internal control over financial reporting could be affected or our ability to assess and operate those controls could be .
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We may not realize the expected financial benefits within the anticipated timeline from our continuous improvement efforts including operational efficiency, modernization and innovation actions, among others.
We remain focused on continuous improvements including operational efficiency, modernization, and innovation to control costs and improve performance and efficiencies. We analyze opportunities in areas such as facility footprint, processing capabilities, equipment needs, team member requirements, fleet replacement and route and long-haul network improvements, managed service opportunities, and container rationalization and modernization. We will continue to evaluate our operating needs and may prospectively adjust our workforce to align. Some of our infrastructure and facilities have been in service for many years, which may result in a higher level of future maintenance costs and unscheduled repairs. Further, a portion of our infrastructure and facilities may need to be improved or replaced to maintain or increase operational efficiency, sustain production capacity, or meet changing regulatory requirements. We may incur more charges and cash expenditures than estimated and may not realize the expected or cost savings in the planned timeframe or at all. As we continue to consider each Operational Optimization activity, the amount, the timing and recognition of charges may be affected by the occurrence of commitments and triggering events as defined under U.S. GAAP, among other factors. We may incur more charges and cash expenditures than estimated and may not realize the expected or cost savings on its planned time frame or at all.
Increases in transportation costs and technological transitions may adversely affect our business and reduce our earnings.
We maintain an extensive transportation network and fleet of vehicles. A significant increase in market prices for trucks or fuel could adversely affect our business through higher transportation costs and reduce our operating margins and reported earnings. Vehicle and parts shortages due to a reduction in the availability of raw materials, supply chain challenges, and manufacturing delays are expected to continue to drive higher prices for vehicles, parts and supplies. In addition, any increases in the prices of fossil fuels are expected to put pressure on our fuel expense, as well as parts and supplies derived from fossil fuels, such as engine oil, diesel exhaust fluid, tires and other rubber and plastic parts.
As an operator of an extensive fleet of vehicles, most of which are heavy-duty trucks that utilize fossil fuels, we will be impacted by emerging regulations that require the transition to different engine technologies, such as electric powered vehicles. Depending upon the scope and pace of such regulations, we may need to direct future capital investments toward alternative fuel and zero emission fleet assets to meet vehicle requirements and accelerated transition timelines. Our operational processes could be impacted, and we could experience increases to our operational costs as well as increased expenditures to acquire the vehicles and infrastructure.
We are subject to legislation and extensive governmental regulation, which is frequently difficult, expensive, and time-consuming with which to comply; noncompliance could adversely affect our operations and efforts to grow our business results.
The regulated waste management and secure information destruction industries are subject to extensive federal, state and local laws and regulations relating to the collection, transportation, packaging, labeling, handling, documentation, reporting, treatment and disposal of regulated waste and the proper handling and protection of personal and confidential information. Our business requires us to obtain many permits, authorizations, approvals, certificates, and other types of governmental permissions and to comply with various regulations in every jurisdiction in which we operate. Federal, state and local laws and regulations change often, and new requirements are frequently adopted. Changes in applicable laws and regulations could require us to obtain new permits or to change the way in which we operate our business.
We might be unable to obtain or maintain the permits that we require, and/or the cost of compliance with new or changed regulations could be significant. Many of the permits that we require, especially those to build and operate waste processing and treatment plants and transfer facilities, are difficult and time-consuming to obtain and they may not be issued as quickly as we need them or be issued at all. For example, permitting availability and timelines may be impacted by emerging environmental justice regulation aimed at expanding opportunities for public participation in the process, and restricting or prohibiting industrial uses of certain locations. Even where permits are obtained, they may contain conditions or restrictions that limit our ability to operate efficiently. If we cannot obtain the permits, or if they contain unfavorable conditions, it could substantially impair our operations and reduce our revenues and/or profitability. For additional information, please see Part II, Item 8, Financial Statements and Supplementary Data; Note 19 – Legal Proceedings in the Consolidated Financial Statements.
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If we encounter regulatory compliance issues in the course of operating our businesses, we may experience adverse publicity, which may intensify if such non-compliance results in legal liability. Any legal liability for non-compliance or adverse publicity from such non-compliance may harm our reputation, and result in difficulties in attracting new customers, or retaining existing customers which would impact our results of operations and financial condition.
The level of governmental enforcement of regulated waste and certain other regulations has an uncertain effect on our business and could reduce the demand for our services.
We believe that strict enforcement of laws and regulations relating to regulated waste collection, treatment and disposal and the handling and protection of personal and confidential information, can have a positive effect on our business, as these laws and regulations may increase the demand for our services. Relaxation of enforcement, government shutdowns, or other changes in governmental regulation of regulated waste and personal and confidential information could increase the number of competitors we face or reduce or delay the need for our services.
Cyber incidents or malicious attacks on our information technology systems could damage our reputation, negatively impact our businesses and expose us to litigation risk.
We use computers in substantially all aspects of our business operations. We also use mobile devices, social networking and other online activities to connect with our team members and our customers. We rely heavily on various proprietary and third-party information systems. Our reputation for the secure handling of customer and other sensitive information is critical to the success of our business. Like other large, global corporations, we are potentially subject to a range of cyber attacks, including but not limited to state-sponsored cyber-attacks, industrial espionage, insider threats, computer denial-of-service attacks, computer viruses, ransomware and other malware, data leakage and compromise, wire fraud, phishing incidents and other cyber incidents. Further, bad actors around the world use increasingly sophisticated methods, including the use of AI, to engage in illegal activities involving the theft and misuse of personal information, confidential information, and intellectual property. In any cyber that we may experience, our ability to detect an , response capabilities, business continuity procedures and recovery planning may not be entirely as our information technology and network infrastructure may still be to attacks or due to employee , , computer viruses, power , natural , acts of terrorism, with respect to third-party systems or vendors or other . A cybersecurity and of our information systems could lead to theft, , of life, to property, environmental issues, or release of sensitive and/or confidential information or intellectual property, which could result in business , publicity, of privacy laws, of customers, brand , financial and operational results, and potential . Although we maintain insurance coverage for various cybersecurity risks, there is no guarantee that all costs or incurred will be fully insured.
Our management depends on relevant and reliable information for decision-making purposes, including key performance indicators and financial reporting. Any significant loss of data, failure to maintain reliable data, disruptions affecting our information systems, or delays or difficulties in transitioning to new systems could adversely affect our business, financial condition and results of operations. In addition, our ability to continue to operate our businesses without significant interruption in the event of a disaster or other disruption depends in part on the ability of our information systems to operate in accordance with our disaster recovery and business continuity plans. If our information systems fail and our redundant systems or disaster recovery plans are not adequate to address such failures, or if our business insurance does not sufficiently compensate us for any that we may incur, our revenues and profits could be reduced and the reputation of our brands and our business could be affected. In addition, remediation of such could result in significant, capital investments.
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Issues related to the development and use of AI present new risks and challenges and could adversely affect our business and operating results.
Issues in the development and use of AI, including generative AI tools and large language models, combined with an uncertain regulatory environment, may result in reputational harm, liability, or other adverse consequences to our business operations. AI presents risks, challenges, and unintended consequences that could affect our and our customers’ and vendors' adoption and use of this technology. If we, our customers or vendors, or our third-party partners experience an actual or perceived breach of privacy or security incident because of the use of AI, we may lose valuable intellectual property and confidential information and our reputation and the public perception of the effectiveness of our security measures could be harmed. AI-related issues, deficiencies and/or failures could (i) give rise to legal and/or regulatory actions, including with respect to proposed legislation regulating AI in jurisdictions such as the European Economic Area; (ii) our reputation; or (iii) otherwise affect our business and operating results.
The handling of secure information for destruction exposes us to potential data security risks that could result in monetary damages against us and could otherwise damage our reputation, and adversely affect our business, results of operations, and financial condition.
The protection of customer, employee, and other company data is critical to our business. The regulatory environment regarding information security and privacy in the U.S. and other countries in which we operate is continuously evolving and becoming increasingly demanding, with the frequent imposition of new and regularly changing requirements. Certain legislation, including FACTA, HIPAA, the Economic Espionage Act in the U.S., the Personal Information Protection and Electronic Documents Act in Canada and the GDPR in the U.K. and EU, require documents to be securely destroyed to avoid identity theft and inadvertent disclosure of confidential and sensitive information. In addition, an increasing number of countries and states in the U.S. have introduced and/or increased enforcement of comprehensive privacy laws or are expected to do so. The continued emphasis on information security as well as increasing concerns about government surveillance may lead customers to request us to implement additional safeguards or controls to enhance our security and/or assume higher liability under our contracts. As a result of legislative initiatives and customer demands, we may have to modify our operations, as well as our internal compliance programs, to further improve data security. Any such modifications may result in increased expenses and operational complexity, and affect our reputation, business, financial condition and operations. A significant of customer, employee, or other company data could attract a substantial amount of media attention, our customer relationships and our reputation, and result in revenues, , expenses, or lawsuits.
We depend on third parties to provide a variety of services.
We depend on third parties to provide a variety of services including information technology, finance and accounting and transporting and processing a portion of the regulated waste we collect from our customers, among others. We may continue to increase our dependence on third-party providers for services. The failure of these service providers to meet their obligations or the development of significant disagreements or other factors may disrupt our ongoing relationship with these providers or the services they provide, which could adversely affect our business, financial condition or results of operations. In addition, failure by waste disposal vendors to properly handle or dispose of the regulated waste we collect from customers could expose us to liability, increase our costs, damage our reputation and generally have an adverse effect on our business, financial condition or results of operations.
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Risks from our International operations could adversely affect our business, financial condition and results of operations.
We have operations in the U.S. and 10 other countries. Foreign operations carry specific risks including: (i) exchange rate and interest rate fluctuations; (ii) substantial inflation in certain markets; (iii) dependence in certain markets on government entities as customers; (iv) delays in the collection of accounts receivable related to certain government funding practices; (v) government controls; (vi) import and export license requirements; (vii) political or economic instability, social unrest, and public safety and security; (viii) changes in or compliance with U.S., local or other applicable laws and regulations, including laws and regulations concerning anti-corruption, anti-bribery (i.e . FCPA, U.K. Bribery Act and similar laws), global trade, trade sanctions, competition, privacy and data protection; (ix) trade restrictions; (x) changes in tariffs and taxes; (xi) tax and foreign investment policies; (xii) industry or macro-economic trends; (xiii) permitting and regulatory standards; (xiv) differences in local laws, regulations, practices, and business customs; (xv) restrictions on repatriating foreign profits back to the U.S. or movement of funds to other countries; (xvi) difficulties in staffing and managing international operations; (xvii) increases and in labor costs; (xviii) property ownership restrictions in certain countries; and (xix) emerging trends or regulations related to reducing the impact of climate change. Any of the foregoing or other factors associated with doing business abroad could affect our business, financial condition and results of operations.
LEGAL, REGULATORY, AND COMPLIANCE RISKS
We are subject to pending legal proceedings that may result in material liability or otherwise harm our business.
We are a defendant in pending lawsuits and other legal proceedings involving private litigants and governmental authorities. See Part II, Item 8. Financial Statements and Supplementary Data; Note 19 – Legal Proceedings in the Consolidated Financial Statements. These current and future matters may result in significant liabilities and diversion of our management’s time, attention, and resources. Given the uncertain nature of litigation generally, we are not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome in these matters. In view of these uncertainties, the outcome of these matters may result in charges that materially exceed any accrued liabilities for contingent losses and, to the extent available, liability insurance. We engage an outside actuary twice a year to assist us in estimating these liabilities. Litigation outcomes may include civil, administrative or criminal penalties as well as other remedies that could materially our reputation, business, financial condition or results of operations, affect our liquidity and ability to service our indebtedness, or require us to or amend the terms of our indebtedness. While we generally carry liability insurance intended to cover these contingencies, instances may occur that are not insured or that are insured . An or could be substantial and could our and reduce our liquidity.
We are subject to extensive government imposed requirements; noncompliance may result in significant liabilities.
Our operations are subject to extensive federal, state and local laws and regulations. The consequences of failure to comply with government-imposed regulations, other requirements and contractual terms, including uncapped liability provisions in government customer contracts, can impact our ability to service our customers, and thus our operational results. Compliance with government regulations can also be costly, which can negatively impact our overall financial condition.
We are involved in government investigations, enforcement proceedings, private lawsuits and other disputes alleging non-compliance with applicable regulations, including possible noncompliance with the Controlled Substances Act and other statutes involving our former Domestic Environmental Solutions business of collecting, transporting, and destroying controlled substances from retail customers. See Part II, Item 8. Financial Statements and Supplementary Data; Note 19 – Legal Proceedings in the Consolidated Financial Statements. These matters may result in material liability against us, including permit revocations or denials, civil, criminal and administrative penalties, and other adverse consequences .
Under previously reported settlements with governmental authorities relating to our compliance with the FCPA and other foreign or domestic anti-corruption laws with respect to operations in Latin America, we have engaged an independent compliance monitor through 2024 and will undertake compliance with self-reporting obligations through 2025. See Part II, Item 8 Financial Statements and Supplementary Data; Note 19 – Legal Proceedings in the Consolidated Financial Statements. Other matters may arise in the future involving alleged violations of the FCPA, other anti-corruption and anti-bribery laws, or laws prohibiting doing business with sanctioned parties. These could subject us to enforcement actions by the SEC or the DOJ or other regulatory bodies, fines, penalties, further
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oversight by an independent compliance monitor and/or self-reporting obligations, litigation, or orders of suspension or debarment, which could adversely affect our business, financial condition and results of operations.
We face risk associated with regulated waste services and the potential regulation of emerging contaminants that may be present in materials historically and presently collected for treatment and disposal. We also face the risk of incurring significant environmental cleanup liabilities for our current operations, pre-existing conditions at the locations where we operate, and/or successor or predecessor liability associated with our portfolio optimization strategy.
Requirements of governments, customers and investors for net zero greenhouse gas emissions strategies, and the introduction of regulations restricting emissions of “greenhouse gases” aimed to limit climate change, could negatively impact our costs to operate.
Around the world, there are a wide range of legislative and regulatory efforts at the state, provincial, regional and federal levels focused on reducing greenhouse gas emission and minimizing the impact of climate change. These emerging legislative and regulatory efforts include, among other things, initiatives to reduce the use of fossil fuels, single use plastics, and waste volumes sent to landfills. We monitor the regulatory landscape and the potential impacts to our operations of such efforts. These evolving regulations and expectations could also affect certain management estimates, including long-lived asset useful lives and asset retirement obligations, which could adversely impact results of operations.
We monitor emerging climate-related regulations potentially impacting the Company on an ongoing basis. Specifically, the Company is monitoring regulations related to required emissions reporting, country mandates applied to industries that are related to carbon emissions reductions (for example, the U.K.’s sixth Carbon Budget, which expands the scope of industries covered by the U.K.’s carbon emission reduction goals), and regulations that limit the purchase or use of fossil fuel powered vehicles (for example, California’s Advanced Green Fleets regulation requiring medium- and heavy-duty vehicle fleets to transition to zero-emission vehicles and the UK’s policy that 80% of new cars and 70% of new light commercial vehicles must be zero emission by 2030, increasing to 100% by 2035).
The Company engages with customers to better understand their current approach and future strategies in response to climate-related regulation and business trends. Certain of the Company’s customers have established, or are in the process of establishing, goals for their organizations to be carbon neutral or reduce waste levels, especially wastes that go to landfills, and have extended such goals to their key vendors and business partners. For example, the National Health Service (“NHS”) in the U.K. established a goal for its suppliers to be net zero by 2045, and, in August 2022, introduced standard contract clauses relating to supplier sustainability which include incremental requirements such as undertaking ‘evergreen supplier’ assessments and the appointments by suppliers of ‘net zero champions’. This increased focus by customers on minimizing climate change impacts may require the Company to invest in incremental and higher-cost technologies for more efficient waste processing, collection services through our fleet of vehicles, or other operational impacts.
Increased focus on minimizing climate change from regulatory bodies, customers, and investors may impact our revenues as well as our cost of operations in the future.
Tax interpretations and changes in tax regulations and legislation could adversely affect us.
Tax interpretations, regulations and legislation in the various jurisdictions in which we operate are subject to measurement uncertainty and the interpretations can impact net income, income tax expense or recovery, and deferred income tax assets or liabilities. Tax rules and regulations, including those relating to foreign jurisdictions, are subject to interpretation and require judgment by us that may be challenged by the applicable taxation authorities upon audit. Furthermore, as a result of portfolio optimization efforts through which we may acquire new assets or businesses, sell existing assets or businesses, or exit particular markets, there may exist tax rules, regulations, or other matters that may be the focus of examination and challenge by applicable taxation authorities. Similarly, we may periodically restructure our legal entities and if taxing authorities were to disagree with our tax positions in connection with any such restructurings, our effective tax rate could be materially affected. In connection with such portfolio optimization, we could also incur additional charges associated with consulting fees and other charges.
Legislatures and taxing authorities in various jurisdictions in which we operate may propose changes to their tax rules. Furthermore, international tax norms that determine each country’s jurisdiction to tax are subject to change. In particular, a project undertaken by the Organisation for Economic Co-operation and Development (“OECD”) focuses on redefining jurisdictional taxation rights in market countries and establishing a global minimum tax. In December 2022, the European Union (“EU”) approved a directive requiring member states to incorporate a 15% global
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minimum tax into their respective domestic laws effective for fiscal years beginning on or after December 31, 2023. Important details of these minimum tax developments are still to be determined and, in various countries, enactment and timing remain uncertain. These changes could include modifications that have temporary effect, and more permanent changes. The impact of these potential new rules on us, our long-term tax planning, and our effective tax rate could be significant. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our Consolidated Financial Statements.
We have accumulated NOLs arising from our operations and foreign and domestic acquisitions of approximately $115.6 million as of December 31, 2023. We have recognized valuation allowances to reduce these amounts to our current estimate for NOLs that will be recoverable against future taxable income prior to their expiration in accordance with the appropriate tax regulations. If our estimates change or we do not generate sufficient taxable income prior to the expiration of these NOLs, we may have to record additional valuation allowances resulting in higher income tax expense. For additional information, please see Part II, Item 8. Financial Statements and Supplementary Data; Note 10 – Income Taxes .
Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated bylaws, which were adopted in December 2022, provide that, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law or any action asserting a claim against us that is governed by the internal affairs doctrine. The exclusive forum provision does not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Our amended and restated bylaws also provide that the U.S. federal district courts are the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended (the “Securities Act”). Any person or entity purchasing or otherwise acquiring any interest in any security of the Company shall be deemed to have notice of and consented to the provisions of our amended and bylaws described above. Under the Securities Act, federal and state courts have concurrent jurisdiction over all suits brought to enforce any duty or liability created by the Securities Act, and investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such a forum selection provision as written in connection with arising under the Securities Act. We believe these provisions may us by providing increased consistency in the application of Delaware law and federal securities laws by chancellors and judges, as applicable, particularly experienced in resolving corporate , administration of cases on a more expedited schedule relative to other forums and protection the of multi-forum . However, these provisions may have the effect of lawsuits our directors, officers, employees and agents, as it may limit any stockholder’s ability to bring a claim in a judicial forum that such stockholder finds for with us or our directors, officers, employees or agents. Alternatively, if a court were to find the choice of forum provision contained in our amended and bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could our business, financial condition and results of operations.
FINANCIAL AND CONTROL RISKS
Market conditions could adversely change and our earnings could decline resulting in charges to impair intangible assets, such as goodwill.
As a result of our various acquisitions, the Consolidated Balance Sheet at December 31, 2023, contains goodwill of $2.76 billion and other intangible assets, net of $686.5 million. We evaluate on an ongoing basis whether facts and circumstances indicate any impairment to the carrying value of indefinite-lived intangible assets such as goodwill. As circumstances after an acquisition can change, we may not realize the value of these intangible assets. Historically, we have recognized non-cash impairment charges related to our reporting units. The Company has historically recognized aggregate non-cash goodwill impairments of approximately $650 million, of which, approximately $550 million was related to divested reporting units. During 2023, 2022, and 2021 we recognized non-cash impairment charges of $3.1 million, $0, and $4.6 million, respectively, of operating permits, tradenames, and customer relationships. We recognized these impairments due to a reduction of forecasted future cash flows in each reporting unit, as discussed in the Impairment section of Part II, Item 7. Management’s Discussion and Analysis of Financial
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Condition and Results of Operations and Part II, Item 8. Financial Statements and Supplementary Data; Note 7 – Goodwill and Other Intangible Assets . The recognition of any potential future impairments could have a material adverse impact on our results of operations.
If we fail to maintain an effective system of internal controls over financial reporting, including increased risk associated with our ERP and system modernization, we may not be able to report our financial results timely and accurately or prevent fraud, which could adversely affect investor confidence in our company, our results of operations and our stock price.
Internal controls related to the operation of technology systems are critical to maintaining adequate internal control over financial reporting. We are implementing remedial measures and new systems and there can be no assurance that our efforts will be successful. These efforts and measures will result in additional technology and other expenses. If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods, could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price.
Some of our customers have suffered or may suffer financial difficulties affecting their credit risk, which could negatively impact our operating results.
We provide service to a number of customers, including governmental entities and municipalities, some of which have suffered or may suffer significant financial difficulties. Some of these entities could be unable to pay amounts owed to us, resulting in increased bad debt expense, or renew contracts with us at previous or increased rates. The inability of our customers to pay us in a timely manner or to pay increased prices could negatively affect our operating results.
We may incur significant charges as a result of portfolio optimization; portfolio optimization may not achieve the desired results.
We continue to evaluate the performance of our portfolio of assets and businesses. Based on this evaluation, we may acquire new assets or businesses and may sell certain existing assets or businesses or exit particular markets. Acquisitions and divestitures may not yield the targeted improvements in our business. Divestitures involve risks, including difficulties in the separation of operations, services, products and personnel, disruption in our operations or businesses, finding a suitable purchaser, the diversion of management’s attention from our other businesses, the potential loss of key team members, the erosion of employee morale or customer confidence, and the retention of contingent liabilities, including pursuant to indemnification provisions related to the divested business. Any charges, including those arising from indemnification provisions, that we are required to record or the failure to achieve the intended financial results associated with of businesses or assets could have a material effect on our business, financial condition or results of operations. Any and on resulting from this process may cause us to record significant charges, including those related to goodwill, other intangible assets, and accumulated currency translation adjustment . See Part II, Item 8. Financial Statements and Supplementary Data; Note 4 – , , and Asset in the Consolidated Financial Statements. Acquisitions also involve certain risks, including our ability to realize operating , synergies and other benefits expected from an acquisition, of management’s time and attention from other business , in retaining key employees, customers and suppliers of the acquired business, in maintaining uniform standards, controls, policies and procedures throughout acquired companies, and effects on existing business relationships with customers and suppliers. We may also face liability with respect to acquired businesses for of environmental laws occurring prior to the date of acquisition, and some or all of these liabilities may not be covered by environmental insurance secured to mitigate the risk or by indemnification from the sellers from which we acquired these businesses. See Part II, Item 8. Financial Statements and Supplementary Data; Note 3 – Acquisitions in the Consolidated Financial Statements.
Restrictions in our Credit Agreement and our Senior Notes could adversely affect our business, financial condition, results of operations, ability to make distributions and the value of our securities.
Our Credit Agreement contains customary affirmative covenants, including, among others, covenants pertaining to the delivery of financial statements; certain financial covenants; notices of default and certain other material events; payment of obligations; preservation of corporate existence, rights, privileges, permits, licenses, franchises and intellectual property; maintenance of property and insurance and compliance with laws, as well as customary negative covenants, including, among others, limitations on the incurrence of liens and entering into capital leases, investments and indebtedness; mergers and certain other fundamental changes; dispositions of assets; restricted
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payments; changes in our line of business; transactions with affiliates and burdensome agreements. These covenants could affect our ability to operate our business, increase the amount of interest expense we ultimately pay pursuant to the Credit Agreement, and may limit our ability to take advantage of potential business opportunities as they arise. Our Senior Notes also contain certain covenants that could have a similar effect on our ability to operate our business. Our Credit Agreement also includes a springing maturity provision whereby it springs to maturity 91 days prior to the maturity of the Senior Notes. As a result, if our $600.0 million Senior Notes due on July 15, 2024 are still outstanding on April 25, 2024, then the maturity date under our credit facility will spring to that date. The Company has the ability and intent to refinance the 2019 Senior Notes on a long-term basis through available capacity under its Revolving Credit Facility. Therefore, as of December 31, 2023, the 2019 Senior Notes remain classified as long-term debt in the Consolidated Financial Statements. On February 1, 2024, the Company issued a redemption notice to 2019 Senior Notes holders for redemption of all of the $600.0 million aggregate principal amount of the outstanding 2019 Senior Notes with a redemption date of March 14, 2024. See Part II, Item 8. Financial Statements and Supplementary Data; Note 9 – Debt in the Consolidated Financial Statements.
Our ability to comply with the covenants and restrictions contained in our Credit Agreement, along with certain of the covenants and restrictions contained in our Senior Notes, may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. A failure to comply with these provisions could result in a default or an event of default. Upon an event of default, unless waived, the lenders could elect to terminate their commitments, cease making further loans, require cash collateralization of letters of credit, cause their loans to become due and payable in full, foreclose against any assets securing the debt under our Credit Agreement and force us and our subsidiaries into bankruptcy or . If the payment of our debt is accelerated, our assets may be to repay such debt in full, and the holders of our stock could experience a partial or total of their investment. See Part II, Item 8. Financial Statements and Supplementary Data; Note 9 – Debt in the Consolidated Financial Statements.
Servicing debt and funding other obligations requires a significant amount of cash, and our ability to generate sufficient cash depends on many factors, some of which are beyond our control.
Our ability to make payments on and refinance our indebtedness and to fund our operations and capital expenditures depends on our ability to generate cash flow and secure financing in the future. Our ability to generate future cash flow depends, among other things, on future operating performance, general economic conditions, competition, and litigation, legislative and regulatory factors affecting our operations and business.
Some of these factors are beyond our control. There is no assurance that our business will generate cash flow from operations or that future debt or equity financings will be available to us to enable us to pay our indebtedness or to fund other needs. As a result, we may need to refinance all or a portion of our indebtedness on or before maturity. There is no assurance that we will be able to refinance any of our indebtedness on favorable terms, or at all. Any inability to generate sufficient cash flow or refinance our indebtedness on favorable terms could have an adverse effect on our financial condition.
The amount of our indebtedness could adversely affect our business.
As of December 31, 2023, we had a total of $1.31 billion of outstanding indebtedness, including long-term debt and short-term debt and excluding unamortized debt issuance costs. We also have the ability to incur additional indebtedness subject to our financial covenants.
Our outstanding indebtedness could have adverse consequences on our business, including the following: (i) we may be required to dedicate a substantial portion of our available cash to payments of principal and interest on our indebtedness, (ii) our ability to access credit markets on terms we deem acceptable may be impaired, and (iii) we may be limited in our flexibility to adjust to changing market conditions.
Our participation in multi-employer pension plans may subject us to liabilities that could materially adversely affect our liquidity, cash flows and results of operations.
We participate in multi-employer pension plans administered by employer and union trustees. To the extent that those plans are underfunded, ERISA may subject us to substantial liabilities in the event we, whether partially or totally, cease to have obligations to contribute to the plans. Under current law regarding multi-employer defined benefit plans, circumstances such as a plan’s termination, an employer’s partial or complete withdrawal from, or the mass withdrawal of all contributing employers from, an underfunded multi-employer defined benefit plan can trigger our obligation to make payments to the plan for our proportionate share of the multi-employer plan’s unfunded vested liabilities. Furthermore, the Pension Protection Act added new funding rules generally applicable to plan years beginning after 2007 for multi-employer plans that are classified as “endangered”, “seriously endangered”, or
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“critical” status. If plans in which we participate are in critical status or underfunded, we could be required to make additional contributions.
Based upon the information available to us from plan administrators, one of the multi-employer pension plans in which we participate is underfunded. The Pension Protection Act requires that underfunded pension plans improve their funding ratios within prescribed intervals based on the level of their underfunding. We have been notified that one plan is in "critical" status and this plan may require additional contributions. The amount of additional funds we may be obligated to contribute in the future cannot be estimated, as such amounts will be based on future levels of employee work that require the specific use of the union team members covered by these plans, investment returns and the level of underfunding of such plans. Additional funding could adversely affect our liquidity, cash flows, and results of operations. For more information, see Part II, Item 8. Financial Statements and Supplementary Data; Note 13 – Retirement and Other Employee Benefit Programs in the Consolidated Financial Statements .
RISKS RELATED TO HUMAN CAPITAL
An inability to retain our executive officers or other key personnel or difficulties in recruiting qualified personnel may adversely affect our business.
Our future success depends to a significant degree on the skills, experience and efforts of our executive officers and key personnel. The unexpected loss of the services of any of our executive officers or other key personnel through retirement or otherwise could have an adverse effect on our operations. In addition, like many other route-based businesses, we are being impacted by our industry’s driver and facility team member shortages.
We depend on the skills, working relationships, and continued services of key personnel, including our experienced management team. We must hire, train and develop effective drivers and other team members. We compete with other companies both within and outside of our industry for talented personnel. In addition, employee turnover increases our cost of operations and makes it more difficult to operate our business. A significant number of our executive officers are currently retirement eligible or will soon become retirement eligible. Upon becoming retirement eligible, time-based RSU and time and performance-based PSU awards held by such employees will no longer be at risk of forfeiture and, therefore, the Company must recognize the expense of these RSU and PSU awards at the time our employees become eligible for retirement, and such expense may be substantial. There can be no assurance that our executive succession planning, retention, or hiring efforts will be successful. Difficulty in replacing or adding personnel and increased compensation costs could have an adverse effect on our business, results of operations and financial condition.
A change or deterioration in our relations with our team members or an increase in labor and employment costs could have a materially adverse effect on our business, financial condition and results of operations.
Labor and employment is one of our highest costs and increases in employment costs could materially affect our cost structure and our profitability. We compete with other businesses in our markets for qualified team members and the labor supply is sometimes tight in our markets. A shortage of qualified team members or further unionization would require us to incur additional costs related to wages and benefits; inefficiencies in operations; unanticipated costs in sourcing temporary or third-party labor; legal fees and interference with customer relationships. Due primarily to increased demand for truck drivers and competition from other employers, we have experienced difficulties hiring a sufficient number of qualified truck drivers. If this condition persists, it could affect our ability to service our customers and affect our results of operations.
As of December 31, 2023, 10% of our total global workforce was covered by collective bargaining agreements. There are 19 collective bargaining agreements in the U.S. and Canada, covering approximately 720 team members, or 7% of our North American workforce. An additional approximate 680 team members of the workforce outside of North America are covered by collective bargaining agreements or work councils. Collective Bargaining agreements expire on a scheduled basis depending upon the negotiated length of the contract’s term. Collective bargaining agreement negotiations occur every year depending upon which agreements expire and whether one or both parties seek the modification of terms.
There can be no assurance that we will be able to negotiate the terms of future agreements with unions in a manner acceptable to us. There is also no guarantee that current non-union team members will not seek union representation resulting in additional collective bargaining agreements with associated increased costs to us. Potential work disruptions from labor disputes may disrupt our businesses and adversely affect our brand, customer relations, financial condition, and results of operations.
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The handling, transportation, and treatment of regulated waste carries with it the risk of personal injury to team members and others.
Our business requires our team members to handle regulated waste which may still be infectious or hazardous to life and property. While we try to handle such materials with care and in accordance with accepted and safe methods, the possibility of accidents, leaks, and spills (including those caused by natural disasters) always exists. Examples of incidents that may present possible exposure to contaminated or infectious waste or other hazardous materials include truck accidents, damaged or leaking containers, improper storage of regulated waste, placement of prohibited materials into the waste stream, or malfunctioning plant equipment, such as power outages, or ineffective backup systems.
Human beings or animals could be injured or sickened, or property could be damaged by exposure to regulated waste. This in turn could result in lawsuits in which we are found liable for such injuries, and substantial damages could be awarded against us. We engage an outside actuary twice a year to assist us in estimating these liabilities.
While we generally carry liability insurance intended to cover these contingencies, instances may occur that are not insured against or that are inadequately insured against. An uninsured or underinsured loss could be substantial and could impair our profitability and reduce our liquidity.
GENERAL RISK FACTORS
Increasing occurrences of natural disasters or other catastrophic events caused by climate change or otherwise could negatively affect our business, financial condition, and results of operations.
Natural disasters such as hurricanes, typhoons or earthquakes could negatively affect our operations and financial performance. Such events could result in physical damage to one or more of our facilities or equipment, the temporary lack of an adequate work force in a market, and the temporary disruption in transportation services which we rely on to deliver waste to our facilities. These events could prevent or delay deliveries and reduce both volumes and revenue. Weather conditions and other event driven special projects may also cause variations in our results of operations. We may be required to suspend operations in some of our locations, which could have a material adverse effect on our business, financial condition, and results of operations. While we have protocols in place for operating regions frequently impacted by severe weather changes, continued climate change may require additional protocols, processes, physical equipment, and training to minimize risks to team members, physical property, and operations, which could have an effect on our results of operations and financial condition.
Inflationary cost environment and supply chain disruption.
For the last several years we have experienced inflationary cost increases in our underlying expenses, including labor, supply chain related, and other expenses. We may continue to experience inflationary cost increases in labor, commodities, vehicle procurement, facility and vehicle leases, third party expenditures, plant equipment and construction expenditures, and other expenses. We may not be able to pass all of these cost increases on to our customers. We may also experience delays in completing certain capital projects and have additional challenges due to macroeconomic supply chain disruptions. Should these conditions persist, our business, financial condition, results of operations and cash flows could be negatively impacted.
Geopolitical tensions, military conflict and the global community’s response may create substantial political and economic disruption, uncertainty and risk.
U.S. and global markets may experience volatility and disruption following the escalation of geopolitical tensions and the military conflicts, such as those between Russia and Ukraine and in the Middle East. Although the length and impact of the ongoing military conflict is highly unpredictable, such conflicts could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions, increased cyber-attacks and social unrest in certain regions in which we operate.
We are subject to risks associated with the current interest rate environment.
Changing interest rates may have unpredictable effects on markets, may result in heightened market volatility and may detract from our performance to the extent we are exposed to such interest rates and/or volatility. An adjustment in rates would impact our variable rate debt. If interest rates increase or remain elevated, we could face higher debt service requirements, which would adversely affect our cash flow and could adversely impact our results of operations. If we are unable to generate sufficient cash flow to service our debt or to fund our other liquidity needs, we could need to restructure or refinance all or a portion of our debt. Any refinancing of indebtedness could be at higher interest rates, thereby resulting in an overall increase in interest expense.
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