item 14 exhibits financial statements schedules reports form 8k financial statements item 14a1 2 following financial statements schedules filed report exhibits item 14a3 following exhibits filed report incorporated reference exhibit number registrants registration statement form s1 declared effective august 22 1996 registration 33305665 management contract compensatory plan required filed pursuant item 601 regulation sk incorporated reference exhibit 21 registrants current report amended form 8ka dated december 20 1996 filed january 23 1996 incorporated reference exhibit 21 registrants current report form 8k dated may 21 1997 filed june 5 1997 reports form 8k item 14b quarter ended december 31 1997 company file reports form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 20 1997 stericycle inc mark c miller mark c miller president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated exhibit index incorporated reference exhibit number registrants registration statement form s1 declared effective august 22 1996 registration 33305665 management contract compensatory plan required filed pursuant item 601 regulation sk incorporated reference exhibit 21 registrants current report amended form 8ka dated december 20 1996 filed january 23 1996 incorporated reference exhibit 21 registrants current report form 8k dated may 21 1997 filed june 5 1997item 14 exhibits financial statements schedules reports form 8k financial statements item 14a1 2 following financial statements schedules filed report exhibits item 14a3 following exhibits filed report management contract compensatory plan required filed pursuant item 601 regulation sk references companys 1996 form s1 companys registration statement form s1 declared effective august 22 1996 registration 33305665 references companys 1999 form s3 companys registration statement form s3 declared effective february 4 1999 registration 33360591 reports form 8k item 14b quarter ended december 31 1998 company filed following reports form 8k current report form 8k dated filed october 15 1998 report companys acquisition october 1 1998 issued outstanding capital stock waste systems inc owns approximately 522 outstanding common stock outstanding preferred stock 3ci complete compliance corporation b related current report amended form 8ka dated filed december 14 1998 c current report form 8k dated filed november 4 1998 report companys purchase certain issued outstanding capital stock junior secured indebtedness medtech environmental limited connection company subsequently filed current reports amended form 8ka reports amended form 8ka january 4 january 7 1999 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 31 1999 stericycle inc mark c miller mark c miller president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated management contract compensatory plan required filed pursuant item 601 regulation sk references companys 1996 form s1 companys registration statement form s1 declared effective august 22 1996 registration 33305665 references companys 1999 form s3 companys registration statement form s3 declared effective february 4 1999 registration no33360591item 14 exhibits financial statements schedules reports form 8k financial statements item 14a1 2 filed following financial statements schedules report exhibits item 14a3 filed following exhibits report previously filed management contract compensatory plan required filed pursuant item 601 regulation sk references registrants 1996 form s1 registrants registration statement form s1 declared effective august 22 1996 registration 33305665 references registrants 1999 form s3 registrants registration statement form s3 declared effective february 4 1999 registration 33360591 references registrants 1999 form s4 registrants registration statement form s4 declared effective december 15 1999 registration 33391831 reports form 8k item 14b quarter ended december 31 1999 filed following reports form 8k filed current report form 8k october 15 1999 report approval stockholders matters submitted vote annual meeting stockholders held october 15 1999 see part item 4 report ii participation investment funds associated madison dearborn partners llc investment funds associated bain capital inc purchase shares series convertible preferred stock reported form 8k filed august 20 1999 b filed current report form 8k october 25 1999 report entered first amendments stock purchase asset purchase agreements allied waste industries inc allied connection purchase allied medical waste business browningferris industries inc bfi reported form 8k filed april 23 1999 c filed current report form 8k november 29 1999 report closed purchase allied bfis medical waste business filed current report amended form 8ka december 29 1999 amend form 8k filed november 29 1999 include certain financial statements bfis medical waste business signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 29 2000 stericycle inc mark c miller mark c miller president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated exhibit index previously filed management contract compensatory plan required filed pursuant item 601 regulation sk references registrants 1996 form s1 registrants registration statement form s1 declared effective august 22 1996 registration 33305665 references registrants 1999 form s3 registrants registration statement form s3 declared effective february 4 1999 registration 33360591 references registrants 1999 form s4 registrants registration statement form s4 declared effective december 15 1999 registration 33391831item 14 exhibits financial statements schedules reports form 8k financial statements item 14a1 2 filed following financial statements schedules report exhibits item 14a3 filed following exhibits report 2 3 4 5 previously filed management contract compensatory plan required filed pursuant item 601 regulation sk references registrants 1996 form s1 registrants registration statement form s1 declared effective august 22 1996 registration 33305665 references registrants 1999 form s3 registrants registration statement form s3 declared effective february 4 1999 registration 33360591 references registrants 1999 form s4 registrants registration statement form s4 declared effective december 15 1999 registration 33391831 reports form 8k item 14b quarter ended december 31 2000 file reports form 8k 6 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 21 2001 stericycle inc mark c miller mark c miller president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated 7 item 14 exhibits financial statements schedules reports form 8k financial statements items 14a1 2 filed following financial statements schedules report page report independent auditors ernst young llp consolidated financial statementsstericycle inc subsidiaries consolidated balance sheets december 31 2000 2001 consolidated statements operations years threeyear period ended december 31 2001 consolidated statements cash flows years threeyear period ended december 31 2001 consolidated statements changes shareholders equity years threeyear period ended december 31 2001 notes consolidated financial statements schedule iivaluation allowance accounts exhibits item 14a3 filed following exhibits report exhibit index description filed electronic submission 21 stock purchase agreement dated april 14 1999 allied waste industries inc stericycle inc incorporated reference exhibit 21 current report form 8k filed april 23 1999 22 asset purchase agreement dated april 14 1999 allied waste industries inc stericycle inc incorporated reference exhibit 22 current report form 8k filed april 23 1999 23 first amendment stock purchase agreement dated october 22 1999 allied waste industries inc stericycle inc incorporated reference exhibit 21 current report form 8k filed october 25 1999 24 first amendment asset purchase agreement dated october 22 1999 allied waste industries inc stericycle inc incorporated reference exhibit 22 current report form 8k filed october 25 1999 25 second amendment stock purchase agreement dated november 12 1999 allied waste industries inc stericycle inc incorporated reference exhibit 21 current report form 8k filed november 29 1999 31 amended restated certificate incorporation stericycle inc incorporated reference exhibit 31 1996 form s1 32 first certificate amendment amended restated certificate incorporation stericycle inc incorporated reference exhibit 31 current report form 8k filed november 29 1999 33 certificate designation relating certificate designation relating series convertible preferred stock par value 01 per share incorporated reference exhibit 32 current report form 8k filed november 29 1999 34 amended restated bylaws stericycle inc incorporated reference exhibit 32 1996 form s1 35 amendment amended restated bylaws stericycle inc incorporated reference exhibit 35 annual report form 10k 1999 41 registration rights agreement dated november 12 1999 among donaldson lufkin jenrette securities corporation bear stearns co inc credit suisse first boston corporation warburg dillon read llc stericycle inc guarantors named agreement incorporated reference exhibit 41 1999 form s4 42 registration rights agreement dated november 12 1999 stericycle inc certain investors affiliated bain capital inc madison dearborn partners llc incorporated reference exhibit 41 current report form 8k filed november 29 1999 43 specimen certificate shares common stock par value 01 per share incorporated reference exhibit 41 1996 form s1 44 form common stock purchase warrant connection december 1998 subordinated loan incorporated reference exhibit 41 1999 form s3 101 amended restated credit agreement dated october 5 2001 among stericycle inc borrower various financial institutions persons time parties lenders bank america na administrative agent lenders banc america securities llc lead arranger book manager credit suisse first boston cosyndication agent ubs warburg llc cosyndication agent fleet national bank documentation agent incorporated reference current report form 8k filed october 15 2001 102 indenture dated november 12 1999 among stericycle inc guarantors named indenture state street bank trust company trustee incorporated reference exhibit 101 1999 form 4 103 amended restated series convertible preferred stock purchase agreement dated september 26 1999 stericycle inc certain investors affiliated bain capital inc madison dearborn partners llc incorporated reference exhibit 101 current report form 8k filed october 15 1999 104 corporate governance agreement dated november 12 1999 stericycle inc certain investors affiliated bain capital inc madison dearborn partners llc incorporated reference exhibit 104 annual report form 10k 1999 105 amended restated incentive compensation plan incorporated reference exhibit 101 1996 form s1 106 first amendment amended restated incentive compensation plan incorporated reference exhibit 107 1999 form s3 107 second amendment amended restated incentive compensation plan x 108 directors stock option plan amended restated incorporated reference exhibit 41 registration statement form s8 filed august 2 2001 registration 33366542 109 first amendment directors stock option plan x 1010 1997 stock option plan incorporated reference exhibit 103 annual report form 10k 1997 1011 first amendment 1997 stock option plan incorporated reference exhibit 109 1999 form s3 1012 second amendment 1997 stock option plan x 1013 2000 nonstatutory stock option plan x 1014 first amendment 2000 nonstatutory stock option plan x 1015 second amendment 2000 nonstatutory stock option plan x 1016 employee stock purchase plan incorporated reference exhibit 41 registration statement form s8 filed august 2 2001 registration 33366544 computation ratio earnings fixed charges x subsidiaries x consent ernst young llp x previously filed management contract compensatory plan required filed pursuant item 601 regulation sk references 1996 form s1 registration statement form s1 declared effective august 22 1996 registration 33305665 references 1999 form s3 registration statement form s3 declared effective february 4 1999 registration 33360591 references 1999 form s4 registration statement form s4 declared effective december 15 1999 registration 33391831 reports form 8k item 14b filed two current reports form 8k fourth quarter 2001 filed current report form 8k october 15 2001 report refinancing senior secured credit facility increase revolving credit facility extend maturity reallocate term loan b components facility extend maturities reduce interest rates charged b filed current report form 8k november 2 2001 report announced earnings third quarter 2001 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 25 2002 stericycle inc mark c miller mark c miller president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated signature title date jack w schuler jack w schuler chairman board directors march 25 2002 mark c miller mark c miller president chief executive officer director principal executive officer march 25 2002 frank jm ten brink frank jm ten brink executive vice president chief financial officer principal financial accounting officer march 25 2002 john p connaughton john p connaughton director march 25 2002 rod f dammeyer rod f dammeyer director march 25 2002 patrick f graham patrick f graham director march 25 2002 john patience john patience director march 25 2002 thomas r reusche thomas r reusche director march 25 2002 l john wilkerson phd l john wilkerson phd director march 25 2002 peter vardy peter vardy director march 25 2002item 14 controls procedures within 90 days prior filing date report management including president chief executive officer chief financial officer conducted evaluation effectiveness design disclosure controls procedures pursuant rule 13a15 securities exchange act 1934 “exchange act” based upon evaluation president chief executive officer chief financial officer concluded disclosure controls procedures effective significant changes internal controls factors could significantly affect controls subsequent date completed evaluation term “disclosure controls procedures” defined rule 13a14c exchange act “controls procedures designed ensure information required disclosed issuer reports files submits exchange act recorded processed summarized reported within time periods specified securities exchange commission’s rules forms” disclosure controls procedures designed ensure material information relating us consolidated subsidiaries accumulated communicated management including president chief executive officer chief financial officer appropriate allow timely decisions regarding required disclosures item 15item 14 principal accountant fees services audit fees aggregate fees billed independent public accountants ernst young llp professional services rendered connection audit annual financial statements review interim financial statements included quarterly reports form 10q fiscal year ended december 31 2002 approximately 315000 amount includes approximately 18000 statutory audit financial statements subsidiary operating puerto rico aggregate fees billed independent public accountants ernst young llp professional services rendered connection audit annual financial statements review interim financial statements included quarterly reports form 10q fiscal year ended december 31 2003 approximately 335000 amount includes approximately 22000 statutory audit financial statements subsidiary operating puerto rico audit related fees ernst young llp billed us approximately 31000 fiscal year ended december 31 2002 relating accounting consultations connection acquisitions made billed us approximately 16000 fiscal year ended december 31 2003 relating internal controls requirements sarbanesoxley act 2002 ernst young llp perform assurance related services either two fiscal years tax fees ernst young llp provide tax compliance tax advice tax planning services us fiscal years ended december 31 2002 2003 fees ernst young llp provide services us fiscal years ended december 31 2002 2003 accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance committee item 15item 14 principal accountant fees services audit fees aggregate fees billed independent registered public accounting firm ernst young llp professional services rendered connection audit annual financial statements review interim financial statements included quarterly reports form 10q fiscal year ended december 31 2003 approximately 395000 amount includes approximately 22000 statutory audit financial statements subsidiary operating puerto rico aggregate fees billed independent registered public accounting firm ernst young llp professional services rendered connection audit annual financial statements review interim financial statements included quarterly reports form 10q fiscal year ended december 31 2004 approximately 484000 amount includes approximately 24000 statutory audit financial statements subsidiary operating puerto rico approximately 64000 specific scope audit statutory audit subsidiary operating united kingdom addition ernst young llp billed us approximately 150000 connection audit internal controls financial reporting audit related fees ernst young llp billed us approximately 16000 fiscal year ended december 31 2003 relating internal controls requirements sarbanesoxley act 2002 year ended december 31 2004 ernst young llp bill us audit related fees ernst young llp perform assurance related services either two fiscal years tax fees ernst young llp provide tax compliance tax advice tax planning services us fiscal years ended december 31 2003 2004 fees ernst young llp provide services us fiscal years ended december 31 2003 2004 accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance committee part iv item 15item 14 principal accountant fees services audit fees aggregate fees billed independent public accountants ernst young llp professional services rendered connection audit annual financial statements review interim financial statements included quarterly reports form 10q fiscal year ended december 31 2005 approximately 568000 amount includes approximately 34000 statutory audit financial statements subsidiary operating puerto rico approximately 63000 specific scope audit statutory audit subsidiary operating united kingdom addition ernst young llp billed us approximately 297000 connection audit internal controls financial reporting aggregate fees billed independent public accountants ernst young llp professional services rendered connection audit annual financial statements review interim financial statements included quarterly reports form 10q fiscal year ended december 31 2004 approximately 484000 amount includes approximately 24000 statutory audit financial statements subsidiary operating puerto rico approximately 64000 specific scope audit statutory audit subsidiary operating united kingdom addition ernst young llp billed us approximately 230000 connection audit internal controls financial reporting audit related fees years ended december 31 2005 2004 ernst young llp bill us audit related fees ernst young llp perform assurance related services either two fiscal years tax fees ernst young llp provide tax compliance tax advice tax planning services us fiscal years ended december 31 2005 2004 fees ernst young llp provide services us fiscal years ended december 31 2005 2004 accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance committee part iv item 15item 14 principal accountant fees services audit fees aggregate fees billed independent public accountants ernst young llp professional services rendered connection audit annual financial statements audit internal controls financial reporting review interim financial statements included quarterly reports form 10q fiscal year ended december 31 2006 approximately 11 million amount includes approximately 34000 statutory audit financial statements subsidiary operating puerto rico approximately 197000 specific scope audit statutory audit subsidiary operating united kingdom aggregate fees billed independent public accountants ernst young llp professional services rendered connection audit annual financial statements review interim financial statements included quarterly reports form 10q fiscal year ended december 31 2005 approximately 10 million amount includes approximately 34000 statutory audit financial statements subsidiary operating puerto rico approximately 63000 specific scope audit statutory audit subsidiary operating united kingdom audit related fees years ended december 31 2006 2005 ernst young llp bill us audit related fees ernst young llp perform assurance related services either two fiscal years tax fees ernst young llp provide tax compliance tax advice tax planning services us fiscal years ended december 31 2006 2005 fees 2006 subscribed ernst young online research tool cost 2000 ernst young llp provide services us fiscal years ended december 31 2006 2005 accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance committee part iv item 15item 14 principal accountant fees services audit fees aggregate fees billed independent public accountants ernst young llp professional services rendered connection audit annual financial statements audit internal controls financial reporting review interim financial statements included quarterly reports form 10q fiscal years ended december 31 2007 2006 approximately 12 million 11 million respectively audit related fees years ended december 31 2007 2006 ernst young llp bill us audit related fees ernst young llp perform assurance related services either two fiscal years tax fees ernst young llp provide tax compliance tax advice tax planning services us fiscal years ended december 31 2007 2006 fees 2007 subscribed ernst young online research tool cost 2000 ernst young llp provide services us fiscal years ended december 31 2007 2006 accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance committee part iv item 15item 14 principal accountant fees services audit fees aggregate fees billed independent public accountants ernst young llp professional services rendered connection audit annual financial statements audit internal controls financial reporting review interim financial statements included quarterly reports form 10q fiscal years ended december 31 2008 2007 approximately 10 million 12 million respectively audit related fees years ended december 31 2008 2007 ernst young llp bill us audit related fees ernst young llp perform assurance related services either two fiscal years tax fees ernst young llp provided project based tax services us 2008 cost 350000 firm provide fiscal year 2007 fees 2008 subscribed ernst young online research tool cost 1790 ernst young llp provide services us fiscal years ended december 31 2008 2007 accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance committee part iv item 15item 14 principal accounting fees services fees professional services provided independent public accountants ernst young llp last two fiscal years following categories thousands fees audit services include fees rendered connection audit annual financial statements audit internal controls financial reporting review interim financial statements included quarterly reports form 10q accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance audit committee part iv item 15item 14 principal accounting fees services fees professional services provided independent public accountants ernst young llp last two fiscal years following categories thousands fees audit services include fees rendered connection audit annual financial statements audit internal controls financial reporting review interim financial statements included quarterly reports form 10q accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance audit committee part iv item 15item 14 principal accounting fees services fees professional services provided independent public accountants ernst young llp last two fiscal years following categories fees audit services include fees rendered connection audit annual financial statements audit internal controls financial reporting review interim financial statements included quarterly reports form 10q accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance audit committee part iv item 15item 14 principal accounting fees services fees professional services provided independent public accountants ernst young llp last two fiscal years following categories fees audit services include fees rendered connection audit annual financial statements audit internal controls financial reporting review interim financial statements included quarterly reports form 10q accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance audit committee part iv item 15item 14 principal accounting fees services fees professional services provided independent public accountants ernst young llp last two fiscal years following categories fees audit services include fees rendered connection audit annual financial statements audit internal controls financial reporting review interim financial statements included quarterly reports form 10q accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance audit committee part iv item 15item 14 principal accounting fees services fees professional services provided independent public accountants ernst young llp last two fiscal years following categories fees audit services include fees rendered connection audit annual financial statements audit internal controls financial reporting review interim financial statements included quarterly reports form 10q accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance audit committee part iv item 15item 14 principal accounting fees services incorporated reference information caption ratification independent registered public accounting firm proxy statement 2018 annual meeting stockholders filed sec within 120 days december 31 2017 10k annual report stericycle inc • 113 part iv part iv item 15item 14 principal accounting fees services incorporated reference information caption ratification independent registered public accounting firm definitive proxy statement 2019 annual meeting stockholders held may 22 2019 filed pursuant regulation 14a 2018 10k annual report stericycle inc • 127 part iv part iv item 15item 14 principal accounting fees services incorporated reference information caption ratification independent registered public accounting firm definitive proxy statement 2020 annual meeting stockholders filed pursuant regulation 14a 2019 10k annual report stericycle inc • 129 part iv part iv item 15item 14 principal accounting fees services incorporated reference information caption ratification independent registered public accounting firm definitive proxy statement 2021 annual meeting stockholders filed pursuant regulation 14a part iv part iv item 15item 14 principal accounting fees services fees professional services provided independent public accountants ernst young llp last two fiscal years following categories fees audit services include fees rendered connection audit annual financial statements audit internal controls financial reporting review interim financial statements included quarterly reports form 10q accordance policies adopted audit committee board directors audit nonaudit related services performed us independent public accountants must approved advance audit committee part iv item 15item 14 principal accounting fees services incorporated reference information caption ratification independent registered public accounting firm proxy statement 2017 annual meeting stockholders filed sec within 120 days december 31 2016 10k annual report stericycle inc • 87 part iv part iv item 15item 14 exhibits financial statements schedules reports form 8k financial statements item 14a1 2 following financial statements filed report exhibits item 14a3 following exhibits filed report incorporated reference exhibit number registrants registration statement form s1 declared effective august 22 1996 registration 33305665 management contract compensatory plan required filed pursuant item 601 regulation sk incorporated reference exhibit 21 registrants current report amended form 8ka dated december 20 1996 filed january 23 1996 reports form 8k item 14b quarter ended december 31 1996 company file reports form 8k company filed following reports item 5 form 8k connection acquisition december 1996 major portion regulated medical waste business waste management inc 1 current report form 8k dated december 20 1996 filed january 4 1997 2 current report amended form 8ka dated december 20 1996 filed january 23 1997 3 current report amended form 8ka dated december 20 1996 filed march 5 1997 included waste management inc regulated medical waste business financial statements december 31 1996 years ended december 31 1996 1995 b companys pro forma condensed consolidated financial statements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 27 1997 stericycle inc mark c miller mark c miller president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated exhibit index incorporated reference exhibit number registrants registration statement form s1 declared effective august 22 1996 registration 33305665 management contract compensatory plan required filed pursuant item 601 regulation sk incorporated reference exhibit 21 registrants current report amended form 8ka dated december 20 1996 filed january 23 1996 item 7 managements discussion analysis financial condition results operation following discussion financial condition results operations company read conjunction companys consolidated financial statements related notes item 8item 7 managements discussion analysis financial condition results operation following discussion financial condition results operations company read conjunction companys consolidated financial statements related notes item 8 report background company incorporated march 1989 company provides regulated medical waste collection transportation treatment disposal reduction reuse recycling services customers together related training education programs consulting services company also sells ancillary supplies transports pharmaceuticals photographic chemicals lead foil amalgam recycling selected geographic service areas company also expanding international markets joint ventures licensing proprietary technology selling associated equipment companys revenues increased 1563000 1991 66681000 1998 company derives revenues services two principal types customers outpatient clinics medical dental offices longterm subacute care facilities biomedical companies municipal entities smallerquantity generators regulated medical waste alternate care generators ii hospitals blood banks pharmaceutical manufacturers largerquantity generators regulated medical waste large quantity generators substantially companys services provided pursuant customer contracts specifying either scheduled oncall regulated medical waste management services contracts alternate care generators generally provide annual price increases automatic renewal provision unless customer notifies company prior completion contract contracts hospitals large quantity generators may run one year typically include price escalator provisions allow price increases generally tied inflation index set fixed percentage december 31 1998 company served 78000 customers company currently expenses incurred permitting design startup costs associated facilities company elects expense rather capitalize costs obtaining permits approvals proposed facility regardless whether company ultimately successful obtaining desired permits approvals developing facility company currently recognizes current expense legal fees costs related obtaining maintaining permits approvals addition company currently expenses costs related research development incurred year ended december 31 1998 compared year ended december 31 1997 revenues increased 20515000 444 66681000 year ended december 31 1998 46166000 year ended december 31 1997 company continued focus sales highermargin alternate care generators simultaneously paring certain lowermargin accounts large quantity generators increase also reflects 5952000 revenues sale equipment brazilian company companhia auxiliar de viacao e obras cavo mexican joint venture medam sa de cv medam company others formed collection treatment disposal regulated medical waste mexico city metropolitan market utilizing companys etd treatment technology 1998 acquisitions contributed approximately 13103000 increase revenues 1997 year internal revenue growth alternate care generators increased 148 revenues large quantity generators decreased 72 cost revenues cost revenues increased 11219000 329 45328000 year ended december 31 1998 34109000 year ended december 31 1997 increase primarily due substantial increase revenues 1998 compared 1997 cost equipment supplied cavo medam gross margin percentage increased 320 1998 261 1997 result sale equipment internationally integration new acquisitions companys existing infrastructure lower costs relating changing mix alternate care large quantity generators increased utilization existing treatment capacity selling general administrative expenses selling general administrative expenses increased 14929000 year ended december 31 1998 10671000 year ended december 31 1997 due companys continued progress strengthening sales administrative organizations due increase amortization goodwill incremental costs associated acquisitions selling general administrative expenses percentage revenues decreased 224 1998 231 1997 amortization goodwill increased 1505000 1998 1047000 1997 interest expense interest income interest expense increased 777000 year ended december 31 1998 428000 year ended december 31 1997 primarily due borrowings companys revolving line credit partially offset repayment certain debt issued connection one companys acquisitions interest income also increased 714000 1998 618000 1997 primarily due interest income med tech subordinated debt acquired october 1998 partially offset lower interest income invested cash balances income tax expense estimated effective tax rate approximately 102 year ended december 31 1998 reflects utilization companys net operating losses income tax purposes offset alternative minimum tax state income taxes states company offsetting net operating losses year ended december 31 1997 compared year ended december 31 1996 revenues increased 21624000 881 46166000 year ended december 31 1997 24542000 year ended december 31 1996 company continued implement strategy focusing highermargin alternate care generators simultaneously paring certain higherrevenue lowermargin accounts large quantity generators increase also reflects inclusion full years revenues acquisition major portion regulated medical waste business waste management inc wmi completed december 1996 eight months revenues environmental control co inc ecco acquisition completed may 1997 partial years revenues various smaller acquisitions incremental revenues 1997 attributable acquisitions completed 1997 late 1996 20975000 excluding incremental revenues acquisitions revenues increased 24542000 1996 25191000 1997 26 year internal revenue growth alternate care generators 130 revenues large quantity generators decreased 40 cost revenues cost revenues increased 14686000 756 34109000 year ended december 31 1997 19423000 year ended december 31 1996 principal reasons increase higher transportation treatment disposal costs result higher volume attributable companys acquisitions integration expenses related companys expansion new geographic service areas gross margin percentage increased 261 1997 209 1996 due continuing shift alternate care customers increased utilization companys treatment capacity selling general administrative expenses selling general administrative expenses increased 10671000 year ended december 31 1997 7556000 year ended december 31 1996 increase largely result increases selling marketing expenses result companys acquisitions expansion sales network increased administrative costs related higher volume selling general administrative expenses percentage revenues decreased 231 1997 308 1996 due improved leverage administrative structure versus sales growth interest expense interest income interest expense increased 428000 year ended december 31 1997 373000 year ended december 31 1996 increase primarily attributable higher indebtedness related wmi ecco acquisitions interest income increased 618000 1997 421000 1996 due interest earned invested cash proceeds companys initial public offering ipo august 1996 income tax expense effective tax rate 93 year ended december 31 1997 reflects utilization companys net operating losses income tax purposes offset alternative minimum tax state income taxes states company offsetting net operating losses company pay income taxes year ended december 31 1996 liquidity capital resources company financed principally sale stock investors prior companys ipo purchasers stock invested 50137000 capital used fund research development acquisitions capital expenditures operating losses working capital requirements companys ipo august 1996 raised 27621000 net offering costs used primarily fund acquisitions general working capital company also able secure plant equipment leasing financing connection facilities debt facilities secured security interests financed assets addition december 31 1998 company available 25000000 revolving line credit secured companys accounts receivable assets december 31 1998 company borrowed 16386000 line credit february 1999 company successfully completed second offering common stock raised 47250000 net offering costs companys financial obligations include industrial development revenue bonds issued behalf guaranteed company finance woonsocket rhode island treatment facility equipment bonds outstanding aggregate balance 1295000 december 31 1998 fixed interest rates ranging 630 7375 due various amounts june 2017 addition company issued various promissory notes connection acquisitions 1997 1998 consisting primarily 10year note issued part ecco acquisition outstanding balance 2070000 december 31 1998 december 31 1998 company working capital 1166000 compared 4879000 14617000 december 31 1997 1996 respectively decrease working capital december 31 1998 compared december 31 1997 primarily due lower cash balances higher current liabilities result debt liabilities assumed connection certain acquisitions partially offset higher receivables current assets decrease december 31 1997 compared 1996 primarily due lower balances cash equivalents shortterm investments decreased 12375000 finance acquisitions partially offset working capital growth net cash provided used operating activities 4862000 year ended december 31 1998 compared 100000 year ended december 31 1997 increase primarily reflects increase companys profitability increase accounts payable offset increase accounts receivable decrease accrued liabilities cash used operations 100000 year ended december 31 1997 compared cash provided operations 57000 year ended december 31 1996 change primarily reflects companys profitability 1997 offset higher working capital investment receivables net cash used investing activities year ended december 31 1998 23753000 compared 3323000 year ended december 31 1997 increase primarily reflects increase cash used acquisitions capital expenditures maturity 1997 temporary investments net proceeds companys ipo capital expenditures 1998 4342000 compared capital expenditures 1235000 1997 increase capital spending result continued improvements companys existing treatment facilities development new billing system targeted implementation 1999 improvements transportation treatment facilities payments acquisitions accounted 19775000 cash used investing activities 1998 net cash used investing activities 3323000 year ended december 31 1997 compared 13310000 year ended december 31 1996 decrease 1997 result 5552000 payment acquisition ecco well several smaller acquisitions joint ventures offset net proceeds shortterm investments 3464000 1997 versus purchases 5799000 shortterm investments 1996 capital expenditures 1997 1235000 primarily improvements existing facilities containers transportation equipment capital expenditures 1996 995000 company may decide build additional treatment facilities volumes increase companys current geographic service areas company enters new areas company also may elect increase capacity existing treatment facilities would require additional capital expenditures addition capital requirements transportation equipment continue increase company grows amount level expenditures cannot determined currently depend upon nature extent companys growth acquisition opportunities company believes cash equivalents shortterm investments bank credit facility cash operations proceeds offering completed february 1999 fund capital requirements 1999 net cash provided financing activities 14729000 year ended december 31 1998 compared net cash used financing activities 3153000 year ended december 31 1997 difference two years results primarily additional borrowings finance acquisitions offset repayments debt 1998 related acquisitions made previous years net cash used financing activities 3153000 year ended december 31 1997 compared net cash provided financing activities 25065000 year ended december 31 1996 change result 28535000 proceeds received 1996 primarily companys ipo repayments 1997 2905000 longterm debt relating primarily note issued connection december 1996 wmi acquisition year 2000 issues company developed plan modify information systems anticipation year 2000 company currently expects plan substantially implemented june 1999 cost exceed 100000 light companys progress date fact companys business significantly affected software employed vendors customers company anticipate year 2000 present material problems respect companys key products services companys plan year 2000 comprises remediating companys existing hardware software upgrading companys business information systems generally company initiated upgrading process 1998 order respond growth size companys business inefficiencies caused disparate hardware software undertaken reasons unrelated year 2000 issues companys upgrading business information systems benefit enabling company become year 2000 compliant course upgrade company conducted extensive review potential year 2000 issues companys assessment treatment facilities equipment concluded risk company would unable treat regulated medical waste result year 2000 issues new software company adopted 1998 accounting related purposes already year 2000 compliant companys software computer hardware currently tested upgrades appropriate adjustments made accordance companys upgrade plans required company also process reviewing year 2000 compliance status significant vendors company believes effective plan place resolve year 2000 issues timely manner march 1999 event company unable complete remaining phases year 2000 plan company believes result year 2000 issues solely affecting company principal effect company would inability invoice portion customers companys services company also developing contingency plans take account inability company others become fully year 2000 compliant time plans involve among actions implementing manual systems increasing inventories parts supplies adjusting staffing strategies item 7aitem 7 managements discussion analysis financial condition results operation following discussion financial condition results operations company read conjunction companys consolidated financial statements related notes item 8 report background incorporated march 1989 provide regulated medical waste collection transportation treatment services customers related training education programs consulting services also sell ancillary supplies transport pharmaceuticals photographic chemicals lead foil amalgam recycling selected geographic service areas also expanding international markets joint ventures licensing proprietary technology selling associated equipment revenues increased 1563000 1991 132848000 1999 derive revenues services two principal types customers longterm subacute care facilities outpatient clinics medical dental offices biomedical companies municipal entities smallerquantity generators regulated medical waste small account customers ii hospitals blood banks pharmaceutical manufacturers largerquantity generators regulated medical waste large account customers substantially services provided pursuant customer contracts specifying either scheduled oncall services contracts small account customers generally provide annual price increases automatic renewal provision unless customer notifies us prior completion contract contracts hospitals large account customers may run one year typically include price escalator provisions allow price increases generally tied inflation index set fixed percentage december 31 1999 served 237000 customers currently expense incurred permitting design startup costs associated facilities elect expense rather capitalize costs obtaining permits approvals proposed facility regardless whether ultimately successful obtaining desired permits approvals developing facility currently recognize current expense legal fees costs related obtaining maintaining permits approvals addition currently expense costs related research development incurred year ended december 31 1999 compared year ended december 31 1998 following summarizes thousands operations ebitda acquisition related costs calculated sum net income plus net interest expense income tax expense depreciation expense amortization expense acquisition related costs extent deducted calculating net income see item 6 note 6 revenues increased 66167000 992 132848000 year ended december 31 1999 66681000 year ended december 311998 completed acquisition medical waste business browningferris industries inc bfi acquisition allied waste industries inc continued focus sales highermargin small account customers simultaneously paring specified higherrevenue lowermargin accounts large account customers revenues generated sale machinery internationally 5862000 1999 compared 5952000 1998 1999 acquisitions contributed approximately 61479000 increase revenues 1998 year internal growth small account customers increased approximately 158 revenues large account customers decreased approximately 13 cost revenues cost revenues increased 40795000 900 86123000 year ended december 31 1999 45328000 year ended december 31 1998 increase primarily due completion bfi acquisition substantial increase revenues 1999 compared 1998 cost equipment sold internationally gross margin percentage increased 352 1999 32 1998 result integration new acquisitions existing infrastructure lower costs relating changing mix small account versus large account customers increased utilization treatment capacity selling general administrative expenses selling general administrative expenses increased 26480000 year ended december 31 1999 14929000 year ended december 311998 increase largely result increases selling marketing expenses goodwill amortization result acquisitions expansion sales network increased administrative expenses related higher volume selling general administrative expenses percentage revenue decreased 199 1999 224 1998 excluding amortization selling general administrative expenses percentage revenues decreased 167 1999 201 1998 acquisition related costs fourth quarter 1999 incurred integration nonrecurring acquisition costs 7961000 related bfi acquisition costs included severance facility closure costs nonrecurring acquisition related costs transition related expenses anticipate incur additional 1586000 integration transitionrelated expenses 2000 ebitda earnings interest income taxes depreciation amortization ebitda acquisition related charges increased 1926 30689000 231 revenues year ended december 31 1999 compared 10489000 157 revenues year ended december 31 1998 increase ebitda primarily due factors described interest expense interest income interest expense increased 6195000 year ended december 31 1999 777000 year ended december 31 1998 primarily due increased borrowings bfi acquisition interest income also increased 1144000 1999 713000 1998 primarily due interest income investment excess funds secondary offering commons stock completed february 1999 income expense year ended december 31 1999 onetime gain 756000 sale routes 3ci complete compliance corporation whollyowned subsidiary waste systems inc majority shareholder partially offset onetime cash expense 192000 warrants issued bridge loan borrowings december 1998 january 1999 income tax expense income tax expense year ended december 31 1999 reflects one time tax benefit 625700 recorded compliance fasb 109 fasb 109 required recognize net deferred assets believe likely benefit carryforward losses tax credits future years year ended december 31 1998 compared year ended december 31 1997 following summarizes thousands operations ebitda calculated sum net income plus net interest expense income tax expense depreciation expense amortization expense extent deducted calculating net income see item 6 note 6 revenues increased 20515000 444 66681000 year ended december 31 1998 46166000 year ended december 31 1997 continued focus sales highermargin small account customers simultaneously paring certain lowermargin large account customers increase also reflects 5952000 revenues sale equipment brazilian company companhia auxiliar de viacao e obras cavo mexican joint venture medam sa de cv medam others formed collection treatment disposal regulated medical waste mexico city metropolitan market utilizing etd treatment technology 1998 acquisitions contributed approximately 13103000 increase revenues 1997 1998 internal growth small account customers increased 148 revenues large account customers decreased 72 cost revenues cost revenues increased 11219000 329 45328000 year ended december 31 1998 34109000 year ended december 31 1997 increase primarily due substantial increase revenues 1998 compared 1997 cost equipment supplied cavo medam gross margin percentage increased 320 1998 261 1997 result sale equipment internationally integration new acquisitions existing infrastructure lower costs relating changing mix small account large account customers increased utilization existing treatment capacity selling general administrative expenses selling general administrative expenses increased 14929000 year ended december 31 1998 10671000 year ended december 311997 due continued progress strengthening sales administrative organizations increase amortization goodwill associated acquisitions selling general administrative expenses percentage revenues decreased 224 1998 231 1997 excluding amortization selling general administrative expenses percentage revenue decreased 201 1998 209 1997 ebitda increased 1350 10489000 157 revenues year ended december 31 1998 compared 4464000 97 revenues year ended december 31 1997 increase ebitda primarily due factors described interest expense interest income interest expense increased 777000 year ended december 31 1998 428000 year ended december 31 1997 primarily due borrowings revolving line credit offset repayment certain debt issued connection one acquisitions interest income also increased 713000 1998 618000 1997 primarily due interest income subordinated debt medtech environmental ltd acquired october 1998 offset lower cash balances income tax expense estimated effective tax rate approximately 102 year ended december 31 1998 reflects utilization net operating losses income tax purposes offset alternative minimum tax state income taxes states offsetting net operating losses liquidity capital resources december 31 1999 working capital 26858000 compared working capital 1166000 december 31 1998 increase working capital primarily due higher cash accounts receivable balances result bfi acquisition net cash provided operating activities 11777000 year ended december 31 1999 compared 4862000 year ended december 31 1998 increase primarily reflects higher net income depreciation amortization expense offset changes working capital net cash used investing activities year ended december 31 1999 425628000 compared 23753000 year ended december 311998 change primarily attributable increase cash used funding acquisitions international investments completed 1999 capital expenditures 3795000 1999 compared 4342000 1998 payments acquisitions international investments amounted 422280000 1999 primarily related bfi acquisition completed november 1999 order finance bfi acquisition conducted series financings result substantially leveraged company also recorded substantial increase goodwill intangible assets connection bfi acquisition experience corresponding large increase amortization expense credit agreement group lenders provides aggregate 275 million senior secured financing comprised sixyear term loan amortizing facility 75 million ii sevenyear term loan b amortizing facility 150 million iii 50 million revolving loan facility december 31 1999 drawn revolving loan facility addition issued 1238 series senior subordinated notes due 2009 aggregate principal amount 125 million donaldson lufkin jenrette securities corporation bear stearns co inc credit suisse first boston corporation warburg dillon read llc pursuant series convertible preferred stock purchase agreement november 12 1999 issued sold investment funds associated bain capital inc madison dearborn partners llc total 75000 shares convertible preferred stock 1000 per share aggregate 75 million cash less fees 61 million dividends convertible preferred stock payable kind additional shares accrue annual rate 3375 subject adjustment net cash provided financing activities 431912000 year ended december 31 1999 compared 14800000 year ended december 311998 difference two years results primarily completion financings previously described second public offering common stock february 1999 raised 47158000 net offering costs financial obligations include industrial development revenue bonds issued behalf guaranteed us finance woonsocket rhode island treatment facility equipment bonds outstanding aggregate balance 1145000 december 31 1999 fixed interest rates ranging 63 7375 due various amounts june 2017 addition issued various promissory notes connection acquisitions 1997 1998 consisting primarily 10year note issued part environmental control corporation inc acquisition outstanding balance 1840000 december 31 1999 recently issued accounting standards june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activity sfas 133 provides comprehensive consistent standards recognition measurement derivative hedging activities requires derivatives recorded consolidated balance sheet fair value establishes criteria hedges changes fair value assets liabilities firm commitments hedges variable cash flows forecasted transactions hedges foreign currency exposures net investments foreign operations changes fair value derivatives meet criteria hedges would recognized consolidated statement earnings statement effective us beginning january 1 2001 adoption sfas 133 expected material impact us item 7aitem 7 managements discussion analysis financial condition results operation following discussion financial condition results operations company read conjunction companys consolidated financial statements related notes item 8 report background incorporated march 1989 provide regulated medical waste collection transportation treatment services customers related training education programs consulting services also sell ancillary supplies transport pharmaceuticals photographic chemicals lead foil amalgam recycling selected geographic service areas also expanding international markets joint ventures licensing proprietary technology selling associated equipment revenues increased 16 million 1991 3237 million 2000 derive revenues services two principal types customers longterm subacute care facilities outpatient clinics medical dental offices biomedical companies municipal entities smallerquantity generators regulated medical waste small account customers ii hospitals blood banks pharmaceutical manufacturers largerquantity generators regulated medical waste large account customers substantially services provided pursuant customer contracts specifying either scheduled oncall regulated medical waste management services contracts small account customers generally provide annual price increases automatic renewal provision unless customer notifies us prior completion contract contracts hospitals large account customers may run one year typically include price escalator provisions allow price increases generally tied inflation index set fixed percentage december 31 2000 served 250000 customers 25 year ended december 31 2000 compared year ended december 31 1999 following summarizes thousands operations ebitda acquisition related costs calculated sum net income plus net interest expense income tax expense depreciation expense amortization expense acquisition related costs extent deducted calculating net income cash flow per share includes benefit 15year goodwill amortization tax purposes versus 25 40 year goodwill amortization book purposes excludes acquisition related costs revenues increased 1909 million 1437 3237 million year ended december 31 2000 1328 million year ended december 311999 full year revenues acquisition medical waste business browning ferris industries inc bfi acquisition completed november 1999 continued focus sales highermargin small account customers simultaneously paring specified higherrevenue lowermargin accounts large account customers revenues generated sale machinery licensing technology internationally 72 million 2000 compared 59 million 1999 2000 acquisitions contributed approximately 1800 million increase revenues 1999 year internal growth small account customers increased approximately 80 revenues large account customers increased approximately 35 cost revenues cost revenues increased 1102 million 1280 1963 million year ended december 31 2000 861 million year ended december 31 1999 increase primarily due substantial increase revenues 2000 compared 1999 cost equipment sold internationally gross margin percentage increased 393 2000 352 1999 result integration bfi acquisition existing infrastructure lower costs relating changing mix small account versus large account customers higher gross margins international equipment sales increased utilization treatment capacity selling general administrative expenses selling general administrative expenses increased 595 million year ended december 31 2000 265 million year ended december 311999 increase largely result increases selling marketing expenses goodwill amortization result bfi acquisition selling general administrative expenses percentage revenue decreased 184 2000 199 1999 excluding amortization selling general administrative expenses percent revenue decreased 141 2000 167 1999 26 acquisition related costs year end december 31 2000 incurred integration nonrecurring acquisition costs 45 million related bfi acquisition compared 80 million year ended december 31 1999 costs included severance facility closure costs nonrecurring acquisition related costs transition related expenses anticipate incur additional 1000000 acquisition related expenses year ended december 31 2001 ebitda earnings interest income taxes depreciation amortization ebitda acquisition related charges increased 1964 91 million 281 revenues year ended december 31 2000 compared 307 million 231 revenues year ended december 31 1999 increase ebitda primarily due factors described interest expense interest income interest expense increased 398 million year ended december 31 2000 62 million year ended december 31 1999 primarily due increased borrowings bfi acquisition interest income decreased 6 million 2000 11 million 1999 primarily due lower cash balances throughout year income tax expense income taxes year ended december 31 2000 reflects effective tax rate approximately 391 federal state income taxes income tax expense year ended december 31 1999 reflects one time tax benefit 63 million recorded compliance fasb 109 year ended december 31 1999 compared year ended december 31 1998 following summarizes thousands operations 27 ebitda acquisition related costs calculated sum net income plus net interest expense income tax expense depreciation expense amortization expense acquisition related costs extent deducted calculating net income see item 6 note 6 cash flow per share includes benefit 15 year goodwill amortization tax purposes versus 25 40 year goodwill amortization book purposes excludes acquisition related costs revenues increased 661 million 992 1328 million year ended december 31 1999 667 million year ended december 311998 completed acquisition medical waste business bfi acquisition continued focus sales highermargin small account customers simultaneously paring specified higherrevenue lowermargin accounts large account customers revenues generated sale machinery internationally 59 million year ended december 31 1999 compared 60 million 1998 1999 acquisitions contributed approximately 615 million increase revenues 1998 year internal growth small account customers increased approximately 158 revenues large account customers decreased approximately 13 cost revenues cost revenues increased 408 million 900 861 million year ended december 31 1999 453 million year ended december 31 1998 increase primarily due completion bfi acquisition substantial increase revenues 1999 compared 1998 cost equipment sold internationally gross margin percentage increased 352 1999 32 1998 result integration new acquisitions existing infrastructure lower costs relating changing mix small account versus large account customers increased utilization treatment capacity selling general administrative expenses selling general administrative expenses increased 265 million year ended december 31 1999 149 million year ended december 311998 increase largely result increases selling marketing expenses goodwill amortization result acquisitions expansion sales network increased administrative expenses related higher volume selling general administrative expenses percentage revenues decreased 199 1999 224 1998 excluding amortization selling general administrative expenses percent revenues decreased 167 1999 201 1998 acquisition related costs fourth quarter 1999 incurred integration nonrecurring acquisition costs 80 million related bfi acquisition costs included severance facility closure costs nonrecurring acquisition related costs transition related expenses ebitda earnings interest income taxes depreciation amortization ebitda acquisition related charges increased 1926 307 million 231 revenues year ended december 31 1999 compared 105 million 28 157 revenues year ended december 31 1998 increase ebitda primarily due factors described interest expense interest income interest expense increased 62 million year ended december 31 1999 8 million year ended december 31 1998 primarily due increased borrowings bfi acquisition interest income also increased 11 million 1999 7 million 1998 primarily due interest income investment excess funds secondary offering public stock completed february 1999 income expense year ended december 31 1999 onetime gain 8 million sale routes 3ci complete compliance corporation whollyowned subsidiary waste systems inc majority shareholder partially offset onetime cash expense 2 million warrants issued bridge loan borrowings december 1998 january 1999 income tax expense income tax expense year ended december 31 1999 reflects one time tax benefit 63 million recorded compliance fasb 109 fasb 109 required recognize net deferred tax assets believe likely benefit carryforward losses tax credits future years liquidity capital resources december 31 2000 working capital 479 million compared working capital 269 million december 31 1999 increase working capital primarily due higher accounts receivable balance result bfi acquisition net cash provided operating activities 102 million year ended december 31 2000 compared 118 million year ended december 31 1999 decrease primarily reflects higher accounts receivable balances offset higher depreciation amortization expense decrease deferred tax asset net cash used investing activities year ended december 31 2000 157 million compared 4256 million year ended december 31 1999 change primarily attributable decrease cash used funding acquisitions international investments completed 2000 capital expenditures 116 million 2000 compared 38 million 1999 payments acquisitions international investments amounted 46 million 2000 order finance bfi acquisition 1999 conducted series financings result substantially leveraged company also recorded substantial increase goodwill intangible assets connection bfi acquisition experienced corresponding large increase amortization expense credit agreement group lenders provides aggregate 260 million senior secured financing comprised sixyear term loan amortizing 29 facility 70 million ii sevenyear term loan b amortizing facility 140 million iii 50 million revolving loan facility december 31 2000 drawn 50 million revolving loan facility payments 145 million made term loans 2000 addition outstanding 1238 series senior subordinated notes due 2009 aggregate principal amount 125 million pursuant series convertible preferred stock purchase agreement november 12 1999 issued sold investment funds associated bain capital madison dearborn partners total 75000 shares convertible preferred stock 1000 per share aggregate 75 million cash less fees 61 million dividends convertible preferred stock payable kind additional shares accrue annual rate 3375 subject adjustment net cash used financing activities 112 million year ended december 31 2000 compared net cash provided financing activities 4319 million year ended december 311999 difference two periods results primarily completion financings 1999 previously described second public offering common stock february 1999 raised 472 million net offering costs financial obligations include industrial development revenue bonds issued behalf guaranteed us finance woonsocket rhode island treatment facility equipment bonds outstanding aggregate balance 10 million december 31 2000 fixed interest rates ranging 65 7375 due various amounts june 2017 addition issued various promissory notes connection acquisitions 1997 1998 2000 consisting primarily 10year note issued part environmental control corporation inc ecco acquisition outstanding balance 16 million december 31 2000 recently issued accounting standards june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activity sfas 133 provides comprehensive consistent standards recognition measurement derivative hedging activities requires derivatives recorded consolidated balance sheets fair value establishes criteria hedges changes fair value assets liabilities firm commitments hedges variable cash flows forecasted transactions hedges foreign currency exposures net investments foreign operations changes fair value derivatives meet criteria hedges would recognized consolidated statement earnings statement effective us beginning january 1 2001 adoption sfas 133 material impact us item 7aitem 7 managements discussion analysis financial condition results operation following discussion financial condition results operations company read conjunction companys consolidated financial statements related notes item 8 report background incorporated march 1989 provide regulated medical waste collection transportation treatment services customers related training education programs consulting services also sell ancillary supplies transport pharmaceuticals photographic chemicals lead foil amalgam recycling selected geographic service areas also expanding international markets joint ventures licensing proprietary technology selling associated equipment revenues increased 16 million 1991 3590 million 2001 derive revenues services two principal types customers outpatient clinics medical dental offices biomedical companies municipal entities longterm subacute care facilities smallerquantity generators regulated medical waste small account customers ii hospitals blood banks pharmaceutical manufacturers largerquantity generators regulated medical waste large account customers substantially services provided pursuant customer contracts specifying either scheduled oncall regulated medical waste management services contracts small account customers generally provide annual price increases automatic renewal provision unless customer notifies us prior completion contract contracts hospitals large account customers may run one year typically include price escalator provisions allow price increases generally tied inflation index set fixed percentage december 31 2001 served 269000 customers critical accounting policies procedures discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities see note 1 consolidated financial statements believe significant accounting policies see note 2 consolidated financial statements following may involve higher degree judgment part complexity reporting accounts receivable accounts receivable consist primarily amounts due us normal business activities maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts single customer accounts 1 revenues revenue recognition recognize revenue time medical waste collection revenue costs contracts supply proprietary treatment equipment accounted percentage completion method whereby income recognized based estimated stage completion individual contract using costtocost method routinely review total estimated costs complete contract revise estimated gross margin contract necessary payments received advance deferred recognized related service period goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired identifiable intangible assets assembled workforce covenants compete currently amortized straight line method estimated useful lives assets currently reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverablesee note 8 consolidated financial statements insurance workers compensation vehicle liability physical damage employeerelated health care benefits covered using high deductible insurance polices third party administrator used process claims require workers compensation claims reported within 24 hours result accrue workers compensation liability based upon claim reserves established thirdparty administrator month employee health insurance benefit liability based historical claims experience rate extent actual claims vary historical experience earnings would impacted review accruals associated exposure liabilities adequacy end reporting period year ended december 31 2001 compared year ended december 31 following summarizes thousands operations year ended december 31 2001 2000 revenues 359024 1000 323722 1000 cost revenues 215959 602 196345 607 gross profit 143065 398 127377 393 selling general administrative 66086 184 59457 184 income operations acquisition related costs write offs 76979 214 67920 210 acquisition related costs 356 01 4454 14 write fixed assets 3329 09 income operations 73294 204 63466 196 income taxes extraordinary item 22019 61 14511 45 extraordinary item debt financing net tax 7309 20 net income 14710 41 14511 45 depreciation amortization 25234 70 23469 72 ebitda 97395 271 86512 267 earnings per share diluted extraordinary item 104 072 extraordinary itemdebt refinancing 034 earnings per sharediluted 070 072 revenues increased 353 million 109 3590 million year ended december 31 2001 3237 million year ended december 31 2000 continued focus sales highermargin small account customers simultaneously paring specified higherrevenue lowermargin accounts large account customers revenues generated sale machinery licensing technology internationally 77 million 2001 compared 72 million 2000 2001 acquisitions contributed approximately 69 million increase revenues 2000 year internal growth small account customers increased approximately 90 revenues large account customers increased approximately 48 cost revenues cost revenues increased 197 million 100 2160 million year ended december 31 2001 1963 million year ended december 31 2000 increase primarily due increase revenues 2001 compared 2000 increase cost equipment sold internationally gross margin percentage increased 398 2001 393 2000 increased utilization treatment capacity lower costs relating changing mix small account versus large account customers reduced energy costs offset higher insurance costs selling general administrative expenses selling general administrative expenses increased 661 million year ended december 31 2001 595 million year ended december 31 2000 increase primarily result increased marketing expenses related sterisafesm program higher insurance costs bad debt expense increased 2001 18 million 16 million 2000 selling general administrative expenses percentage revenue remained constant 184 2001 compared 2000 excluding amortization selling general administrative expenses percent revenue increased 145 2001 141 2000 acquisitionrelated costs year ended december 31 2001 incurred integration nonrecurring acquisition costs 04 million compared 45 million year ended december 31 2000 costs included severance facility closure costs nonrecurring acquisitionrelated costs transition related expenses anticipate incur additional 05 million acquisitionrelated expenses year ended december 31 2002 income operations income operations increased 733 million year ended december 31 2001 635 million year ended december 31 2000 increase due higher revenues lower acquisitionrelated costs offset higher costs revenues selling general administrative expenses write fixed assets related 3ci subsidiary period income operations percentage revenue increased 204 year ended december 31 2001 196 period 2000 result productivity improvements factors described ebitda increased 126 974 million 271 revenues year ended december 31 2001 compared 865 million 267 revenues year ended december 31 2000 increase ebitda primarily due factors described interest expense interest income interest expense decreased 354 million year ended december 31 2001 398 million year ended december 31 2000 primarily due lower debt levels lower interest rates year interest income decreased 04 million 2001 06 million 2000 primarily due lower cash balances lower interest rates throughout year income tax expense income tax expense year ended december 31 2001 reflects effective tax rate approximately 400 federal state income taxes extraordinary item year ended december 31 2001 refinanced senior credit facility successfully completed offering 1025000 shares common stock net proceeds offering used repay 438 million senior subordinated notes result incurred certain onetime cash noncash pretax charges follows thousands cash noncash total redemption premium upon prepayment senior subordinated notes 5416 senior credit facility refinancing fees 957 accelerated amortization finance fees associated senior subordinated notes 1451 accelerated amortization finance fees associated bank debt financing 4408 6373 5859 12232 year ended december 31 2000 compared year ended december 31 following summarizes thousands operations year ended december 31 2000 1999 revenues 323722 1000 132848 1000 cost revenues 196345 607 86123 648 gross profit 127377 393 46725 352 selling general administrative 59457 184 26480 199 income operations acquisition related costs 67920 210 20245 152 acquisition related costs 4454 14 7961 60 income operations 63466 196 12284 92 net income 14511 45 13968 105 depreciation amortization 23469 72 9879 74 ebitda 86512 267 22728 171 earnings per sharediluted 072 092 revenues increased 1909 million 1437 3237 million year ended december 31 2000 1328 million year ended december 31 1999 full year revenues acquisition bfis medical waste business november 1999 continued focus sales highermargin small account customers simultaneously paring specified higherrevenue lowermargin accounts large account customers revenues generated sale machinery licensing technology internationally 72 million 2000 compared 66 million 1999 2000 acquisitions contributed approximately 1800 million increase revenues 1999 year internal growth small account customers increased approximately 80 revenues large account customers increased approximately 35 cost revenues cost revenues increased 1102 million 1280 1963 million year ended december 31 2000 861 million year ended december 31 1999 increase primarily due substantial increase revenues 2000 compared 1999 cost equipment sold internationally gross margin percentage increased 393 2000 352 1999 result integration bfi medical waste business existing infrastructure lower costs relating changing mix small account versus large account customers higher gross margins international equipment sales increased utilization treatment capacity selling general administrative expenses selling general administrative expenses increased 595 million year ended december 31 2000 265 million year ended december 311999 increase largely result increases selling marketing expenses goodwill amortization result bfi acquisition bad debt expense increased 2000 16 million 08 million 1999 result increased sales selling general administrative expenses percentage revenue decreased 184 2000 199 1999 excluding amortization selling general administrative expenses percent revenue decreased 141 2000 167 1999 acquisitionrelated costs year ended december 31 2000 incurred integration nonrecurring acquisition costs 45 million related bfi acquisition compared 80 million year ended december 31 1999 costs included severance facility closure costs nonrecurring acquisitionrelated costs transition related expenses income operations income operations increased 635 million year ended december 31 2000 123 million year ended december 31 1999 increase due higher revenues lower acquisitionrelated costs offset higher costs revenues selling general administrative expenses period income operations percentage revenue increased 196 year ended december 31 2000 92 period 1999 result productivity improvements lower acquisitionrelated costs relative bfi acquisition ebitda increased 2806 865 million 267 revenues year ended december 31 2000 compared 227 million 171 revenues year ended december 31 1999 increase ebitda primarily due factors described interest expense interest income interest expense increased 398 million year ended december 31 2000 62 million year ended december 31 1999 primarily due increased borrowings bfi acquisition interest income decreased 06 million 2000 11 million 1999 primarily due lower cash balances throughout year income tax expense income tax expense year ended december 31 2000 reflects effective tax rate approximately 391 federal state income taxes income tax expense year ended december 31 1999 reflects onetime tax benefit 63 million recorded compliance fasb 109 liquidity capital resources november 1999 completed acquisition bfis medical waste business united states canada puerto rico prior acquisition bfi largest provider regulated medical waste services united states revenues 2017 million 12 months ended june 30 1999 purchase price acquisition 4105 million cash paid purchase price following sources addition cash hand 2250 million borrowings term loan facilities new senior secured credit facility established dlj capital funding inc affiliate credit suisse first boston corporation bankers trust company bank america na ii 1250 million proceeds sale 12 38 senior subordinated notes due november 2009 iii 750 million proceeds issuance new series convertible preferred stock certain investment funds associated bain capital llc madison dearborn partners llc transactions completed concurrently completion acquisition bfis medical waste business result substantially leveraged company also recorded substantial increase goodwill intangible assets connection bfi acquisition experienced corresponding large increase amortization expense october 10 2001 refinanced senior secured credit facility increase revolving credit facility extend maturity reallocate term loan b components facility extend maturities reduce interest rates charged amendment restatement existing credit agreement increased revolving credit facility 500 million 800 million extended maturity november 11 2005 september 30 2006 also reallocated term loan components credit facility increasing lowerinterest term component form 750 million 1000 million extending maturity november 11 2005 september 30 2006 reducing higherinterest term b component 1500 million 750 million extending maturity november 10 2006 september 30 2007 term loans repaid quarterly installments last business day march june september december beginning january 1 2002 refinancing senior secured credit facility reduces interest rates charged reducing applicable margin added relevant interest rate borrowings continue bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference base rate higher reference rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement applicable margin based upon leverage ratio december 31 2001 margin interest rates borrowings revolving credit facility term component 075 base rate loans 175 libor loans margin interest rates borrowings term b component 150 base rate loans 250 libor loans amended restated credit facility secured lien substantially assets subsidiaries except assets 3ci pledge stock whollyowned domestic subsidiaries stock 3ci medam 65 stock medtech amended restated credit facility also requires us comply various financial reporting covenants restrictions including restriction dividend payments december 31 2001 1900 million borrowings outstanding senior secured credit facility dividends series convertible preferred stock payable kind additional shares convertible preferred stock accrue annual rate 3375 subject adjustment december 31 2001 working capital 346 million compared working capital 479 million december 31 2000 decrease working capital primarily due lower account receivable higher accrued liability balances noted available 800 million revolving line credit senior secured credit facility secured accounts receivable assets december 31 2001 150 million borrowed line net cash provided operating activities 646 million year ended december 31 2001 compared 105 million comparable period 2000 increase primarily reflects better collections accounts receivable 2001 compared 2000 higher accrued liability deferred revenue balances higher depreciation amortization expenses partially offset lower accounts payable balance higher asset balances net cash used investing activities year ended december 31 2001 367 million compared 156 million comparable period 2000 increase primarily attributable increase capital expenditures investments international joint ventures capital expenditures 154 million year ended december 31 2001 primarily upgrades incinerator treatment facilities compared 116 million period 2000 rate capital spending within 45 revenues anticipated spending 2001 upgrades completed 1520 treatment capacity incineration 8085 nonincineration technologies proprietary etd technology autoclaving investments acquisitions international joint ventures year ended december 31 2001 213 million versus 45 million comparable period 2000 net cash used financing activities 178 million year ended december 31 2001 compared 115 million comparable period 2000 november 2001 completed public offering 1025000 shares common stock received proceeds 490 million offering net offering expenses used proceeds repay 35 438 million senior subordinated notes due november 2009 additional 54 million prepayment premium 2001 made repayments 386 million debt capital leases consisted 52 million scheduled repayments 334 million prepayments financial obligations include industrial development revenue bonds issued behalf guaranteed us finance woonsocket rhode island treatment facility equipment bonds outstanding balance 08 million december 31 2001 fixed interest rate 65 due june 2017 addition issued various promissory notes connection acquisitions 1997 1998 2000 consisting primarily 10year note issued part environmental control co inc acquisition outstanding balance 14 million december 31 2001 table displays future contractual cash commitments payments due period thousands less total 1 year 13 years 4 5 years 5 years long term debt 276279 11656 38047 57110 169466 capital lease obligations 3719 1013 1552 990 164 operating leases 45311 12541 19910 9241 3619 total contractual cash obligations 325309 25210 59509 67341 173249 anticipate operating cash flow together borrowings senior secured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future recently issued accounting standards june 2001 financial accounting standards board issued statements financial accounting standards 141 business combinations 142 goodwill intangible assets effective fiscal years beginning december 15 2001 new rules goodwill longer amortized subject annual impairment tests accordance statements intangible assets continue amortized useful lives apply new rules accounting goodwill intangible assets beginning first quarter 2002 application nonamortization provisions statements expected result increase net income 68 million 032 per diluted share per year 2002 perform first required impairment tests goodwill indefinite lived intangible assets january 1 2002 yet determined effect tests earnings financial position item 7aitem 7 management’s discussion analysis financial condition results operation following discussion financial condition results operations company read conjunction company’s consolidated financial statements related notes item 8 report background incorporated march 1989 provide compliance services including regulated medical waste collection transportation treatment services customers related training education programs consulting services also sell ancillary supplies transport pharmaceuticals photographic chemicals lead foil amalgam recycling selected geographic service areas also expanding international markets joint ventures licensing proprietary technology selling associated equipment revenues increased 16 million 1991 4015 million 2002 derive revenues services two principal types customers outpatient clinics medical dental offices biomedical companies municipal entities longterm subacute care facilities smallerquantity generators regulated medical waste “small account” customers ii hospitals blood banks pharmaceutical manufacturers largerquantity generators regulated medical waste “large account” customers substantially services provided pursuant customer contracts specifying either scheduled oncall regulated medical waste management services contracts small account customers generally provide annual price increases automatic renewal provision unless customer notifies us prior completion contract contracts hospitals large account customers may run one year typically include price escalator provisions allow price increases generally tied inflation index set fixed percentage december 31 2002 served approximately 290000 customers critical accounting policies procedures discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2 consolidated financial statements following may involve higher degree judgment part complexity reporting accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts 2 revenues revenue recognition recognize revenue time medical waste collection revenue costs contracts supply proprietary treatment equipment accounted percentage completion method whereby income recognized based estimated stage completion individual contract using costtocost method routinely review total estimated costs complete contract revise estimated gross margin contract necessary payments received advance deferred recognized services provided goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired currently amortized determined permits indefinite lives thus amortized accordance statements financial accounting standards 142 effective fiscal years beginning december 15 2001 goodwill permits currently tested annually impairment frequently circumstances indicate may impaired identifiable intangible assets customer lists covenants compete currently amortized straightline method estimated useful lives determined customer lists 40year lives assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted cash flows see note 8 consolidated financial statements insurance worker’s compensation vehicle liability physical damage employeerelated health care benefits covered using high deductible insurance polices thirdparty administrator used process claims require worker’s compensation claims reported within 24 hours result accrue worker’s compensation liability based upon claim reserves established thirdparty administrator month employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period year ended december 31 2002 compared year ended december 31 2001 following summarizes thousands operations revenues increased 425 million 118 4015 million year ended december 31 2002 3590 million year ended december 31 2001 continued focus sales highermargin small account customers revenues generated sale machinery licensing technology internationally 64 million 2002 compared 77 million 2001 2002 acquisitions less one year old contributed approximately 182 million increase revenues 2001 year internal growth small account customers increased approximately 102 revenues large account customers increased approximately 52 cost revenues cost revenues increased 211 million 97 2370 million year ended december 31 2002 2160 million year ended december 31 2001 increase primarily related increase revenues 2002 compared 2001 gross margin percentage increased 410 2002 398 2001 improved margins large account business increased number small account customers electing sterisafesm program partially offset higher employee benefit energy insurance costs selling general administrative expenses selling general administrative expenses decreased 604 million year ended december 31 2002 661 million year ended december 31 2001 decrease primarily result decreased amortization expense result adopting fas 142 partially offset higher bad debt legal expenses increased marketing expenses related sterisafesm program higher insurance costs amortization decreased 20 million year ended december 31 2002 139 million year ended december 31 2001 result adoption fas 142 bad debt expense increased 2002 34 million 18 million 2001 increase result increased writeoffs higher revenues year selling general administrative expenses percentage revenue decreased 150 2002 compared 184 2001 excluding amortization selling general administrative expenses percent revenue increased 146 2002 145 2001 income operations income operations increased 1008 million year ended december 31 2002 733 million year ended december 31 2001 increase due higher revenues combined lower amortization expense offset higher costs revenues year ended december 31 2002 wrote idled incinerator equipment related spare parts amount 29 million compared 33 million write treatment fixed assets related 3ci subsidiary year ended december 31 2001 income operations percentage revenue increased 251 year ended december 31 2002 204 period 2001 result productivity improvements factors described ebitda increased 171 1140 million 284 revenues year ended december 31 2002 compared 974 million 271 revenues year ended december 31 2001 increase ebitda primarily due factors described interest expense interest income interest expense decreased 215 million year ended december 31 2002 354 million year ended december 31 2001 primarily due lower debt levels lower interest rates year interest income remained constant 04 million 2002 compared 2001 debt extinguishment refinancing expenses year ended december 31 2002 repurchased 126 million senior subordinated notes result incurred 18 million redemption premium expenses 04 million accelerated amortization financing fees associated repurchase senior subordinated notes addition amended bank credit facility agreement 2002 increasing available revolving facility 105 million 80 million paid 02 million financing fees year ended december 31 2001 refinanced senior credit facility successfully completed offering 2050000 shares common stock net proceeds used repay 438 million senior subordinated notes result paid 10 million refinancing fees 54 million redemption premium expenses incurred 44 million accelerated amortization financing fees associated senior credit facility 14 million accelerated amortization financing fees associated senior subordinated notes income tax expense income tax expense year ended december 31 2002 reflects effective tax rate approximately 395 federal state income taxes year ended december 31 2001 compared year ended december 31 2000 following summarizes thousands operations revenues increased 353 million 109 3590 million year ended december 31 2001 3237 million year ended december 31 2000 continued focus sales highermargin small account customers simultaneously reviewing specified higherrevenue lowermargin accounts large account customers revenues generated sale machinery licensing technology internationally 77 million 2001 compared 72 million 2000 2001 acquisitions less one year old contributed approximately 69 million increase revenues 2000 year internal growth small account customers increased approximately 89 revenues large account customers increased approximately 43 cost revenues cost revenues increased 197 million 100 2160 million year ended december 31 2001 1963 million year ended december 31 2000 increase primarily due increase revenues 2001 compared 2000 increase cost equipment sold internationally gross margin percentage increased 398 2001 393 2000 increased utilization treatment capacity lower costs relating changing mix small account versus large account customers reduced energy costs offset higher insurance costs selling general administrative expenses selling general administrative expenses increased 661 million year ended december 31 2001 595 million year ended december 31 2000 increase primarily result increased marketing expenses related sterisafesm program higher insurance costs bad debt expense increased 2001 18 million 16 million 2000 selling general administrative expenses percentage revenue remained constant 184 2001 compared 2000 excluding amortization selling general administrative expenses percent revenue increased 145 2001 141 2000 acquisitionrelated costs year ended december 31 2001 incurred integration acquisition costs 04 million compared 45 million year ended december 31 2000 costs included severance facility closure costs nonrecurring acquisitionrelated costs transition related expenses income operations income operations increased 733 million year ended december 31 2001 635 million year ended december 31 2000 increase due higher revenues lower acquisitionrelated costs offset higher costs revenues selling general administrative expenses writeoff fixed assets related 3ci subsidiary period income operations percentage revenue increased 204 year ended december 31 2001 196 period 2000 result productivity improvements factors described ebitda increased 126 974 million 271 revenues year ended december 31 2001 compared 865 million 267 revenues year ended december 31 2000 increase ebitda primarily due factors described interest expense interest income interest expense decreased 354 million year ended december 31 2001 398 million year ended december 31 2000 primarily due lower debt levels lower interest rates year interest income decreased 04 million 2001 06 million 2000 primarily due lower cash balances lower interest rates throughout year debt extinguishment refinancing expenses year ended december 31 2001 refinanced bank debt facility successfully completed offering 2050000 shares common stock net proceeds used repay 438 million senior subordinated notes result incurred certain cash noncash pretax expenses follows year ended december 31 2001 income tax expense income tax expense year ended december 31 2001 reflects effective tax rate approximately 400 federal state income taxes liquidity capital resources october 10 2001 refinanced senior secured credit facility increase revolving credit facility extend maturity reallocate term loan b components facility extend maturities reduce interest rates charged amendment restatement existing credit agreement increased revolving credit facility 500 million 800 million extended maturity november 11 2005 september 30 2006 also reallocated term loan components credit facility increasing lowerinterest term component 750 million 1000 million extending maturity november 11 2005 september 30 2006 reducing higherinterest term b component 1500 million 750 million extending maturity november 10 2006 september 30 2007 refinancing senior secured credit reduced interest rates charged reducing applicable margin added relevant interest rate borrowings bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference “base rate” higher reference rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement applicable margin based upon leverage ratio december 31 2002 margin interest rates borrowings revolving credit facility term component 050 base rate loans 150 libor loans margin interest rates borrowings term b component 150 base rate loans 250 libor loans january 2003 amended senior secured credit facility increase borrowing capacity 510 million reclassifying borrowings revolving credit facility term loans amended credit facility consists 105 million revolving credit facility 1126 million term loan facility 472 million term b loan facility credit agreement amended january 2003 extended maturity revolving credit component term loan component september 2007 extended maturity term b component september 2008 term loans repayable quarterly installments last business day march june september december beginning 2003 required principal repayments term loan component 50 million quarterly payment date june 2007 final payment outstanding principal balance upon maturity september 2007 required principal payments term b loan component 02 million quarterly payment date june 2008 final payment outstanding balance upon maturity september 2008 amended restated credit facility secured lien substantially assets subsidiaries except assets 3ci pledge stock whollyowned domestic subsidiaries stock 3ci medam 65 stock canadian subsidiary amended restated credit facility also requires us comply various financial reporting covenants restrictions including restriction dividend payments december 31 2002 1468 million borrowings outstanding senior secured credit facility prior june 1 2002 series convertible preferred stock bore preferential dividends payable additional shares series convertible preferred stock rate 3375 per annum date issuance dividends accrued daily accumulated annually anniversary initial issuance july 2002 entered waiver amendment agreement holders series convertible preferred stock pursuant agreed among things 3375 paymentinkind dividends ceased accrue may 31 2002 december 31 2002 working capital 406 million compared working capital 350 million december 31 2001 increase working capital primarily due lower current portion long term debt higher deferred tax prepaid asset balances partially offset lower accounts receivable prepaid assets increase result paying annual insurance premiums advance versus financing policy period years prior 2002 funding first payroll january 2003 december 31 2002 due pending bank holidays noted available 1050 million revolving line credit senior secured credit facility secured accounts receivable assets december 31 2002 380 million borrowed line net cash provided operating activities 969 million year ended december 31 2002 compared 646 million comparable period 2001 increase primarily reflects higher revenues income business better collections accounts receivable 2002 compared 2001 lower parts supply balances higher accrued liability deferred income tax balances partially offset lower deferred revenue balance higher asset balances net cash used investing activities year ended december 31 2002 495 million compared 367 million comparable period 2001 increase primarily attributable increase payments acquisitions capital expenditures 148 million year ended december 31 2002 primarily upgrades incinerator treatment facilities expansion infrastructure compared 164 million period 2001 rate capital spending within 45 revenues anticipated spending 2002 december 31 2002 approximately 13 treatment capacity incineration approximately 87 nonincineration technologies proprietary etd technology autoclaving cash investments acquisitions international joint ventures year ended december 31 2002 346 million versus 213 million comparable period 2001 net cash used financing activities 519 million year ended december 31 2002 compared 178 million comparable period 2001 2002 made repayments 819 million debt capital leases consisted 116 million scheduled repayments 703 million prepayments included prepayments 126 million repurchases 12 38 senior subordinated notes financial obligations include 06 million industrial development revenue bond issued behalf guaranteed us finance woonsocket rhode island treatment facility equipment due june 2017 addition december 31 2002 62 million outstanding related promissory notes issued connection acquisitions 1997 2000 2002 consisting primarily 2year note issued part micro med industries inc acquisition outstanding balance 46 million december 31 2002 table reflects future contractual cash commitments based amended credit agreement amount borrowing outstanding agreement january 31 2003 issued guarantees parties recorded balance sheet december 31 2002 43 million stand letters credit issued anticipate operating cash flow together borrowings senior secured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future risk factors subject extensive governmental regulation frequently difficult expensive timeconsuming comply medical waste management industry subject extensive federal state local laws regulations relating collection transportation packaging labeling handling documentation reporting treatment disposal regulated medical waste business requires us obtain many permits authorizations approvals certificates types governmental permission every jurisdiction operate believe currently comply material respects applicable permitting requirements state local regulations change often however new regulations frequently adopted changes applicable regulations could require us obtain new permits change way operate might unable obtain new permits require cost compliance new changed regulations could significant permits require especially build operate treatment plants transfer facilities difficult timeconsuming obtain may also contain conditions restrictions limit ability operate efficiently may issued quickly need cannot obtain permits need contain unfavorable conditions could substantially impair operations reduce revenues handling treatment hazardous medical waste carries risk personal injury employees others business requires us handle materials may infectious poisonous corrosive dangerous life property ways strive handle materials care accordance accepted safe methods possibility accidents leaks spills acts god always exists examples people property may exposed materials include • truck accidents • damaged leaking containers • improper storage medical waste customers • vandalism arson sabotage • placement customers materials waste stream authorized able process nuclear waste certain body parts tissues • malfunctioning treatment plant equipment human beings animals property might injured sickened damaged exposure medical waste turn could result lawsuits found liable injuries substantial damages could awarded us carry liability insurance intended cover contingencies particular instances claims damages events may occur insured inadequately insured uninsured underinsured loss could substantial could impair profitability reduce liquidity handling medical waste exposes us risk environmental liabilities may covered insurance company engaged medical waste management face risks liability environmental contamination federal comprehensive environmental response compensation liability act 1980 cercla similar state laws impose strict liability current former owners operators facilities release hazardous substances environment well businesses generate substances businesses transport facilities responsible parties may liable substantial investigation cleanup costs even operated businesses properly complied applicable federal state laws regulations liability cercla may joint several means found business responsibility particular cercla site could required pay entire cost investigation cleanup even though party responsible release hazardous substance even though companies might also liable pollution liability insurance excludes liabilities cercla thus incur liability cercla could identify parties responsible law compel contribute expenses cost us could substantial could impair profitability reduce liquidity customer service agreements make clear customer responsible making sure appropriate materials disposed claim customer might legally liable may successful recovering damages level governmental enforcement environmental regulations uncertain effect business could reduce demand services believe government’s strict enforcement laws regulations relating medical waste collection treatment good business laws regulations increased demand services relaxation standards changes governmental regulation medical waste • encouraging use landfills • removing obstacles use incineration autoclaving thus allowing continued use existing onsite incinerators medical waste generators without incur additional compliance costs • reducing manpower money used enforce environmental regulations favorable operations could increase number competitors reduce need services may required pay fines penalties violations environmental regulations permits time subject governmental proceedings enforce regulations relating handling treatment medical waste pay fines penalties undertake remedial work facilities may subject similar proceedings future government enforcement actions also may initiated us based claims violating permits proceedings could distract management attention business operations resulting fines shutdowns could reduce profitability unable acquire medical waste businesses revenue profit growth may slowed historically growth strategy based part ability acquire medical waste businesses know whether future able • identify suitable businesses buy • complete purchase businesses terms acceptable us • improve operations businesses buy successfully integrate operations • avoid overcome concerns expressed regulators compete potential buyers acquisition medical waste companies competition may result fewer opportunities purchase companies sale may also result higher purchase prices businesses want purchase addition cannot certain • enough money • able borrow enough money reasonable terms • able issue stock debt instruments like promissory notes consideration purchase • able raise enough money issuing stock financing methods complete purchases businesses want acquire also know whether growth strategy continue effective business significantly larger new acquisitions may desired benefits expected past implementation acquisition strategy could affected certain instances concerns state regulators could result able realize full synergies profitability particular acquisitions may become subject inquiries investigations state antitrust regulators time course completing acquisitions medical waste businesses order obtain regulatory clearance particular acquisition could required modify certain operating practices acquired business divest one assets acquired business changes terms acquisitions required regulators agreed us order settle regulatory investigations could impede acquisition strategy reduce anticipated synergies profitability acquisitions likelihood outcome inquiries investigations state regulators course completing acquisitions cannot predicted aggressive pricing existing competitors entrance new competitors could drive profits slow growth medical waste industry competitive required us past reduce prices especially large account customers competition may require us reduce prices future substantial price reductions could significantly reduce earnings face important competition large number small local competitors requires little money technical knowhow compete us collection transport medical waste many regional local companies industry face competition businesses competition may exist location try expand future competitors could take actions would hurt growth strategy including support regulations could delay prevent us obtaining keeping permits might also give financial support citizens’ groups oppose plans locate treatment transfer facility particular location sources competition include large waste generators hospitals maintain treatment facilities yetunidentified competitors could prevent us obtaining new customers could take existing customers away us require significant amount cash service substantial indebtedness reduces cash available finance internal growth acquisition medical waste businesses substantial amount indebtedness december 31 2002 total longterm indebtedness 2241 million net current maturities borrowings 380 million revolving credit facility ability borrow 670 million facility january 2003 amendment senior credit facility scheduled debt service payments 2003 2004 2005 208 million year ability make payments indebtedness well fund operations future growth depends upon ability generate cash success depends upon results operations upon general economic financial competitive regulatory factors beyond control indebtedness could • make us vulnerable unfavorable economic conditions • make difficult pursue acquisition medical waste management businesses • require us dedicate reserve large portion cash flow operations making payments indebtedness would prevent us using purposes restrictions debt instruments may limit ability pay dividends incur additional debt make acquisitions make investments debt instruments contain covenants restrict ability make distributions stockholders payments unless satisfy certain financial tests comply various financial ratios creditors could declare default debt instruments indebtedness could declared immediately due payable ability comply provisions debt instruments may affected changes economic business conditions beyond control debt instruments also contain covenants limit ability incur additional indebtedness acquire businesses make capital expenditures impose various restrictions covenants could affect ability operate business may limit ability take advantage potential business opportunities arise loss senior executives could affect ability manage business profitably depend small number senior executives future success depend among things upon ability keep executives hire highly qualified employees levels compete potential employers employees may successful hiring keeping executives employees need written employment agreements president chief executive officer executive officers key employees could leave us little prior notice either individually part group loss inability hire key employees could impair ability manage business direct growth expansion foreign countries exposes us unfamiliar regulations may expose us new obstacles growth plan grow united states foreign countries established operations canada mexico argentina south africa entered etd equipment sales licensing agreements australia brazil japan foreign operations carry special risks although business foreign countries yet affected business countries currently operate may operate future could limited disrupted • government controls • import export license requirements • political economic insecurity • trade restrictions • changes tariffs taxes • exchange rates • unfamiliarity laws regulations customs • restrictions repatriating foreign profits back united states • difficulties staffing managing international operations foreign governments agencies often establish permit regulatory standards different united states cannot obtain foreign regulatory approvals cannot get expect growth profitability international operations could limited fluctuations currency exchange rates increases duty rates etd equipment could similar effects competitive advantages etd treatment process aspects business depend patents proprietary rights hold 21 united states patents relating etd treatment process aspects processing medical waste filed assigned patent applications several foreign countries received patents australia canada france hong kong mexico russia south africa south korea united kingdom pending future patent applications may granted issued patents may provide us competitive advantages patents may challenged parties addition companies may develop similar processes avoid patents litigation administrative proceedings may necessary enforce patents issued us determine scope validity others’ proprietary rights litigation administrative proceeding could result substantial cost us distraction management ruling us litigation administrative proceeding could expose us new competition depress earnings commercial success also depends infringing patents issued parties patents belonging parties may require us alter processes pay licensing fees cease using current future processes result may unable license technology rights may require reasonable cost cannot obtain license infringing technology currently use could material adverse effect business registered unregistered trademarks service marks assurance registered unregistered trademarks service marks infringe upon rights parties requirement change trademarks service marks trade names could result loss goodwill associated trademark service mark trade name could entail significant expense earnings could decline writeoff intangible assets goodwill result purchase accounting various acquisitions balance sheet december 31 2002 contains goodwill net accumulated amortization 4473 million intangible assets net accumulated amortization 201 million including indefinite lived intangibles 92 million accordance fas 142 first quarter 2002 began apply new financial accounting rules goodwill indefinite lived intangibles amortized subject annual impairment tests accordance fas 142 ongoing basis evaluate based upon fair value reporting units whether facts circumstances indicate impairment value indefinitelived intangible assets goodwill circumstances acquisition change value intangible assets may realized us determine significant impairment occurred would required incur noncash writeoffs impaired portion goodwill unamortized intangible assets could material adverse effect results operations period writeoff occurs item 7aitem 7 management’s discussion analysis financial condition results operation following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction largest provider regulated medical waste services north america addition offer osha compliance services health care providers introducing several new services 2004 including software hospitals monitor accreditation readiness derive medical waste revenues services two principal types customers outpatient clinics medical dental offices biomedical companies municipal entities longterm subacute care facilities smallerquantity generators regulated medical waste “small account” customers ii hospitals blood banks pharmaceutical manufacturers largerquantity generators regulated medical waste “large account” customers substantially medical waste services provided pursuant customer contracts specifying either scheduled oncall services contracts small account customers generally provide annual price increases automatic renewal provision unless customer notifies us contrary prior expiration current term contract contracts hospitals large account customers may run one year typically include price escalator provisions allow price increases generally tied inflation index set fixed percentage december 31 2003 served approximately 301000 customers approximately 295500 small account customers approximately 5500 large account customers critical accounting policies procedures discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities see note 1 consolidated financial statements believe significant accounting policies see note 2 consolidated financial statements following ones may involve higher degree judgment part greater complexity reporting revenue recognition recognize revenue medical waste services time medical waste collection revenue costs contracts supply proprietary etd treatment equipment accounted percentage completion method whereby income recognized based estimated stage completion individual contract using costtocost method routinely review total estimated costs complete contract revise estimated gross margin contract necessary payments received advance deferred recognized services provided goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired currently amortized determined permits indefinite lives accordingly amortized position accordance statements financial accounting standards 142 became effective fiscal years beginning december 15 2001 goodwill permits currently tested impairment annually frequently circumstances indicate may impaired identifiable intangible assets customer lists covenants compete currently amortized straightline method estimated useful lives determined customer lists 40year lives assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted cash flows see note 8 consolidated financial statements accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined delinquent amount past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts 2 revenues insurance worker’s compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance polices thirdparty administrator used process claims require worker’s compensation claims reported within 24 hours result accrue worker’s compensation liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end quarter year ended december 31 2003 compared year ended december 31 2002 following summarizes thousands operations revenues increased 517 million 129 4532 million 2003 4015 million 2002 continued focus medical waste services sales highermargin small account customers revenues generated sale etd equipment licensing technology internationally 28 million 2003 compared 64 million 2002 2003 acquisitions less one year old contributed approximately 400 million increase revenues 2002 year internal growth small account customers increased approximately 95 revenues large account customers decreased approximately 25 winnowing lowermargin accounts 2003 size regulated medical waste market united states remained relatively stable acquisition january scherer healthcare inc biosystems sharps management program able expand service offerings scherer healthcare acquisition contributed 206 million approximately 400 million acquisition revenue 2003 cost revenues cost revenues increased 196 million 83 2566 million 2003 2370 million 2002 increase primarily related increase revenues 2003 compared 2002 gross margin percentage increased 434 2003 410 2002 realized improvements continuous programs improve margins large quantity business increased number small quantity customers electing sterisafesm program 50000 70000 improved transportation productivity increasing route density improvements gross margins partially offset increase employee benefit costs increased 13 percentage points percentage compensation costs cost healthcare claims increased increase resulted evaluation employee healthcare programs changes thirdparty administrators providers effort manage future cost increases selling general administrative expenses selling general administrative expenses increased 702 million 2003 608 million 2002 increase primarily result increased spending result scherer healthcare acquisition marketing sterisafesm program starting national rollout biosystems sharps management program addition noted cost revenues discussion employee benefit costs percentage compensation costs increased 13 percentage points amortization decreased 19 million 2003 20 million 2002 acquisition related costs increased 07 million 2003 04 million 2002 bad debt expense decreased 2003 20 million 34 million 2002 decrease result improved collections decreased writeoffs 2003 selling general administrative expenses percentage revenue increased 155 2003 compared 151 2002 income operations income operations increased 1264 million 2003 1008 million 2002 increase due higher revenues offset higher costs revenues selling general administrative expenses year ended december 31 2002 noncash write idled incinerator equipment related spare parts amount 29 million income operations percentage revenue increased 279 2003 251 2002 result factors described interest expense interest income interest expense decreased 128 million 2003 215 million 2002 primarily due lower debt levels lower interest rates year interest income increased 06 million 2003 compared 04 million 2002 result higher interest income notes receivable debt extinguishments refinancing expenses 2003 repurchased 178 million senior subordinated notes compared repurchase 126 million 2002 result 2003 incurred 28 million redemption premium expenses 05 million noncash accelerated amortization financing fees associated repurchase senior subordinated notes compared 18 million 04 million respectively 2002 addition amended bank credit facility agreement 2002 paid 02 million financing fees income tax expense income tax expense years 2003 2002 reflects effective tax rate approximately 395 federal state income taxes year ended december 31 2002 compared year ended december 31 2001 following summarizes thousands operations revenues increased 425 million 118 4015 million 2002 3590 million 2001 continued focus medical waste services sales highermargin small account customers revenues generated sale etd equipment licensing technology internationally 64 million 2002 compared 77 million 2001 2002 acquisitions less one year old contributed approximately 182 million increase revenues 2001 year internal growth small account customers increased approximately 102 revenues large account customers increased approximately 52 internal growth fueled increasing number current new customers selecting sterisafesm program increased revenues large customers cost revenues cost revenues increased 211 million 97 2370 million 2002 2160 million 2001 increase primarily related increase revenues 2002 compared 2001 gross margin percentage increased 410 2002 398 2001 improved margins large account business increased number small account customers selecting sterisafesm program 50000 increase partially offset 13 increase insurance energy employee benefit costs percentage cost revenue 2002 selling general administrative expenses selling general administrative expenses decreased 608 million 2002 664 million 2001 decrease primarily result decreased amortization expense result adopting fas 142 partially offset higher bad debt legal expenses increased marketing expenses related sterisafesm program higher insurance costs amortization decreased 20 million 2002 139 million 2001 result adoption fas 142 bad debt expense increased 2002 34 million 18 million 2001 increase allowance doubtful accounts evaluation collectibility outstanding accounts receivable legal expenses increased 2002 21 million 07 million 2001 result lawsuits arizona utah selling general administrative expenses percentage revenue decreased 151 2002 compared 185 2001 income operations income operations increased 1008 million 2002 733 million 2001 increase due higher revenues combined lower amortization expense partially offset higher costs revenues 2002 noncash write incinerator equipment related spare parts amount 29 million compared 33 million noncash write treatment fixed assets related 3ci subsidiary 2001 income operations percentage revenue increased 251 2002 204 period 2001 result factors described interest expense interest income interest expense decreased 215 million 2002 354 million 2001 primarily due lower debt levels lower interest rates year interest income remained constant 04 million 2002 2001 debt extinguishment refinancing expenses 2002 repurchased 126 million senior subordinated notes result incurred 18 million redemption premium expenses 04 million noncash accelerated amortization financing fees associated repurchase senior subordinated notes addition amended senior credit facility 2002 paid 02 million financing fees 2001 refinanced senior credit facility successfully completed offering 2050000 shares common stock net proceeds used repay 438 million senior subordinated notes result paid 10 million refinancing fees 54 million redemption premium expenses incurred 44 million noncash accelerated amortization financing fees associated senior credit facility 14 million accelerated amortization financing fees associated senior subordinated notes income tax expense income tax expense 2002 2001 reflects effective tax rate approximately 395 400 respectively federal state income taxes liquidity capital resources january 2003 amended senior secured credit facility increase borrowing capacity 510 million reclassifying borrowings revolving credit facility term loans amended credit facility consists 105 million revolving credit facility 1126 million term loan facility 472 million term b loan facility borrowings bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference “base rate” higher reference rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement applicable margin based upon leverage ratio december 31 2003 margin interest rates borrowings revolving credit facility term component 00 base rate loans 125 libor loans margin interest rates borrowings term b component 075 base rate loans 225 libor rate loans credit agreement amended january 2003 extended maturity revolving credit component term loan component september 2007 extended maturity term b component september 2008 term loans repayable quarterly installments last business day march june september december beginning 2003 required principal repayments term loan component 50 million quarterly payment date june 2007 final payment outstanding principal balance upon maturity september 2007 required principal payments term b loan component 02 million quarterly payment date june 2008 final payment outstanding balance upon maturity september 2008 amended restated credit facility secured lien substantially assets subsidiaries except assets 3ci pledge stock whollyowned domestic subsidiaries stock 3ci stock mexican subsidiary 65 stock canadian subsidiary amended restated credit facility also requires us comply various financial reporting covenants restrictions including restriction dividend payments december 31 2003 material financial debt covenants follows • permitted minimum leverage ratio 300100 december 31 2003 actual leverage ratio 115100 • permitted minimum fixed charge coverage ratio 110100 december 31 2003 actual fixed charge coverage ratio 149100 • minimum amount net worth allowed december 31 2003 defined credit agreement 3462 million december 31 2003 actual net worth 4288 million december 31 2003 1097 million borrowings outstanding senior secured credit facility consisting 200 million revolving credit facility 624 million term loan facility 273 term b loan facility prior june 1 2002 series convertible preferred stock bore preferential dividends payable additional shares series convertible preferred stock rate 3375 per annum date issuance dividends accrued daily accumulated annually anniversary initial issuance july 2002 entered waiver amendment agreement holders series convertible preferred stock pursuant agreed among things 3375 paymentinkind dividends ceased accrue may 31 2002 working capital december 31 2003 working capital 273 million compared working capital 406 million december 31 2002 decrease working capital primarily due higher accrued insurance employee compensation liabilities lower accounts receivable high deductible insurance program accrued liability increases add additional year exposure balance noted available 1050 million revolving line credit senior secured credit facility december 31 2003 borrowed 200 million line net cash provided used net cash provided operating activities 1211 million year ended december 31 2003 compared 969 million 2002 increase primarily reflects higher revenues income higher accrued liability deferred income tax balances better collections accounts receivable 2003 compared 2002 partially offset increased asset balances net cash provided operating activities 2003 included 100 million tax benefit disqualifying dispositions stock acquired upon exercise incentive stock options net cash used investing activities 2003 576 million compared 495 million 2002 increase primarily attributable increase payments capital expenditures capital expenditures 210 million 2003 primarily investments capital equipment support nationwide rollout biosystems sharps management program improvements infrastructure compared 148 million 2002 december 31 2003 approximately 12 treatment capacity incineration approximately 88 nonincineration technologies proprietary etd technology autoclaving implementation commitment move away incineration may result writedown incineration equipment close incinerators currently operating commitment move away incineration nature goal accomplished undetermined number years uncertainties relating among things customer education acceptance legal requirements incinerate portions medical waste timetable transition specific plans close existing incinerators cash investments acquisitions international joint ventures 2003 372 million compared 346 million 2002 largest acquisition 2003 scherer healthcare inc 302 million net cash net cash used financing activities 640 million 2003 compared 519 million 2002 2003 made repayments 621 million debt capital leases consisted 263 million scheduled repayments 358 million prepayments included prepayments 178 million repurchases 12 38 senior subordinated notes addition december 31 2003 26 million outstanding related promissory notes issued connection acquisitions 2000 2002 consisting primarily 2year note issued part micromed industries inc acquisition outstanding balance 23 million december 31 2003 senior subordinated notes december 31 2003 509 million principal amount senior subordinated notes outstanding notes bear fixed rate interest 12 38 per annum payable semiannually mature november 15 2009 trust indenture governing notes right beginning november 15 2004 redeem portion outstanding notes redemption price equal varying percentages aggregate principal amount note redeemed plus accrued interest redemption date redemptions year beginning november 15 2004 redemption percentage 1061875 contractual cash commitments following table displays future contractual cash commitments issued guarantees parties recorded balance sheet december 31 2003 126 million standby letters credit issued anticipate operating cash flow together borrowings senior secured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future risk factors subject extensive governmental regulation frequently difficult expensive timeconsuming comply medical waste management industry subject extensive federal state local laws regulations relating collection transportation packaging labeling handling documentation reporting treatment disposal regulated medical waste business requires us obtain many permits authorizations approvals certificates types governmental permission every jurisdiction operate believe currently comply material respects applicable permitting requirements state local regulations change often however new regulations frequently adopted changes applicable regulations could require us obtain new permits change way operate might unable obtain new permits require cost compliance new changed regulations could significant permits require especially build operate treatment plants transfer facilities difficult timeconsuming obtain may also contain conditions restrictions limit ability operate efficiently may issued quickly need cannot obtain permits need contain unfavorable conditions could substantially impair operations reduce revenues handling treatment hazardous medical waste carries risk personal injury employees others business requires us handle materials may infectious poisonous corrosive dangerous life property ways strive handle materials care accordance accepted safe methods possibility accidents leaks spills acts god always exists examples people property may exposed materials include • truck accidents • damaged leaking containers • improper storage medical waste customers • vandalism arson sabotage • placement customers materials waste stream authorized able process nuclear waste certain body parts tissues • malfunctioning treatment plant equipment human beings animals property might injured sickened damaged exposure medical waste turn could result lawsuits found liable injuries substantial damages could awarded us carry liability insurance intended cover contingencies particular instances claims damages events may occur insured inadequately insured uninsured underinsured loss could substantial could impair profitability reduce liquidity handling medical waste exposes us risk environmental liabilities may covered insurance company engaged medical waste management face risks liability environmental contamination federal comprehensive environmental response compensation liability act 1980 cercla similar state laws impose strict liability current former owners operators facilities release hazardous substances environment well businesses generate substances businesses transport facilities responsible parties may liable substantial investigation cleanup costs even operated businesses properly complied applicable federal state laws regulations liability cercla may joint several means found business responsibility particular cercla site could required pay entire cost investigation cleanup even though party responsible release hazardous substance even though companies might also liable pollution liability insurance excludes liabilities cercla thus incur liability cercla could identify parties responsible law compel contribute expenses cost us could substantial could impair profitability reduce liquidity customer service agreements make clear customer responsible making sure appropriate materials disposed claim customer might legally liable may successful recovering damages level governmental enforcement environmental regulations uncertain effect business could reduce demand services believe government’s strict enforcement laws regulations relating medical waste collection treatment good business laws regulations increased demand services relaxation standards changes governmental regulation medical waste • encouraging use landfills without prior treatment medical waste • removing obstacles use incineration autoclaving thus allowing continued use existing onsite incinerators medical waste generators without incur additional compliance costs • reducing manpower money used enforce environmental regulations favorable operations could increase number competitors reduce need services may required pay fines penalties violations environmental regulations permits time subject governmental proceedings enforce regulations relating handling treatment medical waste pay fines penalties undertake remedial work facilities may subject similar proceedings future government enforcement actions also may initiated us based claims violating permits proceedings could distract management attention business operations resulting fines shutdowns could reduce profitability unable acquire medical waste businesses revenue profit growth may slowed historically growth strategy based part ability acquire medical waste businesses know whether future able • identify suitable businesses buy • complete purchase businesses terms acceptable us • improve operations businesses buy successfully integrate operations • avoid overcome concerns expressed regulators compete potential buyers acquisition medical waste companies competition may result fewer opportunities purchase companies sale may also result higher purchase prices businesses want purchase addition cannot certain • enough money • able borrow enough money reasonable terms • able issue stock debt instruments like promissory notes consideration purchase • able raise enough money issuing stock financing methods complete purchases businesses want acquire also know whether growth strategy continue effective business significantly larger new acquisitions may desired benefits expected past implementation acquisition strategy could affected certain instances concerns state regulators could result able realize full synergies profitability particular acquisitions may become subject inquiries investigations state antitrust regulators time course completing acquisitions medical waste businesses order obtain regulatory clearance particular acquisition could required modify certain operating practices acquired business divest one assets acquired business changes terms acquisitions required regulators agreed us order settle regulatory investigations could impede acquisition strategy reduce anticipated synergies profitability acquisitions likelihood outcome inquiries investigations state regulators course completing acquisitions cannot predicted aggressive pricing existing competitors entrance new competitors could drive profits slow growth medical waste industry competitive required us past reduce prices especially large account customers competition may require us reduce prices future substantial price reductions could significantly reduce earnings face important competition large number small local competitors requires little money technical knowhow compete us collection transport medical waste many regional local companies industry face competition businesses competition may exist location try expand future competitors could take actions would hurt growth strategy including support regulations could delay prevent us obtaining keeping permits might also give financial support citizens’ groups oppose plans locate treatment transfer facility particular location sources competition include large waste generators hospitals maintain treatment facilities yetunidentified competitors could prevent us obtaining new customers could take existing customers away us require significant amount cash service substantial indebtedness reduces cash available finance internal growth acquisition medical waste businesses large amount indebtedness december 31 2003 total longterm indebtedness 1630 million net current maturities borrowings 200 million revolving credit facility ability utilize 850 million facility scheduled debt service payments senior credit facility 2004 2005 2006 zero 98 million 200 million respectively ability make payments indebtedness well fund operations future growth depends upon ability generate cash success depends upon results operations upon general economic financial competitive regulatory factors beyond control indebtedness could • make us vulnerable unfavorable economic conditions • make difficult pursue acquisition medical waste management businesses • require us dedicate reserve large portion cash flow operations making payments indebtedness would prevent us using purposes restrictions debt instruments may limit ability pay dividends incur additional debt make acquisitions make investments debt instruments contain covenants restrict ability make distributions stockholders payments unless satisfy certain financial tests comply various financial ratios creditors could declare default debt instruments indebtedness could declared immediately due payable ability comply provisions debt instruments may affected changes economic business conditions beyond control debt instruments also contain covenants limit ability incur additional indebtedness acquire businesses make capital expenditures impose various restrictions covenants could affect ability operate business may limit ability take advantage potential business opportunities arise loss senior executives could affect ability manage business profitably depend small number senior executives future success depend among things upon ability keep executives hire highly qualified employees levels compete potential employers employees may successful hiring keeping executives employees need written employment agreements president chief executive officer executive officers key employees could leave us little prior notice either individually part group loss inability hire key employees could impair ability manage business direct growth expansion foreign countries exposes us unfamiliar regulations may expose us new obstacles growth plan grow united states foreign countries established operations canada mexico argentina south africa entered etd equipment sales licensing agreements australia brazil japan foreign operations carry special risks although business foreign countries yet affected business countries currently operate may operate future could limited disrupted • government controls • import export license requirements • political economic insecurity • trade restrictions • changes tariffs taxes • exchange rate fluctuations • unfamiliarity laws regulations customs • restrictions repatriating foreign profits back united states • difficulties staffing managing international operations foreign governments agencies often establish permit regulatory standards different united states cannot obtain foreign regulatory approvals cannot get expect growth profitability international operations could limited fluctuations currency exchange rates increases duty rates etd equipment could similar effects competitive advantages etd treatment process aspects business depend patents proprietary rights hold 18 united states patents relating etd treatment process aspects processing medical waste filed assigned patent applications several foreign countries received patents australia canada france hong kong mexico russia south africa south korea united kingdom pending future patent applications may granted issued patents may provide us competitive advantages patents may challenged parties addition companies may develop similar processes avoid patents litigation administrative proceedings may necessary enforce patents issued us determine scope validity others’ proprietary rights litigation administrative proceeding could result substantial cost us distraction management ruling us litigation administrative proceeding could expose us new competition depress earnings commercial success also depends infringing patents issued parties patents belonging parties may require us alter processes pay licensing fees cease using current future processes result may unable license technology rights may require reasonable cost cannot obtain license infringing technology currently use could material adverse effect business registered unregistered trademarks service marks assurance registered unregistered trademarks service marks infringe upon rights parties requirement change trademarks service marks trade names could result loss goodwill associated trademark service mark trade name could entail significant expense earnings could decline writeoff intangible assets goodwill result purchase accounting various acquisitions balance sheet december 31 2003 contains goodwill net accumulated amortization 4649 million intangible assets net accumulated amortization 316 million including indefinite lived intangibles 110 million accordance fas 142 evaluate ongoing basis using fair value reporting units whether facts circumstances indicate impairment value indefinitelived intangible assets goodwill circumstances acquisition change value intangible assets may realized us determine significant impairment occurred would required incur noncash writeoffs impaired portion goodwill unamortized intangible assets could material adverse effect results operations period writeoff occurs item 7aitem 7 management’s discussion analysis financial condition results operations following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction largest provider regulated medical waste services north america addition offer osha compliance services health care providers monitoring services 2004 acquired white rose environmental ltd leading provider regulated medical waste services united kingdom derive medical waste revenues services two principal types customers outpatient clinics medical dental offices biomedical companies municipal entities longterm subacute care facilities smallerquantity generators regulated medical waste “small account” customers ii hospitals blood banks pharmaceutical manufacturers largerquantity generators regulated medical waste “large account” customers substantially medical waste services provided pursuant customer contracts specifying either scheduled oncall services contracts small account customers generally provide annual price increases automatic renewal provision unless customer notifies us contrary prior expiration current term contract contracts hospitals large account customers may run one year typically include price escalator provisions allow price increases generally tied inflation index set fixed percentage december 31 2004 served approximately 317000 customers approximately 310000 small account customers approximately 7500 large account customers critical accounting policies procedures discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2 consolidated financial statements following ones may involve higher degree judgment part greater complexity reporting revenue recognition recognize revenue medical waste services time medical waste collection revenue costs contracts supply proprietary etd treatment equipment recognized based shipment equipment services provided individual contract routinely review total estimated costs shipments complete contract revise revenues estimated gross margin contract necessary payments received advance deferred recognized services provided royalty revenues calculated based measurements specified contract license revenues recognized end reporting period activity measured completed revenues product sales recognized time goods shipped ordering customer contracts loss position losses would recorded known estimable contracts go loss position payments received advance deferred recognized services provided goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired currently amortized determined permits indefinite lives accordingly amortized position accordance statements financial accounting standards 142 became effective fiscal years beginning december 15 2001 balance sheet december 31 2004 contains goodwill net accumulated amortization 5168 million accordance fas 142 evaluate annual basis using fair value reporting units whether facts circumstances indicate impairment value goodwill determine significant impairment occurred would required incur noncash writeoffs impaired portion goodwill could material adverse effect results operations period writeoff occurs use market value stock current measurement fair value reporting units unforeseen material drop stock price maybe indicator potential impairment goodwill results 2004 impairment test conducted june 2004 show impairment goodwill occurred events since time indicate impairment situation exists permits currently tested impairment annually december 31 frequently circumstances indicate may impaired use discounted cash flow model current measurement fair value permits estimate cash flow based upon among things certain assumptions expected future operating performance appropriate discount rate determined management estimates discounted cash flow may differ actual cash flow due among things inaccuracies economic estimates actual cash flow could materially affect future financial value permits results 2004 impairment test show impairment permits events occurred since time would indicate impairment situation exists identifiable intangible assets customer lists covenants compete currently amortized straightline method estimated useful lives determined customer lists 40year lives assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted cash flows indicators impairment intangibles see note 8 consolidated financial statements intangible asset exclusive license market certain software subject breach contract arbitration pending resolution arbitration accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined delinquent amount past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts 2 revenues insurance worker’s compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance polices thirdparty administrator used process claims require worker’s compensation vehicle liability physical damage claims reported within 24 hours result accrue worker’s compensation vehicle physical damage liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time settlements litigation would recorded known probable estimable stock option plans issued stock options employees directors integral part compensation programs accounting principles generally accepted united states allow alternative methods accounting plans chosen account stock option plans accounting principles board opinion 25 accounting stock issued employees “apb 25” required statement financial accounting standards 148 accounting stockbased compensationtransition disclosure “fas 148” calculations pro forma net income earnings per share computed accordance method prescribed fas 123 accounting stockbased compensation “fas 123” set forth note 12 consolidated financial statements expect adopt provisions fas 123 revised 2004 sharebased payments “fas 123r” july 1 2005 among things fas 123r requires sharebased payments employees including grants employee stock options recognized financial statements based fair values beginning first interim annual period june 15 2005 see note 2new accounting pronouncements item 8 consolidated financial statements supplemental data information year ended december 31 2004 compared year ended december 31 2003 following summarizes thousands operations revenues increased 630 million 139 5162 million 2004 4532 million 2003 revenues generated sale etd equipment licensing technology internationally 82 million 2004 compared 28 million 2003 increase result delivery large portion order etd equipment customer japan 2004 acquisitions less one year old contributed approximately 476 million increase revenues 2003 year internal growth small account customers increased approximately 9 revenues large quantity customers decreased approximately 4 program improving lowermargin accounts margin improvement program identifies large quantity customers margins internally acceptable thresholds make adjustments pricing service effort improve margin adjustments may result renewing customer contract therefore may result reduction revenues 2004 size regulated medical waste market united states remained relatively stable acquisition june white rose environmental ltd able expand geographic presence outside north america cost revenues cost revenues increased 314 million 122 2880 million 2004 2566 million 2003 increase primarily related increase revenues 2004 compared 2003 gross margin percentage increased 442 2004 434 2003 realized improvements continuous programs improve margins large quantity business increased number small quantity customers electing sterisafesm program 70000 87000 improved transportation productivity increasing route density year fuel prices percent revenue increased 20 employee benefit costs percentage compensation costs decreased 33 2004 result changes implemented late 2003 employee healthcare programs including changes thirdparty administrators providers lower gross margins white rose started consolidating financials june 2004 reduced gross margin percentage consolidated business 134 basis points 2004 selling general administrative expenses selling general administrative expenses increased 814 million 2004 702 million 2003 increase primarily result increased spending result marketing sterisafesm program national rollout bio systems sharps management program acquisition white rose june 2004 amortization increased 24 million 2004 19 million 2003 acquisition related costs increased 08 million 2004 07 million 2003 bad debt expense decreased 2004 08 million 20 million 2003 decrease result improved collections decreased writeoffs 2004 legal expenses increased 54 million 2004 34 million 2003 result litigation expense 15 million incurred majorityowned subsidiary 3ci direction special committee board directors addition noted cost revenues discussion employee benefit costs percentage compensation costs decreased 2004 selling general administrative expenses percentage revenue increased 158 2004 compared 155 2003 income operations income operations increased 1457 million 2004 1264 million 2003 increase due higher revenues offset higher costs revenues selling general administrative expenses year ended december 31 2004 noncash write idled incinerator equipment related spare parts amount 12 million income operations percentage revenue increased 282 2004 279 2003 result factors described interest expense interest income interest expense decreased 112 million 2004 128 million 2003 primarily due lower debt levels lower interest rates year interest income 06 million 2004 2003 debt extinguishments refinancing expenses 2004 repurchased retired remaining 509 million senior subordinated notes compared repurchase retirement 178 million notes 2003 result 2004 incurred 31 million redemption premium expenses 11 million noncash accelerated amortization financing fees associated repurchase notes compared 28 million 05 million respectively 2003 addition amended bank credit facility agreement 2004 paid 03 million financing fees income tax expense income tax expense years 2004 2003 reflects effective tax rate approximately 392 395 respectively federal state income taxes year ended december 31 2003 compared year ended december 31 2002 following summarizes thousands operations revenues increased 517 million 129 4532 million 2003 4015 million 2002 continued focus medical waste services sales highermargin small account customers revenues generated sale etd equipment licensing technology internationally 28 million 2003 compared 64 million 2002 2003 acquisitions less one year old contributed approximately 400 million increase revenues 2002 year internal growth small account customers increased approximately 95 revenues large quantity customers decreased approximately 25 program improving lowermargin accounts margin improvement program identifies large quantity customers margins internally acceptable thresholds make adjustments pricing service effort improve margin adjustments may result renewing customer contract therefore may result reduction revenues 2003 size regulated medical waste market united states remained relatively stable acquisition january scherer healthcare inc bio systems sharps management program able expand service offerings cost revenues cost revenues increased 196 million 83 2566 million 2003 2370 million 2002 increase primarily related increase revenues 2003 compared 2002 gross margin percentage increased 434 2003 410 2002 realized improvements continuous programs improve margins large quantity business increased number small quantity customers electing sterisafesm program 50000 70000 improved transportation productivity increasing route density improvements gross margins partially offset increase employee benefit costs increased 13 percentage points percentage compensation costs cost healthcare claims increased increase resulted evaluation employee healthcare programs providers effort manage future cost increases selling general administrative expenses selling general administrative expenses increased 702 million 2003 608 million 2002 increase primarily result increased spending result scherer healthcare acquisition marketing sterisafesm program starting national rollout bio systems sharps management program addition noted cost revenues discussion employee benefit costs percentage compensation costs increased 2003 amortization decreased 19 million 2003 20 million 2002 acquisition related costs increased 07 million 2003 04 million 2002 bad debt expense decreased 2003 20 million 34 million 2002 decrease result improved collections decreased writeoffs 2003 selling general administrative expenses percentage revenue increased 155 2003 compared 151 2002 income operations income operations increased 1264 million 2003 1008 million 2002 increase due higher revenues offset higher costs revenues selling general administrative expenses year ended december 31 2002 noncash write idled incinerator equipment related spare parts amount 29 million income operations percentage revenue increased 279 2003 251 2002 result factors described interest expense interest income interest expense decreased 128 million 2003 215 million 2002 primarily due lower debt levels lower interest rates year interest income increased 06 million 2003 compared 04 million 2002 result higher interest income notes receivable debt extinguishments refinancing expenses 2003 repurchased retired 178 million senior subordinated notes compared repurchase 126 million notes 2002 result 2003 incurred 28 million redemption premium expenses 05 million noncash accelerated amortization financing fees associated repurchase notes compared 18 million 04 million respectively 2002 addition amended bank credit facility agreement 2002 paid 02 million financing fees income tax expense income tax expense years 2003 2002 reflects effective tax rate approximately 395 federal state income taxes liquidity capital resources june 2004 amended credit facility increase size revolver capacity amended credit facility consists 205 million revolving credit facility 1126 million term loan facility 472 million term b loan facility borrowings bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference “base rate” higher reference rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement applicable margin based upon leverage ratio december 31 2004 margin interest rates borrowings revolving credit facility term component 00 base rate loans 125 libor loans credit agreement amended january 2003 extended maturity revolving credit component term loan component september 2007 extended maturity term b component september 2008 term loans repayable quarterly installments last business day march june september december beginning 2003 required principal repayments term loan component 50 million quarterly payment date june 2007 final payment outstanding principal balance upon maturity september 2007 required principal payments term b loan component 02 million quarterly payment date june 2008 final payment outstanding balance upon maturity september 2008 july 2004 repaid 273 million balance term b loan component december 31 2004 nothing outstanding term b loan amended restated credit facility secured lien substantially assets domestic subsidiaries except assets 3ci pledge stock whollyowned domestic subsidiaries stock 3ci mexican subsidiary 65 stock canadian united kingdom subsidiaries amended restated credit facility also requires us comply various financial reporting covenants restrictions including restriction dividend payments december 31 2004 material financial debt covenants follows • permitted maximum leverage ratio 300100 december 31 2004 actual leverage ratio 118100 • minimum fixed charge coverage ratio 110100 december 31 2004 actual fixed charge coverage ratio 148100 • minimum amount net worth allowed december 31 2004 defined credit agreement 3919 million december 31 2004 actual net worth 4954 million december 31 2004 1714 million borrowings outstanding credit facility consisting 1090 million revolving credit facility 624 million term loan facility working capital december 31 2004 working capital 323 million compared working capital 287 million december 31 2003 noted available 2050 million revolving line credit senior secured credit facility december 31 2004 borrowed 1090 million line additional 309 million committed letters credit net cash provided used net cash provided operating activities 1146 million year ended december 31 2004 compared 1239 million 2003 decrease primarily reflects lower accounts payable accrued liability balances higher accounts receivable balance partially offset higher revenues income higher deferred income tax balances increased asset balances net cash provided operating activities 2004 included 77 million tax benefit disqualifying dispositions stock options exercise nonqualified stock options net cash used investing activities 2004 1051 million compared 576 million 2003 increase primarily attributable increase payments acquisitions capital expenditures capital expenditures 333 million 2004 primarily investments capital equipment support nationwide rollout bio systems sharps management program improvements infrastructure compared 210 million 2003 december 31 2004 approximately 10 treatment capacity north america incineration approximately 90 nonincineration technologies proprietary etd technology autoclaving implementation commitment move away incineration north america may result writedown incineration equipment close incinerators currently operating commitment move away incineration north america nature goal accomplished undetermined number years uncertainties relating among things customer education acceptance legal requirements incinerate portions medical waste timetable transition specific plans close existing incinerators cash investments acquisitions international joint ventures 2004 724 million compared 372 million 2003 increase primarily result acquisition white rose environmental ltd completed june 2004 net cash used financing activities 69 million 2004 compared 668 million 2003 2004 borrowed money fund acquisition white rose environmental ltd addition made repayments 836 million debt capital leases consisted 54 million scheduled repayments 782 million prepayments included prepayments 509 million repurchases 12 38 senior subordinated notes 273 million prepayments term b loan addition december 31 2004 175 million outstanding related promissory notes issued connection acquisitions 2002 2004 consisting primarily 3year note issued part white rose environmental ltd acquisition outstanding balance 109 million december 31 2004 contractual cash commitments following table displays future contractual cash commitments long term debt capital lease longterm liabilities items include future principal payment amount well amount calculated expected future interest payments long term debt variable rates interest management used judgment estimate future rate interest december 31 2004 309 million standby letters credit issued anticipate operating cash flow together borrowings senior secured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future guarantees guaranteed loan azoroa bank japan behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business five year loan current balance 93 million azoroa bank expires june 2009 management currently believes amount paid guarantee risk factors subject extensive governmental regulation frequently difficult expensive timeconsuming comply medical waste management industry subject extensive federal state local laws regulations relating collection transportation packaging labeling handling documentation reporting treatment disposal regulated medical waste business requires us obtain many permits authorizations approvals certificates types governmental permission every jurisdiction operate believe currently comply material respects applicable permitting requirements state local regulations change often however new regulations frequently adopted changes regulations could require us obtain new permits change way operate existing permits might unable obtain new permits require cost compliance new changed regulations could significant many permits require especially build operate treatment plants transfer facilities difficult timeconsuming obtain may also contain conditions restrictions limit ability operate efficiently may issued quickly need cannot obtain permits need contain unfavorable conditions could substantially impair operations reduce revenues handling treatment hazardous medical waste carries risk personal injury employees others business requires us handle materials may infectious poisonous corrosive dangerous life property ways strive handle materials care accordance accepted safe methods possibility accidents leaks spills acts god always exists examples possible exposure materials include • truck accidents • damaged leaking containers • improper storage medical waste customers • vandalism • improper placement customers materials waste stream authorized able process certain body parts tissues • malfunctioning treatment plant equipment human beings animals property could injured sickened damaged exposure medical waste turn could result lawsuits found liable injuries substantial damages could awarded us carry liability insurance intended cover contingencies particular instances may occur insured inadequately insured uninsured underinsured loss could substantial could impair profitability reduce liquidity handling medical waste exposes us risk environmental liabilities may covered insurance company engaged medical waste management face risks liability environmental contamination federal comprehensive environmental response compensation liability act 1980 cercla similar state laws impose strict liability current former owners operators facilities release hazardous substances environment well businesses generate substances businesses transport facilities responsible parties may liable substantial investigation cleanup costs even operated businesses properly complied applicable federal state laws regulations liability cercla may joint several means found business responsibility particular cercla site could required pay entire cost investigation cleanup even though party responsible release hazardous substance even though companies might also liable pollution liability insurance excludes liabilities cercla thus incur liability cercla could identify parties responsible law able compel contribute expenses cost us could substantial could impair profitability reduce liquidity customer service agreements make clear customer responsible making sure appropriate materials disposed claim us customer might legally liable might successful recovering damages customer level governmental enforcement environmental regulations uncertain effect business could reduce demand services believe government’s strict enforcement laws regulations relating medical waste collection treatment good business laws regulations increase demand services relaxation standards changes governmental regulation medical waste • encouraging use landfills without prior treatment medical waste • removing obstacles use incineration autoclaving thus allowing continued use existing onsite incinerators medical waste generators without incur additional compliance costs • reducing manpower money used enforce environmental regulations favorable operations could increase number competitors reduce need services may required pay fines penalties violations environmental regulations permits time subject governmental proceedings enforce regulations relating handling treatment medical waste pay fines penalties undertake remedial work facilities may subject similar proceedings future government enforcement actions also may initiated us based claims violating permits proceedings could distract management attention business operations resulting fines shutdowns could reduce profitability unable acquire medical waste businesses revenue profit growth may slowed historically growth strategy based substantial part ability acquire medical waste businesses know whether future able • identify suitable businesses buy • complete purchase businesses terms acceptable us • improve operations businesses buy successfully integrate operations • avoid overcome concerns expressed regulators compete potential buyers acquisition medical waste companies competition may result fewer opportunities purchase companies sale may also result higher purchase prices businesses want purchase addition cannot certain • enough money • able borrow enough money reasonable terms • able issue stock debt instruments like promissory notes consideration purchase • able raise enough money various financing methods complete purchases businesses want acquire also know whether growth strategy continue effective business significantly larger new acquisitions may desired benefits obtained past implementation acquisition strategy could affected certain instances concerns state regulators could result able realize full synergies profitability particular acquisitions may become subject inquiries investigations state antitrust regulators time course completing acquisitions medical waste businesses order obtain regulatory clearance particular acquisition could required modify certain operating practices acquired business divest one assets acquired business changes terms acquisitions required regulators agreed us order settle regulatory investigations could impede acquisition strategy reduce anticipated synergies profitability acquisitions likelihood outcome inquiries investigations state regulators course completing acquisitions cannot predicted aggressive pricing existing competitors entrance new competitors could drive profits slow growth medical waste industry competitive low barriers entry among reasons competition required us past reduce prices especially large account customers may require us reduce prices future substantial price reductions could significantly reduce earnings face direct competition large number small local competitors requires little money technical knowhow compete us collection transportation medical waste many regional local companies industry face competition businesses competition likely exist new locations may expand future addition large national companies substantial resources may decide enter medical waste industry example waste management inc major solid waste treatment company announced february 2005 intended begin offering medical waste management services hospitals possibly large quantity generators medical waste competitors could take actions would hurt growth strategy including support regulations could delay prevent us obtaining keeping permits might also give financial support citizens’ groups oppose plans locate treatment transfer facility particular location sources competition include large waste generators hospitals maintain treatment facilities yetunidentified competitors could prevent us obtaining new customers could take existing customers away us require significant amount cash service substantial indebtedness reduces cash available finance internal growth acquisition medical waste businesses large amount indebtedness december 31 2004 total longterm indebtedness 1904 million net current maturities borrowings 1090 million revolving credit facility ability borrow 960 million facility scheduled debt service payments senior credit facility 2005 2006 2007 98 million 200 million 1416 million respectively ability make payments indebtedness well fund operations future growth depends upon ability generate cash success depends upon results operations upon general economic financial competitive regulatory factors beyond control indebtedness could • make us vulnerable unfavorable economic conditions • make difficult pursue acquisition medical waste management businesses • require us dedicate reserve large portion cash flow operations making payments indebtedness would prevent us using purposes restrictions debt instruments may limit ability pay dividends incur additional debt make acquisitions make investments debt instruments contain covenants restrict ability make distributions stockholders payments unless satisfy certain financial tests comply various financial ratios creditors could declare default debt instruments indebtedness could declared immediately due payable ability comply provisions debt instruments may affected changes economic business conditions beyond control debt instruments also contain covenants limit ability incur additional indebtedness acquire businesses make capital expenditures impose various restrictions covenants could affect ability operate business may limit ability take advantage potential business opportunities arise loss senior executives could affect ability manage business profitably depend small number senior executives future success depend upon among things ability keep executives hire highly qualified employees levels compete potential employers employees may successful hiring keeping executives employees need written employment agreements president chief executive officer executive officers key employees could leave us little prior notice either individually part group loss inability hire key employees could impair ability manage business direct growth expansion foreign countries exposes us unfamiliar regulations may expose us new obstacles growth plan grow united states foreign countries established operations canada mexico united kingdom entered etd equipment sales licensing agreements one case related joint venture argentina australia brazil japan foreign operations carry special risks although business foreign countries yet affected business countries currently operate may operate future could limited disrupted • government controls • import export license requirements • political economic insecurity • trade restrictions • changes tariffs taxes • exchange rate fluctuations • unfamiliarity local laws regulations practices customs • restrictions repatriating foreign profits back united states • difficulties staffing managing international operations foreign governments agencies often establish permit regulatory standards different united states cannot obtain foreign regulatory approvals cannot obtain expect growth profitability international operations could limited fluctuations currency exchange rates increases duty rates etd equipment could similar effects competitive advantages etd treatment process aspects business depend patents proprietary rights hold 18 united states patents relating etd treatment process aspects processing medical waste filed assigned patent applications several foreign countries received patents australia canada france hong kong mexico russia south africa united kingdom pending future patent applications may granted issued patents may provide us competitive advantages patents may challenged parties addition companies may develop similar processes avoid patents litigation administrative proceedings may necessary enforce patents issued us determine scope validity others’ proprietary rights litigation administrative proceeding could result substantial cost us distraction management ruling us litigation administrative proceeding could expose us new competition depress earnings commercial success also depends infringing patents issued parties patents belonging parties may require us alter processes pay licensing fees cease using current future processes result may unable license technology rights may require reasonable cost cannot obtain license infringing technology currently use could material adverse effect business registered unregistered trademarks service marks assurance registered unregistered trademarks service marks infringe upon rights parties requirement change trademarks service marks trade names could result loss goodwill associated trademark service mark trade name could entail significant expense litigation always unpredictable adverse judgments us could require us pay substantial amounts parties private antitrust litigation 3ci stockholder litigation described elsewhere report see part item 3 legal proceedings believe lawsuits us merit vigorously defending litigation however nature unpredictable outcome lawsuits cannot assessed degree certainty insurance may cover claims lawsuits extent insurance company would bear financial burden adverse judgment potential thus exists unanticipated adverse judgments us may substantial amount could materially impair cash reserves financial condition earnings could decline writeoff intangible assets goodwill result purchase accounting various acquisitions balance sheet december 31 2004 contains goodwill net accumulated amortization 5168 million intangible assets net accumulated amortization 508 million including indefinite lived intangibles 174 million accordance fas 142 evaluate annual basis using fair value reporting units whether facts circumstances indicate impairment value goodwill use market value stock current measurement fair value reporting units unforeseen material drop stock price maybe indicator potential impairment goodwill addition evaluate indefinite lived intangibles annual basis frequently circumstances indicate may impaired use discounted cash flow model current measurement fair value permits identifiable intangible assets currently amortized straightline method estimated useful lives assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted cash flows circumstances acquisition change value intangible assets may realized us determine significant impairment occurred would required incur noncash writeoffs impaired portion goodwill unamortized intangible assets could material adverse effect results operations period writeoff occurs item 7aitem 7 management’s discussion analysis financial condition results operation following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction largest provider regulated medical waste services north america addition offer osha compliance services health care providers monitoring services 2004 acquired white rose environmental ltd leading provider regulated medical waste services united kingdom derive revenues services two principal types customers outpatient clinics medical dental offices biomedical companies pharmacies municipal entities longterm subacute care facilities smallerquantity generators regulated medical waste “small account” customers ii hospitals blood banks pharmaceutical manufacturers largerquantity generators regulated medical waste “large account” customers substantially services provided pursuant customer contracts specifying either scheduled oncall services contracts small account customers generally provide annual price increases automatic renewal provision unless customer notifies us contrary prior expiration current term contract contracts hospitals large account customers may run one year typically include price escalator provisions allow price increases generally tied inflation index set fixed percentage also serve pharmacies distributors manufacturers pharmaceutical products managing return disposal expired surplus pharmaceutical products managing recall pharmaceutical products recalled manufacturer 2005 completed four acquisitions companies provide services december 31 2005 served approximately 333000 customers approximately 325000 small account customers approximately 7700 large account customers critical accounting policies procedures discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2 consolidated financial statements following ones may involve higher degree judgment part greater complexity reporting revenue recognition recognize revenue medical waste services time medical waste collection revenue costs contracts supply proprietary etd treatment equipment recognized based shipment equipment services provided individual contract routinely review total estimated costs shipments complete contract revise revenues estimated gross margin contract necessary payments received advance deferred recognized services provided royalty revenues calculated based measurements specified contract license revenues recognized end reporting period activity measured completed revenues product sales recognized time goods shipped ordering customer software licensing revenues recognized prorated basis term license agreement revenues pharmaceutical services recorded time services performed contracts loss position losses would recorded known estimable contracts go loss position payments received advance deferred recognized services provided goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired amortized determined permits indefinite lives accordingly amortized position accordance statements financial accounting standards “fas” 142 became effective fiscal years beginning december 15 2001 balance sheet december 31 2005 contains goodwill net accumulated amortization 6852 million accordance fas 142 evaluate least annual basis using fair value reporting units whether goodwill impaired determine significant impairment occurred would required incur noncash writeoffs impaired portion goodwill could material adverse effect results operations period writeoff occurs use market value stock current measurement total fair value reporting units unforeseen material drop stock price maybe indicator potential impairment goodwill results 2005 impairment test conducted june 2005 show impairment goodwill occurred events since time indicate impairment situation exists permits currently tested impairment annually december 31 frequently circumstances indicate may impaired use discounted cash flow model current measurement fair value permits estimate cash flow based upon among things certain assumptions expected future operating performance appropriate discount rate determined management estimates discounted cash flow may differ actual cash flow due among things inaccuracies economic estimates actual cash flow could materially affect future financial value permits results 2005 impairment test show impairment permits events occurred since time would indicate impairment situation exists identifiable intangible assets customer lists tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined medical waste business customer lists 40year lives pharmaceutical services business customer lists 20year lives assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted cash flows indicators impairment intangibles see note 8 consolidated financial statements 2005 arbitration proceedings regarding various disputes exclusive marketing distribution license agreement licensor software march 1 2006 subsequent yearend arbitrator awarded damages licensor license agreement effectively terminated although event occurred end year required writeoff unamortized portion license fee previously paid effect reduction carrying amount intangible 18 million reduction accumulated amortization 04 million income taxes deferred income tax liabilities assets determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined delinquent amount past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts 2 revenues insurance worker’s compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance polices thirdparty administrator used process claims require workers’ compensation vehicle liability physical damage claims reported within 24 hours result accrue worker’s compensation vehicle physical damage liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time settlements litigation would recorded known probable estimable stock option plans issued stock options employees directors integral part compensation programs accounting principles generally accepted united states allow alternative methods accounting plans chosen account stock option plans accounting principles board opinion 25 accounting stock issued employees “apb 25” required fas 148 accounting stockbased compensationtransition disclosure calculations pro forma net income earnings per share computed accordance method prescribed fas 123 accounting stockbased compensation set forth note 11 consolidated financial statements adopt provisions fas 123 revised 2004 sharebased payments “fas 123r” january 1 2006 among things fas 123r requires sharebased payments employees including grants employee stock options recognized financial statements based fair values beginning first interim annual period january 1 2006 see note 2new accounting pronouncements item 8 financial statements supplemental data information year ended december 31 2005 compared year ended december 31 2004 following summarizes thousands operations revenues increased 932 million 181 6095 million 2005 5162 million 2004 revenues generated sale etd equipment licensing technology internationally 10 million 2005 compared 82 million 2004 decrease result delivery large portion order etd equipment customer japan 2004 2005 acquisitions less one year old contributed approximately 636 million increase revenues 2004 year internal growth small account customers increased approximately 9 revenues large quantity customers increased approximately 5 2005 size regulated medical waste market united states remained relatively stable acquisition white rose environmental ltd june 2004 subsequent united kingdom acquisitions 2005 able expand geographic presence outside north america cost revenues cost revenues increased 534 million 185 3414 million 2005 2880 million 2004 increase primarily related increase revenues 2005 compared 2004 gross margin percentage decreased 440 2005 442 2004 experienced higher energy related costs domestic energy costs increased 2005 partially offset higher revenues related fuel surcharges employee benefit costs percentage compensation costs decreased 20 2005 result changes employee healthcare programs including changes providers program formats selling general administrative expenses selling general administrative expenses increased 988 million 2005 814 million 2004 increase primarily result increased spending marketing sterisafesm program bio systems sharps management program expansion pharmaceutical services programs bad debt expense increased 2005 27 million 08 million 2004 due higher sales increased writeoffs 2005 addition noted cost revenues discussion employee benefit costs percentage compensation costs decreased 2005 amortization decreased 16 million 2005 24 million 2004 result intangibles becoming fully amortized end 2004 selling general administrative expenses percentage revenue increased 162 2005 compared 158 2004 income operations income operations increased 1684 million 2005 1457 million 2004 increase due higher revenues partially offset higher costs revenues selling general administrative expenses year ended december 31 2005 3ci complete compliance corporation majority common stock recorded noncash impairment charge 09 million springhill louisiana building property year ended december 31 2004 recorded noncash writedown idled stericycle incinerator equipment baltimore maryland terrell texas facility 12 million income operations percentage revenue decreased 276 2005 282 2004 result factors described interest expense interest income interest expense increased 130 million 2005 112 million 2004 primarily due higher debt levels year interest income 08 million 2005 06 million 2004 writedown note receivable 2005 wrotedown 25 million note receivable recorded sale interest former south african joint venture determined amount uncollectible legal settlements november 2005 incurred 365 million expenses related preliminary settlement 3ci class action litigation related legal expenses december 2005 recorded cash charge 04 million damages noncash charge 14 million representing writeoff unamortized portion license fee previously paid result arbitrator’s award march 2006 license agreement effectively terminated debt extinguishments refinancing expenses 2005 incurred 05 million refinancing expense noncash accelerated amortization financing fees related amendments bank credit facility agreements 2004 repurchased remaining 509 million senior subordinated notes result 2004 incurred 31 million redemption premium expenses 11 million noncash accelerated amortization financing fees associated repurchase notes income tax expense income tax expense years 2005 2004 reflects effective tax rate approximately 400 392 respectively federal state income taxes excluding effect legal settlement expense effective tax rate 2005 39 year ended december 31 2004 compared year ended december 31 2003 following summarizes thousands operations revenues increased 630 million 139 5162 million 2004 4532 million 2003 revenues generated sale etd equipment licensing technology internationally 82 million 2004 compared 28 million 2003 increase result delivery large portion order etd equipment customer japan 2004 acquisitions less one year old contributed approximately 476 million increase revenues 2003 year internal growth small account customers increased approximately 9 revenues large quantity customers decreased approximately 4 program improving lowermargin accounts margin improvement program identifies large quantity customers margins internally acceptable thresholds make adjustments pricing service effort improve margin adjustments may result renewing customer contract therefore may result reduction revenues 2004 size regulated medical waste market united states remained relatively stable acquisition june white rose environmental ltd able expand geographic presence outside north america cost revenues cost revenues increased 314 million 122 2880 million 2004 2566 million 2003 increase primarily related increase revenues 2004 compared 2003 gross margin percentage increased 442 2004 434 2003 realized improvements continuous programs improve margins large quantity business increased number small quantity customers electing sterisafesm program 70000 87000 improved transportation productivity increasing route density year fuel prices percent revenue increased 20 employee benefit costs percentage compensation costs decreased 33 2004 result changes implemented late 2003 employee healthcare programs including changes thirdparty administrators providers lower gross margins white rose started consolidating financials june 2004 reduced gross margin percentage consolidated business 134 basis points 2004 selling general administrative expenses selling general administrative expenses increased 814 million 2004 702 million 2003 increase primarily result increased spending result marketing sterisafesm program national rollout bio systems sharps management program acquisition white rose june 2004 amortization increased 24 million 2004 19 million 2003 acquisition related costs increased 08 million 2004 07 million 2003 bad debt expense decreased 2004 08 million 20 million 2003 decrease result improved collections decreased writeoffs 2004 legal expenses increased 54 million 2004 34 million 2003 result litigation expense 15 million incurred majorityowned subsidiary 3ci direction special committee board directors addition noted cost revenues discussion employee benefit costs percentage compensation costs decreased 2004 selling general administrative expenses percentage revenue increased 158 2004 compared 155 2003 income operations income operations increased 1457 million 2004 1264 million 2003 increase due higher revenues offset higher costs revenues selling general administrative expenses year ended december 31 2004 noncash write idled incinerator equipment related spare parts amount 12 million income operations percentage revenue increased 282 2004 279 2003 result factors described interest expense interest income interest expense decreased 112 million 2004 128 million 2003 primarily due lower debt levels lower interest rates year interest income 06 million 2004 2003 debt extinguishments refinancing expenses 2004 repurchased remaining 509 million senior subordinated notes compared repurchase 178 million notes 2003 result 2004 incurred 31 million redemption premium expenses 11 million noncash accelerated amortization financing fees associated repurchase notes compared 28 million 05 million respectively 2003 addition amended bank credit facility agreement 2004 paid 03 million financing fees income tax expense income tax expense years 2004 2003 reflects effective tax rate approximately 392 395 respectively federal state income taxes liquidity capital resources june 2005 obtained new 4000 million senior unsecured revolving credit facility maturing june 2010 place existing senior secured credit facility new credit facility reduced interest rates charged reducing applicable margin added relevant interest rate new credit facility also allowed us borrow preapproved currencies united states dollars borrowings bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference “base rate” higher prime rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement applicable margin based upon consolidated leverage ratio december 31 2005 margin interest rates borrowings new credit facility 00 base rate loans 075 libor loans december 2005 amended 4000 million senior unsecured revolving credit facility increased 5500 million additional capacity available 6500 million upon request also increased letter credit sublimit 1250 million 1500 million amended credit facility requires us comply various financial reporting covenants restrictions including restriction dividend payments december 31 2005 material financial covenants follows • permitted maximum leverage ratio 300100 december 31 2005 actual leverage ratio 180100 • permitted minimum interest coverage ratio 300100 december 31 2005 actual interest coverage ratio 1645100 december 31 2005 2917 million borrowings outstanding senior unsecured credit facility includes foreign currency borrowings 52 million addition 659 million committed outstanding letters credit working capital december 31 2005 working capital 453 million compared working capital 323 million december 31 2004 noted available 5500 million revolving line credit senior unsecured credit facility december 31 2005 borrowed 2917 million line additional 659 million committed letters credit net cash provided used net cash provided operating activities 943 million year ended december 31 2005 compared 1146 million 2004 decrease primarily reflects higher accounts receivable accrued liability balances lower net income decrease net income primarily result 234 million net tax recorded preliminary settlement 3ci class action litigation net cash provided operating activities 2005 included 74 million tax benefit disqualifying dispositions stock options net cash used investing activities 2005 1560 million compared 1051 million 2004 increase primarily attributable increase payments acquisitions cash investments acquisitions international joint ventures 2005 1397 million compared 724 million 2004 increase primarily result acquisition pharmaceutical return businesses addition 2005 sold consumer products division universal solutions inc acquired part universal solutions inc acquisition received 103 million net proceeds capital expenditures 263 million 2005 investments capital equipment support nationwide rollout bio systems sharps management program improvements infrastructure compared 333 million 2004 december 31 2005 less 9 treatment capacity north america incineration approximately 91 nonincineration technologies proprietary etd technology autoclaving implementation commitment move away incineration north america may result writedown incineration equipment close incinerators currently operating commitment move away incineration north america nature goal accomplished undetermined number years uncertainties relating among things customer education acceptance legal requirements incinerate portions medical waste timetable transition specific plans close existing incinerators net cash provided financing activities 595 million 2005 compared 69 million net cash used financing activities 2004 2005 borrowed money fund acquisitions stock repurchases 3ci legal settlement addition made debt repayments 1989 million terminated 2001 senior credit facility 607 million common stock repurchases 128 million repayments promissory notes 08 million capital leases 2005 also amended 4000 million senior unsecured revolving credit facility increased 5500 million borrowed 3715 million made debt repayments 798 million addition december 31 2005 680 million outstanding primarily related promissory notes issued connection acquisitions made 2002 2005 contractual cash commitments following table displays future contractual cash commitments longterm debt capital lease longterm liabilities items include future principal payment amount well amount calculated expected future interest payments longterm debt variable rates interest management used judgment estimate future rate interest december 31 2005 659 million standby letters credit issued anticipate operating cash flow together borrowings senior secured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future guarantees guaranteed loan azoroa bank japan behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business fiveyear loan current balance 65 million azoroa bank expires june 2009 management currently believes amount paid guarantee item 7aitem 7 management’s discussion analysis financial condition results operation following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction business managing regulated waste providing array related services operate united states united kingdom mexico canada ireland argentina largequantity generators regulated waste hospitals pharmaceutical companies distributors offer institutional medical waste management services bio systems® sharps management services reduce risk needle sticks variety products services infection control regulated returns management services expired recalled health care products smallquantity generators regulated waste doctors’ offices retail pharmacies offer medical waste management services sterisafe® occupational safety health act health insurance portability accountability act hipaa compliance programs variety products services infection control pharmaceutical returns services expired recalled pharmaceuticals operate integrated national medical waste management networks united states canada mexico argentina united kingdom ireland national networks include total 76 processing combined processing collection sites 104 additional transfer collection combined transfer collection sites medical waste processing technologies include autoclaving proprietary electrothermaldeactivation system etd chemical treatment incineration december 31 2006 served approximately 351700 customers approximately 343100 small quantity customers approximately 8600 large quantity customers critical accounting policies procedures discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2 consolidated financial statements following ones may involve higher degree judgment part greater complexity reporting revenue recognition recognize revenue regulated waste services time waste collection revenues regulated returns management services recorded time services performed royalty revenues calculated based measurements specified contract license revenues recognized end reporting period activity measured completed revenues product sales recognized time goods shipped ordering customer software licensing revenues recognized prorated basis term license agreement revenue costs contracts supply proprietary etd treatment equipment recognized based shipment equipment services provided individual contract revenues related etd sales 2006 2005 contracts loss position losses would recorded known estimable contracts go loss position payments received advance deferred recognized services provided goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired amortized determined permits indefinite lives accordingly amortized position accordance statement financial accounting standards “sfas” 142 became effective fiscal years beginning december 15 2001 see note 8 goodwill intangible assets additional information balance sheet december 31 2006 contains goodwill 8140 million accordance sfas 142 evaluate least annual basis using fair value reporting units whether goodwill impaired determine significant impairment occurred would required incur noncash writeoffs impaired portion goodwill could material adverse effect results operations period writeoff occurs use market value stock measure fair value compare ratio earnings income tax expense depreciation expense amortization expense book value reporting unit testing goodwill impairment unforeseen material drop stock price may indicator potential impairment goodwill results 2006 impairment test conducted june 2006 show impairment goodwill events occurred since time indicate impairment situation exists permits currently tested impairment annually december 31 frequently circumstances indicate may impaired use discounted cash flow model current measurement fair value permits estimate cash flow based upon among things certain assumptions expected future operating performance appropriate discount rate determined management estimates discounted cash flow may differ actual cash flow due among things inaccuracies economic estimates actual cash flow could materially affect future financial value permits results 2006 impairment test show impairment permits events occurred since time would indicate impairment situation exists identifiable intangible assets customer lists tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined regulated waste customer lists 20year 40year lives based specific type relationship assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted cash flows indicators impairment intangibles see note 8 consolidated financial statements income taxes deferred income tax liabilities assets determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse provide certain potential tax exposures maintain reserve specific tax contingencies balance management believes adequate accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined delinquent amount past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts 2 revenues insurance worker’s compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance polices thirdparty administrator used process claims require workers’ compensation vehicle liability physical damage claims reported within 24 hours result accrue worker’s compensation vehicle physical damage liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time settlements litigation would recorded known probable estimable stock option plans issued stock options employees directors integral part compensation programs january 1 2006 adopted provisions sfas 123r “sharebased payment” “sfas 123r” using modified prospective method account stock compensation costs sfas 123r requires measurement recognition compensation expense stockbased payment awards made employees directors fair value recognition provisions sfas 123r stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility expected term riskfree rate expected volatility based upon historical experience expected term stock options based upon historical experience riskfree interest rate assumption based upon average us treasury three fiveyear yield rates factors change employ different assumptions stockbased compensation expense may differ significantly recorded past year ended december 31 2006 compared year ended december 31 2005 following summarizes thousands except per share amounts operations revenues increased 1802 million 296 7896 million 2006 6095 million 2005 revenues primarily increased result domestic international acquisitions 2006 acquisitions less one year old contributed approximately 1161 million increase revenues 2005 addition strong revenue growth exhibited sterisafesm product offerings result increased market penetration small quantity generator markets continued success rollout bio systems sharps management program growth returns management services revenues year internal growth small account customers increased approximately 11 revenues large quantity customers increased approximately 9 2006 size regulated waste market united states services provide remained relatively stable acquisition stg habitat ecologico sa february 2006 able expand geographic presence outside north america cost revenues cost revenues increased 984 million 288 4398 million 2006 3414 million 2005 primarily due increase incremental expenses result business acquisitions completed 2006 2005 gross margin percentage increased 443 2006 440 2005 due increase gross margins domestic business continued realize efficiencies ongoing programs improve gross margins large small quantity business domestic energy transportation costs increased 2006 partially offset higher revenues related fuel surcharges selling general administrative expenses selling general administrative expenses less stock compensation expense increased 366 million 372 1444 million 2006 980 million 2005 increase primarily result incremental overhead expenses result acquisition stg 2006 acquisitions completed fourth quarter 2005 effective january 1 2006 adopted statement financial accounting standards “sfas” 123r sharebased payments “sfas 123r” using modified prospective basis resulted change way recognize sharebased compensation expense increased selling general administrative expenses 98 million 10 percentage revenue bad debt expense increased 2006 42 million 27 million 2005 due higher sales amortization expense increased 30 million 2006 16 million 2005 result amortization new intangibles 2006 2005 selling general administrative expenses percentage revenue increased 183 2006 compared 161 2005 result factors described income operations income operations increased 352 million 212 2018 million 2006 1665 million 2005 increase due higher gross margin partially offset higher selling general administrative expenses year ended december 31 2006 recorded expenses 34 million related acquisition integration compared 08 million 2005 34 million 2006 expense approximately 11 million related facility closures one united states one united kingdom year ended december 31 2006 recorded 03 million noncash writedown equipment acquired 3ci year ended december 31 2005 recorded noncash impairment charge 09 million related springhill louisiana building property income operations percentage revenue decreased 256 2006 273 2005 result factors described interest expense interest income interest expense increased 284 million 2006 130 million 2005 primarily due higher debt levels higher interest rates year interest income 14 million 2006 08 million 2005 writedown investment 2006 10 million noncash writedown investment securities proceeds insurance 2006 received 10 million insurance proceeds related 3ci litigation income tax expense income tax expense years 2006 2005 reflects effective tax rate approximately 390 400 respectively federal state income taxes legal settlement negatively impacted 2005 effective tax rate 10 year ended december 31 2005 compared year ended december 31 2004 following summarizes thousands except per share amounts operations revenues increased 932 million 181 6095 million 2005 5162 million 2004 revenues generated sale etd equipment licensing technology internationally 10 million 2005 compared 82 million 2004 decrease result delivery large portion order etd equipment customer japan 2004 2005 acquisitions less one year old contributed approximately 636 million increase revenues 2004 year internal growth small account customers increased approximately 9 revenues large quantity customers increased approximately 5 2005 size regulated waste market united states services provide remained relatively stable acquisition white rose environmental ltd june 2004 subsequent united kingdom acquisitions 2005 able expand geographic presence outside north america cost revenues cost revenues increased 534 million 185 3414 million 2005 2880 million 2004 increase primarily related increase revenues 2005 compared 2004 gross margin percentage decreased 440 2005 442 2004 experienced higher energy related costs domestic energy costs increased 2005 partially offset higher revenues related fuel surcharges employee benefit costs percentage compensation costs decreased 20 2005 result changes employee healthcare programs including changes providers program formats selling general administrative expenses selling general administrative expenses increased 980 million 2005 806 million 2004 increase primarily result increased spending marketing sterisafesm program bio systems sharps management program expansion pharmaceutical services programs bad debt expense increased 2005 27 million 08 million 2004 due higher sales increased writeoffs 2005 addition noted cost revenues discussion employee benefit costs percentage compensation costs decreased 2005 amortization decreased 16 million 2005 24 million 2004 result intangibles becoming fully amortized end 2004 selling general administrative expenses percentage revenue increased 162 2005 compared 158 2004 result factors described income operations income operations increased 1665 million 2005 1457 million 2004 increase due higher revenues partially offset higher costs revenues selling general administrative expenses year ended december 31 2005 3ci complete compliance corporation majority common stock recorded noncash impairment charge 09 million springhill louisiana building property december 2005 recorded cash charge 04 million damages noncash charge 14 million representing writeoff unamortized portion license fee previously paid result arbitrator’s award march 2006 license agreement effectively terminated year ended december 31 2004 recorded noncash writedown idled stericycle incinerator equipment baltimore maryland terrell texas facility 12 million income operations percentage revenue decreased 273 2005 282 2004 result factors described interest expense interest income interest expense increased 130 million 2005 112 million 2004 primarily due higher debt levels year interest income 08 million 2005 06 million 2004 writedown note receivable 2005 wrotedown 25 million note receivable recorded sale interest former south african joint venture determined amount uncollectible legal settlements november 2005 incurred 365 million expenses related preliminary settlement 3ci class action litigation related legal expenses debt extinguishments refinancing expenses 2005 incurred 05 million refinancing expense noncash accelerated amortization financing fees related amendments bank credit facility agreements 2004 repurchased remaining 509 million senior subordinated notes result 2004 incurred 31 million redemption premium expenses 11 million noncash accelerated amortization financing fees associated repurchase notes income tax expense income tax expense years 2005 2004 reflects effective tax rate approximately 400 392 respectively federal state income taxes legal settlement negatively impacted 2005 effective tax rate 10 liquidity capital resources july 31 2006 certain subsidiaries entered new credit agreement “credit agreement” bank america na lenders party credit agreement new credit agreement effect amendment prior senior unsecured credit facility new credit agreement reduces costs borrowing using favorable pricing grid ii increases revolving credit facility 550 million 650 million iii increases “accordion” amount may request increase size revolving credit facility 100 million 200 million iv increases letter credit sublimit 150 million 200 million v increases foreign currency sublimit 125 million 200 million vi increases debttoebitda covenant 300100 375100 vii extends maturity date borrowings june 30 2010 july 31 2011 new credit agreement reduces costs borrowing reducing applicable margin added relevant interest rate charged borrowings bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference “base rate” higher prime rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement new credit agreement applicable margin based consolidated leverage ratio longterm noncredit enhanced debt rated standard poors ii sp debt rating whichever margin favorable us december 31 2006 margin interest rates borrowings new credit facility 00 base rate loans 075 libor loans new credit agreement contains customary events default including failure pay principal interest amount due violation certain affirmative covenants negative covenants breach representations warranties change control upon occurrence event default payment indebtedness may accelerated lending commitments credit agreement may terminated december 31 2006 3873 million borrowings outstanding senior unsecured credit facility includes foreign currency borrowings 93 million addition 488 million committed outstanding letters credit weighted average rate interest unsecured revolving credit facility 608 year ended december 31 2006 december 31 2006 779 million debt outstanding includes promissory notes issued connection acquisitions 2003 2006 foreign subsidiary bank debt working capital december 31 2006 working capital 766 million compared working capital 453 million december 31 2005 change working capital 265 million related “asset group held sale” amount primarily comprised fixed assets intangible assets sold presented current assets per accounting rules noted available 6500 million revolving line credit senior unsecured credit facility december 31 2006 borrowed 3873 million line additional 488 million committed letters credit net cash provided used net cash provided operating activities 1602 million year ended december 31 2006 compared 943 million 2005 increase primarily reflects higher net income emphasis improved collections 2005 net income included 234 million net tax settlement 3ci class action litigation result adopting sfas 123r effective january 1 2006 benefits tax deductions excess recognized compensation expense reported financing cash flow rather operating cash flow prescribed prior accounting rules requirement reduces net operating cash flow increases net financing cash flows periods adoption total cash flows remain unchanged would reported prior accounting rules result 84 million tax benefits stock options exercised reported cash provided financing activities year ended december 31 2006 compared 74 million reported cash provided operating activities year ended december 31 2005 net cash used investing activities 2006 2014 million compared 1560 million 2005 increase primarily attributable increase payments acquisitions cash investments acquisitions international joint ventures 2006 1640 million compared 1397 million 2005 increase primarily result acquisition stg capital expenditures 364 million 2006 investments capital equipment support growth bio systems sharps management program improvements infrastructure compared 263 million 2005 december 31 2006 less 8 treatment capacity north america incineration approximately 92 nonincineration technologies proprietary etd technology autoclaving implementation commitment move away incineration north america may result writedown incineration equipment close incinerators currently operating commitment move away incineration north america nature goal accomplished undetermined number years uncertainties relating among things customer education acceptance legal requirements incinerate portions regulated waste timetable transition specific plans close existing incinerators net cash provided financing activities 525 million 2006 compared 595 million 2005 2006 borrowed money fund acquisitions common stock repurchases 2006 made 428 million common stock repurchases 307 million promissory notes payments 2660 million debt repayments 08 million capital leases 2005 borrowed money fund acquisitions stock repurchases 3ci legal settlement made debt repayments 1989 million terminated 2001 senior credit facility 128 million repayments promissory notes 08 million capital leases contractual cash commitments following table displays future contractual cash commitments longterm debt capital lease longterm liabilities items include future principal payment amount well amount calculated expected future interest payments longterm debt variable rates interest management used judgment estimate future rate interest longterm liabilities include amounts related noncompete agreements december 31 2006 488 million standby letters credit issued anticipate operating cash flow together borrowings senior secured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future guarantees guaranteed loan aozora bank japan behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding regulated waste management business fiveyear loan current balance 48 million aozora bank expires june 2009 management currently believes amount paid guarantee item 7aitem 7 management’s discussion analysis financial condition results operation following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction business managing regulated waste providing array related services operate united states united kingdom mexico canada ireland argentina largequantity generators regulated waste hospitals pharmaceutical companies distributors offer institutional medical waste management services bio systems® sharps management services reduce risk needle sticks variety products services infection control regulated returns management services expired recalled products smallquantity generators regulated waste doctors’ offices retail pharmacies offer medical waste management services sterisafe® occupational safety health act hipaa compliance programs variety products services infection control pharmaceutical returns services expired recalled pharmaceuticals operate integrated national medical waste management networks united states canada mexico argentina united kingdom ireland national networks include total 78 processing combined processing collection sites 98 additional transfer collection combined transfer collection sites medical waste processing technologies include autoclaving proprietary etd chemical treatment incineration december 31 2007 served approximately 394600 customers approximately 384900 small quantity customers approximately 9700 large quantity customers critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2 consolidated financial statements following ones may involve higher degree judgment part greater complexity reporting revenue recognition recognize revenues regulated waste services time waste collection payments received advance deferred recognized services provided revenues regulated returns management services recorded time services performed royalty revenues calculated based measurements specified contract license revenues recognized end reporting period activity measured completed revenues product sales recognized time goods shipped ordering customer software licensing revenues recognized prorated basis term license agreement contracts loss position losses would recorded known estimable contracts go loss position goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired amortized determined permits indefinite lives accordingly amortized position accordance statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” see note 9 goodwill intangible assets additional information balance sheet december 31 2007 contains goodwill 10333 million accordance sfas 142 evaluate least annual basis using fair value reporting units whether goodwill impaired determine significant impairment occurred would required incur noncash writeoffs impaired portion goodwill could material adverse effect results operations period writeoff occurs use market value stock compared book current measurement total fair value company performance reporting units compared fair value ratio unforeseen material drop stock price may indicator potential impairment goodwill results 2007 impairment test conducted june 2007 show impairment goodwill events occurred since time indicate impairment situation exists permits currently tested impairment annually december 31 frequently circumstances indicate may impaired use discounted income approach model current measurement fair value permits estimate income based upon among things certain assumptions expected future operating performance appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates second quarter 2007 wrote approximately 02 million permit united kingdom due management decision move waste processing alternate location results 2007 impairment test show impairment remaining permits events occurred since time would indicate impairment situation exists identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined regulated waste customer relationships 20year 40year lives based specific type relationship determination based independent study performed customer relationships although regulated waste management business highly competitive able maintain high customer retention contracts automatic renewal provisions excellent customer service valuation contractual customer relationships derived using discounted income approach valuation model similar method used permit impairment testing mentioned earlier assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows indicators impairment intangibles see note 9 consolidated financial statements income taxes deferred income tax liabilities assets determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse provide certain potential tax exposures maintain reserve specific tax contingencies balance management believes adequate september 2006 financial accounting standards board “fasb” issued fasb interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” interpretation clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance statement financial accounting standards “sfas” 109 “accounting income taxes” interpretation prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition adopted provisions fin 48 january 1 2007 adoption fin 48 material impact consolidated financial statements accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined delinquent amount past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts 2 revenues insurance worker’s compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance polices thirdparty administrator used process claims require workers’ compensation vehicle liability physical damage claims reported within 24 hours result accrue worker’s compensation vehicle physical damage liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time settlements litigation would recorded known probable estimable stock option plans issued stock options employees directors integral part compensation programs january 1 2006 adopted provisions sfas 123r “sharebased payment” “sfas 123r” using modified prospective method account stock compensation costs sfas 123r requires measurement recognition compensation expense stockbased payment awards made employees directors fair value recognition provisions sfas 123r stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility expected term riskfree rate expected volatility based upon historical experience expected term stock options based upon measure historical volatility stock price riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past new accounting pronouncements information recently issued accounting pronouncements see note 2 “summary significant accounting policies” notes consolidated financial statements year ended december 31 2007 compared year ended december 31 2006 following summarizes company’s operations revenues increased 1431 million 181 9328 million 2007 7896 million 2006 domestic revenues increased 1050 million 170 7214 million 6164 million 2006 internal growth domestic small account customers increased approximately 371 million 10 driven increase sterisafe customers revenues domestic large account customers increased approximately 131 million 6 increased total number accounts returns management services increased revenues compared 2006 223 million internal growth due larger expected recall volumes domestic acquisitions less one year old added additional 325 million revenues compared 2006 international revenues 2007 2114 million compared 1732 million 2006 increase 381 million 220 internal growth currency rate fluctuations acquisitions divestiture plants united kingdom impact comparison 2007 2006 internal growth 162 million effect exchange rates favorably impacted international 2007 revenues 118 million foreign currencies appreciated us dollar acquisitions less one year old favorably impacted revenues 245 million divestiture gain selected sterile technologies group ltd “stg” plants first quarter 2007 negatively impacted comparison 2006 144 million cost revenues 2007 cost revenues increased 751 million 171 5148 million compared 4398 million 2006 domestic cost revenues increased 474 million 147 3699 million 2007 compared 3226 million 2006 international cost revenues increased 277 million 236 1449 million 2007 compared 1172 million 2006 gross margin percentage increased 448 2007 443 2006 domestic gross margin percentage improved 10 487 2007 477 2006 gross margin increase primarily result increased number small quantity customers better gross margin domestic energy transportation costs increased 2007 partially offset higher revenues related fuel surcharges international gross margin decreased 09 2007 compared 2006 primarily due acquisitions whose margins lower general international gross margins lower domestic gross margins international operations less penetration small quantity generator market better gross margin historically international operations revenues large national healthcare hospitals international segment increases consolidated gross margins receive downward pressure due “business mix” offset additional international small quantity market penetration integration savings domestic business expansion selling general administrative expenses 2007 selling general administrative “sga” expenses increased 324 million 224 1767 million 1444 million 2006 amortization depreciation expense percentage revenue change 2006 2007 domestically 2007 sga increased 266 million 228 1431 million 1166 million 2006 increase primarily due spending related market penetration bio systems® sharps management program investments sterisafe returns management services internationally sga increased 58 million 207 2007 336 million 278 million 2006 mostly due foreign exchange fluctuations higher dollar costs dollar weakened versus currencies percentage revenue international sga decreased 02 decrease reflects ongoing efforts integrate businesses united kingdom argentina income operations income operations increased 228 million 113 2245 million 2007 2018 million 2006 comparisons income operations 2007 2006 affected various charges considered part daytoday operations year ended december 31 2007 charges totaling 174 million related permit writeoffs fixed asset writeoffs settlement arbitration proceedings australia charges partially offset gains 21 million sale assets stg scherer labs year ended december 31 2006 recorded expenses 03 million related fixed asset write downs domestically income operations increased 177 million 101 1928 million 1751 million 2006 internationally income operations increased 51 million 191 317 million 267 million 2006 interest expense interest income interest expense increased 340 million 2007 284 million 2006 increase 56 million related higher debt levels incurred finance acquisitions stock repurchases interest income 16 million 2007 14 million 2006 writedown investment 2007 29 million noncash writedown investment medam ba argentine medical waste processing company writedown due legal restructuring medam ba operations stericycle sole owner medam ba 2006 10 million noncash writedown investment securities proceeds insurance 2007 received 33 million insurance proceeds related 3ci litigation settled 2005 2006 received 10 million insurance proceeds related 3ci litigation settled 2005 income tax expense income tax expense years 2007 2006 reflects effective tax rate approximately 381 390 respectively federal state income taxes year ended december 31 2006 compared year ended december 31 2005 following summarizes company’s operations revenues increased 1802 million 296 7896 million 2006 6095 million 2005 domestic revenues increased 1082 million 213 6164 million 5083 million 2005 internal growth domestic small account customers increased approximately 335 million 11 internal growth large quantity customers increased approximately 165 million 9 internal growth returns management 78 million acquisitions less one year old contributed approximately 504 million increase domestic revenues international revenues increased 720 million 1732 million 1012 million 2005 internal growth international revenues excluding 32 million effect favorable exchange rates approximately 94 million 93 international acquisitions less one year old contributed approximately 594 million increase international revenues acquisition sterile technologies group limited habitat ecologico sa february 2006 able expand geographic presence outside north america cost revenues cost revenues increased 984 million 288 4398 million 2006 3414 million 2005 domestic cost revenues increased 501 million 183 3226 million 2727 million 2005 international cost revenues increased 483 million 1172 million 687 million 2005 increase primarily due increase incremental expenses domestic international cost revenues result acquisitions completed 2006 gross margin percentage increased 443 2006 440 2005 domestic gross margin increased 477 2006 465 2005 international gross margin increased 322 2006 314 2005 increase gross margins domestic business result increased efficiencies higher margin service addons increase gross margins international business result continued acquisition integration efficiencies leveraging international infrastructure general international gross margins lower domestic gross margins international operations less penetration small quantity generator market better gross margin historically international operations revenues large national healthcare hospitals margins may impacted acquisitions period revenue may change selling general administrative expenses 2006 sga expenses less stock compensation expense increased 365 million 372 1345 million 980 million 2006 effective january 1 2006 adopted sfas 123r using modified prospective basis resulted change way recognize sharebased compensation expense increased sga expenses 98 million 12 percentage revenue domestically 2006 sga less stock compensation expense increased 256 million 316 1067 million 810 million 2005 increase primarily due spending related market penetration bio systems® sharps management program increased investing growing sterisafe products internationally sga increased 109 million 640 2006 278 million 170 million 2005 increase primarily due acquisition stg february 2006 income operations income operations increased 352 million 212 2018 million 2006 1665 million 2005 increase due higher gross margin partially offset higher sga expenses year ended december 31 2006 recorded expenses 34 million related acquisition integration compared 08 million 2005 34 million 2006 expense approximately 11 million related facility closures one united states one united kingdom year ended december 31 2006 recorded 03 million noncash writedown equipment acquired 3ci year ended december 31 2005 recorded noncash impairment charge 09 million related springhill louisiana building property income operations percentage revenue decreased 256 2006 273 2005 result factors described interest expense interest income interest expense increased 284 million 2006 130 million 2005 primarily due higher debt levels higher interest rates year interest income 14 million 2006 08 million 2005 writedown investment 2006 10 million noncash writedown investment securities proceeds insurance 2006 received 10 million insurance proceeds related 3ci litigation legal settlements 2005 incurred 365 million expenses related preliminary settlement 3ci class action litigation related legal expenses writedown note receivable 2005 wrotedown 25 million note receivable recorded sale interest former south african joint venture determined amount uncollectible income tax expense income tax expense years 2006 2005 reflects effective tax rate approximately 390 400 respectively federal state income taxes legal settlement negatively impacted 2005 effective tax rate 10 liquidity capital resources august 24 2007 amended restated 6500 million senior unsecured revolving credit facility maturing july 2011 credit facility increased 8500 million maturity extended august 24 2012 december 31 2007 margin interest rates borrowings new credit facility 00 base rate higher federal funds rate plus 05 ii prime rate loans 0625 libor loans credit facility requires compliance various financial reporting covenants restrictions including restriction dividend payments december 31 2007 compliance financial debt covenants december 31 2007 4654 million borrowings outstanding senior unsecured credit facility includes foreign currency borrowings 160 million addition 1394 million committed outstanding letters credit weighted average rate interest unsecured revolving credit facility 553 per annum december 31 2007 1704 million debt outstanding includes promissory notes issued connection acquisitions 2004 2007 foreign subsidiary bank debt 17 million capital leases working capital december 31 2007 working capital 606 million compared working capital 766 million december 31 2006 working capital decreased 265 million due completion divestiture selected stg plants classified “assets disposal group held sale” “liabilities disposal group held sale” presented current assets current liabilities december 31 2006 working capital increased 270 million due higher accounts receivable related increased revenues decreased 150 million due higher accounts payable net cash provided used net cash provided operating activities 1740 million 2007 compared 1602 million 2006 increase primarily due increased net income accounts payable net cash used investing activities 2007 1353 million compared 2014 million used 2006 difference due approximately 492 million less paid acquisitions 265 million received divestiture selected stg plants completed february 2007 partially offset 120 million increased capital expenditures december 31 2007 approximately 9 treatment capacity north america incineration approximately 91 nonincineration technologies autoclaving proprietary patented etd technology implementation commitment move away incineration north america may result writedown incineration equipment close incinerators currently operating net book value north american incinerators approximately 73 million 05 total assets commitment move away incineration north america nature goal accomplished undetermined number years uncertainties relating among things customer education acceptance legal requirements incinerate portions medical waste timetable transition specific plans close existing incinerators net cash used financing activities 326 million 2007 compared net cash provided 525 million 2006 approximately 609 million difference result increase repurchase cancellation common stock 2007 compared 2006 another 185 million related pay longterm debt contractual cash commitments following table displays future contractual cash commitments 1 longterm debt capital lease longterm liabilities items include future principal payment amount well amount calculated expected future interest payments longterm debt variable rates interest management used judgment estimate future rate interest longterm liabilities include amounts related noncompete agreements 2 excludes payments unrecognized tax benefits based contingent uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement respective taxing authorities december 31 2007 1394 million standby letters credit issued anticipate operating cash flow together borrowings senior secured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future guarantees guaranteed loan jpmorganchase bank na behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business sixmonth loan current balance 43 million jpmorganchase bank na expires may 2008 management currently believes amount paid guarantee item 7aitem 7 management’s discussion analysis financial condition results operations following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction business managing regulated waste providing array related services operate united states canada mexico argentina chile united kingdom ireland largequantity generators regulated waste hospitals pharmaceutical companies distributors offer institutional medical waste management services bio systems® sharps management services reduce risk needle sticks variety products services infection control regulated returns management services expired recalled products smallquantity generators regulated waste doctors’ offices retail pharmacies offer medical waste management services sterisafe® occupational safety health act hipaa compliance programs variety products services infection control regulated returns services expired recalled products operate integrated national regulated waste management networks united states canada mexico argentina chile united kingdom ireland national networks include total 89 processing combined processing collection sites 97 additional transfer collection combined transfer collection sites regulated waste processing technologies include autoclaving proprietary etd chemical treatment incineration december 31 2008 served approximately 418000 customers worldwide approximately 407000 small quantity customers 11000 large quantity customers critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2 consolidated financial statements following ones may involve higher degree judgment part greater complexity reporting revenue recognition recognize revenues regulated waste services time waste collection payments received advance deferred recognized services provided revenues regulated returns management services recorded time services performed royalty revenues calculated based measurements specified contract license revenues recognized end reporting period activity measured completed revenues product sales recognized time goods shipped customer software licensing revenues recognized prorated basis term license agreement contracts loss position losses would recorded known estimable contracts go loss position goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired amortized determined permits indefinite lives accordingly amortized position accordance statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” see note 10 consolidated financial statements additional information balance sheet december 31 2008 contains goodwill 11358 million accordance sfas 142 evaluate least annual basis using fair value reporting units whether goodwill impaired determine significant impairment occurred would required incur noncash writeoffs impaired portion goodwill could material adverse effect results operations period writeoff occurs use market value stock compared book current measurement total fair value company performance reporting units compared fair value ratio unforeseen material drop stock price may indicator potential impairment goodwill results 2008 impairment test conducted june 2008 show impairment goodwill events occurred since time indicates impairment situation exists permits currently tested impairment annually december 31 frequently circumstances indicate may impaired use discounted income approach model current measurement fair value permits estimate income based upon among things certain assumptions expected future operating performance appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates results 2008 impairment test show impairment permits events occurred since time would indicate impairment situation exists identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined regulated waste customer relationships 20year 40year lives based specific type relationship determination based independent study performed customer relationships although regulated waste management business highly competitive able maintain high customer retention contracts automatic renewal provisions excellent customer service valuation contractual customer relationships derived using discounted income approach valuation model similar method used permit impairment testing mentioned earlier assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows indicators impairment intangibles see note 10 consolidated financial statements income taxes deferred income tax liabilities assets determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse provide certain potential tax exposures maintain reserve specific tax contingencies balance management believes adequate accordance financial accounting standards board “fasb” interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined delinquent amount past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts 2 revenues insurance worker’s compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance polices thirdparty administrator used process claims require workers’ compensation vehicle liability physical damage claims reported within 24 hours result accrue worker’s compensation vehicle physical damage liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time settlements litigation would recorded known probable estimable stock option plans issued stock options employees directors integral part compensation programs january 1 2006 adopted provisions sfas 123r “sharebased payment” “sfas 123r” using modified prospective method account stock compensation costs sfas 123r requires measurement recognition compensation expense stockbased payment awards made employees directors fair value recognition provisions sfas 123r stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility expected term riskfree rate expected volatility based upon historical experience expected term stock options based upon measure historical volatility stock price riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past new accounting pronouncements information recently issued accounting pronouncements see note 2 consolidated financial statements fair value considerations required sfas 157 financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition sfas 157 fair value measurement liability must reflect nonperformance risk entity december 31 2008 91 million cash equivalents 14 million shortterm investments carry books fair value using level 1 inputs cash flow hedge objective offset foreign currency exchange risk us dollar equivalent cash inflows settlement gbp denominated intercompany loan fair value hedge calculated using level 2 inputs recorded current asset 23 million december 31 2008 october 2008 stericycle entered three interest rate swap contracts covering 225 million borrowings outstanding senior credit facility objective swap reduce risk volatile interest expense fixing rate fair value hedge calculated using level 2 inputs recorded liability 48 million 21 million current december 31 2008 fair value determined using market data inputs calculate expected future interest rates cash streams attributable difference expected future rates fixed rate payable discounted arrive fair value three hedges movements items fair value hierarchies year ended december 31 2008 compared year ended december 31 2007 following summarizes company’s operations thousands except per share data revenues increased 1509 million 162 10837 million 2008 9328 million 2007 domestic revenues increased 1094 million 152 8308 million 7214 million 2007 internal growth domestic small account customers increased approximately 525 million 13 driven increase sterisafe customers revenues domestic large account customers increased approximately 219 million 9 increased total number accounts returns management services decreased revenues compared 2007 108 million due lower expected recall volumes domestic acquisitions less one year old added additional 458 million revenues compared 2007 international revenues 2008 2529 million compared 2114 million 2007 increase 415 million 196 internal growth currency rate fluctuations acquisitions divestiture plants united kingdom impact comparison 2008 2007 internal growth 308 million effect exchange rates negatively impacted international 2008 revenues 113 million foreign currencies depreciated us dollar acquisitions less one year old favorably impacted revenues 239 million divestiture selected sterile technologies group ltd “stg” plants first quarter 2007 negatively impacted comparison 2008 19 million cost revenues 2008 cost revenues increased 838 million 163 5986 million compared 5148 million 2007 domestic cost revenues increased 651 million 176 4350 million 2008 compared 3699 million 2007 international cost revenues increased 187 million 129 1636 million 2008 compared 1449 million 2007 gross margin percentage remained 448 2008 2007 domestic gross margin percentage decreased 11 476 2008 487 2007 domestic gross margin decrease primarily result energy transportation costs increases 2008 partially offset higher revenues related energy surcharges international gross margin increased 39 2008 compared 2007 primarily due integration acquisitions related efficiencies general international gross margins lower domestic gross margins international operations less penetration small quantity generator market better gross margin historically international operations revenues large national healthcare hospitals international segment increases consolidated gross margins receive downward pressure due “business mix” shift offset additional international small quantity market penetration integration savings domestic business expansion selling general administrative expenses 2008 selling general administrative “sga” expenses increased 265 million 150 2032 million 1767 million 2007 amortization depreciation expense percentage revenue change 2007 2008 domestically 2008 sga increased 181 million 126 1612 million 1431 million 2007 increase primarily due spending related acquisitions market penetration bio systems® sharps management program investments sterisafe returns management services internationally sga increased 84 million 250 2008 420 million 336 million 2007 mostly due acquisitions income operations income operations increased 497 million 221 2742 million 2008 2245 million 2007 comparisons income operations 2008 2007 affected various charges considered part daytoday operations year ended december 31 2008 recorded expenses 56 million related business dispute settlement related costs 05 million related fixed asset writeoffs year ended december 31 2007 charges totaling 174 million related permit writeoffs fixed asset writeoffs settlement arbitration proceedings australia charges partially offset gains 21 million sale assets stg scherer labs domestically income operations increased 406 million 211 2334 million 1928 million 2007 internationally income operations increased 91 million 287 408 million 317 million 2006 interest expense interest income interest expense slightly decreased 331 million 2008 340 million 2007 decrease related lower interest rates interest income 09 million 2008 16 million 2007 writedown investment 2007 29 million noncash writedown investment medam ba argentine medical waste processing company writedown due legal restructuring medam ba operations stericycle sole owner medam ba proceeds insurance 2007 received 33 million insurance proceeds related 3ci litigation settled 2005 income tax expense income tax expense years 2008 2007 reflects effective tax rate approximately 378 381 respectively federal state income taxes year ended december 31 2007 compared year ended december 31 2006 following summarizes company’s operations thousands except per share data revenues increased 1431 million 181 9328 million 2007 7896 million 2006 domestic revenues increased 1050 million 170 7214 million 6164 million 2006 internal growth domestic small account customers increased approximately 371 million 10 driven increase sterisafe customers revenues domestic large account customers increased approximately 131 million 6 increased total number accounts grew bio systems® services returns management services increased revenues compared 2006 223 million internal growth due larger expected recall volumes domestic acquisitions less one year old added additional 325 million revenues compared 2006 international revenues 2007 2114 million compared 1732 million 2006 increase 381 million 220 internal growth currency rate fluctuations acquisitions divestiture plants united kingdom impact comparison 2007 2006 internal growth 162 million effect exchange rates favorably impacted international 2007 revenues 118 million foreign currencies appreciated us dollar acquisitions less one year old favorably impacted revenues 245 million divestiture gain selected stg plants first quarter 2007 negatively impacted comparison 2006 144 million cost revenues 2007 cost revenues increased 751 million 171 5148 million compared 4398 million 2006 domestic cost revenues increased 474 million 147 3699 million 2007 compared 3226 million 2006 international cost revenues increased 277 million 236 1449 million 2007 compared 1172 million 2006 gross margin percentage increased 448 2007 443 2006 domestic gross margin percentage improved 10 487 2007 477 2006 gross margin increase primarily result increased number small quantity customers better gross margin domestic energy transportation costs increased 2007 partially offset higher revenues related energy surcharges international gross margin decreased 09 2007 compared 2006 primarily due acquisitions whose margins lower general international gross margins lower domestic gross margins international operations less penetration small quantity generator market better gross margin historically international operations revenues large national healthcare hospitals international segment increases consolidated gross margins receive downward pressure due “business mix” offset additional international small quantity market penetration integration savings domestic business expansion selling general administrative expenses 2007 sga expenses increased 324 million 224 1767 million 1444 million 2006 amortization depreciation expense percentage revenue change 2006 2007 domestically 2007 sga increased 266 million 228 1431 million 1166 million 2006 increase primarily due spending related market penetration bio systems® sharps management program investments sterisafe returns management services acquisitions internationally sga increased 58 million 207 2007 336 million 278 million 2006 mostly due foreign exchange fluctuations higher dollar costs dollar weakened versus currencies acquisitions percentage revenue international sga decreased 02 decrease reflects ongoing efforts integrate businesses united kingdom argentina income operations income operations increased 228 million 113 2245 million 2007 2018 million 2006 comparisons income operations 2007 2006 affected various charges considered part daytoday operations year ended december 31 2007 charges totaling 174 million related permit writeoffs fixed asset writeoffs settlement arbitration proceedings australia charges partially offset gains 21 million sale assets stg scherer labs year ended december 31 2006 recorded expenses 03 million related fixed asset write downs domestically income operations increased 177 million 101 1928 million 1751 million 2006 internationally income operations increased 51 million 191 317 million 267 million 2006 interest expense interest income interest expense increased 340 million 2007 284 million 2006 increase 56 million related higher debt levels incurred finance acquisitions stock repurchases interest income 16 million 2007 14 million 2006 writedown investment 2007 29 million noncash writedown investment medam ba argentine medical waste processing company writedown due legal restructuring medam ba operations stericycle sole owner medam ba 2006 10 million noncash writedown investment securities proceeds insurance 2007 received 33 million insurance proceeds related 3ci litigation settled 2005 2006 received 10 million insurance proceeds related 3ci litigation settled 2005 income tax expense income tax expense years 2007 2006 reflects effective tax rate approximately 381 390 respectively federal state income taxes liquidity capital resources senior credit facility 8500 million maturing august 2012 requires us comply various financial reporting covenants restrictions including restriction dividend payments december 31 2008 compliance financial debt covenants december 31 2008 margin interest rates borrowings new credit facility 00 base rate loans higher federal funds rate plus 05 ii prime rate 075 libor loans december 31 2008 4398 million borrowings outstanding senior unsecured credit facility includes foreign currency borrowings 113 million addition 2123 million committed outstanding letters credit weighted average rate interest unsecured revolving credit facility 270 per annum includes amounts interest rate hedge december 31 2008 3529 million debt outstanding includes promissory notes issued connection acquisitions 2004 2008 sevenyear 100 million private placement notes fixed rate 564 foreign subsidiary bank debt capital leases april 15 2008 entered note purchase agreement nine institutional purchasers pursuant issued sold purchasers 100 million 564 senior notes due april 15 2015 “notes” notes bear interest fixed rate 564 per annum interest payable arrears semiannually april 15 october 15 beginning october 15 2008 principal payable maturity notes april 15 2015 notes unsecured obligations rank pari passu obligations senior unsecured credit facility pursuant credit agreement bank america na lenders party credit agreement applied proceeds sale notes reduce borrowings revolving credit facility senior unsecured credit facility notes contain customary events default including failure pay principal interest amount due violation affirmative negative covenants breach representations warranties upon occurrence event default payment notes may accelerated holders notes working capital december 31 2008 working capital decreased 158 million 448 million compared 606 million december 31 2007 current assets increased 142 million primarily due 116 million increase accounts receivable increased revenues year current liabilities increased 299 million primarily due increase accrued liabilities 179 million debt 169 million major components contributing increase accrued liabilities 120 million acquisition purchase accrual 25 million accrual stock repurchases settled december 31 2008 major component increase shortterm debt notes issued acquisitions made 2008 net cash provided used net cash provided operating activities increased 365 million 210 2106 million 2008 compared 1740 million 2007 increase operating cash primarily due collections higher revenues increased 162 net cash used investing activities 2008 1329 million compared 1353 million used 2007 difference due 265 million received divestiture selected plants united kingdom completed february 2007 offset 298 million less paid acquisitions 2008 net cash used financing activities 779 million 2008 compared 326 million used 2007 described 2008 completed private placement 100 million unsecured sevenyear notes primarily used pay revolver debt three 166 million less repayment longterm debt 2008 compared 2007 offsetting decrease debt repayment additional 637 million purchase treasury stock 2008 contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2008 payments due period dollars thousands 1 longterm debt capital leases longterm liabilities items include future principal payment amount well amount calculated expected future interest payments longterm debt floating rate interest management used judgment estimate future rate interest 2 longterm liabilities include amounts related noncompete agreements excludes payments unrecognized tax benefits based contingent uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement respective taxing authorities december 31 2008 2123 million standby letters credit issued anticipate operating cash flow together borrowings senior secured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future guarantees guaranteed loan jpmorganchase bank na behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding regulated waste management business one year loan current balance 54 million jpmorgan chase bank na expires may 2009 management currently believes amount paid guarantee item 7aitem 7 management’s discussion analysis financial condition results operations following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction business managing regulated waste providing array related services operate united states canada argentina chile mexico ireland portugal romania united kingdom largequantity generators regulated waste hospitals pharmaceutical companies distributors offer institutional regulated waste management services bio systems® sharps management services reduce risk needle sticks variety products services infection control regulated returns waste management services expired recalled products smallquantity generators regulated waste doctors’ offices retail pharmacies offer medical regulated waste management services sterisafe® osha hipaa compliance programs variety products services infection control regulated returns services expired recalled products operate integrated national regulated waste management networks united states canada argentina chile mexico ireland portugal romania united kingdom national networks include total 113 processing combined processing collection sites 135 additional transfer collection combined transfer collection sites regulated waste processing technologies include autoclaving proprietary etd chemical treatment incineration december 31 2009 served approximately 459200 customers worldwide approximately 447900 small quantity customers 11300 large quantity customers critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2 consolidated financial statements following ones may involve higher degree judgment part greater complexity reporting revenue recognition recognize revenues regulated waste services time waste collection payments received advance deferred recognized services provided revenues regulated returns management services recorded time services performed revenues product sales recognized time goods shipped customer software licensing revenues recognized prorated basis term license agreement contracts loss position losses would recorded known estimable contracts go loss position goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired amortized determined permits indefinite lives accordingly amortized see note 10 consolidated financial statements additional information balance sheet december 31 2009 contains goodwill 1394 billion accordance accounting standards evaluate least annual basis using fair value reporting units whether goodwill impaired determine significant impairment occurred would required incur noncash writeoffs impaired portion goodwill could material adverse effect results operations period writeoff occurs use market value stock compared book current measurement total fair value company performance reporting units compared fair value ratio unforeseen material drop stock price may indicator potential impairment goodwill results 2009 impairment test conducted june 2009 show impairment goodwill events occurred since time indicates impairment situation exists permits tested impairment annually december 31 frequently circumstances indicate may impaired use discounted income approach model current measurement fair value permits estimate income based upon among things certain assumptions expected future operating performance appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates results 2009 impairment test show impairment permits events occurred since time would indicate impairment situation exists identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined regulated waste customer relationships 15year 40year lives based specific type relationship determination based independent study performed customer relationships although regulated waste management business highly competitive able maintain high customer retention contracts automatic renewal provisions excellent customer service valuation contractual customer relationships derived using discounted income approach valuation model similar method used permit impairment testing mentioned earlier assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows indicators impairment intangibles see note 10 consolidated financial statements income taxes subject income taxes us numerous foreign jurisdictions compute provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax bases assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected realized settled significant judgments required order determine realizability deferred tax assets assessing need valuation allowance evaluate significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods provide certain potential tax exposures maintain reserve specific tax contingencies balance management believes adequate accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined delinquent amount past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts 2 revenues insurance workers’ compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance policies thirdparty administrator used process claims require workers’ compensation vehicle liability physical damage claims reported within 24 hours result accrue workers’ compensation vehicle physical damage liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time settlements litigation would recorded known probable estimable stock option plans issued stock options employees directors integral part compensation programs stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility expected term riskfree rate expected volatility based upon historical experience expected term stock options based upon measure historical volatility stock price riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past new accounting pronouncements information recently issued accounting pronouncements see note 2 consolidated financial statements fair value considerations financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity december 31 2009 158 million cash equivalents 11 million shortterm investments carry books fair value using level 1 inputs december 31 2009 two interest rate swap contracts covering 100 million borrowings outstanding term loan facility objective swap reduce risk volatile interest expense fixing rate fair value hedge calculated using level 2 inputs recorded current liability 12 million fair value determined using market data inputs calculate expected future interest rates cash streams attributable difference expected future rates fixed rate payable discounted arrive fair value two hedges part acquisition accounting assign fair values identifiable intangible assets primarily customer relationships operating permits use discounted income approach whereby expected tax cash flows acquired entity present valued use financial information provided acquired company management assumptions related future growth determine expected future cash flows use data provided unaffiliated external parties well internal financial information calculate weighted average cost capital “wacc” acquired company expected cash flows calculated wacc significant inputs determining fair value intangibles 2009 assigned 700 million customer relationships 210 million facility environmental permits using level 3 inputs restructuring costs december 2009 announced consolidation operations within returns management services business consolidation result closure facilities boynton beach florida conyers georgia operations facilities moved indianapolis indiana location recognized 16 million expense fourth quarter 2009 related restructuring 09 million fixed asset writeoffs 07 primarily severance paid 2010 estimate additional 16 million expense 2010 approximately 08 million related severance employee expenses 08 million related lease related occupancy charges expect restructuring completed end 2010 believe restructuring allow us maximize efficiency returns management services business single location management infrastructure year ended december 31 2009 compared year ended december 31 2008 following summarizes company’s operations thousands except per share data revenues increased 941 million 87 118 billion 2009 108 billion 2008 domestic revenues increased 818 million 98 9126 million 8308 million 2008 internal growth domestic small account customers increased approximately 396 million 8 driven increase sterisafe revenues domestic large account customers increased approximately 121 million 4 increased total number accounts expanded sharps management program returns management services revenues decreased 223 million compared 2008 due lower expected recall volumes domestic acquisitions less one year old added additional 524 million growth revenues compared 2008 international revenues 2009 2651 million compared 2529 million 2008 increase 123 million 49 internal growth currency rate fluctuations acquisitions impact comparison 2009 2008 internal growth 183 million effect exchange rates negatively impacted international 2009 revenues 381 million foreign currencies depreciated us dollar acquisitions less one year old favorably impacted revenue growth 321 million cost revenues 2009 cost revenues increased 267 million 45 6253 million compared 5986 million 2008 domestic cost revenues increased 233 million 54 4583 million 2009 compared 4350 million 2008 international cost revenues increased 34 million 21 1670 million 2009 compared 1636 million 2008 gross margin percentage increased 469 2009 448 2008 domestic gross margin percentage increased 22 498 2009 476 2008 domestic gross profit 2009 unfavorably impacted 07 million restructuring costs regulated returns management services business lower gross margin 2008 primarily result energy transportation costs increases 2008 partially offset higher revenues related energy surcharges international gross margin improved 17 percentage points 2009 compared 2008 primarily due integration acquisitions related efficiencies general international gross margins lower domestic gross margins international operations less penetration small quantity generator market better gross margin historically international operations revenues large national healthcare hospitals international revenues increase consolidated gross margins receive downward pressure due “business mix” shift offset additional international small quantity market penetration integration savings domestic business expansion selling general administrative expenses 2009 selling general administrative “sga” expenses excluding acquisition related costs increased 247 million 121 2279 million 2032 million 2008 amortization depreciation expense percentage revenue slightly increased 09 2009 08 2008 domestically 2009 sga increased 214 million 132 1826 million 1612 million 2008 increase primarily due spending related acquisitions market penetration bio systems® sharps management pharma waste programs investments sterisafe services internationally sga increased 33 million 79 2009 453 million 420 million 2008 mostly due acquisitions income operations income operations increased 410 million 149 3152 million 2009 2742 million 2008 comparisons income operations 2009 2008 affected various charges considered part daytoday operations year ended december 31 2009 recognized 73 million transactional expenses result adopting changes issued financial accounting standards board “fasb” accounting rules related business combinations 09 million restructuring costs regulated returns management services business year ended december 31 2008 recorded expenses 56 million related business dispute settlement related costs 05 million related fixed asset writeoffs domestically income operations increased 315 million 135 2649 million 2009 2334 million 2008 internationally income operations increased 95 million 234 503 million 2009 408 million 2008 interest expense interest income interest expense increased 344 million 2009 331 million 2008 due higher borrowings 2009 interest income 03 million 2009 09 million 2008 income tax expense income tax expense years 2009 2008 reflects effective tax rate approximately 365 378 respectively federal state income taxes 2009 recognized net 18 million benefit related prior years unrecognized tax benefits year ended december 31 2008 compared year ended december 31 2007 following summarizes company’s operations thousands except per share data revenues increased 1509 million 162 108 billion 2008 9328 million 2007 domestic revenues increased 1094 million 152 8308 million 7214 million 2007 internal growth domestic small account customers increased approximately 525 million 13 driven increase sterisafe customers revenues domestic large account customers increased approximately 219 million 9 increased total number accounts returns management services revenues decreased 108 million compared 2007 due lower expected recall volumes domestic acquisitions less one year old added additional 458 million revenues compared 2007 international revenues 2008 2529 million compared 2114 million 2007 increase 415 million 196 internal growth currency rate fluctuations acquisitions divestiture plants united kingdom impact comparison 2008 2007 internal growth 308 million effect exchange rates negatively impacted international 2008 revenues 113 million foreign currencies depreciated us dollar acquisitions less one year old favorably impacted revenues 239 million divestiture selected sterile technologies group ltd “stg” plants first quarter 2007 negatively impacted comparison 2008 19 million cost revenues 2008 cost revenues increased 838 million 163 5986 million compared 5148 million 2007 domestic cost revenues increased 651 million 176 4350 million 2008 compared 3699 million 2007 international cost revenues increased 187 million 129 1636 million 2008 compared 1449 million 2007 gross margin percentage remained 448 2008 2007 domestic gross margin percentage decreased 11 476 2008 487 2007 domestic gross margin decrease primarily result energy transportation costs increases 2008 partially offset higher revenues related energy surcharges international gross margin increased 39 2008 compared 2007 primarily due integration acquisitions related efficiencies general international gross margins lower domestic gross margins international operations less penetration small quantity generator market better gross margin historically international operations revenues large national healthcare hospitals international segment increases consolidated gross margins receive downward pressure due “business mix” shift offset additional international small quantity market penetration integration savings domestic business expansion selling general administrative expenses 2008 sga expenses increased 265 million 150 2032 million 1767 million 2007 amortization depreciation expense percentage revenue change 2007 2008 domestically 2008 sga increased 181 million 126 1612 million 1431 million 2007 increase primarily due spending related acquisitions market penetration bio systems® sharps management program investments sterisafe returns management services internationally sga increased 84 million 250 2008 420 million 336 million 2007 mostly due acquisitions income operations income operations increased 497 million 221 2742 million 2008 2245 million 2007 comparisons income operations 2008 2007 affected various charges considered part daytoday operations year ended december 31 2008 recorded expenses 56 million related business dispute settlement related costs 05 million related fixed asset writeoffs year ended december 31 2007 charges totaling 174 million related permit writeoffs fixed asset writeoffs settlement arbitration proceedings australia charges partially offset gains 21 million sale assets stg scherer labs domestically income operations increased 406 million 211 2334 million 1928 million 2007 internationally income operations increased 91 million 287 408 million 317 million 2006 interest expense interest income interest expense slightly decreased 331 million 2008 340 million 2007 decrease related lower interest rates interest income 09 million 2008 16 million 2007 writedown investment 2007 29 million noncash writedown investment medam ba argentine medical waste processing company writedown due legal restructuring medam ba operations stericycle sole owner medam ba proceeds insurance 2007 received 33 million insurance proceeds related 3ci litigation settled 2005 income tax expense income tax expense years 2008 2007 reflects effective tax rate approximately 378 381 respectively federal state income taxes liquidity capital resources 850 million senior credit facility maturing august 2012 215 million term loan maturing june 2012 100 million private placement notes maturing april 2015 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility term loan credit agreement private placement notes december 31 2009 compliance financial debt covenants december 31 2009 3816 million borrowings outstanding 850 million senior unsecured credit facility includes foreign currency borrowings 311 million also 2237 million committed outstanding letters credit facility unused portion revolving credit facility december 31 2009 2447 million december 31 2009 interest rates borrowings revolving credit facility • shortterm borrowing less one month federal funds rate plus 05 prime rate whichever higher • borrowing greater one month libor plus 075 weighted average rate interest unsecured revolving credit facility 10 per annum december 31 2009 215 million term loan debt outstanding entered 2009 several lenders maturing june 2012 term loans term loan credit agreement bear interest fluctuating interest rates determined onemonth applicable interest period reference libor plus applicable margin provided term loan agreement applicable margin based consolidated leverage ratio ranges 275 350 december 31 2009 applicable margin 30 weighted average rate interest term loan 58 per annum includes amounts interest rate hedge first year required make quarterly principal payments 25 principal amount outstanding term loans remainder maturity december 31 2009 100 million outstanding 564 private placement notes entered april 15 2008 nine institutional purchasers notes bear interest fixed rate 564 per annum interest payable arrears semiannually april 15 october 15 beginning october 15 2009 principal payable maturity notes april 15 2015 december 31 2009 2922 million debt outstanding includes promissory notes issued connection acquisitions 2004 2009 foreign subsidiary bank debt capital leases working capital december 31 2009 working capital decreased 190 million 258 million compared 448 million december 31 2008 decrease working capital 271 million increase current debt relates financing foreign domestic acquisitions 2009 partially offset reduction accrued liabilities related 120 million payment acquisition purchase accrual net cash provided used net cash provided operating activities increased 667 million 317 2772 million 2009 compared 2106 million 2008 increase operating cash primarily due increase net income 181 improved collections increase accounts payable net cash used investing activities 2009 3502 million compared 1329 million used 2008 difference due 2269 million paid acquisitions 2009 partially offset 76 million less spent capital expenditures net cash provided financing activities 818 million 2009 compared 779 million net cash used 2008 described 2009 entered 215 million term loan credit agreement 2008 completed private placement 100 million unsecured sevenyear notes primarily used pay revolver debt 917 million less purchase treasury stock 2009 contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2009 payments due period dollars thousands 1 longterm debt capital leases longterm liabilities items include future principal payment amount well amount calculated expected future interest payments longterm debt floating rate interest management used judgment estimate future rate interest 2 longterm liabilities include amounts related noncompete agreements exclude payments unrecognized tax benefits based contingent uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement respective taxing authorities december 31 2009 2237 million standby letters credit issued anticipate operating cash flow together borrowings senior secured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future guarantees guaranteed loan jpmorganchase bank na behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business one year loan current balance 52 million jpmorganchase bank na expires may 2010 also notes receivable shiraihsi approximately 149 million support medical waste business amounts collateralized assets shiraishi related companies item 7aitem 7 management’s discussion analysis financial condition results operations following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction business managing regulated waste providing array related services operate united states argentina brazil canada chile ireland japan mexico portugal romania united kingdom largequantity generators regulated waste hospitals pharmaceutical companies distributors offer institutional regulated waste management services bio systems® sharps management services reduce risk needle sticks variety products services infection control regulated returns waste management services expired recalled products smallquantity generators regulated waste doctors’ offices retail pharmacies offer medical regulated waste management services sterisafe® osha hipaa compliance programs variety products services infection control regulated returns recall services expired recalled products operate integrated national regulated waste management networks domestically internationally national networks include total 136 processing combined processing collection sites 129 additional transfer collection combined transfer collection sites regulated waste processing technologies include autoclaving proprietary etd chemical treatment incineration december 31 2010 served 485000 customers worldwide 472000 small quantity customers 13000 large quantity customers critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2 consolidated financial statements following ones may involve higher degree judgment part greater complexity reporting revenue recognition revenues regulated waste management services sterisafe service recognized time waste collection sterisafe revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues regulated returns recall management services recorded time services performed revenues product sales recognized time goods shipped customer contracts loss position losses would recorded known estimable contracts go loss position goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired amortized determined permits indefinite lives accordingly amortized see note 12goodwill intangible assets consolidated financial statements additional information balance sheet december 31 2010 contains goodwill 16 billion accordance accounting standards evaluate least annual basis using fair value reporting units whether goodwill impaired determine significant impairment occurred would required incur noncash charges impaired portion goodwill could material adverse effect results operations period impairment charge occurs use market value stock compared book value current measurement total fair value company performance reporting units compared fair value ratio unforeseen material drop stock price may indicator potential impairment goodwill quarter ended june 30 2010 performed annual goodwill impairment evaluation three reporting units domestic regulated waste domestic regulated returns recall management services foreign countries performed two impairment tests one using market approach using income approach market income approaches indicated impairment goodwill three reporting units market approach market approach begins calculating market capitalization company using average stock price prior 30 days outstanding share count june 30 2010 look company’s earnings interest tax depreciation amortization “ebitda” adjusted stock compensation expense adjustments gain sale divested assets prior twelve months calculated market capitalization divided modified ebitda arrive valuation multiple fair value reporting unit calculated taking product valuation multiple trailing twelve month modified ebitda reporting unit fair value compared reporting units’ book value determined excess book value believe starting fair value company whole reasonable measure fair value allocated reporting unit based reporting unit’s individual earnings sustained drop stock price would negative impact fair value calculations temporary drop earnings reporting unit would negative impact fair value calculations results goodwill impairment test using market approach indicated fair value domestic regulated waste foreign countries reporting units exceeded book value substantial amount excess 100 book value june 30 2010 regulated returns recall management services reporting unit fair value exceeded book value excess 30 1199 million assigned goodwill income approach income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows calculated using management assumptions internal growth capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based company calculated weighted average cost capital adjusted reporting units based risk size premium foreign country premium significant assumptions used income approach include realization future cash flows discount rate used present value cash flows results goodwill impairment test using income approach indicated fair value reporting units exceeded book value substantial amount excess 100 book value permits tested impairment annually december 31 frequently circumstances indicate may impaired use either discounted income cost savings model current measurement fair value permits fair value based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates 2010 wrote 06 million permit intangibles two redundant domestic treatment locations identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined regulated waste customer relationships 15year 40year lives based specific type relationship determination based independent study performed customer relationships although regulated waste management business highly competitive able maintain high customer retention contracts automatic renewal provisions excellent customer service valuation contractual customer relationships derived using discounted income approach valuation model assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows indicators impairment intangibles see note 12goodwill intangible assets consolidated financial statements income taxes subject income taxes us numerous foreign jurisdictions compute provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax bases assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected realized settled significant judgments required order determine realizability deferred tax assets assessing need valuation allowance evaluate significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods provide certain potential tax exposures maintain reserve specific tax contingencies balance management believes adequate accounts receivable accounts receivable consists amounts due us normal business activities carried estimated collectible amounts accounts receivable balances determined delinquent amount past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected accounts receivable referred third party collection agency written uncollected 120 days single customer accounts 2 accounts receivable insurance workers’ compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance policies thirdparty administrator used process claims require workers’ compensation vehicle liability physical damage claims reported within 24 hours result accrue workers’ compensation vehicle physical damage liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time settlements litigation would recorded known probable estimable stock option plans issued stock options employees directors integral part compensation programs stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility stock expected term award riskfree rate stock’s expected volatility based upon historical experience expected term awards based upon measure historical volatility stock price riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past new accounting pronouncements information recently issued accounting pronouncements see note 2 consolidated financial statements fair value considerations financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity december 31 2010 771 million cash equivalents 185 million shortterm investments record fair value using level 1 inputs december 31 2010 derivative instruments restructuring costs december 2009 announced consolidation operations within returns recall management services “rms” business consolidation resulted closure facilities boynton beach florida conyers georgia operations facilities moved indianapolis indiana location recognized expense 16 million fourth quarter 2009 22 million 2010 accrual balance 03 million related rms restructuring december 31 2010 estimate immaterial additional expense 2011 believe restructuring allow us maximize efficiency rms business single location management infrastructure december 2010 reorganized structure international management group order leverage strong local management recognized 54 million expense related restructuring 33 million related stock options accrual balance 18 million related reorganization december 31 2010 paid primarily 2011 additional disbursements 2012 addition restructuring charges recognized 09 million noncash expenses 2010 related consolidation redundant plant operations year ended december 31 2010 compared year ended december 31 2009 highlights year ended december 31 2010 included following • revenues grew 144 billion 222 increase 118 billion 2009 • gross margins decreased 464 2010 469 2009 • operating income 3707 million 176 increase 3152 million 2009 • incurred net 158 million expenses related restructuring plant closure acquisitions litigation settlement gain sale assets • cash flow operations 3257 million following summarizes company’s operations thousands except per share data revenues increased 2617 million 222 144 billion 2010 118 billion 2009 domestic revenues increased 1710 million 187 108 billion 9126 million 2009 internal growth domestic small account customers increased approximately 467 million approximately 9 driven increase sterisafe clinical services revenues domestic large account customers increased approximately 175 million 5 increased total number accounts expanded sharps management pharmaceutical waste disposal programs returns recall management services revenues increased 557 million compared 2009 resulting larger recalls 2010 domestic acquisitions less one year old added additional 511 million growth revenues compared 2009 international revenues 2010 3558 million compared 2651 million 2009 increase 907 million 342 internal growth currency rate fluctuations acquisitions impact comparison 2010 2009 internal growth 191 million effect exchange rates positively impacted international 2010 revenues 25 million foreign currencies appreciated us dollar acquisitions less one year old favorably impacted revenue growth 691 million cost revenues 2010 cost revenues increased 1466 million 234 7719 million compared 6253 million 2009 domestic cost revenues increased 864 million 189 5447 million 2010 compared 4583 million 2009 international cost revenues increased 602 million 360 2272 million 2010 compared 1670 million 2009 gross margin percentage decreased 464 2010 469 2009 domestic gross margin percentage slightly decreased 497 2010 498 2009 domestic gross profit unfavorably impacted 15 million 2010 07 million 2009 restructuring costs regulated returns recall management services business international gross margin decreased 361 compared 370 2009 primarily due acquisitions lower margins consolidated general international gross margins lower domestic gross margins international operations less penetration small quantity generator market better gross margin historically international operations revenues large national healthcare hospitals international revenues increase consolidated gross margins receive downward pressure due “business mix” shift offset additional international small quantity market penetration integration savings domestic business expansion selling general administrative expenses 2010 selling general administrative “sga” expenses excluding acquisition related costs increased 504 million 221 2783 million 2279 million 2009 percentage revenue sga expenses remained 193 2010 2009 depreciation expense percentage revenue 05 2010 2009 amortization expense percentage revenue increased 07 2010 05 2009 due larger quantity acquisitions related amortization domestically sga increased 316 million 173 2142 million 2010 1826 million 2009 increase primarily due presynergized cost structure acquired revenues higher amortization expense market penetration pharmaceutical waste programs investments sterisafe services internationally sga increased 188 million 415 2010 641 million 453 million 2009 percentage revenue sga 180 2010 171 2009 increase sga partially due acquisitions uk brazil japan higher sga expenses higher amortization expense related recognized intangible assets acquisitions investment clinical services program also contributed increase sga income operations income operations increased 555 million 176 3707 million 2010 3152 million 2009 comparisons income operations 2010 2009 affected various charges considered part daytoday operations year ended december 31 2010 recognized 95 million acquisition expenses 41 million expenses related integration new acquisitions 76 million restructuring cost 08 million plant closure expenses litigation settlement 09 million partially offset 30 million gain sale assets related medserve divestiture various adjustments resulted 199 million net expense pretax basis year ended december 31 2009 recognized 73 million acquisition expenses 11 million expenses related integration new acquisitions 16 million restructuring costs regulated returns recall management services business adjustments resulted 100 million net expenses pretax basis domestically income operations increased 455 million 172 3104 million 2010 2649 million 2009 internationally income operations increased 100 million 199 603 million 2010 503 million 2009 interest expense interest income interest expense increased 371 million 2010 344 million 2009 due higher borrowings 2010 higher interest rates interest income 03 million 2010 2009 income tax expense income tax expense years 2010 2009 reflects effective tax rate approximately 366 365 respectively federal state income taxes 2010 recognized net 12 million benefit related prior years unrecognized tax benefits 2009 recognized net 18 million benefit related prior years unrecognized tax benefits year ended december 31 2009 compared year ended december 31 2008 highlights year ended december 31 2009 included following • revenues grew 118 billion 87 increase 108 billion 2008 • gross margins increased 469 2009 448 2008 • operating income 3152 million 149 increase 2742 million 2008 • incurred net 89 million expenses related acquisitions restructuring • cash flow operations 2772 million following summarizes company’s operations thousands except per share data revenues increased 941 million 87 118 billion 2009 108 billion 2008 domestic revenues increased 818 million 98 9126 million 8308 million 2008 internal growth domestic small account customers increased approximately 396 million 8 driven increase sterisafe revenues domestic large account customers increased approximately 121 million 4 increased total number accounts expanded sharps management program returns recall management services revenues decreased 223 million compared 2008 due lower expected recall volumes domestic acquisitions less one year old added additional 524 million growth revenues compared 2008 international revenues 2009 2651 million compared 2529 million 2008 increase 123 million 49 internal growth currency rate fluctuations acquisitions impact comparison 2009 2008 internal growth 183 million effect exchange rates negatively impacted international 2009 revenues 381 million foreign currencies depreciated us dollar acquisitions less one year old favorably impacted revenue growth 321 million cost revenues 2009 cost revenues increased 267 million 45 6253 million compared 5986 million 2008 domestic cost revenues increased 233 million 54 4583 million 2009 compared 4350 million 2008 international cost revenues increased 34 million 21 1670 million 2009 compared 1636 million 2008 gross margin percentage increased 469 2009 448 2008 domestic gross margin percentage increased 22 498 2009 476 2008 domestic gross profit 2009 unfavorably impacted 07 million restructuring costs regulated returns recall management services business lower gross margin 2008 primarily result energy transportation costs increases 2008 partially offset higher revenues related energy surcharges international gross margin improved 17 percentage points 2009 compared 2008 primarily due integration acquisitions related efficiencies general international gross margins lower domestic gross margins international operations less penetration small quantity generator market better gross margin historically international operations revenues large national healthcare hospitals international revenues increase consolidated gross margins receive downward pressure due “business mix” shift offset additional international small quantity market penetration integration savings domestic business expansion selling general administrative expenses 2009 sga expenses excluding acquisition related costs increased 247 million 121 2279 million 2032 million 2008 amortization depreciation expense percentage revenue slightly increased 09 2009 08 2008 domestically 2009 sga increased 214 million 132 1826 million 1612 million 2008 increase primarily due spending related acquisitions market penetration bio systems® sharps management pharmacy waste disposal programs investments sterisafe services internationally sga increased 33 million 79 2009 453 million 420 million 2008 mostly due acquisitions investment clinical services program income operations income operations increased 410 million 149 3152 million 2009 2742 million 2008 comparisons income operations 2009 2008 affected various charges considered part daytoday operations year ended december 31 2009 recognized 73 million acquisition expenses 11 million expenses related integration new acquisitions 16 million restructuring costs regulated returns recall management services business adjustments resulted 100 million net expenses pretax basis year ended december 31 2008 recorded expenses 56 million related business dispute settlement related costs 15 million expenses related integration new acquisitions 05 million related fixed asset writeoffs domestically income operations increased 315 million 135 2649 million 2009 2334 million 2008 internationally income operations increased 95 million 234 503 million 2009 408 million 2008 interest expense interest income interest expense increased 344 million 2009 331 million 2008 due higher borrowings 2009 interest income 03 million 2009 09 million 2008 income tax expense income tax expense years 2009 2008 reflects effective tax rate approximately 365 378 respectively federal state income taxes 2009 recognized net 18 million benefit related prior years unrecognized tax benefits liquidity capital resources 8500 million senior credit facility maturing august 2012 810 million term loan maturing june 2012 1000 million private placement notes maturing april 2015 1750 million private placement note maturing october 2017 2250 million private placement notes maturing october 2020 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility term loan credit agreement private placement notes december 31 2010 compliance financial debt covenants december 31 2010 1754 million borrowings outstanding 8500 million senior unsecured credit facility includes foreign currency borrowings 574 million also 1840 million committed outstanding letters credit senior credit facility unused portion revolving credit facility december 31 2009 4906 million december 31 2010 interest rates borrowings revolving credit facility follows • shortterm borrowing less one month federal funds rate plus 05 prime rate whichever higher • borrowing greater one month libor plus 075 weighted average rate interest unsecured revolving credit facility 10 per annum december 31 2010 810 million term loan debt outstanding entered 2010 several lenders maturing june 2012 term loans term loan credit agreement bear interest fluctuating interest rates determined onemonth applicable interest period reference libor plus applicable margin provided term loan agreement applicable margin based consolidated leverage ratio ranges 275 350 december 31 2010 applicable margin 30 weighted average rate interest term loan 33 per annum required make quarterly principal payments 25 original principal amount outstanding term loans remainder maturity december 31 2010 1000 million outstanding 564 private placement notes entered april 15 2008 notes bear interest fixed rate 564 per annum interest payable arrears semiannually april 15 october 15 beginning october 15 2009 principal payable maturity notes april 15 2015 october 15 2010 entered private placement note purchase agreement sell 1750 million new 389 sevenyear unsecured senior notes “series notes” 2250 million new 10year 447 unsecured senior notes “series b notes” notes outstanding december 31 2010 series notes bear interest fixed rate 389 per annum series b notes bear interest fixed rate 447 per annum interest payable arrears semiannually april 15 october 15 beginning april 15 2011 principal amount 1750 million series notes payable maturity notes october 15 2017 principal amount 2250 million series b notes payable maturity notes october 15 2020 december 31 2010 2490 million promissory notes issued connection acquisitions 2004 2010 914 foreign subsidiary bank debt outstanding 63 million capital lease obligations working capital december 31 2010 working capital increased 602 million compared 137 million december 31 2009 cash equivalents december 31 2010 includes 230 million used recalled product reimbursement offset equivalent amount accrued liabilities working capital increased 357 million net accounts receivables related higher sales 173 million shortterm investments july 2010 financed portion japan acquisition local borrowings required us deposit 158 million one year certificates deposit affiliated bank located united states classified part shortterm investments balance sheet see note 4fair value measurements net cash provided used net cash provided operating activities increased 484 million 175 3257 million 2010 cash provided operating activities 2010 includes prepayment recalled product reimbursements excess amounts paid resulted increase accrued liabilities amount 230 million increase net income 183 improved collections reflected days sales outstanding increase accounts payable contributed increase cash operating activities net cash used investing activities 2010 2477 million compared 3502 million used 2009 decrease mainly due 1215 million decrease cash acquisitions 2010 partially offset increase 158 million purchases shortterm investments related acquisitions japan see note 4fair value measurements net cash used financing activities 136 million 2010 compared 818 million provided financing activities 2009 change primarily consists decrease net proceeds long term debt amount 1237 million addition 186 million share repurchases 2010 contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2010 payments due period dollars thousands 1 longterm debt capital leases longterm liabilities items include future principal payment amount well amount calculated expected future interest payments longterm debt floating interest rate requires use management judgment estimate future rate interest 2 longterm liabilities include amounts related covenants nottocompete agreements exclude payments unrecognized tax benefits based contingent uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement applicable taxing authorities december 31 2010 1840 million standby letters credit issued anticipate operating cash flow together borrowings senior unsecured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future guarantees guaranteed loan jpmorganchase bank na behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business one year loan current balance 61 million jpmorganchase bank na expires may 2011 also extended notes receivable shiraishi approximately 152 million support medical waste business amounts collateralized assets shiraishi related companies item 7aitem 7 management’s discussion analysis financial condition results operations following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction business managing regulated waste providing array related services operate united states argentina brazil canada chile ireland japan mexico portugal romania spain united kingdom largequantity generators regulated waste hospitals pharmaceutical companies distributors offer institutional regulated waste management services bio systems® reusable sharps management services reduce risk needle sticks variety products services infection control regulated recall returns management services expired recalled products pharmaceutical waste disposal services hazardous waste disposal patient communication services small quantity generators regulated waste doctors’ offices retail pharmacies offer medical regulated waste management services sterisafe® osha hipaa compliance programs variety products services infection control regulated recall returns management services expired recalled products patient communication services operate integrated national regulated waste management networks domestically internationally national networks include total 219 processing combined processing collection sites 141 additional transfer collection combined transfer collection sites regulated waste processing technologies include autoclaving proprietary etd chemical treatment incineration serve approximately 541000 customers worldwide approximately 16500 largequantity generators approximately 524500 smallquantity generators critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2summary significant accounting policies consolidated financial statements following ones may involve higher degree judgment part greater complexity reporting revenue recognition revenues regulated waste management services sterisafe service recognized time waste collection sterisafe revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues regulated recall returns management services patient communication services recorded time services performed revenues product sales recognized time goods shipped customer charges related international value added tax “vat” similar pass taxes included revenue goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired amortized determined permits indefinite lives accordingly amortized see note 11goodwill intangible assets consolidated financial statements additional information balance sheet december 31 2012 contains goodwill 21 billion accordance applicable accounting standards evaluate least annual basis using fair value reporting units whether goodwill impaired determine significant impairment occurred would required incur noncash charges impaired portion goodwill could material adverse effect results operations period impairment charge occurs quarter ended june 30 2012 performed annual goodwill impairment evaluation three reporting units domestic regulated waste management services domestic regulated recall returns management services international calculate fair value reporting units using income method validate results using market approach income market approaches indicated impairment goodwill three reporting units income approach income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows calculated using management assumptions internal growth capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based company calculated weighted average cost capital adjusted reporting units based risk size premium foreign country premium significant assumptions used income approach include realization future cash flows discount rate used present value cash flows results goodwill impairment test using income approach indicated fair value reporting units exceeded book value substantial amount excess 100 market approach market approach begins calculating market capitalization company using average stock price prior 30 days outstanding share count june 30 2012 look company’s earnings interest tax depreciation amortization “ebitda” adjusted stock compensation expense items gain loss sale divested assets prior twelve months calculated market capitalization divided modified ebitda arrive valuation multiple fair value reporting unit calculated taking product valuation multiple trailing twelve month modified ebitda reporting unit fair value compared reporting units’ book value determined excess book value believe starting fair value company whole reasonable measure fair value allocated reporting unit based reporting unit’s individual earnings sustained drop stock price would negative impact fair value calculations temporary drop earnings reporting unit would negative impact fair value calculations results goodwill impairment test using market approach indicated fair value reporting units exceeded book value substantial amount excess 100 book value permits tested impairment annually december 31 frequently circumstances indicate may impaired use either discounted income cost savings model current measurement fair value permits fair value based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates 2012 wrote 17 million permit intangibles two facilities due rationalizing operations current acquisition accounting fair value must assigned acquired assets based theoretical “market participant” regardless acquirers’ intended use assets accounting treatment lead recognition losses company disposes acquired assets identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined regulated waste customer relationships 14year 40year lives based specific type relationship although contracted regulated waste management business highly competitive able maintain high customer retention excellent customer service valuation contractual customer relationships derived using discounted income approach valuation model assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may undiscounted estimated future cash flows indicators impairment intangibles see note 11goodwill intangible assets consolidated financial statements share repurchases purchase price par value share repurchases allocated retained earnings income taxes subject income taxes us numerous foreign jurisdictions compute provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax bases assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected realized settled significant judgments required order determine realizability deferred tax assets assessing need valuation allowance evaluate significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods provide uncertain tax positions maintain reserve tax benefits assumed meet threshold “more likely not” sustained management believes amount provided uncertain tax positions adequate december 31 2012 net operating loss carryforwards us federal state income tax purposes fully utilized excluding net operating loss carryforwards related acquisitions net operating loss carryforwards foreign domestic acquisitions approximately 321 million certain net operating loss carryforwards begin expire 2015 85 million valuation allowance offsetting benefit valuation allowance primarily represents loss carryforwards limitations place utilization expiration uncertain changes valuation allowance 2012 primarily related adjustments acquisition accounting accounts receivable accounts receivable consists amounts due us normal business activities carried estimated collectible amounts accounts receivable balance includes amounts related vat similar international passthrough taxes accounts receivable balances determined delinquent amount past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected single customer accounts 2 accounts receivable insurance workers’ compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance policies thirdparty administrator used process claims require workers’ compensation vehicle liability physical damage claims reported within 24 hours result accrue workers’ compensation vehicle physical damage liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time settlements litigation recorded known probable estimable stock option plans issued stock options employees directors integral part compensation programs stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility stock expected term award riskfree rate stock’s expected volatility based upon historical experience expected term awards based upon historical experience riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past new accounting pronouncements information recently issued accounting pronouncements see note 2summary significant accounting policies consolidated financial statements fair value considerations financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity december 31 2012 313 million cash equivalents 05 million shortterm investments recorded fair value using level 1 inputs 185 million contingent consideration related acquisitions recorded fair value using level 3 inputs december 31 2012 derivative instruments year ended december 31 2012 compared year ended december 31 2011 highlights year ended december 31 2012 included following • revenues grew 191 billion 141 increase 168 billion 2011 • gross margins decreased 448 2012 454 2011 • operating income 4688 million 105 increase 4243 million 2011 • incurred 249 million pretax expenses related acquisitions litigation settlement restructuring plant closure costs loss sale business changes fair value contingent consideration • incurred 49 million integration expenses related acquisitions • cash flow operations 3874 million analyzing company’s performance necessary understand various regulated waste services share common infrastructure customer base market regulated waste services offering various pricing options meet customers’ preferences customers move different billing paradigms example regulated waste customers may contract us “medical waste disposal” services billed based weight waste collected processed disposed particular period subsequent period customer could move standard service “sterisafe osha compliance program” packages regulated waste services training education services contracted subscription fee another example customer purchases “medical waste disposal” “sharps disposal management” services provides customer regulated waste services different pricing billing arrangement track movement customers various types regulated waste services offer although identify directional trends services regulated waste services similar nature inherent inaccuracies disaggregation believe aggregating revenues communicates appropriate metric analyze revenue growth identifying changes related internal growth acquired growth changes due currency exchange fluctuations following summarizes company’s operations revenues increased 2371 million 141 191 billion 2012 168 billion 2011 domestic revenues increased 1587 million 131 137 billion 121 billion 2011 internal growth domestic small account customers increased 714 million approximately 10 driven increase sterisafe revenues domestic large account customers increased 339 million approximately 9 increased total number accounts expanded reusable sharps services pharmaceutical waste disposal programs internal revenues recall returns management services decreased 67 million compared 2011 due fewer large recalls internal revenues exclude revenue growth attributed businesses acquired 2012 2011 total domestic regulated waste recall returns management services acquisitions less one year old contributed approximately 601 million increase domestic revenues 2012 international revenues 2012 5423 million compared 4639 million 2011 increase 784 million 169 internal growth currency rate fluctuations acquisitions impact comparison 2012 2011 internal growth 201 million effect exchange rates unfavorably impacted international 2012 revenues 218 million foreign currencies declined us dollar international revenue growth 801 million attributed business acquisitions net business divestitures 2012 2011 cost revenues 2012 cost revenues increased 1405 million 154 106 billion compared 9153 million 2011 domestic cost revenues increased 869 million 142 6996 million 2012 compared 6127 million 2011 result costs related proportional increase revenues acquisitions internal growth international cost revenues increased 537 million 177 3563 million 2012 compared 3026 million 2011 result costs related proportional increase revenues acquisitions internal growth gross margin percentage decreased 448 2012 454 2011 due inclusion lower margin acquired revenues domestic gross margin percentage decreased 490 2012 495 2011 international gross margin decreased 343 compared 348 2011 primarily due acquisitions lower margins consolidated general international gross margins lower domestic gross margins international operations fewer small account customers tend provide higher gross margins historically international operations revenues large account customers hospitals international revenues increase consolidated gross margins receive downward pressure due “business mix” shift may offset additional international small account market penetration integration savings domestic business expansion selling general administrative depreciation amortization expenses excluding effect litigation settlement acquisition integration expenses restructuring plant closure costs loss sale business items collectively “acquisitionrelated items” depreciation amortization expenses selling general administrative “sga” expenses increased 356 million 122 3271 million 2012 2915 million 2011 primarily investment spending supported increase revenues acquired sga expenses percentage revenues costs decreased 03 2012 compared 2011 depreciation expense percentage revenues 05 2012 2011 amortization expense percentage revenues increased 12 2012 10 2011 domestically sga expenses excluding acquisitionrelated items depreciation amortization expenses increased 200 million 92 2374 million 2012 2174 million 2011 percentage revenues sga lower 173 2012 compare 179 2011 percentage revenues amortization expense acquired intangible assets increased 01 2012 internationally sga expenses excluding acquisitionrelated items depreciation amortization expenses increased 156 million 211 2012 897 million 741 million 2011 percentage revenues sga 165 2012 compare 160 2011 percentage revenues amortization expense acquired intangible assets increased 03 2012 year ended december 31 2012 recognized 79 million acquisition expenses 49 million expense related integration new acquisitions 60 million litigation settlement costs 53 million restructuring plant closure costs 49 million loss related divestiture united kingdom 08 million unfavorable change fair value contingent consideration acquisitionrelated items resulted 298 million expense pretax basis 2012 year ended december 31 2011 recognized 167 million acquisition expenses 43 million expense related integration new acquisitions 51 million restructuring plant closure costs 12 million litigation settlement expense partially offset 72 million favorable change fair value contingent consideration acquisitionrelated items resulted 201 million net expense pretax basis 2011 income operations income operations increased 445 million 105 4688 million 2012 4243 million 2011 comparisons income operations 2012 2011 affected various charges considered part daytoday operations described sga section domestically income operations increased 488 million 139 4005 million 2012 3517 million 2011 internationally income operations decreased 43 million 59 683 million 2012 726 million 2011 interest expense interest income interest expense increased 517 million 2012 494 million 2011 due higher rate outstanding revolver borrowings interest income 04 million 2012 08 million 2011 income tax expense income tax expense increased 1473 million 2012 1350 million 2011 effective tax rates years 2012 2011 approximately 353 363 respectively primarily related lower international tax rates year ended december 31 2011 compared year ended december 31 2010 highlights year ended december 31 2011 included following • revenues grew 168 billion 164 increase 144 billion 2010 • gross margins decreased 454 2011 464 2010 • operating income 4243 million 145 increase 3707 million 2010 • incurred net 157 million expenses related restructuring plant closure acquisitions changes fair value contingent consideration litigation settlement • incurred 43 million integration expenses related acquisitions • cash flow operations 3061 million following summarizes company’s operations revenues increased 2367 million 164 168 billion 2011 144 billion 2010 domestic revenues increased 1285 million 119 121 billion 108 billion 2010 internal growth domestic small account customers increased approximately 488 million approximately 8 driven increase sterisafe revenues domestic large account customers increased approximately 194 million 5 increased total number accounts expanded sharps management pharmaceutical waste disposal programs internal revenues recall returns management services decreased 199 million compared 2010 large recalls resulted higher revenues internal revenues exclude acquisitions less one year old total domestic regulated waste recall returns management acquisitions less one year old contributed approximately 802 million increase domestic revenues 2011 international revenues 2011 4639 million compared 3558 million 2010 increase 1081 million 304 internal growth currency rate fluctuations acquisitions impact comparison 2011 2010 internal growth 189 million effect exchange rates positively impacted international 2011 revenues 112 million foreign currencies appreciated us dollar acquisitions divestitures less one year old contributed additional 780 million international revenues cost revenues 2011 cost revenues increased 1433 million 186 9153 million compared 7719 million 2010 domestic cost revenues increased 680 million 125 6127 million 2011 compared 5447 million 2010 result costs related proportional increase revenues acquisitions internal growth international cost revenues increased 754 million 332 3026 million 2011 compared 2272 million 2010 result costs related proportional increase revenues partially driven impact exchange rates gross margin percentage decreased 454 2011 464 2010 due inclusion lower margin acquired revenues domestic gross margin percentage slightly decreased 495 2011 497 2010 domestic gross profit unfavorably impacted 15 million 2010 restructuring costs regulated recall returns management services business international gross margin decreased 348 compared 361 2010 primarily due acquisitions lower margins consolidated general international gross margins lower domestic gross margins international operations less penetration small account market higher gross margin historically international operations revenues large hospitals international revenues increase consolidated gross margins receive downward pressure due “business mix” shift may offset additional international small account market penetration integration savings domestic business expansion selling general administrative depreciation amortization expenses 2011 sga expenses excluding acquisition costs items increased 381 million 137 3164 million 2783 million 2010 percentage revenues costs decreased 04 2011 compared 2010 depreciation expense percentage revenues 05 2011 2010 amortization expense percentage revenues increased 10 2011 07 2010 due larger quantity acquisitions related amortization domestically sga increased 195 million 91 2337 million 2011 2142 million 2010 increase primarily due sga expenses related acquired revenues higher amortization expense percentage revenues costs decreased 05 2011 compared 2010 internationally sga increased 186 million 290 2011 827 million 641 million 2010 increased sga due increased number international acquisitions investment clinical services program partially offset restructuring international management structure continued integration acquisitions higher amortization expense related recognized intangible assets acquisitions percentage revenue costs decreased 02 2011 compared 2010 year ended december 31 2011 recognized 167 million acquisition expenses 43 million related integration new acquisitions 51 million restructuring plant closure costs 12 million litigation settlement partially offset 72 million favorable change fair value contingent consideration various adjustments resulted 201 million net expense pretax basis year ended december 31 2010 recognized 95 million acquisition expenses 41 million expenses related integration new acquisitions 76 million restructuring cost 08 million plant closure expenses litigation settlement 09 million partially offset 30 million gain sale assets related medserve divestiture various adjustments resulted 199 million net expense pretax basis income operations income operations increased 536 million 145 4243 million 2011 3707 million 2010 comparisons income operations 2011 2010 affected various charges considered part daytoday operations described sga section domestically income operations increased 413 million 133 3517 million 2011 3104 million 2010 internationally income operations increased 123 million 204 726 million 2011 603 million 2010 interest expense interest income interest expense increased 494 million 2011 371 million 2010 due higher borrowings 2011 higher interest rates interest income 08 million 2011 03 million 2010 income tax expense income tax expense increased 1350 million 2011 1214 million 2010 2011 2010 recognized net 13 million 12 million respectively tax benefits related prior years unrecognized tax positions positively impacted diluted earnings per share 001 2011 2010 effective tax rates years 2011 2010 approximately 363 366 respectively liquidity capital resources 10 billion senior credit facility maturing september 2016 1000 million private placement notes maturing april 2015 1750 million private placement notes maturing october 2017 1250 million private placement notes maturing december 2019 2250 million private placement notes maturing october 2020 1250 million private placement notes maturing december 2022 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility private placement notes december 31 2012 compliance financial debt covenants december 31 2012 2259 million borrowings outstanding 10 billion senior unsecured credit facility includes foreign currency borrowings 944 million also 1576 million committed outstanding letters credit senior credit facility unused portion revolving credit facility december 31 2012 6165 million december 31 2012 interest rates borrowings revolving credit facility follows • shortterm borrowing less one month federal funds rate plus 05 prime rate euro currency rate plus 1 whichever higher spread 0025 plus 0225 facility fee • borrowing greater one month libor plus 1025 plus 0225 facility fee weighted average rate interest unsecured revolving credit facility 162 per annum includes 0225 facility fee december 31 2012 outstanding 1000 million sevenyear 564 unsecured senior notes issued nine institutional purchasers private placement completed april 2008 interest payable arrears semiannually april 15 october 15 beginning october 15 2009 principal payable maturity notes april 15 2015 december 31 2012 outstanding 1750 million sevenyear 389 unsecured senior notes 2250 million 10year 447 unsecured senior notes issued 39 institutional purchasers private placement completed october 2010 interest payable arrears april 15 october 15 beginning april 15 2011 principal payable maturity notes october 15 2017 case sevenyear notes october 15 2020 case 10year notes december 31 2012 outstanding 1250 million sevenyear 268 unsecured senior notes 1250 million 10year 326 unsecured senior notes issued 46 institutional purchasers private placement completed december 2012 interest payable arrears semiannually june 12 december 12 beginning june 12 2013 principal payable maturity notes december 12 2019 case sevenyear notes december 12 2022 case 10year notes december 31 2012 2359 million promissory notes issued connection acquisitions 2004 2012 1391 million foreign subsidiary bank debt outstanding 52 million capital lease obligations working capital december 31 2012 working capital increased 465 million 1102 million compared 637 million december 31 2011 current assets increased primarily due increase net accounts receivable 314 million 2012 acquired 267 million accounts receivable days sales outstanding “dso” 59 days december 31 2012 december 31 2011 current liabilities increased 41 million 2012 increase short term portion obligations acquisitions 114 million accounts payable increased 76 million 10 million attributed acquisitions fourth quarter 2012 remainder related primarily timing payments deferred revenues also increased 52 million due yearend collections ahead 2013 service accrued liabilities decreased 52 million primarily related reduction taxes payable 164 million addition short term debt decreased 158 million refinanced portion foreign bank debt long term net cash provided used net cash provided operating activities increased 813 million 266 3874 million 2012 3061 million 2011 increase driven strong collections higher revenues domestically internationally dso 59 days 2012 2011 cash provided operations ratio net income 144 129 2012 2011 respectively net cash used investing activities 2012 2942 million compared 5146 million used 2011 2500 million decrease cash spent acquire new businesses largely attributable acquisition april 2011 healthcare waste solutions inc 2344 million cash capital expenditures increased 119 million 2012 percentage revenues increased 34 2012 32 2011 net cash used financing activities 862 million 2012 compared 1483 million net cash provided financing activities 2011 used proceeds private placement notes 2500 million available cash paydown senior credit facility resulting year net decrease 3251 million share repurchases 480 million 2012 compared 1241 million 2011 decrease 760 million contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2012 1 longterm debt capital leases longterm liabilities items include future principal payment amount well amount calculated expected future interest payments longterm debt floating interest rates requires use management judgment estimate future rates interest 2 longterm liabilities include amounts related covenants nottocompete agreements exclude payments unrecognized tax benefits based contingent uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement applicable taxing authorities december 31 2012 1576 million standby letters credit issued anticipate operating cash flow together borrowings senior unsecured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future guarantees guaranteed loan jpmorganchase bank na behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business one year loan current balance 57 million jpmorganchase bank na matures may 2013 also extended loans shiraishi approximately 154 million reflected consolidated balance sheet part long term “other assets” support medical waste business collateral agreement place assets shiraishi related companies support amounts owed item 7aitem 7 management’s discussion analysis financial condition results operations following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction business providing regulated compliance solutions healthcare commercial businesses includes collection processing specialized waste disposal variety training consulting recallreturn communication compliance services operate united states argentina brazil canada chile ireland japan mexico portugal romania spain united kingdom regulated solutions provide include medical waste disposal sterisafe® medical waste compliance program clinical services program sharps management service featuring bio systems® reusable sharps containers pharmaceutical waste disposal hazardous waste disposal medical safety products compliance solutions training consulting inboundoutbound communications data reporting regulatory compliance services addition regulated compliance solutions offer regulated recall returns management solutions encompass number services variety businesses consist primarily managing recall withdrawal return expired recalled products pharmaceuticals operate integrated national regulated waste management networks domestically internationally worldwide networks include total 166 processing facilities 155 transfer sites 70 services facilities regulated waste processing technologies include autoclaving proprietary etd chemical treatment incineration serve approximately 566000 customers worldwide approximately 20000 largequantity generators approximately 546000 smallquantity generators critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2 summary significant accounting policies notes consolidated financial statements item 8 part ii following ones may involve higher degree judgment part greater complexity reporting revenue recognition revenues regulated waste management services sterisafe service recognized time waste collection sterisafe revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues regulated recall returns management services communication solutions recorded time services performed revenues product sales recognized time goods shipped customer charges related international value added tax “vat” similar pass taxes included revenue acquisition accounting acquisition accounting requires us recognize assets liabilities fair value process determining fair value requires time complete therefore make estimates time acquisition estimates primarily amortizable intangibles appropriate associated deferred tax liability estimates based historical experience allows us recognize amortization expense final valuation complete goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired amortized determined permits indefinite lives accordingly amortized see note 11 goodwill intangible assets notes consolidated financial statements item 8 part ii additional information balance sheet december 31 2013 contains goodwill 22 billion accordance applicable accounting standards evaluate least annual basis using fair value reporting units whether goodwill impaired determine significant impairment occurred would required incur noncash charges impaired portion goodwill could material adverse effect results operations period impairment charge occurs quarter ended june 30 2013 performed annual goodwill impairment evaluation three reporting units domestic regulated compliance services domestic regulated recall returns management services international regulated compliance services calculate fair value reporting units using income method validate results using market approach income market approaches indicated impairment goodwill three reporting units income approach income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows calculated using management assumptions organic growth capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based company calculated weighted average cost capital adjusted reporting units based risk size premium foreign country premium significant assumptions used income approach include realization future cash flows discount rate used present value cash flows results goodwill impairment test using income approach indicated fair value reporting units exceeded book value substantial amount excess 100 market approach market approach begins calculating market capitalization company using average stock price prior 30 days outstanding share count june 30 2013 look company’s earnings interest tax depreciation amortization “ebitda” adjusted stock compensation expense items gain loss sale divested assets prior twelve months calculated market capitalization divided modified ebitda arrive valuation multiple fair value reporting unit calculated taking product valuation multiple trailing twelve month modified ebitda reporting unit fair value compared reporting units’ book value determined excess book value believe starting fair value company whole reasonable measure fair value allocated reporting unit based reporting unit’s individual earnings sustained drop stock price would negative impact fair value calculations temporary drop earnings reporting unit would negative impact fair value calculations results goodwill impairment test using market approach indicated fair value reporting units exceeded book value substantial amount excess 100 book value permits tested impairment annually december 31 frequently circumstances indicate may impaired use either discounted income cost savings model current measurement fair value permits fair value based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates 2013 wrote 29 million permit intangibles four facilities due rationalizing operations current acquisition accounting fair value must assigned acquired assets based theoretical “market participant” regardless intended use assets accounting treatment lead recognition losses dispose close acquired assets identifiable intangible assets customer relationships covenants nottocompete tradenames license agreements currently amortized using straightline method estimated useful lives determined customer relationships 14year 40year lives based specific type relationship although contracted regulated waste services business highly competitive able maintain high customer retention excellent customer service valuation contractual customer relationships derived using discounted income approach valuation model assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may undiscounted estimated future cash flows 2013 wrote 04 million customer relationships due impairment see note 11 goodwill intangible assets notes consolidated financial statements item 8 part ii share repurchases purchase price par value share repurchases allocated retained earnings income taxes subject income taxes us numerous foreign jurisdictions compute provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax basis assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected realized settled significant judgments required order determine realizability deferred tax assets assessing need valuation allowance evaluate significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods undistributed earnings foreign subsidiaries considered permanently reinvested therefore deferred taxes recorded thereon provide uncertain tax positions maintain reserve tax benefits assumed meet threshold “more likely not” sustained management believes amount provided uncertain tax positions adequate accounts receivable accounts receivable consists amounts due us normal business activities carried estimated collectible amounts accounts receivable balance includes amounts related vat similar international passthrough taxes accounts receivable balances determined delinquent amount past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected single customer accounts approximately 2 accounts receivable insurance workers’ compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance policies thirdparty administrator used process claims require workers’ compensation vehicle liability physical damage claims reported within 24 hours result accrue workers’ compensation vehicle physical damage liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time settlements litigation recorded known probable estimable stock option plans issued stock options employees directors integral part compensation programs stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility stock expected term award riskfree rate stock’s expected volatility expected term awards based upon historical experience riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past new accounting pronouncements information recently issued accounting pronouncements see note 2 summary significant accounting policies notes consolidated financial statements item 8 part ii fair value considerations financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity december 31 2013 620 million cash equivalents 04 million shortterm investments recorded fair value using level 1 inputs 125 million contingent consideration related acquisitions recorded fair value using level 3 inputs december 31 2013 derivative instruments year ended december 31 2013 compared year ended december 31 2012 highlights year ended december 31 2013 included following • revenues grew 214 billion 120 increase 191 billion 2012 • gross margins increased 450 2013 448 2012 • operating income 5356 million 142 increase 4688 million 2012 • incurred 206 million pretax expenses related acquisitions integration expenses related acquisitions litigation settlement restructuring plant closure costs impairment intangible assets partially offset gain changes fair value contingent consideration • cash flow operations 4035 million analyzing company’s performance necessary understand various regulated services share common infrastructure customer base market regulated compliance services offering various pricing options meet customers’ preferences customers move different billing paradigms example customers may contract us “medical waste disposal” services billed based weight waste collected processed disposed particular period subsequent period customer could move standard service “sterisafe osha compliance program” packages regulated medical waste services training education services contracted subscription fee another example customer purchases “medical waste disposal” “sharps disposal management” services provides customer regulated services different pricing billing arrangement track movement customers various types regulated services offer although identify directional trends services regulated services similar nature inherent inaccuracies disaggregation believe aggregating revenues communicates appropriate metric analyze revenue growth identifying changes related organic growth acquired growth changes due currency exchange fluctuations following summarizes company’s operations revenues increased 2297 million 120 214 billion 2013 191 billion 2012 domestic revenues increased 1358 million 99 151 billion 137 billion 2012 organic revenue growth domestic small account customers increased 662 million approximately 8 driven increase sterisafe revenues regulated waste management retailers organic revenues domestic large account customers increased 283 million approximately 6 increased total number accounts expanded reusable sharps services pharmaceutical waste regulated waste services retailers organic revenues recall returns management services decreased 185 million compared 2012 due less large recalls organic revenues exclude revenue growth attributed businesses acquired within preceding twelve months revenues domestic acquisitions closed within preceding twelve months contributed approximately 598 million increase revenues 2013 international revenues 2013 6362 million compared 5423 million 2012 increase 939 million 173 organic growth currency rate fluctuations acquisitions impact comparison 2013 2012 organic growth international segment contributed 351 million revenues approximately 7 organic growth excludes effect foreign exchange acquisitions divestitures less one year old foreign exchange rates unfavorably impacted international revenues 2013 190 million foreign currencies declined us dollar revenue international acquisitions net business divestitures closed within preceding twelve months contributed approximately 778 million increase revenues 2013 cost revenues 2013 cost revenues increased 1223 million 116 118 billion compared 106 billion 2012 year ended december 31 2013 recognized 21 million litigation settlement costs year ended december 31 2012 recognized 01 million restructuring costs domestic cost revenues increased 610 million 87 7606 million 2013 compared 6996 million 2012 result costs related proportional increase revenues acquisitions organic growth international cost revenues increased 613 million 172 4176 million 2013 compared 3563 million 2012 result costs related proportional increase revenues acquisitions organic growth gross margin percentage increased 450 2013 448 2012 domestic gross margin percentage increased 495 2013 490 2012 international gross margin increased 344 2013 compared 343 2012 general international gross margins lower domestic gross margins international operations fewer small account customers tend provide higher gross margins historically international operations revenues large account customers hospitals international revenues increase consolidated gross margins receive downward pressure due “business mix” shift may offset additional international small account market penetration integration savings domestic business expansion selling general administrative depreciation amortization expenses excluding effect acquisition integration expenses items collectively “acquisitionrelated items” depreciation amortization expenses selling general administrative “sga” expenses increased 450 million 137 3721 million 2013 3271 million 2012 primarily investment spending supported increase revenues acquired sga expenses percentage revenues costs increased 174 2013 171 2012 primarily due increase compensation expense domestically sga expenses excluding acquisitionrelated items depreciation amortization expenses increased 272 million 115 2646 million 2013 2374 million 2012 percentage revenues sga 176 2013 compare 173 2012 percentage revenues amortization expense acquired intangible assets increased 01 2013 internationally sga expenses excluding acquisitionrelated items depreciation amortization expenses increased 178 million 198 2013 1075 million 897 million 2012 percentage revenues sga 169 2013 compare 165 2012 percentage revenues amortization expense acquired intangible assets increased 02 2013 year ended december 31 2013 recognized 103 million acquisition expenses 65 million expenses related integration acquisitions 25 million restructuring plant closure costs 14 million impairment intangible assets 01 million litigation settlement costs partially offset 23 million favorable change fair value contingent consideration acquisitionrelated items including 21 million litigation settlement costs described cost revenues section resulted 206 million expense pretax basis 2013 year ended december 31 2012 recognized 79 million acquisition expenses 49 million expense related integration acquisitions 61 million litigation settlement costs 52 million restructuring plant closure costs 49 million loss related divestiture united kingdom 08 million unfavorable change fair value contingent consideration acquisitionrelated items including 01 million restructuring costs described cost revenue section resulted 298 million expense pretax basis 2012 income operations income operations increased 668 million 142 5356 million 2013 4688 million 2012 comparison income operations 2013 2012 affected acquisitionrelated items described cost revenues sga sections domestically income operations increased 483 million 120 4488 million 2013 4005 million 2012 internationally income operations increased 185 million 271 868 million 2013 683 million 2012 expenses acquisitionrelated items decreased 92 million 2013 compared 2012 net interest expense net interest expense increased 549 million 2013 513 million 2012 due higher average borrowing costs us caused full year impact fixed rate private placement borrowings 2013 entered december 2012 see liquidity capital resources section increased borrowings higher interest costs latin america income tax expense income tax expense increased 1647 million 2013 1473 million 2012 effective tax rates years 2013 2012 345 353 respectively decrease current year tax rate primarily related reduction international statutory rates notably united kingdom decrease tax accrual unrecognized tax benefits due expiration statute limitations year ended december 31 2012 compared year ended december 31 2011 highlights year ended december 31 2012 included following • revenues grew 191 billion 141 increase 168 billion 2011 • gross margins decreased 448 2012 454 2011 • operating income 4688 million 105 increase 4243 million 2011 • incurred 249 million pretax expenses related acquisitions litigation settlement restructuring plant closure costs loss sale business changes fair value contingent consideration • incurred 49 million integration expenses related acquisitions • cash flow operations 3874 million following summarizes company’s operations revenues increased 2371 million 141 191 billion 2012 168 billion 2011 domestic revenues increased 1587 million 131 137 billion 121 billion 2011 internal growth domestic small account customers increased 714 million approximately 10 driven increase sterisafe revenues domestic large account customers increased 339 million approximately 9 increased total number accounts expanded reusable sharps services pharmaceutical waste disposal programs internal revenues recall returns management services decreased 67 million compared 2011 due fewer large recalls internal revenues exclude revenue growth attributed businesses acquired 2012 2011 total domestic regulated waste recall returns management services acquisitions less one year old contributed approximately 601 million increase domestic revenues 2012 international revenues 2012 5423 million compared 4639 million 2011 increase 784 million 169 internal growth currency rate fluctuations acquisitions impact comparison 2012 2011 internal growth 201 million effect exchange rates unfavorably impacted international 2012 revenues 218 million foreign currencies declined us dollar international revenue growth 801 million attributed business acquisitions net business divestitures 2012 2011 cost revenues 2012 cost revenues increased 1405 million 154 106 billion compared 9153 million 2011 domestic cost revenues increased 869 million 142 6996 million 2012 compared 6127 million 2011 result costs related proportional increase revenues acquisitions internal growth international cost revenues increased 537 million 177 3563 million 2012 compared 3026 million 2011 result costs related proportional increase revenues acquisitions internal growth gross margin percentage decreased 448 2012 454 2011 due inclusion lower margin acquired revenues domestic gross margin percentage decreased 490 2012 495 2011 international gross margin decreased 343 2012 compared 348 2011 primarily due acquisitions lower margins consolidated general international gross margins lower domestic gross margins international operations fewer small account customers tend provide higher gross margins historically international operations revenues large account customers hospitals international revenues increase consolidated gross margins receive downward pressure due “business mix” shift may offset additional international small account market penetration integration savings domestic business expansion selling general administrative depreciation amortization expenses excluding effect acquisitionrelated items depreciation amortization expenses sga expenses increased 356 million 122 3271 million 2012 2915 million 2011 primarily investment spending supported increase revenues acquired sga expenses percentage revenues costs decreased 03 2012 compared 2011 depreciation expense percentage revenues 05 2012 2011 amortization expense percentage revenues increased 12 2012 10 2011 domestically sga expenses excluding acquisitionrelated items depreciation amortization expenses increased 200 million 92 2374 million 2012 2174 million 2011 percentage revenues sga lower 173 2012 compared 179 2011 percentage revenues amortization expense acquired intangible assets increased 01 2012 internationally sga expenses excluding acquisitionrelated items depreciation amortization expenses increased 156 million 211 2012 897 million 741 million 2011 percentage revenues sga 165 2012 compared 160 2011 percentage revenues amortization expense acquired intangible assets increased 03 2012 year ended december 31 2012 recognized 79 million acquisition expenses 49 million expense related integration new acquisitions 60 million litigation settlement costs 53 million restructuring plant closure costs 49 million loss related divestiture united kingdom 08 million unfavorable change fair value contingent consideration acquisitionrelated items resulted 298 million expense pretax basis 2012 year ended december 31 2011 recognized 167 million acquisition expenses 43 million expense related integration new acquisitions 51 million restructuring plant closure costs 12 million litigation settlement expense partially offset 72 million favorable change fair value contingent consideration acquisitionrelated items resulted 201 million net expense pretax basis 2011 income operations income operations increased 445 million 105 4688 million 2012 4243 million 2011 comparisons income operations 2012 2011 affected various charges considered part daytoday operations described sga section domestically income operations increased 488 million 139 4005 million 2012 3517 million 2011 internationally income operations decreased 43 million 59 683 million 2012 726 million 2011 interest expense interest income interest expense increased 517 million 2012 494 million 2011 due higher rate outstanding revolver borrowings interest income 04 million 2012 08 million 2011 income tax expense income tax expense increased 1473 million 2012 1350 million 2011 effective tax rates years 2012 2011 approximately 353 363 respectively primarily related lower international tax rates liquidity capital resources 10 billion senior credit facility maturing september 2016 1000 million private placement notes maturing april 2015 1750 million private placement notes maturing october 2017 1250 million private placement notes maturing december 2019 2250 million private placement notes maturing october 2020 1250 million private placement notes maturing december 2022 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility private placement notes december 31 2013 compliance financial debt covenants december 31 2013 2724 million borrowings outstanding 10 billion senior unsecured credit facility includes foreign currency borrowings 1254 million also 1550 million committed outstanding letters credit senior credit facility unused portion revolving credit facility december 31 2013 5726 million december 31 2013 interest rates borrowings revolving credit facility follows • shortterm borrowing less two weeks federal funds rate plus 05 prime rate euro currency rate plus 1 whichever higher spread 0025 plus 0225 facility fee • borrowing greater two weeks libor plus 1025 plus 0225 facility fee weighted average rate interest unsecured revolving credit facility 160 per annum includes 0225 facility fee december 31 2013 december 31 2013 outstanding 1000 million sevenyear 564 unsecured senior notes issued nine institutional purchasers private placement completed april 2008 interest payable arrears semiannually april 15 october 15 beginning october 15 2009 principal payable maturity notes april 15 2015 december 31 2013 outstanding 1750 million sevenyear 389 unsecured senior notes 2250 million 10year 447 unsecured senior notes issued 39 institutional purchasers private placement completed october 2010 interest payable arrears april 15 october 15 beginning april 15 2011 principal payable maturity notes october 15 2017 case sevenyear notes october 15 2020 case 10year notes december 31 2013 outstanding 1250 million sevenyear 268 unsecured senior notes 1250 million 10year 326 unsecured senior notes issued 46 institutional purchasers private placement completed december 2012 interest payable arrears semiannually june 12 december 12 beginning june 12 2013 principal payable maturity notes december 12 2019 case sevenyear notes december 12 2022 case 10year notes december 31 2013 2522 million promissory notes issued connection acquisitions 2004 2013 1491 million foreign subsidiary bank debt outstanding 73 million capital lease obligations working capital december 31 2013 working capital increased 139 million 1241 million compared 1102 million december 31 2012 current assets increased 938 million net accounts receivable inclusive acquisitions increased 668 million days sales outstanding “dso” calculated 63 days december 31 2013 59 days december 31 2012 affected acquired receivables cash equivalents december 31 2013 included 227 million offset equivalent amount current liabilities used recalled product reimbursement current liabilities increased 799 million 2013 primarily related increase short term portion acquisition notes foreign bank debt product reimbursement liability net cash provided used net cash provided operating activities increased 160 million 41 4035 million 2013 3874 million 2012 cash provided operations ratio net income 2013 2012 129 144 respectively net cash used investing activities 2013 2350 million compared 2889 million used 2012 used 624 million less funds acquire new businesses 2013 capital expenditures increased 79 million 2013 percentage revenues stayed 34 2013 2012 net cash used financing activities 1360 million 2013 compared 915 million 2012 share repurchases 1637 million 2013 compared 480 million 2012 increase 1157 million 2013 447 million net borrowings senior credit facility compared 543 million net repayments includes 2500 million proceeds private placements 2012 contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2013 1 longterm debt capital leases longterm liabilities items include future principal payment amount well amount calculated expected future interest payments longterm debt floating interest rates requires use management judgment estimate future rates interest 2 longterm liabilities include amounts related covenants nottocompete agreements exclude payments unrecognized tax benefits based contingent uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement applicable taxing authorities december 31 2013 1550 million standby letters credit issued anticipate operating cash flow together borrowings senior unsecured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future guarantees loans shiraishisogyo co ltd “shiraishi” unrelated party japan expanding medical waste management business guaranteed shiriashi’s loan 47 million borrowed jpmorganchase bank na currently due may 31 2014 based information currently available concluded guarantee probable called therefore recorded contingent liability relating guarantee also extended noninterest bearing loans shiraishi approximately 155 million due april 18 2018 reflected consolidated balance sheet part long term assets december 31 2013 2012 collateral agreement place assets shiraishi related companies support amounts owed company item 7aitem 7 management’s discussion analysis financial condition results operations following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction business providing regulated compliance solutions healthcare commercial businesses includes collection processing specialized waste disposal variety training consulting recallreturn communication compliance services incorporated 1989 presently serve diverse customer base 600000 customers throughout united states argentina brazil canada chile ireland japan mexico portugal romania republic korea spain united kingdom regulated solutions provide include medical waste disposal sterisafe® medical waste compliance program clinical services program sharps management service featuring bio systems® reusable sharps containers pharmaceutical waste disposal hazardous waste disposal compliance solutions include training consulting inboundoutbound communications data reporting regulatory compliance services addition regulated compliance solutions offer regulated recall returns management solutions encompass number services variety businesses consist primarily managing recall withdrawal return expired recalled products pharmaceuticals critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2 summary significant accounting policies notes consolidated financial statements item 8 part ii following policies may involve higher degree judgment part greater complexity reporting revenue recognition revenues regulated waste management services sterisafe service recognized time waste collection sterisafe revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues hazardous waste services recorded time waste received processing facility revenues regulated recall returns management services communication solutions recorded time services performed revenues product sales recognized time goods shipped customer charges related international value added tax vat similar pass taxes included revenue acquisition accounting acquisition accounting requires us recognize assets liabilities fair value process determining fair value acquired assets liabilities requires time complete accordingly make estimates time acquisition estimates primarily amortizable intangibles appropriate associated deferred tax liability estimates based historical experience allow us recognize amortization expense final valuation complete goodwill identifiable intangible assets goodwill associated excess purchase price fair value net assets acquired amortized determined permits indefinite lives accordingly amortized see note 11 goodwill intangible assets notes consolidated financial statements item 8 part ii additional information balance sheet december 31 2014 contains goodwill 24 billion accordance applicable accounting standards evaluate least annual basis using fair value reporting units whether goodwill impaired determine significant impairment occurred would required incur noncash charges impaired portion goodwill could material adverse effect results operations period impairment charge occurs quarter ended june 30 2014 performed annual goodwill impairment evaluation three reporting units domestic regulated compliance services domestic regulated recall returns management services international regulated compliance services calculate fair value reporting units using income method validate results using market approach income market approaches indicated impairment goodwill three reporting units income approach income approach uses expected future cash flows reporting unit discounts cash flows present values expected future cash flows calculated using management assumptions internal growth capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based company calculated weighted average cost capital adjusted reporting units based size risk premium country risk premium significant assumptions used income approach include realization future cash flows discount rate used derive present value cash flows results goodwill impairment test using income approach indicated fair value domestic regulated compliance services recall returns management services reporting units exceeded 100 book value substantial amount international regulated compliance services reporting units fair value exceeded book value approximately 85 5767 million assigned goodwill june 30 2014 market approach market approach begins calculating market capitalization company using average stock price prior twelve months outstanding share count june 30 2014 look companys earnings interest tax depreciation amortization ebitda adjusted stock compensation expense items changes fair value contingent consideration restructuring plant closure costs litigation settlement prior twelve months calculated market capitalization divided adjusted ebitda arrive valuation multiple fair value reporting unit calculated taking product valuation multiple trailing twelve months adjusted ebitda reporting unit fair value compared reporting units book value determined excess book value believe starting fair value company whole reasonable measure fair value allocated reporting unit based reporting units individual earnings sustained drop stock price would negative impact fair value calculations temporary drop earnings reporting unit would negative impact fair value calculations results goodwill impairment test using market approach corroborated results impairment test income approach indicated fair value reporting units exceeded respective book values substantial amounts excess 100 respective book values permits tested impairment annually december 31 frequently circumstances indicate may impaired use qualitative assessment provided fasb accounting standards codification topic 350 intangibles goodwill determine likely asset impaired indication impairment test recoverability asset using either discounted income cost savings model calculate fair value calculated fair value based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates 2014 wrote 99 million operating permits due rationalizing certain domestic international operations expenses reflected part selling general administrative expenses generally accepted accounting principles fair value must assigned acquired assets based theoretical market participant regardless acquirers intended use assetsthis accounting treatment lead recognition losses company disposes acquired assets finitelived intangible assets customer relationships covenants nottocompete tradenames license agreements currently amortized using straightline method estimated useful lives determined customer relationships useful lives 10 40 years based upon type customer although contracted regulated waste services business highly competitive able maintain high customer retention quality customer service valuation contractual customer relationships derived using discounted income approach valuation model assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may undiscounted estimated future cash flows 2014 indicators impairment intangibles see note 11 goodwill intangible assets notes consolidated financial statements item 8 part ii share repurchases purchase price par value share repurchases allocated retained earnings income taxes subject income taxes us numerous foreign jurisdictions compute provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax basis assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected realized settled significant judgments required order determine realizability deferred tax assets assessing need valuation allowance evaluate significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods undistributed earnings foreign subsidiaries considered permanently reinvested therefore deferred taxes recorded thereon provide uncertain tax positions maintain reserve tax benefits assumed meet threshold likely sustained management believes amount provided uncertain tax positions adequate accounts receivable accounts receivable consists amounts due us normal business activities carried estimated collectible amounts accounts receivable balance includes amounts related vat similar international passthrough taxes accounts receivable balances determined delinquent amount past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected single customer accounts approximately 1 accounts receivable environmental remediation liabilities record liability environmental remediation liability becomes probable costs damages reasonably estimated accrue environmental remediation costs undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable accruals based currently available information estimated timing remedial actions existing technology enacted laws regulations insurance workers’ compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance policies thirdparty administrator used process claims require workers’ compensation vehicle liability physical damage claims reported within 24 hours result accrue workers’ compensation vehicle physical damage liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time liabilities litigation accrued known probable estimable stock option plans issued stock options employees directors integral part compensation programs stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility stock expected term award riskfree rate stock’s expected volatility expected term awards based upon historical experience riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past new accounting pronouncements information recently issued accounting pronouncements see note 2 summary significant accounting policies notes consolidated financial statements item 8 part ii fair value considerations financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity december 31 2014 222 million cash equivalents 04 million shortterm investments recorded fair value using level 1 inputs 199 million contingent consideration related acquisitions recorded fair value using level 3 inputs december 31 2014 derivative instruments fair value liability 19 million material financial statements year ended december 31 2014 compared year ended december 31 2013 highlights year ended december 31 2014 included following • revenues grew 256 billion 193 increase 214 billion 2013 • gross margins decreased 428 2014 450 2013 • operating income 5563 million 39 increase 5356 million 2013 • incurred 590 million pretax expenses related acquisitions integration expenses related acquisitions plant conversion restructuring expenses litigation expenses partially offset gain changes fair value contingent consideration • cash flow operations 4485 million analyzing company’s performance necessary understand various regulated services share common infrastructure customer base market regulated compliance services offering various pricing options meet customers’ preferences customers move different billing paradigms example customers may contract us medical waste disposal services billed based weight waste collected processed disposed particular period subsequent period customer could move standard service sterisafe osha compliance program packages regulated medical waste services training education services contracted subscription fee another example customer purchases medical waste disposal sharps disposal management services provides customer regulated services different pricing billing arrangement track movement customers various types regulated services offer although identify directional trends services regulated services similar nature inherent inaccuracies disaggregation believe aggregating revenues communicates appropriate metric analyze revenue growth identifying changes related organic growth acquired growth changes due currency exchange fluctuations following summarizes company’s operations revenues increased 4128 million 193 256 billion 214 billion 2013 domestic revenues increased 2902 million 193 180 billion 151 billion 2013 organic revenue growth domestic small account customers increased 719 million approximately 8 driven higher revenues sterisafe revenues regulated waste services retailers organic revenue domestic large account customers increased 353 million approximately 7 increased total number accounts expanded reusable sharps services pharmaceutical waste disposal programs well strong performance specialty waste services organic revenues recall returns management services decreased 173 million 2014 although recall returns management services overall increase number recall events fewer large scale events organic revenues exclude revenue growth attributed businesses acquired within preceding twelve months revenues domestic acquisitions closed within preceding twelve months contributed 2003 million increase revenues 2014 international revenues increased 1226 million 193 2014 7588 million 6362 million 2013 organic growth currency rate fluctuations acquisitions impact comparison 2014 2013 organic growth international segment contributed 549 million revenues approximately 9 organic growth excludes effect foreign exchange acquisitions less one year old effect foreign exchange rates unfavorably impacted international revenues 2014 336 million foreign currencies declined us dollar revenues international acquisitions closed within preceding twelve months contributed 1013 million increase revenues 2014 cost revenues 2014 cost revenues increased 2830 million 240 14612 million 11782 million 2013 years ended december 31 2014 2013 recognized 29 million 04 million plant conversion expenses respectively year ended december 31 2013 recognized 21 million litigation settlement costs domestic cost revenues increased 1867 million 245 9473 million 2014 compared 7606 million 2013 result costs related proportional increase revenues acquisitions internal growth international cost revenues increased 963 million 231 5139 million 2014 4176 million 2013 result costs related proportional increase revenues acquisitions internal growth consolidated gross profit percent revenues decreased 428 2014 450 2013 identified plant conversion expenses negatively impacted consolidated gross profit general international gross profits lower domestic gross profits international operations fewer small account customers tend provide higher gross profits historically international operations revenues large account customers hospitals international revenues increase consolidated gross profits receive downward pressure due business mix shift may offset additional international small account market penetration integration savings domestic business expansion domestic gross profit percent revenues decreased 473 2014 495 2013 primarily due inclusion psc environmental acquisition results 2014 less contribution high margin recall events international gross profit percent revenues decreased 323 2014 344 2013 due service mix shift new revenues selling general administrative expenses excluding effect acquisition integration expenses related acquisitions items collectively adjusting items depreciation amortization expenses sga expenses increased 618 million 166 2014 4339 million 3721 million 2013 primarily investment spending supported increase revenues acquired sga expenses percent revenues costs decreased 170 2014 174 2013 domestically 2014 sga expenses excluding adjusting items depreciation amortization expenses increased 359 million 136 3005 million 2014 2646 million 2013 percent revenues sga decreased 167 2014 compared 176 2013 percent revenues amortization expense acquired intangible assets change remained 10 internationally sga expenses excluding adjusting items increased 259 million 241 1334 million 2014 1075 million 2013 percent revenues sga 176 2014 compared 169 2013 percent revenues amortization expense acquired intangible assets change remained 19 year ended december 31 2014 recognized 133 million acquisition expenses 260 million expenses related integration acquisitions 116 million plant conversion restructuring expenses related write permit intangibles support plant rationalization new plant start costs 66 million litigation expenses partially offset 15 million gain related change fair value contingent consideration year ended december 31 2013 recognized 103 million acquisition expenses 65 million expenses related integration acquisitions 25 million restructuring plant closure expenses 14 million impairment intangible assets 01 million litigation expenses partially offset 23 million gain related change fair value contingent consideration income operations income operations increased 207 million 39 5563 million 2014 5356 million 2013 comparison income operations 2014 2013 affected adjusting items described sga section domestically income operations increased 340 million 76 4828 million 2014 4488 million 2013 internationally income operations decreased 133 million 153 735 million 2014 868 million 2013 decrease international income operations primarily related increase integration expenses related acquisitions restructuring expenses related write permit intangibles support plant rationalization net interest expense net interest expense increased 660 million 2014 549 million 2013 due increased borrowings higher interest costs latin america well increased borrowings senior credit facility fund acquisition psc environmental april 22 2014 income tax expense income tax expense decreased 1594 million 2014 1647 million 2013 reported tax rates years 2014 2013 327 345 respectively decrease current year tax rate primarily related benefit recognition tax deductible goodwill associated legal entity mergers brazil well reduction international statutory tax rates year ended december 31 2013 compared year ended december 31 2012 highlights year ended december 31 2013 included following • revenues grew 214 billion 120 increase 191 billion 2012 • gross margins increased 450 2013 448 2012 • operating income 5356 million 142 increase 4688 million 2012 • incurred 206 million pretax expenses related acquisitions integration expenses related acquisitions litigation settlement restructuring plant closure costs impairment intangible assets partially offset gain changes fair value contingent consideration • cash flow operations 4035 million following summarizes company’s operations revenues increased 2297 million 120 214 billion 2013 191 billion 2012 domestic revenues increased 1358 million 99 151 billion 137 billion 2012 organic revenue growth domestic small account customers increased 662 million approximately 8 driven increase sterisafe revenues regulated waste management retailers organic revenues domestic large account customers increased 283 million approximately 6 increased total number accounts expanded reusable sharps services pharmaceutical waste regulated waste services retailers organic revenues recall returns management services decreased 185 million compared 2012 due less large recalls organic revenues exclude revenue growth attributed businesses acquired within preceding twelve months revenues domestic acquisitions closed within preceding twelve months contributed approximately 598 million increase revenues 2013 international revenues 2013 6362 million compared 5423 million 2012 increase 939 million 173 organic growth currency rate fluctuations acquisitions impact comparison 2013 2012 organic growth international segment contributed 351 million revenues approximately 7 organic growth excludes effect foreign exchange acquisitions divestitures less one year old foreign exchange rates unfavorably impacted international revenues 2013 190 million foreign currencies declined us dollar revenue international acquisitions net business divestitures closed within preceding twelve months contributed approximately 778 million increase revenues 2013 cost revenues 2013 cost revenues increased 1223 million 116 118 billion compared 106 billion 2012 year ended december 31 2013 recognized 21 million litigation settlement costs year ended december 31 2012 recognized 01 million restructuring costs domestic cost revenues increased 610 million 87 7606 million 2013 compared 6996 million 2012 result costs related proportional increase revenues acquisitions organic growth international cost revenues increased 613 million 172 4176 million 2013 compared 3563 million 2012 result costs related proportional increase revenues acquisitions organic growth gross margin percentage increased 450 2013 448 2012 domestic gross margin percentage increased 495 2013 490 2012 international gross margin increased 344 2013 compared 343 2012 general international gross margins lower domestic gross margins international operations fewer small account customers tend provide higher gross margins historically international operations revenues large account customers hospitals international revenues increase consolidated gross margins receive downward pressure due business mix shift may offset additional international small account market penetration integration savings domestic business expansion selling general administrative depreciation amortization expenses excluding effect adjusting items depreciation amortization expenses sga expenses increased 450 million 137 3721 million 2013 3271 million 2012 primarily investment spending supported increase revenues acquired sga expenses percentage revenues costs increased 174 2013 171 2012 primarily due increase compensation expense domestically sga expenses excluding adjusting items depreciation amortization expenses increased 272 million 115 2646 million 2013 2374 million 2012 percentage revenues sga 176 2013 compare 173 2012 percentage revenues amortization expense acquired intangible assets increased 01 2013 internationally sga expenses excluding adjusting items depreciation amortization expenses increased 178 million 198 2013 1075 million 897 million 2012 percentage revenues sga 169 2013 compare 165 2012 percentage revenues amortization expense acquired intangible assets increased 02 2013 year ended december 31 2013 recognized 103 million acquisition expenses 65 million expenses related integration acquisitions 25 million restructuring plant closure costs 14 million impairment intangible assets 01 million litigation settlement costs partially offset 23 million favorable change fair value contingent consideration adjusting items including 21 million litigation settlement costs described cost revenues section resulted 206 million expense pretax basis 2013 year ended december 31 2012 recognized 79 million acquisition expenses 49 million expense related integration acquisitions 61 million litigation settlement costs 52 million restructuring plant closure costs 49 million loss related divestiture united kingdom 08 million unfavorable change fair value contingent consideration adjusting items including 01 million restructuring costs described cost revenue section resulted 298 million expense pretax basis 2012 income operations income operations increased 668 million 142 5356 million 2013 4688 million 2012 comparison income operations 2013 2012 affected adjusting items described cost revenues sga sections domestically income operations increased 483 million 120 4488 million 2013 4005 million 2012 internationally income operations increased 185 million 271 868 million 2013 683 million 2012 expenses adjusting items decreased 92 million 2013 compared 2012 net interest expense net interest expense increased 549 million 2013 513 million 2012 due higher average borrowing costs us caused full year impact fixed rate private placement borrowings 2013 entered december 2012 increased borrowings higher interest costs latin america income tax expense income tax expense increased 1647 million 2013 1473 million 2012 effective tax rates years 2013 2012 345 353 respectively decrease tax rate 2013 primarily related reduction international statutory rates notably united kingdom decrease tax accrual unrecognized tax benefits due expiration statute limitations liquidity capital resources 12 billion senior credit facility maturing june 2019 1000 million private placement notes maturing april 2015 1750 million private placement notes maturing october 2017 1250 million private placement notes maturing december 2019 2250 million private placement notes maturing october 2020 1250 million private placement notes maturing december 2022 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility private placement notes december 31 2014 compliance financial debt covenants june 3 2014 certain subsidiaries entered second amended restated credit agreement new credit agreement bank america na administrative agent swingline lender letter credit issuer lenders party new credit agreement jpmorgan chase bank na hsbc bank usa national association syndication agents union bank na santander bank national association codocumentation agents new credit agreement amended restated prior amended restated credit agreement dated september 21 2011 new credit agreement increases unsecured revolving credit facility 10 billion 12 billion extends maturity date borrowings september 21 2016 june 3 2019 paid 21 million financing fees amortized interest expense life new credit agreement december 31 2014 4600 million borrowings outstanding 12 billion senior unsecured credit facility includes foreign currency borrowings 1445 million also 1629 million committed outstanding letters credit facility unused portion revolving credit facility december 31 2014 5771 million december 31 2014 interest rates borrowings revolving credit facility follows • fee 0125 revolving credit facility • borrowings less one month higher following ◦ federal funds rate plus 05 ◦ euro currency rate plus 10 prime rate • borrowings greater one month libor plus 10 weighted average rate interest unsecured revolving credit facility 150 per annum includes 0125 facility fee december 31 2014 december 31 2014 outstanding 1000 million sevenyear 564 unsecured senior notes issued nine institutional purchasers private placement completed april 2008 interest payable arrears semiannually april 15 october 15 beginning october 15 2009 principal payable maturity notes april 15 2015 notes classified longterm debt due intent pay obligation borrowing 12 billion senior credit facility december 31 2014 outstanding 1750 million sevenyear 389 unsecured senior notes 2250 million 10year 447 unsecured senior notes issued 39 institutional purchasers private placement completed october 2010 interest payable arrears semiannually april 15 october 15 beginning april 15 2011 principal payable maturity notes october 15 2017 case sevenyear notes october 15 2020 case 10year notes december 31 2014 outstanding 1250 million sevenyear 268 unsecured senior notes 1250 million 10year 326 unsecured senior notes issued 46 institutional purchasers private placement completed december 2012 interest payable arrears semiannually june 12 december 12 beginning june 12 2013 principal payable maturity notes december 12 2019 case sevenyear notes december 12 2022 case 10year notes december 31 2014 2796 million promissory notes issued connection acquisitions 2007 2014 1605 million foreign subsidiary bank debt outstanding 92 million capital lease obligations working capital december 31 2014 working capital decreased 54 million 1187 million compared 1241 million december 31 2013 current assets increased 400 million net accounts receivable inclusive acquisitions increased 765 million days sales outstanding dso calculated 63 days december 31 2014 december 31 2013 affected acquired receivables 680 million 2014 cash equivalents decreased 449 million 2014 december 31 2013 excess cash 227 million offset equivalent amount current liabilities used recalled product reimbursements 2014 current liabilities increased 453 million 2014 255 million related entities showing negative cash due book bank differences reclass current liabilities net cash provided used net cash provided operating activities increased 432 million 107 4485 million 2014 4053 million 2013 increase primarily related stronger collections period higher revenues 2014 net cash provided operating activities negatively impacted 227 million used recalled product reimbursement cash provided operations ratio net income 2014 2013 137 129 respectively net cash used investing activities 2014 4628 million compared 2350 million 2013 used 2124 million funds acquire new businesses 2014 notably psc environmental acquisition april 2014 capital expenditures increased 134 million 2014 percent revenues 34 2014 2013 net cash used financing activities 300 million 2014 compared 1360 million 2013 2014 1970 net borrowings senior credit facility used fund current year acquisitions share repurchases 1941 million 2014 compared 1637 million 2013 increase 304 million contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2014 1 longterm debt capital leases longterm liabilities items include future principal payment amount well amount calculated expected future interest payments longterm debt floating interest rates requires use management judgment estimate future rates interest 2 longterm liabilities include amounts related covenants nottocompete agreements exclude payments unrecognized tax benefits based contingent uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement applicable taxing authorities december 31 2014 1629 million standby letters credit issued anticipate operating cash flow together borrowings senior unsecured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future item 7aitem 7 management’s discussion analysis financial condition results operations following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction businesstobusiness services provider focus regulated compliance solutions healthcare retail commercial businesses includes collection processing regulated specialized waste disposal collection personal confidential information secure destruction plus variety training consulting recallreturn communication compliance services incorporated 1989 presently serve diverse customer base 1000000 customers throughout united states argentina austria australia belgium brazil canada chile france germany ireland japan luxembourg mexico netherlands portugal romania republic korea singapore south africa spain united kingdom solutions regulated specialty waste streams include medical waste disposal pharmaceutical waste disposal hazardous waste management sustainability solutions expired unused inventory secure information destruction documents emedia compliance solutions include training consulting sterisafe® clinical services programs inboundoutbound communications data reporting regulatory compliance services regulated recall returns management solutions consist communication logistics data management services support recall withdrawal return expired recalled products critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2 summary significant accounting policies notes consolidated financial statements item 8 part ii following policies may involve higher degree judgment part greater complexity reporting revenue recognition revenues regulated medical waste management services compliances services secure information destruction services recognized time waste collection compliance service revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues hazardous waste services recorded time waste received processing facility revenues regulated recall returns management services communication solutions recorded time services performed revenues product sales recognized time goods shipped ordering customer charges related sales taxes international value added tax vat similar pass taxes included revenue acquisition accounting acquisition accounting requires us recognize assets liabilities fair value process determining fair value requires time complete therefore make estimates time acquisition estimates primarily amortizable intangibles appropriate associated deferred tax liability estimates based historical experience allow us recognize amortization expense final valuation complete goodwill identifiable intangible assets goodwill associated excess purchase price fair value net assets acquired amortized subject annual impairment test accordance applicable accounting standards evaluate least annual basis using fair value reporting units whether goodwill impaired determine significant impairment occurred would required incur noncash charges impaired portion goodwill could material adverse effect results operations period impairment charge occurs quarter ended june 30 2015 performed annual goodwill impairment evaluation three reporting units domestic regulated compliance services domestic regulated recall returns management services international regulated compliance services calculate fair value reporting units using income method validate results using market approach income market approaches indicated impairment goodwill three reporting units see note 11 goodwill intangible assets notes consolidated financial statements item 8 part ii information goodwill annual impairment test income approach income approach uses expected future cash flows reporting unit discounts cash flows present values expected future cash flows calculated using management assumptions internal growth capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based company calculated weighted average cost capital adjusted reporting units based size risk premium country risk premium significant assumptions used income approach include realization future cash flows discount rate used derive present value cash flows results goodwill impairment test using income approach indicated fair value domestic regulated compliance services recall returns management services reporting units exceeded 100 book value substantial amount international regulated compliance services reporting units fair value exceeded book value approximately 88 market approach market approach begins calculating market capitalization company using average stock price prior twelve months outstanding share count june 30 2015 look companys earnings interest tax depreciation amortization ebitda adjusted stock compensation expense items changes fair value contingent consideration restructuring plant conversion expense litigation settlements prior twelve months calculated market capitalization divided adjusted ebitda arrive valuation multiple fair value reporting unit calculated taking product valuation multiple trailing twelve months adjusted ebitda reporting unit fair value compared reporting units book value determined excess book value believe starting fair value company whole reasonable measure fair value allocated reporting unit based reporting units individual earnings sustained drop stock price would negative impact fair value calculations temporary drop earnings reporting unit would negative impact fair value calculations results goodwill impairment test using market approach corroborated results impairment test income approach indicated fair value reporting units exceeded respective book values substantial amounts determined permits indefinite lives due ability renew permits minimal additional cost therefore amortized also tradename determined indefinite life indefinite lived intangible assets tested impairment annually december 31 frequently circumstances indicate may impaired use qualitative assessment provided fasb accounting standards codification topic 350 intangibles goodwill determine likely asset impaired indication impairment test recoverability asset using either discounted income cost savings model calculate fair value calculated fair value based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates see note 11 goodwill intangible assets notes consolidated financial statements item 8 part ii information indefinite lived intangible assets 2015 impaired 42 million intangibles due rationalizing certain domestic international operations expenses reflected part selling general administrative expenses consolidated statements income generally accepted accounting principles fair value must assigned acquired assets based theoretical market participant regardless acquirers intended use assets accounting treatment lead recognition losses company disposes acquired assets finitelived intangible assets amortized useful lives using straightline method determined customer relationships useful lives 10 40 years based upon type customer covenants nottocompete intangibles useful lives 5 14 years tradename intangibles useful lives 15 40 years assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows see note 11 goodwill intangible assets notes consolidated financial statements item 8 part ii information intangible assets goodwill valuation intangibles valuation intangible assets goodwill derived using discounted income cost savings approach financial information revenues costs assets liabilities assumptions related intangible asset input standard valuation model determine stream income attributable intangible income stream discounted present arrive valuation perform annual impairment tests indefinite lived intangible assets customer relationship valuation model using multiperiod excess earnings method assumes straightline revenue loss calculation determining revenue loss rate starts baseline revenue point tracks revenue customer assuming revenue growth point zero revenues calculation baseline revenue zero revenue determines useful life customer relationships determining accurate consumption benefits acquired customer relationships cannot reliably determined services provide acquired customers changes baseline revenues extended period time due factors volume increase price increase complementary service offerings therefore amortize finitelived intangible assets using straightline method consistent valuation model income taxes subject income taxes us numerous foreign jurisdictions compute provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax basis assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected realized settled significant judgments required order determine realizability deferred tax assets assessing need valuation allowance evaluate significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods undistributed earnings foreign subsidiaries considered permanently reinvested therefore deferred taxes recorded thereon provide uncertain tax positions maintain reserve tax benefits assumed meet threshold likely sustained management believes amount provided uncertain tax positions adequate accounts receivable accounts receivable consist amounts due us normal business activities carried estimated collectible amounts accounts receivable balance includes amounts related vat similar international passthrough taxes require collateral part standard trade credit policy accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectability accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts approximately 15 accounts receivable stockbased compensation issue stock options restricted stock units rsu employees directors integral part compensation programs stock options cost measured grant date using blackscholes model recognized expense vesting period determining fair value stock options grant date requires estimating expected volatility stock expected term award riskfree rate stock’s expected volatility expected term awards based upon historical experience riskfree interest rate assumption based upon us treasury yield rates comparable period fair value rsu based closing price companys common stock date grant amortized expense service period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time liabilities litigation accrued known probable estimable share repurchases purchase price par value share repurchases allocated retained earnings year ended december 31 2015 compared year ended december 31 2014 highlights year ended december 31 2015 included following •revenues grew 299 billion 168 increase 256 billion 2014 •gross margins decreased 424 2015 428 2014 •operating income decreased 124 4876 million 5563 million 2014 •we incurred 1744 million pretax expenses related acquisitions integration expenses related acquisitions restructuring plant conversion expenses litigation expenses impairment intangible assets favorable change fair value contingent consideration •cash flow operations 3903 million •the acquisition shredit international ulc shredit largest acquisition stericycle’s history completed october 1 2015 aggregate purchase price 23 billion cash •borrowed 130 billion term loan credit facility october 1 2015 fund portion purchase price paid shredit •net proceeds 7469 million registered public offering series mandatory convertible preferred stock completed september 15 2015 fund portion purchase price paid shredit •dividends 101 million paid december 15 2015 holders series preferred stock analyzing company’s performance necessary understand various regulated services share common infrastructure customer base market regulated compliance services offering various pricing options meet customers’ preferences customers move different billing paradigms example customers may contract us medical waste disposal services billed based weight waste collected processed disposed particular period subsequent period customer could move standard service sterisafe osha compliance program packages regulated medical waste services training education services contracted subscription fee another example customer purchases medical waste disposal sharps disposal management services provides customer regulated services different pricing billing arrangement track movement customers various types regulated services offer although identify directional trends services regulated services similar nature inherent inaccuracies disaggregation believe aggregating revenues communicates appropriate metric analyze revenue growth identifying changes related organic growth acquired growth changes due currency exchange fluctuations following summarizes company’s operations revenues increased 4303 million 168 299 billion 256 billion 2014 domestic revenues increased 3766 million 211 217 billion 179 billion 2014 organic revenue growth domestic small account customers increased 694 million approximately 68 driven increase sterisafe® revenues regulated waste services retailers organic revenue domestic large account customers increased 225 million approximately 36 increased total number accounts expanded reusable sharps services pharmaceutical waste disposal programs organic revenues small account customers large account customers negatively impacted lower fuel surcharges well lower hazardous waste volume industrial customers organic revenues recall returns management services increased 70 million 2015 organic revenues exclude revenue growth attributed businesses acquired within preceding twelve months revenues domestic acquisitions closed within preceding twelve months contributed 2777 million increase revenues 2015 international revenues increased 537 million 70 8209 million 7672 million 2014 organic growth currency rate fluctuations acquisitions impact comparison 2015 2014 organic growth international segment contributed 631 million revenues approximately 84 organic growth excludes effect foreign exchange acquisitions less one year old effect foreign exchange rates unfavorably impacted international revenues 2015 1102 million foreign currencies declined us dollar revenues international acquisitions closed within preceding twelve months contributed 1008 million increase revenues 2015 cost revenues 2015 cost revenues increased 2585 million 177 172 billion 146 billion 2014 percent revenues costs revenues increased 04 resulted consolidated gross profit 424 2015 compared 428 2014 incurred 15 million 29 million plant conversion expenses years ended december 31 2015 2014 respectively general international gross profits lower domestic gross profits international operations fewer small account customers tend provide higher gross profits historically international operations revenues large account customers hospitals international revenues increase consolidated gross profits receive downward pressure due business mix shift may offset additional international small account market penetration integration savings domestic business expansion domestic cost revenues increased 2208 million 235 116 billion 9402 million 2014 domestic gross profit percent revenues decreased 464 2015 474 2014 primarily due higher operating costs related current stringent compliance requirements medical waste incinerators title v additionally less anticipated revenues industrial customers higher fixed cost structure unfavorably impacted gross margins international cost revenues increased 377 million 72 5587 million 5210 million 2014 international gross profit percent revenues decreased 319 2015 321 2014 due foreign exchange impact profitability mix experienced unfavorable foreign exchange impact primarily areas higher profitability similarly experienced higher compensation costs areas high inflation selling general administrative expenses exclusive adjusting items depreciation amortization sga expenses increased 1061 million 244 5399 million 4339 million 2014 support increase revenues inclusion 2015 acquisitions mainly shredit percent revenues costs increased 181 2015 compared 170 2014 domestically sga expenses increased 750 million 251 3742 million 2992 million 2014 primarily related increased healthcare benefit costs higher professional fees increased investments growth inclusion shredit acquisition 2015 percent revenues sga increased 173 2015 compared 167 2014 percent revenues amortization expense acquired intangible assets increased 13 2015 compared 10 2014 internationally sga expenses increased 310 million 230 1657 million 1347 million 2014 percent revenues sga increased 202 2015 compared 176 2014 primarily related compensation expenses support new business growth opportunities inclusion shredit acquisition 2015 percent revenues amortization expense acquired intangible assets increased 20 2015 compared 19 2014 income operations income operations decreased 687 million 124 4876 million 5563 million 2014 comparison income operations 2015 2014 affected adjusting items described first quarter 2015 management began executing realignment operations reduce labor redundancies facility costs part realignment company recorded charges related severance fixed asset impairments impairment intangible assets recognition lease expense properties longer used contractual obligation year ended december 31 2015 recognized 597 million litigation expenses mostly due 285 million settlement qui tam action 282 million settlement junk fax lawsuit described note 19 legal proceedings notes consolidated financial statements item 8 part ii 391 million acquisition expenses relates recent acquisition shredit 517 million expenses related integration acquisitions relates recent acquisition shredit 191 million restructuring expenses see note 17 restructuring charges notes consolidated financial statements item 8 part ii 36 million plant conversion expenses 18 million impairment charges intangible assets 06 million favorable change fair value contingent consideration year ended december 31 2014 recognized 133 million acquisition expenses 260 million expenses related integration acquisitions 146 million plant conversion restructuring expenses related impairment permit intangibles support plant rationalization new plant start costs 66 million litigation expenses partially offset 15 million gain related change fair value contingent consideration domestically income operations decreased 410 million 85 4418 million 4828 million 2014 internationally income operations decreased 277 million 377 458 million 735 million 2014 net interest expense net interest expense increased 773 million 2015 660 million 2014 due increased borrowings fund acquisition shredit fourth quarter 2015 well higher interest costs latin america income tax expense income tax expense decreased 1429 million 2015 1594 million 2014 reported tax rates years 2015 2014 348 327 respectively increase current year tax rate compared prior year primarily related increase state tax rate partially offset benefit recognition tax deductible goodwill associated entity mergers spain brazil chile prior year ended december 31 2014 compared year ended december 31 2013 highlights year ended december 31 2014 included following •revenues grew 256 billion 193 increase 214 billion 2013 •gross margins decreased 428 2014 450 2013 •operating income 5563 million 39 increase 5356 million 2013 •we incurred 590 million pretax expenses related acquisitions integration expenses related acquisitions plant conversion restructuring expenses litigation expenses partially offset gain changes fair value contingent consideration •cash flow operations 4485 million following summarizes company’s operations revenues increased 4128 million 193 256 billion 214 billion 2013 domestic revenues increased 2902 million 193 180 billion 151 billion 2013 organic revenue growth domestic small account customers increased 719 million approximately 8 driven higher revenues sterisafe® revenues regulated waste services retailers organic revenue domestic large account customers increased 353 million approximately 7 increased total number accounts expanded reusable sharps services pharmaceutical waste disposal programs well strong performance specialty waste services organic revenues recall returns management services decreased 173 million 2014 although recall returns management services overall increase number recall events fewer large scale events organic revenues exclude revenue growth attributed businesses acquired within preceding twelve months revenues domestic acquisitions closed within preceding twelve months contributed 2003 million increase revenues 2014 international revenues increased 1226 million 193 2014 7588 million 6362 million 2013 organic growth currency rate fluctuations acquisitions impact comparison 2014 2013 organic growth international segment contributed 549 million revenues approximately 9 organic growth excludes effect foreign exchange acquisitions less one year old effect foreign exchange rates unfavorably impacted international revenues 2014 336 million foreign currencies declined us dollar revenues international acquisitions closed within preceding twelve months contributed 1013 million increase revenues 2014 cost revenues 2014 cost revenues increased 2830 million 240 14612 million 11782 million 2013 years ended december 31 2014 2013 recognized 29 million 04 million plant conversion expenses respectively year ended december 31 2013 recognized 21 million litigation settlement costs domestic cost revenues increased 1867 million 245 9473 million 2014 compared 7606 million 2013 result costs related proportional increase revenues acquisitions internal growth international cost revenues increased 963 million 231 5139 million 2014 4176 million 2013 result costs related proportional increase revenues acquisitions internal growth consolidated gross profit percent revenues decreased 428 2014 450 2013 identified plant conversion expenses negatively impacted consolidated gross profit general international gross profits lower domestic gross profits international operations fewer small account customers tend provide higher gross profits historically international operations revenues large account customers hospitals international revenues increase consolidated gross profits receive downward pressure due business mix shift may offset additional international small account market penetration integration savings domestic business expansion domestic gross profit percent revenues decreased 473 2014 495 2013 primarily due inclusion psc environmental acquisition results 2014 less contribution high margin recall events international gross profit percent revenues decreased 323 2014 344 2013 due service mix shift new revenues sga expenses increased 618 million 166 2014 4339 million 3721 million 2013 primarily investment spending supported increase revenues acquired sga expenses percent revenues costs decreased 170 2014 174 2013 domestically 2014 sga increased 359 million 136 3005 million 2646 million 2013 percent revenues sga decreased 167 2014 compared 176 2013 percent revenues amortization expense acquired intangible assets change remained 10 internationally 2014 sga increased 259 million 241 1334 million 1075 million 2013 percent revenues sga 176 2014 compared 169 2013 percent revenues amortization expense acquired intangible assets change remained 19 income operations income operations increased 207 million 39 5563 million 2014 5356 million 2013 comparison income operations 2014 2013 affected adjusting items described year ended december 31 2014 recognized 133 million acquisition expenses 260 million expenses related integration acquisitions 146 million plant conversion restructuring expenses related impairment permit intangibles support plant rationalization new plant start costs 66 million litigation expenses partially offset 15 million gain related change fair value contingent consideration year ended december 31 2013 recognized 103 million acquisition expenses 65 million expenses related integration acquisitions 25 million restructuring plant closure expenses 14 million impairment intangible assets 01 million litigation expenses partially offset 23 million gain related change fair value contingent consideration domestically income operations increased 340 million 76 4828 million 2014 4488 million 2013 internationally income operations decreased 133 million 153 735 million 2014 868 million 2013 decrease international income operations primarily related increase integration expenses related acquisitions restructuring expenses related impairment permit intangibles support plant rationalization net interest expense net interest expense increased 660 million 2014 549 million 2013 due increased borrowings higher interest costs latin america well increased borrowings senior credit facility fund acquisition psc environmental april 22 2014 income tax expense income tax expense decreased 1594 million 2014 1647 million 2013 reported tax rates years 2014 2013 327 345 respectively decrease current year tax rate primarily related benefit recognition tax deductible goodwill associated legal entity mergers brazil well reduction international statutory tax rates liquidity capital resources following senior credit facility term loan private placement notes require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility term loan private placement notes december 31 2015 compliance financial debt covenants senior credit facility term loan private placement notes rank pari passu unsecured debt obligations april 30 2015 entered note purchase agreement several institutional purchasers pursuant issued sold purchasers 2000 million new sevenyear 272 unsecured senior notes series 1000 million new eightyear 279 unsecured senior notes series b closing issuance sale notes occurred july 31 2015 series notes bear interest fixed rate 272 per annum series b notes bear interest fixed rate 279 per annum interest payable arrears semiannually january 1 july 1 beginning january 1 2016 principal series notes payable maturity notes july 1 2022 principal series b notes payable maturity notes july 1 2023 notes unsecured obligations company entered term loan credit agreement dated august 21 2015 term loan credit agreement bank america na administrative agent maturing august 21 2020 term loan credit agreement provides term loan credit facility term loan credit facility company may obtain loans aggregate amount 15 billion borrowings term loan credit facility may bear interest base rate eurodollar rate respectively plus applicable rate base rate day fluctuating rate per annum equal highest federal funds rate plus 12 100 ii rate interest effect day publicly announced time bank america prime rate iii eurodollar rate plus 100 applicable rate depends consolidated leverage ratio company subsidiaries set forth recent compliance certificate received administrative agent used proceeds term loan fund portion purchase price paid shredit acquisition see note 3 acquisitions notes consolidated financial statements information october 1 2015 issued sold purchasers 1500 million new sixyear 289 unsecured senior notes 1500 million new eightyear 318 unsecured senior notes collectively notes bear interest unpaid principal thereof october 1 2015 respective stated rates interest payable arrears semiannually first 1st day april october year maturity commencing april 1 2016 notes unsecured obligations used proceeds unsecured senior notes fund portion purchase price paid shredit acquisition see note 3 acquisitions notes consolidated financial statements information december 31 2015 3538 million borrowings outstanding 120 billion senior unsecured credit facility includes foreign currency borrowings 1018 million also 1604 million committed outstanding letters credit facility unused portion revolving credit facility december 31 2015 6858 million december 31 2015 interest rates borrowings revolving credit facility follows • fee 01 revolving credit facility • borrowings less one month higher following ◦ federal funds rate plus 05 ◦ euro currency rate plus 09 prime rate • borrowings greater one month libor plus 09 weighted average rate interest unsecured revolving credit facility 154 per annum includes 01 facility fee december 31 2015 december 31 2015 125 billion outstanding 150 billion term loan credit facility weighted average rate interest unsecured term loan facility 171 per annum december 31 2015 outstanding 1750 million sevenyear 389 unsecured senior notes 2250 million 10year 447 unsecured senior notes issued 39 institutional purchasers private placement completed october 2010 interest payable arrears semiannually april 15 october 15 beginning april 15 2011 principal payable maturity notes october 15 2017 case sevenyear notes october 15 2020 case 10year notes december 31 2015 outstanding 1250 million sevenyear 268 unsecured senior notes 1250 million 10year 326 unsecured senior notes issued 46 institutional purchasers private placement completed december 2012 interest payable arrears semiannually june 12 december 12 beginning june 12 2013 principal payable maturity notes december 12 2019 case sevenyear notes december 12 2022 case 10year notes december 31 2015 outstanding 2000 million sevenyear 272 unsecured senior notes 1000 million eightyear 279 unsecured senior notes issued several institutional purchasers private placement completed july 2015 interest payable arrears semiannually january 1 july 1 beginning january 1 2016 principal payable maturity notes july 1 2022 case sevenyear notes july 1 2023 case eightyear notes december 31 2015 outstanding 1500 million sixyear 289 unsecured senior notes 1500 million eightyear 318 unsecured senior notes issued several institutional purchasers private placement completed october 2015 interest payable arrears semiannually april 1 october 1 beginning april 1 2016 principal payable maturity notes october 1 2021 case sixyear notes october 1 2023 case eightyear notes december 31 2015 2397 million promissory notes issued connection acquisitions 2008 2015 1055 million foreign subsidiary bank debt outstanding 150 million capital lease obligations working capital december 31 2015 working capital increased 835 million 1745 million compared 910 million december 31 2014 current assets increased 2099 million 1626 million acquired shredit see note 3 acquisitions notes consolidated financial statements information net accounts receivable excluding acquisitions increased 132 million days sales outstanding dso calculated 64 days december 31 2015 63 days december 31 2014 current liabilities increased 1264 million 2015 722 million acquired shredit december 31 2015 current portion new term loan facility 50 million net cash provided used net cash provided operating activities decreased 582 million 130 3903 million 2015 4485 million 2014 cash provided operations ratio net income 2015 2014 146 137 respectively net cash used investing activities 2015 253 billion compared 4628 million 2014 used 205 billion funds acquire new businesses 2015 notably shredit october 2015 capital expenditures increased 283 million 2015 percent revenues 38 34 2015 2014 respectively net cash provided financing activities 218 billion 2015 compared 300 million net cash used 2014 2015 500 million net proceeds private placement notes 125 billion net proceeds new term loan used fund current year acquisitions september 2015 completed registered public offering series mandatory convertible preferred stock total gross proceeds 7700 million 7469 million net 231 million underwriting discounts commissions expenses see note 7 preferred stock notes consolidated financial statements item 8 part ii used net proceeds offering fund portion purchase price paid acquisition shredit share repurchases 1306 million 2015 compared 1941 million 2014 decrease 635 million contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2015 1 longterm debt capital leases longterm liabilities items include future principal payment amount well aggregate amount calculated expected future interest payments 366 million longterm debt 12 million capital leases longterm debt floating interest rates requires use management judgment estimate future rates interest payments unrecognized tax benefits excluded contractual obligations based contingent uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement applicable taxing authorities december 31 2015 1604 million standby letters credit issued anticipate operating cash flow together borrowings senior unsecured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future item 7aitem 7 management’s discussion analysis financial condition results operations following discussion stericycle’s financial condition results operations read conjunction consolidated financial statements related notes part ii item 8 financial statements supplementary data report overview stericycle multinational businesstobusiness services company core purpose protect people brands promote health safeguard environment stericycle works customers ensure regulatory compliance minimize environmental impact manage business personal risk improve safety facilitate communication services include medical waste disposal sharps disposal management product recalls retrievals osha hipaa compliance programs pharmaceutical returns disposal sustainability services retail hazardous waste management hospital waste stream management secure information destruction inboundoutbound communication solutions stericycle provides services united states 20 markets around world information company’s business segments services see part item 1 business following table identifies key strategies significant matters impacting business years ended december 31 2017 2016 2015 business transformation stericycle focused driving longterm growth profitability delivering enhanced shareholder value part business strategy third quarter 2017 initiated comprehensive multiyear business transformation objective improve longterm operational financial performance business transformation based strategic vision build bestinclass enterprise performance management “epm” operating model enable company operate efficiently provide enhanced experience customers better capitalize future growth opportunities establish greater controls oversight drive consistent results additionally key component business transformation implementation enterprise resource planning “erp” system 2017 10k annual report stericycle inc • 33 part ii leverage standard processes throughout organization accelerate decision making expedite acquisition integration remediate compliance control issues enable realtime analytics key initiatives business transformation include • portfolio rationalization executing comprehensive review company’s global service lines identify pursue divestiture nonstrategic assets • operational optimization standardizing route planning logistics modernizing field operations driving network efficiency across facilities • organizational excellence efficiency redesigning company’s organizational structure optimize resources align around global shared business services model • commercial excellence aligning sales service organizations around customer standardizing customer relationship management process expanding customer selfservice options • strategic sourcing reducing spend global procuretopay processes leveraging organizational scale part business transformation company expects record approximately 275 million 300 million expenses capital expenditures five years business transformation costs include following types activities • employee termination • asset impairment • consulting professional services including system integration project management erp advisory information technology related costs • internal resources including project related incentive compensation • related expenses year ended december 31 2017 recorded 313 million costs related business transformation included 164 million consulting professional services primarily related business case development execution governance 108 million employee termination 24 million noncash impairment longlived assets 10 million related expenses reflected part selling general administrative “sga” consolidated statements income 07 million employee termination reflected part cost revenues “cor” consolidated statements income fourth quarter 2017 capitalized 109 million licenses erp system classified within property plant equipment construction progress consolidated balance sheets intangible amortization years ended december 31 2017 2016 2015 company recorded 1184 million 1293 million 455 million respectively intangible amortization expense acquisitions acquisition integration proven acquisitions steady efficient way scale operations build critical customer density transportation treatment operations enter new markets geographies 2017 10k annual report stericycle inc • 34 part ii well provide opportunity introduce additional services acquired customers early history acquisitions key strategy rapidly building customer base route density united states able expand internationally acquisition operate 20 different markets outside us history stericycle completed 496 acquisitions 271 united states 225 internationally expect continue acquisition strategy remaining focused small highly accretive tuck acquisitions broaden various service capabilities creating value shareholders following table summarizes locations services acquisitions years ended december 31 2017 2016 2015 acquisition integration costs include following types activities • consulting professional services incurred connection identification valuation due diligence execution acquisition potential acquisition internal resources • consulting professional services incurred connection integrating newly acquired businesses may include integration sales collection processes systems rebranding company’s name closure activities employee termination related personnel redundancies contract lease exit costs integration related activities • accelerated depreciation 2017 10k annual report stericycle inc • 35 part ii • change fair value contingent consideration years ended december 31 2017 2016 2015 company recorded 407 million 609 million 799 million respectively acquisition integration expenses reflected part sga consolidated statements income acquisition integration expenses year ended december 31 2017 included 106 million acquisition expenses 305 million integration expenses 04 million favorable change fair value contingent consideration acquisition integration expenses year ended december 31 2016 included 96 million acquisition expenses 533 million integration expense primarily related fourth quarter 2015 shredit acquisition 20 million favorable change fair value contingent consideration acquisition integration expenses year ended december 31 2015 included 391 million acquisition expenses primarily related fourth quarter 2015 shredit acquisition 414 million integration expense 06 million favorable change fair value contingent consideration results operations acquired businesses included consolidated statements income date acquisitions pro forma results operations acquisitions presented pro forma effects individually aggregate material company’s results operations operational optimization years ended december 31 2017 2016 2015 company recorded 711 million 591 million 348 million respectively operational optimization expenses reflected part sga consolidated statements income plant throughput route density competitive strengths stericycle maintain strengths making adjustments network transportation treatment facilities optimize overall logistics processing capabilities within service line reducing operational costs part efforts seek reduce network redundancies consolidating facilities closing redundant facility restructuring local organization operation efficiency operational optimization costs include following types activities • consulting professional services • employee termination • closure activities • contract lease exit costs • environmental retirement obligations • impairments accelerated depreciation • related expenses 2015 2017 closedconsolidated number communications related services business sites mostly call centers reducing 80 31 better leveraging technology crosstraining agents able reduce redundant facilities resources improve overall customer service levels 2017 10k annual report stericycle inc • 36 part ii 2016 result company’s evaluation optimization portfolio services stericycle ceased operating patient transport business uk exited related contracts 2016 2017 first quarter 2017 management began executing realignment operations reduce labor redundancies facility costs latin american countries various operating locations primarily brazil consolidated increase efficiency reducing headcount part optimization efforts 2017 incurred operating permit longlived asset noncash impairment charges plant japan related facility rationalization year ended december 31 2017 recorded 711 million operational optimization expenses • 416 million us 16 million employee termination 32 million lease exit costs related closureconsolidation call centers domestic communications related services business 89 million noncash impairment charges related operating permits rationalization tradenames 92 million consulting professional services reduce operational redundancies 187 million improve efficiency optimizing overall logistics centralizing customer service sales functions secure information destructions locations • 157 million operational optimization costs latin america 32 million employee termination 42 million closure exit costs due rationalizing operations environmental matters 83 million noncash impairment charges longlived assets operating permits customer relationships • 88 million charges related facility rationalization japan including 87 million noncash impairment charges longlived assets operating permits • 05 million employee severance charges 45 million closure exit charges facility rationalization contract exit charges uk year ended december 31 2017 charges described included sga except 04 million included cor year ended december 31 2016 recorded 591 million operational optimization expenses • 45 million related employee termination • 265 million charges exit certain patient transport services contracts plant conversion expense uk • 161 million mostly us improve efficiency optimizing overall logistics processing capabilities security information destruction locations centralizing customer service sales functions medical waste business including 68 million lease exit costs related closureconsolidation call centers communications related services business • 120 million consulting professional services identify opportunities reduce operational redundancies year ended december 31 2016 charges described included sga except 90 million cor 2017 10k annual report stericycle inc • 37 part ii year ended december 31 2015 recorded 348 million operational optimization expenses • 86 million related employee termination • 81 million noncash impairment charges longlived assets intangible assets • 102 million us improve efficiency including 36 million lease exit costs related closureconsolidation call centers communications related services business • 79 million costs incurred due plant conversion facility rationalization uk year ended december 31 2015 charges described included sga except 15 million included cor divestitures years ended december 31 2017 2016 company recorded 95 million 271 million respectively divestiture expenses reflected part sga consolidated statements income company record divestiture related expense year ended december 31 2015 company evaluates portfolio services ongoing basis countrybycountry service linebyservice line approach assess longterm potential identify potential business candidates divestiture decision criterion divestiture based • outlook longterm market conditions • potential impact complimentary services customer relationships • ability leverage infrastructure customer base growth • potential margin improvement • divestiture value today versus future divestiture value • return invested capital • implications erp divestiture costs include • consulting professional services • impairments • loss gain disposal • related expenses result portfolio optimization effort stericycle divested niche manufacturing industrial hazardous waste business uk 2016 2017 furthermore late 2017 stericycle divested secure information destruction business south africa year ended december 31 2017 company recorded 95 million divestiture related expenses included 68 million noncash asset impairment charges related changes fair value assets held sale uk 57 million loss sale certain assets liabilities 2017 10k annual report stericycle inc • 38 part ii uk partially offset gain 30 million related sale secure information destruction business south africa year ended december 31 2016 company recorded 271 million divestiture related expense included 255 million charge certain uk operations classified assets held sale primarily noncash impairment charges customer relationships operating permits goodwill longlived assets 16 million loss sale certain assets uk anticipated implementation global enterprise resource planning system stericycle continue strategic portfolio review intent identifying additional nonstrategic service lines markets divestiture prior implementation erp technology platform litigation settlements regulatory compliance operate highly regulated industries must address regulatory inquiries respond investigations time also involved variety civil litigation time financial results may also include considerations nonrecurring matters including settlements environmental remediation legal related consulting professional fees reflected part sga consolidated statements income notable 2017 company executed definitive written settlement agreement “settlement” small quantity medical waste customer class action lawsuit initiated 2013 terms settlement establish common fund 2950 million paid compensation members settlement class attorneys’ fees class counsel incentive awards named class representatives costs notice administration existing contracts customers remain force also establish part settlement guidelines future price increases provide customers additional transparency regarding increases settlement also addresses additional matters including availability alternative dispute resolution members settlement class settlement admitted fault wrongdoing whatsoever entered settlement order avoid cost uncertainty litigation june 2017 securities exchange commission “sec” issued subpoena company requesting documents information relating company’s compliance foreign corrupt practices act “fcpa” foreign domestic anticorruption laws respect certain company’s operations latin america addition department justice “doj” notified company investigating matter parallel sec company cooperating agencies company also conducting internal investigation matters including outside latin america oversight audit committee board directors assistance outside counsel investigation found evidence improper conduct accrued potential associated contingent liabilities cannot reasonably estimate possible loss range possible losses may incur factual legal issues presented matter sufficiently unique judgment unable make estimate year ended december 31 2017 company recorded 3277 million legal settlement regulatory compliance expenses 2950 million settlement 327 million regulatory compliance consulting professional services primarily related certain nonrecurring litigation matters 2017 10k annual report stericycle inc • 39 part ii year ended december 31 2016 company recorded 72 million regulatory compliance consulting professional services primarily related certain nonrecurring litigation matters year ended december 31 2015 company recorded 597 million legal settlement regulatory compliance expenses 285 million related qui tam action settlement 282 million related junk fax lawsuit settlement 30 million certain nonrecurring litigation matters impairment form 10q quarter ended september 30 2017 disclosed process completing valuation reporting units assistance external valuation specialist time evaluating impact prolonged declining market trends latin america continued softness company’s manufacturing industrial regional hazardous waste business experienced cost pressures latin america due strength local competition resulting increasing inability pass inflationary price increases addition cost savings initiatives anticipated 2017 taken longer expected implement extending 2018 fourth quarter 2017 finalized long rang plan “lrp” reflect challenging conditions latin america partially offset incorporating impact business transformation prospective results result company recorded 650 million noncash goodwill impairment charge related company’s latin america reporting unit reflected part sga consolidated statements income impairment charge recognized amount carrying value latin america reporting unit exceeded fair value result factors described lrp overall decline forecasted financial information included income approach valuation model addition concluded appropriate riskadjust discount rate used compared prior year impairments recorded 2017 already referenced year ended december 31 2016 company recorded 14 million noncash permit impairment charge japan reflected part sga consolidated statements income impairments recorded 2016 already referenced impairments recorded year ended december 31 2015 already referenced year ended december 31 2017 recorded 248 million consulting professional services related implementation new revenue recognition lease accounting standards well internal control remediation activities reflected part sga consolidated statements income year ended december 31 2016 recorded 88 million consulting professional services related internal control remediation activities implementation new revenue recognition standard reflected part sga consolidated statements income also recorded 25 million noncash impairment charge offset 31 million gain insurance settlement reflected part expense income net consolidated statements income 2017 10k annual report stericycle inc • 40 part ii special project costs year ended december 31 2015 capital allocation stericycle maintained structured capital allocation strategy balances investment business debt reduction returns shareholders capital allocation items include following types activities • stock issuance costs • dividends preferred stock • debt modification costs connection related nonrecurring matters • early extinguishment debt gains losses • related expenses dividends shares series preferred stock payable cumulative basis declared board directors authorized committee thereof annual rate 525 liquidation preference 1000 per share correspondingly 10000 per share respect depositary shares dividends may payable cash subject certain limitations shares common stock combination cash shares common stock march 15 june 15 september 15 december 15 year commencing december 15 2015 including september 15 2018 declared paid dividends 363 million 394 million 101 million preferred stock shareholders years ended december 31 2017 2016 2015 respectively tax reform result us tax cuts jobs act 2017 “tax act” signed law december 22 2017 company calculated best estimate impact tax act year end 2017 income tax benefitprovision result recorded 1298 million income tax benefit fourth quarter 2017 discussion see part ii item 8 financial statements supplementary data note 8 income taxes consolidated financial statements 2017 10k annual report stericycle inc • 41 part ii year ended december 31 2017 compared year ended december 31 2016 consolidated following summarizes company’s consolidated operations revenues analyzing company’s performance necessary understand various regulated services share common infrastructure customer base market regulated compliance services offering various pricing options meet customers’ preferences customers move different billing paradigms example customers may contract us medical waste disposal services billed based weight waste collected processed disposed particular period subsequent period customer could move standard service sterisafe osha compliance program packages regulated medical waste services training education services contracted subscription fee another example customer purchases medical waste disposal sharps disposal management services provides customer regulated services different pricing billing arrangement track movement customers various types regulated services offer although identify directional trends services regulated services similar nature inherent inaccuracies disaggregation believe aggregating revenues communicates appropriate metric analyze revenue growth identifying changes related organic growth acquired growth divestitures changes due currency exchange fluctuations consolidated revenues increased 184 million 05 2017 358 billion 356 billion 2016 overall organic revenues growth contributed 201 million 06 organic growth excludes effect foreign exchange acquisitions divestitures less full year revenues comparative period acquisitions contributed 322 million revenues divestitures reduced revenues 216 million net effect acquisitions divestitures resulted 03 increase revenues 2017 10k annual report stericycle inc • 42 part ii 2017 effect foreign exchange rates unfavorably impacted total revenues 2017 123 million 03 foreign currencies declined us dollar gross profit consolidated gross profit decreased 244 million 16 2017 146 billion 149 billion 2016 percentage revenues consolidated gross profit decreased 408 2017 compared 417 2016 decline gross profit primarily due lower revenues manufacturing industrial “mi” customers higher fixed cost structure approximately 180 million noncash fixed assets depreciation increases writeoffs domestically pricing pressure small quantity regulated waste compliance customers negatively impacted gross profit percentage revenues addition international gross profit lower domestic gross profit international operations fewer small account customers tend generate higher gross profit historically international operations generate revenues large account customers hospitals international revenues increase consolidated gross profit percentages experience downward pressure due business mix shift may offset additional international small account market penetration integration savings domestic business expansion sga consolidated sga expenses increased 4170 million 396 2017 147 billion 105 billion 2016 increase primarily attributable 2950 million charge settlement small quantity customer class action lawsuit 650 million noncash goodwill impairment charge latin america 327 million regulatory compliance consulting professional expenses primarily related certain nonrecurring litigation matters 306 million business transformation related expenses 248 million consulting professional services related implementation new revenue recognition lease accounting standards internal control remediation work percentage revenues excluding 2950 million settlement charge 650 million noncash goodwill impairment charge sga increased 310 2017 compared 296 2016 loss income operations consolidated loss income operations decreased 4414 million 1018 2017 76 million loss 4338 million income 2016 comparison income operations 2017 2016 primarily driven items described gross profit sga interest expense net interest expense decreased 2017 937 million 978 million 2016 due reduction average outstanding debt balance partially offset increase interest rates us income tax benefit expense income tax benefit 1509 million 2017 compared income tax expense 1202 million 2016 effective tax rates years 2017 2016 1399 366 respectively change 2017 rate compared prior year primarily due impact tax act signed law december 22 2017 company recognized income tax benefit 1298 million result revaluing us net deferred tax liabilities 35 newly enacted us corporate income tax rate 21 partially offset onetime transition tax unremitted foreign earnings profits elect pay eightyear period expected foreign withholding taxes 2017 10k annual report stericycle inc • 43 part ii information segment domestic canada rcs revenues domestic canada rcs revenues increased 431 million 17 2017 255 billion 251 billion 2016 organic revenue growth contributed 190 million 08 acquisitions contributed 209 million 08 revenues secure information destruction revenues strong due higher sales activity recurring onetime purge services combined higher recycling revenue strengthening canadian dollar favorable impact 2017 revenues 32 million 01 services related manufacturing industrial “mi” experienced decline 197 million last year reduced overall organic growth 09 decline due fewer oncall services related softness us industrial market addition experienced pricing pressure small quantity regulated waste compliance customers resulting hospital consolidation physician practices increased competitive activities market gross profit domestic canada rcs gross profit decreased 296 million 26 2017 109 billion 112 billion 2016 percentage revenues gross profit decreased 428 2017 compared 447 2016 primarily due lower revenues mi customers higher fixed cost structure approximately 180 million noncash fixed assets depreciation increases writeoffs pricing pressure small quantity regulated waste compliance customers negatively impacted gross profit percentage revenues also experienced higher costs related wages fuel sga domestic canada rcs sga expenses increased 2740 million 531 2017 7898 million 5158 million 2016 primarily due 2950 million charge settlement small quantity customer class action lawsuit percentage revenues excluding 2950 million settlement sga decreased 194 2017 compared 206 2016 income operations domestic canada rcs income operations decreased 3036 million 501 2017 3019 million 6055 million 2016 comparison income operations 2017 2016 primarily driven items described gross profit sga international rcs 2017 10k annual report stericycle inc • 44 part ii revenues international rcs revenue decreased 441 million 59 2017 7076 million 7517 million 2016 2017 organic revenue decline international rcs segment 134 million 18 primarily due exiting certain patient transport service contracts uk decline mi waste services latin american countries acquisitions international rcs segment contributed 64 million revenues divestitures related sale certain assets uk reduced revenues 216 million net effect acquisitions divestitures resulted 20 decrease revenues 2017 effect foreign exchange rates unfavorably impacted international revenues 2017 155 million 21 foreign currencies declined us dollar gross profit international rcs gross profit decreased 96 million 42 2017 2189 million 2285 million 2016 percentage revenues gross profit increased 309 2017 compared 304 2016 result divesting lower margin patient transport business uk sga international rcs sga expenses increased 392 million 153 2017 2960 million 2568 million 2016 primarily due 650 million noncash goodwill impairment charge latin america partially offset divestiture patient transport business uk 2017 percentage revenues excluding 650 million noncash goodwill impairment charge latin america sga decreased 326 2017 compared 342 2016 loss operations international rcs loss operations increased 488 million 2017 771 million 283 million 2016 comparison loss operations 2017 2016 primarily driven items described sga segment includes domestic communication related services operations consists services including inboundoutbound communication automated patient reminders online scheduling notifications product retrievals product returns quality audits well expenses related corporate support shared services functions stockbased compensation certain nonrecurring litigation matters implementation new revenue recognition lease accounting standards internal control remediation activities business transformation revenues related domestic communication related services increased 194 million 64 2017 3212 million 3018 million 2016 primarily due serving new brands across many industries several larger nonrecurring recall events 2017 gross profit gross profit increased 148 million 108 2017 1519 million 1371 million 2016 percentage revenues gross profit increased 473 2017 compared 454 2016 sga expenses increased 1038 million 370 2017 3843 million 2805 million 2016 primarily due 205 million business transformation related expenses 248 million 2017 10k annual report stericycle inc • 45 part ii consulting professional services related implementation new revenue recognition lease accounting standards internal control remediation activities 327 million regulatory compliance consulting professional expenses primarily related certain nonrecurring litigation matters loss operations loss operations increased 890 million 2017 2324 million 1434 million 2016 comparison loss operations 2017 2016 primarily driven items described sga year ended december 31 2016 compared year ended december 31 2015 consolidated following summarizes company’s operations revenues consolidated revenues increased 5764 million 193 2016 356 billion 299 billion 2015 overall organic revenue growth contributed 946 million 32 organic growth excludes effect foreign exchange acquisitions divestitures less full year revenues comparative period acquisitions contributed 5701 million revenues driven full year impact 2015 shredit acquisition divestitures reduced revenues 02 million net effect acquisitions divestitures resulted 191 increase revenues 2016 effect foreign exchange rates unfavorably impacted total revenues 2016 880 million 29 foreign currencies declined us dollar gross profit consolidated gross profit increased 2321 million 185 2016 149 billion 125 billion 2015 increase 2016 gross profit primarily reflects full year impact 2015 shredit acquisition percentage revenues however consolidated gross profit decreased 417 2016 compared 420 2015 primarily driven costs incurred exit certain patient 2017 10k annual report stericycle inc • 46 part ii transport services contracts uk 83 million lower international gross profit due customer mix fewer small customers tend provide higher gross profits sga consolidated sga expenses increased 2859 million 373 2016 105 billion 7672 million 2015 support increase revenues full year impact 2015 shredit acquisition depreciation amortization increased 947 million 2016 primarily related shredit acquisition fourth quarter 2016 increased allowance doubtful accounts due market economic conditions continued experience challenges internationally mi waste services primarily brazil mexico markets latin america aging profiles older receivables increasing collection efforts yielding desired improvement accordingly concluded higher degree risk ability collect aged accounts therefore determined would appropriate adjust allowance doubtful accounts increasing reserve percentages applied aged accounts also noted significant increase mi accounts receivable increased allowance related receivables percentage revenues sga increased 296 2016 compared 257 2015 income operations consolidated income operations decreased 538 million 110 2016 4338 million 4876 million 2015 comparison income operations 2016 2015 primarily driven items described gross profit sga net interest expense net interest expense increased 978 million 2016 773 million 2015 due full year impact increased borrowings fund acquisition shredit late 2015 income tax expense income tax expense decreased 1202 million 2016 1429 million 2015 effective tax rates years 2016 2015 366 348 respectively increase 2016 tax rate compared 2015 primarily related recognition tax benefits 2015 well higher proportion pretax income us higher statutory tax rate compared international operations information segment domestic canada rcs revenues domestic canada rcs revenues increased 5096 million 255 2016 251 billion 200 billion 2015 reflecting full year impact 2015 shredit acquisition acquisitions contributed 4761 million organic growth contributed 358 million 18 revenues canadian dollar weakened negatively affected 2016 revenue 23 million services related mi waste decreased 150 million due fewer call services project work softness us mi market negatively impacting overall organic growth 17 addition experienced pricing pressure small quantity regulated waste compliance customers resulting hospital consolidation physician practices increased competitive activities market 2017 10k annual report stericycle inc • 47 part ii gross profit domestic canada rcs gross profit increased 2125 million 234 2016 112 billion 9088 million 2015 reflecting full year impact 2015 shredit acquisition percentage revenues gross profit decreased 447 2016 compared 455 2015 primarily due less anticipated revenues mi customers higher fixed cost structure additionally higher disposal costs industrial waste project work 2016 unfavorably impacted domestic gross profit sga domestic canada rcs sga expenses increased 1117 million 276 2016 5158 million 4041 million 2015 primarily related full year impact 2015 shredit acquisition increased compensation marketing expenses increase allowance doubtful accounts driven challenging market economic conditions encountered macroeconomic slowdowns general economy well slowdown manufacturing industrial mi customer base percentage revenues sga increased 206 2016 compared 202 2015 income operations domestic canada rcs income operations increased 1008 million 200 2016 6055 million 5047 million 2015 reflecting full year impact 2015 shredit acquisition comparison income operations 2016 2015 primarily driven items described gross profit sga international rcs revenues international rcs revenues increased 349 million 49 2016 7517 million 7168 million 2015 organic growth currency rate fluctuations acquisitions impacted comparison 2016 2015 organic growth international rcs segment contributed 331 million revenues 46 exit certain patient transport services contracts uk negatively impacted organic growth 2016 effect foreign exchange rates unfavorably impacted international revenues 2016 857 million 120 foreign currencies declined us dollar revenues international acquisitions contributed 878 million increase revenues 2016 reflecting full year impact 2015 shredit acquisition gross profit international rcs gross profit decreased 18 million 08 2016 2285 million 2303 million 2015 percentage revenues gross profit decreased 304 2016 compared 321 2015 due negative impact higher costs related servicing certain government contracts charges incurred exit contracts uk patient transport services business partially offset fullyear inclusion 2015 shredit acquisition higher average gross profit addition international gross profit negatively impacted inability pass full cost increases customers areas high inflation sga international rcs sga expenses increased 757 million 418 2016 2568 million 1811 million 2015 percentage revenues sga increased 342 2016 compared 2017 10k annual report stericycle inc • 48 part ii 253 2015 following factors negatively impacted international sga 2016 full year inclusion 2015 shredit acquisition increased compensation expense support new business growth opportunities increase allowance doubtful accounts due market economic conditions continued experience challenges internationally mi waste services primarily brazil mexico markets latin america aging profiles older receivables increasing collection efforts yielding desired improvement accordingly concluded higher degree risk ability collect aged accounts therefore determined would appropriate adjust allowance doubtful accounts increasing reserve percentages applied aged accounts brazil mexico saw largest increases allowance doubtful accounts loss income operations international rcs income operations decreased 775 million 283 million loss 2016 492 million income 2015 comparison loss income operations 2016 2015 primarily driven items described gross profit sga segment includes domestic communication related services operations consists services including inboundoutbound communication automated patient reminders online scheduling notifications product retrievals product returns quality audits well expenses related corporate support shared services functions stockbased compensation certain nonrecurring litigation matters implementation new revenue recognition lease accounting standards internal control remediation activities revenues year ended december 31 2016 increased 319 million 118 3018 million 2699 million year ended december 31 2015 primarily due significant recall event fourth quarter 2016 domestic communication related services gross profit gross profit increased 214 million 185 2016 1371 million 1157 million 2015 percentage revenues gross profit increased 454 2016 compared 429 2015 sga expenses increased 985 million 541 2016 2805 million 1820 million 2015 primarily due increase corporate shared services 2016 loss operations loss operations increased 771 million 2016 1434 million 663 million 2015 primarily driven items described sga 2017 10k annual report stericycle inc • 49 part ii liquidity capital resources company believes sufficient liquidity support ongoing operations invest future growth create value stockholders operating cash flows company’s 12 billion senior credit facility company’s primary sources liquidity expected used among things payment interest principal company’s longterm debt obligations acquisitions capital expenditures necessary support growth productivity improvements including associated multiyear business transformation board director approved stockholder distribution company’s credit facilities contain number covenants including financial covenants company compliance december 31 2017 based upon company’s expected 2018 business transformation investment plans reasonably possible company could exceed debtebitda leverage threshold leverage covenant point 2018 risk mitigated appropriate spending controls andor seeking temporary relief leverage covenant lenders working capital december 31 2017 working capital decreased 3867 million 1560 million compared 2307 million december 31 2016 current assets increased 398 million 2017 8134 million 7736 million 2016 primarily driven 338 million increase prepaid expenses timing income tax payments 117 million increase classification assets held sale partially offset 108 million reduction net accounts receivable days sales outstanding dso 63 days 64 days december 31 2017 2016 respectively current liabilities increased 4265 million 2017 9694 million 5429 million 2016 primarily due accrual 2950 million related settlement 475 million reclassification term loan debt longterm current 242 million increase accrued professional services 229 million increase accrued taxes 229 million increase accounts payable 117 million increase accrued compensation selfinsurance net cash provided used net cash provided operating activities decreased 522 million 93 2017 5086 million 5608 million 2016 net cash used investing activities decreased 26 million 13 2017 1930 million 1956 million 2016 used 114 million less cash acquisitions 2017 2016 capital expenditures increased 68 million 2017 percentage revenues 40 38 2017 2016 respectively invested 109 million business transformation late 2017 software licenses related erp system net cash used financing activities decreased 556 million 148 2017 3212 million 3768 million 2016 repaid net 1756 million 1784 million senior credit facility private placement term loan facility 2017 2016 respectively preferred share repurchases 342 million 2017 compared 408 million common 309 million preferred share repurchases 2016 dividends 363 million 394 million paid 2017 2016 respectively holders series preferred stock 2017 10k annual report stericycle inc • 50 part ii contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2017 1 us federal income tax mandatory deemed repatriation payable 8 years pursuant tax act 2 environmental liabilities presented undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable 3 amounts represent scheduled principal payments related longterm debt capital leases excluding interest 4 interest fixedrate debt calculated based contractual rates interest debt floating interest rates requires use management judgment estimate future rates interest 5 operating lease obligations include various plant equipment office furniture equipment motor vehicles office warehouse space landfill leasing arrangements operating lease obligations expire various dates latest maturity 2043 6 purchase obligations primarily represent cancelable contractual obligations related information technology products services generally incur ordinary course business payments unrecognized tax benefits excluded contractual obligations based uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement applicable taxing authorities december 31 2017 1308 million outstanding standby letters credit 190 million surety bonds 157 million bank guarantees bank guarantees issued mostly international subsidiaries various purposes including leases seller notes contracts permits surety bonds used performance guarantees neither bank guarantees surety bonds affect ability use various lines credit anticipate operating cash flows together borrowings senior unsecured credit facility sufficient meet anticipated future operating expenses strategic initiatives 2017 10k annual report stericycle inc • 51 part ii business transformation capital expenditures debt service obligations become due next 12 months foreseeable future critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance us gaap preparation financial statements requires management make estimates assumptions judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities although management believes estimates assumptions reasonable based upon information available made therefore actual results may differ estimates different assumptions conditions company’s critical accounting policies may material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change material impact financial condition operating performance company identified following critical accounting policies estimates revenue recognition recognize revenue following criteria met persuasive evidence arrangement exists services rendered sales price fixed determinable collectability reasonably assured revenues regulated medical waste management services compliances services secure information destruction services recognized time waste collection compliance service revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues hazardous waste services recorded time waste received processing facility delivered third party revenues regulated recall returns management services communication solutions recorded time services performed revenues product sales recognized upon transfer title risk ownership generally time goods shipped customer charges related sales taxes international value added tax vat similar pass taxes included revenue effective january 1 2018 company adopted asu 201409 “revenue contracts customers topic 606 using modified retrospective method company applying certain practical expedients including right invoice criteria met company concluded material change revenue recognition new standard certain costs associated obtaining contracts customers capitalized amortized expected economic life contract process finalizing measurement cumulative effect adopting new guidance primarily related capitalizing commission costs recognition first quarter 2018 10q filing allowance doubtful accounts company reports accounts receivable net realizable value management’s best estimate cash ultimately received maintain allowance doubtful accounts reflect expected uncollectability accounts receivable based historical collection data specific risks identified among uncollected accounts adequacy allowances uncollectible accounts reviewed least quarterly adjusted necessary based reviews considerable amount management’s judgment required assess collectability account based detailed analysis aging receivables creditworthiness customers historical collection trends current economic trends accounts receivable written subsequent periods differ allowance doubtful accounts provided historically 2017 10k annual report stericycle inc • 52 part ii provision adequate allowance doubtful accounts 652 million 496 million years ended december 31 2017 2016 respectively intangible asset valuations methods commonly used value intangible assets acquire income market cost approaches nature characteristics asset indicate approach appropriate based analysis performed company fair values intangible assets generally estimated using acceptable income approaches multiperiod excess earnings method “mpeem” generally used determine fair value customer relationships fair value derived calculating present value estimated aftertax earnings attributable respective intangible assets key inputs assumptions valuation model forecasted aftertax cashflows identification contributory assets quantification appropriate returns assets discount rate applied present value cashflows attrition rates determining accurate consumption benefits acquired customer relationships cannot reliably determined services provide acquired customers change baseline revenues extended period time due factors volume increase price increase complementary service offerings therefore amortize finitelived intangible assets using straightline method consistent valuation model relief royalty method generally used determine fair value tradenames key inputs assumptions valuation model reasonable approximation license rate trade name forecasted revenues discount rate applied present value aftertax stream estimated royalties avoided acquiring trade name tangible asset valuation trucks containers equipment major asset classes subject revaluation result acquisitions indirect direct methods cost approach market approach used company value tangible personal property assets following description methodologies estimating fair value major tangible fixed asset classes • market approach used valuation trucks market approach based market conditions transactions market approach assets valued compared recent sales andor asking prices comparable properties assets using similar units comparison adjustments made comparable assets account factors condition capacity age • direct method cost approach used valuation containers direct method cost approach replacement cost new “rcn” determined current cost information obtained original equipment manufacturers equipment dealers vendors independent research • cost reproduction new “crn” equipment calculated using indirect method cost approach historical equipment costs dates used calculate current crn indirect method cost approach trend factors applied historical costs estimate crn assets timeadjusted trend factors applied historical costs using asset category specific cost indices published industry sources crn adjusted physical deterioration functional economic obsolescence goodwill identifiable intangible assets evaluate goodwill indefinitelived intangibles impairment annually october 1 indicator impairment exists 2017 10k annual report stericycle inc • 53 part ii indefinite lived intangibles may assessed using either qualitative quantitative approach qualitative approach first determines morelikelythannot fair value asset less carrying value determination made impairment test complete however determined likely impairment quantitative assessment must made one determination whether use qualitative approach time since last quantitative approach used quantitative approach assess goodwill impairment fair value reporting unit calculated using income approach including discounted cash flows validated using market approach involvement third party valuation specialist income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows calculated using management assumptions growth rates including longterm growth rates capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based calculated weighted average cost capital adjusted reporting units based size country company specific risk premiums market approach compares valuation multiples similar companies associated reporting unit reconcile calculated fair values market capitalization fair value compared carrying value including goodwill fair value excess carrying value related goodwill impaired fair value less carrying value recognize impairment loss amount carrying value exceeds fair value performed annual goodwill impairment test october 1 2017 recognized 650 million noncash goodwill impairment charges latin america reporting unit fair value remaining reporting units significantly exceeded carrying value believe estimated fair value used measuring impairment based reasonable assumptions performed sensitivity analysis estimated fair value noting 50 basis point increase discount rate 50 basis point reduction longterm growth rate would result incremental impairment charge approximately 5 million 9 million respectively determined permits certain tradenames indefinite lives due ability renew minimal additional cost therefore amortized fourth quarter 2017 company performed annual impairment test indefinite lived intangibles goodwill using qualitative approach certain assets quantitative approach remaining assets calculated fair value indefinitelived intangibles based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management future changes assumptions interrelationship assumptions described may negatively impact future valuations future measurements fair value adverse changes assumptions could result impairments goodwill intangible assets would require noncash charges may material effect financial condition operating results finitelived intangible assets amortized useful lives using straightline method customer relationships useful lives 5 30 years based upon type customer noncompete covenant intangibles useful lives 5 14 years also tradename intangibles useful lives 4 40 years evaluate useful life intangible assets annually determine whether events circumstances warrant revision remaining useful life changes reflected prospectively intangible asset amortized revised remaining useful life fourth quarter 2017 company performed annual assessment useful life finitelived intangibles concluded 2017 10k annual report stericycle inc • 54 part ii domestic medical waste customer relationship intangibles revised 40 years 30 years due change mix small large quantity customer relationships change life change estimate accounted prospectively estimated increase amortization expense approximately 70 million annually assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows environmental remediation liabilities environmental remediation liabilities primarily include costs associated remediating air groundwater surface water soil contamination applicable legal costs estimate ultimate liability sites evaluate several factors including nature extent contamination identified site required remediation methods timing expenditures apportionment responsibility among potentially responsible parties “prps” financial viability parties routinely review evaluate sites require remediation considering whether owner operator transporter generator site amount type waste hauled site number years connected site next review information respect named unnamed prps estimates cost likely remedy either developed using internal resources third party environmental engineers service providers income taxes record provision income taxes anticipated tax consequences reported results operations using asset liability method deferred income taxes recognized applying enacted statutory tax rates applicable future years differences financial statement carrying amounts existing assets liabilities respective tax basis well net operating loss tax credit carryforwards effect deferred tax assets liabilities change tax rates recognized income period includes enactment date measurement deferred tax assets reduced necessary valuation allowance tax benefits future realization uncertain although believe assumptions judgments estimates reasonable changes tax laws interpretation tax laws resolution tax audits could significantly impact amounts provided income taxes consolidated financial statements evaluating ability recover deferred tax assets full part consider available positive negative evidence including past operating results forecast future earnings future taxable income prudent feasible tax planning strategies assumptions utilized determining future taxable income require significant judgment consistent plans estimates using manage underlying businesses actual operating results future years could differ current assumptions judgments estimates however believe likely deferred tax assets recorded consolidated balance sheets ultimately realized record valuation allowance reduce deferred tax assets net amount believe likely realized december 31 2017 valuation allowance 161 million related foreign net operating losses tax deductible goodwill expected realize recognize certain tax benefits uncertain tax positions within provision income taxes may recognize tax benefit likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements positions measured based largest benefit greater 50 likelihood realized upon settlement december 31 2017 10k annual report stericycle inc • 55 part ii estimated gross unrecognized tax benefits 274 million 222 million recognized would favorably impact future earnings due uncertainties tax audit outcome estimates ultimate settlement unrecognized tax positions may change actual tax benefits may differ significantly estimates december 22 2017 us tax cuts jobs act 2017 “tax act” signed law making significant changes internal revenue code changes include limited corporate income tax rate decrease 35 21 effective tax years beginning december 31 2017 transition us international taxation worldwide tax system territorial system onetime transition tax mandatory deemed repatriation cumulative foreign earnings december 31 2017 tax act results related change assertion expected foreign withholding taxes sec staff issued staff accounting bulletin 118 sab 118 december 2017 address application us gaap situations registrant necessary information available prepared analyzed including computations reasonable detail complete accounting certain income tax effects tax act guidance specifies income tax effects tax act reasonably estimated accounting measurement analysis yet complete entities report provisional amounts reporting period includes enactment date provisional amounts adjusted measurement period exceed one year enactment date additionally income tax effects tax act cannot reasonably estimated entities report provisional amounts income tax effects first reporting period reasonable estimate determined exceed one year enactment date accordance sab 118 based understanding act guidance available date filing company calculated involvement third party tax specialist best estimate impact tax act year end 2017 income tax provision result recorded income tax benefit 1298 million fourth quarter 2017 period legislation enacted provisional amount related remeasurement certain deferred tax assets liabilities based rates expected reverse future income tax benefit 1677 million provisional amount related onetime transition tax mandatory deemed repatriation foreign earnings income tax expense 243 million based cumulative foreign earnings 1492 million 136 million related expected foreign withholding taxes result tax act company reevaluated assertion related indefinite reinvestment unremitted foreign earnings recorded provisional deferred tax liability amount 136 million expected withholding taxes related remittances certain foreign subsidiaries although company recorded deferred tax liability company still evaluating tax act affect company’s accounting position related indefinite reinvestment unremitted foreign earnings measurement period company may reflect adjustments provisional amount upon obtaining preparing analyzing necessary information complete accounting asc 740 income taxes subsequent adjustment amounts recorded current tax expense quarter 2018 analysis complete tax act also establishes global intangible lowtaxed income gilti provisions impose tax foreign income excess deemed return intangible assets foreign corporations company process evaluating impact prospective taxes gilti yet determined 2017 10k annual report stericycle inc • 56 part ii whether accounting policy recognize deferred taxes basis differences expected affect amount gilti inclusion upon reversal recognize taxes gilti expense period incurred company still evaluating prospective accounting policy taxes gilti provisional estimates tax effects tax act reported basis taxes gilti recognized tax expense year incurred period expense information see part ii item 8 financial statements supplementary data note 8 income taxes consolidated financial statements insured selfinsured claims retained significant portion risks related employee benefit autofleet general liability workers’ compensation claims programs exposure unpaid claims associated expenses including incurred reported losses based third party actuarial valuations internal estimates accruals liabilities could revised future occurrences loss developments significantly differ assumptions used estimated recoveries associated insured claims recorded assets believe receipt amounts probable stock based compensation measure cost employee services received exchange award equity instruments based grantdate fair value award fair value liabilities incurred cost recognized period employee required provide service exchange awardthe requisite service period usually vesting period date vesting awards performance based awards recorded consistent performance metrics asc 718 compensation stock compensation cost recognized equity instruments employees render requisite service grantdate fair value incentive stock options “isos” similar instruments estimated using optionpricing models adjusted unique characteristics instruments unless observable market prices similar instruments available optionpricing models black scholes include assumptions evaluated third party valuation specialist evaluated approved vp treasurer based historical experience current company trends comparative analysis industry trends equity award modified grant date incremental compensation cost recognized amount equal excess fair value modified award fair value original award immediately modification restricted shares “rsus” awarded employee performancebased restricted stock units “psus” awarded executive officer measured fair value amount similarly restricted share would issued third parties nonvested equity share unit awarded employee measured fair value vested issued grant date forfeitures accounted occur detail see part ii item 8 financial statements supplementary data note 12 stock based compensation consolidated financial statements restructuring involuntary termination benefits accrued upon commitment termination plan benefit arrangement communicated affected employees liabilities determined probable estimable depending existence substantive plan severance termination costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contract termination costs recorded contracts terminated cease use 2017 10k annual report stericycle inc • 57 part ii leased facility longer derives economic benefit contract exit costs expensed incurred restructuring liabilities might change future periods based several factors could differ original estimates assumptions include limited contract settlements terms different originally expected ability sublease properties based market conditions rates timelines different originally estimated changes original plans result acquisitions changes might result reversals additions restructuring charges could affect amounts reported consolidated statements income future periods item 7aitem 7 management’s discussion analysis financial condition results operations following discussion stericycle’s financial condition results operations read conjunction consolidated financial statements related notes part ii item 8 financial statements supplementary data report overview stericycle multinational businesstobusiness services provider core purpose help customers fulfill promise providing solutions protect people brands promote health safeguard environment focused driving longterm growth profitability delivering enhanced shareholder value operate highly regulated markets believe continue grow result number factors see part item 1 business aim take advantage growth organically focusing enhancing service offerings platforms acquisitions believe highly fragmented industries serve customers 50 states united states “us” puerto rico 21 countries part business strategy third quarter 2017 initiated comprehensive multiyear business transformation see information company’s business segments services see part item 1 business highlights year ended december 31 2018 compared prior year include • revenues 349 billion decrease 26 driven expected declines small quantity “sq” medical waste business communication related services “crs” foreign exchange divestitures partially offset strong organic growth secure information destruction • gross profit 138 billion decrease 59 primarily attributable expected impact sq mix pricing noncash impairment charges impact lower call volumes smaller recall events crs also continue see challenges latin america business result prolonged market declines cost pressures • loss per share 291 due 3587 million noncash goodwill impairment charges related crs latin america reporting units items discussed third quarter 2018 funded 2950 million sq medical waste customer class action settlement “sq settlement” announced fourth quarter 2018 reached proposed resolution plaintiffs counsel pending securities class action lawsuit additional information see part ii item 8 financial statements supplementary data note 19 legal proceedings consolidated financial statements entered several amendments credit agreement cover senior credit facility term loan various note purchase agreements cover private placement notes amendments adjusted definition ebitda purposes calculation allowed increase permitted consolidated leverage ratio addition terms added certain circumstances would lead increases interest rates charged senior credit facility term loan private placement notes connection underlying terms saw increase 025 interest rate charged senior credit facility term loan total increases 075 2018 10k annual report stericycle inc • 39 part ii interest rates charged private placement notes expect annual impact interest rate increases interest expense net approximately 118 million additional information see part ii item 8 financial statements supplementary data note 8 debt consolidated financial statements finally september 2018 series mandatory convertible preferred stock “series preferred stock” converted accordance terms issue total 47 million shares common stock additional information see part ii item 8 financial statements supplementary data note 14 preferred stock consolidated financial statements following table identifies key strategies significant matters impacting business years ended december 31 2018 2017 2016 respectively amounts stated pretax except noted 2018 10k annual report stericycle inc • 40 part ii strategies significant matters include following types activities 1 includes employee contract termination facility closure clean costs 2 includes dedicated resources including project related incentive compensation stock based compensation 3 includes costs related strategy eg software maintenance fees changes contingent consideration environmental provisions 4 includes impairments accelerated depreciation andor amortization gainloss disposal business transformation business transformation based strategic vision build bestinclass enterprise performance management “epm” operating model enable company operate efficiently provide enhanced experience customers better capitalize future growth opportunities establish greater controls oversight drive consistent results additionally key component business transformation implementation enterprise resource planning “erp” system leverage standard processes throughout organization accelerate decision making expedite acquisition integration remediate compliance control issues enable realtime analytics key initiatives business transformation include • portfolio rationalization executing comprehensive review company’s global service lines identify pursue divestiture nonstrategic assets see divestitures section decision criteria divestiture related charges • operational optimization standardizing route planning logistics modernizing field operations driving network efficiency across facilities • organizational excellence efficiency redesigning company’s organizational structure optimize resources align around global shared business services model • commercial excellence aligning sales service organizations around customer standardizing customer relationship management process expanding customer selfservice options • strategic sourcing reducing spend global procuretopay processes leveraging organizational scale 2018 10k annual report stericycle inc • 41 part ii execution business transformation began 2017 identification validation key transformational opportunities well organizational restructuring occurred fourth quarter 2017 execution business transformation expected continue 2022 implementation enterprise resource planning system us canada 2020 remaining international rollouts beginning 2021 august 2 2018 announced part portfolio rationalization strategy within business transformation pursuing strategic alternatives noncore crs demonstrating commitment streamlining portfolio process conducted assistance financial legal advisers considering range strategic alternatives crs including divestiture focus pursuing outcome drive value stericycle shareholders assurances form timing transaction consummated potential gain loss depend number factors ability identify appropriate strategic alternative reach mutual agreement counterparty satisfy closing conditions associated proposed transaction years ended december 31 2018 2017 since program’s inception recognized following charges capital expenditures related business transformation company expects incur additional aggregate charges duration business transformation principally aligned erp implementation timeline discussed amount timing recognition additional charges time period affected nature spending occurrence commitments triggering events defined accounting principles generally accepted us “gaap” among factors asset impairment charges noncash remaining charges cash costs primarily expensed capitalized incurred 2018 10k annual report stericycle inc • 42 part ii company may incur charges cash expenditures estimated may realize expected improvement cost savings planned time frame noncash charges incurred year ended december 31 2018 discussed part ii item 8 financial statements supplementary data note 5 property plant equipment consolidated financial statements may incur additional noncash impairment andor accelerated depreciation charges continue evolve future information technology strategy conjunction erp implementation business transformation charges reportable segment year ended december 31 2018 follows business transformation charges reportable segment year ended december 31 2017 follows part business transformation undertaking legal entity organizational restructuring actions assist streamlining simplifying business operations help lower general administrative costs actions could result additional charges associated consulting professional services increases potential exposure us foreign taxes foreign exchange charges intangible amortization years ended december 31 2018 2017 2016 company recognized 1303 million 1184 million 1293 million respectively intangible amortization expense increase partially due adjustment estimated useful lives customer relationship intangibles see part ii item 8 financial statements supplementary data note 6 goodwill intangible assets consolidated financial statements 2018 remaining change arising acquisitions acquisition integration believe acquisitions steady efficient way scale operations build critical customer density transportation treatment operations enter new markets geographies well provide opportunity introduce additional services acquired customers expect continue acquisition strategy remaining focused small highly accretive tuck acquisitions broaden various service capabilities creating value shareholders 2018 10k annual report stericycle inc • 43 part ii details acquisitions completed years ended december 31 2018 2017 2016 found part ii item 8 financial statements supplementary data note 3 acquisitions consolidated financial statements acquisition integration expenses years ended december 31 2018 2017 2016 follows integration expenses incurred years ended december 31 2018 2017 2016 primarily related acquisitions completed us fourth quarter 2015 shredit® acquisition operational optimization company aims achieve culture continuous improvement enhance efficiency effectiveness competitiveness improve cost base cash flow part strategy company taken number actions reduce operating costs optimize operations example believe plant throughput route density competitive strengths stericycle maintain strengths making adjustments network transportation treatment facilities optimize overall logistics processing capabilities within service line reducing operational costs part efforts seek reduce network redundancies consolidating facilities closing redundant facility restructuring local organization operation efficiency projects included within operational optimization category generally commenced prior announcement business transformation initiative discussed identified additional items related business transformation operational optimization expenses recognized sga year ended december 31 2018 follows • domestic canada rcs closure exit costs related optimizing overall logistics sales functions lease exit costs consolidation call centers canada communication related services locations noncash charges relate accelerated depreciation associated software 2018 10k annual report stericycle inc • 44 part ii • international rcs closure exit costs relate closure contract exit cleanup costs primarily latin america japan noncash impairment charges related longlived assets customer relationships operating permits primarily latin america japan rationalization tradename europe expenses primarily japan • exit costs related lease exit costs consolidation call centers domestic communication related services locations operational optimization charges except 04 million recognized cor recognized sga year ended december 31 2017 follows • domestic canada rcs closure exit costs related optimizing overall logistics sales functions noncash impairment charges related long lived assets consulting professional fees relate costs identify opportunities reduce operational redundancies • international rcs closure exit costs employee termination closure exit costs included amounts incurred latin america rationalizing operations uk facility rationalization contract exit costs noncash impairment charges related longlived assets operating permits customer relationships latin america japan • closure exit costs related consolidating call centers domestic communication related services locations noncash charges relate impairment tradename consulting professional fees represented fees incurred eliminate operational redundancies operational optimization charges except 90 million recognized cor recognized sga year ended december 31 2016 follows 2018 10k annual report stericycle inc • 45 part ii • domestic canada rcs exit costsother related optimizing overall logistics sales functions consolidation call centers canadian communication related services locations consulting professional fees identify opportunities reduce operational redundancies • international rcs exitcosts related charges exit certain patient transport services contracts plant conversion expense uk • closure exit costs related consolidation call centers domestic communication related services consulting professional fees incurred identify opportunities reduce operational redundancies company continues consider continuous improvement activity amount timing recognition charges affected occurrence commitments triggering events defined gaap among factors company may incur charges cash expenditures estimated may realize expected improvement cost savings planned time frame divestitures company evaluates portfolio services ongoing basis countrybycountry service linebyservice line approach assess longterm potential identify potential business candidates divestiture decision divestiture based upon following criteria • outlook longterm market conditions • potential impact complimentary services customer relationships • ability leverage infrastructure customer base growth • potential margin improvement • current divestiture value versus future divestiture value • return invested capital • implications erp system implementation years ended december 31 2018 2017 2016 recognized charges totaling 128 million 95 million 271 million respectively associated divestitures businesses details divestitures undertaken years ended december 31 2018 2017 2016 found part ii item 8 financial statements supplementary data note 4 restructuring divestitures assets held sale consolidated financial statements addition charges 2018 incurred 77 million consulting professional fees associated portfolio rationalization efforts primarily review strategic alternatives crs anticipated implementation erp system stericycle continue strategic portfolio review intent identifying additional nonstrategic service lines markets divestiture prior implementation erp system 2018 10k annual report stericycle inc • 46 part ii litigation settlements regulatory compliance operate highly regulated industries must address regulatory inquiries respond investigations time also involved variety civil litigation time including items detailed part ii item 8 financial statements supplementary data note 19 legal proceedings consolidated financial statements financial results may also include considerations nonrecurring matters including settlements environmental remediation legal related consulting professional fees year ended december 31 2018 recognized 932 million legal settlement regulatory compliance expenses consulting professional fees primarily related certain litigation matters including provision net insurance recoveries proposed securities class action settlement announced december 19 2018 year ended december 31 2017 recognized 3277 million legal settlement regulatory compliance expenses consulting professional fees primarily related certain litigation matters 2950 million sq settlement year ended december 31 2016 recognized 72 million regulatory compliance consulting professional fees primarily related certain litigation matters see also item 1a risk factor “we subject number pending lawsuits” impairment charges comprise following years ended december 31 2018 2017 2016 impairment charges included cor year ended december 31 2018 described part ii item 8 financial statements supplementary data note 5 property plant equipment consolidated financial statements result annual goodwill impairment assessment october 1 interim assessment performed fourth quarter 2018 recognized total noncash goodwill impairment charges 3587 million related domestic crs latin america reporting units impairment charges discussed impairment section part ii item 7 management’s discussion 2018 10k annual report stericycle inc • 47 part ii analysis financial condition results operations goodwill impairment additional information see part ii item 8 financial statements supplementary data note 6 goodwill intangible assets consolidated financial statements goodwill impairment charges may recognized future periods extent changes factors circumstances occur including deterioration macroeconomic environment equity markets including market value common shares deterioration performance future projections changes companys plans one reporting units years ended december 31 2018 2017 2016 recognized 291 million 248 million 88 million respectively consulting professional fees related internal control remediation activities well implementation new accounting standards reflected part sga consolidated statements loss income year ended december 31 2018 recognized foreign exchange loss 38 million expense net consolidated statements loss income related remeasurement net monetary assets held argentina result designation highly inflationary economy capital allocation stericycle aims maintain structured capital allocation strategy balances investment business debt reduction returns shareholders capital allocation items include following types activities • stock issuance costs • dividends preferred stock • debt modification costs connection related nonrecurring matters • early extinguishment debt gains losses • related expenses declared paid dividends 255 million 363 million 394 million series preferred stock shareholders years ended december 31 2018 2017 2016 respectively september 14 2018 accordance terms issuance series preferred stock converted common stock outstanding shares preferred stock associated depositary shares cancelled year ended december 31 2018 recognized 27 million debt modification charges related amending credit agreements charges recognized interest expense net consolidated statements loss income 2018 10k annual report stericycle inc • 48 part ii tax reform us tax cuts jobs act 2017 “tax act” signed law december 22 2017 introduced changes including limited corporate income tax rate decrease 35 21 effective tax years beginning december 31 2017 transition us international taxation worldwide tax system territorial system onetime transition tax mandatory deemed repatriation cumulative foreign earnings december 31 2017 company calculated provisional impact tax act year end 2017 income tax benefitprovision result recognized 1298 million income tax benefit fourth quarter 2017 consistent requirements staff accounting bulletin 118 “sab 118” impact finalized 2018 resulting charge 88 million adjustments may necessary future periods due potential technical corrections tax act andor regulatory guidance may issued us internal revenue service discussion see part ii item 8 financial statements supplementary data note 9 income taxes consolidated financial statements results operations nm percentage change meaningful revenues analyzing company’s performance necessary understand various regulated services share common infrastructure customer base market regulated compliance services offering various pricing options meet customers’ preferences customers move different billing paradigms example customers may contract us medical waste disposal services billed based weight waste collected processed disposed particular period subsequent period customer could move standard service packages regulated medical waste services training education services contracted subscription fee another example customer purchases medical waste disposal sharps disposal management services provides customer regulated services different pricing billing arrangement 2018 10k annual report stericycle inc • 49 part ii track movement customers various types regulated services offer although identify directional trends services regulated services similar nature inherent inaccuracies disaggregation analyze revenues aggregated basis analyze revenue growth identifying changes related organic growth acquisitions divestitures changes due currency exchange fluctuations organic growth excludes effect foreign exchange acquisitions divestitures less full year revenues comparative period year movements revenues service segment 2018 compared 2017 compared 2016 follows 2018 10k annual report stericycle inc • 50 part ii 2018 compared 2017 consolidated basis revenues decreased 948 million 26 2018 349 billion 358 billion 2017 decrease largely driven expected declines sq medical waste business crs foreign exchange divestitures partially offset strong organic growth secure information destruction domestic canada rcs revenues increased 222 million 09 2018 257 billion 255 billion 2017 organic revenues declined 15 million 01 saw declines due impact sq pricing partially offset increases secure information destruction revenues result increased pricing related demand pricing recycled paper well organic growth new customers growth regulated waste compliance revenues retail larger customers acquisitions contributed 270 million 11 revenues divestitures primarily related us clean room business reduced revenues 33 million 01 international rcs revenue decreased 525 million 74 2018 6551 million 7076 million 2017 increase international rcs segment organic revenues 133 million 19 secure information destruction revenues increased result increased pricing related demand pricing recycled paper well organic growth new customers impact new general data protection regulation laws europe also saw increases medical waste compliance revenues result growth europe increases offset declines due exit patient transport business uk overall economic declines several latin america markets acquisitions international rcs segment contributed 27 million 04 revenues divestitures related hazardous waste business uk secure information destruction business south africa reduced revenues 417 million 59 effect foreign exchange rates primarily latin america unfavorably impacted international revenues 2018 268 million 38 foreign currencies notably latin america declined us dollar revenues related domestic communication related services decreased 645 million 201 2018 2567 million 3212 million 2017 revenues impacted reductions crs volumes due smallersized recall events compared multiple largesized recall events managed 2017 lower call volumes 2017 compared 2016 consolidated basis revenues increased 184 million 05 2017 358 billion 356 billion 2016 domestic canada rcs revenues increased 431 million 17 2017 255 billion 251 billion 2016 organic revenue growth contributed 190 million 08 acquisitions contributed 209 million 08 revenues secure information destruction revenues strong due higher sales activity recurring onetime purge services combined higher recycling revenue strengthening canadian dollar favorable impact 2017 revenues 32 million 01 revenue related manufacturing industrial services “mi” experienced decline 197 million 2016 reduced overall organic growth 09 decline due lower activity oncall services related softness us industrial market addition experienced pricing pressure related sq regulated waste compliance customers resulting hospital consolidation physician practices increased competitive activities market 2018 10k annual report stericycle inc • 51 part ii international rcs revenue decreased 441 million 59 2017 7076 million 7517 million 2016 2017 organic revenue decline international rcs segment 134 million 18 primarily due exiting certain patient transport service contracts uk decline mi revenue latin american business acquisitions international rcs segment contributed 64 million 09 revenues divestitures related sale certain assets uk reduced revenues 216 million 29 net effect acquisitions divestitures resulted 20 decrease revenues 2017 effect foreign exchange rates unfavorably impacted international revenues 2017 155 million 21 foreign currencies declined us dollar revenues related domestic communication related services increased 194 million 64 2017 3212 million 3018 million 2016 organic revenue increased 145 million 48 primarily due serving new brands across many industries several larger nonrecurring recall events 2017 acquisitions contributed 49 million 16 gross profit consolidated gross profit decreased 865 million 59 2018 138 billion 146 billion 2017 percentage revenues consolidated gross profit decreased 395 2018 compared 408 2017 decline gross profit primarily attributable expected impact sq mix pricing approximately 257 million noncash impairment charges incurred domestic canada rcs reportable segments impact lower volumes crs decreases also due prolonged declining market trend cost pressures latin america consolidated gross profit decreased 244 million 16 2017 146 billion 149 billion 2016 percentage revenues consolidated gross profit decreased 408 2017 compared 417 2016 decline gross profit primarily due lower revenues mi customers higher fixed cost structure approximately 180 million noncash fixed assets depreciation increases writeoffs domestically pricing pressure sq regulated waste compliance customers negatively impacted gross profit percentage revenues international gross profit lower domestic gross profit international operations fewer small account customers tend generate higher gross profit historically international operations generate revenues large account customers hospitals publically funded healthcare organizations government bodies international revenues increase consolidated gross profit percentages experience downward pressure due business mix shift may offset additional international small account market penetration integration savings domestic business expansions 2018 10k annual report stericycle inc • 52 part ii sga expenses decreased 2267 million 161 2018 118 billion 141 billion 2017 percentage revenues sga decreased 338 2018 compared 392 2017 decrease primarily attributable lower charges associated key strategies significant matters 3957 million 2018 compared 6224 million 2017 matters discussed additionally also decreases consulting professional fees bad debt expense partially offset increase incentive based compensation achievement higher overall levels 2018 sga expenses increased 3520 million 334 2017 141 billion 105 billion 2016 percentage revenues sga increased 392 revenues 2017 compared 296 2016 increase primarily attributable impact sq settlement charges associated key strategies significant matters discussed aggregate contributed 3376 million increase addition increases consulting professional fees partially offset lower compensation bad debt expense goodwill impairment goodwill impairment 3587 million 2018 compared 650 million 2017 form 10q quarter ended september 30 2018 disclosed process completing october 1 annual goodwill impairment assessment certain reporting units including domestic crs latin america potentially risk impairment based preliminary review long range plan “lrp” process finalized also evaluating recent declines stock price impact reconciliation aggregate fair values reporting units market capitalization performed annual goodwill assessment october 1 2018 continued update assumptions reflect certain business strategic developments fourth quarter negatively impacted estimated cash flows certain reporting units resulted decision also complete interim assessment december 31 2018 company determined domestic crs latin america reporting units’ carrying values excess estimated fair values factors contributed estimated fair value reporting units carrying value include • domestic crs experienced progressive decrease revenues operating margins 2018 due continued declines large recall events leading higher level uncertainty occurring future periods ii recall events smaller number 2018 10k annual report stericycle inc • 53 part ii units significantly lower revenue per event experienced recent years iii continued decline inboundoutbound call volumes live voice services also gathered insights process evaluating strategic alternatives initiated 2018 • latin america continue experience prolonged challenges volatility certain markets due declining market trends cost pressures revenue increases manufacturing industrial “mi” business due inflationary price increases argentina offset impact currency devaluation continuing declines several local economies challenges factored updates forecasted cashflow assumptions fourth quarter reflect current outlook made certain adjustments discount rates used present value forecasted cashflows result impairment assessments recognized 2863 million noncash goodwill impairment charges fully impair goodwill domestic crs reporting unit addition recognized 724 million noncash goodwill impairment charges related latin america reporting unit following impairment remaining latin america reporting unit’s goodwill 20 million 2017 result annual impairment assessment goodwill recognized noncash goodwill impairment charge latin america reporting unit 65 million segment profitability use adjusted ebitda primary measure profitability reportable segments see part ii item 8 financial statements supplementary data note 17 segment reporting consolidated financial statements explanation measure segment profitability reconciliation total segment profitability loss income operations years ended december 31 2018 2017 2016 respectively follows 2018 10k annual report stericycle inc • 54 part ii 2018 compared 2017 adjusted ebitda domestic canada rcs reportable segment decreased 271 million 33 2018 7824 million 8095 million 2017 percentage domestic canada rcs revenues adjusted ebitda 304 317 2018 2017 respectively decrease primarily result impact lower margins caused expected impact pricing sq medical waste customers well pricing pressures experienced sq regulated waste compliance customers resulting hospital consolidation physician practices increased competitive activities partially offset impact business transformation cost savings efficiencies additionally overall decrease partially offset benefits increased volume pricing recycled paper adjusted ebitda international rcs reportable segment increased 19 million 20 2018 956 million 937 million 2017 percentage international rcs revenues adjusted ebitda 146 132 2018 2017 respectively experienced improvements overall margins europe result exit lower margin businesses improvements partially offset lower margins latin america due prolonged declining market trend costs pressures 2018 10k annual report stericycle inc • 55 part ii adjusted ebitda decreased 422 million 2018 1334 million 912 million 2017 decrease result lower revenues domestic communication related services business combined disproportionally lower gross profits due higher fixed costs nature business 2017 compared 2016 adjusted ebitda domestic canada rcs reportable segment decreased 154 million 19 2017 8095 million 8249 million 2016 percentage domestic canada rcs revenues adjusted ebitda 317 329 2017 2016 respectively decrease result lower gross profit percentage result impacts associated mi customers higher fixed costs structure sq regulated waste compliance pricing pressures well higher costs related wages fuel adjusted ebitda international rcs reportable segment increased 06 million 06 2017 937 million 931 million 2016 percentage international rcs revenues adjusted ebitda 132 124 2017 2016 respectively increase result impacts gross margin sga resulting divestiture lower margin patient transport business uk adjusted ebitda decreased 240 million 357 2017 912 million 672 million 2016 interest expense net interest expense net increased 2018 1060 million 937 million 2017 due increase overall interest rates borrowings caused increase libor rate interest rate adjustments related private placement notes senior credit facility combined overall increase average outstanding debt balance primarily due funding sq settlement payment 2950 million using amounts available senior credit facility connection underlying terms saw increase 025 interest rate charged senior credit facility term loan total increases 075 interest rates charged private placement notes expect annual impact late 2018 interest rate increases interest expense net approximately 118 million interest expense net decreased 2017 937 million 978 million 2016 due reduction average outstanding debt balance partially offset increase interest rates us expense net expense net increased 2018 83 million 66 million 2017 primarily due 38 million foreign exchange loss resulting remeasurement argentinian peso denominated net monetary assets result designation july 1 2018 argentina highly inflationary economy expense net decreased 2017 66 million 79 million 2016 income tax benefit expense income tax benefit 298 million 2018 compared 1509 million 2017 effective tax rates years 2018 2017 108 1399 respectively 2017 result introduction tax act company recognized income tax benefit 1298 million arising revaluing us net deferred tax liabilities 35 newly enacted us corporate income tax rate 21 partially offset onetime transition tax 2018 10k annual report stericycle inc • 56 part ii unremitted foreign earnings profits elected pay eightyear period expected foreign withholding taxes 2018 accordance sab 118 recognized charge 88 million completed analysis associated impact tax act addition 2018 2017 effective rate also impacted nondeductibility goodwill impairments certain jurisdictions valuation allowances recognized net operating losses several countries income tax benefit 1509 million 2017 compared income tax expense 1202 million 2016 effective tax rates years 2017 2016 1399 366 respectively change 2017 rate compared 2016 primarily due impact tax act discussed partially offset impact nondeductibility goodwill impairment charge recognized year liquidity capital resources details company’s outstanding debt obligations found part ii item 8 financial statements supplementary data note 8 debt consolidated financial statements company believes sufficient liquidity support ongoing operations invest future growth least next twelve months operating cash flows company’s 12 billion senior credit facility company’s primary sources liquidity expected used among things payment interest principal company’s debt obligations acquisitions capital expenditures necessary support growth productivity improvements including associated multiyear business transformation working capital december 31 2018 working capital increased 1701 million 141 million compared deficit 1560 million december 31 2017 current assets decreased 661 million 2018 7473 million 8134 million 2017 primarily driven 245 million decrease accounts receivable 265 million decrease prepaid expenses 208 million decrease assets held sale days sales outstanding “dso” 63 days december 31 2018 2017 current liabilities decreased 2362 million 2018 7332 million 9694 million 2017 primarily due payment 2950 million related sq settlement funded available capacity senior credit facility partially offset 280 million increase accrued compensation primarily result higher incentive compensation accruals 2018 timing payroll processing respect year end 306 million increase accounts payable connection efforts extend vendor terms business transformation initiatives temporary impact implementation purchase order system latter part 2018 operating cash flows net cash operating activities decreased 3429 million 674 2018 1657 million 5086 million 2017 primary drivers decline payment 2950 million sq settlement payments related legal regulatory compliance business transformation initiatives amounts partially offset lower tax payments result losses generated year extending vendor payment terms temporary impact implementation purchase order system latter part 2018 investing cash flows net cash used investing activities decreased 455 million 236 2018 1475 million 1930 million 2017 used 78 million less cash acquisitions 2018 10k annual report stericycle inc • 57 part ii 2017 generated additional 240 million divestiture businesses 2018 capital expenditures decreased 122 million 2018 38 40 2018 2017 respectively percentage revenues higher capital expenditures expected 2019 principally associated business transformation initiatives financing cash flows net cash used financing activities decreased 2955 million 920 2018 257 million 3212 million 2017 funded 2950 million sq settlement available capacity senior credit facility resulting net borrowings 687 million 2018 compared net repayments 1756 million senior credit facility private placement term loan facility 2017 net repayments debt including foreign debt capital leases longterm debt 784 million 2018 compared 843 million 2017 preferred share repurchases 172 million 2018 compared 342 million 2017 dividends 255 million 363 million paid 2018 2017 respectively holders series preferred stock accordance terms issue series preferred stock converted common stock september 2018 see part ii item 8 financial statements supplementary data note 14 preferred stock consolidated financial statements contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2018 1 amounts represent scheduled principal payments related longterm debt capital leases excluding interest included amounts due 2019 125 million related private placement note company ability intent refinance see part ii item 8 financial statements supplementary data note 8 debt consolidated financial statements payments unrecognized tax benefits excluded contractual obligations based uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement applicable taxing authorities elected pay 235 million transition tax liability eight years net receivable position us internal revenue service “irs” amounts become due offset amounts deposit irs 2018 10k annual report stericycle inc • 58 part ii environmental liabilities presented accrued undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable see part ii item 8 financial statements supplementary data note 11 commitments contingencies consolidated financial statements december 31 2018 631 million standby letters credit outstanding senior credit facility 522 million standby letters credit outstanding another facility 637 million surety bonds 195 million bank guarantees bank guarantees issued mostly international subsidiaries various purposes including leases seller notes contracts permits surety bonds used performance guarantees neither bank guarantees surety bonds affect ability use various lines credit anticipate operating cash flows together additional borrowings available senior unsecured credit facility sufficient meet anticipated future operating expenses strategic initiatives business transformation capital expenditures debt service obligations become due next 12 months foreseeable future critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance us gaap preparation financial statements requires management make estimates assumptions judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities although management believes estimates assumptions reasonable based upon information available made therefore actual results may differ estimates different assumptions conditions company’s critical accounting policies may material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change policies material impact financial condition operating performance company part ii item 8 financial statements supplementary data note 1 basis presentation summary significant accounting polices consolidated financial statements provides detailed description material accounting policies however company identified following critical accounting policies estimates revenue recognition company’s revenue recognition policy detailed part ii item 8 financial statements supplementary data note 1 basis presentation summary significant accounting polices consolidated financial statements allowance doubtful accounts company reports accounts receivable net realizable value management’s best estimate cash ultimately received maintain allowance doubtful accounts reflect expected uncollectability accounts receivable based historical collection data specific risks identified among uncollected accounts adequacy allowances uncollectible accounts reviewed least quarterly adjusted necessary based reviews considerable amount management’s judgment required assess collectability account based detailed analysis aging receivables creditworthiness customers historical collection trends current economic trends accounts receivable written subsequent periods differ allowance doubtful accounts provided historically 2018 10k annual report stericycle inc • 59 part ii provision adequate allowance doubtful accounts 719 million 652 million december 31 2018 2017 respectively intangible asset valuations methods commonly used value intangible assets acquire income market cost approaches nature characteristics asset indicate approach appropriate based analysis performed company fair values intangible assets generally estimated using acceptable income approaches multiperiod excess earnings method “mpeem” generally used determine fair value customer relationships fair value derived calculating present value estimated aftertax earnings attributable respective intangible assets key inputs assumptions valuation model forecasted aftertax cashflows identification contributory assets quantification appropriate returns assets discount rate applied present value cashflows attrition rates determining accurate consumption benefits acquired customer relationships cannot reliably determined services provide acquired customers change baseline revenues extended period time due factors volume increase price increase complementary service offerings therefore amortize finitelived intangible assets using straightline method consistent valuation model relief royalty method generally used determine fair value tradenames key inputs assumptions valuation model reasonable approximation license rate trade name forecasted revenues discount rate applied present value aftertax stream estimated royalties avoided acquiring trade name tangible asset valuation trucks containers equipment major asset classes subject revaluation result acquisitions indirect direct methods cost approach market approach used company value tangible personal property assets following description methodologies estimating fair value major tangible fixed asset classes • market approach used valuation trucks market approach based market conditions transactions market approach assets valued compared recent sales andor asking prices comparable properties assets using similar units comparison adjustments made comparable assets account factors condition capacity age • direct method cost approach used valuation containers direct method cost approach replacement cost new “rcn” determined current cost information obtained original equipment manufacturers equipment dealers vendors independent research • cost reproduction new “crn” equipment calculated using indirect method cost approach historical equipment costs dates used calculate current crn indirect method cost approach trend factors applied historical costs estimate crn assets timeadjusted trend factors applied historical costs using asset category specific cost indices published industry sources crn adjusted physical deterioration functional economic obsolescence goodwill represents excess purchase price related costs fair value assigned net tangible identifiable tangibles business acquired goodwill subject 2018 10k annual report stericycle inc • 60 part ii amortization subject evaluation impairment annually october 1 indicator impairment exists used quantitative approach assess goodwill impairment fair value reporting unit calculated using income approach including discounted cash flows “dcf” validated using market approach involvement third party valuation specialist companys reporting units domestic healthcare compliance services domestic shredit domestic crs domestic environmental solutions canada europe asia pacific latin america income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows calculated using management assumptions growth rates including longterm growth rates capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based calculated weighted average cost capital adjusted reporting units based size country company specific risk premiums market approach compares valuation multiples similar companies associated reporting unit reconcile calculated fair values market capitalization fair value compared carrying value including goodwill fair value excess carrying value related goodwill impaired fair value less carrying value recognize impairment charge amount carrying value exceeds fair value goodwill impairment testing process involves use significant assumptions estimates judgments subject inherent uncertainties subjectivity determination fair value reporting units estimating reporting units projected cash flows involves use significant assumptions estimates judgments respect numerous factors including longterm growth rates operating margin including selling general administrative expense rates working capital expenditures allocation shared corporate items among factors estimates based internal current operating plans longterm forecasts reporting unit projected cash flow estimates discounted necessitates selection appropriate discount rate discount rates selected reflect marketbased estimates risks associated projected cash flows reporting unit also include company specific risk premium market value comparisons fair value require selection appropriate peer group companies addition analyze differences sum fair value reporting units total market capitalization reasonableness taking account certain factors including control premiums performed annual goodwill assessment october 1 2018 continued update assumptions reflect certain business strategic developments fourth quarter negatively impacted estimated cash flows certain reporting units resulted decision also complete interim assessment december 31 2018 outcome goodwill impairment assessments discussed goodwill impairment section part ii item 7 management’s discussion analysis financial condition results operations goodwill impairment additional information see part ii item 8 financial statements supplementary data note 6 goodwill intangible assets consolidated financial statements measure sensitivity amount goodwill impairment charges key assumptions amount reporting units fair value exceeds respective carrying value subsequent impairment charges incurred december 31 2018 amount fair value excess carrying value based reporting unit specific risk premiums considered fourth quarter impairment 2018 10k annual report stericycle inc • 61 part ii assessments follows domestic reporting units less ten percent much approximately ninety percent international reporting units latin america less twenty five percent much approximately sixty percent latin america reporting unit future reduction fair value may result additional impairment charges consideration changes carrying value time impairment assessment performed sensitivity analysis estimated fair values december 31 2018 noting 50 basis point increase discount rate 50 basis point reduction longterm growth rate would result impairments except incremental impairment charge latin america reporting unit approximately 7 million 4 million respectively following impairment charges incurred december 31 2018 domestic crs latin america reporting units recorded goodwill remaining zero 20 million net accumulated impairment respectively use different assumptions estimates judgments goodwill impairment testing process may significantly increase decrease estimated fair value reporting unit generally changes dcf estimates would similar effect estimated fair value reporting unit believe estimated fair value used measuring impairment based reasonable assumptions future changes underlying assumptions could differ due inherent judgment making estimates identifiable intangible assets indefinite life intangibles also subject amortization assessed impairment manner goodwill indefinite lived intangibles may assessed using either qualitative quantitative approach qualitative approach first determines morelikelythannot fair value asset less carrying value determination made impairment test complete however determined likely impairment quantitative assessment must made one factor determination whether use qualitative approach time elapsed since last assessment using quantitative approach determined operating permits certain tradenames indefinite lives due ability renew minimal additional cost therefore amortized fourth quarter 2018 company performed annual impairment test indefinite lived intangibles goodwill using qualitative approach certain assets quantitative approach remaining assets calculated fair value indefinitelived intangibles based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management future changes assumptions interrelationship assumptions described may negatively impact future valuations future measurements fair value adverse changes assumptions could result impairments goodwill intangible assets would require noncash charges may material effect financial condition operating results finitelived intangible assets amortized useful lives using straightline method customer relationships useful lives 5 25 years based upon type customer noncompete covenant intangibles useful lives 5 14 years also tradename intangibles useful lives 4 40 years evaluate useful life intangible assets annually determine whether events circumstances warrant revision remaining useful life changes reflected prospectively intangible asset amortized revised remaining useful life fourth quarter 2018 10k annual report stericycle inc • 62 part ii company performed annual assessment useful life finitelived intangibles company updated useful life customer relationship intangibles result analyzing recent quantitative qualitative observations market factors impacting business change estimate accounted prospectively weighted average remaining life adjusted approximately 109 92 years reflect new estimated useful lives estimate approximately 510 increase annual amortization expense environmental remediation liabilities environmental remediation liabilities primarily include costs associated remediating air groundwater surface water soil contamination applicable legal costs estimate ultimate liability sites evaluate several factors including nature extent contamination identified site required remediation methods timing expenditures apportionment responsibility among potentially responsible parties “prps” financial viability prp’s routinely review evaluate sites require remediation considering whether owner operator transporter generator site amount type waste hauled site number years contracted owned site next review information respect named unnamed prps estimates cost likely remediation either developed using internal resources third party environmental engineers service providers additional information see part ii item 8 financial statements supplementary data note 11 commitments contingencies consolidated financial statements income taxes record provision income taxes anticipated tax consequences reported results operations using asset liability method deferred income taxes recognized applying enacted statutory tax rates applicable future years differences financial statement carrying amounts existing assets liabilities respective tax basis well net operating loss tax credit carryforwards effect deferred tax assets liabilities change tax rates recognized income period includes enactment date measurement deferred tax assets reduced necessary valuation allowance tax benefits future realization uncertain although believe assumptions judgments estimates reasonable changes tax laws interpretation tax laws resolution tax audits could significantly impact amounts provided income taxes consolidated financial statements evaluating ability recover deferred tax assets full part consider available positive negative evidence including past operating results forecast future earnings future taxable income prudent feasible tax planning strategies assumptions utilized determining future taxable income require significant judgment consistent plans estimates using manage underlying businesses actual operating results future years could differ current assumptions judgments estimates however believe likely deferred tax assets recognized consolidated balance sheets ultimately realized record valuation allowance reduce deferred tax assets net amount believe likely realized december 31 2018 valuation allowance 353 million related foreign net operating losses tax deductible goodwill expected realize recognize certain tax benefits uncertain tax positions within provision income taxes may recognize tax benefit likely tax position sustained 2018 10k annual report stericycle inc • 63 part ii examination taxing authorities based technical merits position tax benefits recognized financial statements positions measured based largest benefit greater 50 likelihood realized upon settlement december 31 2018 estimated gross unrecognized tax benefits 647 million 618 million recognized would favorably impact future earnings due uncertainties tax audit outcome estimates ultimate settlement unrecognized tax positions may change actual tax benefits may differ significantly estimates accordance sab 118 company calculated involvement third party tax specialist provisional tax impact tax act year end 2017 income tax provision result recognized income tax benefit 1298 million fourth quarter 2017 period legislation enacted allowed measurement period company completed analysis recognized adjustments resulting charge 88 million 2017 provisional amount 2018 tax act also establishes global intangible lowtaxed income gilti provisions impose tax foreign income excess deemed return intangible assets foreign corporations company could elect accounting policy recognize deferred taxes basis differences expected affect amount gilti inclusion upon reversal recognize taxes gilti expense period incurred chose report basis taxes gilti recognized tax expense year incurred period expense information see part ii item 8 financial statements supplementary data note 9 income taxes consolidated financial statements insured selfinsured claims retained significant portion risks related employee benefit autofleet general liability workers’ compensation claims programs exposure unpaid claims associated expenses including incurred reported losses based third party actuarial valuations internal estimates accruals liabilities could revised future occurrences loss developments significantly differ assumptions used estimated recoveries associated insured claims recognized assets believe receipt amounts probable stock based compensation measure cost employee services received exchange award equity instruments based grantdate fair value award fair value liabilities incurred cost recognized period employee required provide service exchange awardthe requisite service period usually vesting period date vesting awards performance based awards recognized consistent performance metrics accounting standards codification section 718 compensation stock compensation cost recognized equity instruments employees render requisite service grantdate fair value incentive stock options “isos” similar instruments estimated using optionpricing models adjusted unique characteristics instruments unless observable market prices similar instruments available optionpricing models black scholes include assumptions evaluated third party valuation specialist evaluated approved vice president treasurer based historical experience current company trends comparative analysis industry trends equity award modified grant date incremental 2018 10k annual report stericycle inc • 64 part ii compensation cost recognized amount equal excess fair value modified award fair value original award immediately modification restricted shares “rsus” awarded employee performancebased restricted stock units “psus” awarded measured fair value related performance criteria established amount similarly restricted share would issued third parties nonvested equity share unit awarded employee measured fair value vested issued grant date forfeitures accounted occur detail see part ii item 8 financial statements supplementary data note 13 stock based compensation consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations following discussion financial condition results operations read conjunction consolidated financial statements related notes part ii item 8 financial statements supplementary data 2019 form 10k overview incorporated 1989 stericycle protects people safeguards communities reduces risk highly specialized medical hazardous waste management secure information services team 19500 employees serves customers us 18 countries concentration growing healthcare industry worldleading services company scale expertise experience handle complicated behindthescenes essential services waste management regulatory compliance destruction secure information customers team members communities serve stericycle company protects matters offering services appeals wide range small large business customers majority customers healthcare businesses hospitals physician dental practices outpatient clinics longterm care facilities etc also provide services retailers manufacturers financial services providers professional services providers governmental entities businesses manage large volumes waste materials volume per customer site average small highlights year ended december 31 2019 compared prior year include • revenues year ended december 31 2019 331 billion compared 349 billion 2018 decline 1770 million due impact divestitures macroeconomic factors foreign exchange rates sop pricing reduced revenues 641 million 678 million 415 million respectively • organic revenue rwcs sid excluding impact sop pricing remained strong increases 07 36 compared 2018 respectively offset continued lowered sales domestic crs primarily due smaller sized recall events fewer mandated recalls lower mi revenues • loss operations year 2119 million 2019 compared loss operations 1611 million 2018 incurred significant charges associated key priorities significant matters 6639 million 7801 million detailed 2019 2018 respectively excluding matters loss operations decreased 1670 million attributed macroeconomic factors 590 million including sop pricing foreign exchange impact divestitures operational matters 1080 million including higher rwcs corporate operating costs declines crs operations • net loss 3468 million 381 diluted loss per share compared 2533 million 291 diluted loss per share 2018 primarily due changes significant charges associated key priorities significant matters operational items previously highlighted • cash flow operations full year 2480 million compared 1657 million 2018 cash flow operations reduced small quantity customer class action settlement payment 2950 million excluding settlement payment cash flow operations decreased 2127 million primarily due lower operating performance 2019 10k annual report stericycle inc • 36 part ii previously highlighted payments 2019 certain litigation matters 2018 incentive compensation erprelated prepaid software • capital expenditures year 1942 million including 806 million erp implementation compared 1308 million 2018 including 180 million erp implementation 2019 completed following debt related transactions issued 6000 million par aggregate principal senior notes due july 2024 unsecured bear interest 5375 per annum payable january 15 july 15 year b executed fourth amendment amended credit agreement among things provide incremental term loan 3650 million ii modify definition “consolidated ebitda” iii revise financial covenant requirement consolidated leverage ratio iv make certain modifications negative covenants related restricted payments investments may make c repaid full 1075 billion outstanding private placement notes using net proceeds senior notes incremental term loan together additional borrowings senior credit facility february 25 2020 executed fifth amendment amended credit agreement among things • increase maximum allowable consolidated leverage ratio 500 100 end first quarter 2022 450 100 thereafter • upon consummation divesture esol disposal group foregoing maximum permitted consolidated leverage ratio levels step 475 100 425 100 respectively • allow continuation 200 million cash add backs ebitda december 31 2020 addbacks 100 million december 31 2021 addbacks thereafter • increase leverage ratio pricing tier greater 450 100 0125 • grant firstpriority security interest administrative agent benefit lenders substantially personal property company certain material domestic subsidiaries including certain equity interests held entities additional information see part ii item 8 financial statements supplementary data note 9 debt consolidated financial statements course 2019 divested texting business based uk telephone answering services business pharmaceutical returns business north america substantially operations mexico chile five transactions combined generated 837 million gross proceeds 2019 result divestitures recorded total noncash divestiture losses net gains 1030 million additional information see part ii item 8 financial statements supplementary data note 4 restructuring divestitures consolidated financial statements february 6 2020 entered purchase agreement sell domestic environmental solutions business harsco corporation exclusive retained business 2019 10k annual report stericycle inc • 37 part ii subject terms conditions purchase agreement buyer agreed purchase outstanding equity interests domestic environmental solutions subsidiary buyer agreed indemnify party losses arising certain breaches purchase agreement liabilities subject certain limitations purchase price transaction approximately 4625 million subject adjustment based esol disposal group’s net working capital closing adjustments defined purchase agreement transaction anticipated result loss currently estimable expected charge based current estimate proceeds allocated disposal transaction evaluate terms hsa agreement negotiated buyer concurrently transaction net assets disposed allocation goodwill based relative fair value esol disposal group domestic environmental solutions reporting unit remaining goodwill allocated retained business anticipate become part domestic healthcare compliance services reporting unit transaction closes purchase agreement contains customary representations warranties covenants related business transaction date purchase agreement completion transaction agreed conduct ordinary course esol disposal group business consistent past practices material respects agreed certain operating covenants respect esol disposal group business set forth fully purchase agreement purchase agreement includes customary termination provisions including closing transaction occurred november 6 2020 may extended february 6 2021 needed obtain applicable regulatory approvals buyer agreed indemnify party losses arising certain breaches purchase agreement liabilities subject certain limitations connection closing transaction buyer enter certain additional ancillary agreements including transition services agreement buyer also enter longterm subcontracted hsa respect retained business currently provide integrated waste compliance services healthcare customers including medical hazardous waste disposal services continue integrated waste services provider customers subcontracted buyer performed hazardous waste services including collection transportation disposal necessary domestic environmental solutions business generated revenue 5596 million including approximately 1000 million related retained business included regulated waste compliance services revenue category north america rwcs segment key business priorities following founding 1989 stericycle grew rapidly medical waste industry developed largely inorganic acquisitions growth medical waste acquisitions helped us achieve scale infrastructure route density leadership position us also leveraged acquisitions enter new geographies add additional services portfolio grew evolved operated without centralization efficiencies come integrated modern corporate structure associated information systems 2019 10k annual report stericycle inc • 38 part ii following table identifies key priorities significant matters impacting business amounts stated pretax except noted 2019 10k annual report stericycle inc • 39 part ii priorities significant matters include following types activities 1 includes employee contract termination facility closure cleanup costs 2 includes dedicated resources including project related incentive compensation stockbased compensation 3 includes costs related priority eg software maintenance fees changes contingent consideration environmental provisions 4 includes impairments accelerated depreciation andor amortization gainloss disposal changes deferred consideration end 2017 began implementation business transformation including development erp system focused driving longterm growth improving profitability enhancing shareholder value 2019 refocused transformation efforts aligned around five key business priorities 1 portfolio rationalization look future continue pursue divestiture service lines geographies profitable limited growth potential vertically integrated essential regulated waste compliance services secure information destruction service categories andor present opportunity reduce debt 2 quality revenue services offer help customers meet complex regulations expertise infrastructure service levels provide differentiated premium brand value customers serve focused improving quality revenue deliver 2019 added chief commercial officer began implementing changes commercial operations realigned sales organization around customer channels implemented best practices sales management training reorganized marketing teams focus functional area expertise across services improved contracting processes customers 3 operational cost efficiencies daytoday operations shifting toward standardized operating model optimize processes drive efficiencies improve safety service 2019 added chief engineer begun centralizing operational decision making corporate engineering group additionally focused driving cost efficiencies work measurement asset optimization use technology expanded strategic sourcing 2019 10k annual report stericycle inc • 40 part ii 4 debt reduction leverage improvement result debt accumulated historic acquisition strategy debt structure debt improvement key focus 2019 june 2019 raised 600 million issuance senior notes 365 million incremental term loan combined additional draw senior credit facility stericycle paid restrictive 1075 billiondollar private placement notes additionally 2019 applied cash flow operations proceeds divestitures enable net debt reduction approximately 1000 million 5 erp implementation 30year history stericycle acquired 500 companies without fully integrating certain acquisitions onto centralized information technology platforms disparate operating information systems resulted significant operational inefficiencies implementation erp expect improve daily decision making via realtime information insights simplify enhance forecast accuracy provide transparency greater accountability aid development strategic planning make easier customers business us “golive” erp system began january 2020 global rollout humanresources performance management module 2020 additional erp capabilities including commercial operational financial implemented staged approach across north america rwcs reportable segment excluding esol disposal group 2019 10k annual report stericycle inc • 41 part ii business transformation since program’s inception recognized following charges capital expenditures related business transformation december 31 2019 completed activities originally contemplated part business transformation areas investment costs savings business capability related matters prospectively business transformation activities focused erp development implementation additional operating expenditures capital expenditures anticipated 2020 complete design testing deployment north america north america deployment occurs additional costs added ongoing operations reflect cost erp post golive 2020 beyond continue incur costs maintain legacy suite applications supporting global businesses applications replaced new erp 2019 10k annual report stericycle inc • 42 part ii business transformation operating expenditures reportable segment follows part business transformation undertaking legal entity organizational restructuring actions assist streamlining simplifying business operations help lower general administrative costs actions could result additional charges associated consulting professional fees increases potential exposure us foreign taxes foreign exchange charges intangible amortization years ended december 31 2019 2018 2017 recognized 1452 million 1303 million 1184 million respectively intangible amortization expense increase partially due adjustment estimated useful lives certain customer relationship intangibles see part ii item 8 financial statements supplementary data note 7 goodwill intangible assets consolidated financial statements end 2018 remaining changes net arising acquisitions divestitures acquisition integration details acquisitions completed years ended december 31 2019 2018 2017 found part ii item 8 financial statements supplementary data note 3 acquisitions consolidated financial statements acquisition integration expenses follows acquisition expenses years principally comprise internal costs changes deferred consideration integration expenses incurred years ended december 31 2018 2017 primarily related acquisitions completed us particular shredit® acquisition prospectively baring new acquisitions anticipate acquisition integration expenses limited deferred consideration changes operational optimization aim achieve culture continuous improvement enhance efficiency effectiveness competitiveness improve cost base cash flow taken number actions reduce operating costs optimize operations example believe plant throughput route density competitive strengths stericycle maintain strengths making adjustments network 2019 10k annual report stericycle inc • 43 part ii transportation treatment facilities optimize overall logistics processing capabilities within service category reducing operational costs part efforts seek reduce network redundancies consolidating facilities closing redundant facility restructuring local organization operation efficiency operational optimization expenses 98 million recognized cor 47 million recognized sga year ended december 31 2019 follows significant charges • north america rwcs exit costs employee termination related employee severance payments noncash charges related impairment longlived assets arising site relocation us • international rwcs exit costs employee termination noncash charges relate site closures facility exits emea latin america expenses primarily related additional charges incurred result diverting waste processing conversion one plants apac • exit costs employee termination relate severance payments domestic crs business better align cost structure associated revenues noncash charges relate impairment customer list intangibles operational optimization expenses recognized sga year ended december 31 2018 follows significant charges • north america rwcs closure exit costs related optimizing overall logistics sales functions primarily related secure information destruction locations lease exit costs consolidation call centers canadian crs locations noncash charges related accelerated depreciation associated software 2019 10k annual report stericycle inc • 44 part ii • international rwcs closure exit costs related closure contract exit cleanup costs primarily latin america apac noncash impairment charges related longlived assets customer relationships operating permits primarily latin america apac rationalization tradename europe expenses primarily apac • closure exit costs related lease exit costs consolidation call centers domestic crs locations operational optimization charges except 04 million recognized cor recognized sga year ended december 31 2017 follows significant charges • north america rwcs closure exit costs related optimizing overall logistics sales functions primarily related secure information destruction locations noncash impairment charges related long lived assets consulting professional fees related costs identify opportunities reduce operational redundancies • international rwcs closure exit costs employee termination closure exit costs included amounts incurred latin america rationalizing operations uk facility rationalization contract exit costs noncash impairment charges related longlived assets operating permits customer relationships latin america apac • closure exit costs related consolidating call centers domestic crs locations noncash charges relate impairment tradename consulting professional fees represented expenses incurred eliminate operational redundancies continue consider operational optimization activity amount timing recognition charges affected occurrence commitments triggering events defined us gaap among factors may incur charges cash expenditures estimated may realize expected improvement cost savings planned time frame divestitures evaluate portfolio services ongoing basis countrybycountry service linebyservice line approach assess longterm potential identify potential business candidates divestiture decision divest business based upon several criteria including following • outlook longterm market conditions • potential impact complementary services customer relationships • ability leverage infrastructure customer base growth 2019 10k annual report stericycle inc • 45 part ii • potential margin improvement inclusive vertical integration collection treatment • current divestiture value versus future divestiture value • return invested capital • impact overall leverage including impact debt leverage ratio • implications ongoing internal control compliance efforts • implications erp system implementation recognized following divestiture losses net gains associated divestitures following businesses see part ii item 8 financial statements supplementary data note 4 restructuring divestitures consolidated financial statements included losses divestiture mexico chile operations charges 189 million 168 million respectively relating recognition losses accumulated associated cumulative currency translation adjustments reclassified earnings date disposal addition charges 2019 2018 incurred 117 million 77 million respectively consulting professional fees associated portfolio rationalization efforts incur fees year ended december 31 2017 part longterm strategy improving profitability return invested capital continue evaluate performance entire portfolio assets businesses divestitures resulting ongoing evaluation may cause us record significant charges including related goodwill intangible assets longlived assets cumulative currency translation adjustments addition divestitures complete may yield targeted improvements business charges required record failure achieve intended financial results associated divestiture may complete result ongoing reviews could material adverse effect business financial condition results operations continue monitoring businesses achievement criteria may require classification assets heldforsale impairment otherwise required applicable accounting standards impairment evaluation based assumption assets businesses continue operated us heldforuse divested classified heldforsale 2019 10k annual report stericycle inc • 46 part ii litigation settlements regulatory compliance operate highly regulated industries must address regulatory inquiries respond investigations time also involved variety civil litigation time including items detailed part ii item 8 financial statements supplementary data note 20 legal proceedings consolidated financial statements financial results may also include considerations nonrecurring matters including settlements environmental remediation legal related consulting professional fees year ended december 31 2019 recognized 282 million regulatory compliance consulting professional fees primarily related certain litigation matters year ended december 31 2018 recognized 932 million legal settlement regulatory compliance expenses consulting professional fees primarily related certain litigation matters including provision net insurance recoveries securities class action settlement announced december 19 2018 approved july 2019 year ended december 31 2017 recognized 3277 million legal settlement regulatory compliance expenses consulting professional fees primarily related certain litigation matters 2950 million sq settlement see also item 1a risk factor “we subject number pending lawsuits” asset goodwill impairments asset impairment charges comprise following year ended december 31 2019 impairment charges primarily consisted 16 million related software result rationalization system applications primarily 10 million related permits mexico due site closures prior mexico operations divestiture 07 million related customer list intangibles netherlands 183 million associated property equipment customer relationship permits intangibles brazil operations part international rwcs reportable segment 05 million associated site closure north 2019 10k annual report stericycle inc • 47 part ii america rwcs reportable segment year ended december 31 2018 impairment charges primarily associated software connection evolving future information systems strategy including rationalization applications used within reportable segment impairment charges included sga cor year ended december 31 2019 2018 respectively described part ii item 8 financial statements supplementary data note 5 property plant equipment note 7 goodwill intangible assets consolidated financial statements result annual goodwill impairment assessments october 1 interim assessments applicable recognized goodwill impairment charges discussed impairment section part ii item 7 management’s discussion analysis financial condition results operations goodwill impairment additional information see part ii item 8 financial statements supplementary data note 7 goodwill intangible assets consolidated financial statements impairment charges may recognized future periods extent changes factors circumstances occur including deterioration macroeconomic environment equity markets including market value common shares deterioration performance future projections changes plans one reporting units specified longlived assets among factors years ended december 31 2019 2018 2017 recognized 397 million 291 million 248 million respectively consulting professional fees related internal control remediation activities well implementation new accounting standards years ended december 31 2019 2018 recognized foreign exchange losses 33 million 38 million respectively related remeasurement net monetary assets held argentina result designation highly inflationary economy capital allocation stericycle aims maintain structured capital allocation strategy balances investment business debt reduction returns shareholders capital allocation items include following types activities • stock issuance costs • dividends preferred stock • debt modification costs connection related nonrecurring matters • losses early extinguishment debt • related expenses year ended december 31 2019 incurred pretax loss early extinguishment debt 231 million comprising “makewhole” premium 204 million due terms certain private placement notes 27 million related unamortized debt issuance costs associated repayments private placement notes also incurred 02 million debt modification charges associated execution fourth amendment recorded interest expense net charges 34 million related write 2019 10k annual report stericycle inc • 48 part ii unamortized portion premiums associated interest rate locks executed connection issuance certain private placement notes recorded interest expense net year ended december 31 2018 recognized 27 million debt modification charges related amending credit agreements charges recognized interest expense net consolidated statements loss income declared paid dividends 255 million 363 million series preferred stock shareholders years ended december 31 2018 2017 respectively september 14 2018 accordance terms issuance series preferred stock converted common stock outstanding shares preferred stock associated depositary shares cancelled tax reform analyzed provisional impact tax act year end 2017 income tax benefitprovision result recognized 1298 million income tax benefit 2017 consistent requirements staff accounting bulletin 118 “sab 118” analysis determination provisional impact finalized 2018 resulting charge 88 million discussion see part ii item 8 financial statements supplementary data note 10 income taxes consolidated financial statements results operations revenues including segment revenue analyzing company’s performance necessary understand various regulated services share common infrastructure customer base market regulated compliance services offering various pricing options meet customers’ preferences customers move different billing paradigms example customers may contract us medical waste disposal services billed based weight waste collected processed disposed particular period subsequent period customer could move standard service packages regulated medical waste services training education services contracted subscription fee another example customer purchases medical waste disposal sharps disposal management services provides customer regulated services different pricing billing arrangement track movement customers various types regulated services offer although identify directional trends services regulated services similar nature inherent inaccuracies disaggregation analyze revenues revenue service category operating segment analyze revenue growth identifying changes related organic growth acquisitions divestitures changes due currency exchange fluctuations organic growth excludes effect foreign exchange acquisitions divestitures less full year revenues comparative period revenues gross profit associated sid services impacted changes sop pricing declined recent quarters continued declines sop pricing could material impact revenues gross profit results operations regulated waste compliance services consist medical waste compliance solutions hazardous waste solutions communication related services revenues consist communications services expert solutions 2019 10k annual report stericycle inc • 49 part ii 2019 compared 2018 year movements revenues service category follows 1 excluding sop price impact sid organic percentage change 36 year ended december 31 2019 2 excluding sop price impact north america rwcs organic percentage change 02 year ended december 31 2019 3 excluding sop price impact international rwcs organic percentage change 41 year ended december 31 2019 consolidated basis revenues decreased 1770 million 51 2019 331 billion 349 billion 2018 decrease largely driven impact divestiture activity foreign exchange sop pricing reductions crs partially offset organic growth rwcs sid due among things implementation recycling revenue surcharge north america rwcs revenues decreased 299 million 12 2019 254 billion 257 billion 2018 organic revenue declined 300 million 12 result approximately 350 million related impact sop pricing partially offset growth sid acquisitions contributed 95 million 04 revenues divestitures reduced revenues 57 million 02 decline canadian dollar unfavorable impact 2019 revenues 37 million 02 international rwcs revenue decreased 758 million 116 2019 5793 million 6551 million 2018 organic revenue increased international rwcs segment 2019 204 million 31 primarily due higher volumes rwcs revenues result implementation new sales strategies higher sid revenues due higher volumes increases recycling surcharge revenue offset impact decreases sop pricing divestitures businesses primarily uk hazardous waste business 2018 reduced revenues 321 million 49 effect foreign exchange rates unfavorably impacted international revenues 2019 641 million 98 foreign currencies declined us dollar 2019 10k annual report stericycle inc • 50 part ii revenues related domestic crs decreased 713 million 278 2019 1854 million 2567 million 2018 organic revenue decreased 450 million 175 primarily due reductions crs volumes due smaller sized recall events fewer mandated recalls result us federal government shutdown early 2019 divestitures primarily related north america tas retail pharmaceutical returns businesses divested 2019 reduced revenues 263 million 103 2018 compared 2017 consolidated basis revenues decreased 948 million 27 2018 349 billion 358 billion 2017 decrease largely driven expected declines sq medical waste business crs foreign exchange divestitures partially offset strong organic growth sid north america rwcs revenues increased 222 million 09 2018 257 billion 255 billion 2017 organic revenues decreased 15 million saw declines due impact sq pricing partially offset increases sid revenues result increased pricing related demand sop pricing increases related recycled paper well organic growth new customers growth regulated waste compliance revenues retail larger customers acquisitions contributed 270 million 11 revenues divestitures primarily related us clean room business reduced revenues 33 million 01 international rwcs revenue decreased 525 million 74 2018 6551 million 7076 million 2017 increase international rwcs segment organic revenues 133 million 19 sid revenues increased result increased pricing related demand sop pricing recycled paper well organic growth new customers impact new general data protection regulation laws europe also saw increases medical waste compliance revenues result growth europe increases offset declines due exit patient transport business uk overall economic declines several latin america markets acquisitions international rwcs segment contributed 27 million 04 revenues divestitures related hazardous waste business uk sid business south africa reduced revenues 417 million 59 effect foreign exchange rates primarily latin america unfavorably impacted 2019 10k annual report stericycle inc • 51 part ii international revenues 2018 268 million 38 foreign currencies notably latin america declined us dollar revenues related domestic crs decreased 645 million 201 2018 2567 million 3212 million 2017 revenues impacted reductions crs volumes due smallersized recall events compared multiple largesized recall events managed 2017 lower call volumes gross profit consolidated gross profit decreased 2015 million 146 2019 117 billion 138 billion 2018 percentage revenues consolidated gross profit decreased 355 2019 compared 395 2018 decline gross profit primarily due impact higher operational costs including thirdparty disposal hazardous waste operations equipment maintenance rental costs well impact sop pricing declines consolidated gross profit decreased 865 million 59 2018 138 billion 146 billion 2017 percentage revenues consolidated gross profit decreased 395 2018 compared 408 2017 decline gross profit primarily attributable expected impact sq mix pricing approximately 257 million impairment charges incurred north america rwcs reportable segments impact lower volumes crs decreases also due prolonged declining market trend cost pressures latin america international gross profit lower domestic gross profit international operations fewer small account customers tend generate higher gross profit historically international operations generate revenues large account customers hospitals publicly funded healthcare organizations government bodies international revenues increase consolidated gross profit percentages experience downward pressure due business mix shift may offset additional international small account market penetration integration savings domestic business expansions sga expenses decreased 1105 million 95 2019 106 billion 117 billion 2018 percentage revenues sga decreased 319 revenues 2019 compared 334 2018 decrease primarily result lower charges associated key priorities significant matters discussed 3174 million 2019 compared 3829 million 2018 2019 10k annual report stericycle inc • 52 part ii lower incentive compensation sga expenses decreased 2300 million 165 2018 117 billion 140 billion 2017 percentage revenues sga decreased 334 2018 compared 390 2017 decrease primarily attributable lower charges associated key priorities significant matters 3829 million 2018 compared 6129 million 2017 matters discussed additionally also decreases consulting professional fees bad debt expense partially offset increase incentive compensation achievement higher overall levels 2018 goodwill impairment goodwill impairment 2283 million 2019 3587 million 2018 650 million 2017 performed annual goodwill assessment october 1 2019 result determined canada domestic environmental solutions reporting units’ carrying values excess estimated fair values following factors contributed changes longrange plan approved fourth quarter negatively impacted estimated fair value reporting units • domestic environmental solutions 2019 experienced higher operating costs particularly related hazardous waste disposal costs addition anticipate timelines achieving betterment plans revenue quality cost improvements extended also gathered insights process evaluating domestic environmental solutions part portfolio rationalization considerations • canada 2019 experienced competitive pricing pressure sid regulated medical waste services lower sop pricing higher medical hazardous waste costs including canada based operating costs due reliance thirdparty disposal us based enabling support costs expect challenges prolonged impact adjusted current year longrange plan challenges factored updates longrange plan forecasted cashflow assumptions reflect current outlook also made certain adjustments discount rates used present value forecasted cashflows result recognized 1266 million fully impair goodwill associated canada reporting unit 808 million noncash impairment charges related domestic environmental solutions reporting unit first quarter 2019 business market strategic developments negatively impacted estimated cash flows latin america reporting unit triggered interim assessment march 31 2019 determined latin america reporting unit’s carrying value excess estimated fair value recognized 209 million noncash goodwill impairment 2018 result annual impairment assessment goodwill recognized noncash goodwill impairment charge domestic crs latin america reporting units 2863 million 724 million respectively 2019 10k annual report stericycle inc • 53 part ii 2017 result annual impairment assessment goodwill recognized noncash goodwill impairment charge latin america reporting unit 650 million segment profitability use adjusted ebitda primary measure profitability reportable segments see part ii item 8 financial statements supplementary data note 18 segment reporting consolidated financial statements explanation measure segment profitability reconciliation total segment profitability loss income operations follows 2019 compared 2018 adjusted ebitda north america rwcs reportable segment decreased 1392 million 178 2019 6432 million 7824 million 2018 percentage north america rwcs revenues adjusted ebitda 253 304 2019 2018 respectively decrease primarily result lower gross margins due impact higher operational costs including thirdparty disposal hazardous waste operations equipment maintenance rental costs well impact sop pricing declines 2019 10k annual report stericycle inc • 54 part ii adjusted ebitda international rwcs reportable segment increased 34 million 36 2019 990 million 956 million 2018 percentage international rwcs revenues adjusted ebitda 171 146 2019 2018 respectively increase percentage revenues primarily result higher gross profit percentage europe result divestitures lower margin businesses 2018 lower sga expenses offset lower operating margins latin america due impact lower volumes decreases sop pricing europe adjusted ebitda decreased 310 million 232 2019 1644 million 1334 million 2018 decrease result lower revenues domestic crs business due smaller sized recall events fewer mandated recalls result us federal government shutdown early 2019 combined disproportionally lower gross profits due higher fixed cost nature business higher corporate enabling functional expenses 2018 compared 2017 adjusted ebitda north america rwcs reportable segment decreased 271 million 33 2018 7824 million 8095 million 2017 percentage north america rwcs revenues adjusted ebitda 304 317 2018 2017 respectively decrease primarily result impact lower margins caused expected impact pricing sq medical waste customers well pricing pressures experienced sq regulated waste compliance customers resulting hospital consolidation physician practices increased competitive activities partially offset impact business transformation cost savings efficiencies additionally overall decrease partially offset benefits increased volume higher sop pricing adjusted ebitda international rwcs reportable segment increased 19 million 20 2018 956 million 937 million 2017 percentage international rwcs revenues adjusted ebitda 146 132 2018 2017 respectively experienced improvements overall margins europe result exit lower margin businesses improvements partially offset lower margins latin america due prolonged declining market trend costs pressures adjusted ebitda decreased 422 million 2018 1334 million 912 million 2017 decrease result lower revenues domestic crs business combined disproportionally lower gross profits due higher fixed costs nature business interest expense net interest expense net increased 2019 1183 million 1060 million 2018 due overall increase interest rates charged borrowings caused increase libor rate interest rate adjustments interest rate adjustments calculated terms relevant agreements related private placement notes prior early extinguishment senior credit facility combined overall increase average outstanding debt balance 2019 10k annual report stericycle inc • 55 part ii 2019 interest expense net includes noncash charge 34 million together 02 million detailed capital allocation interest expense net increased 2018 1060 million 937 million 2017 due increase overall interest rates borrowings caused increase libor rate interest rate adjustments higher interest rates result higher rates calculated terms relevant agreements related private placement notes senior credit facility combined overall increase average outstanding debt balance primarily due funding sq settlement payment 2950 million using amounts available senior credit facility capitalized interest 54 million 29 million 16 million years ended december 31 2019 2018 2017 respectively interest capitalization based upon balance construction progress within property plant equipment primarily comprised amounts associated erp implementation erp becomes operational amounts reclassified construction progress thereby reducing amount interest capitalized increasing amount recognized interest expense addition based terms amendment credit agreement signed february 25 2020 expect annual interest expense increase approximately 20 million loss early extinguishment debt 2019 incurred pretax loss early extinguishment debt 231 million relating repayment private placement notes discussed capital allocation expense net expense net increased 2019 95 million 83 million 2018 expense includes 33 million 38 million 2019 2018 respectively relating foreign exchange loss resulting remeasurement argentina peso denominated net monetary assets result designation july 1 2018 argentina highly inflationary economy expense net increased 2018 83 million 66 million 2017 primarily due 38 million foreign exchange loss resulting remeasurement argentinian peso denominated net monetary assets income tax benefit income tax benefit 168 million 2019 compared income tax benefit 298 million 2018 effective tax rates years 2019 2018 46 108 respectively 2019 2018 effective rate impacted nondeductibility portion goodwill impairments certain jurisdictions valuation allowances recognized net operating losses several countries income tax benefit 298 million 2018 compared 1509 million 2017 effective tax rates years 2018 2017 108 1399 respectively 2017 result introduction tax act recognized income tax benefit 1298 million arising 2019 10k annual report stericycle inc • 56 part ii revaluation us net deferred tax liabilities 35 newly enacted us corporate income tax rate 21 partially offset onetime transition tax unremitted foreign earnings profits elected pay eightyear period expected foreign withholding taxes 2018 accordance sab 118 recognized charge 88 million completed analysis associated impact tax act addition 2018 2017 effective rate also impacted nondeductibility goodwill impairments certain jurisdictions valuation allowances recognized net operating losses several countries file income tax returns united states various states certain foreign jurisdictions longer subject us federal state local nonus income tax examinations tax authorities years prior 2015 company filed pfa irs related claim internal revenue code section 1341 concerning tax rate applied sq settlement company’s 2018 tax return irs reviewed subsequently agreed hold discussions regarding pfa 2020 year ended december 31 2018 company established longterm receivable amount within uncertain tax positions reflect estimate potential refund claim successful longterm receivable included assets uncertain tax position liability included liabilities consolidated balance sheets december 31 2019 2018 positive income tax benefit resulting claim future period recognized appropriate accordance guidance asc 740 accounting uncertain tax positions longterm receivable addition net operating loss assets included assets consolidated balance sheets assurance amount recovered result claim liquidity capital resources details outstanding debt obligations found part ii item 8 financial statements supplementary data note 9 debt consolidated financial statements believe sufficient liquidity support ongoing operations including erp implementation invest future growth create value shareholders operating cash flows 12 billion senior credit facility primary sources liquidity expected used among things payment interest principal longterm debt obligations capital expenditures necessary support growth productivity improvements including associated erp implementation extent liquidity needs prove greater expected cash generated operations less anticipated cash hand credit availability insufficient breach existing credit agreement would need seek additional financing alternative sources including approaching capital markets order provide additional liquidity february 25 2020 executed fifth amendment amended credit agreement among things • increase maximum allowable consolidated leverage ratio 500 100 end first quarter 2022 450 100 thereafter • upon consummation divesture esol disposal group foregoing maximum permitted consolidated leverage ratio levels step 475 100 425 100 respectively 2019 10k annual report stericycle inc • 57 part ii • allow continuation 200 million cash add backs ebitda december 31 2020 addbacks 100 million december 31 2021 addbacks thereafter • increase leverage ratio pricing tier greater 450 100 0125 • grant firstpriority security interest administrative agent benefit lenders substantially personal property company certain material domestic subsidiaries including certain equity interests held entities expect incur facility fees approximately 20 million connection execution fifth amendment credit agreement fifth amendment contain number covenants including financial covenants december 31 2019 compliance consolidated leverage ratio covenant actual ratio 445 100 allowed maximum ratio 500 100 contained fifth amendment working capital december 31 2019 working capital decreased 644 million deficit 503 million compared 141 million december 31 2018 change primarily related recognition operating lease liabilities associated adoption asc 842 impact divestitures increased collections partially offset increase prepaid expenses decreases accrued liabilities bank overdrafts current assets decreased 407 million 2019 7066 million 7473 million 2018 increases prepaid expenses result increases prepaid softwareasaservice fees partially offset declines accounts receivable result divestitures increased collections days sales outstanding dso 60 days 63 days december 31 2019 2018 respectively current liabilities increased 237 million 2019 7569 million 7332 million 2018 primarily result adoption asc 842 requires recognition operating lease liabilities consolidated balance sheet increase partially offset decreases accrued liabilities due timing payments related 2018 annual incentive plans decrease bank overdrafts used portion proceeds divestiture business reduce overdraft balances uk operating cash flows net cash operating activities increased 823 million 497 2019 2480 million 1657 million 2018 cash flow operations 2018 lower primarily result payment 2950 million sq settlement excluding settlement payment cash flow operations decreased 2127 million primarily due lower operating performance 2019 previously highlighted payments 2019 certain litigation matters 2018 incentive compensation erprelated prepaid software investing cash flows net cash used investing activities decreased 435 million 295 2019 1040 million 1475 million 2018 capital expenditures increased 634 million 1942 2019 10k annual report stericycle inc • 58 part ii million 1308 million 2018 primarily result capital expenditure payments associated erp implementation also received 866 million divestiture businesses 2019 receipt note receivable issued connection divestiture uk hazardous waste business 2018 payments acquisitions net cash acquired decreased 445 million completed one acquisition 2019 versus 21 2018 financing cash flows net cash used financing activities increased 1159 million 4510 2019 net outflow 1416 million net outflow 257 million 2018 june 2019 raised proceeds 6000 million issuance senior notes used proceeds net issuance costs together additional borrowings senior credit facility term loan repay full approximately 1075 billion outstanding balance private placement notes result repayment also incurred “makewhole” premium 204 million payable terms certain private placement notes net borrowings senior credit facility term loan 4463 million including additional term loan 3650 million 2019 compared net borrowings 687 million 2018 primarily result additional borrowings finance repayment private placement notes made repayments 125 million 2019 including using portion proceeds divestiture business reduce bank overdraft uk made series repurchases 172 million paid dividends 255 million holders series 2018 series converted accordance terms issuance common stock september 2018 result dividends due payable 2019 contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2019 1 amounts represent scheduled principal payments related longterm debt excluding interest see part ii item 8 financial statements supplementary data note 9 debt consolidated financial statements payments unrecognized tax benefits excluded contractual obligations based uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement applicable taxing authorities elected pay 235 million transition tax liability eight years net receivable position irs due estimated payments credits tax periods 2019 irs offset transition tax payable payments credits deposit irs environmental liabilities presented accrued undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable see part ii item 8 financial statements supplementary data note 12 commitments contingencies consolidated financial statements 2019 10k annual report stericycle inc • 59 part ii december 31 2019 330 million standby letters credit outstanding senior credit facility 523 million standby letters credit outstanding another facility 723 million surety bonds 193 million bank guarantees bank guarantees issued mostly international subsidiaries various purposes including leases seller notes contracts permits surety bonds used performance guarantees neither bank guarantees surety bonds affect ability use various lines credit anticipate operating cash flows together additional borrowings available senior credit facility amended february 25 2020 sufficient meet anticipated future operating expenses key priorities erp implementation capital expenditures debt service obligations become due next 12 months foreseeable future critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance us gaap preparation financial statements requires management make estimates assumptions judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities although management believes estimates assumptions reasonable based upon information available made therefore actual results may differ estimates different assumptions conditions critical accounting policies may material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change policies material impact financial condition operating performance company part ii item 8 financial statements supplementary data note 1 basis presentation summary significant accounting polices consolidated financial statements provides detailed description material accounting policies however identified following critical accounting policies estimates revenue recognition revenue recognized customer obtains control promised goods services amount revenue recognized reflects consideration company expects entitled receive exchange good services revenue recognized net revenuebased taxes assessed governmental authorities provide regulated waste compliance services include collection processing regulated specialized waste disposal collection personal confidential information secure destruction expert solutions communication services associated activities series distinct services substantially pattern transfer time therefore respective services treated single performance obligation recognize revenue applying right invoice practical expedient right consideration corresponds directly value provided customer performance date revenues regulated medical waste solutions secure information destruction services recognized upon waste collection compliance solution revenues recognized contractual service period revenues hazardous waste solutions manufacturing industrial services recognized time waste received facility appropriate permit either processing facility third party revenues communication services expert solutions recorded services performed 2019 10k annual report stericycle inc • 60 part ii allowance doubtful accounts report accounts receivable net realizable value management’s best estimate cash ultimately received maintain allowance doubtful accounts reflect expected uncollectability accounts receivable based historical collection data specific risks identified among uncollected accounts current economic trends events changes circumstances indicate specific receivable balances may impaired consideration given collectability balances allowance adjusted accordingly adequacy allowances uncollectible accounts reviewed least quarterly adjusted necessary based reviews management’s judgment required assess collectability account based detailed analysis aging receivables creditworthiness customers historical collection trends current economic trends accounts receivable written subsequent periods differ allowance doubtful accounts provided historically provision adequate allowance doubtful accounts 679 million 719 million december 31 2019 2018 respectively impairment longlived assets property plant equipment intangible assets definitelives net longlived assets property plant equipment amortizing intangible assets reviewed whenever events changes circumstances indicate related carrying amounts may recoverable impairment assets definitelives generally determined comparing projected undiscounted cash flows generated asset appropriate grouping assets carrying value impairment identified loss recognized equal excess assets net book value fair value cost basis adjusted determining extent impairment typically requires various estimates assumptions including using managements judgment cash flows directly attributable asset useful life asset residual value necessary company uses internal cash flow estimates quoted market prices appraisals appropriate determine fair value actual results could vary estimates addition remaining useful life impaired asset revised necessary additional information see part ii item 8 financial statements supplementary data note 5 property plant equipment note 7 goodwill intangible assets consolidated financial statements intangible assets indefinitelived intangibles consist primarily permits tradenames indefinitelived intangibles assessed impairment annually october 1 frequently event occurs circumstances change subject amortization assessed impairment manner goodwill indefinite lived intangibles may assessed using either qualitative quantitative approach qualitative approach first determines morelikelythannot fair value asset less carrying value determination made impairment test complete however determined likely impairment quantitative assessment performed fourth quarter 2019 performed annual impairment test indefinitelived intangibles goodwill using qualitative approach certain assets quantitative approach remaining assets calculated fair value indefinitelived intangibles based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management 2019 10k annual report stericycle inc • 61 part ii future changes assumptions interrelationship assumptions described may negatively impact future valuations would require noncash charges may material effect financial condition operating results goodwill assessed impairment annually october 1 year frequently event occurs circumstances change could reduce value reporting carrying value used quantitative approach assess goodwill impairment fair value reporting unit calculated using income approach including dcf validated using market approach involvement thirdparty valuation specialist reporting units domestic healthcare compliance services domestic shredit domestic crs domestic environmental solutions canada europe asia pacific latin america income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows calculated using management assumptions growth rates including longterm growth rates capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based calculated weighted average cost capital adjusted reporting units based size country company specific risk premiums market approach compares valuation multiples similar companies associated reporting unit addition analyze differences sum fair value reporting units total market capitalization reasonableness taking account certain factors including control premiums fair value compared carrying value including goodwill fair value excess carrying value related goodwill impaired fair value less carrying value recognize impairment charge amount carrying value exceeds fair value exceed carrying value goodwill performed interim review goodwill assessment latin america reporting unit first quarter 2019 annual goodwill assessment october 1 2019 result assessments recorded noncash goodwill impairment charges 1266 million relating canada reporting unit 808 million relating domestic environmental solutions reporting unit 209 million relating latin america reporting unit factors considered goodwill impairment assessments discussed goodwill impairment section part ii item 7 management’s discussion analysis financial condition results operations goodwill impairment additional information see part ii item 8 financial statements supplementary data note 7 goodwill intangible assets consolidated financial statements measure sensitivity amount goodwill impairment charges key assumptions amount reporting units fair value exceeds respective carrying value subsequent impairment charges incurred december 31 2019 fair value exceeds carrying value reporting units except domestic environmental solutions less forty percent performed sensitivity analysis estimated fair values noting 50 basis point increase discount rate 50 basis point reduction longterm growth rate would result impairments reporting units except domestic environmental solutions would result incremental impairment charges 390 million 260 million respectively following impairment charges recorded december 31 2019 domestic crs canada latin america reporting units goodwill remaining intangible assets lives 2019 10k annual report stericycle inc • 62 part ii determined certain operating permits certain tradenames indefinite lives due ability renew minimal additional cost therefore amortized finitelived intangible assets amortized useful lives using straightline method customer relationships useful lives 10 25 years based upon type customer noncompete covenant intangibles useful lives 5 14 years also tradename intangibles useful lives 15 40 years evaluate useful life intangible assets annually determine whether events circumstances warrant revision remaining useful life changes reflected prospectively intangible asset amortized revised remaining useful life fourth quarter 2019 performed annual assessment useful life finitelived intangibles made changes useful lives assets liabilities heldforsale classify longlived assets disposal groups heldforsale management appropriate authority generally board directors certain executive officers commits plan sale disposal group ready immediate sale active program locate buyer initiated sale probable expected completed within one year classified heldforsale disposal groups valued lower carrying amount fair value less estimated selling costs disposal group constitutes substantially generally 90 assets liabilities operations foreign country balance cumulative currency translation adjustment associated country included carrying value disposal group carrying value including amount associated cumulative currency translation adjustment exceeds fair value less estimated selling costs heldforsale impairment charge recorded reduce carrying value estimate fair value reviewed end every reporting period disposal group classified heldforsale carrying value adjusted whenever estimated fair value less costs sell less carrying value environmental remediation liabilities environmental remediation liabilities primarily include costs associated remediating air groundwater surface water soil contamination applicable legal costs estimate ultimate liability sites evaluate several factors including nature extent contamination identified site required remediation methods timing expenditures apportionment responsibility among potentially responsible parties “prps” financial viability prp’s routinely review evaluate sites require remediation considering whether owner operator transporter generator site amount type waste hauled site number years contracted owned site next review information respect named unnamed prps estimates cost likely remediation either developed using internal resources third party environmental engineers service providers additional information see part ii item 8 financial statements supplementary data note 12 commitments contingencies consolidated financial statements income taxes record provision income taxes anticipated tax consequences reported results operations using asset liability method deferred income taxes recognized applying enacted statutory tax rates applicable future years differences financial statement 2019 10k annual report stericycle inc • 63 part ii carrying amounts existing assets liabilities respective tax basis well net operating loss tax credit carryforwards effect deferred tax assets liabilities change tax rates recognized income period includes enactment date measurement deferred tax assets reduced necessary valuation allowance tax benefits future realization uncertain although believe assumptions judgments estimates reasonable changes tax laws interpretation tax laws resolution tax audits could significantly impact amounts provided income taxes consolidated financial statements evaluating ability recover deferred tax assets full part consider available positive negative evidence including past operating results forecast future earnings future taxable income prudent feasible tax planning strategies assumptions utilized determining future taxable income require significant judgment consistent plans estimates using manage underlying businesses actual operating results future years could differ current assumptions judgments estimates however believe likely deferred tax assets recognized consolidated balance sheets ultimately realized record valuation allowance reduce deferred tax assets net amount believe likely realized recognize certain tax benefits uncertain tax positions within provision income taxes may recognize tax benefit likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements positions measured based largest benefit greater 50 likelihood realized upon settlement december 31 2019 estimated gross unrecognized tax benefits 627 million 613 million recognized would favorably impact future earnings due uncertainties tax audit outcome estimates ultimate settlement unrecognized tax positions may change actual tax benefits may differ significantly estimates company filed pfa irs related claim internal revenue code section 1341 concerning tax rate applied sq settlement company’s 2018 tax return irs reviewed subsequently agreed hold discussions 2020 regarding pfa positive income tax benefit resulting claim future period recognized appropriate accordance guidance asc 740 accounting uncertain tax positions assurance amount recovered result claim tax act established global intangible lowtaxed income gilti provisions impose tax foreign income excess deemed return intangible assets foreign corporations recognize taxes gilti period expense rather recognize deferred taxes basis differences expected affect amount gilti inclusion upon reversal information see part ii item 8 financial statements supplementary data note 10 income taxes consolidated financial statements insured selfinsured claims company’s insurance workers’ compensation autofleet general liability property employeerelated health care benefits obtained using high deductible insurance policies meaning company retained significant portion risks related claims associated programs estimated exposure unpaid claims associated expenses including incurred reported losses based calculation performed third party actuarial specialist using 2019 10k annual report stericycle inc • 64 part ii company’s historical claims experience accruals liabilities could revised future occurrences loss developments significantly differ assumptions used estimated recoveries associated insured claims recognized assets receipt amounts probable stockbased compensation measure cost employee services received exchange award equity instruments based grantdate fair value award cost recognized period employee required provide service exchange awardthe requisite service period usually vesting period performance based awards recognized consistent performance metrics accounting standards codification section 718 compensation stock compensation cost recognized equity instruments employees render requisite service grantdate fair value isos similar instruments estimated using optionpricing models black scholes option pricing model includes assumptions evaluated thirdparty valuation specialist evaluated approved vice president treasurer based historical experience current company trends comparative analysis industry trends equity award modified grant date assess impact modification necessary record compensation cost calculated incremental fair value modified award fair value original award immediately modification rsu’s awarded employee psu’s awarded measured fair value related performance criteria established nonvested equity share unit awarded employee measured fair value vested issued grant date detail see part ii item 8 financial statements supplementary data note 14 stock based compensation consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations following discussion financial condition results operations read conjunction consolidated financial statements related notes part ii item 8 financial statements supplementary data 2020 form 10k discussion regarding operating financial data year ended december 31 2019 compared year ended december 31 2018 refer item 7 managements discussion analysis financial condition results operations annual report form 10k fiscal year ended december 31 2019 2020 updated presentation company’s segment reporting see part ii item 8 financial statements supplementary data note 18 segment reporting consolidated financial statements information result changes segment reporting applicable historical segment information recast conform new presentation also presenting amounts year ended december 31 2018 results operations revenues segment profitability tables comparative discussion mentioned addition updated service lines reflect remaining hazardous waste solutions services manufacturing industrial services rwcs reclassification driven divestiture environmental solutions business discussed part ii item 8 financial statements supplementary data note 4 restructuring divestitures impairments service line information recast conform new presentation overview incorporated 1989 stericycle us based businesstobusiness services company leading provider compliancebased solutions protects people promotes health safeguards environment stericycle serves customers us 17 countries worldwide solutions regulated waste compliance services secure information destruction patient engagement customers team members communities serve stericycle company protects matters offering services appeals wide range business customers majority customers healthcare businesses hospitals physician dental practices outpatient clinics longterm care facilities etc also provide services retailers manufacturers financial services providers professional services providers governmental entities businesses manage large volumes waste materials volume per customer site average small highlights year ended december 31 2020 compared prior year include •revenues year ended december 31 2020 268 billion compared 331 billion 2019 6334 million decline impact divestitures 4837 million lower sid revenues excluding sop pricing 1571 million primarily reflecting pandemicrelated business disruption partially offset growth regulated waste compliance services 365 million •income operations year ended december 31 2020 319 million compared loss operations 2119 million 2019 change primarily due goodwill impairment 2020 compared goodwill impairment 2283 million 2019 offset net divestiture losses 1236 million 2020 compared net divestiture losses 1030 million 2019 net divestiture difference 206 million addition continue see lower charges associated key priorities significant matters discussed •net loss year ended december 31 2020 573 million 063 diluted loss per share compared 3468 million 381 diluted loss per share 2019 difference related higher income operations 2438 million lower interest expense 364 million lower loss early extinguishment debt 231 million partially offset higher income tax expense 167 million •cash flow operations year ended december 31 2020 5302 million compared 2480 million 2019 representing 2822 million yearoveryear improvement •cash paid capital expenditures year ended december 31 2020 1195 million compared 1942 million year ended december 31 2019 primarily driven timing 2019 investments erp disciplined capital management throughout 2020 part ii 2020 completed following debt related transactions november 9 2020 issued 5000 million par aggregate principal senior notes due january 2029 unsecured bear interest 3875 per annum payable january 15 july 15 year b february 25 2020 executed fifth amendment amended credit agreement among things •increase maximum allowable consolidated leverage ratio 500 100 end first quarter 2022 450 100 thereafter •upon consummation divestiture esol disposal group foregoing maximum permitted consolidated leverage ratio levels stepped 475 100 425 100 respectively •allow continuation 200 million cash add backs ebitda december 31 2020 addbacks 100 million december 31 2021 addbacks thereafter •increase leverage ratio pricing tier greater 450 100 0125 •grant firstpriority security interest administrative agent benefit lenders substantially personal property company certain material domestic subsidiaries including certain equity interests held entities additional information see part ii item 8 financial statements supplementary data note 9 debt consolidated financial statements course 2020 divested environmental solutions business expert solutions business reported primarily north america reportable segment operations argentina international reportable segment divestiture transactions combined generated 4989 million net proceeds 2020 primarily used repay debt additional information see part ii item 8 financial statements supplementary data note 4 restructuring divestitures impairments consolidated financial statements covid19 pandemic march 2020 world health organization declared covid19 virus outbreak pandemic covid19 pandemic global economic impact including temporary closure nonessential businesses worldwide postponement elective surgeries preventative care company continues maintain operations within business service offerings although maritime waste service offering significantly adversely impacted monitoring future implications covid19 pandemic continue take actions manage spending align operational requirements company’s covid19 pandemic response included efforts protect health wellbeing workforce customers worked proactively centers disease control prevention occupational safety health administration department transportation regulatory agencies around world ensure readiness proper regulated waste management updated implemented numerous protocols specifically reduce risk among frontline team members strategic sourcing team worked diligently take measures provide field operations employees appropriate personal protective equipment we’ve staggered shift times dedicated trucks specific drivers reduce exposure we’ve implemented rigorous cleaning protocols facilities since march 2020 7000 team members around globe sheltering place protect staff communities serve continue monitor safety team members result covid19 pandemic longterm impact known point scale severity outbreak related behavioral changes still uncertain additionally increased frequency communications board directors height pandemic provided weekly updates board communication kept board apprised evolving impacts pandemic organization team members well provided opportunity understand monitor response pandemic providing oversight guidance company taken leadership position related covid19 pandemic support customers provide industry expertise regarding effective management covid19 waste part ii impact covid19 pandemic across revenue service categories follows key business priorities •quality revenue executing foundational initiatives launched drive revenue quality included formal crossfunctional deal review committee realignment sales incentive plans reorganization commercial leadership team around service lines key customer channels implementation global customer pipeline management processes regulated waste compliance services secure information destruction combination quality revenue initiatives continue develop deploy innovative solutions meet unmet customer needs strengthen customer engagement drive longterm organic growth example 2020 regulated waste compliance services innovated meet customer needs pandemic part ii rapidly deploying solutions support temporary covid19 testing centers introduce nonhealth care ppe disposal options secure information destruction services deployed express priority offerings address unmet customer needs around service speed predictability pandemic •operational efficiencies manage volatile times remain focused operational efficiencies modernization innovation control variable discretionary costs improving performance efficiencies field operations engineering operations teams continue implement operational process performance improvements significantly contributed gross profit margin expansion 390 basis points year ended december 31 2020 gaining traction right sizing balancing fleet equipment driving efficiencies route longhaul planning optimizing network assets additionally normalized workforce following furloughs experienced earlier year •debt reduction leverage improvement reduced net debt approximately 9000 million year ended december 31 2020 applied 4989 million net proceeds divestiture expert solutions operations argentina environmental solutions repayment debt december august april 2020 respectively divestitures proceeds continued focus operating margin expansion free cash flow generation reduced adjusted debt ebitda leverage ratio defined credit agreement 354 times december 31 2020 9472 million december 31 2020 available senior credit facility matures november 2022 •portfolio rationalization december 2 2020 stericycle divested expert solutions approximately 780 million cash august 3 2020 stericycle divested operations argentina approximately 39 million cash april 6 2020 also divested environmental solutions business 4625 million cash expect continue evaluate opportunities optimize portfolio businesses •erp implementation entered 2020 schedule begin staged deployment commercial operational financial systems north america first stage included implementation human capital management system completed january 2020 however guided commitment protect matters concluded health travel risks associated field deployment covid19 pandemic environment substantial given priorities serve customers keep team members safe made decision defer erp deployment 2021 interim making progress mining data legacy systems tools gain business insights build scorecards improve performance additionally past several months accelerated rollout certain technologies associated north american erp system including new employee travel expense system global tax management system key priorities significant matters following table identifies key priorities significant matters impacting business amounts stated pretax except noted part ii priorities significant matters include following types activities 1includes employee contract termination facility closure cleanup costs 2includes dedicated resources including project related incentive compensation stockbased compensation part ii 3includes costs related priority eg software maintenance fees changes contingent consideration environmental provisions 4includes impairments accelerated depreciation andor amortization gainloss disposal changes deferred consideration business transformation years presented cumulative period since inception business transformation recognized following principally reported 2019 completed activities originally contemplated part business transformation areas investment cost savings business capability related matters shifted planned deployment rest north american erp system 2021 interim accelerated deployment certain technologies associated north american erp system including new employee travel expense system new global tax management system intangible amortization see table key priorities significant matters intangible amortization expense acquisitions years presented classified consolidated statements loss decrease amortization expense result reduction intangible assets related divestitures see part ii item 8 financial statements supplementary data note 7 goodwill intangible assets consolidated financial statements information intangible amortization segment see part ii item 8 financial statements supplementary data note 18 segment reporting consolidated financial statements acquisition integration see table key priorities significant matters acquisition integration expense years presented primarily classified consolidated statements loss details acquisition completed year ended december 31 2019 found part ii item 8 financial statements supplementary data note 3 acquisitions consolidated financial statements part ii operational optimization organization focused operation efficiency modernization innovation aim focus achieve culture continuous improvement enhance efficiency effectiveness competitiveness improve cost base cash flow taken number actions reduce operating costs optimize operations example believe plant throughput route density competitive strengths stericycle maintain strengths making adjustments network transportation treatment facilities standardizing containers right sizing fleet levels effort optimize overall logistics processing capabilities within service category reducing operational costs part efforts seek reduce network redundancies consolidating facilities closing redundant facilities optimizing containers fleet levels restructuring local organization operations efficiency recognized following operational optimization expenses continue consider operational optimization activity amount timing recognition charges affected occurrence commitments triggering events defined us gaap among factors may incur charges cash expenditures accelerated depreciation impairments estimated may realize expected improvement cost savings planned time frame see part ii item 8 financial statements supplementary data note 4 restructuring divestitures impairments consolidated financial statements divestitures evaluate portfolio services ongoing basis countrybycountry service linebyservice line approach assess longterm potential identify potential business candidates divestiture decisions regarding divestitures based upon following criteria •outlook longterm market conditions •potential impact complementary services customer relationships •ability leverage infrastructure customer base growth •potential margin improvement •current divestiture value versus future divestiture value •ongoing capital requirements business part ii •return invested capital •impact overall leverage including impact debt leverage ratio •implications internal control remediation efforts •implications new erp system implementation recognized following divestitures including divestiture losses gains net consolidated statements loss additional information regarding divestiture losses gains including significant impacts foreign currency translation adjustments net see part ii item 8 financial statements supplementary data note 4 restructuring divestitures impairments consolidated financial statements continue evaluate performance entire portfolio assets businesses divestitures resulting evaluation may cause us record significant charges including related goodwill intangible assets longlived assets cumulative translation adjustments addition divestitures complete may yield targeted improvements business charges required record failure achieve intended financial results associated portfolio rationalization evaluation could material adverse effect business financial condition results operations see part ii item 8 financial statements supplementary data note 4 restructuring divestitures impairments consolidated financial statements litigation settlements regulatory compliance operate highly regulated industries must address regulatory inquiries respond investigations time also involved variety civil litigation time including items detailed part ii item 8 financial statements supplementary data note 20 legal proceedings consolidated financial statements see table key priorities significant matters litigation settlement regulatory compliance charges primarily consulting professional fees contingent liability provisions settlements net insurance recoveries impacting business years presented primarily classified consolidated statements loss part ii asset goodwill impairments impairment charges comprise following impairment charges may recognized future periods extent changes factors circumstances occur including deterioration macroeconomic environment equity markets including market value common shares deterioration performance future projections changes plans one reporting units specified longlived assets among factors additional information asset goodwill impairments see part ii item 8 financial statements supplementary data note 4 restructuring divestitures impairments note 7 goodwill intangible assets consolidated financial statements see table key priorities significant matters charges primarily consulting professional fees related internal control remediation activities well implementation new accounting standards impacting business primarily years presented classified consolidated statements loss see table key priorities significant matters impact foreign exchange remeasurement net monetary assets held argentina result designation highly inflationary economy years presented classified consolidated statements loss argentina operations divested august 2020 capital allocation stericycle aims maintain structured capital allocation strategy balances investment business debt reduction returns shareholders current capital allocation strategy includes debt reduction investments business year ended december 31 2019 incurred pretax loss early extinguishment debt 231 million comprising “makewhole” premium 204 million due terms certain private placement notes 27 million related unamortized debt issuance costs associated repayments private placement notes also incurred 02 million debt modification charges associated execution fourth amendment recorded interest expense net charges 34 million related writeoff unamortized portion premiums associated interest rate locks executed connection issuance certain private placement notes recorded interest expense net cares act tax reform part ii discussion see part ii item 8 financial statements supplementary data note 10 income taxes consolidated financial statements results operations revenues including segment revenue various regulated services share common infrastructure customer base market regulated compliance services offering various pricing options meet customers’ preferences customers move different billing paradigms example customers may contract us regulated waste disposal services billed based weight waste collected processed disposed particular period subsequent period customer could move standard service packages regulated waste services training education services contracted subscription fee another example customer purchases regulated waste disposal sharps disposal management services provides customer regulated services different pricing billing arrangement track movement customers various types regulated services offer although identify directional trends services regulated services similar nature inherent inaccuracies disaggregation analyze revenues revenue service category operating segment analyze revenue growth identifying changes related organic growth acquisitions divestitures changes due currency exchange fluctuations organic growth excludes effect foreign exchange acquisitions divestitures less full year revenues comparative period 2020 compared 2019 year movements revenues service category segment follows 1growth change revenues excluding impact sop pricing divestitures foreign exchange 2the comparisons constant currency rates foreign exchange reflect comparative local currency balances prior period’s foreign exchange rates stericycle calculated percentages taking current period reported revenues less respective prior period reported revenues divided prior period reported revenues respective prior period’s foreign exchange rates measure provides information change revenues assuming foreign currency exchange rates changed prior current period management believes use measure aids understanding changes revenues without impact foreign currency part ii year ended december 31 2020 compared prior year organic sid crs revenues lower primarily reflecting covid19 pandemicrelated business disruption organic rwcs revenue slightly favorable current year comparison prior year primarily reflecting organic growth quality revenue initiatives sustainable valueadded services provide customers rwcs saw covid19 pandemicrelated headwinds maritime waste services business along continued trend patients deferring elective surgeries however negative trends largely offset increased covid19 waste mailback volume along new popup testing centers nonhealth care ppe service north america revenues decreased 5507 million 201 year ended december 31 2020 21892 million 27399 million year ended december 31 2019 divestiture environmental solutions business second quarter 2020 divestiture components crs business sold fourth quarter 2019 reduced revenues 4234 million 155 organic rwcs revenue slightly favorable 06 current year comparison prior year primarily reflecting organic growth quality revenue initiatives sustainable valueadded services provide customers rwcs saw covid19 pandemicrelated headwinds maritime waste services business along continued trend patients deferring elective surgeries however negative trends largely offset increased covid19 waste mailback volume along new popup testing centers nonhealth care ppe service sid organic revenue excluding sop pricing decreased 1094 million 142 reflective reduction service stops additionally decrease revenue due impact sop pricing 123 million 16 compared prior year international revenues decreased 827 million 145 year ended december 31 2020 4863 million 5690 million year ended december 31 2019 decrease international segment organic revenue excluding sop pricing 55 million 10 additionally decrease revenue due impact sop pricing 24 million 18 compared prior year international rwcs organic growth 62 crs growth 86 offset decline sid 249 majority international rwcs revenue growth attributable supporting customers covid19 pandemic estimate underlying business slight growth impacted delayed elective surgeries decline sid due closures nonessential businesses lasted longer international locations us divestiture components crs business sold fourth quarter 2020 divestiture argentina operations third quarter 2020 divestitures uk businesses chile mexico operations fiscal 2019 reduced revenues 603 million 106 effect foreign exchange rates unfavorably impacted international revenues 2020 145 million 25 foreign currencies notably latin america declined us dollar part ii 2019 compared 2018 1growth change revenues excluding impact sop pricing divestitures foreign exchange 2the comparisons constant currency rates foreign exchange reflect comparative local currency balances prior period’s foreign exchange rates stericycle calculated percentages taking current period reported revenues less respective prior period reported revenues divided prior period reported revenues respective prior period’s foreign exchange rates measure provides information change revenues assuming foreign currency exchange rates changed prior current period management believes use measure aids understanding changes revenues without impact foreign currency gross profit decrease gross profit year ended december 31 2020 compared 2019 primarily due divestiture environmental solutions argentina expert solutions businesses 2020 divestitures occurred 2019 partially offset quality revenue initiatives addition gross profit lower associated covid19 pandemic resulting decreased revenue discussed specific sid crs partially offset reductions variable discretionary costs driven operational efficiency improvements including transportation productivity gains gross profit percentage revenues improved divested businesses historically produced lower margins compared core businesses operational efficiencies noted addition continue see lower charges associated key priorities significant matters discussed international gross profit percentage revenues lower domestic gross profit percentage revenues international operations fewer small account customers tend generate higher gross profit percentages international operations generate revenues large account part ii customers hospitals publicly funded healthcare organizations government bodies international revenues increase consolidated gross profit percentages may experience downward pressure due business mix shift may offset additional international small account market penetration operational optimization domestic business expansion sga decrease sga year ended december 31 2020 compared 2019 primarily due disciplined spending operations 2020 divestitures environmental solutions business argentina operations components crs business divestitures 2019 additionally company lower employee costs due impact furloughed team members lower commissions reduced consulting professional fees related divestitures compliance material weakness remediation costs decreases referenced partially offset higher incentive compensation decrease intangible asset amortization assets became fully amortized percentage revenue sga increased year ended december 31 2020 primarily due higher incentive stock based compensation divestitures losses gains net additional information regarding divestiture losses gains net including significant impacts foreign currency translation adjustments see part ii item 8 financial statements supplementary data note 4 restructuring divestitures impairments consolidated financial statements goodwill impairment company performed annual goodwill assessment october 1 2020 determined reporting units carrying values excess estimated fair value 2019 result annual goodwill impairment periodic assessments recognized noncash goodwill impairment charges canada environmental solutions latin america reporting units 1266 million 808 million 209 million respectively segment profitability beginning first quarter 2020 changed measure segment profitability adjusted income operations see part ii item 8 financial statements supplementary data note 18 segment reporting consolidated financial statements explanation measure segment profitability reconciliation total segment profitability income loss operations follows part ii nm percentage change meaningful 1 see part ii item 8 financial statements supplementary data note 18 segment reporting 2020 compared 2019 adjusted income operations north america segment increased 110 million 18 year ended december 31 2020 6060 million 5950 million year ended december 31 2019 percentage north america revenues adjusted income operations 277 217 years ended december 31 2020 2019 respectively adjusted income operations improved due reductions variable discretionary costs driven operational efficiency improvements including compensation transportation disciplined spending operations increase partially offset 2020 divestitures environmental solutions business argentina operations components crs business divestitures occurred 2019 operating margin improved certain divested businesses historically produced lower margins compared core businesses operational efficiencies noted adjusted income operations international segment decreased 242 million 342 year ended december 31 2020 465 million 707 million year ended december 31 2019 decline primarily reduction income operations due covid19 pandemic related revenue decreases discussed percentage international revenues adjusted income operations 96 124 years ended december 31 2020 2019 respectively adjusted loss operations increased year ended december 31 2020 compared prior year result higher incentive stockbased compensation information technology corporate insurance partially offset lower worker’s compensation expense interest expense net decrease year ended december 31 2020 compared 2019 result lower weightedaverage debt balance well lower interest rates information see part ii item 8 financial statements supplementary data note 9 debt loss early extinguishment debt 2019 incurred pretax loss early extinguishment debt 231 million relating repayment private placement notes discussed capital allocation pretax loss early part ii extinguishment debt 2020 information see part ii item 8 financial statements supplementary data note 9 debt expense net expense net primarily comprised foreign exchange losses including remeasurement net monetary assets held argentina prior divestiture august 2020 result designation highly inflationary economy income tax benefit income tax benefit 01 million 2020 compared income tax benefit 168 million 2019 effective tax rates years 2020 2019 02 46 respectively 2020 effective tax rate negatively impacted valuation allowances divestitures partially offset benefits cares act 2019 effective tax rate impacted nondeductibility portion goodwill impairments certain jurisdictions valuation allowances recognized net operating losses several countries information see part ii item 8 financial statements supplementary data note 10 income taxes consolidated financial statements liquidity capital resources details outstanding debt obligations found part ii item 8 financial statements supplementary data note 9 debt consolidated financial statements company believes sufficient liquidity support ongoing operations invest future growth create value shareholders operating cash flows company’s 120 billion senior credit facility company’s primary sources liquidity expected used among things payment interest principal company’s longterm debt obligations capital expenditures necessary support growth productivity improvements including associated shareholder distributions approved board directors extent company needs add additional funding options meet additional liquidity requirements diversify funding portfolio company could seek additional financing alternative sources including approaching capital markets company generated positive impacts cash flow operations 2020 result cares act company received 1100 million comprised 480 million july 2020 620 million december 2020 cash tax refunds 2018 2019 us net operating loss carryback claim respectively remaining carryback claims associated finalization 2019 us federal income tax return currently filed irs anticipated refund less 10 million additionally starting second quarter 2020 continued year ended december 31 2020 company deferred payments associated employer related payroll taxes approximately 233 million cares act expected payments late 2021 2022 similar tax provisions stimulus measures granted either december 31 2020 certain foreign us state jurisdictions company continues evaluate apply applicable company benefited year ended december 31 2020 nonus indirect tax payment deferrals approximately 100 million due 2021 part ii credit agreement fifth amendment contain number covenants including financial covenants december 31 2020 company compliance credit agreement debt leverage ratio covenant actual ratio 354 100 allowed maximum ratio 475 100 contained fifth amendment april 6 2020 company completed divestiture environmental solutions business therefore effective april 6 2020 consolidated leverage ratio decreased 025 475 100 fiscal quarters ending december 31 2021 425 100 fiscal quarters ending march 31 2022 given current leverage position believe able operate within covenant thresholds due unpredictability covid19 pandemic situations outside control reasonably likely could exceed consolidated leverage ratio threshold point next 12 months risk mitigated potentially managed appropriate spending controls divestitures restructuring company’s existing indebtedness amending credit agreement seeking temporary relief consolidated leverage ratio covenant company’s lenders failure comply covenant provisions could result event default upon event default unless waived lenders could elect terminate commitments cease making loans andor cause loans become due payable full foreclose assets securing debt credit agreement force us subsidiaries bankruptcy liquidation working capital december 31 2020 working capital decreased 943 million deficit 1446 million compared deficit 503 million december 31 2019 change primarily driven divestiture environmental solutions business 2020 current assets decreased 1541 million 2020 5525 million 7066 million 2019 primarily driven divestitures environmental solutions expert solutions businesses dso 52 days 60 days december 31 2020 2019 respectively excluding divestiture revenues trailing 12month dso calculation dso relatively consistent 56 55 days 2020 2019 respectively current liabilities decreased 598 million 2020 6971 million 7569 million 2019 primarily driven divestiture environmental solutions business 2020 operating cash flows net cash operating activities increased 2822 million year ended 2020 5302 million 2480 million 2019 current period primarily reflects us cares act net operating loss carryback refund received third fourth quarters 2020 total 1100 million ii lower payments legal professional fees annual incentive compensation prepaid software 556 million compared 2019 iii government relief taxrelated payment deferrals 302 million 2020 roughly split twothirds us onethird nonus iv lower interest payments 260 million 2020 v advances received executed service agreements 192 million related environmental solutions divestiture second quarter 2020 vi lower operating expenditures erp related matters approximately 200 million compared 2019 investing cash flows net cash investing activities increased 4854 million 2020 net cash provided 3814 million net cash used 1040 million 2019 capital expenditures decreased 747 million 1195 million 1942 million 2019 primarily driven timing 2019 investments erp 2020 disciplined capital management 2020 received 4989 million net proceeds divestiture expert solutions operations argentina environmental solutions businesses compared 866 million net divestiture proceeds 2019 part ii financing cash flows net cash financing activities increased 7509 million year ended 2020 8925 million 1416 million 2019 change related net repayments senior credit facility term loan 13374 million principally due proceeds received new debt issuance senior notes divestiture environmental solutions expert solutions businesses higher net cash operating activities generated 2020 additionally company made payments longterm debt foreign debt 400 million 2020 decrease partially offset proceeds 5000 million associated debt issuance senior notes 2020 2019 net borrowings 1148 million included repayment private placement notes 6000 million new debt issuance senior notes additional borrowings senior credit facility term loan result 2019 repayment private placement notes company paid 204 million make whole premium contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2020 1these amounts represent scheduled principal payments related longterm debt excluding interest see part ii item 8 financial statements supplementary data note 9 debt consolidated financial statements company establishes asset retirement obligations present value estimated future costs retire longlived assets termination expiration lease asset retirement obligations presented timing payments fixed determinable see part ii item 8 financial statements supplementary data note 12 commitments contingencies consolidated financial statements payments unrecognized tax benefits excluded contractual obligations based uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement applicable taxing authorities december 31 2020 795 million standby letters credit outstanding senior credit facility 379 million surety bonds 212 million bank guarantees bank guarantees issued mostly international subsidiaries various purposes including leases seller notes contracts permits surety bonds used performance guarantees neither bank guarantees surety bonds affect ability use various lines credit anticipate operating cash flows together additional borrowings available senior credit facility amended february 25 2020 sufficient meet anticipated future operating expenses key priorities new erp implementation capital expenditures debt service obligations become due next 12 months foreseeable future critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance us gaap preparation financial statements requires management make estimates assumptions judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities although management believes estimates assumptions reasonable based upon information available made therefore actual results may differ estimates different assumptions conditions critical accounting policies may material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change policies material impact financial condition operating performance company part ii item 8 financial statements supplementary data note 1 basis presentation part ii summary significant accounting polices consolidated financial statements provides detailed description material accounting policies however identified following critical accounting policies estimates revenue recognition revenue recognized customer obtains control promised goods services amount revenue recognized reflects consideration company expects entitled receive exchange good services revenue recognized net revenuebased taxes assessed governmental authorities company provides rwcs provide collection processing regulated specialized waste including medical pharmaceutical hazardous waste disposal compliance programs sid services provide collection personal confidential information secure destruction recycling shredded paper crs includes communication services appointment reminders secure messaging event registration communications hospitals idn’s associated activities series distinct services substantially pattern transfer time therefore respective services treated single performance obligation recognize revenue applying right invoice practical expedient right consideration corresponds directly value provided customer performance date revenues regulated waste secure information destruction services recognized upon waste collection compliance services recognized contractual service period revenues communication services recorded services performed allowance doubtful accounts company reports accounts receivable net realizable value management’s best estimate cash ultimately received company maintains allowance doubtful accounts reflect expected uncollectability accounts receivable based historical collection data specific risks identified among uncollected accounts well management’s expectation future economic conditions current expected future economic trends events changes circumstances indicate specific receivable balances may impaired consideration given collectability balances allowance adjusted accordingly adequacy allowances uncollectible accounts reviewed least quarterly adjusted necessary based reviews management’s judgment required assess collectability account based detailed analysis aging receivables creditworthiness company’s customers historical collection trends current future expected economic trends accounts receivable written subsequent periods differ allowance doubtful accounts provided historically provision adequate allowance doubtful accounts 562 million 679 million december 31 2020 2019 respectively impairment longlived assets property plant equipment intangible assets definitelives net longlived assets property plant equipment amortizing intangible assets reviewed whenever events changes circumstances indicate related carrying amounts may recoverable impairment assets definitelives generally determined comparing projected undiscounted cash flows generated asset appropriate grouping assets carrying value impairment identified loss recognized equal excess assets net book value fair value cost basis adjusted determining extent impairment typically requires various estimates assumptions including using managements judgment cash flows directly attributable asset useful life asset residual value necessary company uses internal cash flow estimates quoted market prices appraisals appropriate determine fair value actual results could vary estimates addition remaining useful life impaired asset revised necessary additional information see part ii item 8 financial statements supplementary data note 5 property plant equipment note 7 goodwill intangible assets consolidated financial statements part ii intangible assets indefinitelived intangibles consist primarily permits tradenames indefinitelived intangibles assessed impairment annually october 1 frequently event occurs circumstances change subject amortization assessed impairment manner goodwill indefinite lived intangibles may assessed using either qualitative quantitative approach qualitative approach first determines morelikelythannot fair value asset less carrying value determination made impairment test complete however determined likely impairment quantitative assessment performed fourth quarter 2020 performed annual impairment test indefinitelived intangibles goodwill using qualitative approach certain assets quantitative approach remaining assets calculated fair value indefinitelived intangibles based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management future changes assumptions interrelationship assumptions described may negatively impact future valuations would require noncash charges may material effect financial condition operating results goodwill assessed impairment annually october 1 year frequently event occurs circumstances change could reduce value reporting carrying value used quantitative approach assess goodwill impairment fair value reporting unit calculated using income approach including dcf validated using market approach involvement thirdparty valuation specialist reporting units domestic rwcs domestic sid domestic crs canada europe asia pacific latin america income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows calculated using management assumptions growth rates including longterm growth rates capital expenditures cost efficiencies future acquisitions divestitures included expected future cash flows use discount rate based calculated weighted average cost capital adjusted reporting units based size country company specific risk premiums market approach compares valuation multiples similar companies associated reporting unit addition analyze differences sum fair value reporting units total market capitalization reasonableness taking account certain factors including control premiums fair value compared carrying value including goodwill fair value excess carrying value related goodwill impaired fair value less carrying value recognize impairment charge amount carrying value exceeds fair value exceed carrying value goodwill performed annual goodwill assessment october 1 2020 result assessment goodwill impairment charges recognized 2020 additional information see part ii item 8 financial statements supplementary data note 7 goodwill intangible assets consolidated financial statements measure sensitivity amount goodwill impairment charges key assumptions amount reporting units fair value exceeds respective carrying value october 1 2020 assessment estimated fair value reporting unit exceeded carrying value least 20 performed sensitivity analysis estimated fair values noting 50 basis point increase discount rate 50 basis point reduction longterm growth rate would result impairments reporting units intangible assets lives determined certain operating permits certain tradenames indefinite lives due ability renew minimal additional cost therefore amortized finitelived intangible assets amortized useful lives using straightline method customer relationships useful lives 10 25 years based upon type customer noncompete covenant intangibles useful lives 5 years also tradename intangibles useful lives 15 40 years evaluate useful life intangible assets annually determine whether events circumstances warrant revision remaining useful life changes reflected prospectively intangible asset part ii amortized revised remaining useful life fourth quarter 2020 performed annual assessment useful life finitelived intangibles made changes useful lives assets liabilities heldforsale classify longlived assets disposal groups heldforsale management appropriate authority generally board directors certain executive officers commits plan sale disposal group ready immediate sale active program locate buyer initiated sale probable expected completed within one year classified heldforsale disposal groups valued lower carrying amount fair value less estimated selling costs disposal group constitutes substantially generally 90 assets liabilities operations foreign country balance cumulative currency translation adjustment associated country included carrying value disposal group carrying value including amount associated cumulative currency translation adjustment exceeds fair value less estimated selling costs heldforsale impairment charge recorded reduce carrying value estimate fair value reviewed end every reporting period disposal group classified heldforsale carrying value adjusted whenever estimated fair value less costs sell less carrying value contingencies litigation subject various legal proceedings claims regulatory matters outcomes subject significant uncertainty determine whether disclose accrue loss contingencies based assessment whether risk loss remote reasonably possible probable whether reasonably estimated analyze litigation regulatory matters based available information assess potential liabilities management’s assessment developed based analysis possible outcomes various strategies record disclose loss contingencies pursuant applicable accounting guidance matters additional information see part ii item 8 financial statements supplementary data note 20 legal proceedings consolidated financial statements income taxes record provision income taxes anticipated tax consequences reported results operations using asset liability method deferred income taxes recognized applying enacted statutory tax rates applicable future years differences financial statement carrying amounts existing assets liabilities respective tax basis well net operating loss tax credit carryforwards effect deferred tax assets liabilities change tax rates recognized income period includes enactment date measurement deferred tax assets reduced necessary valuation allowance tax benefits future realization uncertain although believe assumptions judgments estimates reasonable changes tax laws interpretation tax laws resolution tax audits could significantly impact amounts provided income taxes consolidated financial statements evaluating ability recover deferred tax assets full part consider available positive negative evidence including past operating results forecast future earnings future taxable income prudent feasible tax planning strategies assumptions utilized determining future taxable income require significant judgment consistent plans estimates using manage underlying businesses actual operating results future years could differ current assumptions judgments estimates however believe likely deferred tax assets recognized consolidated balance sheets ultimately realized record valuation allowance reduce deferred tax assets net amount believe likely realized recognize certain tax benefits uncertain tax positions within provision income taxes may recognize tax benefit likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements positions measured based largest benefit greater 50 likelihood realized upon settlement december 31 2020 estimated gross unrecognized tax benefits 243 million 232 million recognized would favorably impact future earnings due uncertainties tax audit outcome estimates ultimate settlement unrecognized tax positions may change actual tax benefits may differ significantly estimates part ii tax act established gilti provisions impose tax foreign income excess deemed return intangible assets foreign corporations recognize taxes gilti period expense rather recognize deferred taxes basis differences expected affect amount gilti inclusion upon reversal information see part ii item 8 financial statements supplementary data note 10 income taxes consolidated financial statements insured selfinsured claims company’s insurance workers’ compensation autofleet general liability property employeerelated health care benefits obtained using high deductible insurance policies meaning company retained significant portion risks related claims associated programs estimated exposure unpaid claims associated expenses including incurred reported losses based calculation performed thirdparty actuarial specialist using company’s historical claims experience accruals liabilities could revised future occurrences loss developments significantly differ assumptions used estimated recoveries associated insured claims recognized assets receipt amounts probable stockbased compensation measure cost employee services received exchange award equity instruments based grantdate fair value award cost recognized period employee required provide service exchange awardthe requisite service period usually vesting period performance based awards recognized consistent performance metrics accounting standards codification section 718 compensation stock compensation cost recognized equity instruments employees render requisite service use blackscholes valuation model monte carlo simulation model determine fair value stock options psu’s respectively related performance criteria established fair value models include various assumptions including expected volatility expected life awards given considerable judgment involved assumptions complex modeling typically obtain assistance thirdparty valuation specialists fair value rsus determined based closing price common stock date grant equity award modified grant date assess impact modification necessary record compensation cost calculated incremental fair value modified award fair value original award immediately modification detail see part ii item 8 financial statements supplementary data note 14 stock based compensation consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction business managing regulated waste providing array related services operate united states argentina brazil canada chile ireland japan mexico portugal romania spain united kingdom largequantity generators regulated waste hospitals pharmaceutical companies distributors offer institutional regulated waste management services bio systems® reusable sharps management services reduce risk needle sticks variety products services infection control patient communication services regulated returns waste management services expired recalled products pharmaceutical waste disposal services hazardous waste disposal small quantity generators regulated waste doctors’ offices retail pharmacies offer medical regulated waste management services sterisafe® osha hipaa compliance programs variety products services infection control patient communication services regulated returns recall services expired recalled products operate integrated national regulated waste management networks domestically internationally national networks include total 175 processing combined processing collection sites 154 additional transfer collection combined transfer collection sites regulated waste processing technologies include autoclaving proprietary etd chemical treatment incineration serve approximately 522000 customers worldwide approximately 16000 largequantity generators approximately 506000 smallquantity generators critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe significant accounting policies see note 2 summary significant accounting policies consolidated financial statements following ones may involve higher degree judgment part greater complexity reporting revenue recognition revenues regulated waste management services sterisafe service recognized time waste collection sterisafe revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues regulated returns recall management services patient communication services recorded time services performed revenues product sales recognized time goods shipped customer contracts loss position losses would recorded known estimable contracts go loss position goodwill identifiable intangible assets goodwill associated excess purchase price fair value assets acquired amortized determined permits indefinite lives accordingly amortized see note 11goodwill intangible assets consolidated financial statements additional information balance sheet december 31 2011 contains goodwill 19 billion accordance accounting standards evaluate least annual basis using fair value reporting units whether goodwill impaired determine significant impairment occurred would required incur noncash charges impaired portion goodwill could material adverse effect results operations period impairment charge occurs quarter ended june 30 2011 performed annual goodwill impairment evaluation three reporting units domestic regulated waste management services domestic regulated returns recall management services international calculate fair value reporting units using two methods one market approach income approach market income approaches indicated impairment goodwill three reporting units market approach market approach begins calculating market capitalization company using average stock price prior 30 days outstanding share count june 30 2011 look company’s earnings interest tax depreciation amortization “ebitda” adjusted stock compensation expense items gain sale divested assets prior twelve months calculated market capitalization divided modified ebitda arrive valuation multiple fair value reporting unit calculated taking product valuation multiple trailing twelve month modified ebitda reporting unit fair value compared reporting units’ book value determined excess book value believe starting fair value company whole reasonable measure fair value allocated reporting unit based reporting unit’s individual earnings sustained drop stock price would negative impact fair value calculations temporary drop earnings reporting unit would negative impact fair value calculations results goodwill impairment test using market approach indicated fair value reporting units exceeded book value substantial amount excess 100 book value income approach income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows calculated using management assumptions internal growth capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based company calculated weighted average cost capital adjusted reporting units based risk size premium foreign country premium significant assumptions used income approach include realization future cash flows discount rate used present value cash flows results goodwill impairment test using income approach indicated fair value reporting units exceeded book value substantial amount excess 100 permits tested impairment annually december 31 frequently circumstances indicate may impaired use either discounted income cost savings model current measurement fair value permits fair value based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates 2011 wrote 28 million permit intangibles three facilities due rationalizing operations current acquisition accounting fair value must assigned acquired assets based theoretical “market participant” regardless acquirers’ intended use assets accounting treatment lead recognition losses company disposes acquired assets identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined regulated waste customer relationships 14year 40year lives based specific type relationship although contracted regulated waste management business highly competitive able maintain high customer retention excellent customer service valuation contractual customer relationships derived using discounted income approach valuation model assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows indicators impairment intangibles see note 11goodwill intangible assets consolidated financial statements share repurchases purchase price par value share repurchases allocated additional paidin capital additional paidin capital reaches zero remainder allocated retained earnings income taxes subject income taxes us numerous foreign jurisdictions compute provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax bases assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected realized settled significant judgments required order determine realizability deferred tax assets assessing need valuation allowance evaluate significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods provide uncertain tax positions maintain reserve tax benefits assumed meet threshold “more likely not” sustained management believes amount provided uncertain tax positions adequate accounts receivable accounts receivable consists amounts due us normal business activities carried estimated collectible amounts accounts receivable balances determined delinquent amount past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected single customer accounts 2 accounts receivable insurance workers’ compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance policies thirdparty administrator used process claims require workers’ compensation vehicle liability physical damage claims reported within 24 hours result accrue workers’ compensation vehicle physical damage liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time settlements litigation would recorded known probable estimable stock option plans issued stock options employees directors integral part compensation programs stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility stock expected term award riskfree rate stock’s expected volatility based upon historical experience expected term awards based upon measure historical volatility stock price riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past new accounting pronouncements information recently issued accounting pronouncements see note 2summary significant accounting policies consolidated financial statements fair value considerations financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity december 31 2011 225 million cash equivalents 04 million shortterm investments recorded fair value using level 1 inputs 99 million contingent consideration related acquisitions recorded fair value using level 3 inputs december 31 2011 derivative instruments restructuring costs december 2010 reorganized structure international management group order leverage strong local management resulting employee severance charges third quarter 2011 expanded program include consolidation administrative facilities united kingdom reorganization international legal structure recognized 23 million expense 2011 22 million recognized consolidated statement income within “selling general administrative expense” accrual balance 09 million december 31 2011 expect pay primarily first quarter 2012 immaterial additional expense addition restructuring charges recognized 28 million 09 million non cash expenses 2011 2010 respectively related rationalization domestic plant operations year ended december 31 2011 compared year ended december 31 2010 highlights year ended december 31 2011 included following • revenues grew 168 billion 164 increase 144 billion 2010 • gross margins decreased 454 2011 464 2010 • operating income 4243 million 145 increase 3707 million 2010 • incurred net 157 million expenses related restructuring plant closure acquisitions changes fair value contingent consideration litigation settlement • incurred 43 million integration expenses related acquisitions • cash flow operations 3061 million analyzing company’s performance necessary understand various regulated waste services share common infrastructure customer base market regulated waste services offering various pricing options meet customers’ preferences customers move different billing paradigms example regulated waste customers may contract us “medical waste disposal” services billed based weight waste collected processed disposed particular period subsequent period customer could move standard service “sterisafe osha compliance program” packages regulated waste services training education services contracted subscription fee another example customer purchases “medical waste disposal” “sharps disposal management” services provides customer regulated waste services different pricing billing arrangement track movement customers various types regulated waste services offer although identify directional trends services regulated waste services similar nature inherent inaccuracies disaggregation believe aggregating revenues communicates appropriate metric analyze revenue growth identifying changes related internal growth acquired growth changes due currency exchange fluctuations following summarizes company’s operations revenues increased 2367 million 164 168 billion 2011 144 billion 2010 domestic revenues increased 1285 million 119 121 billion 108 billion 2010 internal growth domestic small account customers increased approximately 488 million approximately 8 driven increase sterisafe revenues domestic large account customers increased approximately 194 million 5 increased total number accounts expanded sharps management pharmaceutical waste disposal programs internal revenues returns recall management services decreased 199 million compared 2010 large recalls resulted higher revenues internal revenues exclude acquisitions less one year old total domestic regulated waste returns recall management acquisitions less one year old contributed approximately 802 million increase domestic revenues 2011 international revenues 2011 4639 million compared 3558 million 2010 increase 1081 million 304 internal growth currency rate fluctuations acquisitions impact comparison 2011 2010 internal growth 189 million effect exchange rates positively impacted international 2011 revenues 112 million foreign currencies appreciated us dollar acquisitions divestitures less one year old contributed additional 780 million international revenues cost revenues 2011 cost revenues increased 1433 million 186 9153 million compared 7719 million 2010 domestic cost revenues increased 680 million 125 6127 million 2011 compared 5447 million 2010 result costs related proportional increase revenues acquisitions internal growth international cost revenues increased 754 million 332 3026 million 2011 compared 2272 million 2010 result costs related proportional increase revenues partially driven impact exchange rates gross margin percentage decreased 454 2011 464 2010 due inclusion lower margin acquired revenues domestic gross margin percentage slightly decreased 495 2011 497 2010 domestic gross profit unfavorably impacted 15 million 2010 restructuring costs regulated returns recall management services business international gross margin decreased 348 compared 361 2010 primarily due acquisitions lower margins consolidated general international gross margins lower domestic gross margins international operations less penetration small quantity generator market higher gross margin historically international operations revenues large hospitals international revenues increase consolidated gross margins receive downward pressure due “business mix” shift may offset additional international small quantity market penetration integration savings domestic business expansion selling general administrative expenses 2011 selling general administrative “sga” expenses excluding acquisition costs items increased 381 million 137 3164 million 2783 million 2010 percentage revenue costs decreased 04 2011 compared 2010 depreciation expense percentage revenue 05 2011 2010 amortization expense percentage revenue increased 10 2011 07 2010 due larger quantity acquisitions related amortization domestically sga increased 195 million 91 2337 million 2011 2142 million 2010 increase primarily due sga expenses related acquired revenues higher amortization expense percentage revenue costs decreased 05 2011 compared 2010 internationally sga increased 186 million 290 2011 827 million 641 million 2010 increased sga due increased number international acquisitions investment clinical services program partially offset restructuring international management structure continued integration acquisitions higher amortization expense related recognized intangible assets acquisitions percentage revenue costs decreased 02 2011 compared 2010 income operations income operations increased 536 million 145 4243 million 2011 3707 million 2010 comparisons income operations 2011 2010 affected various charges considered part daytoday operations year ended december 31 2011 recognized 167 million acquisition expenses 43 million related integration new acquisitions 51 million restructuring plant closure costs 12 million litigation settlement partially offset 72 million change fair value contingent consideration various adjustments resulted 201 million net expense pretax basis year ended december 31 2010 recognized 95 million acquisition expenses 41 million expenses related integration new acquisitions 76 million restructuring cost 08 million plant closure expenses litigation settlement 09 million partially offset 30 million gain sale assets related medserve divestiture various adjustments resulted 199 million net expense pretax basis domestically income operations increased 413 million 133 3517 million 2011 3104 million 2010 internationally income operations increased 123 million 204 726 million 2011 603 million 2010 interest expense interest income interest expense increased 494 million 2011 371 million 2010 due higher borrowings 2011 higher interest rates interest income 08 million 2011 03 million 2010 income tax expense income tax expense increased 1350 million 2011 1214 million 2010 2011 2010 recognized net 13 million 12 million respectively tax benefits related prior years unrecognized tax positions positively impacted diluted earnings per share 001 2011 2010 effective tax rates years 2011 2010 approximately 363 366 respectively year ended december 31 2010 compared year ended december 31 2009 highlights year ended december 31 2010 included following • revenues grew 144 billion 222 increase 118 billion 2009 • gross margins decreased 464 2010 469 2009 • operating income 3707 million 176 increase 3152 million 2009 • incurred net 158 million expenses related restructuring plant closure acquisitions litigation settlement gain sale assets • incurred 41 million integration expenses related acquisitions • cash flow operations 3257 million following summarizes company’s operations revenues increased 2617 million 222 144 billion 2010 118 billion 2009 domestic revenues increased 1710 million 187 108 billion 9126 million 2009 internal growth domestic small account customers increased approximately 467 million approximately 9 driven increase sterisafe clinical services revenues domestic large account customers increased approximately 175 million 5 increased total number accounts expanded sharps management pharmaceutical waste disposal programs returns recall management services revenues increased 557 million compared 2009 resulting larger recalls 2010 domestic acquisitions less one year old added additional 511 million growth revenues compared 2009 international revenues 2010 3558 million compared 2651 million 2009 increase 907 million 342 internal growth currency rate fluctuations acquisitions impact comparison 2010 2009 internal growth 191 million effect exchange rates positively impacted international 2010 revenues 25 million foreign currencies appreciated us dollar acquisitions less one year old favorably impacted revenue growth 691 million cost revenues 2010 cost revenues increased 1466 million 234 7719 million compared 6253 million 2009 domestic cost revenues increased 864 million 189 5447 million 2010 compared 4583 million 2009 international cost revenues increased 602 million 360 2272 million 2010 compared 1670 million 2009 gross margin percentage decreased 464 2010 469 2009 domestic gross margin percentage slightly decreased 497 2010 498 2009 domestic gross profit unfavorably impacted 15 million 2010 07 million 2009 restructuring costs regulated returns recall management services business international gross margin decreased 361 compared 370 2009 primarily due acquisitions lower margins consolidated general international gross margins lower domestic gross margins international operations less penetration small quantity generator market better gross margin historically international operations revenues large hospitals international revenues increase consolidated gross margins receive downward pressure due “business mix” shift offset additional international small quantity market penetration integration savings domestic business expansion selling general administrative expenses 2010 sga expenses excluding acquisition costs items increased 504 million 221 2783 million 2279 million 2009 percentage revenue sga expenses remained 193 2010 2009 depreciation expense percentage revenue 05 2010 2009 amortization expense percentage revenue increased 07 2010 05 2009 due larger quantity acquisitions related amortization domestically sga increased 316 million 173 2142 million 2010 1826 million 2009 increase primarily due presynergized cost structure acquired revenues higher amortization expense market penetration pharmaceutical waste programs investments sterisafe services internationally sga increased 188 million 415 2010 641 million 453 million 2009 percentage revenue sga 180 2010 171 2009 increase sga partially due acquisitions uk brazil japan higher sga expenses higher amortization expense related recognized intangible assets acquisitions investment clinical services program also contributed increase sga income operations income operations increased 555 million 176 3707 million 2010 3152 million 2009 comparisons income operations 2010 2009 affected various charges considered part daytoday operations year ended december 31 2010 recognized 95 million acquisition expenses 41 million expenses related integration new acquisitions 76 million restructuring cost 08 million plant closure expenses litigation settlement 09 million partially offset 30 million gain sale assets related medserve divestiture various adjustments resulted 199 million net expense pretax basis year ended december 31 2009 recognized 73 million acquisition expenses 11 million expenses related integration new acquisitions 16 million restructuring costs regulated returns recall management services business adjustments resulted 100 million net expenses pretax basis domestically income operations increased 455 million 172 3104 million 2010 2649 million 2009 internationally income operations increased 100 million 199 603 million 2010 503 million 2009 interest expense interest income interest expense increased 371 million 2010 344 million 2009 due higher borrowings 2010 higher interest rates interest income 03 million 2010 2009 income tax expense income tax expense years 2010 2009 reflects effective tax rate approximately 366 365 respectively federal state income taxes 2010 recognized net 12 million benefit related prior years unrecognized tax benefits 2009 recognized net 18 million benefit related prior years unrecognized tax benefits liquidity capital resources 10 billion senior credit facility maturing september 2016 1000 million private placement notes maturing april 2015 1750 million private placement note maturing october 2017 2250 million private placement notes maturing october 2020 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility private placement notes december 31 2011 compliance financial debt covenants december 31 2011 5279 million borrowings outstanding 10 billion senior unsecured credit facility includes foreign currency borrowings 724 million also 1591 million committed outstanding letters credit senior credit facility unused portion revolving credit facility december 31 2011 3130 million december 31 2011 interest rates borrowings revolving credit facility follows • shortterm borrowing less one month federal funds rate plus 05 prime rate euro currency rate plus 1 whichever higher spread 0125 plus 025 facility fee • borrowing greater one month libor plus 1125 plus 025 facility fee weighted average rate interest unsecured revolving credit facility 173 per annum includes 025 facility fee december 31 2011 1000 million outstanding 564 private placement notes entered april 15 2008 notes bear interest fixed rate 564 per annum interest payable arrears semiannually april 15 october 15 beginning october 15 2009 principal payable maturity notes april 15 2015 december 31 2011 outstanding 1750 million sevenyear unsecured senior notes “series notes” 2250 million 10year unsecured senior notes “series b notes” series notes bear interest fixed rate 389 per annum series b notes bear interest fixed rate 447 per annum interest payable arrears semiannually april 15 october 15 beginning april 15 2011 principal amount 1750 million series notes payable maturity notes october 15 2017 principal amount 2250 million series b notes payable maturity notes october 15 2020 december 31 2011 2401 million promissory notes issued connection acquisitions 2004 2011 1119 million foreign subsidiary bank debt outstanding 47 million capital lease obligations working capital december 31 2011 working capital increased 35 million 637 million compared 602 million december 31 2010 current assets increased 219 million 2011 primarily due acquired assets 619 million 544 million accounts receivable cash equivalents december 31 2010 included 230 million offset equivalent amount accrued liabilities used recalled product reimbursement 2011 current liabilities increased 184 million 2011 acquired 391 million current liabilities 271 million accounts payable offsetting acquired liabilities decrease recalled product reimbursement 230 million repaid outstanding principal term loan debt 202 million current see note 13debt also 99 million shortterm portion acquisition notes offsetting shortterm debt decreases increase shortterm amounts senior credit facility 302 million due borrowings acquisitions remaining increase current liabilities primarily increase accrued taxes increase accrued interest related higher debt net cash provided used net cash provided operating activities decreased 196 million 60 3061 million 2011 cash provided operations ratio net income 129 155 2011 2010 respectively days sales outstanding 53 days excluding acquired receivables related acquisition spain 59 days including acquired receivables 2011 compared 51 days 2010 cash provided operating activities 2010 includes cash inflow recalled product reimbursements resulted increase accrued liabilities amount 230 million net cash used investing activities 2011 5146 million compared 2455 million used 2010 increase due acquisitions largest acquisition hws resulted 2344 million cash used redeemed 158 million certificates deposit quarter ended september 30 2011 capital expenditures 2011 decreased percentage revenue 32 34 2010 net cash provided financing activities 1483 million 2011 compared 136 million net cash used financing activities 2010 change 2165 million related increased borrowings finance certain acquisitions partially offset share repurchases 1241 million compared 943 million 2010 increase 297 million contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2011 1 longterm debt capital leases longterm liabilities items include future principal payment amount well amount calculated expected future interest payments longterm debt floating interest rate requires use management judgment estimate future rate interest 2 longterm liabilities include amounts related covenants nottocompete agreements exclude payments unrecognized tax benefits based contingent uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement applicable taxing authorities december 31 2011 1591 million standby letters credit issued anticipate operating cash flow together borrowings senior unsecured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future guarantees guaranteed loan jpmorganchase bank na behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business one year loan current balance 64 million jpmorganchase bank na expires may 2012 also extended loans shiraishi approximately 152 million support medical waste business amounts collateralized assets shiraishi related companies item 7aitem 7 management’s discussion analysis financial condition results operations following discussion financial condition results operations read conjunction consolidated financial statements related notes item 8 report introduction businesstobusiness services provider focus regulated compliance solutions healthcare retail commercial businesses includes collection processing regulated specialized waste disposal collection personal confidential information secure destruction plus variety training consulting recallreturn communication compliance services incorporated 1989 presently serve diverse customer base 1000000 customers throughout united states argentina austria australia belgium brazil canada chile france germany ireland japan luxembourg mexico netherlands portugal romania republic korea singapore south africa spain united kingdom specifically services products include • medical waste management services • reusable sharps disposal management services • pharmaceutical waste services • integrated waste stream solutions iwss program • hazardous waste management services • sustainability recycling services expired unused inventory • secure information destruction hard drive destruction services • compliance programs sterisafe® clinical services segurimed enviroassure brand names • regulated recall returns management communication logistics data management services expired withdrawn recalled products 2016 10k annual report stericycle inc • 27 part ii • live voice automated communication services including afterhours answering appointment scheduling appointment reminders secure messaging event registration • mailback solutions regulated medical waste universal wastes pharmaceutical wastes specialty wastes 2016 made certain changes organizational structure integrate domestic international shredit operations q2 2016 also changed composition operating segments align compliance communication services due change part domestic regulated waste compliance services operating segment combined legacy domestic regulated recall returns management services operating segment form new operating segment domestic crs q4 2016 made additional change organizational structure management reporting result changes domestic rcs segment manager responsible operations canada operations canada previously reported part international rcs operating segment result changes domestic rcs operating segment become domestic canada rcs domestic crs meet quantitative criteria separate reportable segment therefore included beginning q4 2016 costs related corporate headquarter functions also included three operating segments • domestic canada rcs • domestic crs • international rcs segment information included herein presented accordance change reporting structure periods presented critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes accounting estimates reasonably likely occur periodically could materially impact consolidated financial statements management believes critical accounting policies reflect significant estimates assumptions follows revenue recognition revenues regulated medical waste management services compliances services secure information destruction services recognized time waste collection compliance service revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues hazardous waste services recorded time waste received processing facility delivered third party revenues regulated recall returns management services communication solutions recorded time services performed revenues product sales recognized time goods shipped ordering 2016 10k annual report stericycle inc • 28 part ii customer charges related sales taxes international value added tax vat similar pass taxes included revenue intangible asset valuations methods commonly used value intangible assets acquire income market cost approaches nature characteristics asset indicate approach appropriate based analysis performed company fair values intangible assets generally estimated using acceptable income approaches multiperiod excess earnings method “mpeem” generally used determine fair value customer relationships fair value derived calculating present value estimated aftertax earnings attributable respective intangible assets key inputs assumptions valuation model forecasted aftertax cashflows identification contributory assets quantification appropriate returns assets discount rate applied present value cashflows attrition rates determining accurate consumption benefits acquired customer relationships cannot reliably determined services provide acquired customers change baseline revenues extended period time due factors volume increase price increase complementary service offerings therefore amortize finitelived intangible assets using straightline method consistent valuation model relief royalty method generally used determine fair value trade names key inputs assumptions valuation model reasonable approximation license rate trade name forecasted revenues discount rate applied present value aftertax stream estimated royalties avoided acquiring trade name tangible asset valuation trucks containers equipment major asset classes subject revaluation result acquisitions indirect direct methods cost approach market approach used company value tangible personal property assets following description methodologies estimating fair value major tangible fixed asset classes • market approach used valuation trucks market approach based market conditions transactions market approach assets valued compared recent sales andor asking prices comparable properties assets using similar units comparison adjustments made comparable assets account factors condition capacity age • direct method cost approach used valuation containers direct method cost approach replacement cost new “rcn” determined current cost information obtained original equipment manufacturers equipment dealers vendors independent research • cost reproduction new “crn” equipment calculated using indirect method cost approach historical equipment costs dates used calculate current crn indirect method cost approach trend factors applied historical costs estimate crn assets timeadjusted trend factors applied historical costs using asset category specific cost indices published industry sources crn adjusted physical deterioration functional economic obsolescence goodwill identifiable intangible assets historically evaluated goodwill impairment annually june 30 indicator impairment exists 2016 changed date annual goodwill impairment assessment reporting units october 1st addition changed annual impairment test date indefinitelived intangibles december 31 october 1 voluntary change annual indefinitelived intangible testing dates change accounting principle believe preferable better aligns timing annual goodwill impairment test timing company’s annual strategic planning forecasting process occurs q3 change indefinitelived intangible testing date aligns testing indefinitelived impairment testing consistent date voluntary change accounting principle related annual testing dates delay accelerate avoid 2016 10k annual report stericycle inc • 29 part ii impairment charge change applied retrospectively impracticable retrospective application would require application significant estimates assumptions use hindsight accordingly change applied prospectively discussed changed composition operating segments 2016 due changes part domestic rcs operating segment combined legacy domestic regulated recall returns management services operating segment form new operating segment domestic crs q2 2016 domestic rcs domestic canada rcs operations canada previously reported part international rcs operating segment q4 determined former international rcs reporting unit disaggregated three new reporting units goodwill impairment testing purposes one level operating segment referred “component” addition four components domestic canada rcs operating segment reporting units primarily result business economic challenges recently faced mi internationally result changes goodwill former international rcs reporting unit reallocated four new reporting units including canada based relative fair values completed similar reallocation goodwill new domestic canada rcs reporting units due establishment new reporting units q4 2016 change annual goodwill impairment testing date discussed performed goodwill impairment evaluation reporting units october 1 2016 impairment goodwill fair value reporting units exceeded carrying values also tested former reporting units goodwill impairment immediately prior establishment new reporting units impairment goodwill calculate fair value reporting units using income approach including discounted cash flows validate results using market approach income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows calculated using management assumptions growth rates including longterm growth rates capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based calculated weighted average cost capital adjusted reporting units based size country company specific risk premiums market approach compares valuation multiples similar companies associated reporting unit reconciled calculated fair values market capitalization results 2016 goodwill impairment test using market approach corroborated results impairment test income approach indicated fair value reporting units exceeded respective book values determined permits certain tradenames indefinite lives due ability renew minimal additional cost therefore amortized calculated fair value indefinitelived intangibles based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management based impairment test october 1 2016 recognized impairment charge 14 million within selling general administrative expenses consolidated statements income future changes assumptions interrelationship assumptions described may negatively impact future valuations future measurements fair value adverse changes assumptions could result impairments goodwill intangible assets would require noncash charges may material effect financial condition operating results 2016 10k annual report stericycle inc • 30 part ii finitelived intangible assets amortized useful lives using straightline method determined customer relationships useful lives 5 40 years based upon type customer covenants nottocompete intangibles useful lives 5 14 years tradename intangibles useful lives 10 40 years assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows environmental remediation liabilities environmental remediation liabilities primarily include costs associated remediating air groundwater surface water soil contamination applicable legal costs estimate ultimate liability sites evaluate several factors including nature extent contamination identified site required remediation methods timing expenditures apportionment responsibility among potentially responsible parties “prps” financial viability parties routinely review evaluate sites require remediation considering whether owner operator transporter generator site amount type waste hauled site number years connected site next review information respect named unnamed prps estimates cost likely remedy either developed using internal resources third party environmental engineers service providers income taxes subject income taxes us numerous foreign jurisdictions compute provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax basis assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected realized settled significant judgments required order determine realizability deferred tax assets assessing need valuation allowance evaluate significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods undistributed earnings foreign subsidiaries considered permanently reinvested therefore deferred taxes recorded outside basis differences tax liabilities recorded management’s judgment tax position meet likely threshold recognition tax positions meet likely threshold tax liability may still recorded depending management’s assessment tax position ultimately settled company records interest penalties unrecognized tax benefits provision income taxes year ended december 31 2016 compared year ended december 31 2015 highlights year ended december 31 2016 included following • revenues grew 356 billion 193 increase 299 billion 2015 • gross profit percentage revenue decreased 422 2016 424 2015 • operating income decreased 110 4338 million 4876 million 2015 • incurred 1645 million pretax expenses related acquisitions integration expenses litigation professional services expenses plant conversion expenses contract exit costs asset impairment charges favorable change fair value contingent consideration • amortization expense increased 1293 million 455 million 2015 primarily due completion intangible valuations shredit acquisition resulting trueup amortization expense • cash flows operations 5472 million 2016 10k annual report stericycle inc • 31 part ii • dividends 394 million paid 2016 holders series preferred stock 2016 made certain changes organizational structure integrate domestic international shredit operations domestic regulated waste compliance services international regulated waste compliance services operating segments respectively canadian operations integrated domestic operations reviewed new combined segment management determined stericycle’s regulated waste compliance services operating segment changed canadian domestic regulated waste compliance services operations form one segment “domestic canada rcs” international regulated waste compliance services segment excludes canada “international rcs” also changed composition operating segments align compliance communication services due change part domestic regulated waste compliance services operating segment combined legacy domestic regulated recall returns management services operating segment form new operating segment domestic communication related services meet quantitative criteria separate reportable segment therefore included additionally costs related business activities primarily corporate headquarter functions disclosed separately operating segments also included sales organization realigned focus growing healthcare customer base expanding national account relationships converting unvended secure information destruction market expanding multiple services across new existing customers also established one field operations management organization regulated waste compliance services secure information destruction services operations aligned one leadership team drive best practices across organization provide bestinclass service customers also enable us drive longterm efficiencies margin improvement addition combined recall communication solutions services one operating segment since large portion recall services call center related consolidated operations sales marketing client service functions one leadership team finally developing longterm plan expand shared services model across services shared services include financial support human resources strategic sourcing fully implemented plan enable us better leverage best practices sga believe allow us better serve customers provide longterm sustainable growth 2016 10k annual report stericycle inc • 32 part ii following summarizes company’s operations revenues analyzing company’s performance necessary understand various regulated services share common infrastructure customer base market regulated compliance services offering various pricing options meet customers’ preferences customers move different billing paradigms example customers may contract us medical waste disposal services billed based weight waste collected processed disposed particular period subsequent period customer could move standard service sterisafe osha compliance program packages regulated medical waste services training education services contracted subscription fee another example customer purchases medical waste disposal sharps disposal management services provides customer regulated services different pricing billing arrangement track movement customers various types regulated services offer although identify directional trends services regulated services similar nature inherent inaccuracies disaggregation believe aggregating revenues communicates appropriate metric analyze revenue growth identifying changes related organic growth acquired growth changes due currency exchange fluctuations consolidated revenues increased 5764 million 193 356 billion 299 billion 2015 overall organic revenue growth contributed 946 million 32 revenues organic growth excludes effect foreign exchange acquisitions divestitures less full year revenues comparative period revenues acquisitions contributed 5701 million increase revenues 2016 divestitures negatively 2016 10k annual report stericycle inc • 33 part ii impacted current year revenues 02 million effect foreign exchange rates unfavorably impacted total revenues 2016 880 million 29 foreign currencies declined us dollar domestic canada regulated waste compliance services “domestic canada rcs” revenues increased 5097 million 255 251 billion 200 billion 2015 acquisitions contributed 4761 million organic growth contributed 358 million 18 revenues canadian dollar weakened negatively affected 2016 revenue 23 million services related manufacturing industrial “mi” waste experienced reduction 150 million negatively impacting overall organic growth 17 reduction due fewer call services project work softness us mi market addition experienced pricing pressure small quantity regulated waste compliance customers resulting hospital consolidation physician practices increased competitive activities market international regulated waste compliance services “international rcs” revenues increased 349 million 49 7517 million 7168 million 2015 organic growth currency rate fluctuations acquisitions impact comparison 2016 2015 organic growth international rcs segment contributed 331 million revenues 46 costs incurred exit certain patient transport services contracts uk negatively impacted organic growth 2016 organic growth excludes effect foreign exchange acquisitions divestitures less full year revenues comparative period effect foreign exchange rates unfavorably impacted international revenues 2016 857 million 120 foreign currencies declined us dollar revenue international acquisitions contributed 878 million increase revenues 2016 divestitures negatively impacted current year revenues 02 million revenues related domestic communication related services increased 319 million 118 3018 million 2699 million 2015 primarily driven significant recall event q4 2016 cost revenues consolidated 2016 cost revenues increased 3407 million 198 206 billion 172 billion 2015 percentage revenues consolidated gross profit 422 2016 compared 424 2015 incurred 08 million 15 million plant conversion expenses years ended december 31 2016 2015 respectively 2016 also incurred 83 million costs exit certain patient transport services contracts uk general international gross profit lower domestic gross profits international operations fewer small account customers tend provide higher gross profits historically international operations generate revenues large account customers hospitals international revenues increase percentage consolidated revenues consolidated gross profit experiences downward pressure due business mix shift may offset additional international small account market penetration integration savings domestic business expansion domestic canada rcs cost revenues increased 2971 million 273 138 billion 109 billion 2015 gross profit percentage revenues decreased 448 2016 456 2015 primarily due less anticipated revenues mi customers higher fixed cost structure additionally higher disposal costs industrial waste project work year unfavorably impacted domestic gross profit international rcs cost revenues increased 367 million 76 5232 million 4864 million 2015 international gross profit percentage revenues decreased 304 2016 321 2015 due negative impact higher costs related servicing certain government contracts charges incurred exit contracts uk patient transport services business partially offset inclusion 2015 shredit acquisition higher average gross profit addition international gross profit negatively impacted inability pass full costs customers areas high inflation selling general administrative expenses exclusive adjusting items depreciation amortization sga consolidated sga expenses increased 2087 million 387 7487 million 5399 million 2015 support increase revenues inclusion 2015 shredit acquisition q4 2016 increased allowance doubtful accounts due market economic conditions continued experience challenges internationally mi waste services 2016 10k annual report stericycle inc • 34 part ii domestic canada rcs sga expenses increased 1473 million 537 4214 million 2742 million 2015 primarily related inclusion 2015 shredit acquisition increased compensation marketing expenses increase allowance doubtful accounts based historical collection experience percentage revenues sga increased 168 2016 compared 137 2015 international rcs sga expenses increased 347 million 250 1734 million 1387 million 2015 percentage revenues sga increased 231 2016 compared 193 2015 following factors negatively impacted international sga 2016 inclusion 2015 shredit acquisition increased compensation expense support new business growth opportunities increase allowance doubtful accounts driven market economic conditions continued experience challenges international rcs income operations consolidated income operations decreased 538 million 110 4338 million 4876 million 2015 comparison income operations 2016 2015 affected adjusting items described year ended december 31 2016 recognized 96 million acquisition expenses 876 million expenses related integration acquisitions mainly shredit 129 million litigation professional services expenses 40 million plant conversion expense 240 million costs exit certain patient transport services contracts uk 285 million asset impairment charges mostly writedown certain assets uk either sold loss classified assets held sale december 31 2016 21 million favorable change fair value contingent consideration year ended december 31 2015 recognized 391 million acquisition expenses related acquisition shredit 517 million expenses related integration acquisitions 597 million litigation expenses mostly due 285 million settlement qui tam action 282 million settlement junk fax lawsuit 227 million restructuring plant conversion expenses 18 million intangible asset impairment 06 million favorable change fair value contingent consideration consolidated depreciation amortization expense increased 2525 million 2016 compared 1274 million 2015 primarily due inclusion shredit acquisition higher level depreciation expense completion customer relationships intangible valuation related shredit acquisition resulting trueup amortization expense percentage revenue depreciation amortization expense increased 71 compared 43 2015 domestic canada rcs income operations increased 319 million 63 5366 million 5047 million 2015 year ended december 31 2016 recognized 560 million acquisition integration plant conversion expenses year ended december 31 2015 recognized 1040 million acquisition integration restructuring litigation expense intangible asset impairment charges domestic canada rcs depreciation amortization expense increased 1694 million 2016 compared 658 million 2015 primarily due inclusion shredit acquisition higher level depreciation expense completion customer relationships intangible valuation related shredit acquisition resulting trueup amortization expense percentage revenue depreciation amortization expense increased 68 compared 33 2015 international rcs income operations decreased 772 million 280 million loss 492 million income 2015 2016 10k annual report stericycle inc • 35 part ii year ended december 31 2016 recognized 512 million acquisition integration plant conversion expenses costs exit certain uk patient transport services contracts asset impairments charges mostly writedown certain assets uk either sold loss classified assets held sale december 31 2016 favorable change fair value contingent consideration year ended december 31 2015 recognized 234 million acquisition integration restructuring plant conversion expenses favorable adjustment litigation expenses favorable change fair value contingent consideration international rcs depreciation amortization expense increased 608 million 2016 compared 423 million 2015 primarily due inclusion shredit acquisition higher level depreciation expense completion customer relationships intangible valuation related shredit acquisition resulting trueup amortization expense percentage revenues depreciation amortization expense increased 81 2016 compared 59 2015 net interest expense net interest expense increased 977 million 2016 773 million 2015 due increased borrowings fund acquisition shredit q4 2015 income tax expense income tax expense decreased 1202 million 2016 1429 million 2015 effective tax rates years 2016 2015 366 348 respectively increase current year tax rate compared prior year primarily related recognition tax benefits 2015 well higher proportion pretax income united states higher statutory tax rate compared international operations year ended december 31 2015 compared year ended december 31 2014 revised 2015 10k disclosure align 2016 change segments highlights year ended december 31 2015 included following • revenues grew 299 billion 168 increase 256 billion 2014 • gross margins decreased 424 2015 428 2014 • operating income decreased 124 4876 million 5563 million 2014 • incurred 1744 million pretax expenses related acquisitions integration expenses related acquisitions restructuring plant conversion expenses litigation settlement expense impairment intangible assets favorable change fair value contingent consideration • cash flows operations 3903 million • acquisition shredit largest acquisition stericycle’s history completed october 1 2015 aggregate purchase price 23 billion cash funded follows borrowed 130 billion term loan credit facility october 1 2015 fund portion purchase price paid shredit net proceeds 7469 million received registered public offering series mandatory convertible preferred stock completed september 15 2015 fund portion purchase price paid shredit issued sold 300 million new sixyear eightyear unsecured senior notes • dividends 101 million paid december 15 2015 holders series preferred stock 2016 10k annual report stericycle inc • 36 part ii following summarizes company’s operations revenues consolidated revenues increased 4303 million 168 299 billion 256 billion 2014 overall organic revenue growth contributed 1620 million 65 revenues acquisitions contributed 3785 million increase revenues 2015 effect foreign exchange rates unfavorably impacted total revenues 2015 1102 million 43 foreign currencies declined us dollar domestic canada rcs revenues increased 3318 million 199 200 billion 167 billion 2014 acquisitions contributed 2658 million organic growth contributed 825 million 49 revenues canadian dollar weakened negatively affected 2015 revenue 165 million services related mi waste experienced reduction 135 million negatively impacting overall organic growth 08 reduction due lower fuel surcharges well lower hazardous waste volume industrial customers international rcs revenues increased 529 million 80 7168 million 6639 million 2014 organic growth currency rate fluctuations acquisitions impact comparison 2015 2014 organic growth international rcs segment contributed 599 million revenues 90 effect foreign exchange rates unfavorably impacted international revenues 2015 937 million 141 foreign currencies declined us dollar revenue international acquisitions contributed 867 million increase revenues 2015 revenues related domestic communication related services increased 456 million 203 2699 million 2244 million 2014 cost revenues consolidated 2015 cost revenues increased 2585 million 177 172 billion 146 billion 2014 percentage revenues consolidated gross profit 424 2015 compared 2016 10k annual report stericycle inc • 37 part ii 428 2014 incurred 15 million 29 million plant conversion expenses years ended december 31 2015 2014 respectively domestic canada rcs cost revenues increased 1921 million 215 109 billion 8948 million 2014 gross profit percentage revenues decreased 456 2015 463 2014 primarily due higher operating costs related current stringent compliance requirements medical waste incinerators title v additionally less anticipated revenues industrial customers higher fixed cost structure unfavorably impacted gross margins international rcs cost revenues increased 389 million 87 4864 million 4475 million 2014 gross profit percentage revenues decreased 321 2015 326 2014 due foreign exchange impact profitability mix experienced unfavorable foreign exchange impact primarily areas higher profitability similarly experienced higher compensation costs areas high inflation sga consolidated sga expenses increased 1060 million 244 5399 million 4339 million 2014 support increase revenues inclusion 2015 acquisitions mainly shredit percentage revenues costs increased 181 2015 compared 170 2014 domestic canada rcs sga expenses increased 960 million 538 2742 million 1782 million 2014 primarily related increased healthcare benefit costs higher professional fees increased investments growth inclusion shredit acquisition 2015 percentage revenues sga increased 137 2015 compared 107 2014 international rcs sga expenses increased 235 million 170 1387 million 1152 million 2014 percentage revenues sga increased 193 2015 compared 173 2014 primarily related compensation expenses support new business growth opportunities inclusion shredit acquisition 2015 income operations consolidated income operations decreased 687 million 124 4876 million 5563 million 2014 comparison income operations 2015 2014 affected adjusting items described q1 2015 management began executing realignment operations reduce labor redundancies facility costs part realignment company recorded charges related severance fixed asset impairment intangible asset impairment recognition lease expense properties longer used contractual obligation year ended december 31 2015 recognized 597 million litigation expenses mostly due 285 million settlement qui tam action 282 million settlement junk fax lawsuit 391 million acquisition expenses related 2015 acquisition shredit 517 million expenses related integration acquisitions relates acquisition shredit 227 million restructuring plant conversion expenses 18 million impairment charges intangible assets 06 million favorable change fair value contingent consideration year ended december 31 2014 recognized 133 million acquisition expenses 260 million expenses related integration acquisitions 146 million plant conversion restructuring expenses related impairment permit intangibles support plant rationalization new plant startup costs 66 million litigation expenses partially offset 15 million gain related change fair value contingent consideration consolidated depreciation amortization expense increased 1274 million 2015 compare 1046 million 2014 primarily due inclusion shredit acquisition last quarter 2015 percentage revenue depreciation amortization expense increased 43 compared 41 2014 2016 10k annual report stericycle inc • 38 part ii domestic canada rcs income operations decreased 539 million 97 5047 million 5586 million 2014 year ended december 31 2015 recognized 1040 million acquisition integration restructuring litigation expense intangible asset impairment charges year ended december 31 2014 recognized 200 million acquisition integration restructuring plant conversion expenses domestic canada rcs depreciation amortization expense increased 658 million 2015 compare 449 million 2014 primarily due inclusion shredit acquisition last quarter 2015 percentage revenue depreciation amortization expense increased 33 compared 22 2014 international rcs income operations decreased 174 million 262 492 million 666 million 2014 year ended december 31 2015 recognized 234 million acquisition integration restructuring plant conversion expense favorable adjustment litigation expenses favorable change fair value contingent consideration year ended december 31 2014 recognized 186 million acquisition integration restructuring plant conversion expenses favorable change fair value contingent consideration international rcs depreciation amortization expense increased 423 million 2015 compare 415 million 2014 primarily due inclusion shredit acquisition last quarter 2015 percentage revenue depreciation amortization expense increased 59 compared 58 2014 net interest expense net interest expense increased 773 million 2015 660 million 2014 due increased borrowings fund acquisition shredit q4 2015 well higher interest costs latin america income tax expense income tax expense decreased 1429 million 2015 1594 million 2014 reported tax rates years 2015 2014 348 327 respectively increase current year tax rate compared prior year primarily related increase state tax rate partially offset benefit recognition tax deductible goodwill associated entity mergers spain brazil chile prior year liquidity capital resources following senior credit facility term loan private placement notes require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility term loan private placement notes december 31 2016 compliance financial debt covenants senior credit 2016 10k annual report stericycle inc • 39 part ii facility term loan private placement notes rank pari passu unsecured debt obligations december 31 2016 4071 million borrowings outstanding 120 billion senior unsecured credit facility includes foreign currency borrowings 1209 million also 1380 million outstanding letters credit facility unused portion revolving credit facility december 31 2016 6549 million december 31 2016 interest rates borrowings revolving credit facility follows • fee 02 revolving credit facility • borrowings less one month prime rate plus 03 • borrowings greater one month libor plus 13 weighted average rate interest unsecured revolving credit facility 214 per annum includes 02 facility fee december 31 2016 december 31 2016 10 billion outstanding term loan credit facility weighted average rate interest unsecured term loan facility 207 per annum december 31 2016 1750 million sevenyear 389 unsecured senior notes 2250 million 10year 447 unsecured senior notes outstanding issued 39 institutional purchasers private placement completed october 2010 interest payable arrears semiannually april 15 october 15 beginning april 15 2011 principal payable october 15 2017 sevenyear notes october 15 2020 10year notes classified 1750 million private placement notes mature october 2017 longterm debt due intent settle obligation borrowing 12 billion senior credit facility due 2019 december 31 2016 1250 million sevenyear 268 unsecured senior notes 1250 million 10year 326 unsecured senior notes outstanding issued 46 institutional purchasers private placement completed december 2012 interest payable arrears semiannually june 12 december 12 beginning june 12 2013 principal payable december 12 2019 december 12 2022 respectively december 31 2016 2000 million sevenyear 272 unsecured senior notes 1000 million eightyear 279 unsecured senior notes outstanding issued several institutional purchasers private placement completed july 2015 interest payable arrears semiannually january 1 july 1 beginning january 1 2016 principal payable july 1 2022 july 1 2023 respectively december 31 2016 1500 million sixyear 289 unsecured senior notes 1500 million eightyear 318 unsecured senior notes outstanding issued several institutional purchasers private placement completed october 2015 interest payable arrears semiannually april 1 october 1 beginning april 1 2016 principal payable october 1 2021 october 1 2023 respectively december 31 2016 1916 million promissory notes outstanding issued connection acquisitions 2008 2016 994 million foreign subsidiary bank debt outstanding 111 million capital lease obligations working capital december 31 2016 working capital increased 563 million 2308 million compared 1745 million december 31 2015 current assets increased 118 million driven 204 million increase accounts receivable offset 114 million reduction cash days sales outstanding dso 64 days december 31 2016 2015 2016 10k annual report stericycle inc • 40 part ii current liabilities decreased 445 million 2016 primarily related 886 million decrease current debt offset 312 million increase accrued liabilities net cash provided used net cash provided operating activities increased 1569 million 402 5472 million 2016 3903 million 2015 cash provided operations ratio net income 2016 2015 263 146 respectively january 1 2016 company adopted guidance accounting standards update asu 201609 “compensation stock compensation topic 718 improvements employee sharebased payment accounting” asu 201609 requires income taxrelated cash flows resulting sharebased payments reported operating activities statement cash flows previously income tax benefits settlement award reported reduction operating cash flows increase financing cash flows extent benefits exceeded income tax benefits reported earnings awards vesting period company elected apply change cash flow classification prospective basis leaving previously reported net cash provided operating activities net cash used financing activities accompanying consolidated statements cash flows period ended december 31 2015 unchanged net cash used investing activities 2016 1956 million compared 253 billion 2015 used 23 billion acquire shredit october 2015 capital expenditures increased 214 million 2016 percentage revenues 38 2016 2015 net cash used financing activities 3633 million 2016 compared 218 billion net cash provided financing activities 2015 september 2015 completed registered public offering series mandatory convertible preferred stock total gross proceeds 7700 million 7469 million net 231 million underwriting discounts commissions expenses used net proceeds offering fund portion purchase price paid acquisition shredit 2016 repaid 1784 million net senior credit facility term loan facility compares 125 billion net proceeds new term loan 5000 million net proceeds private placement notes used fund 2015 acquisitions including shredit october 2015 common preferred share repurchases 717 million 2016 compared 1306 million 2015 dividends 394 million paid 2016 holders series preferred stock contractual obligations following table summarizes significant contractual obligations cash commitments december 31 2016 1 environmental liabilities presented undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable 2 amounts represent scheduled principal payments related longterm debt capital leases excluding interest 2016 10k annual report stericycle inc • 41 part ii 3 interest fixedrate debt calculated based contractual rates interest debt floating interest rates requires use management judgment estimate future rates interest 4 operating lease obligations include various plant equipment office furniture equipment motor vehicles office warehouse space landfill leasing arrangements operating lease obligations expire various dates latest maturity 2035 5 purchase obligations primarily represent noncancelable contractual obligations related information technology products services generally incur ordinary course business payments unrecognized tax benefits excluded contractual obligations based uncertain nature liability unrecognized tax benefits unable make estimate period potential settlement applicable taxing authorities december 31 2016 1380 million outstanding standby letters credit anticipate operating cash flows together borrowings senior unsecured credit facility sufficient meet anticipated future operating expenses capital expenditures debt service obligations become due next 12 months foreseeable future item 7aitem 7 managements discussion analysis financial condition results operation following discussion financial condition results operations company read conjunction companys consolidated financial statements related notes item 8 nanitem 7a qualitative disclosures market risk companys exposure market risk includes possibility rising interest rates connection companys credit facility lasalle national bank thereby increasing debt service obligations could adversely affect companys cash flows february 1999 upon receipt proceeds companys public offering common stock borrowings credit facility repaid march 1999 company borrowings outstanding credit facility see item 7 managements discussion analysis financial condition results operations liquidity capital resources item 8item 7a quantitative qualitative disclosures market risk exposure market risk includes possibility rising interest rates connection senior credit facility thereby increasing debt service obligations could adverse affect cash flows see item 7 managements discussion analysis financial condition results operation liquidity capital resources item 8item 7a quantitative qualitative disclosures market risk 30 exposed interest rate risk senior credit facility variable rate debt 1 change interest rate would result change interest expense approximately 21 million see item 7 managements discussion analysis financial condition results operationliquidity capital resources 31 item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates senior secured credit facility interest rate exposure results changes libor base rate used determine applicable interest rates term loans revolving credit facility potential loss one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 02 million fluctuations interest rates affect interest payable senior subordinated notes fixed entered interest rate swapcollar agreements effectively convert portion floatingrate debt fixedrate basis next two years thus reducing impact interest rate changes future interest expense approximately 92 175 million outstanding variable rate debt covered interest rate swapcollar agreements december 31 2001 differential paid received accrued monthly adjustment interest expense item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates senior secured credit facility interest rate exposure results changes libor base rate used determine applicable interest rates term loans revolving credit facility potential loss one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 15 million fluctuations interest rates affect interest payable senior subordinated notes fixed 2001 entered interest rate swap agreements effectively converted portion floatingrate debt fixedrate basis two years thus reducing impact interest rate changes future interest expense swaps expire first quarter 2003 approximately 85 125 million outstanding variable rate debt covered interest rate swap agreements december 31 2002 differential paid received accrued monthly adjustment interest expense item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates senior secured credit facility interest rate exposure results changes libor base rate used determine applicable interest rates term loans revolving credit facility potential loss one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 10 million fluctuations interest rates affect interest payable senior subordinated notes fixed 2001 entered interest rate swap agreements effectively converted portion floatingrate debt fixedrate basis subsequent two years thus reducing impact interest rate changes future interest expense swaps expired first quarter 2003 december 31 2003 none floating rate debt covered interest rate swap agreement exposure commodity pricing gas diesel fuel trucks hedge items manage exposure item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates senior secured credit facility interest rate exposure results changes libor base rate used determine applicable interest rates term loans revolving credit facility potential loss one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 17 million fluctuations interest rates affect interest payable senior subordinated notes fixed exposure commodity pricing gas diesel fuel trucks hedge items manage exposure item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates senior unsecured credit facility interest rate exposure results changes libor base rate used determine applicable interest rates revolving credit facility potential loss one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 29 million exposure commodity pricing gas diesel fuel trucks hedge items manage exposure item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates senior unsecured credit facility interest rate exposure results changes libor base rate used determine applicable interest rates revolving credit facility potential loss one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 42 million exposure commodity pricing gas diesel fuel trucks hedge items manage exposure foreign exchange related loans denominated foreign currency two loans denominated gbp cash flow hedge foreign exchange could also negatively impact reported net income due translation item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 49 million pretax basis exposure currency exchange rate fluctuations us dollar uk pound sterling “gbp” related 11 million gbp intercompany loan stericycle international ltd parent company white rose environmental use cash flow hedge accounting treatment forward contracts intercompany loan balance forward contracts marked market end reporting period impact balances recorded balance sheet comprehensive income exposure commodity pricing gas diesel fuel trucks purchase containers boxes hedge items manage exposure item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 25 million pretax basis october 2008 entered three interest rate derivative transactions effectively fix interest rate applicable notional amounts variable rate debt follows thousands interest rate swaps designated cash flow hedges notional amounts significant terms swap agreement matched provisions terms variable rate debt hedged apply hedge accounting account instruments exposure currency exchange rate fluctuations us dollar uk pound sterling “gbp” related eight million gbp intercompany loan stericycle international ltd parent company white rose environmental hedge forward contract use cash flow hedge accounting treatment forward contract intercompany loan balance forward contract marked market end reporting period impact balances recorded balance sheet comprehensive income forward contract expires july 2009 exposure commodity pricing gas diesel fuel trucks purchase containers boxes hedge items manage exposure item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 55 million pretax basis october 2008 stericycle entered three interest rate swap contracts covering 225 million borrowings outstanding senior credit facility objective swap reduce risk volatile interest expense fixing rate october 2009 settled one interest rate swap notional value 125 million remaining two contracts follows thousands interest rate swaps designated cash flow hedges notional amounts significant terms swap agreement matched provisions terms variable rate debt hedged apply hedge accounting account instruments exposure commodity pricing gas diesel fuel trucks purchase containers boxes hedge items manage exposure item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 33 million pretax basis year ending december 31 2010 settled us treasury lock hedge related private debt placement settlement resulted cash payment 46 million reflected statement cash flows within financing activities settlement amount amortized life related debt exposure foreign currency fluctuations subsidiaries ten foreign countries whose functional currency local currency changes foreign currency exchange rates could unfavorably impact consolidated results operations exposure commodity pricing gas diesel fuel trucks purchase containers boxes hedge items manage exposure item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 39 million pretax basis exposure foreign currency fluctuations subsidiaries eleven foreign countries whose functional currency local currency changes foreign currency exchange rates could unfavorably impact consolidated results operations exposure commodity pricing gas diesel fuel trucks purchase containers boxes hedge items manage exposure item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 42 million pretax basis exposure commodity pricing gas diesel fuel trucks purchase containers boxes hedge items manage exposure foreign currency fluctuations subsidiaries eleven foreign countries whose functional currency local currency operations argentina seen erosion value argentine peso compared us dollar translate results operations international operations using average exchange rate changes foreign currency exchange rates could unfavorably impact consolidated results operations item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 65 million pretax basis exposure commodity pricing gas diesel fuel trucks purchase containers boxes hedge items manage exposure foreign currency fluctuations subsidiaries twelve foreign countries whose functional currency local currency international subsidiaries use local currency denominated lines credit funding needs exposure currency fluctuations translate results operations international operations using average exchange rate changes foreign currency exchange rates could unfavorably impact consolidated results operations item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 173 million pretax basis exposure commodity pricing gas diesel fuel trucks purchase containers boxes hedge items manage exposure foreign currency fluctuations subsidiaries twelve foreign countries whose functional currency local currency international subsidiaries use local currency denominated lines credit funding needs exposure currency fluctuations translate results operations international operations using average exchange rate changes foreign currency exchange rates could unfavorably impact consolidated results operations item 8item 7a quantitative qualitative disclosures market risk normal course business exposed market risks including changes interest rates certain commodity prices foreign currency rates subject market risks arising changes interest rates related primarily financing activities performed sensitivity analysis determine market rate changes might affect fair value market risksensitive debt instruments potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 150 million pretax basis exposure commodity pricing gas diesel fuel trucks purchase containers boxes hedge items manage exposure foreign currency fluctuations subsidiaries 20 foreign countries whose functional currency local currency international subsidiaries use local currency denominated lines credit funding needs translate results operations international operations using average exchange rate quantified described impact foreign currency translation revenues 2017 10k annual report stericycle inc • 58 part ii item 8item 7a quantitative qualitative disclosures market risk normal course business exposed market risks including changes interest rates certain commodity prices foreign currency rates subject market risks arising changes interest rates relate primarily financing activities performed sensitivity analysis determine market rate changes might affect fair value market risksensitive debt instruments potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 156 million pretax basis exposure foreign currency fluctuations subsidiaries 20 foreign countries whose revenues expenses denominated local currency use local currency denominated lines credit funding needs translate results operations international operations using average exchange rate quantified described impact foreign currency translation revenues estimate based upon amounts reported individual countries year ended december 31 2018 prevailing exchange rates date 1 devaluation functional currencies foreign businesses would result reduction approximately 05 million net loss income attributable stericycle inc reported consolidated statements loss income addition argentina classified highly inflationary economy resulting foreign exchange gains losses arising translation argentinian peso denominated net monetary assets recognized net income foreign exchange loss recognized year ended december 31 2018 38 million ongoing basis estimate based argentinian peso denominated net monetary asset position december 31 2018 record additional exchange losses approximately 01 million 1 devaluation december 31 2018 argentinian peso rate exchange versus us dollar 2018 10k annual report stericycle inc • 65 part ii item 8item 7a quantitative qualitative disclosures market risk normal course business exposed market risks including changes interest rates certain commodity prices including sop diesel fuel foreign currency rates specifically hedge exposure risks subject market risks arising changes interest rates relate primarily financing activities performed sensitivity analysis determine market rate changes might affect fair value market risksensitive debt instruments potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 197 million pretax basis exposure foreign currency fluctuations subsidiaries 17 foreign countries whose revenues expenses denominated local currency use local currency denominated lines credit funding needs translate results operations international operations using average exchange rate quantified described impact foreign currency translation revenues estimate based upon amounts reported individual countries year ended december 31 2019 prevailing exchange rates date 1 devaluation functional currencies foreign businesses would result reduction approximately 21 million net loss income attributable stericycle inc reported consolidated statements loss income addition argentina classified highly inflationary economy resulting foreign exchange gains losses arising translation argentinian peso denominated net monetary assets 2019 10k annual report stericycle inc • 65 part ii recognized net income foreign exchange losses recognized years ended december 31 2019 2018 33 million 38 million respectively ongoing basis estimate based argentinian peso denominated net monetary asset position december 31 2019 record additional exchange losses approximately 01 million 1 devaluation december 31 2019 argentinian peso rate exchange versus us dollar december 31 2019 net monetary assets approximately 82 million relating operations argentina cumulative currency translation adjustment losses december 31 2019 approximately 3181 million subject continued fluctuations due changes foreign currency rates addition extent sell substantially operations within one country similar transactions undertaken mexico chile 2019 would required recognize statements loss income accumulated currency translation losses gains associated country 2019 10k annual report stericycle inc • 66 part ii item 8item 7a quantitative qualitative disclosures market risk normal course business exposed market risks including changes interest rates certain commodity prices including sop diesel fuel foreign currency rates specifically hedge exposure risks subject market risks arising changes interest rates relate primarily financing activities performed sensitivity analysis determine market rate changes might affect fair value market risksensitive debt instruments potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 63 million pretax basis exposure foreign currency fluctuations subsidiaries 17 foreign countries whose revenues expenses denominated local currency use local currency denominated lines credit funding needs translate results operations international operations using average exchange rate quantified described impact foreign currency translation revenues estimate based upon amounts reported individual countries year ended december 31 2020 prevailing exchange rates date 1 devaluation functional currencies foreign businesses would result approximate 19 million increase net loss attributable stericycle inc reported consolidated statements loss part ii cumulative currency translation adjustment losses december 31 2020 approximately 1874 million subject continued fluctuations due changes foreign currency rates addition extent sell substantially operations within one country similar transactions undertaken argentina 2020 mexico chile 2019 would required recognize statements loss accumulated currency translation losses gains associated country uk’s financial conduct authority regulates libor announced 2017 intends phase libor end 2021 company’s contracts respect borrowings already contain comparable alternative reference rates would automatically take effect upon phasing libor item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 61 million pretax basis exposure foreign currency fluctuations subsidiaries eleven foreign countries whose functional currency local currency changes foreign currency exchange rates could unfavorably impact consolidated results operations exposure commodity pricing gas diesel fuel trucks purchase containers boxes hedge items manage exposure item 8item 7a quantitative qualitative disclosures market risk subject market risks arising changes interest rates potential additional interest expense one year would result hypothetical instantaneous unfavorable change 100 basis points interest rate variable rate obligations would approximately 151 million pretax basis exposure commodity pricing gas diesel fuel trucks purchase containers boxes hedge items manage exposure foreign currency fluctuations subsidiaries twelve foreign countries whose functional currency local currency international subsidiaries use local currency denominated lines credit funding needs translate results operations international operations using average exchange rate changes foreign currency exchange rates could unfavorably impact consolidated results operations 2016 10k annual report stericycle inc • 42 part ii item 8nan item 8 financial statements supplementary data report independent auditors board directors shareholders stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 1996 1997 related consolidated statements operations changes shareholders equity cash flows years threeyear period ended december 31 1997 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 1996 1997 consolidated results operations cash flows years threeyear period ended december 31 1997 conformity generally accepted accounting principles ernst young llp chicago illinois march 6 1998 stericycle inc subsidiaries consolidated balance sheets thousands accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements operations thousands except share per share data accompanying notes integral part financial statements accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 1description business stericycle inc company incorporated delaware march 1989 purpose providing collection transportation treatment disposal reduction reuse recycling services regulated medical waste hospitals healthcare providers united states canada note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc whollyowned subsidiaries stericycle arkansas inc stericycle washington inc swd acquisition corporation environmental control co inc significant intercompany accounts transactions eliminated revenue recognition company recognizes revenue treatment regulated medical waste completed onsite waste shipped offsite processing disposal waste shipped offsite associated costs recognized time shipment cash equivalents shortterm investments company considers highly liquid instruments maturity less three months purchased cash equivalents shortterm investments consist highly liquid investments corporate debt obligations mature less one year classified heldtomaturity since management positive intent ability hold securities maturity obligations stated amortized cost approximates fair market value interest income recognized earned property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows buildings improvements10 30 years machinery equipment3 10 years office equipment furniture5 10 years goodwill amortized using straightline method 25 years amortization expense 1995 1996 1997 related goodwill approximately 320000 390000 1042000 respectively company continually evaluates value future benefits goodwill company assesses stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 2summary significant accounting policies continued coverability future operations using income operations related acquired business measure approach carrying value goodwill would reduced becomes probable companys best estimate expected undiscounted future cash flows related business would less carrying amount goodwill remaining amortization period threeyear period ended december 31 1997 adjustments carrying amounts goodwill resulting evaluations new plant development permitting costs company expenses costs associated operations new plants prior commencement services customers initial ongoing costs related permitting research development costs company expenses costs associated research development incurred research development expense 1995 1996 1997 975000 194000 281000 respectively income taxes deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes deferred tax liabilities assets determined based differences financial statement tax bases assets liabilities using enacted tax rates effect year differences expected reverse financial instruments companys financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt fair values financial instruments materially different carrying values financial instruments potentially subject company concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size companys customer base single customer represents greater 10 total accounts receivable company performs ongoing credit evaluation customers maintains allowances potential credit losses incurred within range managements expectations use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 2summary significant accounting policies continued net income loss per common share 1997 financial accounting standards board fasb issued statement financial accounting standards 128 earnings per share fas 128 fas 128 replaced calculation primary fully diluted earnings per share basic diluted earnings per share unlike primary earnings per share basic earnings per share excludes dilutive effects options warrants convertible securities diluted earnings per share similar previously reported fully diluted earnings per share net income loss per common share amounts periods presented appropriate restated conform fas 128 requirements restating net income loss per common share comply requirements fas 128 company applied recently issued staff accounting bulletin 98 sab 98 result applying provisions sab 98 company restated 1995 1996 loss per share exclude antidilutive effect options warrants granted within one year companys 1996 initial public offering impact recently issued accounting standards june 1997 fasb issued statement financial accounting standards 130 reporting comprehensive income fas 130 fas 130 establishes standards reporting display comprehensive income components financial statements effective fiscal years beginning december 15 1997 adoption fas 130 impact companys financial position results operations cash flows june 1997 fasb issued statement financial accounting standards 131 disclosure segments enterprise related information fas 131 fas 131 establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued stockholders also establishes standards related disclosure products services geographic areas major customers fas 131 effective financial statements fiscal years beginning december 15 1997 company evaluating disclosure requirements fas 131 determined whether adoption material impact future disclosure requirements note 3initial public offering august 28 august 30 1996 company successfully completed initial public offering 3450000 shares common stock 9 per share company received total proceeds offering net offering costs approximately 27621000 stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 4income taxes companys deferred tax liabilities assets december 31 1996 1997 follows december 311997 company net operating loss carryforwards federal income tax purposes approximately 36000000 expire beginning 2004 based internal revenue code 1986 amended changes ownership company utilization net operating loss carryforwards subject annual limitations could significantly restrict partially eliminate utilization net operating losses additionally company alternative minimum tax credit carryforward 60000 available indefinitely significant components companys income tax expense year ended december 31 1997 follows stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 4income taxes continued reconciliation income tax provision computed federal statutory tax rate effective tax rate year ended december 31 1997 follows 1997 company paid income tax 58300 income taxes paid 1996 1995 additionally company recognize income tax benefit 1996 1995 due companys recurring operating losses valuation allowances established net deferred tax assets note 5acquisitions divestitures november 1997 company purchased customer list certain assets calva inc calva operated regulated medical waste business northern virginia washington dc purchase price paid issuance shares companys common stock assumption certain calvas liabilities purchase price adjusted event revenues fall certain levels november 1997 company purchased selected customer contracts phoenix services inc phoenix operated regulated medical waste business baltimore maryland metropolitan area purchase price paid cash january 1998 delivery 20000 note due september 1998 august 1997 company purchased customer list certain assets envirotech enterprises inc operated regulated medical waste business arizona purchase price paid cash delivery 300000 note due august 1998 purchase price adjusted event acquired revenues fall certain levels june 1997 company purchased customer list certain assets regulated medical waste business waste management inc wmi wisconsin wmiwi july 1997 company announced purchase customer lists certain assets regulated medical waste businesses regional carting inc rumpke container service inc new jersey ohio respectively purchase price three acquisitions paid combination cash assumption liabilities issuance shares common stock company one case delivery stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 5acquisitions divestitures continued note paid december 1997 event acquired revenues three companies fall certain levels purchase price adjusted accordingly may 1997 company announced acquisition outstanding stock environmental control co inc ecco one leading medical waste companies new york city market company paid 4200000 cash issued 125000 shares stock assumed debt vehicles issued 2300000 10year promissory note balance purchase price note bears interest rate 686 per annum payable 10 equal annual installments 230000 starting may 1998 ecco purchase price subject downward adjustments reflect uncollectible acquired accounts receivable additional outstanding obligations reflected purchase price closing extent eccos revenues oneyear period following closing less specified amount december 1996 company purchased customer lists vehicles certain assets major portion wmis medical waste business wmi acquisition 5450000 cash note 5210000 quarter ended june 30 1997 adjustments made value vehicles purchased purchase price purchase price decreased 756000 specified agreement related goodwill note payable adjusted accordingly company finalized estimate value vehicles purchased reduced related note accordingly quarter ended december 31 1997 purchase price decreased 163000 specified agreement related goodwill adjusted accordingly company paid 1796650 adjusted 3593301 balance note wmi december 1997 balance plus accrued interest due december 1998 may 1996 company purchased customer list certain assets doctors environmental control inc 400000 cash notes payable issued 600000 payable may 1 1998 interest rate 6 per annum addition company assumed vehicle leases totaling 77000 paid may 1996 delivered option agreements shareholders seller giving option purchase total 53816 shares companys common stock price purchase common stock upon exercise option surrender cancellation note payable options exercised august 1996 april 1996 company purchased customer list certain assets sharps incinerator fort inc 757000 cash 562000 payable closing balance plus interest paid november 1996 january 1996 company purchased customer lists certain assets wmi medical services new england inc 100000 cash 492000 notes payable issued seller notes bear interest rate 75 per annum 150000 plus interest paid 1996 157000 plus interest paid 1997 185000 plus interest paid january 1998 july 1995 company sold selected customer lists related assets 248000 company recognized gain 50000 transaction included selling general administrative expense 1995 consolidated statement operations stericycle inc subsidiaries notes consolidated financial statements continued december 31 1997 note 5acquisitions divestitures continued june 1995 company purchased customer list transportation equipment assumed certain contract obligations safetech health care 160000 april 1995 company sold st louis portion business competitor company received 544000 payment customer list concurrently agreed resolve antitrust lawsuit brought competitor company recognized gain transaction of408000 included selling general administrative expense 1995 consolidated statement operations financial reporting purposes acquisition transactions accounted using purchase method accounting total purchase price 1995 1996 1997 459000 13013000 10197000 respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market value date acquisition total purchase price 1997 acquisitions includes value 403000 shares common stock issued sellers excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill results operations acquired businesses included consolidated statement operations date acquisition effect acquisitions would significant effect companys operations except wmi acquisition ecco acquisition following unaudited pro forma results operations assumes wmi acquisition occurred january 1 1995 ecco acquisition occurred january 1 1996 giving effect certain adjustments including amortization goodwill increased interest expense debt incurred connection acquisitions adjustments record incremental recurring costs associated consolidation operations historical results operations wmi ecco reflect costs pro forma financial information purport indicative results operations would occurred transactions taken place beginning periods indicated future results operations stericycle inc subsidiaries notes consolidated financial statements continued december 31 1997 note 6longterm debt longterm debt consists following december 31 march 1998 company entered new revolving line credit silicon valley bank secure line credit company granted bank lien companys assets borrowings line credit limited lesser 7500000 specific percentage companys eligible receivables defined loan security agreement outstanding borrowings bear interest banks prime rate plus 050 libor plus 30 companys option agreement maturity date march 5 1999 terms loan security agreement company among things restricted paying dividends required maintain minimum levels total liabilities net worth quick ratio profitability company borrowings prior 2500000 line credit bank december 31 1997 connection companys may 1997 purchase eccos stock 10year note 2300000 issued owners ecco note payable 10 equal annual installments due may 1 year starting 1998 note bears interest rate 686 per annum connection companys december 1996 purchase wmis medical waste business note payable totaling 5210000 issued wmi note adjusted 3593301 1796650 repaid 1997 1796651 due december 20 1998 note bears interest rate 7 per annum 1995 agreement reached rhode island department environmental management regarding two notices violation issued 1994 1995 although company believed allegations meritless agreement entered order resolve matter best interest company customers timely manner company agreed pay 35000 year 1995 1998 50000 1999 60000 2000 150000 2001 rhode island air water protection fund addition company agreed perform community services conduct seminars fiveyear period company recorded obligation based discounted cash flows expected paid term agreement using discount rate 1175 recorded obligation 222000 december 31 1997 included mortgage payable longterm debt expense 458000 included 1995 consolidated statement operations selling general administrative stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 6longterm debt continued expense amount reflects recorded obligation legal fees incurred settlement 1994 noninterest bearing note amount 2480000 issued part purchase net assets safe way disposal systems inc result companys initial public offering august 1996 portion note converted 98001 shares common stock remainder paid cash 1992 company entered obligation finance development woonsocket rhode island facility development purchase substantially property equipment woonsocket rhode island facility financed issuance industrial development revenue bonds due various amounts 2017 fixed interest rates ranging 60 7375 collateralized property equipment woonsocket rhode island facility terms agreement entered connection issuance bonds contain among provisions requirements maintaining defined levels working capital various financial ratios including debt net worth payments due longterm debt excluding capital lease obligations five years subsequent december 31 1997 follows company paid interest 262000 352000 444000 fiscal years ended december 31 1995 1996 1997 respectively capital leases february 1994 company entered sale leaseback transaction equipment acquisitions yorkville wisconsin facility amount 882000 lease arrangement term 60 months end lease company option renew lease return equipment purchase equipment fair market value exceed 11 original purchase price january 1996 company entered capital lease obligation 364000 equipment lease expires 1998 stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 6longterm debt continued december 31 property capital leases included property plant equipment accompanying consolidated balance sheet follows minimum future lease payments capital leases follows note 7lease commitments company leases various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next six years leases properties contain renewal provisions rent expense 1995 1996 1997 1739000 2462000 3284000 respectively stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 7lease commitments continued minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 1997 next five years aggregate follows note 8common preferred stock august 1995 board directors adopted plan recapitalization approved companys stockholders september 1995 pursuant company reclassified outstanding convertible redeemable preferred stock common stock part plan recapitalization conversion redemption liquidation rights associated convertible redeemable preferred stock terminated exchange issuance shares common stock shares companys common stock reserved issuance upon exercise options warrants also see note 10 shares reserved follows december 31 1997 stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 9net income loss per common share following table sets forth computation net income loss per common share thousands except share per share data additional information regarding outstanding employee stock options outstanding warrants see note 10 options warrants purchase 1170626 838849 shares common stock outstanding 1995 1996 respectively exercise prices ranging 536902 respectively included computation diluted earnings per common share years company net losses 1995 1996 effect would antidilutive stock options september 1993 companys shareholders approved amended restated stock option plan 1993 plan provided granting options purchase 113018 shares common stock november 1995 outstanding options current employees canceled conjunction companys recapitalization 1995 companys board directors shareholders approved incentive compensation plan 1995 plan amended restated 1996 provides granting 1500000 shares common stock form stock options restricted stock employees officers directors consultants company exercise price options granted 1995 plan must least equal stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 10stock options warrants fair market value common stock date grant 1995 board directors authorized grant officers employees options purchase 923292 shares companys common stock exercise price 53 per share 1996 board directors authorized grant officers employees options purchase 229883 shares companys common stock exercise prices ranging 53 212 per share options granted 1995 plan 1996 1997 options granted date 10year terms vest periods four years date grant 1997 companys board directors shareholders approved 1997 stock option plan 1997 plan provides granting 1500000 shares common stock form stock options selected officers directors employees company subsidiaries exercise price options granted 1997 plan must least equal fair market value common stock date grant 1997 board directors authorized grant officers employees options purchase 376367 shares companys common stock exercise prices ranging 725 950 per share options granted date 10year terms vest periods 5 years date grant june 1996 companys board directors adopted july 1996 companys stockholders approved directors stock option plan authorizes stock options total 285000 shares common stock granted eligible directors company consisting directors neither officers employees company six incumbent eligible directors automatically received option date closing companys initial public offering 8195 shares common stock exercise price 1025 annual meeting companys stockholders incumbent eligible director reelected director annual meeting automatically receives option grant based predetermined formula exercise price option closing price date grant 1997 six incumbent eligible directors automatically received option date 1997 annual meeting 9500 shares common stock exercise price 750 term option six years date grant option vests 16 equal quarterly installments may exercised vested holder option remains director company 90day period following date ceases serve director stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 10stock options warrants continued summary stock option information follows options outstanding exercisable december 31 1997 price range company elected follow accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations accounting employee stock options discussed alternative fair value accounting provided statement financial accounting standards 123 accounting stockbased compensation fas 123 requires use option valuation models developed use valuing employee stock options apb 25 exercise price companys employee stock options approximates market price underlying stock date grant compensation expense recognized stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 10stock options warrants continued pro forma information regarding net income loss net loss per share required fas 123 company accounted employee stock options granted subsequent december 31 1994 fair value method statement options granted 1997 valued using blackscholes option pricing model options granted 1996 1995 nonpublic company valued using minimum value method following assumptions used 1995 1996 1997 riskfree interest rates ranging 55 57 1995 51 67 1996 59 68 1997 dividend yield 0 weightedaverage expected life option 31 months 1995 1996 72 months 1997 weightedaverage fair values options granted 1995 1996 1997 09 per share 79 per share 448 per share respectively option value models require input highly subjective assumptions companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing method necessarily provide reliable single measure fair value employee stock options purposes pro forma disclosures estimated fair value options amortized expense option vesting period companys pro forma information follows thousands except per share information pro forma effect 1995 1996 1997 representative pro forma effect future years pro forma disclosures reflect fair value stock options granted subsequent december 31 1994 warrants company conjunction lease financing agreement issued lessor warrants purchase 15064 shares common stock 1858 per share december 31 1997 warrants outstanding expire march 1998 company connection issuance preferred stock subsequently reclassified common stock issued warrants purchase 6773 shares common stock exercise price 6902 per share december 31 1997 warrants outstanding expire march 1999 1995 several companys shareholders directors provided bridge loan company loan totaled 830000 interest prime rate plus 3 repaid addition interest lenders received warrants purchase 220559 shares common stock 159 per share warrants expire july 31 2000 1996 lenders exercised warrants purchase 166749 shares december 31 1997 warrants purchase 53810 shares common stock remained outstanding stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 11employee stock purchase plan 1997 approved board directors employees stericycle purchase shares common stock market price terms plan employees allowed purchase shares throughout year pay stock salary deduction employees elected purchase total 5235 shares plan 1997 note 12registration agreement company party registration agreement gives certain shareholders company registration rights shares parties registration agreement original holders companys prior class b c e f h preferred stock holder warrant purchase 15064 shares common stock company issued conjunction lease financing agreement companys 1995 recapitalization registration agreement amended provide registration rights applied shares common stock parties registration agreement received pursuant recapitalization shares issuable certain warrants issued purchasers companys prior class f preferred stock shares issuable warrant issued conjunction lease financing agreement common stock delivered company payment note delivered connection safe way acquisition total 5227608 shares according registration agreement time holders majority shares subject registration rights request registration shares form s1 longform registration holders least 25 shares request registration shares form s2 s3 ii time one shareholder party registration agreement may request long form registration iii time another shareholder party registration agreement request long form registration iv parties registration agreement right include shares registration requested registration company may otherwise undertake registration requested company use best efforts effect requested registration expense note 13employee benefit plan company 401k defined contribution retirement savings plan covering substantially employees company participant may elect defer portion compensation subject certain limitations company may match 30 first 1000 contributed plan employee companys contributions years ended december 31 1995 1996 1997 approximately 14000 25000 respectively note 14related parties february 1997 company announced formation international joint venture company called medam sa de cv medam utilize stericycles proprietary electrothermal deactivation etd technology treat medical infectious waste mexico city market stericycles partners joint venture controladora ambiental sa de cv contam headquartered mexico city pennoni associates inc headquartered philadelphia pennsylvania company owns 245 common stock medam 1997 company received partial payments machinery delivered medam 1998 year ended december 31 1997 company stericycle inc subsidiaries notes consolidated financial statements december 31 1997 note 14related parties continued made 461000 capital contributions capital contributions approximately 702000 1998 october 1993 company entered alliance agreement alliance investor company purpose alliance develop new technologies procedures recycling regulated medical waste company devoted resources alliance research development program first 18 months alliance investor rights respect development alliance technology part research development program initial 18 months alliance company provided 1 million research development costs agreement license agreement effective upon nonrenewal alliance grants investor license use alliance technology subject certain conditions initial term alliance agreement ends october 12 1998 automatically renewed successive oneyear terms thereafter unless either party notifies least six months prior end term intent terminate agreement alliance investor company ongoing relationship provide services products healthcare market place item 9item 8 financial statements supplementary data report independent auditors board directors shareholders stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 1997 1998 related consolidated statements operations changes shareholders equity cash flows years threeyear period ended december 31 1998 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 1997 1998 consolidated results operations cash flows years threeyear period ended december 31 1998 conformity generally accepted accounting principles ernst young llp chicago illinois march 16 1999 stericycle inc subsidiaries consolidated balance sheets thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements operations thousands except per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes shareholders equity years ended december 31 1996 1997 1998 thousands stericycle inc subsidiaries notes consolidated financial statements december 31 1998 note 1 description business stericycle inc subsidiaries company provides medical waste collection transportation treatment disposal reduction reuse recycling services hospitals health care providers small quantity generators united states canada company also expanding international markets joint ventures licensing proprietary technology selling associated equipment note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc whollyowned subsidiaries stericycle arkansas inc stericycle washington inc swd acquisition corp environmental control co inc ecco waste systems inc wsi majority shareholder 3ci complete compliance corporation 3ci midamerica environmental inc 507375 nb ltd medtech environmental limited medtech significant intercompany accounts transactions eliminated revenue recognition company recognizes revenue treatment regulated medical waste completed onsite waste shipped offsite processing disposal waste shipped offsite associated costs recognized time shipment revenue costs contracts supply companys proprietary treatment equipment accounted percentage completion method whereby income recognized based estimated stage completion individual contract cash equivalents shortterm investments company considers highly liquid instruments maturity less three months purchased cash equivalents shortterm investments consist highly liquid investments corporate debt obligations certificates deposit mature less one year classified heldtomaturity obligations stated amortized cost approximates fair market value interest income recognized earned property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows buildings improvement 10 30 years machinery equipment 3 10 years office equipment furniture 5 10 years goodwill amortized using straightline method 25 years amortization expense 1996 1997 1998 related goodwill approximately 390000 1042000 1505000 respectively stericycle inc subsidiaries notes consolidated financial statements december 31 1998 company continually evaluates value future benefits goodwill company assesses recoverability future operations using income operations related acquired business measure approach carrying value goodwill would reduced becomes probable companys best estimate expected undiscounted future cash flows related business would less carrying amount goodwill remaining amortization period threeyear period ended december 31 1998 adjustments carrying amounts goodwill resulting evaluations new plant development permitting costs company expenses costs associated operation new plants prior commencement services customers initial ongoing costs related permitting research development costs company expenses costs associated research development incurred research development expense 1996 1997 1998 194000 281000 15000 respectively income taxes deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes deferred tax liabilities assets determined based differences financial statement tax bases assets liabilities using enacted tax rates effect year differences expected reverse financial instruments companys financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt fair values financial instruments materially different carrying values financial instruments potentially subject company concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size companys customer base single customer represents greater 10 total accounts receivable company performs ongoing credit evaluation customers maintains allowances potential credit losses incurred within range managements expectations use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates segment reporting effective january 1 1998 company adopted financial accounting standards boards statement financial accounting standards 131 disclosures segments enterprise related information fas 131 fas 131 establishes standards way public business enterprises report information operating segments annual financial statements requires stericycle inc subsidiaries notes consolidated financial statements december 31 1998 enterprises report selected information operating segments interim financial reports also establishes standards related enterprisewide disclosures products services geographic areas major customers adoption fas 131 affect companys results operations financial position affect disclosures companys operating segments stericycle inc wsi medtech similar economic characteristics similar nature products services treatment processes types customers methods distribution services nature regulatory environments based conclusion company presented segment disclosure information company provided enterprisewide disclosures note 15 note 3 public offerings august 28 august 30 1996 company successfully completed initial public offering 3450000 shares common stock 9 per share company received total proceeds offering net offering costs approximately 27621000 february 5 1999 company successfully completed public offering 3500000 shares common stock 1450 per share company received total proceeds offering net offering costs approximately 47250000 note 4 income taxes companys deferred tax liabilities assets december 31 1997 1998 follows stericycle inc subsidiaries notes consolidated financial statements december 31 1998 december 31 1998 company net operating loss carryforwards federal income tax purposes approximated 27000000 expire beginning 2004 based internal revenue code 1986 amended changes ownership company utilization net operating loss carryforwards subject annual limitations could significantly restrict partially eliminate utilization net operating losses additionally company alternative minimum tax credit carryforward 140000 available indefinitely reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 1997 1998 follows company paid income taxes 1030000 58300 1998 1997 additionally company recognize income tax benefit 1996 due companys historical operating losses valuation allowances established net deferred tax assets note 5 acquisitions late december 1998 company gained control significant majority outstanding common stock warrants medtech environmental limited medtech january 1999 company acquired remaining outstanding common stock warrants medtech located toronto canada provides medical waste management services canada northeastern united states company paid total approximately 3059000 cash medtech shares warrants acquired october 1998 company purchased medtechs junior secured indebtedness approximately 3576000 paying face value acquired debt form 2920000 cash 36940 shares companys common stock replacing letter credit approximately 1641000 cancelled january 1999 october 1998 company acquired outstanding capital stock waste systems inc wsi purchase price 10000000 cash ii grant certain exclusive negotiation first refusal rights sellers connection purchase installation operation stericycle inc subsidiaries notes consolidated financial statements december 31 1998 federal republic germany medical waste treatment units incorporating companys proprietary etd technology wsi owns approximately 522 common stock preferred stock 3ci provides regulated medical waste management services southeastern united states 3cis common stock traded nasdaq smallcap market symbol tccc wsi also owns secured promissory note 3ci amended december 1998 payable wsi principal amount approximately 6237000 september 30 1999 august 1998 company acquired customer contracts vehicles certain assets regulated medical waste management business medical compliance services inc mcs 5850000 cash company also agreed purchase mcs related party mcss albuquerque new mexico treatment facility equipment 1250000 cash purchase treatment facility equipment closed march 1999 may 1997 company acquired outstanding stock environmental control co inc ecco regulated medical waste business operating new york city market company paid 4200000 cash issued 125000 shares stock assumed debt vehicles issued 2300000 10year promissory note balance purchase price note bears interest rate 686 per annum payable 10 equal installments 230000 started may 1998 december 1996 company purchased customer lists vehicles certain assets major portion medical waste business waste management inc wmi 5450000 cash note 5210000 quarter ended june 30 1997 adjustments made value vehicles purchased purchase price purchase price decreased 756000 specified agreement related goodwill note payable adjusted accordingly company finalized estimate value vehicles purchased reduced related note accordingly quarter ended december 31 1997 purchase price decreased 163000 specified agreement related goodwill adjusted accordingly company paid adjusted balance note plus accrued interest 1997 1998 addition acquisitions 1996 1997 1998 company acquired customer contracts certain assets nineteen regulated medical waste businesses purchase prices acquisitions paid combination cash notes payable shares common stock company financial reporting purposes acquisition transactions accounted using purchase method accounting total aggregate purchase price 1996 1997 1998 13013000 10197000 22538000 respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market values dates acquisition total aggregate purchase price 1997 1998 acquisitions includes value 403000 167000 shares common stock respectively issued sellers excess purchase prices fair market values net assets acquired reflected accompanying consolidated balance sheets goodwill results operations acquired businesses included consolidated statement operations respective dates acquisition effect acquisitions would significant effect companys stericycle inc subsidiaries notes consolidated financial statements december 31 1998 operations except medtech wsi mcs ecco acquisitions following unaudited pro forma results operations assumes medtech wsi mcs ecco acquisitions occurred january 1 1997 giving effect certain adjustments including amortization goodwill increased interest expense debt incurred connection acquisitions adjustments record incremental recurring costs associated consolidation operations historical results operations med tech wsi mcs ecco reflect costs unaudited pro forma financial information purport indicative results operations would occurred transactions taken place beginning periods indicated future results operations note 6 longterm debt longterm debt consists following december 31 december 1998 company entered subordinated loan agreement group lenders consisting six companys seven directors pursuant lenders agreed provide company 5500000 shortterm financing upon companys request december 31 1998 company borrowed 2750000 loan bore interest 60 per annum due earlier 10 days completion companys february 5 1999 public offering pending loan made january 5 2000 terms subordinated loan agreement lenders granted fiveyear warrants purchase shares companys common stock exercisable time first anniversary grant date upon entering loan agreement lender granted warrant number shares common stock equal amount lenders loan commitment multiplied 005 divided closing price share common stock trading day immediately prior date lenders execution stericycle inc subsidiaries notes consolidated financial statements december 31 1998 loan agreement closing price also exercise price warrant addition time loan lender granted warrant number shares common stock equal amount loan multiplied 030 divided closing price share common stock trading day immediately prior date disbursement lenders loan closing price also exercise price warrant january 1999 company borrowed remaining balance 2750000 available loan agreement connection loans lenders granted warrants purchase aggregate 18970 shares common stock 1450 per share 43551 shares common stock 1550 per share 59092 shares common stock 1650 per share loans repaid march 1999 connection companys acquisition medtech december 1998 company assumed bank notes payable aggregate balance 3023000 december 31 1998 national bank canada notes paid full january 1999 connection companys acquisition wsi october 1998 company acquired number notes payable aggregate balance 1838000 december 31 1998 notes collateralized vehicles equipment due monthly installments including interest rates ranging 7 1675 2002 october 1998 company established new 25000000 credit facility lasalle national bank chicago illinois credit agreement entered company subsidiaries lasalle national bank agent lenders may participate credit agreement new credit facility replaced credit facility previously place silicon valley bank new credit facility provides fiveyear 5000000 revolving line credit working capital purposes oneyear 20000000 revolving line credit acquisition purposes upon maturity latter line credit outstanding balance convert fouryear term loan repayable 16 equal quarterly payments principal amount term loan upon conversion less 15000000 however oneyear line credit amount difference available acquisition purposes upon maturity line credit outstanding balance convert threeyear term loan repayable 12 equal quarterly payments principal companys borrowings lasalle bank credit facility bear interest either banks prime rate plus 25 800 december 31 1998 adjusted libor rate 705 december 31 1998 company elects time borrowing company also pays commitment fee 025 per annum unborrowed portion credit facility interest payable quarterly end interest period company selects interest period less three months case borrowing bearing interest adjusted libor rate security companys borrowings company granted bank security interest companys tangible intangible assets pledged capital stock subsidiaries addition company required maintain minimum level net worth comply certain restrictive financial covenants restricted paying dividends capital stock december 31 1998 company borrowed 16386000 credit facility february 1999 upon receipt proceeds companys public offering common stock borrowings credit facility repaid connection companys may 1997 purchase eccos stock 10year note 2300000 issued owners ecco note payable 10 equal annual installments due may 1 year starting 1998 note bears interest rate 686 per annum connection companys december 1996 purchase wmis medical waste business note payable totaling 5210000 issued wmi amount note subsequently adjusted 3593301 repaid 1997 1998 stericycle inc subsidiaries notes consolidated financial statements december 31 1998 1994 noninterest bearing note amount 2480000 issued part purchase net assets safe way disposal systems inc result companys initial public offering august 1996 portion note converted 98001 shares common stock remainder paid cash 1992 company entered obligation finance development woonsocket rhode island facility development purchase substantially property equipment woonsocket rhode island facility financed issuance industrial development revenue bonds due various amounts 2017 fixed interest rates ranging 63 7375 collateralized property equipment woonsocket rhode island facility terms agreement entered connection issuance bonds contain among provisions requirements maintaining defined levels working capital various financial ratios including debt net worth payments due longterm debt five years subsequent december 31 1998 including capital lease obligations excluding borrowings companys lasalle national bank credit facility subordinated loan agreement certain directors amounts repaid february 1999 follows company paid interest 352000 444000 670000 fiscal years ended december 31 1996 1997 1998 respectively stericycle inc subsidiaries notes consolidated financial statements december 31 1998 note 7lease commitments company leases various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next eight years leases properties contain renewal provisions rent expense 1996 1997 1998 2462000 3284000 3508000 respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 1998 next five years aggregate follows stericycle inc subsidiaries notes consolidated financial statements december 31 1998 note 8 net income loss per share following table sets forth computation basic diluted net income loss per share additional information regarding outstanding employee stock options outstanding warrants see note 9 options purchase 838849 shares common stock outstanding 1996 exercise prices ranging 536902 included computation diluted earnings per share company net loss 1996 effect would antidilutive 1997 1998 options warrants purchase 75945 shares 67615 shares respectively exercise prices 1025 6902 1550 6902 respectively included computation diluted earnings per share effect would antidilutive 1999 company issued 3500000 shares common stock upon completion february 5 1999 public offering 59157 shares common stock payment certain acquisitions note 9 stock options warrants shares companys common stock reserved issuance upon exercise options warrants shares reserved follows december 31 1998 stock options 1995 companys board directors shareholders approved incentive compensation plan 1995 plan amended restated 1996 provides granting 1500000 shares common stock form stock options restricted stock employees officers directors consultants company exercise price options granted 1995 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods four years date grant 1997 companys board directors shareholders approved 1997 stock option plan 1997 plan provides granting 1500000 shares common stock form stock options selected officers directors employees company subsidiaries exercise price options granted 1997 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods 5 years date grant june 1996 companys board directors adopted july 1996 companys shareholders approved directors stock option plan authorizes stock options total 285000 shares common stock granted eligible directors company consisting directors neither officers employees company annual meeting companys shareholders incumbent eligible director reelected director annual meeting automatically receives option grant based predetermined formula exercise price option closing price date grant term option six years date grant option vests 16 equal quarterly installments may exercised vested holder option remains director company 90day period following date ceases serve director summary stock option information follows options outstanding exercisable december 31 1998 price range company elected follow accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations accounting employee stock options discussed alternative fair value accounting provided statement financial accounting standards 123 accounting stockbased compensation fas 123 requires use option valuation models developed use valuing employee stock options apb 25 exercise price companys employee stock options approximates market price underlying stock date grant compensation expense recognized stericycle inc subsidiaries notes consolidated financial statements december 31 1998 pro forma information regarding net income loss net income loss per share required fas 123 company accounted employee stock options granted subsequent december 31 1994 fair value method statement options granted 1997 1998 valued using blackscholes option pricing model options granted 1996 1995 nonpublic company valued using minimum value method following assumptions used 1996 1997 1998 expected volatility zero 1996 050 1997 061 1998 riskfree interest rates ranging 51 67 1996 59 68 1997 45 48 1998 dividend yield 0 weightedaverage expected life option 31 months 1996 72 months 1997 1998 weightedaverage fair values options granted 1996 1997 1998 079 per share 448 per share 652 per share respectively option value models require input highly subjective assumptions companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing method necessarily provide reliable single measure fair value employee stock options purposes pro forma disclosures estimated fair value options amortized expense option vesting period companys pro forma information follows thousands except per share information pro forma effect 1996 1997 1998 representative pro forma effect future years pro forma disclosures reflect fair value stock options granted subsequent december 31 1994 warrants company connection issuance preferred stock subsequently reclassified common stock issued warrants purchase 6773 shares common stock exercise price 6902 per share december 31 1998 warrants outstanding expire march 1999 1995 several companys shareholders directors provided bridge loan company loan totaled 830000 interest prime rate plus 3 repaid addition interest lenders received warrants purchase 220559 shares common stock 159 per share warrants expire july 31 2000 1996 lenders exercised warrants purchase 166749 shares 1998 remaining warrants purchase 53810 shares exercised may 1996 company obtained 1000000 bridge loan certain shareholders directors officers provide working capital finance acquisitions bridge loan repaid august 1996 connection loan company issued warrants members lending group purchase aggregate 226036 shares common stock 796 per share warrants expire may 2001 1998 warrants purchase 35940 shares exercised december 31 1998 warrants purchase 190096 shares remained outstanding december 1998 company entered subordinated loan agreement group lenders consisting six companys seven directors pursuant lenders agreed provide company 5500000 shortterm financing upon companys request terms subordinated loan agreement stericycle inc subsidiaries notes consolidated financial statements december 31 1998 lenders granted fiveyear warrants purchase shares companys common stock exercisable time first anniversary grant date closing price companys common stock dates grant also exercise price warrant december 1998 january 1999 lenders granted warrants purchase aggregate 18970 shares common stock 1450 per share 43551 shares common stock 1550 per share 59092 shares common stock 1650 per share note 10 employee stock purchase plan 1997 approved board directors employees stericycle purchase shares common stock market price terms plan employees allowed purchase shares throughout year pay stock salary deduction employees elected purchase total 2905 shares plan 1998 note 11 employee benefit plan company 401k defined contribution retirement savings plan covering substantially employees company participant may elect defer portion compensation subject certain limitations company may match 30 first 1000 contributed plan employee companys contributions years ended december 31 1996 1997 1998 approximately 14000 25000 10000 respectively note 12 related parties february 1998 company announced formation international joint venture company called medam sa de cv medam utilizes stericycles proprietary electrothermal deactivation etd technology treat medical infectious waste mexico city market stericycles partners joint venture controladora ambiental sa de cv contam headquartered mexico city pennoni associates inc headquartered philadelphia pennsylvania company owns 245 common stock medam december 31 1998 company made 1164000 capital contributions 1998 company sold medam 1202000 proprietary equipment earned technology license fees 1060000 companys investment medam accounted equity method included noncurrent assets consolidated balance sheets companys share results operations medam 1998 material note 13 legal proceedings company operates highly regulated industry exposed regulatory inquiries investigations time investigations initiated variety reasons company involved several legal administrative proceedings settled otherwise resolved terms acceptable company without material adverse effect companys business financial condition results operations time company may consider costeffective settle proceedings involve costly timeconsuming administrative actions litigation company also party various legal proceedings arising ordinary course business company believes resolution matters material adverse effect companys business financial condition results operations note 14 subsequent events first quarter 1999 company completed six acquisitions january 1999 company purchased customer lists selected assets environmental transloading services inc los angeles california medical resources corporation farmington new mexico february 1999 company purchased customer lists selected assets medical resource recycling systems inc spokane washington southwest medecol lc amarillo texas medical express general courier service inc pittsburgh pennsylvania march 1999 company purchased customer list selected assets envirotech disposal division lancaster general service business trust lancaster pennsylvania stericycle inc subsidiaries notes consolidated financial statements december 31 1998 aggregate purchase price six acquisitions approximately 3825000 exclusive liabilities assumed two cases approximately 2550000 paid cash approximately 1200000 paid issuance 59157 unregistered shares companys common stock 75000 paid sevenmonth interestfree note addition company assumed certain liabilities two sellers aggregate amount approximately 130000 case three acquisitions purchase price subject downwards adjustment revenues customer contracts acquired reach certain specified levels note 15 products services geographic information summary revenue information companys products services follows summary financial information geographic area follows revenues attributed countries based location customers 1998 company provided medical waste management services customers canada licensed sold proprietary equipment brazilian company joint venture mexico additionally individual customer represents 10 companys revenues item 9item 8 financial statements supplementary data report independent auditors board directors shareholders stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 1998 1999 related consolidated statements operations changes shareholders equity cash flows three years period ended december 31 1999 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 1998 1999 consolidated results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp march 17 2000 stericycle inc subsidiaries consolidated balance sheets thousands except share per share data accompanying notes integral part financial statements accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes shareholders equity years ended december 31 1997 1998 1999 thousands accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 1999 unless context requires otherwise us refers stericycle inc subsidiaries consolidated basis note 1 description business provide medical waste collection transportation treatment services hospitals health care providers small quantity generators north america also expanding international markets joint ventures licensing proprietary technology selling associated equipment note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc whollyowned subsidiaries stericycle arkansas inc stericycle washington swd acquisition corporation environmental control co inc ecco waste systems inc wsi majority shareholder 3ci complete compliance corporation 507375 nb ltd medtech environmental ltd medtech bfi medical waste inc bfi medical waste connecticut inc bfi medical waste inc puerto rico significant intercompany accounts transactions eliminated addition 49 ownership medam mexico company 33 ownership medam ba srl argentine company accounted using equity method revenue recognition recognize revenue treatment regulated medical waste completed onsite waste shipped offsite processing disposal waste shipped offsite associated costs recognized time shipment revenue costs contracts supply proprietary treatment equipment accounted percentage completion method whereby income recognized based estimated stage completion individual contract cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist highly liquid investments corporate debt obligations mature less one year classified heldtomaturity obligations stated amortized cost approximates fair market value interest income recognized earned property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows buildings improvement 10 30 years machinery equipment 3 10 years office equipment furniture 5 10 years goodwill amortized using straightline method 25 years except goodwill connection acquisition medical waste business browningferris industries inc bfi acquisition amortized 40 years amortization expense 1997 1998 1999 related goodwill approximately 1042000 1505000 4278000 respectively continually evaluate value future benefits goodwill assess recoverability future operations using cash flows related acquired business measure approach carrying value goodwill would reduced becomes probable best estimate expected undiscounted future cash flows related business would less carrying amount goodwill remaining amortization period threeyear period ended december 31 1999 adjustments carrying amounts goodwill resulting evaluations new plant development permitting costs expense costs associated operation new plants prior commencement services customers initial ongoing costs related permitting income taxes deferred income taxes reflect net tax effect temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes deferred tax liabilities assets determined based differences financial statement tax basis assets liabilities using enacted tax rates effect year differences expected reverse financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt fair values financial instruments materially different carrying values financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater 1 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates derivative reporting june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activity sfas 133 provides comprehensive consistent standards recognition measurement derivative hedging activities requires derivatives recorded consolidated balance sheets fair value establishes criteria hedges changes fair value assets liabilities firm commitments hedges variable cash flows forecasted transactions hedges foreign currency exposures net investments foreign operations changes fair value derivatives meet criteria hedges would recognized consolidated statement operations statement effective us beginning january 1 2001 adoption sfas 133 expected material impact us segment reporting effective january 1 1998 adopted financial accounting standards boards statement financial accounting standards 131 disclosures segments enterprise related information fas 131 fas 131 establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports also establishes standards related enterprisewide disclosures products services geographic areas major customers adoption fas 131 affect results operations financial position affect disclosures operating segments stericycle inc bfi wsi med tech similar economic characteristics similar nature products services treatment processes types customers methods distribution services nature regulatory environments based conclusion presented segment disclosure information provided enterprisewide disclosures note 16 note 3 public offering february 1999 successfully completed public offering 3500000 shares common stock 1450 per share received total proceeds offering net offering costs approximately 47158000 note 4 income taxes december 31 1999 net operating loss carryforwards federal income tax purposes approximately 24500000 excluding 3ci expire beginning 2006 based internal revenue code 1986 amended changes ownership utilization net operating loss carryforwards subject annual limitations could significantly restrict partially eliminate utilization net operating losses additionally alternative minimum tax credit carryforward 238000 available indefinitely significant components income tax expense benefit years ended december 31 1997 1998 1999 follows reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 1997 1998 1999 follows paid income taxes 1030000 2014000 1998 1999 respectively deferred tax liabilities assets december 31 1999 1998 follows fourth quarter 1999 reevaluated estimated amount valuation allowance required light profitability achieved 1997 1998 1999 well improved profitability expected future years result bfi acquisition november 1999 result reduced valuation allowance deferred tax assets accordance sfas 109 accounting income taxes sfas 109 amount believe likely recovered accordingly income tax benefit approximately 63 million reflected fourth quarter amount net deferred tax assets estimated recoverable based upon assessment likelihood near term operating income coupled uncertainties respect impact future market conditions december 31 1999 valuation allowance relates principally net operating loss carryforward 3ci note 5 acquisitions november 1999 completed acquisition allied waste industries inc allied medical waste business browningferris industries inc bfi united states canada puerto rico prior acquisition bfi largest provider regulated medical waste services united states revenues 2017 million 12 months ended june 30 1999 purchase price acquisition 4105 million cash subject postclosing adjustments paid purchase price following sources addition cash hand 2250 million borrowings term loan facilities new senior credit facility established dlj capital funding inc bankers trust company bank america na ii 1250 million proceeds sale 1238 senior subordinated notes due 2009 iii 750 million proceeds issuance new series convertible preferred stock investment funds affiliated bain capital inc madison dearborn partners llc transactions completed concurrently completion acquisition bfi medical waste business see note 6 longterm debt senior credit facility senior subordinated notes note 11 series preferred stock addition year ended december 31 1999 purchased customer lists selected assets 13 medical waste management businesses aggregate purchase price acquisitions approximately 8216000 6491000 paid cash 1622000 paid issuance unregistered shares common stock 103000 paid issuance promissory notes addition assumed certain liabilities sellers aggregating approximately 105000 certain cases purchase price subject downwards adjustment revenues customer contracts acquired reach certain specified levels september 1999 purchased additional 1845 mexican joint venture increasing ownership percentage 49 purchase price immaterial paid issuance shares common stock december 1998 january 1999 acquired outstanding stock warrants medtech environmental ltd medtech located toronto canada provides medical waste management services canada northeastern united states paid total approximately 3059000 cash medtech shares warrants acquired october 1998 purchased medtechs junior secured indebtedness approximately 3576000 paying face value acquired debt form 2920000 cash 36940 shares common stock replacing letter credit approximately 1641000 returned january 1999 october 1998 acquired outstanding capital stock waste systems inc wsi purchase price 10000000 cash grant certain exclusive negotiation first refusal rights sellers respect purchase installation operation federal republic germany medical waste treatment units incorporating proprietary etd technology wsi owns approximately 555 common stock preferred stock 3ci complete compliance corporation 3ci provides regulated medical waste management services southeastern united states 3cis common stock traded overthe counter symbol tccc wsi also owns secured promissory note 3ci amended december 1998 payable wsi principal amount approximately 6237000 march 31 2000 upon satisfaction certain conditions 3ci may elect extend maturity note september 30 2000 addition 1998 acquired customer contracts certain assets 10 regulated medical waste businesses purchase price six acquisitions paid form cash issuance common stock assumption liabilities two cases delivery notes payable 1998 1997 acquired customer contracts certain assets six regulated medical waste businesses purchase price six acquisitions paid form cash issuance shares common stock assumption liabilities three cases delivery notes paid 1997 1998 also 1997 acquired outstanding stock environmental control co inc ecco medical waste company operating new york city market paid 4200000 cash issued 125000 shares common stock assumed certain debt vehicles issued 2300000 10year promissory note balance purchase price note bears interest rate 686 per annum payable 10 equal annual installments 230000 starting may 1998 financial reporting purposes acquisition transactions accounted using purchase method accounting total purchase price 1997 1998 1999 10197000 22538000 425426000 respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market value date acquisition total purchase price 1997 1998 1999 acquisitions includes value 403000 167000 220058 shares respectively common stock issued sellers excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill results operations acquired businesses included consolidated statement operations date acquisition effect acquisitions would significant effect operations except bfi med tech wsi ecco acquisitions following unaudited pro forma results operations assumes med tech wsi bfi acquisitions occurred january 1 1998 giving effect certain adjustments including amortization goodwill increased interest expense debt incurred connection acquisitions adjustments record incremental recurring costs associated consolidation operations historical results operations wsi med tech bfi reflect costs pro forma financial information purport indicative results operations would occurred transactions taken place beginning periods indicated future results operations note 6 longterm debt longterm debt consists following december 31 december 1998 entered subordinated loan agreement group lenders consisting six seven directors patrick f graham director participating pursuant lenders agreed provide us 5500000 shortterm financing upon request terms subordinated loan agreement lenders granted fiveyear warrants purchase shares common stock exercisable time first anniversary grant date upon entering loan agreement lender granted warrant number shares common stock equal amount lenders loan commitment multiplied 005 divided closing price share common stock trading day immediately prior date lenders execution loan agreement closing price also exercise price warrant addition time loan lender granted warrant number shares common stock equal amount loan multiplied 030 divided closing price share common stock trading day immediately prior date disbursement lenders loan closing price also exercise price warrant lenders granted warrants purchase aggregate 18970 shares common stock 1450 per share 43551 shares common stock 1550 per share 59052 shares common stock 1650 per share march 1999 repaid loans cash connection may 1997 purchase eccos stock issued 10year note 2300000 sellers note payable 10 equal annual installments due may 1 year starting 1998 note bears interest rate 686 per annum 1992 entered obligation finance development woonsocket rhode island treatment facility development purchase substantially property equipment facility financed issuance industrial development revenue bonds due various amounts 2017 fixed interest rates ranging 63 7375 collateralized property equipment facility terms agreement entered connection issuance bonds contain among provisions requirements maintaining defined levels working capital various financial ratios including debt net worth payments due longterm debt excluding capital lease obligations five years subsequent december 31 1999 follows company paid interest 444000 670000 2202000 fiscal years ended december 31 1997 1998 1999 respectively capital leases november 1999 assumed capital lease obligations connection bfi acquisition amount 5785000 capital leases terms ranging 30 120 months final lease expire 2008 december 31 property capital leases included property plant equipment accompanying consolidated balance sheet follows minimum future lease payments capital leases follows senior credit facility november 1999 established term loan revolving credit facility credit agreement various financial institutions facility consists sixyear revolving credit facility 500 million ii sixyear term loan principal amount 650 million iii sevenyear term loan b principal amount 1600 million borrowed full amount available term loan term loan b principally finance portion purchase price acquisition bfi december 31 1999 made draws revolving credit facility repayment term loan matures quarterly installments resulting aggregate annual amortization payments percentage initial principal amount follows term loan b matures quarterly installments resulting aggregate annual amortization payments percentage initial principal amount follows guarantees security credit facility secured firstpriority perfected lien subject customary exceptions substantially property assets substantially property assets subsidiaries certain unrestricted subsidiaries foreign subsidiaries ii capital stock similar equity interests direct indirect subsidiaries exception 65 capital stock similar equity interests foreign subsidiaries directly held us domestic subsidiary pledged capital stock foreign subsidiaries held foreign subsidiary pledged iii intercompany notes intercompany notes held companys foreign subsidiaries credit facility guaranteed senior secured basis entities customary transactions nature including direct indirect domestic subsidiaries unrestricted subsidiaries interest option interest rates per annum applicable revolving credit facility term loan term loan b fluctuating rates interest determined reference london interbank offered rate libor plus applicable margin b base rate greater prime rate 12 1 excess rates overnight federal funds transactions published federal reserve bank new york plus applicable margin applicable margin determined basis total leverage ratio december 31 1999 range rate interest term loan 8931025 per annum rate interest term loan b 967 per annum prepayments permitted time voluntarily prepay obligations term loans reduce amount committed revolving credit facility without penalty premium required prepay term loans 100 net proceeds specified asset sales proceeds condemnation like proceeds loss casualty subject customary exceptions repairs replacements ii 100 net proceeds sale issuance debt securities iii 50 net proceeds issuance equity securities subject customary adjustments mutually determined iv 75 excess cash flow subject customary adjustments mutually determined v 100 payments behalf allied respect purchase price adjustments connection bfi acquisition prepayments applied pro rata term loan term loan b applied scheduled installments loan pro rata basis exception lenders respect term loan b decline prepaid covenants events default credit facility contains covenants restricting ability subsidiaries among things incur debt subject assets liens make investments incur contingent liabilities pay dividends merge sell assets make capital expenditures enter saleleaseback transactions enter new businesses discount receivables enter affiliate transactions addition credit facility requires us meet financial performance tests including maximum leverage ratio minimum cash interest coverage ratio elect either minimum fixed charge coverage ratio minimum ebitda earnings income taxes depreciation amortization credit facility contains conditions event default credit facility exist including failure make payments due credit facility defaults agreements breach covenants material misrepresentations involuntary voluntary bankruptcy judgments attachments us dissolution changes control senior subordinated notes november 1999 issued 1238 series senior subordinated notes due 2009 aggregate principal amount 1250 million connection issuance series notes initial purchasers agreed make offer holders series notes exchange notes substantially identical series b notes registered securities act exchange offer completed january 2000 holders series notes exchanging notes new registered 1238 series b notes used net proceeds sale notes finance portion purchase price acquisition bfi notes general unsecured obligations subordinated right payment debt senior credit facility notes mature november 15 2009 interest notes accrues rate 1238 per annum payable semiannually may 15 november 15 beginning may 15 2000 subsidiary guarantees notes guaranteed subsidiaries except foreign subsidiaries 3ci subsidiaries restricted subsidiaries purposes trust indenture pursuant notes issued certain circumstances may designate one subsidiaries unrestricted subsidiary unrestricted subsidiary subject many restrictive covenants trust indenture previously guarantor notes released guarantee redemption option prior november 15 2002 may elect redeem net proceeds one equity offerings 35 initial aggregate principal amount notes redemption price 112375 principal amount redeemed plus accrued interest redemption date except permitted redemptions may otherwise redeem notes prior november 15 2004 date may elect redeem part notes redemption price expressed percentage principal amount redeemed 12month period beginning november 15 year indicated plus accrued interest redemption date follows trust indenture permitted acquire notes means redemption example pursuant tender offer purchases open market acquisition otherwise violate terms indenture agreements governing senior credit facility however currently prohibit us purchasing notes redemption holders option time change control holder notes may require us repurchase cash part holders notes 101 aggregate principal amount plus accrued interest date repurchase addition certain circumstances required use portion net proceeds asset sales issuance stock offer redeem outstanding notes pro rata basis redemption price 100 aggregate principal amount redeemed plus accrued interest redemption date otherwise required make mandatory redemptions respect notes covenants events default trust indenture contains covenants restricting ability subsidiaries among things incur debt including debt junior senior debt senior notes subject assets liens make investments incur contingent liabilities pay dividends merge sell assets make capital expenditures enter saleleaseback transactions enter new businesses discount receivables enter affiliate transactions trust indenture contains conditions event default notes exist including failure make payments due breach covenants indenture notes material misrepresentations involuntary voluntary bankruptcy judgments attachments us acceleration notes following event default effective acceleration debt senior credit facility note 7 lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next eight years leases properties contain renewal provisions rent expense 1997 1998 1999 3284000 3508000 6823000 respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 1999 next five years aggregate follows note 8 acquisition related expenses 1999 recorded 7961000 costs related bfi acquisition closure redundant offices elimination excess revenue producing assets resulted costs incurred severance closure expenses 3373000 transition related expenses 1659000 incurred part transition addition nonrecurring acquisition related costs written expense amount 2929000 following table reflects activity related 1999 acquisition related costs thousands 1999 paid approximately 3689 acquisition related expenses december 31 1999 4272 accrued note 9 net income per common share following tables sets forth computation basic diluted net income per share additional information regarding outstanding employee stock options outstanding warrants see note 10 1997 1998 1999 options warrants purchase 75495 shares 67615 shares 458363 shares respectively exercise prices 1025 6902 1550 6902 1275 1813 respectively included computation diluted earnings per share effect would antidilutive note 10 stock options warrants stock options 1995 board directors shareholders approved incentive compensation plan 1995 plan amended restated 1996 provides granting 1500000 shares common stock form stock options restricted stock employees officers directors consultants exercise price options granted 1995 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods four years date grant 1997 board directors shareholders approved 1997 stock option plan 1997 plan provides granting 1500000 shares common stock form stock options selected officers directors employees exercise price options granted 1997 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods five years date grant june 1996 board directors adopted july 1996 shareholders approved directors stock option plan authorizes stock options total 285000 shares common stock granted eligible directors consisting directors neither officers employees company six incumbent eligible directors automatically received option date closing initial public offering 8195 shares common stock exercise price 1025 annual meeting shareholders incumbent eligible director reelected director annual meeting automatically receives option grant based predetermined formula exercise price option closing price date grant term option six years date grant option vests 16 equal quarterly installments may exercised holder option remains director 90day period following date ceases serve director shares companys common stock reserved issuance upon exercise options warrants shares reserved follows december 31 1999 summary stock option information follows options outstanding exercisable december 31 1999 price range elected follow accounting principles board opinion 25 accounting stock issued employees apb25 related interpretations accounting employee stock options discussed alternative fair value accounting provided statement financial accounting standards 123 accounting stockbased compensation fas 123 requires use option valuation models developed use valuing employee stock options apb 25 exercise price employee stock options approximate market price underlying stock date grant compensation expense recognized pro forma information regarding net income loss net loss per share required fas 123 accounted employee stock options granted subsequent december 31 1994 fair value method statement options granted 1997 1998 1999 valued using blackscholes option pricing model options granted 1996 1995 public company valued using minimum value method following assumptions used 1997 1998 1999 expected volatility 050 1997 061 1998 062 1999 riskfree interest rates ranging 59 68 1997 45 48 1998 483 673 1999 dividend yield 0 weightedaverage expected life option 72 months weightedaverage fair values options granted 1997 1998 1999 448 per share 652 per share 727 per share respectively option value models require input highly subjective assumptions employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing method necessarily provide reliable single measure fair value employee stock options purposes pro forma disclosures estimated fair value options amortized expense option vesting period pro forma information follows thousands except per share information pro forma effect 1997 1998 1999 representative pro forma effect future years pro forma disclosures reflect fair value stock options granted subsequent december 31 1994 warrants 1995 several shareholders directors provided bridge loan company loan totaled 830000 interest prime rate plus 3 repaid addition interest lenders received warrants purchase 220559 shares common stock 159 per share warrants expire july 31 2000 1996 1998 lenders exercised warrants purchase 166749 53810 shares respectively may 1996 connection loan certain shareholders directors officers issued warrants purchase 226036 shares common stock 796 per share warrants expire may 2001 1998 warrants purchase 35940 shares exercised december 31 1999 warrants purchase 190096 shares remained outstanding connection subordinated loan agreement six directors granted fiveyear warrants purchase shares common stock exercisable time first anniversary grant date december 1998 january 1999 lenders granted warrants purchase aggregate 18970 shares common stock 1450 per share 43551 shares common stock 1550 per share 59092 shares common stock 1650 per share note 11 series preferred stock november 1999 issued sold 75000 shares series convertible preferred stock 1000 per share 750 million aggregate cash less various fees expenses used net proceeds sale finance portion purchase price bfi acquisition dividends series convertible preferred stock bears preferential dividends payable additional shares series convertible preferred stock rate 3375 per annum date issuance dividends accrue daily accumulate annually anniversary date initial issuance series convertible preferred stock also entitled share pro rata holders common stock basis number shares common stock series convertible preferred stock convertible dividends distributions liquidation upon liquidation dissolution winding company holders series convertible preferred stock entitled paid distribution payment made holders common stock greater sum 1000 per share plus accumulated preferential dividends plus accrued unpaid dividends yet accumulated liquidation value ii amount would payable series convertible preferred stock converted common stock voting holders series convertible preferred stock entitled vote holders common stock single class matter submitted vote stockholders share series convertible preferred stock number votes equal number votes possessed common stock series convertible preferred stock convertible long initial investors series convertible preferred stock affiliates hold 50 underlying common stock ie shares common stock issuable previously issued upon conversion series convertible preferred stock right voting separate class elect two directors board directors initial investors affiliates cease hold 50 still hold 25 underlying common stock right voting separate class elect one director cease hold 25 underlying common stock right elect directors separate class terminate conversion holder series convertible preferred stock may time upon 10 business days notice convert part holders series convertible preferred stock shares common stock price holder may convert 1750 per share subject adjustment conversion price adjusted issue deemed issue additional shares common stock price per share less conversion price market price time issuance ii issue deemed issue options warrants convertible securities exercise price conversion price per share less conversion price market price time issuance conversion price also adjusted certain circumstances adjustment conversion price extent fiscal year issue common stock connection acquisitions approved board directors grant reprice stock options price lower market price time grant repricing aggregate number shares common stock issued options granted repriced exceed 40 shares common stock outstanding last trading day prior fiscal year purposes adjustment conversion price market price per share common stock average closing price 20 business day period preceding date determination redemption option beginning may 12 2002 closing price common stock exceeds 150 conversion price 20 consecutive trading days may elect upon least 30 days prior written notice redeem part outstanding shares series convertible preferred stock subject holders right convert shares common stock prior redemption date make election redemption price equal liquidation value date redemption holders option time change control occurrence bankruptcy event continues 60 days holder series convertible preferred stock may require us redeem part holders shares price equal liquidation value per share upon 15 days prior written notice covenants restrictions stock purchase agreement initial investors agreed various covenants restrictions covenants restrictions include grant preemptive rights holders series convertible preferred stock certain circumstances agreement provide specified financial business information registration rights agreement initial investors entered registration rights agreement closing agreement requires us request holders majority underlying common stock time first anniversary closing register portion shares securities act underwritten public offering holders series convertible preferred stock limited three registrations agreement also grants holders series convertible preferred stock piggyback registration rights registrations certain limited exceptions required pay expenses registration holders series convertible preferred stock excluding underwriting discounts commissions corporate governance agreement initial investors also entered corporate governance agreement closing agreements contains certain provisions intended implement right initial investors elect directors board directors also provides earlier date initial investors permitted transferees cease series convertible preferred stock ii date initial investors completed distribution series convertible preferred stock partners iii first anniversary closing initial investors transferees affiliates acquire beneficial ownership 30 voting power company acquire attempt acquire control company except response proposal made stockholders would materially adversely affect investors pursuant exercise preemptive rights corporate governance agreement also contains specified restrictions period five years initial investors ability transfer shares series convertible preferred stock shares common stock issuable upon conversion shares addition agreement provides approval holders majority underlying common stock required us 1 engage mergers acquisitions divestitures specified sizes 2 enter contracts officers directors employees affiliates except ordinary employment contracts benefit plans transactions subsidiaries 3 incur indebtedness issue specified capital stock would cause fixed charge coverage ratio less 175 10 20 10 second anniversary initial issuance series convertible preferred stock note 12 employee stock purchase plan 1997 approved board directors employees purchase shares common stock market price terms plan employees allowed purchase shares throughout year pay stock salary deductions employees elected purchase total 5534 shares plan 1999 plan discontinued december 31 1999 note 13 employee benefit plan 401k defined contribution retirement savings plan covering substantially employees participant may elect defer portion compensation subject certain limitations may match 30 first 1000 contributed plan employee contributions years ended december 31 1997 1998 1999 approximately 25000 10000 49000 respectively note 14 related parties february 1998 announced formation international jount venture company called medam sade cv medam utilizes electrothermal deactivation etd technology treat medical waste mexico city market 49 common stock medam december 31 1999 made 2865000 capital contributions investment medam accounted equity method included noncurrent assets consolidated balance sheets share results operations medam 1999 material september 1999 announced formation new joint venture medam ba srl argentine corporation utilize etd technology treat medical waste primarily buenos aires market 1999 recorded 2866000 revenue note 15 legal proceedings operate highly regulated industry exposed regulatory inquiries investigations time investigations initiated variety reasons involved several legal administrative proceedings settled otherwise resolved terms acceptable us without material adverse effect business financial condition results operations time may consider costeffective settle proceedings involve costly timeconsuming administrative actions litigation also party various legal proceedings arising ordinary course business believe resolution matters material adverse affect business financial condition results operation note 16 products services geographic information summary revenue information products services follows summary financial information geographic area follows revenues attributed countries based location customers 1998 1999 company provided medical waste management services customers canada puerto rico licensed sold proprietary equipment brazilian company joint ventures mexico argentina additionally individual customer represents 1 revenues note 17 selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 1998 1999 thousands except per share amounts note 18 condensed consolidating financial information payments senior subordinated notes unconditionally guaranteed jointly severally whollyowned domestic subsidiaries include ecco wsi med tech bfi certain subsidiaries insignificant assets operations collectively guarantors financial information concerning guarantors years ended december 31 1999 1998 presented purposes complying reporting requirements guarantor subsidiaries financial information concerning guarantors presented condensed consolidating financial statements since minimal independent operations guarantees full unconditional joint several guarantor financial statements presented management believe financial statements material investors condensed consolidating balance sheet december 31 1999 condensed consolidating balance sheet december 31 1998 condensed consolidating statement income year ended december 31 1999 condensed consolidating statement income year ended december 31 1998 condensed consolidating statement cash flows year ended december 31 1999 condensed consolidating statement cash flows year ended december 31 1998 schedule ii valuation allowance accounts thousands 1 charges consist primarily costs assumed acquired companies recorded prior date acquisition item 9item 8 financial statements supplemental data report independent auditors board directors stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 1999 2000 related consolidated statements operations changes shareholders equity cash flows three years period ended december 31 2000 audits also included financial statement schedule listed index items 14a financial statements schedule responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 1999 2000 consolidated results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp chicago illinois february 23 2001 stericycle inc subsidiaries consolidated balance sheets thousands except share per share data accompanying notes integral part financial statements 1 stericycle inc subsidiaries consolidated statements operations thousands except share per share data accompanying notes integral part financial statements 2 stericycle inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements 3 stericycle inc subsidiaries consolidated statements changes shareholders equity years ended december 31 1998 1999 2000 thousands accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 2000 unless context requires otherwise us refers stericycle inc subsidiaries consolidated basis note 1description business provide regulated medical waste collection transportation treatment services customers related training education compliance programs consulting services also sell ancillary supplies transport pharmaceuticals photographic chemicals lead foil amalgam recycling selected geographic service areas also expanding international markets joint ventures licensing proprietary technology selling associated equipment note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc whollyowned subsidiaries stericycle arkansas inc stericycle washington swd acquisitions corporation environmental control co inc ecco waste systems inc wsi majority shareholder 3ci complete compliance corporation med tech environmental ltd medtech bfi medical waste inc bfi medical waste inc puerto rico well 64 ownership medam mexican company significant intercompany accounts transactions eliminated addition 33 ownership medam ba srl argentine company 265 ownership medical waste specialists pty ltd south african company accounted using equity method revenue recognition recognize revenue time medical waste collection revenue costs contracts supply proprietary treatment equipment accounted percentage completion method whereby income recognized based estimated stage completion individual contract cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist highly liquid investments corporate debt obligations mature less one year classified heldtomaturity obligations stated amortized cost approximates fair market value interest income recognized earned property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows 5 buildings improvement10 30 years machinery equipment3 10 years office equipment furniture5 10 years software3 7 years goodwill amortized using straightline method 25 years except goodwill related acquisition medical waste business browningferris industries inc bfi acquisition amortized 40 years amortization expense 1998 1999 2000 related goodwill approximately 15 million 43 million 138 million respectively continually evaluate value future benefits goodwill assess recoverability future operations using cash flows related acquired business measure approach carrying value goodwill would reduced becomes probable best estimate expected undiscounted future cash flows related business would less carrying amount goodwill remaining amortization period threeyear period ended december 31 2000 adjustments carrying amounts goodwill resulting evaluations new plant development permitting costs expense costs associated operation new plants prior commencement services customers initial ongoing costs related permitting income taxes deferred income taxes reflect net tax effect temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes deferred tax liabilities assets determined based differences financial statement tax basis assets liabilities using enacted tax rates effect year differences expected reverse financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt fair values financial instruments materially different carrying values financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater 1 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates derivative reporting june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activity sfas 133 provides comprehensive consistent standards recognition measurement derivative hedging activities requires derivatives recorded 6 consolidated balance sheets fair value establishes criteria hedges changes fair value assets liabilities firm commitments hedges variable cash flows forecasted transactions hedges foreign currency exposures net investments foreign operations changes fair value derivatives meet criteria hedges would recognized consolidated statement operations statement effective us beginning january 1 2001 adoption sfas 133 material impact us segment reporting effective january 1 1998 adopted financial accounting standards boards statement financial accounting standards 131 disclosures segments enterprise related information fas 131 fas 131 establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports also establishes standards related enterprisewide disclosures products services geographic areas major customers adoption fas 131 affect results operations financial position affect disclosures operating segments stericycle inc bfi wsi med tech similar economic characteristics similar nature products services treatment processes types customers methods distribution services nature regulatory environments based conclusion presented segment disclosure information provided enterprisewide disclosures note 15 note 3income taxes december 31 2000 net operating loss carryforwards federal income tax purposes approximately 94 million excluding 3ci medtech expire beginning 2006 based internal revenue code 1986 amended changes ownership utilization net operating loss carryforwards subject annual limitations could significantly restrict partially eliminate utilization net operating losses additionally alternative minimum tax credit carryforward 3 million available indefinitely well foreign tax credit approximately 22 million begin expire beginning 2004 significant components income tax expense benefit years ended december 31 1998 1999 2000 follows 1998 1999 2000 deferred federal 6015000 4450000 state 1104000 530000 7119000 4980000 current federal 243000 100000 3165000 state 405000 849000 1160000 total provisions 648000 6170000 9305000 reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 1998 1999 2000 follows 7 1998 1999 2000 federal statutory income tax rate 340 350 effect state taxes net federal tax effect 40 76 50 alternative minimum taxes 38 non deductible goodwill amortization 18 39 04 change valuation allowance 334 1269 12 23 01 effective tax rate 102 791 391 paid income taxes 1030000 2014000 1966000 1998 1999 2000 respectively deferred tax liabilities assets december 31 1999 2000 follows 1999 2000 deferred tax liabilities capital lease obligations property plant equipment 2511000 3085000 goodwill 4014000 6861000 201000 2127000 total deferred tax liabilities 6726000 12073000 deferred tax assets accrued liabilities 2561000 3807000 1538000 2291000 net operating tax loss carryforward 19095000 16378000 alternate minimum tax credit carryforward 238000 324000 total deferred tax assets 23432000 22800000 net deferred tax assets 16706000 10727000 valuation allowance 9587000 8588000 net deferred tax assets 7119000 2139000 fourth quarter 1999 reevaluated estimated amount valuation allowance required light profitability achieved 1997 1998 1999 well improved profitability expected future years result bfi acquisition november 1999 result reduced valuation allowance deferred tax assets accordance sfas 109 accounting income taxes amount believe likely recovered accordingly income tax benefit approximately 63 million reflected fourth quarter amount net deferred tax assets estimated recoverable based upon assessment likelihood near term operating income coupled uncertainties respect impact future market conditions december 31 1999 2000 valuation allowance relates principally net operating loss carryforward 3ci note 4acquisitions year ended december 31 2000 purchased customer lists selected assets seven medical waste management businesses aggregate purchase price acquisitions approximately 32 million 24 million paid cash 5 million paid issuance unregistered shares common stock 3 million paid issuance promissory notes 8 certain cases purchase price subject downwards adjustment revenues customer contracts acquired reach certain specified levels july 1 2000 increased ownership mexico joint venture medam sa de cv medam 64 49 purchasing additional 15 interest coventurer paid purchase price 16 million combination cash installment payments warrants purchase common stock increase ownership changes accounting method joint venture equity consolidation method beginning july 1 2000 november 1999 completed acquisition allied waste industries inc allied medical waste business browningferris industries inc bfi united states canada puerto rico prior acquisition bfi largest provider regulated medical waste services united states revenues 2017 million 12 months ended june 30 1999 purchase price acquisition 4105 million cash paid purchase price following sources addition cash hand 2250 million borrowings term loan facilities new senior credit facility established dlj capital funding inc bankers trust company bank america na ii 1250 million proceeds sale 1238 senior subordinated notes due 2009 iii 750 million proceeds issuance new series convertible preferred stock investment funds affiliated bain capital inc madison dearborn partners llc transactions completed concurrently completion acquisition bfi medical waste business see note 5 long term debtsenior credit facility senior subordinated notes note 10 series preferred stock addition year ended december 31 1999 purchased customer lists selected assets 13 medical waste management businesses aggregate purchase price acquisitions approximately 82 million 65 million paid cash 16 million paid issuance unregistered shares common stock 1 million paid issuance promissory notes addition assumed certain liabilities sellers aggregating approximately 1 million certain cases purchase price subject downwards adjustment revenues customer contracts acquired reach certain specified levels december 1998 january 1999 acquired outstanding stock warrants medtech environmental ltd medtech located toronto canada provides medical waste management services canada northeastern united states paid total approximately 31 million cash medtech shares warrants acquired october 1998 purchased medtechs junior secured indebtedness approximately 36 million paying face value acquired debt form 29 million cash 36940 shares common stock replacing letter credit approximately 16 million returned january 1999 october 1998 acquired outstanding capital stock waste systems inc wsi purchase price 10 million cash grant certain exclusive negotiation first refusal rights sellers respect purchase installation operation federal republic germany medical waste treatment units incorporating proprietary etd technology wsi owns approximately 555 common stock preferred stock 3ci complete compliance corporation 3ci provides regulated medical waste management services southeastern united states 3cis common stock traded overthecounter symbol tccc wsi also owns secured promissory note 3ci amended december 1998 payable wsi principal amount approximately 56 million march 31 2001 addition 1998 acquired customer contracts certain assets 10 regulated medical waste businesses purchase price six acquisitions paid form cash issuance common stock assumption liabilities two cases delivery notes payable 1998 9 financial reporting purposes acquisition transactions accounted using purchase method accounting total purchase price 1998 1999 2000 225 million 4244 million 31 million respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market value date acquisition total purchase price 1998 1999 2000 acquisitions includes value 167000 220058 26000 shares respectively common stock issued sellers excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill results operations acquired businesses included consolidated statement operations date acquisition effect acquisitions would significant effect operations except bfi med tech waste systems acquisitions following unaudited pro forma results operations assumes bfi acquisition occurred january 1 1999 giving effect certain adjustments including amortization goodwill increased interest expense debt incurred connection acquisitions adjustments record incremental recurring costs associated consolidation operations historical results operations bfi reflect costs year ended december 31 1999 thousands except per share data pro forma revenues 304386 pro forma net income 20277 pro forma diluted net income per share 107 includes tax benefit 63 million 1999 pro forma financial information purport indicative results operations would occurred transactions taken place beginning period indicated future results operations note 5long term debt long term debt consists following december 31 1999 2000 thousands industrial development revenue bonds 1145 990 obligations capital leases 6140 4749 notes payable bank 225000 215456 senior subordinated debt 125000 notes payable 3900 4006 361185 350201 less current portion 5741 5097 total 355444 345104 10 connection may 1997 purchase eccos stock 10year note 2300000 issued owners ecco note payable 10 equal annual installments due may 1 year starting 1998 note bears interest rate 686 per annum 1992 entered obligation finance development woonsocket rhode island facility development purchase substantially property equipment facility financed issuance industrial development revenue bonds due various amounts 2017 fixed interest rates ranging 65 7375 collateralized property equipment facility terms agreement entered connection issuance bonds contain among provisions requirements maintaining defined levels working capital various financial ratios including debt net worth payments due longterm debt excluding capital lease obligations five years subsequent december 31 2000 follows thousands 2001 4143 2002 15588 2003 17283 2004 19148 2005 23685 thereafter 265605 company paid interest 7 million 22 million 379 million fiscal years ended december 31 1998 1999 2000 respectively december 31 2000 property capital leases included property plant equipment accompanying consolidated balance sheet follows thousands machinery equipment 43 vehicles 5741 lessaccumulated depreciation amortization 1350 4435 minimum future lease payments capital leases follows thousands 2001 1334 2002 1288 2003 1041 2004 844 2005 711 thereafter 691 total minimum lease payments 5909 less amounts representing interest 1160 present value net minimum lease payments 4749 less current portion 954 longterm obligations capital leases 3795 11 senior credit facility november 1999 established term loan revolving credit facility credit agreement various financial institutions facility consists sixyear revolving credit facility 500 million ii sixyear term loan principal amount 750 million iii sevenyear term loan b principal amount 1500 million company borrowed full amount available term loan term loan b principally finance portion purchase price acquisition bfi december 31 2000 made 50 million payments term loan 95 million payments term loan b addition 50 million outstanding revolving credit facility repayment term loan matures quarterly installments resulting aggregate annual amortization payments percentage initial principal amount follows year annual amortization percentage initial principal amount 2000 25 2001 75 2002 125 2003 225 2004 250 2005 300 term loan b matures quarterly installments resulting aggregate annual amortization payments percentage initial principal amount follows year annual amortization percentage initial principal amount 20002005 10 2006 940 guarantees security credit facility secured firstpriority perfected lien subject customary exceptions substantially property assets substantially property assets subsidiaries certain unrestricted subsidiaries foreign subsidiaries ii capital stock similar equity interests direct indirect subsidiaries exception 65 capital stock similar equity interests foreign subsidiaries directly held us domestic subsidiary pledged capital stock foreign subsidiaries held foreign subsidiary pledged iii intercompany notes intercompany notes held companys foreign subsidiaries credit facility guaranteed senior secured basis entities customary transactions nature including direct indirect domestic subsidiaries unrestricted subsidiaries interest option interest rates per annum applicable revolving credit facility term loan term loan b fluctuating rates interest determined reference london interbank offered rate libor plus applicable margin b base rate greater prime rate 12 1 excess rates overnight federal funds transactions published federal reserve bank new york plus applicable margin applicable margin determined basis total leverage ratio december 31 2000 range rate interest term loan 895925 per annum range rate interest term loan b 9951200 per annum prepayments permitted time voluntarily prepay obligations term loans reduce amount committed revolving credit facility without penalty premium required prepay term loans 100 net proceeds specified asset sales proceeds condemnation like proceeds loss casualty subject customary exceptions repairs replacements ii 100 net proceeds sale issuance debt securities iii 50 net proceeds issuance equity securities subject customary adjustments mutually determined iv 75 excess cash flow subject customary adjustments mutually determined v 100 payments behalf allied respect purchase price adjustments connection bfi acquisition prepayments applied pro rata term loan term loan b applied scheduled installments loan pro rata basis exception lenders respect term loan b decline prepaid december 31 2000 prepaid term loan 31 million prepaid term loan b 80 million covenants events default credit facility contains covenants restricting ability subsidiaries among things incur debt subject assets liens make investments incur contingent liabilities pay dividends merge sell assets make capital expenditures enter saleleaseback transactions enter new businesses discount receivables enter affiliate transactions addition credit facility requires us meet financial performance tests including maximum leverage ratio minimum cash interest coverage ratio elect either minimum fixed charge coverage ratio minimum ebitda earnings income taxes depreciation amortization 12 credit facility contains conditions event default credit facility exist including failure make payments due credit facility defaults agreements breach covenants material misrepresentations involuntary voluntary bankruptcy judgments attachments us dissolution changes control senior subordinated notes november 1999 issued 1238 series senior subordinated notes due 2009 aggregate principal amount 1250 million connection issuance series notes initial purchasers agreed make offer holders series notes exchange notes substantially identical series b notes registered securities act exchange offer completed january 2000 holders series notes exchanging notes new registered 1238 series b notes used net proceeds sale notes finance portion purchase price acquisition bfi notes general unsecured obligations subordinated right payment debt senior credit facility notes mature november 15 2009 interest notes accrues rate 1238 per annum payable semiannually may 15 november 15 beginning may 15 2000 subsidiary guarantees notes guaranteed subsidiaries except foreign subsidiaries 3ci subsidiaries restricted subsidiaries purposes trust indenture pursuant notes issued certain circumstances may designate one subsidiaries unrestricted subsidiary unrestricted subsidiary subject many restrictive covenants trust indenture previously guarantor notes released guarantee redemption option prior november 15 2002 may elect redeem net proceeds one equity offerings 35 initial aggregate principal amount notes redemption price 112375 principal amount redeemed plus accrued interest redemption date except permitted redemptions may otherwise redeem notes prior november 15 2004 date may elect redeem part notes redemption price expressed percentage principal amount redeemed 12month period beginning november 15 year indicated plus accrued interest redemption date follows year percentage 2004 1061875 2005 1041250 2006 1020625 2007 thereafter 1000000 trust indenture permitted acquire notes means redemption example pursuant tender offer purchases open market acquisition otherwise violate terms indenture agreements governing senior credit facility however currently prohibit us purchasing notes redemption holders option time change control holder notes may require us repurchase cash part holders notes 101 aggregate principal amount plus accrued interest date repurchase addition certain circumstances 13 required use portion net proceeds asset sales issuance stock offer redeem outstanding notes pro rata basis redemption price 100 aggregate principal amount redeemed plus accrued interest redemption date otherwise required make mandatory redemptions respect notes covenants events default trust indenture contains covenants restricting ability subsidiaries among things incur debt including debt junior senior debt senior notes subject assets liens make investments incur contingent liabilities pay dividends merge sell assets make capital expenditures enter saleleaseback transactions enter new businesses discount receivables enter affiliate transactions trust indenture contains conditions event default notes exist including failure make payments due breach covenants indenture notes material misrepresentations involuntary voluntary bankruptcy judgments attachments us acceleration notes following event default effective acceleration debt senior credit facility note 6lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next eight years leases properties contain renewal provisions rent expense 1998 1999 2000 3508000 6823000 11167000 respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2000 next five years aggregate follows thousands 2001 8020 2002 7200 2003 6283 2004 5379 2005 4359 thereafter 3039 total minimum rental payments 34280 note 7acquisition related expenses year ended december 31 2000 recorded 4454000 acquisition related expenses compared 7961000 year ended december 31 1999 closure redundant offices eliminating excess revenue 14 producing assets resulted costs incurred severance closure expenses 3351000 transition related expenses 1103000 incurred part transition following table reflects activity related 1999 2000 acquisition related costs thousands 1999 2000 paid approximately 3789000 7502000 acquisition related expenses december 31 1999 2000 4172000 1124000 accrued note 8net income per common share following table sets forth computation basic diluted net income per share additional information regarding outstanding employee stock options outstanding warrants see note 9 1998 1999 2000 options warrants purchase 67615 shares 458363 shares 41471 shares respectively exercise prices 15506902 12751813 25064247 respectively included computation diluted earnings per share effect would antidilutive 15 note 9stock options warrants stock options 2000 board directors approved 2000 nonstatutory stock option plan 2000 plan provides granting 500000 shares common stock form stock options employees officers directors exercise price options granted 2000 plan must least equal fair market value common stock date grant options granted date 10 year terms vest periods five years date grant 1997 board directors shareholders approved 1997 stock option plan 1997 plan provides granting 1500000 shares common stock form stock options selected officers directors employees company subsidiaries exercise price options granted 1997 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods 5 years date grant 1995 board directors shareholders approved incentive compensation plan 1995 plan amended restated 1996 provides granting 1500000 shares common stock form stock options restricted stock employees officers directors consultants exercise price options granted 1995 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods four years date grant june 1996 board directors adopted july 1996 shareholders approved directors stock option plan directors plan directors plan authorizes stock options total 285000 shares common stock granted outside directors option grants made board directors times amounts board determines taking account guidelines board may adopt purpose exercise price options granted directors plan must least equal fair market value common stock date grant options granted prior april 1 1998 vest 16 consecutive quarterly installments options granted march 31 1998 vest 12 equal monthly installments shares companys common stock reserved issuance upon exercise options warrants shares reserved follows december 31 2000 1995 plan options 420549 1996 directors plan options 285000 1997 plan options 1170009 2000 plan options 500000 warrants 177289 total shares reserved 2552847 summary stock option information follows options outstanding exercisable december 31 2000 price range 16 elected follow accounting principles board opinion 25 accounting stock issued employees apb25 related interpretations accounting employee stock options discussed alternative fair value accounting provided statement financial accounting standards 123 accounting stockbased compensation fas 123 requires use option valuation models developed use valuing employee stock options apb 25 exercise price employee stock options approximate market price underlying stock date grant compensation expense recognized pro forma information regarding net income net income per share required fas 123 accounted employee stock options granted subsequent december 31 1994 fair value method statement options granted 1998 1999 2000 valued using blackscholes option pricing model options granted 1996 1995 nonpublic company valued using minimum value method following assumptions used 1998 1999 2000 expected volatility 061 1998 062 1999 061 2000 riskfree interest rates ranging 45 48 1998 483 673 1999 502 669 2000 dividend yield 0 weightedaverage expected life option 72 months weightedaverage fair values options granted 1998 1999 2000 652 per share 727 per share 1018 per share respectively option value models require input highly subjective assumptions employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing method necessarily provide reliable single measure fair value employee stock options purposes pro forma disclosures estimated fair value options amortized expense option vesting period pro forma information follows thousands except per share information year ended december 31 1998 1999 2000 pro forma net income 4485 11860 10585 pro forma net income per sharediluted 040 078 053 17 pro forma effect 1998 1999 2000 representative pro forma effect future years pro forma disclosures reflect fair value stock options granted subsequent december 31 1994 warrants may 1996 connection loan certain shareholders directors officers issued warrants purchase 226036 shares common stock 796 per share warrants expire may 2001 1998 2000 warrants purchase 35940 shares 178794 shares respectively exercised december 31 2000 warrants purchase 11302 shares remained outstanding connection subordinated loan agreement six directors granted fiveyear warrants purchase shares common stock exercisable time first anniversary grant date december 1998 january 1999 lenders granted warrants purchase aggregate 18970 shares common stock 1450 per share 43551 shares common stock 1550 per share 59092 shares common stock 1650 per share june 2000 connection acquisition additional 15 interest medam issued warrants purchase 44374 shares common stock warrants 31128 shares immediately exercisable remaining 13246 shares become contingently exercisable five years exercise price warrants 1750 per share note 10series preferred stock november 1999 issued sold 75000 shares series convertible preferred stock 1000 per share 750 million aggregate cash less various fees expenses company used net proceeds sale finance portion purchase price bfi acquisition dividends series convertible preferred stock bears preferential dividends payable additional shares series convertible preferred stock rate 3375 per annum date issuance dividends accrue daily accumulate annually anniversary date initial issuance series convertible preferred stock also entitled share pro rata holders common stock basis number shares common stock series convertible preferred stock convertible dividends distributions liquidation upon liquidation dissolution winding company holders series convertible preferred stock entitled paid distribution payment made holders common stock greater sum 1000 per share plus accumulated preferential dividends plus accrued unpaid dividends yet accumulated liquidation value ii amount would payable series convertible preferred stock converted common stock voting holders series convertible preferred stock entitled vote holders common stock single class matter submitted vote companys stockholders share series convertible preferred stock number votes equal number votes possessed common 18 stock series convertible preferred stock convertible long initial investors series convertible preferred stock affiliates hold 50 underlying common stock ie shares common stock issuable previously issued upon conversion series convertible preferred stock right voting separate class elect two directors companys board directors initial investors affiliates cease hold 50 still hold 25 underlying common stock right voting separate class elect one director cease hold 25 underlying common stock right elect directors separate class terminate conversion holder series convertible preferred stock may time upon 10 business days notice convert part holders series convertible preferred stock shares common stock price holder may convert 1750 per share subject adjustment conversion price adjusted company issues deemed issue additional shares common stock price per share less conversion price market price time issuance ii company issues deemed issue options warrants convertible securities exercise price conversion price per share less conversion price market price time issuance conversion price also adjusted certain circumstances adjustment conversion price extent fiscal year company issues common stock connection acquisitions approved board directors grants reprices stock options price lower market price time grant repricing aggregate number shares common stock issued options granted repriced exceed 40 shares common stock outstanding last trading day prior fiscal year purposes adjustment conversion price market price per share common stock average closing price 20 business day period preceding date determination redemption companys option beginning may 12 2002 closing price common stock exceeds 150 conversion price 20 consecutive trading days company may elect upon least 30 days prior written notice redeem part outstanding shares series convertible preferred stock subject holders right convert shares common stock prior redemption date company makes election redemption price equal liquidation value date redemption holders option time change control occurrence bankruptcy event continues 60 days holder series convertible preferred stock may require company redeem part holders shares price equal liquidation value per share upon 15 days prior written notice covenants restrictions stock purchase agreement initial investors company agreed various covenants restrictions covenants restrictions include companys grant preemptive rights holders series convertible preferred stock certain circumstances companys agreement provide specified financial business information registration rights agreement company initial investors entered registration rights agreement closing agreement requires company request holders majority underlying common stock time first anniversary closing register portion shares securities act underwritten public offering holders series convertible preferred stock limited three registrations agreement also grants holders series convertible preferred stock piggyback registration rights registrations certain limited exceptions company required pay expenses registration holders series convertible preferred stock excluding underwriting discounts commissions 19 corporate governance agreement company initial investors also entered corporate governance agreement closing agreements contains certain provisions intended implement right initial investors elect directors companys board directors also provides earlier date initial investors permitted transferees cease series convertible preferred stock ii date initial investors completed distribution series convertible preferred stock partners iii first anniversary closing initial investors transferees affiliates acquire beneficial ownership 30 voting power company acquire attempt acquire control company except response proposal made stockholders would materially adversely affect investors pursuant exercise preemptive rights corporate governance agreement also contains specified restrictions period five years initial investors ability transfer shares series convertible preferred stock shares common stock issuable upon conversion shares addition agreement provides approval holders majority underlying common stock required company 1 engage mergers acquisitions divestitures specified sizes 2 enter contracts companys officers directors employees affiliates except ordinary employment contracts benefit plans transactions companys subsidiaries 3 incur indebtedness issue specified capital stock would cause companys fixed charge coverage ratio less 175 10 20 10 second anniversary initial issuance series convertible preferred stock note 12employee benefit plan 401k defined contribution retirement savings plan covering substantially employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee contributions years ended december 31 1998 1999 2000 approximately 10000 49000 782000 respectively note 13related parties september 1999 announced formation new joint venture medam ba srl argentine corporation utilize etd technology treat medical waste primarily buenos aires market 1999 2000 recorded 2866000 507000 revenues respectively related sale equipment agreements august 2000 announced formation new joint venture medical waste specialists pty ltd service medical waste market south africa using etd technology joint venture company headquartered johannesburg south africa 2000 recorded 5085000 revenue related sale equipment agreements note 14legal proceedings operate highly regulated industry exposed regulatory inquiries investigations time investigations initiated variety reasons involved several legal administrative proceedings settled otherwise resolved terms acceptable us without material adverse effect business financial condition results operations also party various legal proceedings arising ordinary course business believe resolution matters material adverse affect business financial condition results operation 20 note 15products services geographic information summary revenue information companys products services follows year ended december 31 1998 1999 2000 thousands medical waste management services 59669 126286 316549 proprietary equipment technology license 7012 6562 7173 sales total 66681 132848 323722 summary financial information geographic area follows year ended december 31 1998 1999 2000 thousands revenues united states 59206 119618 304512 foreign countries 7475 13230 19210 total 66681 132848 323722 longlived assets united states 66853 508956 494755 foreign countries 9092 9290 12216 total 75945 518246 506971 revenues attributed countries based location customers 1998 1999 2000 provided medical waste management services customers canada mexico licensed proprietary equipment brazilian japanese companies joint ventures argentina south africa note 16selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 1998 1999 2000 thousands except per share amounts 21 note 17condensed consolidating financial information payments companys senior subordinated notes unconditionally guaranteed jointly severally companys wholly domestic subsidiaries include ecco wsi medtech bfi certain subsidiaries insignificant assets operations collectively guarantors financial information concerning guarantors years ended december 31 2000 1999 1998 presented purposes complying reporting requirements guarantor subsidiaries financial information concerning guarantors presented condensed consolidating financial statements since company minimal independent operations guarantees full unconditional joint several guarantor financial statements presented management believe financial statements material investors 22 condensed consolidating balance sheet december 31 2000 23 condensed consolidating balance sheet december 31 1999 24 condensed consolidating statement income year ended december 31 2000 condensed consolidating statement income year ended december 31 1999 25 condensed consolidating statement income year ended december 31 1998 26 condensed consolidating statement cash flows year ended december 31 2000 27 condensed consolidating statement cash flows year ended december 31 1999 28 condensed consolidating statement cash flows year ended december 31 1998 29 schedule ii valuation allowance accounts thousands 1 amounts consist primarily costs assumed acquired companies recorded prior date acquisition item 9item 8 financial statements supplemental data report independent public auditors board directors stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2000 2001 related consolidated statements operations changes shareholders equity cash flows three years period ended december 31 2001 audits also included financial statement schedule listed index items 14a financial statements schedule responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2000 2001 consolidated results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements 2001 company changed accounting derivative financial instruments ernst young llp chicago illinois february 15 2002 stericycle inc subsidiaries consolidated balance sheets thousands except share per share data december 31 2000 2001 assets current assets cash equivalents 2666 12737 shortterm investments 281 280 accounts receivable less allowance doubtful accounts 3625 2000 3106 2001 71225 65300 parts supplies 3216 6044 prepaid expenses 1858 2457 11765 11175 total current assets 91011 97993 property plant equipment land 7486 7596 buildings improvements 26565 28075 machinery equipment 54040 65409 office equipment furniture 6515 10458 construction progress 3834 5193 98440 116731 less accumulated depreciation 24532 33995 property plant equipment net 73908 82736 assets goodwill less accumulated amortization 24507 2000 36559 2001 418790 422652 14273 11149 total assets 433063 433801 total assets 597982 614530 liabilities shareholders equity current liabilities current portion long term debt 5097 12633 accounts payable 14444 13317 accrued liabilities 23067 32509 deferred revenue 505 4920 total current liabilities 43113 63379 longterm debt net current portion 345104 267365 liabilities 3628 6404 redeemable preferred stock series convertible preferred stock par value 01 per share 75000 shares authorized outstanding 2000 45405 shares outstanding 2001 liquidation preference 77883 december 31 2000 48735 december 31 2001 71437 44872 common shareholders equity common stock par value 01 per share 30000000 shares authorized 15208866 issued outstanding 2000 18539950 issued outstanding 2001 152 185 additional paidin capital 141304 230909 accumulated comprehensive loss 3996 retained earnings accumulated deficit 6756 5412 total shareholders equity 134700 232510 total liabilities shareholders equity 597982 614530 accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements operations thousands except per share data year ended december 31 1999 2000 2001 revenues 132848 323722 359024 costs expenses cost revenues 86123 196345 215959 selling general administrative 26480 59457 66086 write fixed assets 3329 acquisition related costs 7961 4454 356 total costs expenses 120564 260256 285730 income operations 12284 63466 73294 income expense interest income 1144 558 366 interest expense 6195 39785 35417 income net 565 423 1495 total income expense 4486 39650 36546 income taxes extraordinary item 7798 23816 36748 income tax expense benefit 6170 9305 14729 income extraordinary item 13968 14511 22019 extraordinary loss debt refinancing net tax 4923 7309 net income loss 13968 14511 14710 earnings per share basic extraordinary item 096 08 122 extraordinary itemdebt refinancing 046 earnings per share basic 096 080 076 earnings per share diluted extraordinary item 092 072 104 extraordinary itemdebt refinancing 034 earnings per share diluted 092 072 070 weighted average number common shares outstanding basic 14240084 14879103 15908895 weighted average number common shares outstanding diluted 15241778 20092844 21100381 accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows thousands year ended december 31 1999 2000 2001 operating activities net income 13968 14511 14710 adjustments reconcile net income net cash provided operating activities stock compensation expense 192 160 95 write fixed assets 3329 write deferred financing costs 5859 ineffective portion cash flow hedges 384 tax benefit disqualifying dispositions stock options 1059 1697 depreciation amortization 9879 23469 25234 deferred income taxes 7119 4980 9085 change operating assets liabilities net effects acquisitions accounts receivable 31595 21979 6741 parts supplies 526 881 2743 prepaid expenses assets 1439 4593 4776 accounts payable 7845 66 1127 accrued liabilities 21556 6686 1647 deferred revenue 2036 363 4415 net cash provided operating activities 11777 10469 64550 investing activities payments acquisitions international investments net cash acquired 422280 4516 21262 proceeds maturity shortterm investments 447 502 1 capital expenditures 3795 11586 15412 net cash used investing activities 425628 15600 36673 financing activities net proceeds repayment bank lines credit 16359 5000 12171 net proceeds repayment subordinated debt 2750 proceeds long term bank debt 225000 repayments senior subordinated debt 43750 proceeds senior subordinated debt 125000 repayment long term debt 4366 16428 37099 payments deferred financing costs 10828 631 173 principal payments capital lease obligations 290 1487 1525 net proceeds public offering common stock 47158 49005 net proceeds payments related issuance preferred stock 68855 300 proceeds issuances common stock 492 2299 3565 net cash provided used financing activities 431912 11547 17806 net increase decrease cash equivalents 18061 16678 10071 cash equivalents beginning period 1283 19344 2666 cash equivalents end period 19344 2666 12737 noncash activities net issuances notes payable certain acquisitions 103 250 net issuances common stock warrants certain acquisitions 3043 1260 6250 accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes shareholders equity years ended december 31 1999 2000 2001 thousands issued retained additional earnings total outstanding paidin accumulated comprehensive shareholders shares amount capital deficit income equity balances december 31 1998 10866 109 85894 32352 53651 issuance common stock exercise options warrants employee stock purchases 148 1 633 634 common stock issued acquisitions 220 2 3041 3043 public offering common stock net offering costs 3500 35 47123 47158 preferred dividends 340 net income 13968 balances december 31 1999 14734 147 136691 18724 118114 issuance common stock exercise options warrants employee stock purchases 449 5 2294 2299 common stock warrants issued acquisitions 26 1260 tax benefit disqualifying dispositions stock options 1059 preferred dividends 2543 net income 14511 balances december 31 2000 15209 152 141304 6756 134700 issuance common stock exercise options warrants employee stock purchases 363 4 3656 3660 public offering common stock net offering costs 1025 10 48995 49005 conversion preferred stock 1806 18 29008 29026 common stock warrants issued acquisitions 137 1 6249 6250 tax benefit disqualifying dispositions stock options 1697 preferred dividends 2542 currency translation adjustment 10 change fair value cashflow hedge 3986 net income 14710 comprehensive income 10714 balances december 31 2001 18540 185 230909 5412 3996 232510 accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 2001 unless context requires otherwise us refers stericycle inc subsidiaries consolidated basis note 1description business provide regulated medical waste collection transportation treatment services customers related training education compliance programs consulting services also sell ancillary supplies transport pharmaceuticals photographic chemicals lead foil amalgam recycling selected geographic service areas also expanding international markets joint ventures licensing proprietary technology selling associated equipment note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc whollyowned subsidiaries well 64 ownership medam sa de cv mexican company significant intercompany accounts transactions eliminated addition 33 ownership medam ba srl argentine company 265 ownership evertrade medical waste pty ltd south african company accounted using equity method revenue recognition recognize revenue time medical waste collection revenue costs contracts supply proprietary treatment equipment accounted percentage completion method whereby income recognized based estimated stage completion individual contract using cost method payments received advance deferred recognized related service period cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist highly liquid investments corporate debt obligations mature less one year classified heldtomaturity obligations stated amortized cost approximates fair market value interest income recognized earned property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows buildings improvement 10 30 years machinery equipment 3 10 years office equipment furniture 5 10 years software 3 7 years year ended december 31 2001 recorded writedown idled treatment equipment majorityowned subsidiary 3ci complete compliance corporation inc 3ci 33 million goodwill acquisitions completed prior june 30 2001 amortized using straightline method 25 years except goodwill related acquisition medical waste business browningferris industries inc bfi acquisition amortized 40 years amortization expense 1999 2000 2001 related goodwill approximately 43 million 137 million 139 million respectively continually evaluate value future benefits goodwill assess recoverability future operations using cash flows related acquired business measure approach carrying value goodwill would reduced becomes probable best estimate expected undiscounted future cash flows related business would less carrying amount goodwill remaining amortization period threeyear period ended december 31 2001 adjustments carrying amounts goodwill resulting evaluations new plant development permitting costs expense costs associated operation new plants prior commencement services customers initial ongoing costs related permitting capitalized costs associated title v permitting part related capital spending income taxes deferred income taxes reflect net tax effect temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes deferred tax liabilities assets determined based differences financial statement tax basis assets liabilities using enacted tax rates effect year differences expected reverse financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt fair values financial instruments materially different carrying values financial instruments potentially subject us concentrations credit risk consist principally account receivable credit risk trade receivables minimized result large size customer base single customer represents greater 1 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes example areas make estimates include bad debt allowance employee health welfare benefits auto workers compensation insurance claims estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates derivative instruments effective january 1 2001 adopted statement financial accounting standards 133 accounting derivative instruments hedging activity sfas 133 sfas 133 provides comprehensive consistent standards recognition measurement derivative hedging activities requires derivatives recorded consolidated balance sheets fair value establishes criteria hedges changes fair value assets liabilities firm commitments hedges variable cash flows forecasted transactions hedges foreign currency exposures net investments foreign operations changes fair value derivatives meet criteria hedges would recognized consolidated statement operations initial adoption sfas 133 material impact us upon termination interest rate agreements resulting gain loss recognized shorter remaining original term hedging instrument remaining life underlying debt obligation foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated current exchange rates income statement accounts translated average rates period related translation adjustments reported component comprehensive income directly equity reclassifications certain amounts 1999 2000 financial statements reclassified conform 2001 presentation note 3income taxes december 31 2001 net operating loss carryforwards federal income tax purposes approximately 122 million excluding 3ci medtech expire beginning 2006 based internal revenue code 1986 amended changes ownership utilization net operating loss carryforwards subject annual limitations could significantly restrict partially eliminate utilization net operating losses additionally alternative minimum tax credit carryforward 6 million available indefinitely well foreign tax credit approximately 23 million begin expire 2004 significant components income tax expense benefit years ended december 31 1999 2000 2001 follows thousands 1999 2000 2001 deferred federal 6015 4450 8104 state 1104 530 981 7119 4980 9085 current federal 100 3165 4756 state 849 1160 888 total provisions 6170 9305 14729 reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 1999 2000 2001 follows 1999 2000 2001 federal statutory income tax rate 340 350 effect state taxes net federal tax effect 76 50 40 non deductible goodwill amortization 39 04 11 change valuation allowance 1269 12 23 01 effective tax rate 791 391 400 cash payments income taxes 20 million 1999 2000 2001 deferred tax liabilities assets december 31 2000 2001 follows thousands 2000 2001 deferred tax liabilities property plant equipment 3085 1661 goodwill 6861 14083 2127 69 total deferred tax liabilities 12073 15813 deferred tax assets accrued liabilities 3807 2886 2291 2272 net operating tax loss carryforward 16378 12378 alternate minimum tax credit carryforward 324 569 total deferred tax assets 22800 18105 net deferred tax assets 10727 2292 valuation allowance 8588 9238 net deferred tax assets liabilities 2139 6946 fourth quarter 1999 reevaluated estimated amount valuation allowance required light profitability achieved 1998 1999 2000 well improved profitability expected future years result bfi acquisition november 1999 result reduced valuation allowance deferred tax assets accordance sfas 109 accounting income taxes amount believe likely recovered accordingly income tax benefit approximately 63 million reflected fourth quarter amount net deferred tax assets estimated recoverable based upon assessment likelihood near term operating income coupled uncertainties respect impact future market conditions december 31 1999 2000 2001 valuation allowance relates principally net operating loss carryforward 3ci note 4acquisitions year ended december 31 2001 completed acquisition four domestic medical waste management businesses mexican subsidiary medam sa de cv completed one acquisition april purchased customer contracts selected assets trans med ltd operated new york new jersey connecticut also customer contracts selected assets biosafe america inc operated florida july acquired stock american medical disposal inc operated oklahoma nebraska several states december acquired substantially assets integrated environmental systems inc operated california nevada august medam acquired stock tecnicas medio ambientales winco sa de cv mexico city based operation aggregate purchase price acquisitions approximately 233 million approximately 170 million paid cash 63 million paid issuance unregistered shares common pursuant agreement subsequently registered sale accordance sfas 142 goodwill intangible assets goodwill related acquisitions completed subsequent june 30 2001 amortized year ended december 31 2000 purchased customer lists selected assets seven medical waste management businesses aggregate purchase price acquisitions approximately 32 million 24 million paid cash 5 million paid issuance unregistered shares common stock 3 million paid issuance promissory notes july 1 2000 increased ownership mexico joint venture medam sa de cv medam 64 49 purchasing additional 15 interest coventurer paid purchase price 16 million combination cash installment payments warrants purchase common stock increase ownership changes accounting method joint venture equity consolidation method beginning july 1 2000 november 1999 completed acquisition allied waste industries inc allied medical waste business browning ferris industries inc bfi united states canada puerto rico prior acquisition bfi largest provider regulated medical waste services united states revenues 2017 million 12 months ended june 30 1999 purchase price acquisition 4105 million cash paid purchase price following sources addition cash hand 2250 million borrowings term loan facilities new senior credit facility established dlj capital funding inc bankers trust company bank america na ii 1250 million proceeds sale 1238 senior subordinated notes due 2009 iii 750 million proceeds issuance new series convertible preferred stock investment funds affiliated bain capital inc madison dearborn partners llc transactions completed concurrently completion acquisition bfi medical waste business see note 5 long term debtsenior credit facility senior subordinated notes note 13 series preferred stock addition year ended december 31 1999 purchased customer lists selected assets 13 medical waste management businesses aggregate purchase price acquisitions approximately 82 million 65 million paid cash 16 million paid issuance unregistered shares common stock 1 million paid issuance promissory notes addition assumed certain liabilities sellers aggregating approximately 1 million financial reporting purposes acquisition transactions accounted using purchase method accounting total purchase price 1999 2000 2001 4244 million 31 million 233 million respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market value date acquisition total purchase price 1999 2000 2001 acquisitions includes value 220058 26000 137443 shares respectively common stock issued sellers certain cases purchase price subject downwards adjustment revenues customer contracts acquired reach certain specified levels excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill recorded amount 115 million 193 million years 2000 2001 respectively results operations acquired businesses included consolidated statement operations date acquisition effect acquisitions would significant effect operations except bfi note 5long term debt long term debt consists following december 31 2000 2001 thousands industrial development revenue bonds 990 825 obligations capital leases 4749 3719 notes payable bank 215456 190000 senior subordinated debt 125000 81250 notes payable 4006 4204 350201 279998 less current portion 5097 12633 total 345104 267365 1992 entered obligation finance development woonsocket rhode island facility development purchase substantially property equipment facility financed issuance industrial development revenue bonds due 2017 fixed interest rate 65 collateralized property equipment facility terms agreement entered connection issuance bonds contain among provisions requirements maintaining defined levels working capital various financial ratios including debt net worth payments due longterm debt excluding capital lease obligations five years subsequent december 31 2001 follows thousands 2002 11656 2003 16645 2004 21402 2005 26130 2006 30980 thereafter 169466 company paid interest 22 million 379 million 338 million fiscal years ended december 31 1999 2000 2001 respectively december 31 property capital leases included property plant equipment accompanying consolidated balance sheet follows 2000 2001 thousands machinery equipment 43 vehicles 5741 lessaccumulated depreciation amortization 1350 2506 4434 3278 minimum future lease payments capital leases follows thousands 2002 1235 2003 1049 2004 844 2005 711 2006 496 thereafter 195 total minimum lease payments 4530 less amounts representing interest 811 present value net minimum lease payments 3719 less current portion 945 longterm obligations capital leases 2774 senior credit facility november 1999 established senior secured credit facility credit agreement various financial institutions facility consisted sixyear revolving credit facility 500 million sixyear term loan principal amount 750 million sevenyear term loan b principal amount 1500 million october 2001 refinanced senior secured credit facility increase revolving credit component facility 800 million extend maturity september 2006 reallocate term loan components facility increasing lowerinterest term component 1000 million extending maturity september 2006 reducing higherinterest term b component 750 million extending maturity september 2007 december 31 2001 1900 million borrowings outstanding senior secured credit facility 150 million consisted borrowings revolving credit component refinancing senior secured credit facility october 2001 reduced interest rates charged reducing applicable margin added relevant interest rate borrowings continue bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference base rate higher reference rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided amended restated credit agreement applicable margin based upon leverage ratio december 31 2001 margin interest rates borrowings revolving credit facility term component 075 base rate loans 175 libor loans margin interest rates borrowings term b component 150 base rate loans 250 libor loans december 31 2001 rate interest revolver 368 per annum rate interest term loan 424 per annum rate interest term loan b 499 per annum term loans repayable quarterly installments last business day march june september december beginning 2002 annual required principal repayments term loan component 100 million 2002 150 million 2003 200 million 2004 250 million 2005 75 million first two quarterly payment dates 2006 150 million outstanding balance upon maturity september 2006 annual required principal payments term loan b component 08 million 2002 2006 178 million first two quarterly payments dates 2007 356 million outstanding balance upon maturity september 2007 senior secured credit facility secured lien substantially assets subsidiaries except assets 3ci complete compliance corporation 3ci pledge stock whollyowned domestic subsidiaries stock 3ci mexican subsidiary medam sa de cv 65 stock canadian subsidiary medtech environmental limited credit agreement requires us comply various financial reporting covenants restrictions including restriction dividend payments senior subordinated notes november 1999 issued 1238 series senior subordinated notes due 2009 aggregate principal amount 1250 million connection issuance notes initial purchasers agreed exchange notes substantially identical series b notes registered securities act 1933 exchange completed january 2000 holders series notes exchanging notes new registered 1238 series b notes used net proceeds sale notes finance portion purchase price bfi acquisition november 1999 senior subordinated notes mature november 15 2009 bear fixed rate interest 1238 per annum payable semiannually arrears may 15 november 15 notes general unsecured obligations subordinated payment debt senior secured credit facility december 2001 redeemed senior subordinated notes aggregate principal amount 438 million trust indenture governing notes right one occasions november 15 2002 redeem 35 notes redemption price 112375 aggregate principal amount notes redeemed plus accrued interest redemption date using net cash proceeds one equity offerings exercised right november 2001 using net proceeds public offering 1025000 shares common stock completed earlier month redeem maximum permissible amount notes may redeem additional senior subordinated notes prior november 15 2004 may redeem portion outstanding notes redemption price equal following percentages aggregate principal amount notes redeemed plus accrued interest redemption date redemption year beginning november 15 percentage 2007 later 1061875 1041250 1020625 1000000 certain circumstances specified trust indenture required use portion net proceeds asset sales issuance stock offer redeem outstanding notes pro rata basis redemption price 100 aggregate principal amount redeemed plus accrued interest redemption date otherwise required make mandatory redemptions respect notes senior subordinated notes guaranteed domestic subsidiaries except 3ci foreign subsidiaries trust indenture requires us comply various financial reporting covenants restrictions connection refinancing senior secured credit facility redemption senior subordinated notes recorded extraordinary loss year ended december 31 2001 included following thousands cash noncash total redemption premium upon prepayment senior subordinated notes 5416 senior credit facility refinancing fees 957 accelerated amortization finance fees associated senior subordinated notes 1451 accelerated amortization finance fees associated bank debt financing 4408 6373 5859 12232 note 6 accrued liabilities accrued liabilities december 31 consist following items thousands 2000 2001 accrued compensation 3887 6127 accrued acquisition related expenses 3766 637 accrued interest 3794 3995 accrued insurance 3489 5440 deferred tax liability 3753 derivative instrument obligation 4370 accrued liabilitiesother 8131 8187 total accrued liabilities 23067 32509 note 7derivative instruments entered interest rate swap agreements effectively convert portion floatingrate debt fixedrate basis next year thus reducing impact interest rate changes future interest expense interest rate swap agreement covering 1000 million principal 523 fixed interest rate expiring january 2003 interest rate swap agreement covering 250 million principal 519 fixed interest rate expiring february 2003 also entered interest rate collar agreement covering 500 million principal reducing impact interest rate changes future interest expense agreement expires march 2002 interest rate floor 575 interest rate cap 946 approximately 92 175 million outstanding floatingrate debt designated hedged items interest rate swapcollar agreements december 31 2001 differential paid received accrued monthly adjustment interest expense adoption new accounting standard resulted 02 million effect change accounting principle recorded comprehensive loss year ended december 31 2001 recognized net loss 04 million related ineffective portion hedging instruments interest expense activity related accumulated loss derivative instruments follows thousands balance january 1 2001 initial adoption fas 133 225 change associated current period hedge transactions 4145 amount reclassified earnings 384 balance december 31 2001 3986 note 8adoption new accounting standard june 2001 financial accounting standards board issued statements financial accounting standards 141 business combinations 142 goodwill intangible assets effective fiscal years beginning december 15 2001 new rules goodwill longer amortized subject annual impairment test accordance statements intangible assets continue amortized useful lives apply new rules accounting goodwill intangible assets beginning first quarter 2002 application nonamortization provisions statement expected result increase net income 68 million 032 per diluted share per year 2002 perform first required impairment tests goodwill indefinite lived intangible assets january 1 2002 yet determined effect test earnings financial position note 9lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next eight years leases properties contain renewal provisions rent expense 1999 2000 2001 07 million 112 million 122 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2001 next five years aggregate follows thousands 2002 12541 2003 11077 2004 8833 2005 6842 2006 2399 thereafter 3619 total minimum rental payments 45311 note 10acquisition related expenses year ended december 31 2001 recorded 04 million acquisition related expenses compared 80 million 45 million years ended december 31 1999 2000 following table reflects activity related 1999 2000 2001 acquisitionrelated costs thousands charges 1999 2000 2001 severance closure costs 3373 3351 transition expenses 1659 1103 356 nonrecurring acquisition related costs 2929 total 7961 4454 356 1999 2000 2001 paid approximately 38 million 75 million 08 million acquisitionrelated expenses december 31 1999 2000 2001 42 million 11 million 03 million accrued note 11net income per common share following table sets forth computation basic diluted net income per share year ended december 31 1999 2000 2001 thousands except share per share data numerator net income 13968 14511 14710 preferred stock dividends 340 2543 2542 numerator basic earnings per share income available common stockholders 13628 11968 12168 effect dilutive securities preferred stock dividends 340 2543 2542 numerator diluted earnings per share income available common stockholders assumed conversions 13968 14511 14710 denominator basic earnings per share weightedaverage shares 14240084 14879103 15908895 effect dilutive securities employee stock options 338540 640714 860334 warrants 86482 195328 85458 convertible preferred stock 576672 4377699 4245694 dilutive potential common shares 1001694 5213741 5191486 denominator diluted earnings per share adjusted weightedaverage shares assumed conversions 15241778 20092844 21100381 basic net income per share 096 080 076 diluted net income per share 092 072 070 additional information regarding outstanding employee stock options outstanding warrants see note 12 1999 2000 2001 options warrants purchase 458363 shares 41471 shares 50730 shares respectively exercise prices 12751813 25064227 45014734 respectively included computation diluted earnings per share effect would antidilutive note 12stock options warrants stock options 2000 board directors approved 2000 nonstatutory stock option plan 2000 plan total provides granting 750000 shares common stock form stock options employees officers directors exercise price options granted 2000 plan must least equal fair market value common stock date grant options granted date 10 year terms vest periods five years date grant 1997 board directors shareholders approved 1997 stock option plan 1997 plan provides granting 1500000 shares common stock form stock options selected officers directors employees exercise price options granted 1997 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods 5 years date grant 1995 board directors shareholders approved incentive compensation plan 1995 plan amended restated 1996 provides granting 1500000 shares common stock form stock options restricted stock employees officers directors consultants exercise price options granted 1995 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods four years date grant june 1996 board directors adopted july 1996 shareholders approved directors stock option plan directors plan directors plan amended authorizes stock options total 585000 shares common stock granted outside directors option grants made board directors times amounts board determines taking account guidelines board may adopt purpose exercise price options granted directors plan must least equal fair market value common stock date grant options granted prior april 1 1998 vest 16 consecutive quarterly installments options granted march 31 1998 vest 12 equal monthly installments shares companys common stock reserved issuance upon exercise outstanding options warrants shares include shares available option grant shares granted options yet exercised reserved follows december 31 2001 1995 plan options 391950 1996 directors plan options 494728 1997 plan options 1006042 2000 plan options 724855 warrants 88956 total shares reserved 2706531 summary stock option information follows 1999 2000 2001 weighted average exercise shares price shares price shares price outstanding beginning year 945970 837 1572359 1122 1640958 1466 granted 840579 1291 583106 2063 575389 3343 exercised 146419 236 358249 957 307983 1189 cancelledforfeited 67771 1136 156258 1397 85351 1368 outstanding end year 1572359 1122 1640958 1466 1823013 2076 exercisable end year 448948 849 532518 1146 641538 1604 available future grant 662013 734600 794562 options outstanding exercisable december 31 2001 price range options outstanding options exercisable outstanding average weighted remaining average life exercise range exercise price shares years price shares price 0531025 183616 422 779 166400 776 10811275 413346 742 1273 126645 1270 13252025 600259 744 1806 267677 1686 20694734 625792 901 3245 80816 3561 1823013 765 2076 641538 1604 elected follow accounting principles board opinion 25 accounting stock issued employees apb25 related interpretations accounting employee stock options discussed alternative fair value accounting provided statement financial accounting standards 123 accounting stockbased compensation fas 123 requires use option valuation models developed use valuing employee stock options apb 25 exercise price employee stock options approximates market price underlying stock date grant compensation expense recognized pro forma information regarding net income net income per share required fas 123 accounted employee stock options granted subsequent december 31 1994 fair value method statement options granted 1999 2000 2001 valued using blackscholes option pricing model options granted 1996 1995 public company valued using minimum value method following assumptions used 1999 2000 2001 expected volatility 062 1999 061 2000 062 2001 riskfree interest rates ranging 483 673 1999 502 669 2000 338 546 2001 dividend yield 0 weightedaverage expected life option 72 months weightedaverage fair values options granted 1999 2000 2001 727 per share 1018 per share 1597 per share respectively option value models require input highly subjective assumptions employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing method necessarily provide reliable single measure fair value employee stock options purposes pro forma disclosures estimated fair value options amortized expense optionvesting period pro forma information follows thousands except per share information year ended december 31 1999 2000 2001 pro forma net income 11860 10585 9189 pro forma net income per sharediluted 078 053 044 warrants may 1996 connection loan certain shareholders directors officers issued warrants purchase 226036 shares common stock 796 per share 1999 2000 2001 warrants purchase 35940 shares 178794 shares 11302 shares respectively exercised warrants exercised prior expiration connection subordinated loan agreement six directors granted fiveyear warrants purchase shares common stock exercisable time first anniversary grant date december 1998 january 1999 lenders granted warrants purchase aggregate 18970 shares common stock 1450 per share 43551 shares common stock 1550 per share 59092 shares common stock 1650 per share 2001 warrants purchase 6898 shares 1450 per share 19356 shares 1550 per share 18182 shares 1650 per share exercised december 31 2001 warrants purchase 12072 shares 1450 per share 24195 shares 1550 per share 40910 shares 1650 per share remained outstanding june 2000 connection acquisition additional 15 interest medam issued warrants purchase 44374 shares common stock warrants 31128 shares immediately exercisable remaining 13246 shares become contingently exercisable five years exercise price warrants 1750 per share 2001 warrants purchase 32595 shares exercised december 31 2001 warrants purchase 11779 shares remained outstanding note 13series convertible preferred stock november 1999 issued sold 75000 shares series convertible preferred stock 1000 per share 750 million aggregate cash less various fees expenses used net proceeds sale finance portion purchase price bfi acquisition 2001 holders series convertible preferred stock converted 29595 shares 1805664 shares common stock series convertible preferred stock bears preferential dividends payable additional shares series convertible preferred stock rate 3375 per annum date issuance dividends accrue daily accumulate annually anniversary initial issuance holders series convertible preferred stock also entitled share pro rata holders common stock basis number shares common stock shares series convertible preferred stock convertible dividends distributions upon liquidation dissolution winding company holders series convertible preferred stock entitled paid distribution payment made holders common stock greater 1000 per share plus accumulated preferential dividends accrued unpaid dividends yet accumulated liquidation value amount would payable series convertible preferred stock converted common stock holders series convertible preferred stock entitled vote holders common stock single class matter submitted vote stockholders share series convertible preferred stock number votes equal number votes possessed common stock series convertible preferred stock convertible long initial investors series convertible preferred stock affiliates hold 50 underlying common stock ie shares common stock issuable previously issued upon conversion series convertible preferred stock right voting separate class elect two directors board directors initial investors affiliates cease hold 50 still hold 25 underlying common stock right voting separate class elect one director cease hold 25 underlying common stock right elect directors separate class terminate holder series convertible preferred stock may time convert part holders series convertible preferred stock shares common stock price holder may convert 1750 per share subject adjustment certain circumstances beginning may 2002 closing price common stock exceeds 150 conversion price 20 consecutive trading days may elect redeem part outstanding shares series convertible preferred stock redemption price equal liquidation value date redemption subject holders right convert shares common stock prior redemption date time change control certain circumstances occurrence bankruptcy event holder series convertible preferred stock may require us redeem part holders shares price equal liquidation value per share stock purchase agreement initial investors agreed various covenants restrictions covenants restrictions include grant preemptive rights holders series convertible preferred stock certain circumstances agreement provide specified financial business information entered registration rights agreement initial investors closing requiring us certain circumstances register portion shares series convertible preferred stock securities act also entered corporate governance agreement implementing right initial investors elect directors board directors restricting right initial investors transfer shares series convertible preferred stock restricting ability engage certain transactions example acquisitive mergers involving specified amount consideration without approval holders majority underlying common stock note 14employee benefit plan 401k defined contribution retirement savings plan covering substantially employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee contributions years ended december 31 1999 2000 2001 approximately 49000 08 million 09 million respectively note 15employee stock purchase plan october 2000 board directors adopted stericycle inc employee stock purchase plan espp effective july 1 2001 stockholders approved espp may 2001 espp authorizes 150000 shares common stock purchased employees 15 discount market price stock payroll deductions two sixmonth offerings year employee elects participate offering granted option first day offering number shares equal employees payroll deductions espp offering period may exceed 5000 divided option price per share option price per share lower 85 closing price share common stock first trading day offering period 85 closing price last trading day offering period every employee completed one years employment first day offering fulltime employee parttime employee customarily works least 20 hours per week eligible participate offering note 16related party transactions september 1999 announced formation new joint venture medam ba srl argentine corporation utilize etd technology treat medical waste primarily buenos aires market 1999 2000 recorded 29 million 05 million revenues respectively related sale equipment medam ba de srl licensing consulting agreements december 31 2000 2001 investment joint venture 40 million included longterm assets august 2000 announced formation new joint venture evertrade medical waste pty ltd service medical waste market south africa using etd technology joint venture company headquartered johannesburg south africa 2000 2001 recorded 51 million 14 million revenues respectively related sale equipment evertrade medical waste pty ltd licensing consulting agreements december 31 2001 total receivables 55 million joint venture related agreements loans 43 million joint venture included current assets addition investment joint venture 34 million included longterm assets august 2001 announced agreement stericorp limited australia utilize etd technology service medical waste market australia purchased convertible notes 25 million stericorp notes convertible beginning august 2002 maximum 19 ownership interest company headquartered melbourne australia 2001 recorded 24 million revenue related sale equipment stericorp licensing consulting agreements note 17legal proceedings operate highly regulated industry exposed regulatory inquiries investigations time investigations initiated variety reasons involved several legal administrative proceedings settled otherwise resolved terms acceptable us without material adverse effect business financial condition results operations also party various legal proceedings arising ordinary course business believe resolution matters material adverse affect business financial condition results operation note 18products services geographic information summary revenue information companys products services follows year ended december 31 1999 2000 2001 thousands medical waste management services 126286 316549 351316 proprietary equipment technology license sales 6562 7173 7708 total 132848 323722 359024 summary financial information geographic area follows year ended december 31 1999 2000 2001 thousands revenues united states 119618 304512 334301 foreign countries 13230 19210 24723 total 132848 323722 359024 longlived assets united states 508956 494755 503321 foreign countries 9290 12216 13216 total 518246 506971 516537 revenues attributed countries based location customers 1999 2000 2001 provided medical waste management services customers canada mexico licensed proprietary equipment brazilian japanese companies joint ventures argentina south africa australia note 19selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2000 2001 thousands except per share amounts first second third fourth quarter 2000 revenues 77668 79557 81066 85431 gross profit 30311 31296 31915 33855 income operations 15827 15163 15667 16809 net income 3773 3086 3433 4219 basic earnings per common share 021 017 019 024 diluted earnings per common share 019 015 017 021 first second third fourth quarter 2001 revenues 85835 88549 91261 93379 gross profit 34064 35201 36467 37333 income operations 17998 18862 19730 16704 income extraordinary item 5017 5594 6335 5073 extraordinary item net tax 7309 net income 5017 5594 6335 2236 basic earnings per common share extraordinary item 029 032 036 025 diluted earnings per common share extraordinary item 024 027 030 023 earnings per share calculated quarterly basis amounts may total calculated fullyear earnings per share note 20condensed consolidating financial statements payments companys senior subordinated notes unconditionally guaranteed jointly severally companys whollyowned domestic subsidiaries include ecco amdi wsi medtech bfi certain subsidiaries insignificant assets operations collectively guarantors financial information concerning guarantors years ended december 31 2001 2000 1999 presented purposes complying reporting requirements guarantor subsidiaries financial information concerning guarantors presented condensed consolidating financial statements since company minimal independent operations guarantees full unconditional joint several guarantor financial statements presented management believe financial statements material investors condensed consolidating balance sheet december 31 2001 stericycle non stericycle guarantor inc subsidiaries eliminations consolidated assets current assets cash equivalents 8919 833 9752 2985 12737 current assets 73742 19585 93327 8304 16375 85256 total current assets 82661 20418 103079 11289 16375 97993 property plant equipment net 70208 1764 71972 10764 82736 goodwill net 391301 19252 410553 12099 422652 investment subsidiaries 60004 1437 61441 assets 16559 5589 22148 118 11117 11149 total assets 620733 48460 669193 34270 88933 614530 liabilities shareholders equity current liabilities current portion longterm debt 12143 490 12633 current liabilities 60972 817 61789 5332 16375 50746 total current liabilities 73115 817 73932 5822 16375 63379 longterm debt net current portion 5051 1353 6404 liabilities 265185 118 265303 13179 11117 267365 redeemable preferred stock 44872 common shareholders equity 232510 47525 280035 13916 61441 232510 total liabilities shareholders equity 620733 48460 669193 34270 88933 614530 condensed consolidating balance sheet december 31 2000 stericycle non stericycle guarantor inc subsidiaries eliminations consolidated assets current assets cash equivalents 1408 595 2003 663 2666 current assets 78193 12220 90413 7113 9181 88345 total current assets 79601 12815 92416 7776 9181 91011 property plant equipment net 60165 242 60407 13501 73908 goodwill net 377178 29384 406562 12228 418790 investment subsidiaries 63306 3308 66614 assets 19234 6582 25816 124 11667 14273 total assets 599484 52331 651815 33629 87462 597982 liabilities shareholders equity current liabilities current portion longterm debt 4035 1062 5097 current liabilities 43175 1233 44408 2793 9185 38016 total current liabilities 47210 1233 48443 3855 9185 43113 longterm debt net current portion 344142 12585 11623 345104 liabilities 1995 1633 3628 redeemable preferred stock 71437 common shareholders equity 134700 51098 185798 15556 66654 134700 total liabilities shareholders equity 599484 52331 651815 33629 87462 597982 condensed consolidating statement income year ended december 31 2001 stericycle non stericycle guarantor inc subsidiaries eliminations consolidated revenues 304666 21147 325813 35551 2340 359024 cost revenues 179937 12843 192780 25519 2340 215959 selling general administrative expense 57891 2043 59934 6185 33 66086 writeoff fixed assets 697 2632 3329 acquisition related expenses 356 total costs expenses 238881 14886 253767 34336 2373 285730 income operations 65785 6261 72046 1215 33 73294 equity net income loss subsidiaries 3893 1209 2684 expense income net 34967 544 34423 2090 33 36546 income taxes extraordinary items 34711 5596 40307 875 2684 36748 income tax expense benefit 12692 1754 14446 283 14729 net income extraordinary items 22019 3842 25861 1158 2684 22019 extraordinary loss 7309 net income loss 14710 3842 18552 1158 2684 14710 condensed consolidating statement income year ended december 31 2000 stericycle non stericycle guarantor inc subsidiaries eliminations consolidated revenues 135981 158992 294973 29580 831 323722 cost revenues 78593 96568 175161 22015 831 196345 selling general administrative expense 34419 19695 54114 5343 59457 acquisition related expenses 4454 total costs expenses 117466 116263 233729 27358 831 260256 income operations 18515 42729 61244 2222 63466 equity net income loss subsidiaries 28001 1025 26976 expense income net 38329 483 37846 1804 39650 income taxes 8187 42187 50374 418 26976 23816 income tax expense benefit 6324 15462 9138 167 9305 net income 14511 26725 41236 251 26976 14511 condensed consolidating statement income year ended december 31 1999 stericycle non stericycle guarantor inc subsidiaries eliminations consolidated revenues 61069 46618 107687 25533 372 132848 cost revenues 38455 28892 67347 19086 310 86123 selling general administrative expense 15478 6306 21784 4931 235 26480 acquisition related expenses 7961 total costs expenses 61894 35198 97092 24017 545 120564 income loss operations 825 11420 10595 1516 173 12284 equity net income subsidiaries 8675 119 8794 expense income net 3934 778 3156 1157 173 4486 income taxes 3916 12317 16233 359 8794 7798 income tax benefit expense 10052 3882 6170 net income 13968 8435 22403 359 8794 13968 condensed consolidating statement cash flows year ended december 31 2001 stericycle non stericycle guarantor inc subsidiaries eliminations consolidated cash flows operating activities net cash provided operating activities 52422 7242 59664 4886 64550 cash flows investing activities capital expenditures 15289 196 15485 73 15412 payments acquisitions international investments net cash acquired 11171 6808 17979 3283 21262 proceeds maturity shortterm investments 199 purchases shortterm investments 200 net cash used investing activities 26459 7004 33463 3210 36673 cash flows financing activities payment subordinated notes 43750 principal payments capital lease obligations 1507 18 1525 repayment long term debt 35592 1507 37099 payments deferred financing costs 173 borrowings long term debt 10000 2171 12171 proceeds issuance common stock 3565 proceeds public offering common stock 49005 net cash used financing activities 18452 646 17806 net decrease increase cash equivalents 7511 238 7749 2322 10071 cash equivalents beginning period 2666 cash equivalents end period 12737 condensed consolidating statement cash flows year ended december 31 2000 stericycle non stericycle guarantor inc subsidiaries eliminations consolidated cash flows operating activities net cash provided operating activities 2911 4801 7712 2757 10469 cash flows investing activities capital expenditures 8816 2109 10925 661 11586 payments acquisitions international investments net cash acquired 3044 1456 4500 16 4516 proceeds maturity shortterm investments 502 net cash used investing activities 11358 3565 14923 677 15600 cash flows financing activities net proceeds bank line credit 5000 principal payments capital lease obligations 309 887 1196 291 1487 repayment long term debt 15012 1416 16428 payments deferred financing costs 631 proceeds issuance common stock 2299 payments related issuance preferred stock 300 net cash used financing activities 8953 887 9840 1707 11547 net decrease increase cash equivalents 17400 349 17051 373 16678 cash equivalents beginning period 19344 cash equivalents end period 2666 condensed consolidating statement cash flows year ended december 31 1999 stericycle non stericycle guarantor inc subsidiaries eliminations consolidated cash flows operating activities net cash provided operating activities 4951 283 5234 6543 11777 cash flows investing activities capital expenditures 2534 85 2619 1176 3795 payments acquisitions international investments net cash acquired 418280 4000 422280 proceeds maturity shortterm investments 447 net cash used investing activities 420367 85 420452 5176 425628 cash flows financing activities net payment bank lines credit 16359 repayment long term debt 3884 482 4366 principal payments capital lease obligations 50 125 175 115 290 proceeds long term debt 350000 net payments subordinated debt 2750 payment deferred financing costs 10828 net proceeds common stock offering 47158 proceeds issuance preferred stock 68855 proceeds issuances common stock 492 net cash provided used financing activities 432634 125 432509 597 431912 net increase cash equivalents 17218 73 17291 770 18061 cash equivalents beginning period 1283 cash equivalents end period 19344 stericycle inc subsidiaries schedule ii valuation allowance accounts thousands balance charges writeoffs balance 123198 expenses charges 1 payments 123199 allowance doubtful accounts 901 842 202 965 980 accrued severance closure costs 3373 210 3163 accrued transition expenses 1659 650 1009 deferred tax valuation allowance 19481 9894 9587 balance charges writeoffs balance 123199 expenses charges 1 payments 123100 allowance doubtful accounts 980 1552 1996 903 3625 accrued severance closure costs 3163 3351 5390 1124 accrued transition expenses 1009 1103 2112 deferred tax valuation allowance 9587 999 8588 balance charges writeoffs balance 123100 expenses charges 1 payments 123101 allowance doubtful accounts 3625 1840 192 2551 3106 accrued severance closure costs 1124 843 281 accrued transition expenses 356 deferred tax valuation allowance 8588 650 9238 1 amounts consist primarily costs assumed acquired companies recorded prior date acquisition item 9item 8 financial statements supplemental data report independent public auditors board directors stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2001 2002 related consolidated statements income changes shareholders’ equity cash flows three years period ended december 31 2002 audits also included financial statement schedule listed index items 15a financial statements schedule responsibility company’s management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2001 2002 consolidated results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 7 financial statements year ended december 31 2001 company changed method accounting derivatives discussed note 8 financial statements year ended december 31 2002 company changed method accounting goodwill ernst young llp chicago illinois february 7 2003 stericycle inc subsidiaries consolidated balance sheets thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements income thousands except per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes shareholders’ equity years ended december 31 2000 2001 2002 thousands accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 2002 unless context requires otherwise “we” “us” “our” refers stericycle inc subsidiaries consolidated basis note 1description business provide regulated medical waste collection transportation treatment services customers related training education compliance programs consulting services also sell ancillary supplies transport pharmaceuticals photographic chemicals lead foil amalgam recycling selected geographic service areas also expanding international markets joint ventures licensing proprietary technology selling associated equipment note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc wholly owned subsidiaries well 645 ownership medam sa de cv mexican company 675 common stock ownership 3ci complete compliance corporation significant intercompany accounts transactions eliminated addition 33 ownership medam ba srl argentine company 265 ownership evertrade medical waste pty ltd south african company accounted using equity method revenue recognition recognize revenue time medical waste collection revenue costs contracts supply proprietary treatment equipment accounted percentage completion method whereby income recognized based estimated stage completion individual contract using costtocost method payments received advance deferred recognized services provided cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows year ended december 31 2002 recorded writedown idled incinerator equipment chandler arizona st louis missouri facilities 25 million 04 million related spare parts year ended december 31 2001 recorded writedown idled treatment equipment majorityowned subsidiary 3ci complete compliance corporation inc ‘3ci’ 33 million depreciation expense years ended december 31 2000 2001 2002 98 million 114 million 130 million respectively goodwill intangibles goodwill acquisitions completed prior june 30 2001 amortized using straightline method 25 years except goodwill related acquisition medical waste business browningferris industries inc “bfi acquisition” amortized 40 years amortization expense 2000 2001 related goodwill approximately 137 million 139 million respectively effective january 1 2002 adopted fas 142 accordingly goodwill indefinite lived intangibles longer amortized subject annual impairment test according fas 142 intangible assets continue amortized useful lives determined customer relationships useful life 40 years noncompete intangible useful life 5 years determined permits indefinite lives thus amortized income taxes deferred tax liabilities assets determined based differences financial statement tax basis assets liabilities using enacted tax rates effect year differences expected reverse accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected andor account referred third party collection agency financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt fair values financial instruments materially different carrying values except senior subordinated notes valued open market approximately 782 million 114 686 million carrying value december 31 2002 financial instruments potentially subject us concentrations credit risk consist principally account receivable credit risk trade receivables minimized result large size customer base single customer represents greater 2 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits accrued auto workers’ compensation insurance claims estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates derivative instruments effective january 1 2001 adopted statement financial accounting standards 133 “accounting derivative instruments hedging activity” fas 133 fas 133 provides comprehensive consistent standards recognition measurement derivative hedging activities requires derivatives recorded consolidated balance sheets fair value establishes criteria hedges changes fair value assets liabilities firm commitments hedges variable cash flows forecasted transactions hedges foreign currency exposures net investments foreign operations changes fair value derivatives meet criteria hedges would recognized consolidated statement income initial adoption fas 133 material impact us upon termination interest rate agreements resulting gain loss recognized shorter remaining original term hedging instrument remaining life underlying debt obligation stockbased compensation december 31 2002 stockbased compensation plans described fully note 13 elected follow accounting principles board opinion 25 “accounting stock issued employees” “apb25” related interpretations accounting employee stock options alternative fair value accounting provided statement financial accounting standards 123 “accounting stockbased compensation” “fas 123” requires use option valuation models developed use valuing employee stock options apb 25 exercise price employee stock options equals market price underlying stock date grant compensation expense recognized following table illustrates effect net income earnings per share applied fair value recognition fas123 stockbased employee compensation foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated current exchange rates income statement accounts translated average rates period related translation adjustments reported component comprehensive income directly equity common stock close business may 31 2002 recorded 2for1 stock split stock split form stock dividend one share payable may 31 2002 share common stock outstanding may 16 2002 share earnings per share information financial statements reported postsplit basis reclassifications certain amounts 2000 2001 financial statements reclassified conform 2002 presentation note 3income taxes december 31 2002 net operating loss carry forwards federal income tax purposes fully utilized excluding net operating loss carry forwards related 3ci foreign tax credit approximately 13 million begin expire beginning 2004 significant components income tax expense years ended december 31 follows thousands reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 follows cash payments income taxes 20 million 2000 2001 32 million 2002 deferred tax liabilities assets december 31 follows thousands december 31 2001 2002 valuation allowance relates principally net operating loss carryforward 3ci net operating loss carry forwards approximate 240 million december 31 2002 expire 2020 note 4acquisitions year ended december 31 2002 completed acquisition nine domestic medical waste management businesses canadian mexican subsidiaries completed one acquisition individual acquisition significant operations december acquired stock micromed industries inc substantially operating assets three related companies operated florida georgia south carolina north carolina october acquired stock bridgeview inc operated principally pennsylvania purchased customer contracts selected assets enviromed inc operated south carolina july purchased customer contracts selected assets sanitec kentucky llc operated kentucky june purchased customer contracts selected assets biowaste industries central florida inc operated florida march acquired stock biooxidation services inc operated pennsylvania new jersey several states customer contracts selected assets bmw medtech west virginia inc operated west virginia customer contracts selected assets amedco inc operated texas addition march mexican subsidiary medam sa de cv “medam” completed acquisition majority stock ecotermica de oriente sa de cv january purchased customer contracts selected assets bio environmental services inc operated west virginia canadian subsidiary stericycle inc formerly “medtech environmental limited” acquired stock pyroval inc operated province quebec addition acquired additional shares 3ci common stock certain profit sharing rights put rights three stockholders 3ci complete compliance corporation settlement agreement originally entered 3ci january 1996 december 2002 exercised warrants purchase 541286 shares common stock 010 per share connection transactions increased common stock ownership 6578504 shares 675 outstanding common stock aggregate purchase price acquisitions 2002 approximately 559 million approximately 336 million paid cash 173 million paid issuance unregistered shares common stock pursuant purchase agreements subsequently registered sale 50 million paid issuance promissory notes year ended december 31 2001 completed acquisition four domestic medical waste management businesses medam completed one acquisition april purchased customer contracts selected assets trans med ltd operated new york new jersey connecticut also customer contracts selected assets biosafe america inc operated florida july acquired stock american medical disposal inc operated oklahoma nebraska several states december acquired substantially assets integrated environmental systems inc operated california nevada august medam acquired stock tecnicas medio ambientales winco sa de cv based mexico city aggregate purchase price acquisitions approximately 233 million approximately 170 million paid cash 63 million paid issuance unregistered shares common pursuant agreement subsequently registered sale year ended december 31 2000 purchased customer lists selected assets seven medical waste management businesses aggregate purchase price acquisitions approximately 32 million 24 million paid cash 5 million paid issuance unregistered shares common stock 3 million paid issuance promissory notes july 1 2000 increased ownership medam joint venture mexico 645 purchasing additional 155 interest coventurer paid purchase price 16 million combination cash payments warrants purchase common stock increase ownership changed accounting method joint venture equity consolidation method beginning july 1 2000 financial reporting purposes acquisition transactions accounted using purchase method accounting total purchase price 2000 2001 2002 32 million 233 million 559 million respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market value date acquisition total purchase price acquisitions completed 2000 2001 2002 includes value 52000 274886 500269 shares respectively common stock issued sellers certain cases purchase price subject downwards adjustment revenues customer contracts acquired failed reach certain specified levels excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill recorded amounts 193 million 354 million years 2001 2002 respectively results operations acquired businesses included consolidated statements income date acquisition note 5long term debt longterm debt consists following december 31 development purchase substantially property equipment woonsocket rhode island facility financed issuance industrial development revenue bonds due 2017 fixed interest rate 65 collateralized property equipment facility terms agreement entered connection issuance bonds contain among provisions requirements maintaining defined levels working capital various financial ratios including debt net worth payments due longterm debt excluding capital lease obligations five years subsequent december 31 2002 follows paid interest 379 million 338 million 256 million fiscal years ended december 31 2000 2001 2002 respectively property capital leases included property plant equipment accompanying consolidated balance sheet follows december 31 amortization related capital leases included depreciation expense minimum future lease payments capital leases follows thousands senior credit facility november 1999 established senior secured credit facility credit agreement various financial institutions facility consisted sixyear revolving credit facility 500 million sixyear term loan principal amount 750 million sevenyear term b loan principal amount 1500 million october 2001 refinanced senior secured credit facility increase revolving credit component facility 800 million extend maturity september 2006 reallocate term loan components facility increasing lowerinterest term loan component 1000 million extending maturity september 2006 reducing higherinterest term b loan component 750 million extending maturity september 2007 june 2002 increased revolving credit component 800 million 1050 million december 31 2002 1468 million borrowings outstanding senior secured credit facility 380 million consisted borrowings revolving credit component 616 million term component 472 million term b component addition december 31 2002 43 million stand letters credit issued revolving credit component refinancing senior secured credit facility october 2001 reduced interest rates charged reducing applicable margin added relevant interest rate borrowings bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference “base rate” higher reference rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement applicable margin based upon leverage ratio december 31 2002 margin interest rates borrowings revolving credit facility term component 050 base rate loans 150 libor loans margin interest rates borrowings term b component 150 base rate loans 250 libor loans december 31 2002 average rate interest revolving credit facility 292 per annum average rate interest term loan 291 per annum rate interest term b loan 391 per annum january 2003 amended senior secured credit facility increase borrowing capacity 510 million reclassifying borrowings revolving credit facility term loans amended credit facility consists 105 million revolving credit facility 1126 million term loan facility 472 million term b loan facility credit agreement amended january 2003 extended maturity revolving credit component term loan component september 2007 extended maturity term b component september 2008 term loans repayable quarterly installments last business day march june september december beginning 2003 required principal repayments term loan component 50 million quarterly payment date june 2007 final payment outstanding principal balance upon maturity september 2007 required principal payments term b loan component 02 million quarterly payment date june 2008 final payment outstanding balance upon maturity september 2008 result january 2003 amendment credit facility payments due longterm debt excluding capital lease obligations next five years including amount borrowings outstanding agreement january 31 2003 follows senior secured credit facility secured lien substantially assets subsidiaries except assets 3ci complete compliance corporation “3ci” pledge stock whollyowned domestic subsidiaries stock 3ci mexican subsidiary medam sa de cv 65 stock canadian subsidiary stericycle inc formerly “medtech environmental limited” credit agreement requires us comply various financial reporting covenants restrictions including restriction dividend payments senior subordinated notes senior subordinated notes mature november 15 2009 bear fixed rate interest 12 38 per annum payable semiannually arrears may 15 november 15 notes general unsecured obligations subordinated payment debt senior secured credit facility december 2001 redeemed senior subordinated notes aggregate principal amount 438 million trust indenture governing notes right one occasions november 15 2002 redeem 35 notes redemption price 112375 aggregate principal amount notes redeemed plus accrued interest redemption date using net cash proceeds one equity offerings exercised right november 2001 using net proceeds public offering 2050000 shares common stock completed earlier month redeem maximum permissible amount notes 2002 repurchased 126 million notes private transactions trust indenture permits approximately 105 million notes purchased certain directors investment funds associated bain capital llc private transactions may redeem additional senior subordinated notes prior november 15 2004 may redeem portion outstanding notes redemption price equal following percentages aggregate principal amount notes redeemed plus accrued interest redemption date certain circumstances specified trust indenture required use portion net proceeds asset sales issuance stock offer redeem outstanding notes pro rata basis redemption price 100 aggregate principal amount redeemed plus accrued interest redemption date otherwise required make mandatory redemptions respect notes senior subordinated notes guaranteed domestic subsidiaries except 3ci foreign subsidiaries trust indenture requires us comply various financial reporting covenants restrictions connection october 2001 refinancing senior secured credit facility redemption senior subordinated notes recorded debtextinguishment expenses refinancing expenses year ended december 31 2001 included following result 2002 repurchases senior subordinated notes incurred 18 million redemption premium expenses 04 million accelerated amortization financing fees associated senior subordinated notes connection june 2002 bank credit facility amendment paid 02 million financing fees note 6accrued liabilities accrued liabilities december 31 consist following items thousands note 7derivative instruments entered interest rate swap agreements effectively convert portion floatingrate debt fixedrate basis thus reducing impact interest rate changes future interest expense interest rate swap agreement covering 1000 million principal 523 fixed interest rate expiring january 2003 interest rate swap agreement covering 250 million principal 519 fixed interest rate expiring february 2003 approximately 85 125 million outstanding floatingrate debt designated hedged items interest rate swap agreements december 31 2002 differential paid received accrued monthly adjustment interest expense adoption fas 133 january 1 2001 resulted 02 million effect change accounting principle recorded comprehensive loss years ended december 31 2001 2002 recognized net loss 04 million net gain 04 million respectively related ineffective portion hedging instruments interest expense activity related accumulated loss derivative instruments follows thousands note 8goodwill intangible assets june 2001 financial accounting standards board issued statements financial accounting standards 141 business combinations 142 goodwill intangible assets new rules goodwill indefinite lived intangibles longer amortized subject annual impairment test frequent testing circumstances indicate may impaired 2002 performed first annual impairment evaluation determined impairment two geographical reporting segments united states foreign countries goodwill changes carrying amount goodwill year ended december 31 2002 follows thousands pro forma impact eliminating goodwill amortization years december 31 2000 2001 follows according fas 142 intangible assets continue amortized useful lives year ended december 31 2002 recorded fair value intangibles acquired acquisitions american medical disposal inc wholly owned subsidiary environmental health services inc bio environmental services inc pyroval inc amedco inc biowaste industries central florida inc ecotermica de oriente sa de cv enviromed inc bridgeview inc micro med industries inc assigned 90 million customer relationships amortization period 40 years assigned 92 million facility environmental permits indefinite life noncompete intangible amortization period 5 years november 1999 bfi acquisition december 31 2002 value amortizing intangible assets follows thousands year ended december 31 2002 aggregate amortization expense 20 million estimated amortization expense thousands next five years follows years ended december 31 note 9lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next thirteen years leases properties contain renewal provisions rent expense 2000 2001 2002 112 million 122 million 148 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2002 next five years aggregate follows note 10acquisitionrelated expenses following table reflects activity related 2000 2001 2002 acquisitionrelated expenses thousands 2000 2001 2002 paid approximately 75 million 08 million 02 million acquisitionrelated expenses respectively note 11net income per common share following table sets forth computation basic diluted net income per share additional information regarding outstanding employee stock options outstanding warrants see note 13 2000 2001 2002 options warrants purchase 82942 shares 101460 shares 70752 shares respectively exercise prices 12532114 22512367 22913648 respectively included computation diluted earnings per share effect would antidilutive note 12comprehensive income components accumulated comprehensive income loss follows note 13stock options warrants stock options 2000 board directors approved 2000 nonstatutory stock option plan “2000 plan” total provides granting 3500000 shares common stock form stock options employees officers directors exercise price options granted 2000 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods five years date grant 1997 board directors shareholders approved 1997 stock option plan “1997 plan” provides granting 3000000 shares common stock form stock options selected officers directors employees exercise price options granted 1997 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods five years date grant 1995 board directors shareholders approved incentive compensation plan “1995 plan” amended restated 1996 provides granting 3000000 shares common stock form stock options restricted stock employees officers directors consultants exercise price options granted 1995 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods four years date grant june 1996 board directors adopted july 1996 shareholders approved directors stock option plan “directors plan” directors plan amended authorizes stock options total 1170000 shares common stock granted outside directors option grants made board directors times amounts board determines taking account guidelines board may adopt purpose exercise price options granted directors plan must least equal fair market value common stock date grant options granted prior april 1 1998 vested 16 consecutive quarterly installments options granted march 31 1998 vest 12 equal monthly installments shares company’s common stock reserved issuance upon exercise outstanding options warrants shares include shares available option grant shares granted options yet exercised reserved follows december 31 2002 summary stock option information follows options outstanding exercisable december 31 2002 price range elected follow accounting principles board opinion 25 “accounting stock issued employees” apb25” related interpretations accounting employee stock options discussed alternative fair value accounting provided statement financial accounting standards 123 “accounting stockbased compensation” “fas 123” requires use option valuation models developed use valuing employee stock options apb 25 exercise price employee stock options equals market price underlying stock date grant compensation expense recognized pro forma information regarding net income net income per share required fas 123 accounted employee stock options granted subsequent december 31 1994 fair value method statement options granted valued using blackscholes optionpricing model following assumptions used 2000 2001 2002 expected volatility 061 2000 062 2001 060 2002 riskfree interest rates ranging 502 669 2000 374 519 2001 301 45 2002 dividend yield 0 weightedaverage expected life option 48 months weightedaverage fair values options granted 2000 2001 2002 508 per share 800 per share 1277 per share respectively option value models require input highly subjective assumptions employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate management’s opinion existing method necessarily provide reliable single measure fair value employee stock options purposes pro forma disclosures estimated fair value options amortized expense optionvesting period pro forma information follows thousands except per share information warrants connection subordinated loan agreement six directors granted fiveyear warrants purchase shares common stock exercisable time first anniversary grant date december 1998 january 1999 lenders granted warrants purchase aggregate 37940 shares common stock 725 per share 87102 shares common stock 775 per share 118184 shares common stock 825 per share 2001 warrants purchase 13796 shares 725 per share 38712 shares 775 per share 36364 shares 825 per share exercised 2002 warrants purchase 3450 shares 725 per share 9678 shares 775 per share 9092 shares 825 per share exercised december 31 2002 warrants purchase 20694 shares 725 per share 38712 shares 775 per share 72728 shares 825 per share remained outstanding exercisable june 2000 connection acquisition additional 15 interest medam issued warrants purchase 88748 shares common stock warrants 62256 shares immediately exercisable remaining 26492 shares become exercisable five years exercise price warrants 875 per share 2001 warrants purchase 65190 shares exercised december 31 2002 warrants purchase 23558 shares remained outstanding included 7666 shares exercisable note 14series convertible preferred stock november 1999 issued sold 75000 shares series convertible preferred stock 1000 per share 750 million aggregate cash less various fees expenses used net proceeds sale finance portion purchase price bfi acquisition holders series convertible preferred stock converted 29595 shares 3611328 shares common stock 2001 16079 shares 2000000 shares common stock 2002 december 31 2002 29326 shares series convertible preferred stock issued outstanding prior june 1 2002 series convertible preferred stock bore preferential dividends payable additional shares series convertible preferred stock rate 3375 per annum date issuance dividends accrued daily accumulated annually anniversary initial issuance july 2002 entered waiver amendment agreement holders series convertible preferred stock pursuant agreed among things 3375 paymentinkind dividends ceased accrue may 31 2002 holders series convertible preferred stock remain entitled share pro rata holders common stock basis number shares common stock shares series convertible preferred stock convertible dividends distributions upon liquidation dissolution winding company holders series convertible preferred stock entitled paid distribution payment made holders common stock greater 1000 per share plus accumulated preferential dividends accrued unpaid dividends yet accumulated “liquidation value” amount would payable series convertible preferred stock converted common stock holders series convertible preferred stock entitled vote holders common stock single class matter submitted vote stockholders share series convertible preferred stock number votes equal number votes possessed common stock series convertible preferred stock convertible amended july 2002 corporate governance agreement entered initial investors provides long two groups initial investors affiliates continues hold 25 group’s initial “underlying common stock” ie shares common stock issuable previously issued upon conversion group’s series convertible preferred stock group right voting separate class elect one director board directors group ceases hold 25 initial underlying common stock group’s right elect one director terminate two groups initial investors consist investment funds associated bain capital llc investment funds associated madison dearborn partners llc holder series convertible preferred stock may time convert part holder’s series convertible preferred stock shares common stock price holder may convert 875 per share subject adjustment certain circumstances beginning may 2002 closing price common stock exceeds 150 conversion price 20 consecutive trading days may elect redeem part outstanding shares series convertible preferred stock redemption price equal liquidation value date redemption subject holder’s right convert shares common stock prior redemption date time change control certain circumstances occurrence bankruptcy event holder series convertible preferred stock may require us redeem part holder’s shares price equal liquidation value per share stock purchase agreement initial investors agreed various covenants restrictions covenants restrictions include grant preemptive rights holders series convertible preferred stock certain circumstances agreement provide specified financial business information entered registration rights agreement initial investors requiring us certain circumstances register portion shares series convertible preferred stock securities act amended july 2002 two groups initial investors right two demand registrations may shelf registrations one may firm commitment underwritten public offering may shelf registration agreement implements right initial investors elect directors board directors restricts right initial investors transfer shares series convertible preferred stock restricts ability engage certain transactions example acquisitive mergers involving specified amount consideration without approval holders majority underlying common stock note 15employee benefit plan 401k defined contribution retirement savings plan covering substantially employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee contributions years ended december 31 2000 2001 2002 approximately 08 million 09 million 10 million respectively note 16employee stock purchase plan october 2000 board directors adopted stericycle inc employee stock purchase plan “espp” effective july 1 2001 stockholders approved espp may 2001 espp authorizes 300000 shares common stock purchased employees 15 discount market price stock payroll deductions two sixmonth offerings year employee elects participate offering granted option first day offering number shares equal employee’s payroll deductions espp offering period may exceed 5000 divided option price per share option price per share lower 85 closing price share common stock first trading day offering period 85 closing price last trading day offering period every employee completed one year’s employment first day offering fulltime employee parttime employee customarily works least 20 hours per week eligible participate offering 2002 22278 shares issued espp note 17nonconsolidating joint ventures investment joint venture medam ba srl argentine corporation formed utilize etd technology treat medical waste primarily buenos aires market 2000 recorded 05 million revenues related sale equipment medam ba de srl licensing consulting agreements december 31 2001 2002 investment joint venture 24 million 25 million respectively included longterm assets also invested joint venture evertrade medical waste pty ltd formed service medical waste market south africa using etd technology joint venture company headquartered johannesburg south africa 2000 2001 recorded 51 million 14 million revenues respectively related sale equipment evertrade medical waste pty ltd licensing consulting agreements december 31 2001 2002 total receivables 55 million 23 million respectively joint venture related agreements included current assets addition investment joint venture december 31 2001 2002 10 million 07 million respectively included longterm assets also joint venture investment evertrade medical waste manufacturing limited formed manufacture reusable tubs south africa december 31 2001 2002 loans 43 million 51 million respectively joint venture included notes receivable note 18legal proceedings operate highly regulated industry exposed regulatory inquiries investigations time investigations initiated variety reasons involved several legal administrative proceedings settled otherwise resolved terms acceptable us without material adverse effect business financial condition results operations also party various legal proceedings arising ordinary course business believe resolution matters material adverse affect business financial condition results operation september 2002 entered consent decree implementing terms settlement arizona attorney general’s office antitrust investigation relating december 1997 sale purchase medical waste assets utah arizona bfi subsequent failure provide treatment services certain thirdparty haulers medical waste treatment facilities arizona utah consent decree required pay total 03 million civil penalties attorney’s fees quarterly installments threeyear period initial payment 01 million also required provide 50000 pounds per month treatment services thirdparty haulers chandler arizona treatment facility fiveyear period commercially competitive prices addition required twoyear period rebate 25 amounts billed collected two thirdparty haulers whose complaints prompted initial investigation january 2003 reached definitive settlement antitrust investigation utah attorney general’s office relating issues terms consent decree incorporating settlement agreed pay total 06 million attorney general’s office threeyear period also agreed make certain operational changes utah enhance competition including providing incineration treatment services thirdparty haulers salt lake city treatment facility january 2003 sued federal court arizona private plaintiff alleging anticompetitive conduct arizona colorado utah november 1997 present seeking certification lawsuit class action behalf customers stericycle bfi threestate area period question march 2003 sued federal court utah private plaintiff similarly alleging anticompetitive conduct arizona colorado utah november 1997 present seeking similar class action certification believe lawsuits’ allegations without merit certain officers directors parties lawsuit filed july 2002 shareholder 3ci lawsuit filed behalf minority shareholders 3ci derivatively behalf 3ci alleges among things 3ci’s directors majority also officers directors unjustly enriched stericycle expense 3ci shareholders plaintiff seeks among relief damages order requiring buyout 3ci’s minority shareholders lawsuit still early stage believe plaintiff’s allegations without merit note 19products services geographic information summary revenue information products services follows summary financial information geographic area follows revenues attributed countries based location customers 2000 2001 2002 provided medical waste management services customers canada mexico licensed technology sold proprietary equipment australian brazilian japanese companies joint ventures argentina south africa note 20selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2001 2002 thousands except per share amounts earnings per share calculated quarterly basis amounts may total calculated fullyear earnings per share note 21subsequent events january 9 2003 announced completion acquisition scherer healthcare inc purchase price net cash acquired 264 million cash scherer operates two business lines consumer healthcare products ii waste management services focuses primarily containment control collection processing sharpedged medical waste scherer’s reusable sharps programs marketed bio systems subsidiaries 10 northeastern midatlantic states plus district columbia concurrent closing scherer healthcare transaction announced entered voluntary assurance agreements commonwealth massachusetts state connecticut conclude review proposed merger scherer pursuant substantially identical agreements became effective upon closing merger agreed sell medical waste transfer station haverhill massachusetts acquired scherer addition agreed continue provide access transfer disposal facilities certain new england based medical waste collectors provide notice attorneys general massachusetts connecticut certain future acquisitions also january 2003 repurchased total 91 million principal amount 12 38 senior subordinated notes due 2009 repurchases made prevailing market prices privately negotiated transactions two note holders connection repurchases paid premium approximately 14 million addition principal amount notes recorded 02 million accelerated amortization financing fees associated senior subordinated notes expenses recorded quarter ended march 31 2003 note 22condensed consolidating financial statements payments senior subordinated notes unconditionally guaranteed jointly severally whollyowned domestic subsidiaries include bridgeview inc ecco micromed industries inc wsi certain subsidiaries insignificant assets operations collectively “guarantors” financial information concerning guarantors years ended december 31 2002 2001 2000 presented purposes complying reporting requirements guarantor subsidiaries financial information concerning guarantors presented condensed consolidating financial statements since company minimal independent operations guarantees full unconditional joint several guarantor financial statements presented management believe financial statements material investors condensed consolidating balance sheet december 31 2002 condensed consolidating balance sheet december 31 2001 condensed consolidating statement income year ended december 31 2002 condensed consolidating statement income year ended december 31 2001 condensed consolidating statement income year ended december 31 2000 condensed consolidating statement cash flows year ended december 31 2002 condensed consolidating statement cash flows year ended december 31 2001 condensed consolidating statement cash flows year ended december 31 2000 stericycle inc subsidiaries schedule iivaluation allowance accounts thousands 1 amounts consist primarily costs assumed acquired companies recorded prior date acquisition item 9item 8 financial statements supplemental data report independent public auditors board directors stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2002 2003 related consolidated statements income changes shareholders’ equity cash flows three years period ended december 31 2003 audits also included financial statement schedule listed index items 15a financial statements schedule responsibility company’s management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2002 2003 consolidated results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 7 financial statements year ended december 31 2001 company changed method accounting derivatives discussed note 8 financial statements year ended december 31 2002 company changed method accounting goodwill ernst young llp chicago illinois february 9 2004 stericycle inc subsidiaries consolidated balance sheets thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements income thousands except per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes shareholders’ equity years ended december 31 2001 2002 2003 accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 2003 unless context requires otherwise “we” “us” “our” refers stericycle inc subsidiaries consolidated basis note 1description business incorporated march 1989 presently serve approximately 301000 customers throughout united states puerto rico canada mexico integrated medical waste management network use network provide compliance services including regulated medical waste collection transportation treatment services customers related training education programs consulting services also sell ancillary supplies also expanding international markets joint ventures licensing proprietary technology selling associated equipment medical waste treatment technologies include proprietary electrothermaldeactivation system “etd” well traditional methods autoclaving incineration note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc wholly owned subsidiaries well 64 ownership medam sa de cv mexican company 675 common stock ownership 3ci complete compliance corporation significant intercompany accounts transactions eliminated addition 375 ownership medam ba srl argentine company 265 ownership evertrade medical waste pty ltd south african company accounted using equity method minority interest expense related majority owned subsidiaries equity interest income loss unconsolidated subsidiaries included income expense revenue recognition recognize revenue time medical waste collection revenue costs contracts supply proprietary treatment equipment accounted percentage completion method whereby income recognized based estimated stage completion individual contract using costtocost method payments received advance deferred recognized services provided cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows buildings improvement 3 30 years machinery equipment 3 10 years transportation equipment 3 5 years office equipment furniture 3 10 years software 3 7 years year ended december 31 2002 recorded noncash writedown idled incinerator equipment chandler arizona st louis missouri facilities 25 million 04 million related spare parts year ended december 31 2001 recorded noncash writedown idled treatment equipment majorityowned subsidiary 3ci complete compliance corporation inc ‘3ci’ 33 million depreciation expense years ended december 31 2001 2002 2003 114 million 130 million 154 million respectively goodwill intangibles goodwill acquisitions completed prior june 30 2001 amortized using straightline method 25 years except goodwill related acquisition medical waste business browningferris industries inc “bfi acquisition” amortized 40 years amortization expense 2001 related goodwill approximately 116 million effective january 1 2002 adopted fas 142 accordingly goodwill indefinite lived intangibles longer amortized subject annual impairment test according fas 142 intangible assets continue amortized useful lives determined customer relationships useful life 40 years noncompete intangibles useful lives 5 years determined permits indefinite lives thus amortized income taxes deferred tax liabilities assets determined based differences financial statement tax basis assets liabilities using enacted tax rates effect year differences expected reverse accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected andor account referred third party collection agency financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt fair values financial instruments materially different carrying values except senior subordinated notes valued open market approximately 566 million 111 509 million carrying value december 31 2003 financial instruments potentially subject us concentrations credit risk consist principally account receivable credit risk trade receivables minimized result large size customer base single customer represents greater 2 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses contracts loss positions losses recorded known estimatable losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits accrued auto workers’ compensation insurance claims estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates derivative instruments effective january 1 2001 adopted statement financial accounting standards 133 “accounting derivative instruments hedging activity” fas 133 fas 133 provides comprehensive consistent standards recognition measurement derivative hedging activities requires derivatives recorded consolidated balance sheets fair value establishes criteria hedges changes fair value assets liabilities firm commitments hedges variable cash flows forecasted transactions hedges foreign currency exposures net investments foreign operations changes fair value derivatives meet criteria hedges would recognized consolidated statement operations initial adoption fas 133 material impact us upon termination interest rate agreements resulting gain loss recognized shorter remaining original term hedging instrument remaining life underlying debt obligation stockbased compensation december 31 2003 stockbased compensation plans described fully note 13 elected follow accounting principles board opinion 25 “accounting stock issued employees” “apb 25” related interpretations accounting employee stock options using intrinsic value method alternative fair value accounting method provided statement financial accounting standards 123 “accounting stockbased compensation” “fas 123” requires use option valuation models developed use valuing employee stock options apb 25 exercise price employee stock options equals market price underlying stock date grant compensation expense recognized following table illustrates effect net income earnings per share applied fair value recognition fas 123 stockbased employee compensation foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated current exchange rates income statement accounts translated average rates period related translation adjustments reported component comprehensive income loss directly equity common stock close business may 31 2002 recorded 2for1 stock split stock split form stock dividend one share payable may 31 2002 share common stock outstanding may 16 2002 share earnings per share information financial statements reported postsplit basis reclassifications certain amounts 2002 financial statements reclassified conform 2003 presentation new accounting standards january 2003 fasb issued interpretation 46 “consolidation variable interest entities interpretation accounting research bulletin arb 51” “interpretation” interpretation introduces new consolidation model determines control consolidation based potential variability gains losses entity evaluated consolidation interpretation applies later end first reporting period ending march 15 2004 believe adoption interpretation material impact consolidated financial statements may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” statement establishes standards issuer classifies measures certain financial instruments characterisitics liabilities equity requires issuer classify financial instrument within scope liability asset circumstances standard effective financial instruments entered modified may 31 2003 instruments beginning first interim financial reporting period beginning june 15 2003 impact statement consolidated financial statements note 3income taxes december 31 2003 net operating loss carry forwards federal income tax purposes fully utilized excluding net operating loss carry forwards related 3ci foreign tax credit approximately 15 million begin expire beginning 2004 significant components income tax expense years ended december 31 follows thousands reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 follows cash payments income taxes 20 million 2001 32 million 2002 167 million 2003 deferred tax liabilities assets december 31 follows thousands 3ci majority owned subsidiary net operating loss carryforwards federal state purposes 106 million beginning expire 2004 stericycle net operating loss carryforwards state purposes 66 million expire 2018 note 4acquisitions year ended december 31 2003 completed acquisition four domestic medical waste management businesses canadian subsidiary completed one acquisition majority owned subsidiary 3ci completed one acquisition addition completed acquisition software company individual acquisition significant operations january completed acquisition reverse subsidiary merger common preferred stock scherer healthcare inc operated two business lines consumer healthcare products ii waste management services latter focused containment control collection processing sharpedged medical waste scherer’s reusable sharps programs marketed biosystems subsidiaries 10 northeastern midatlantic states addition january completed acquisition selected assets kuglen services ltd llp operated texas june completed acquisition selected assets environmental management group inc operated ohio kentucky also june 3ci acquired selected assets pmt usa inc dba air sea environmental operated southeast texas september completed acquisition selected assets nawa medical disposal llc operated western texas november whollyowned canadian subsidiary completed acquisition selected assets enviromed canada inc operated northern ontario december 2003 acquired substantially assets pharmacy software solutions inc “pssi” pssi engaged business designing developing enhancing selling marketing distributing maintaining supporting software programs used pharmaceutical returns retail hospital pharmacies pharmaceutical companies aggregate net purchase price acquisitions 2003 approximately 374 million approximately 372 million paid cash 02 million paid issuance unregistered shares common stock year ended december 31 2002 completed acquisition nine domestic medical waste management businesses canadian mexican subsidiaries completed one acquisition individual acquisition significant operations december acquired stock micromed industries inc substantially operating assets three related companies operated florida georgia south carolina north carolina october acquired stock bridgeview inc operated principally pennsylvania purchased customer contracts selected assets enviromed inc operated south carolina july purchased customer contracts selected assets sanitec kentucky llc operated kentucky june purchased customer contracts selected assets biowaste industries central florida inc operated florida march acquired stock biooxidation services inc operated pennsylvania new jersey several states customer contracts selected assets bmw medtech west virginia inc operated west virginia customer contracts selected assets amedco inc operated texas addition march mexican subsidiary medam sa de cv “medam” completed acquisition majority stock ecotermica de oriente sa de cv january purchased customer contracts selected assets bio environmental services inc operated west virginia canadian subsidiary stericycle inc formerly “medtech environmental limited” acquired stock pyroval inc operated province quebec addition acquired certain profit sharing rights put rights three stockholders 3ci complete compliance corporation settlement agreement originally entered 3ci january 1996 december 2002 exercised warrants purchase 541286 shares common stock 037 per share connection transactions increased common stock ownership 6578504 shares 675 outstanding common stock aggregate purchase price acquisitions 2002 approximately 559 million approximately 336 million paid cash 173 million paid issuance shares common stock 50 million paid issuance promissory notes year ended december 31 2001 completed acquisition four domestic medical waste management businesses mexican subsidiary completed one acquisition april purchased customer contracts selected assets trans med ltd operated new york new jersey connecticut also customer contracts selected assets biosafe america inc operated florida july acquired stock american medical disposal inc operated oklahoma nebraska several states december acquired substantially assets integrated environmental systems inc operated california nevada august mexican subsidiary acquired stock tecnicas medio ambientales winco sa de cv based mexico city aggregate purchase price acquisitions approximately 233 million approximately 170 million paid cash 63 million paid issuance unregistered shares common pursuant agreement subsequently registered sale financial reporting purposes acquisition transactions accounted using purchase method accounting total purchase price 2001 2002 2003 233 million 559 million 374 million respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market value date acquisition total purchase price acquisitions completed 2001 2002 2003 includes value 274886 500269 1906 shares respectively common stock issued sellers certain cases purchase price subject downwards adjustment revenues customer contracts acquired failed reach certain specified levels excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill recorded amounts 354 million 222 million years 2002 2003 respectively results operations acquired businesses included consolidated statements income date acquisition note 5long term debt longterm debt consists following december 31 payments due longterm debt excluding capital lease obligations five years subsequent december 31 2003 follows paid interest 338 million 256 million 136 million fiscal years ended december 31 2001 2002 2003 respectively property capital leases included property plant equipment accompanying consolidated balance sheet follows december 31 amortization related capital leases included depreciation expense minimum future lease payments capital leases follows thousands senior credit facility november 1999 established senior secured credit facility credit agreement various financial institutions facility consisted sixyear revolving credit facility 500 million sixyear term loan principal amount 750 million sevenyear term b loan principal amount 1500 million october 2001 refinanced senior secured credit facility increase revolving credit component facility 800 million extend maturity september 2006 reallocate term loan components facility increasing lowerinterest term loan component 1000 million extending maturity september 2006 reducing higherinterest term b loan component 750 million extending maturity september 2007 june 2002 increased revolving credit component 800 million 1050 million january 2003 amended senior secured credit facility increase borrowing capacity 510 million reclassifying borrowings revolving credit facility term loans amended credit facility consisted 105 million revolving credit facility 1126 million term loan facility 472 million term b loan facility credit agreement amended january 2003 extended maturity revolving credit component term loan component september 2007 extended maturity term b component september 2008 term loans repayable quarterly installments last business day march june september december beginning 2003 required principal repayments term loan component 50 million quarterly payment date june 2007 final payment outstanding principal balance upon maturity september 2007 required principal payments term b loan component 02 million quarterly payment date june 2008 final payment outstanding balance upon maturity september 2008 december 31 2003 1097 million borrowings outstanding senior secured credit facility 200 million consisted borrowings revolving credit component 624 million term component 273 million term b component addition december 31 2003 126 million stand letters credit issued revolving credit component refinancing senior secured credit facility october 2001 reduced interest rates charged reducing applicable margin added relevant interest rate borrowings bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference “base rate” higher reference rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement applicable margin based upon leverage ratio december 31 2003 margin interest rates borrowings revolving credit facility term component zero base rate loans 125 libor loans margin interest rates borrowings term b component 075 base rate loans 225 libor loans december 31 2003 average rate interest revolving credit facility 242 per annum average rate interest term loan 240 per annum rate interest term b loan 342 per annum senior secured credit facility secured lien substantially assets subsidiaries except assets 3ci complete compliance corporation “3ci” pledge stock whollyowned domestic subsidiaries stock 3ci mexican subsidiary medam sa de cv 65 stock canadian subsidiary stericycle inc formerly “medtech environmental limited” credit agreement requires us comply various financial reporting covenants restrictions including restriction dividend payments senior subordinated notes senior subordinated notes mature november 15 2009 bear fixed rate interest 12 38 per annum payable semiannually arrears may 15 november 15 notes general unsecured obligations subordinated payment debt senior secured credit facility december 2001 redeemed senior subordinated notes aggregate principal amount 438 million trust indenture governing notes right one occasions november 15 2002 redeem 35 notes redemption price 112375 aggregate principal amount notes redeemed plus accrued interest redemption date using net cash proceeds one equity offerings exercised right november 2001 using net proceeds public offering 2050000 shares common stock completed earlier month redeem maximum permissible amount notes 2002 2003 repurchased 126 million 178 million respectively notes private transactions trust indenture permits may redeem additional senior subordinated notes prior november 15 2004 may redeem portion outstanding notes redemption price equal following percentages aggregate principal amount notes redeemed plus accrued interest redemption date certain circumstances specified trust indenture required use portion net proceeds asset sales issuance stock offer redeem outstanding notes pro rata basis redemption price 100 aggregate principal amount redeemed plus accrued interest redemption date otherwise required make mandatory redemptions respect notes senior subordinated notes guaranteed domestic subsidiaries except 3ci trust indenture requires us comply various financial reporting covenants restrictions connection october 2001 refinancing senior secured credit facility redemption senior subordinated notes recorded debtrefinancing expenses extinguishment expenses year ended december 31 2001 included 10 million refinancing fees 54 million redemption premium expenses incurred 44 million accelerated amortization financing fees associated senior credit facility 14 million accelerated amortization financing fees associated senior subordinated notes result 2002 repurchases senior subordinated notes incurred 18 million redemption premium expenses 04 million accelerated amortization financing fees associated senior subordinated notes result 2003 repurchases senior subordinated notes incurred 28 million redemption premium expenses 05 million accelerated amortization financing fees associated senior subordinated notes connection june 2002 bank credit facility amendment paid 02 million financing fees note 6accrued liabilities accrued liabilities december 31 consist following items thousands note 7derivative instruments 2001 entered interest rate swap agreements effectively converted portion floatingrate debt fixedrate basis thus reducing impact interest rate changes future interest expense interest rate swap agreement covering 1000 million principal 523 fixed interest rate expired january 2003 interest rate swap agreement covering 250 million principal 519 fixed interest rate expired february 2003 interest rate swap agreements entered 2003 accordingly none outstanding floatingrate debt designated hedged items interest rate swap agreements december 31 2003 adoption fas 133 january 1 2001 resulted 02 million effect change accounting principle recorded comprehensive loss years ended december 31 2001 2002 recognized net loss 04 million net gain 04 million respectively related ineffective portion hedging instruments interest expense 2003 gain loss related ineffective portion hedging instruments interest expense activity related accumulated loss derivative instruments follows thousands note 8goodwill intangible assets june 2001 financial accounting standards board issued statements financial accounting standards 141 business combinations 142 goodwill intangible assets new rules goodwill indefinite lived intangibles longer amortized subject annual impairment test frequent testing circumstances indicate may impaired 2002 2003 performed annual impairment evaluations determined impairment december 31 2003 110 million indefinite lived intangibles consist environmental permits performed annual impairment test determined impairment two geographical reporting segments united states foreign countries goodwill changes carrying amount goodwill years ended december 31 2002 2003 follows thousands 2003 reduced net operating loss deferred tax valuation allowance originally established part purchase accounting 3ci canadian subsidiary thus reducing goodwill 46 million pro forma impact eliminating goodwill amortization year ended december 31 2001 follows according fas 142 intangible assets continue amortized useful lives year ended december 31 2003 recorded fair value intangibles acquired connection acquisitions scherer healthcare inc kuglen services ltd llp environmental management group nawa enviromed canada 3ci also recorded fair value intangibles acquired connection acquisition selected assets pmt usa inc assigned 73 million customer relationships amortization period 40 years 15 million trade names amortization period 40 years 18 million facility environmental permit indefinite life 10 million noncompete amortization period 5 years addition acquired rights exclusive marketing license 18 million amortized fouryear term license agreement year ended december 31 2002 recorded fair value intangibles acquired acquisitions american medical disposal inc wholly owned subsidiary environmental health services inc bio environmental services inc pyroval inc amedco inc biowaste industries central florida inc ecotermica de oriente sa de cv enviromed inc bridgeview inc micro med industries inc assigned 90 million customer relationships amortization period 40 years assigned 92 million facility environmental permits indefinite life also noncompete agreements amortized term noncompete agreement generally five years december 31 2003 value amortizing intangible assets follows thousands year ended december 31 2002 2003 aggregate amortization expense 20 19 million respectively estimated amortization expense thousands next five years follows years ended december 31 note 9lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next twelve years leases properties contain renewal provisions rent expense 2001 2002 2003 122 million 148 million 182 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2003 next five years aggregate follows note 10acquisition related expenses 2001 2002 2003 incurred acquisitionrelated expenses 04 million 04 million 07 million respectively expenses primarily related severence relabeling equipment 2001 2002 2003 paid approximately 08 million 02 million 01 million acquisition related expenses respectively note 11net income per common share following table sets forth computation basic diluted net income per share additional information regarding outstanding employee stock options outstanding warrants see note 13 2001 2002 2003 options warrants purchase 101460 shares 70752 shares 13623 shares respectively exercise prices 22512367 22913648 35054984 respectively included computation diluted earnings per share effect would antidilutive note 12comprehensive income components accumulated comprehensive income follows note 13stock options warrants stock options 2000 board directors approved 2000 nonstatutory stock option plan “2000 plan” total provides granting 3500000 shares common stock form stock options employees officers directors exercise price options granted 2000 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods five years date grant 1997 board directors shareholders approved 1997 stock option plan “1997 plan” provides granting 3000000 shares common stock form stock options selected officers directors employees exercise price options granted 1997 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods five years date grant 1995 board directors shareholders approved incentive compensation plan “1995 plan” amended restated 1996 provides granting 3000000 shares common stock form stock options restricted stock employees officers directors consultants exercise price options granted 1995 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods four years date grant june 1996 board directors adopted july 1996 shareholders approved directors stock option plan “directors plan” directors plan amended authorizes stock options total 1170000 shares common stock granted outside directors option grants made board directors times amounts board determines taking account guidelines board may adopt purpose exercise price options granted directors plan must least equal fair market value common stock date grant options granted prior april 1 1998 vested 16 consecutive quarterly installments options granted march 31 1998 vest 12 equal monthly installments shares company’s common stock reserved issuance upon exercise outstanding options warrants shares include shares available option grant shares granted options yet exercised reserved follows december 31 2003 summary stock option information follows options outstanding exercisable december 31 2003 price range elected follow accounting principles board opinion 25 “accounting stock issued employees” apb25” related interpretations accounting employee stock options discussed alternative fair value accounting provided statement financial accounting standards 123 “accounting stockbased compensation” “fas 123” requires use option valuation models developed use valuing employee stock options apb 25 exercise price employee stock options equals market price underlying stock date grant compensation expense recognized pro forma information regarding net income net income per share required fas 123 accounted employee stock options granted subsequent december 31 1994 fair value method statement options granted valued using blackscholes optionpricing model following assumptions used 2001 2002 2003 expected volatility 062 2001 060 2002 055 2003 riskfree interest rates ranging 374 519 2001 301 45 2002 118 3745 2003 dividend yield 0 weightedaverage expected life option 48 months weightedaverage fair values options granted 2001 2002 2003 1277 per share 1293 per share 1551 per share respectively option value models require input highly subjective assumptions employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate management’s opinion existing method necessarily provide reliable single measure fair value employee stock options purposes pro forma disclosures estimated fair value options amortized expense optionvesting period pro forma information follows thousands except per share information warrants connection subordinated loan agreement six directors granted fiveyear warrants purchase shares common stock exercisable time first anniversary grant date december 1998 january 1999 lenders granted warrants purchase aggregate 37940 shares common stock 725 per share 87102 shares common stock 775 per share 118184 shares common stock 825 per share 2001 warrants purchase 13796 shares 725 per share 38712 shares 775 per share 36364 shares 825 per share exercised 2002 warrants purchase 3450 shares 725 per share 9678 shares 775 per share 9092 shares 825 per share exercised 2003 warrants purchase 20694 shares 725 per share 38712 shares 775 per share 72728 shares 825 per share exercised december 31 2003 none warrants purchase shares remained outstanding june 2000 connection acquisition additional 15 interest medam issued warrants purchase 88748 shares common stock warrants 62256 shares immediately exercisable remaining 26492 shares become exercisable five years exercise price warrants 875 per share 2001 warrants purchase 65190 shares exercised 2003 warrants purchase 12966 shares exercised december 31 2003 warrants purchase 10592 shares remained outstanding exercisable note 14series convertible preferred stock november 1999 issued sold 75000 shares series convertible preferred stock 1000 per share 750 million aggregate cash less various fees expenses used net proceeds sale finance portion purchase price bfi acquisition holders series convertible preferred stock converted 29595 shares 3611328 shares common stock 2001 16079 shares 2000000 shares common stock 2002 6527 shares 812000 shares common stock 2003 december 31 2002 22799 shares series convertible preferred stock issued outstanding prior june 1 2002 series convertible preferred stock bore preferential dividends payable additional shares series convertible preferred stock rate 3375 per annum date issuance dividends accrued daily accumulated annually anniversary initial issuance july 2002 entered waiver amendment agreement holders series convertible preferred stock pursuant agreed among things 3375 paymentinkind dividends ceased accrue may 31 2002 holders series convertible preferred stock remain entitled share pro rata holders common stock basis number shares common stock shares series convertible preferred stock convertible dividends distributions upon liquidation dissolution winding company holders series convertible preferred stock entitled paid distribution payment made holders common stock greater 1000 per share plus accumulated preferential dividends accrued unpaid dividends yet accumulated “liquidation value” amount would payable series convertible preferred stock converted common stock holders series convertible preferred stock entitled vote holders common stock single class matter submitted vote stockholders share series convertible preferred stock number votes equal number votes possessed common stock series convertible preferred stock convertible amended july 2002 corporate governance agreement entered initial investors provides long two groups initial investors affiliates continues hold 25 group’s initial “underlying common stock” ie shares common stock issuable previously issued upon conversion group’s initial series convertible preferred stock group right voting separate class elect one director board directors group ceases hold 25 initial underlying common stock group’s right elect one director terminate two groups initial investors consist investment funds associated bain capital llc investment funds associated madison dearborn partners llc reason conversion total 10451 shares preferred stock 1300000 shares common stock january 2004 concurrent sale common stock group ceased hold 25 initial underlying common stock right elect one director terminated holder series convertible preferred stock may time convert part holder’s series convertible preferred stock shares common stock price holder may convert 875 per share subject adjustment certain circumstances beginning may 2002 closing price common stock exceeds 150 conversion price 20 consecutive trading days may elect redeem part outstanding shares series convertible preferred stock redemption price equal liquidation value date redemption subject holder’s right convert shares common stock prior redemption date time change control certain circumstances occurrence bankruptcy event holder series convertible preferred stock may require us redeem part holder’s shares price equal liquidation value per share stock purchase agreement initial investors agreed various covenants restrictions covenants restrictions include grant preemptive rights holders series convertible preferred stock certain circumstances agreement provide specified financial business information entered registration rights agreement initial investors requiring us certain circumstances register portion shares series convertible preferred stock securities act amended july 2002 two groups initial investors right two demand registrations may shelf registrations one may firm commitment underwritten public offering may shelf registration agreement implements right initial investors elect directors board directors restricts right initial investors transfer shares series convertible preferred stock restricting ability engage certain transactions example acquisitive mergers involving specified amount consideration without approval holders majority underlying common stock note 15employee benefit plan 401k defined contribution retirement savings plan covering substantially employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee maximum 1500 per annum contributions years ended december 31 2001 2002 2003 approximately 09 million 10 million 11 million respectively note 16employee stock purchase plan october 2000 board directors adopted stericycle inc employee stock purchase plan “espp” effective july 1 2001 stockholders approved espp may 2001 espp authorizes 300000 shares common stock purchased employees 15 discount market price stock payroll deductions two sixmonth offerings year employee elects participate offering granted option first day offering number shares equal employee’s payroll deductions espp offering period may exceed 5000 divided option price per share option price per share lower 85 closing price share common stock first trading day offering period 85 closing price last trading day offering period every employee completed one year’s employment first day offering fulltime employee parttime employee customarily works least 20 hours per week eligible participate offering 2002 2003 22278 shares 22012 shares respectively issued espp note 17nonconsolidating joint ventures investment joint venture medam ba srl argentine corporation formed utilize etd technology treat medical waste primarily buenos aires market december 31 2002 2003 investment joint venture 25 million 28 million respectively included longterm assets also invested joint venture evertrade medical waste pty ltd formed service medical waste market south africa using etd technology joint venture company headquartered johannesburg south africa 2001 recorded 14 million revenues related sale equipment evertrade medical waste pty ltd licensing consulting agreements december 31 2002 2003 total receivables 23 million 20 million respectively joint venture related agreements included current assets addition investment joint venture december 31 2002 2003 23 million 12 million respectively included longterm assets also joint venture evertrade medical waste manufacturing limited formed manufacture reusable tubs south africa december 31 2002 2003 loans 51 million respectively joint venture included notes receivable 2003 recorded 17 million minority interest expense related joint ventures recorded income expense note 18legal proceedings operate highly regulated industry exposed regulatory inquiries investigations time government authorities initiate investigations variety reasons involved several legal administrative proceedings settled otherwise resolved terms acceptable us without material adverse effect business august 2002 announced reached agreement principle settle antitrust investigation arizona attorney general’s office relating december 1997 sale purchase medical waste assets utah arizona bfi subsequent failure provide treatment services certain thirdparty haulers medical waste treatment facilities arizona utah also announced currently settlement discussions utah attorney general’s office connection antitrust investigation relating issues september 2002 entered consent decree implementing terms settlement arizona attorney general’s office previously announced consent decree required pay total 03 million civil penalties attorneys’ fees quarterly installments threeyear period initial payment 01 million also required provide 50000 pounds per month treatment services thirdparty haulers chandler arizona treatment facility fiveyear period commercially competitive prices addition required twoyear period rebate 25 amounts billed collected two thirdparty haulers whose complaints prompted initial investigation consent decree expressly stated admit truth substantive allegations underlying complaint arizona attorney general’s office january 2003 reached definitive settlement antitrust investigation utah attorney general’s office relating issues terms consent decree incorporating settlement agreed pay total 06 million attorney general’s office threeyear period also agreed make certain operational changes utah enhance competition including providing incineration treatment services third party haulers salt lake city treatment facility consent decree expressly stated admit violated utah federal antitrust laws january 2003 sued federal court arizona private plaintiff claiming anticompetitive conduct arizona colorado utah november 1997 present seeking certification lawsuit class action behalf customers bfi threestate area period question next three months four similar suits filed federal court utah arizona colorado new mexico february may 2003 two additional suits filed federal court utah arizona claiming substantially anticompetitive conduct seeking class action certification december 2003 eighth suit filed federal court utah claiming monopolistic anticompetitive conduct california prior four years seeking certification suit class action behalf california customers fouryear period eight suits consolidated judge federal court utah first five suits consolidated one consolidated class action complaint next two suits consolidated discovery purposes eighth suit coordinated discovery purposes believe none eight suits merit four officers directors parties suit filed state court louisiana july 2002 shareholder majorityowned subsidiary 3ci suit filed behalf minority shareholders 3ci derivatively behalf 3ci alleges among claims four directors 3ci serving designees also officers directors unjustly enriched stericycle expense 3ci shareholders plaintiff seeks among relief damages order requiring buyout 3ci’s minority shareholders october 2003 plaintiffs filed amended complaint adding 3ci derivative defendant suit still early stage parties 3ci currently conducting preliminary discovery believe plaintiff’s claims without merit may 2003 3ci direction independent directors filed declaratory judgment action state court texas resolve disagreement us proper rate conversion shares 3ci’s preferred stock held whollyowned subsidiary waste systems inc “wsi” august 2003 action dismissed court procedural grounds 3ci refiled action new suit september 2003 wsi filed action judicial interpretation conversion provisions 3ci’s preferred stock following hearing wsi’s action abated court november 2003 leaving 3ci’s suit go forward october 2003 plaintiff louisiana lawsuit others answered intervened 3ci’s texas lawsuit naming us thirdparty defendant making substantially claims alleged louisiana lawsuit wsi denied claims believe without merit september 2003 full board 3ci appointed special committee consisting 3ci’s three independent directors act 3ci’s behalf respect dispute us wsi regarding conversion rate 3ci’s preferred stock january 2004 full board expanded special committee’s authority include investigation claims plaintiff louisiana lawsuit thirdparty plaintiffs texas lawsuit act 3ci’s behalf respect lawsuits note 19products services geographic information fasb statement 131 disclosures segments enterprise related information requires segment information reported based information utilized executive management internally assess performance make operating decisions determining reportable operating segments management determined appropriate aggregate operating segments based consideration following criteria • services provided • types customers serviced • types medical waste collection transportation treatment methods utilized • operate regulatory environment • employ sales marketing techniques activities summary revenue information products services follows summary financial information geographic area follows revenues attributed countries based location customers 2001 2002 2003 provided medical waste management services customers canada mexico licensed technology sold proprietary equipment australian brazilian japanese companies joint ventures argentina south africa note 20selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2002 2003 thousands except per share amounts fourth quarter 2002 includes 29 million 18 million tax noncash write idled incinerator equipment related spare parts earnings per share calculated quarterly basis amounts may total calculated fullyear earnings per share note 21condensed consolidating financial statements payments senior subordinated notes unconditionally guaranteed jointly severally certain 100 owned domestic subsidiaries collectively “guarantors” financial information concerning guarantors years ended december 31 2003 2002 2001 presented purposes complying reporting requirements guarantor subsidiaries financial information concerning guarantors presented condensed consolidating financial statements since company minimal independent operations guarantees full unconditional joint several guarantor financial statements presented management believe financial statements material investors condensed consolidating balance sheet december 31 2003 condensed consolidating balance sheet december 31 2002 condensed consolidating statement income year ended december 31 2003 condensed consolidating statement income year ended december 31 2002 condensed consolidating statement income year ended december 31 2001 condensed consolidating statement cash flows year ended december 31 2003 condensed consolidating statement cash flows year ended december 31 2002 condensed consolidating statement cash flows year ended december 31 2001 stericycle inc subsidiaries schedule iivaluation allowance accounts thousands 1 amounts consist primarily costs assumed acquired companies recorded prior date acquisition item 9item 8 consolidated financial statements supplemental data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting internal control financial reporting defined rules 13a15f securities exchange act 1934 process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management assessed effectiveness company’s internal control financial reporting december 31 2004 making assessment management used criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework management excluded one entity assessment based assessment criteria management concluded company maintained effective internal control financial reporting december 31 2004 company’s audited consolidated financial statements include results consolidated operations united kingdom operations began june 10 2004 company’s united kingdom subsidiary stericycle international ltd formed purpose acquiring stock white rose environmental ltd management’s assessment effectiveness company’s internal control financial reporting december 31 2004 include assessment internal control financial reporting company’s consolidated united kingdom operations december 31 2004 total assets net assets company’s consolidated united kingdom operations 866 million 294 million respectively revenues net income seven months ended december 31 2004 350 million 25 million respectively amounts converted using applicable exchange rates december 31 2004 company’s independent auditors issued attestation report management’s assessment company’s internal control financial reporting report appears page 34 stericycle inc lake forest il march 7 2005 report independent registered public accounting firm internal control financial reporting board directors shareholders stericycle inc audited management’s assessment included accompanying management’s report internal control financial reporting stericycle inc maintained effective internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria stericycle inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls company’s united kingdom operations began june 10 2004 company’s united kingdom subsidiary stericycle international ltd formed purpose acquiring stock white rose environmental ltd company’s united kingdom operations included 2004 consolidated financial statements stericycle inc constituted 866 million 294 million total net assets respectively december 31 2004 350 million 25 million revenues net income respectively seven months ended december 31 2004 audit internal control financial reporting stericycle inc also include evaluation internal control financial reporting united kingdom subsidiary opinion management’s assessment stericycle inc maintained effective internal control financial reporting december 31 2004 fairly stated material respects based coso criteria also opinion stericycle inc maintained material respects effective internal control financial reporting december 31 2004 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets stericycle inc december 31 2003 2004 related consolidated statements income changes shareholders’ equity cash flows three years period ended december 31 2004 report dated march 7 2005 expressed unqualified opinion thereon ernst young llp chicago illinois march 7 2005 report independent registered public accounting firm board directors shareholders stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2003 2004 related consolidated statements income changes shareholders’ equity cash flows three years period ended december 31 2004 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2003 2004 consolidated results operations cash flows three years period ended december 31 2004 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness stericycle inc’s internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 7 2005 expressed unqualified opinion thereon ernst young llp chicago illinois march 7 2005 stericycle inc subsidiaries consolidated balance sheets thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements income thousands except per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes shareholders’ equity years ended december 31 2002 2003 2004 thousands accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 2004 unless context requires otherwise “we” “us” “our” refers stericycle inc subsidiaries consolidated basis note 1description business incorporated march 1989 presently serve approximately 317000 customers throughout united states puerto rico canada mexico united kingdom integrated medical waste management network use network provide regulated medical waste collection transportation treatment compliance services customers also sell ancillary supplies expanded international markets acquisitions joint ventures licensing proprietary technology selling associated equipment medical waste treatment technologies include proprietary electrothermaldeactivation system “etd” well traditional methods autoclaving incineration note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc wholly owned subsidiaries well 64 ownership medam sa de cv mexican company 675 common stock ownership 3ci complete compliance corporation significant intercompany accounts transactions eliminated addition 375 ownership medam ba srl argentine company accounted using equity method minority interest expense related majority owned subsidiaries equity interest income loss unconsolidated subsidiaries included income expense revenue recognition recognize revenue medical waste services time medical waste collection revenue costs contracts supply proprietary etd treatment equipment recognized based shipment equipment services provided individual contract routinely review total estimated costs shipments complete contract revise revenues estimated gross margin contract necessary payments received advance deferred recognized services provided royalty revenues calculated based measurements specified technology contract revenues recognized end reporting period activity measured completed revenues product sales recognized time goods shipped ordering customer contracts loss position losses would recorded known estimable contracts go loss position payments received advance deferred recognized services provided cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method lesser lease term estimated useful lives assets follows year ended december 31 2004 recorded noncash writedown idled incinerator equipment baltimore maryland terrell texas facility 12 million year ended december 31 2002 recorded noncash writedown idled incinerator equipment chandler arizona st louis missouri facilities 25 million 04 million related spare parts 2004 evaluated estimate useful life reusable bio system containers performing durability studies based studies determined useful life containers actually longer current life used calculated depreciation 2004 adjusted total useful lives 3 years 17 years containers purchased 2003 2004 addition adjusted useful lives containers acquired scherer healthcare acquisition january 2003 total 10 years date original purchase impact change estimated useful life immaterial results 2004 goodwill intangibles effective january 1 2002 adopted fas 142 accordingly goodwill indefinite lived intangibles longer amortized subject annual impairment test according fas 142 intangible assets continue amortized useful lives determined customer relationship intangible assets useful lives 20 40 years based upon type customer noncompete intangibles useful lives one five years tradename intangibles useful lives 20 40 years software technology intangible useful life five years determined permits indefinite lives thus amortized income taxes deferred income tax liabilities assets determined based differences financial statement tax basis assets liabilities using enacted tax rates effect year differences expected reverse accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable charged allowance doubtful accounts determined receivable collected andor account referred third party collection agency financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable forward contracts longterm debt fair values financial instruments materially different carrying values financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater 2 total accounts receivable perform ongoing credit evaluations customers maintain allowances potential credit losses contracts loss positions losses recorded known estimable losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits accrued auto workers’ compensation insurance claims estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates derivative instruments entered four forward contracts sale sterling gbp hedging instruments intercompany loan company subsidiary united kingdom stericycle international ltd subsidiary borrowed funds purchase white rose forward contracts align anticipated repayment schedule loan last contract expires july 2009 reporting period mark forward contracts fair value related adjustment recorded income expense amount generally offset currency adjustment intercompany receivable 2004 cost forward contracts recognized immaterial net income total cost forward contracts entire fiveyear period approximately 10 million tax stockbased compensation december 31 2004 stockbased compensation plans described fully note 12 elected follow accounting principles board opinion 25 “accounting stock issued employees” “apb 25” related interpretations accounting employee stock options apb 25 exercise price employee fixed stock options equals market price underlying stock date grant compensation expense recognized following table illustrates effect net income earnings per share applied fair value recognition fas 123 stockbased employee compensation thousands except per share information foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated current exchange rates income statement accounts translated average rates period related translation adjustments reported component comprehensive income loss directly equity reclassifications certain amounts 2002 2003 financial statements reclassified conform 2004 presentation new accounting standards october 2004 financial accounting standards board “fasb” issued staff position “fsp” 1092 accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004 “fsp 1092” fsp 1092 provides guidance fasb statement 109 accounting income taxes respect recording potential impact repatriation provisions american jobs creation act 2004 “jobs act” enterprises’ income tax expense deferred tax liability fsp 1092 states enterprise allowed time beyond financial reporting period enactment evaluate effect jobs act plan reinvestment repatriation foreign earnings purposes applying fasb statement 109 based upon preliminary evaluation effects repatriation provision expect apply provision december 2004 fasb issued fas 123r replaces fas 123 supersedes apb 25 fas 123r requires sharebased payments employees including grants employee stock options recognized financial statements based fair values beginning first interim annual period june 15 2005 early adoption encouraged pro forma disclosures previously permitted fas 123 longer alternative financial statement recognition required adopt fas 123r beginning july 1 2005 fas 123r must determine appropriate fair market value model used valuing sharebased payments amortization method compensation cost transition method used date adoption transition methods include modified prospective modified retroactive alternative options modified retroactive option prior periods may restated either beginning year adoption periods presented however expense amounts grants prior adoption based fas 123 fas 123r modified prospective method requires compensation expense recorded unvested stock options restricted stock beginning first quarter adoption fas 123r evaluating requirements fas 123r expect adoption fas 123r material impact consolidated statements income earnings per share yet determined method adoption determined whether adoption result amounts similar current pro forma disclosures fas 123 reason believe amounts reported result adoption materially different currently disclosed pro forma amounts december 2004 fasb issued sfas 153 exchanges nonmonetary assetsan amendment apb opinion 29 accounting nonmonetary transactions “fas 153” fas 153 eliminates exception fair value measurement nonmonetary exchanges similar productive assets paragraph 21 b apb opinion 29 accounting nonmonetary transactions replaces exception exchanges commercial substance fas 153 specifies nonmonetary exchange commercial substance future cash flows entity expected change significantly result exchange fas 153 effective fiscal periods beginning june 15 2005 required adopted us three months ended september 30 2005 currently evaluating effect adoption fas 153 consolidated statement income financial condition expect material impact note 3income taxes december 31 2004 net operating loss carry forwards us federal income tax purposes fully utilized excluding net operating loss carry forwards related 3ci foreign tax credit approximately 06 million begin expire beginning 2010 undistributed earnings foreign subsidiaries considered permanently invested therefore us deferred taxes recorded thereon cumulative amount earnings 120 million december 31 2004 practical estimate us withholding tax thereon assuming repatriation significant components income tax expense years ended december 31 follows thousands reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 follows cash payments income taxes 32 million 2002 167 million 2003 259 million 2004 deferred tax liabilities assets december 31 follows thousands 3ci majority owned subsidiary net operating loss carryforwards federal state purposes 92 million beginning expire 2006 stericycle net operating loss carryforwards state purposes 47 million expire 2018 note 4acquisitions year ended december 31 2004 completed acquisition two domestic medical waste businesses mexican subsidiary completed acquisition three medical waste businesses newly formed united kingdom subsidiary completed first acquisition individual acquisition significant operations march completed acquisition selected assets american waste industries inc operated virginia maryland north carolina july completed acquisition selected assets texas environmental services inc operated texas july mexican subsidiary medam sa de cv acquired common stock sterimed sa de cv remaining stock proterm de mexico jv sa de cv october medam acquired selected assets bioinfex servicios technologia sa de cv june international subsidiary stericycle international llc wholly owned united kingdom subsidiary completed acquisition common stock white rose environmental ltd operates united kingdom aggregate net purchase price acquisitions 2004 approximately 906 million approximately 724 million paid cash 178 million paid issuance note payable 04 million paid issuance unregistered shares common stock year ended december 31 2003 completed acquisition four domestic medical waste management businesses canadian subsidiary completed one acquisition majority owned subsidiary 3ci completed one acquisition addition completed acquisition software company individual acquisition significant operations january completed acquisition reverse subsidiary merger common preferred stock scherer healthcare inc operated two business lines consumer healthcare products ii waste management services latter focused containment control collection processing sharpedged medical waste scherer’s reusable sharps programs marketed biosystems subsidiaries 10 northeastern midatlantic states addition january completed acquisition selected assets kuglen services ltd llp operated texas june completed acquisition selected assets environmental management group inc operated ohio kentucky also june 3ci acquired selected assets pmt usa inc dba air sea environmental operated southeast texas september completed acquisition selected assets nawa medical disposal llc operated western texas november whollyowned canadian subsidiary completed acquisition selected assets enviromed canada inc operated northern ontario december 2003 acquired substantially assets pharmacy software solutions inc “pssi” pssi engaged business designing developing enhancing selling marketing distributing maintaining supporting software programs used pharmaceutical returns retail hospital pharmacies pharmaceutical companies aggregate net purchase price acquisitions 2003 approximately 374 million approximately 372 million paid cash 02 million paid issuance unregistered shares common stock year ended december 31 2002 completed acquisition nine domestic medical waste management businesses canadian mexican subsidiaries completed one acquisition individual acquisition significant operations december acquired stock micromed industries inc substantially operating assets three related companies operated florida georgia south carolina north carolina october acquired stock bridgeview inc operated principally pennsylvania purchased customer contracts selected assets enviromed inc operated south carolina july purchased customer contracts selected assets sanitec kentucky llc operated kentucky june purchased customer contracts selected assets biowaste industries central florida inc operated florida march acquired stock biooxidation services inc operated pennsylvania new jersey several states customer contracts selected assets bmw medtech west virginia inc operated west virginia customer contracts selected assets amedco inc operated texas addition march mexican subsidiary medam completed acquisition majority stock ecotermica de oriente sa de cv january purchased customer contracts selected assets bio environmental services inc operated west virginia canadian subsidiary stericycle inc formerly “medtech environmental limited” acquired stock pyroval inc operated province quebec addition acquired certain profit sharing rights put rights three stockholders 3ci settlement agreement originally entered 3ci january 1996 december 2002 exercised warrants purchase 541286 shares 3ci common stock 037 per share connection transactions increased common stock ownership 6578504 shares 675 outstanding common stock aggregate purchase price acquisitions 2002 approximately 559 million approximately 346 million paid cash 173 million paid issuance shares common stock 50 million paid issuance promissory notes financial reporting purposes acquisition transactions accounted using purchase method accounting total purchase price 2002 2003 2004 559 million 374 million 906 million respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market value date acquisition total purchase price acquisitions completed 2002 2003 2004 includes value 500269 1906 8323 shares respectively common stock issued sellers certain cases purchase price subject downwards adjustment revenues customer contracts acquired failed reach certain specified levels excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill recorded amounts 222 million 496 million years 2003 2004 respectively results operations acquired businesses included consolidated statements income date acquisition note 5long term debt longterm debt consists following december 31 payments due longterm debt excluding capital lease obligations five years subsequent december 31 2004 follows paid interest 249 million 136 million 115 million fiscal years ended december 31 2002 2003 2004 respectively property capital leases included property plant equipment accompanying consolidated balance sheet follows december 31 amortization related capital leases included depreciation expense minimum future lease payments capital leases follows thousands senior credit facility november 1999 established senior secured credit facility credit agreement various financial institutions facility consisted sixyear revolving credit facility 500 million sixyear term loan principal amount 750 million sevenyear term b loan principal amount 1500 million october 2001 refinanced senior secured credit facility increase revolving credit component facility 800 million extend maturity september 2006 reallocate term loan components facility increasing lowerinterest term loan component 1000 million extending maturity september 2006 reducing higherinterest term b loan component 750 million extending maturity september 2007 june 2002 increased revolving credit component 800 million 1050 million january 2003 amended senior secured credit facility increase borrowing capacity 510 million reclassifying borrowings revolving credit facility term loans reclassification credit facility consisted 105 million revolving credit facility 1126 million term loan facility 472 million term b loan facility march 2004 increased letter credit sublimit revolving credit facility 200 million 300 million june 2004 increased sublimit 300 million 400 million also increased amount credit agreement could request increase lenders’ loan commitments 500 million 1000 million july 2004 obtained right allocate voluntary prepayments discretion among revolving credit term loan components credit facility prepaid entire term b loan 273 million addition increased revolving credit facility 1050 million 1870 million reducing amount could request increase lenders’ loan commitments 1000 million 180 million august 2004 increased indebtedness foreign subsidiaries permitted incur 100 million 250 million november 2004 exercised right request increase lenders’ loan commitments increased revolving credit facility 1870 million 2050 million december 31 2004 senior secured credit facility consisted 2050 million revolving credit facility term loan principal amount 624 million february 2005 increased letter credit sublimit revolving credit facility 400 million 800 million credit agreement amended january 2003 extended maturity revolving credit component term loan component september 2007 extended maturity term b component september 2008 term loans repayable quarterly installments last business day march june september december beginning 2003 required principal repayments term loan component 50 million quarterly payment date june 2007 final payment outstanding principal balance upon maturity september 2007 december 31 2004 1714 million borrowings outstanding senior secured credit facility 1090 million consisted borrowings revolving credit component 624 million term loan component addition december 31 2004 309 million standby letters credit issued revolving credit component refinancing senior secured credit facility october 2001 reduced interest rates charged reducing applicable margin added relevant interest rate borrowings bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference “base rate” higher reference rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement applicable margin based upon leverage ratio december 31 2004 margin interest rates borrowings revolving credit facility term component zero base rate loans 125 libor loans december 31 2004 average rate interest revolving credit facility 364 per annum average rate interest term loan 366 per annum senior secured credit facility secured lien substantially assets domestic subsidiaries except assets 3ci pledge stock whollyowned domestic subsidiaries stock 3ci mexican subsidiary medam 65 stock canadian subsidiary stericycle inc formerly “medtech environmental limited” united kingdom subsidiary stericycle international ltd credit agreement requires us comply various financial reporting covenants restrictions including restriction dividend payments senior subordinated notes november 15 2004 redeemed remaining 509 million senior subordinated notes accordance terms governing specified trust indenture redemption price 1061875 principal face amount plus accrued interest redemption date interest rate senior subordinated notes 12 38 per annum notes maturity date november 15 2009 2002 2003 repurchased retired 126 million 178 million respectively senior subordinated notes private transactions permitted trust indenture result 2002 repurchases senior subordinated notes incurred 18 million redemption premium expenses 04 million accelerated amortization financing fees associated senior subordinated notes result 2003 repurchases senior subordinated notes incurred 28 million redemption premium expenses 05 million accelerated amortization financing fees associated senior subordinated notes result 2004 redemption remaining senior subordinated notes incurred 31 million redemption premium expenses 11 million accelerated amortization financing fees associated senior subordinated notes guarantees guaranteed loan azoroa bank japan behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business five year loan current balance 93 million azoroa bank expires june 2009 note 6accrued liabilities accrued liabilities december 31 consist following items thousands note 7derivative instruments 2001 entered interest rate swap agreements effectively converted portion floatingrate debt fixedrate basis thus reducing impact interest rate changes future interest expense interest rate swap agreement covering 1000 million principal 523 fixed interest rate expired january 2003 interest rate swap agreement covering 250 million principal 519 fixed interest rate expired february 2003 interest rate swap agreements entered 2003 2004 accordingly none outstanding floatingrate debt designated hedged items interest rate swap agreements december 31 2003 2004 year ended december 31 2002 recognized net gain 04 million related ineffective portion hedging instruments interest expense 2003 2004 gain loss related ineffective portion hedging instruments interest expense activity related accumulated loss derivative instruments follows thousands entered four forward contracts sale sterling gbp hedging instruments intercompany loan company subsidiary united kingdom stericycle international ltd denominated gbp subsidiary borrowed funds purchase white rose forward contracts align anticipated repayment schedule loan last contract expires july 2009 reporting period mark forward contracts market value related adjustment recorded income expense amount generally offset currency adjustment intercompany receivable 2004 cost forward contracts recognized immaterial net income total cost forward contracts entire fiveyear period approximately 10 million tax note 8goodwill intangible assets june 2001 financial accounting standards board issued statements financial accounting standards 141 business combinations 142 goodwill intangible assets new rules goodwill indefinite lived intangibles longer amortized subject annual impairment test frequent testing circumstances indicate may impaired 2003 2004 performed annual impairment evaluations determined impairment december 31 2004 174 million indefinite lived intangibles consist environmental permits performed annual impairment test determined impairment two geographical reporting segments united states foreign countries goodwill changes carrying amount goodwill years ended december 31 2003 2004 follows thousands 2003 reduced net operating loss deferred tax valuation allowance originally established part purchase accounting 3ci canadian subsidiary thus reducing goodwill 46 million according fas 142 intangible assets continue amortized useful lives year ended december 31 2004 recorded fair value intangibles acquired connection acquisitions pssi american waste industries inc texas environmental services inc white rose environmental ltd sterimed sa de cv assigned 117 million customer relationships amortization periods 20 40 years 22 million tradenames amortization period 20 40 years 64 million facility environmental permits indefinite lives 05 million software license amortization period 5 years 02 million noncompete agreements amortization periods one five years year ended december 31 2003 recorded fair value intangibles acquired connection acquisitions scherer healthcare inc kuglen services ltd llp environmental management group nawa enviromed canada 3ci also recorded fair value intangibles acquired connection acquisition selected assets pmt usa inc assigned 73 million customer relationships amortization period 40 years 15 million trade names amortization period 40 years 18 million facility environmental permit indefinite life 10 million noncompete amortization period 5 years addition acquired rights exclusive marketing license 18 million amortized fouryear term license agreement october 2004 ceased amortizing exclusive marketing license intangible see note 18legal proceedings litigation year ended december 31 2002 recorded fair value intangibles acquired acquisitions american medical disposal inc wholly owned subsidiary environmental health services inc bio environmental services inc pyroval inc amedco inc biowaste industries central florida inc ecotermica de oriente sa de cv enviromed inc bridgeview inc micro med industries inc assigned 90 million customer relationships amortization period 40 years assigned 92 million facility environmental permits indefinite life also noncompete agreements amortized term noncompete agreement generally five years december 31 2003 2004 value amortizing intangible assets follows thousands year ended december 31 2002 2003 2004 aggregate amortization expense 20 19 24 million respectively estimated amortization expense thousands next five years follows years ended december 31 note 9lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next twelve years leases properties contain renewal provisions rent expense 2002 2003 2004 148 million 182 million 212 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2004 next five years aggregate follows note 10net income per common share following table sets forth computation basic diluted net income per share additional information regarding outstanding employee stock options outstanding warrants see note 12 2002 2003 2004 options warrants purchase 70752 shares 13623 shares 55719 shares respectively exercise prices 22913648 35054984 46955114 respectively included computation diluted earnings per share effect would antidilutive note 11accumulated comprehensive income components accumulated comprehensive income follows thousands note 12stock options warrants stock options 2000 board directors approved 2000 nonstatutory stock option plan “2000 plan” total provides granting 3500000 shares common stock form stock options employees officers directors exercise price options granted 2000 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods five years date grant 1997 board directors shareholders approved 1997 stock option plan “1997 plan” provides granting 3000000 shares common stock form stock options selected officers directors employees exercise price options granted 1997 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods five years date grant 1995 board directors shareholders approved incentive compensation plan “1995 plan” amended restated 1996 provides granting 3000000 shares common stock form stock options restricted stock employees officers directors consultants exercise price options granted 1995 plan must least equal fair market value common stock date grant options granted date 10year terms vest periods four years date grant june 1996 board directors adopted july 1996 shareholders approved directors stock option plan “directors plan” directors plan amended authorizes stock options total 1170000 shares common stock granted outside directors option grants made board directors times amounts board determines taking account guidelines board may adopt purpose exercise price options granted directors plan must least equal fair market value common stock date grant options granted prior april 1 1998 vested 16 consecutive quarterly installments options granted march 31 1998 vest 12 equal monthly installments shares company’s common stock reserved issuance upon exercise outstanding options warrants shares include shares available option grant shares granted options yet exercised reserved follows december 31 2004 summary stock option information follows options outstanding exercisable december 31 2004 price range elected follow accounting principles board opinion 25 “accounting stock issued employees” “apb 25” related interpretations accounting employee stock options apb 25 exercise price employee fixed stock options equals market price underlying stock date grant compensation expense recognized pro forma information regarding net income net income per share required fas 123 accounted employee stock options granted subsequent december 31 1994 fair value method statement options granted valued using blackscholes optionpricing model following assumptions used 2002 2003 2004 expected volatility 060 2002 055 2003 054 2004 riskfree interest rates ranging 301 45 2002 118 3745 2003 118 481 2004 dividend yield 0 weightedaverage expected life option 48 months 2002 2003 44 months 2004 weightedaverage fair values options granted 2002 2003 2004 1293 per share 1551 per share 1854 per share respectively option value models require input highly subjective assumptions employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate management’s opinion existing method necessarily provide reliable single measure fair value employee stock options purposes pro forma disclosures estimated fair value options amortized expense optionvesting period pro forma information follows thousands except per share information warrants june 2000 connection acquisition additional 15 interest medam issued warrants purchase 88748 shares common stock warrants 62256 shares immediately exercisable remaining 26492 shares become exercisable five years exercise price warrants 875 per share 2001 warrants purchase 65190 shares exercised 2003 warrants purchase 12966 shares exercised december 31 2004 warrants purchase 10592 shares remained outstanding exercisable september 2003 connection acquisition nawa medical disposal llc issued warrants purchase 1000 shares common stock warrants become exercisable september 2008 exercise price warrants 4725 per share december 31 2004 warrants outstanding note 13series convertible preferred stock november 1999 issued sold 75000 shares series convertible preferred stock 1000 per share 750 million aggregate cash less various fees expenses used net proceeds sale finance portion purchase price bfi acquisition shares series convertible preferred stock converted shares common stock december 31 2004 shares series convertible preferred stock remained outstanding holders preferred stock converted 29595 shares 3611328 shares common stock 2001 16079 shares 2000000 shares common stock 2002 6527 shares 812000 shares common stock 2003 22799 shares 2835930 shares common stock 2004 amended july 2002 corporate governance agreement entered initial investors convertible preferred stock provided long two groups initial investors affiliates continued hold 25 group’s initial “underlying common stock” ie shares common stock issuable previously issued upon conversion group’s initial series convertible preferred stock group right voting separate class elect one director board directors two groups initial investors consisted investment funds associated bain capital llc investment funds associated madison dearborn partners llc reason group’s conversion remaining shares convertible preferred stock 2004 concurrent sale common stock issued upon conversion group ceased hold required underlying common stock right elect director terminated note 14employee benefit plan 401k defined contribution retirement savings plan covering substantially employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee maximum 1500 per annum contributions years ended december 31 2002 2003 2004 approximately 10 million 11 million 13 million respectively note 15employee stock purchase plan october 2000 board directors adopted stericycle inc employee stock purchase plan “espp” effective july 1 2001 stockholders approved espp may 2001 espp authorizes 300000 shares common stock purchased employees 15 discount market price stock payroll deductions two sixmonth offerings year employee elects participate offering granted option first day offering number shares equal employee’s payroll deductions espp offering period may exceed 5000 divided option price per share option price per share lower 85 closing price share common stock first trading day offering period 85 closing price last trading day offering period every employee completed one year’s employment first day offering fulltime employee parttime employee customarily works least 20 hours per week eligible participate offering 2002 2003 2004 22278 22012 shares 20363 shares respectively issued espp note 16nonconsolidating joint ventures investment joint venture medam ba srl argentine corporation formed utilize etd technology treat medical waste primarily buenos aires market investment joint venture 28 million december 31 2003 2004 included longterm assets also invested joint venture evertrade medical waste pty ltd formed service medical waste market south africa using etd technology joint venture company headquartered johannesburg south africa december 31 2003 total receivables 20 million joint venture related agreements included current assets addition investment joint venture december 31 2002 2003 23 million 12 million respectively included longterm assets also joint venture evertrade medical waste manufacturing limited formed manufacture reusable tubs south africa december 31 2003 loans 51 million joint venture included notes receivable january 2004 sold minority interest investment evertrade medical waste pty ltd associated current receivables loans due joint venture reno africa pte ltd balance 81 million notes receivable issued related sale included current 12 million long term 69 million notes receivable balances balance sheet gain loss recognized 2004 disposition assets 2003 2004 recorded 17 million 02 million respectively equity losses related joint ventures recorded income expense note 17legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time private antitrust litigation january 2003 sued federal court arizona private plaintiff claiming anticompetitive conduct arizona colorado utah november 1997 present seeking certification lawsuit class action behalf customers bfi threestate area period question next three months four similar suits filed federal court utah arizona colorado new mexico february may 2003 two additional suits filed federal court utah arizona claiming substantially anticompetitive conduct seeking class action certification december 2003 eighth suit filed federal court utah claiming monopolistic anticompetitive conduct california prior four years seeking certification suit class action behalf california customers fouryear period eight suits subsequently consolidated judge federal court utah first five suits consolidated one consolidated class action complaint next two suits consolidated discovery purposes eighth suit coordinated discovery purposes june 2004 settled immaterial amount suit filed may 2003 noted seek class action certification proceedings remaining seven suits discovery stage believe suits merit vigorously defending 3ci litigation louisiana four officers directors parties suit filed state court louisiana july 2002 shareholder majorityowned subsidiary 3ci suit filed behalf minority shareholders 3ci derivatively behalf 3ci alleges among claims four directors 3ci serving designees also officers directors unjustly enriched stericycle expense 3ci shareholders plaintiff seeks among relief actual punitive damages order requiring buyout 3ci’s minority shareholders september 2003 full board 3ci appointed special committee consisting 3ci’s three independent directors one later resigned act 3ci’s behalf respect dispute us wsi described regarding conversion rate 3ci’s preferred stock january 2004 full board expanded special committee’s authority include investigation claims plaintiff louisiana lawsuit thirdparty plaintiffs texas lawsuit act 3ci’s behalf respect lawsuits purporting conduct investigation claims special committee concluded claims louisiana lawsuit merit december 2004 3ci special committee’s direction filed joint petition plaintiff superseding plaintiff’s prior petition seeking substantially relief prior petition prior filing joint petition 3ci special committee’s direction entered joint prosecution agreement plaintiff law firm pursuant twothirds work prosecuting suit would performed plaintiff law firm onethird 3ci counsel twothirds monetary recovery would allocated plaintiff class onethird 3ci january 2005 filed thirdparty complaint contribution various former officers directors 3ci participated approving actions complained joint petition also filed counterclaim members special committee grounds among others breached fiduciary duties directors failing conduct thorough investigation analysis plaintiff’s claims entering joint prosecution agreement february 2005 court granted class certification approved plaintiff’s law firm class counsel preliminarily approved joint prosecution agreement subject objections members plaintiff class court set suit trial september 2005 tried jury october 2005 tried judge believe claims us directors 3ci serving designees merit intend continue vigorously defend suit 3ci litigation texas may 2003 3ci direction independent directors filed declaratory judgment action state court texas resolve disagreement us proper rate conversion shares 3ci’s preferred stock held whollyowned subsidiary waste systems inc “wsi” august 2003 action dismissed court procedural grounds 3ci refiled action new suit october 2003 plaintiff louisiana lawsuit others answered intervened 3ci’s suit naming us thirdparty defendant making substantially claims alleged louisiana lawsuit wsi denied claims believe merit suit inactive 2004 various claims prosecuted defended louisiana litigation arbitration proceedings regarding various disputes exclusive marketing distribution license note 18products services geographic information fasb statement 131 disclosures segments enterprise related information requires segment information reported based information utilized executive management internally assess performance make operating decisions determining reportable operating segments management determined two reportable segments united states foreign operations based consideration following criteria • services provided • types customers serviced • types medical waste collection transportation treatment methods utilized • regulatory environments similar vary based upon country specific regulations • employ sales marketing techniques activities summary information reporting units follows revenues attributed countries based location customers intercompany revenues recorded united states work performed canada eliminated prior reporting united states revenues amounts eliminated 03 million 03 million 01 million 2002 2003 2004 respectively accounting principles critical accounting policies used preparation financial statements reporting segments detailed information united states reporting segment follows detailed information foreign reporting segment follows note 19selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2003 2004 thousands except per share amounts first quarter 2003 includes 14 million 08 million tax repurchase premium expense 02 million 01 million tax noncash accelerated amortization financing fees see note 5long term debtsenior subordinated notes second quarter 2003 includes 14 million 08 million tax repurchase premium expense 02 million 01 million tax noncash accelerated amortization financing fees see note 5long term debtsenior subordinated notes second quarter 2004 includes 12 million 07 million tax noncash write idled incinerator equipment related spare parts fourth quarter 2004 includes 31 million 19 million tax redemption premium expense 11 million 07 million tax noncash accelerated amortization financing fees see note 5long term debtsenior subordinated notes earnings per share calculated quarterly basis amounts may total calculated fullyear earnings per share stericycle inc subsidiaries schedule iivaluation allowance accounts thousands 1 amounts consist primarily costs assumed acquired companies recorded prior date acquisition item 9item 8 consolidated financial statements supplemental data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting internal control financial reporting defined rules 13a15f securities exchange act 1934 process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management assessed effectiveness company’s internal control financial reporting december 31 2005 making assessment management used criteria set forth committee sponsoring organizations treadway commission coso internal control integrated framework based assessment criteria management concludes company maintained effective internal control financial reporting december 31 2005 company’s independent auditors issued attestation report management’s assessment company’s internal control financial reporting report appears page 30 stericycle inc lake forest il march 1 2006 report independent registered public accounting firm internal control financial reporting board directors shareholders stericycle inc audited management’s assessment included accompanying management’s report internal control financial reporting stericycle inc maintained effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso criteria stericycle inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment stericycle inc maintained effective internal control financial reporting december 31 2005 fairly stated material respects based coso criteria also opinion stericycle inc maintained material respects effective internal control financial reporting december 31 2005 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets stericycle inc subsidiaries december 31 2005 2004 related consolidated statements income cash flows changes shareholders’ equity three years period ended december 31 2005 report dated march 1 2006 expressed unqualified opinion thereon ernst young llp chicago illinois march 1 2006 report independent registered public accounting firm board directors shareholders stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2005 2004 related consolidated statements income cash flows changes shareholders’ equity three years period ended december 31 2005 audits also included financial statement schedule listed index item 15a financial statements responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2005 2004 consolidated results operations cash flows three years period ended december 31 2005 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness stericycle inc’s internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated march 1 2006 expressed unqualified opinion thereon ernst young llp chicago illinois march 1 2006 stericycle inc subsidiaries consolidated balance sheets accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements income accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes shareholders’ equity years ended december 31 2005 2004 2003 accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 2005 unless context requires otherwise “we” “us” “our” refers stericycle inc subsidiaries consolidated basis note 1 description business incorporated 1989 presently serve approximately 333000 customers throughout united states puerto rico canada mexico united kingdom north america fully integrated national medical waste management network includes 45 treatmentcollection centers 105 additional transfer collection sites use network provide broad range services customers medical waste treatment technologies include proprietary electrothermaldeactivation system etd well traditional methods autoclaving incineration united kingdom fully integrated waste management network includes 12 treatmentcollection centers two additional transfercollection sites also serve pharmacies distributors manufacturers pharmaceutical products five processing centers within united states managing return disposal expired surplus pharmaceutical products managing recall pharmaceutical products recalled manufacturer note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc wholly owned subsidiaries well 645 ownership medam sa de cv “medam” mexican company 675 common stock ownership 3ci complete compliance corporation “3ci” significant intercompany accounts transactions eliminated addition 375 ownership medam ba srl argentine company accounted using equity method minority interest expense related majority owned subsidiaries equity interest income loss unconsolidated subsidiaries included income expense revenue recognition recognize revenue medical waste services time medical waste collection revenue costs contracts supply proprietary etd treatment equipment recognized based shipment equipment services provided individual contract routinely review total estimated costs shipments complete contract revise revenues estimated gross margin contract necessary payments received advance deferred recognized services provided royalty revenues calculated based measurements specified technology contract revenues recognized end reporting period activity measured completed revenues product sales recognized time goods shipped ordering customer software licensing revenues recognized prorata basis term license agreement revenues pharmaceutical services recorded time services performed contracts loss position losses would recorded known estimable contracts go loss position payments received advance deferred recognized services provided cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows year ended december 31 2005 3ci majority common stock recorded noncash impairment charge 09 million springhill louisiana building property year ended december 31 2004 recorded noncash writedown idled stericycle incinerator equipment baltimore maryland terrell texas facility 12 million 2004 evaluated estimated useful life reusable bio systems containers performing durability studies based studies determined useful life containers actually longer current life used calculate depreciation 2004 adjusted total useful lives 3 years 17 years containers purchased 2003 2004 addition adjusted useful lives containers originally acquired scherer healthcare acquisition january 2003 total 10 years date original purchase impact change estimated useful life immaterial results 2004 goodwill intangibles goodwill indefinite lived intangibles amortized subject annual impairment test according statements financial accounting standards “fas” 142 intangible assets continue amortized useful lives determined customer relationships useful lives 20 40 years based upon type customer noncompete intangibles useful lives one five years tradename intangibles useful lives 20 40 years software technology intangible useful life five years determined permits indefinite lives thus amortized income taxes deferred income tax liabilities assets determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 financial instruments financial instruments consist cash equivalents shortterm investments derivatives accounts receivable payable longterm debt fair values financial instruments materially different carrying values financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater 2 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses contracts loss positions losses recorded known estimable losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits income tax liabilities accrued auto workers’ compensation insurance claims estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates derivative instruments three forward contracts purchase sterling gbp hedging instruments intercompany loan parent company subsidiary united kingdom stericycle international ltd described fully note 7 subsidiary borrowed funds purchase white rose forward contracts align anticipated repayment schedule loan last contract expires july 2009 october 1 2005 prospectively designated existing foreign currency forward contracts cash flow hedges receive hedge accounting treatment stockbased compensation december 31 2005 stockbased compensation plans described fully note 11 elected follow accounting principles board opinion 25 “accounting stock issued employees” “apb 25” related interpretations accounting employee stock options using intrinsic value method alternative fair value accounting method provided statement financial accounting standards 123 “accounting stockbased compensation” “fas 123” requires use option valuation models developed use valuing employee stock options apb 25 exercise price employee stock options equals market price underlying stock measurement date grant compensation expense recognized stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 following table illustrates effect net income earnings per share applied fair value recognition fas 123 stockbased employee compensation thousands except per share information foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated current exchange rates income statement accounts translated average rates period related translation adjustments reported component comprehensive income loss directly equity environmental matters record liability environmental remediation damages cleanup program becomes probable costs damages reasonably estimated environmental liabilities recorded december 31 2005 aware issues facilities could initiate need environmental remediation reclassifications certain amounts 2003 2004 financial statements reclassified conform 2005 presentation new accounting standards december 2004 financial accounting standards board “fasb” issued fas 123r replaces fas 123 supersedes apb 25 fas 123r requires sharebased payments employees including grants employee stock options recognized financial statements based fair values beginning first interim annual period january 1 2006 pro forma disclosures previously permitted fas 123 longer alternative financial statement recognition begin expensing stock options first quarter 2006 use modified prospective transition method modified prospective method requires compensation expense recorded new awards previously granted fully vested adoption date anticipate continue use blackscholes optionpricing model determine fair value options granted employees expect adoption fas 123r material impact consolidated statements stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 income earnings per share reason believe amounts reported result adoption materially different currently disclosed pro forma amounts note 3 income taxes significant components income tax expense years ended december 31 follows thousands reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 follows cash payments income taxes 281 million 259 million 167 million years ended december 31 2005 2004 2003 respectively stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 deferred tax liabilities assets december 31 follows thousands december 31 2005 net operating loss carry forwards us federal income tax purposes fully utilized excluding net operating loss carry forwards related 3ci foreign tax credit approximately 05 million begin expire beginning 2010 undistributed earnings foreign subsidiaries considered permanently invested therefore us deferred taxes recorded thereon cumulative amounts earnings 223 million december 31 2005 practible estimate us withholding tax thereon assuming repatriation 3ci majority owned subsidiary net operating loss carry forwards federal state purposes 100 million beginning expire 2006 stericycle net operating loss carry forwards state purposes 44 million expire 2018 note 4 acquisitions divestiture year ended december 31 2005 completed acquisition nine domestic medical waste businesses four pharmaceutical returns reverse distribution businesses mexican subsidiary completed acquisition seven medical waste businesses united kingdom subsidiary completed acquisition two medical waste businesses individual acquisition acquisitions aggregate significant operations quarter ended march 31 2005 mexican subsidiary medam sa de cv “medam” acquired selected assets servicios ecologicos pege asociados de rl de cv quarter ended june 30 2005 completed six acquisitions medical waste businesses consisting selected assets envirotech america inc operated central new york medical systems inc operated missouri bioclean inc operated western new york stock sanford motors inc two affiliated companies operated eastern pennsylvania new jersey selected assets five star waste inc operated florida selected assets biomed tec inc affiliated company operated west virginia southern ohio also acquired stock automated health technologies inc pharmaceutical returns company based florida united kingdom subsidiary stericycle international ltd acquired stock healthcare waste limited formerly known select environmental limited medam completed acquisition stock planta incineradora de residuos biologicos infecciosos sa de cv soluciones ecologicas integrales sa de cv lae gabriela hernandez romo stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 quarter ended september 30 2005 completed two acquisitions medical waste businesses consisting stock nicklin associates inc operated new york maryland washington dc selected assets medtrac inc operated pennsylvania medam completed acquisition selected assets impulso mexicano sa de cv selected assets biol donaji de la caridad gutierrez garcia quarter ended december 31 2005 acquired stock iowa medical waste reduction center inc operated iowa addition completed acquisition three pharmaceutical returns businesses consisting selected assets horizons inc also known certified returns operated florida stock universal solutions international inc operated north carolina georgia new jersey stock nnc group llc operated indiana conjunction acquisition universal solutions international inc sold selected assets consumer products division carolina supply chain services llc 123 million 103 million net amount received cash 20 million held escrow medam completed acquisition selected assets servicios integrales en manejo de residuos sa de cv formerly known simar united kingdom subsidiary stericycle international ltd acquired stock indigo equity holdings limited formerly known waste solution inc aggregate net purchase price acquisitions 2005 approximately 1894 million approximately 1397 million paid cash 497 million paid issuance notes payable december 31 2005 valuation certain goodwill intangibles assets associated acquisitions finalized year ended december 31 2004 completed acquisition two domestic medical waste businesses medam completed acquisition three medical waste businesses stericycle international llc completed one acquisition individual acquisition acquisitions aggregate significant operations quarter ended march 31 2004 completed acquisition two medical waste businesses consisting selected assets american waste industries inc operated virginia maryland north carolina quarter ended june 30 2004 completed acquisition selected assets texas environmental services inc operated texas stericycle international ltd completed acquisition common stock white rose environmental ltd “white rose” operated united kingdom quarter ended september 30 2004 medam completed acquisition common stock sterimed sa de cv remaining stock proterm de mexico jv sa de cv selected assets bioinfex servicios technologia sa de cv aggregate net purchase price acquisitions 2004 approximately 906 million approximately 724 million paid cash 178 million paid issuance notes payable 04 million paid issuance unregistered shares common stock year ended december 31 2003 completed acquisition four medical waste businesses canadian subsidiary completed one acquisition majority owned subsidiary 3ci complete compliance corporation “3ci” completed one acquisition addition completed acquisition pharmaceutical returns software company individual acquisition acquisitions aggregate significant operations stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 quarter ended march 31 2003 completed acquisition two medical waste businesses consisting common preferred stock scherer healthcare inc operated 10 northeastern midatlantic states selected assets kuglen services ltd llp operated texas quarter ended june 30 2003 completed acquisition selected assets environmental management group inc operated medical waste business ohio kentucky majority owned subsidiary 3ci acquired selected assets pmt usa inc dba air sea environmental operated medical waste business southeast texas quarter ended september 30 2003 completed acquisition selected assets nawa medical disposal llc operated medical waste business western texas addition acquired substantially assets pharmacy software solutions inc “pssi” pharmaceutical returns software company based illinois wholly owned canadian subsidiary completed acquisition selected assets enviromed canada inc operated medical waste business northern ontario aggregate net purchase price acquisitions 2003 approximately 374 million approximately 372 million paid cash 02 million paid issuance unregistered shares common stock financial reporting purposes acquisition transactions accounted using purchase method accounting total purchase price 2005 2004 2003 1894 million 906 million 374 million respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market value date acquisition total purchase price acquisitions completed 2004 2003 includes value 8323 1906 shares respectively common stock issued sellers certain cases purchase price subject downwards adjustment revenues customer contracts acquired failed reach certain specified levels excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill recorded amounts 1700 million 496 million years 2005 2004 respectively results operations acquired businesses included consolidated statements income date acquisition note 5 long term debt longterm debt consists following december 31 stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 payments due longterm debt excluding capital lease obligations five years subsequent december 31 2005 follows paid interest 135 million 115 million 136 million years ended december 31 2005 2004 2003 respectively property capital leases included property plant equipment accompanying consolidated balance sheets follows december 31 amortization related capital leases included depreciation expense minimum future lease payments capital leases follows thousands senior credit facility june 2005 obtained new 4000 million senior unsecured revolving credit facility maturing june 2010 containing letter credit sub limit 1250 million place existing senior secured credit facility new revolving credit facility provided credit agreement various financial institutions reduced interest rates charged reducing applicable margin added relevant stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 interest rate new facility also allows us borrow preapproved currencies united states dollars borrowings bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference “base rate” higher prime rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement applicable margin based upon consolidated leverage ratio december 31 2005 margin interest rates borrowings revolving new credit facility zero base rate loans 075 libor loans credit agreement requires us comply various financial reporting covenants restrictions including restrictions dividend payments december 31 2005 compliance covenants restrictions december 2005 increased revolving credit facility 4000 million 5500 million also increased letter credit sub limit 1250 million 1500 million december 31 2005 2917 million borrowings outstanding senior unsecured credit facility includes foreign currency borrowings 52 million addition 659 million committed outstanding letters credit weighted average rate interest unsecured revolving credit facility 499 per annum december 31 2004 senior secured credit facility consisted 2050 million revolving credit facility term loan principal amount 624 million december 31 2004 1714 million borrowings outstanding senior secured credit facility 1090 million consisted borrowings revolving credit component 624 million term component addition december 31 2004 309 million standby letters credit issued revolving credit component december 31 2004 margin interest rates borrowings revolving credit facility term component zero base rate loans 125 libor loans average rate interest revolving credit facility 364 per annum average rate interest term loan 366 per annum secured credit facility replaced june 2005 unsecured credit facility discussed senior subordinated notes november 15 2004 redeemed remaining 509 million senior subordinated notes accordance terms governing specified trust indenture redemption price 1061875 principal face amount plus accrued interest redemption date interest rate senior subordinated notes 1238 per annum notes maturity date november 15 2009 notes payable december 31 2005 promissory notes primarily issued result acquisitions totaling 680 million weighted average interest rate notes 530 fixed rate floating rate ratio 784 216 weighted average maturity approximately 42 years december 31 2004 175 million outstanding related promissory notes issued connection acquisitions 2002 2004 consisting primarily threeyear note issued part white rose environmental ltd acquisition outstanding balance 109 million december 31 2004 stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 guarantees guaranteed loan azoroa bank japan behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business fiveyear loan current balance 65 million azoroa bank expires june 2009 note 6 accrued liabilities accrued liabilities december 31 consist following items thousands note 7 derivative instruments july 2004 entered four forward contracts hedge gbp sterlingbased intercompany loan usbased subsidiary stericycle international llc subsidiary united kingdom stericycle international ltd subsidiary borrowed funds purchase white rose forward contracts align anticipated repayment schedule loan last contract expires july 2009 initially elect hedge accounting forward contracts recognizing change value hedges income expense amount generally offset currency adjustment intercompany receivable 2004 cost forward contract immaterial net income october 1 2005 prospectively designated existing forward contracts cash flow hedges using hedge accounting expect income related hedge accounting election 01 million recognized remaining life contracts interest income 2005 2004 cost forward contracts recognized immaterial net income december 31 2005 total notional amount hedges outstanding gbp 130 million december 31 2005 hedges determined 100 effective note 8 goodwill intangible assets june 2001 fasb issued fas 141 business combinations fas 142 goodwill intangible assets fas 142 goodwill indefinite lived intangibles longer amortized subject annual impairment test frequent testing circumstances indicate may impaired 2005 2004 performed annual impairment evaluations determined impairment december 31 2005 2004 185 million 174 million respectively indefinite lived intangibles consist environmental permits performed annual impairment test determined impairment stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 two geographical reporting segments united states foreign countries goodwill changes carrying amount goodwill years ended december 31 2005 2004 follows thousands according fas 142 intangible assets continue amortized useful lives year ended december 31 2005 recorded fair value intangibles acquired connection acquisitions sanford motors iowa medical waste reduction center automated health technologies horizons biomed tech envirotech bio clean medical systems med trac acquisitions completed united kingdom mexican subsidiaries assigned 133 million customer relationships amortization periods 20 40 years 17 million facility environmental permits indefinite lives 04 million noncompete agreements amortization periods one five years 2005 arbitration proceedings regarding various disputes exclusive marketing license agreement licensor software march 1 2006 subsequent yearend arbitrator awarded favor licensor although event occurred end year required writeoff unamortized portion license fee previously paid license agreement effectively terminated effect reduction carrying amount intangible 18 million reduction accumulated amortization 04 million year ended december 31 2004 recorded fair value intangibles acquired connection acquisitions pssi american waste industries inc texas environmental services inc white rose environmental ltd sterimed sade cv assigned 117 million customer relationships amortization periods 20 40 years 22 million tradenames amortization period 20 40 years 64 million facility environmental permits indefinite lives 05 million software license amortization period 5 years 02 million noncompete agreements amortization periods one five years stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 december 31 value amortizing intangible assets follows thousands year ended december 31 2005 2004 2003 aggregate amortization expense 16 million 24 million 19 million respectively estimated amortization expense thousands next five years follows years ended december 31 note 9 lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next twelve years leases properties contain renewal provisions rent expense 2005 2004 2003 258 million 212 million 182 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2005 next five years aggregate follows stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 note 10 net income per common share following table sets forth computation basic diluted net income per share additional information regarding outstanding employee stock options outstanding warrants see note 11 2005 2004 2003 options warrants purchase 33208 shares 55719 shares 13623 shares respectively exercise prices 44226221 46955114 35054984 respectively included computation diluted earnings per share effect would antidilutive note 11 preferred stock options warrants preferred stock december 31 2005 2004 1000000 authorized shares preferred stock shares issued outstanding stock options adopted five stock option plans 2005 incentive stock option plan “2005 plan” stockholders approved april 2005 ii 2000 nonstatutory stock option plan “2000 plan” board directors adopted february 2000 iii 1997 stock option plan “1997 plan” stockholders approved april 1997 iv directors stock option plan “directors plan” shareholders approved july 1996 prior initial public offering august 1996 v 1995 incentive compensation plan “1995 plan” stockholders approved september 1995 2005 plan authorizes awards stock options stock appreciation rights total 2400000 shares amended 2000 plan authorizes stock option grants total 3500000 shares stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 1997 1995 plans authorize stock option grants total 3000000 shares amended directors plan authorizes stock option grants total 1170000 shares 2005 plan provides grant nonstatutory stock options “nsos” incentive stock options intended qualify section 422 internal revenue code “isos” well stock appreciation rights 2000 plan provides grant nsos 1997 1995 plans provide grant nsos isos directors plan provides grant nsos 2005 plan authorizes awards officers employees consultants following expiration directors plan may 2006 directors 2000 plan authorizes stock option grants employees consultants officers directors 1997 1995 plans authorize stock option grants officers directors employees consultants directors plan authorizes stock option grants outside directors exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment options granted officers employees generally vest five years 2005 options granted officers employees generally vested rate 20 option shares first five anniversaries option grant date 2004 options granted officers employees generally vested rate 20 option shares first anniversary option grant date rate 160 option shares next 48 months 2000 board directors approved 2000 nonstatutory stock option plan “2000 plan” total provides granting 3500000 shares common stock form stock options employees officers directors shares company’s common stock reserved issuance upon exercise outstanding options warrants shares include shares available option grant shares granted options yet exercised reserved follows december 31 2005 stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 summary stock option information follows options outstanding exercisable december 31 2005 price range elected follow apb 25 “accounting stock issued employees” related interpretations accounting employee stock options discussed alternative fair value accounting provided fas 123 “accounting stockbased compensation” requires use option valuation models developed use valuing employee stock options apb 25 exercise price employee stock options equals market price underlying stock date grant compensation expense recognized pro forma information regarding net income net income per share required fas 123 accounted employee stock options granted subsequent december 31 1994 fair value method statement options granted valued using blackscholes optionpricing model 2005 anticipation adoption fas 123r january 1 2006 reviewed values variables used determine fair value stock options granted 2003 2004 2005 determined values expected volatility weighted average expected life option riskfree interest rates variables modified slightly order provide better estimate fair value employee stock options modifications resulted immaterial reduction pro forma stock option expense 2005 2004 2003 following revised assumptions used 2005 2004 2003 expected volatility 032 2005 042 2004 049 2003 riskfree interest rates 405 2005 343 2004 stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 297 2003 dividend yield 0 weightedaverage expected life option 52 months 2005 56 months 2004 56 months 2003 revised weightedaverage fair values options granted 2005 2004 2003 1452 per share 1557 per share 1373 per share respectively option value models require input highly subjective assumptions employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate management’s opinion existing method necessarily provide reliable single measure fair value employee stock options purposes pro forma disclosures estimated fair value options amortized expense optionvesting period pro forma information follows thousands except per share information warrants june 2000 connection acquisition additional 15 interest medam issued warrants purchase 88748 shares common stock warrants 62256 shares immediately exercisable remaining 26492 shares become exercisable five years exercise price warrants 875 per share 2001 warrants purchase 65190 shares exercised 2003 warrants purchase 12966 shares exercised 2005 warrants purchase 10592 shares exercised december 31 2005 warrants outstanding september 2003 connection acquisition nawa medical disposal llc issued warrants purchase 1000 shares common stock warrants become exercisable september 2008 exercise price warrants 4725 per share december 31 2005 warrants outstanding note 12 employee benefit plan 401k defined contribution retirement savings plan covering substantially employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 maximum 1500 per annum contributions years ended december 31 2005 2004 2003 approximately 13 million 13 million 11 million respectively note 13 employee stock purchase plan october 2000 board directors adopted stericycle inc employee stock purchase plan “espp” effective july 1 2001 stockholders approved espp may 2001 espp authorizes 300000 shares common stock purchased employees 15 discount market price stock payroll deductions two sixmonth offerings year employee elects participate offering granted option first day offering number shares equal employee’s payroll deductions espp offering period may exceed 5000 divided option price per share option price per share lower 85 closing price share common stock first trading day offering period 85 closing price last trading day offering period every employee completed one year’s employment first day offering fulltime employee parttime employee customarily works least 20 hours per week eligible participate offering 2005 2004 2003 18572 shares 20363 shares 22012 shares respectively issued espp note 14 nonconsolidating joint ventures investment joint venture medam ba srl argentine corporation formed utilize etd technology treat medical waste primarily buenos aires market investment joint venture 26 million 28 million december 31 2005 2004 respectively included longterm assets 2005 2004 2003 recorded 03 million 02 million 17 million respectively equity losses related joint venture recorded income expense january 2004 sold minority interest investment evertrade medical waste pty ltd south african company associated current receivables loans due joint venture reno africa pte ltd cash 81 million note receivable fourth quarter 2005 remaining unpaid loan balance 25 million december 2005 determined issuer note would unable generate remaining cash pay note receivable therefore wroteoff remaining 25 million balance uncollectible december 31 2005 note 15 legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time 3ci litigation november 2005 entered preliminary settlement resolve class action litigation minority shareholders majorityowned subsidiary 3ci complete compliance corporation “3ci” 3ci joined class plaintiff litigation pending state court louisiana robb et al v stericycle inc et al first judicial district court caddo parish louisiana 467704a “louisiana litigation” described litigation number occasions including report form 10k 2004 terms preliminary settlement agreed pay 325 million cash trust fund established claims administrator approved court purpose settling claims louisiana litigation related litigation state court texas 3ci complete compliance corporation v waste systems inc et al 269th judicial district harris county texas 200346899 ii canceling stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 otherwise acquiring shares 3ci common stock held members plaintiff class iii paying courtapproved administrative expenses legal fees accordance terms preliminary settlement made required 325 million deposit claims administrator following court’s preliminary approval settlement december 2005 preliminary settlement remains subject court’s final approval hearing final approval held february 21 2006 court yet rendered decision parties preliminary settlement intend settlement acquire sufficient shares 3ci common stock shares one subsidiaries already 90 3ci’s outstanding common stock level ownership would enable us acquire balance outstanding 3ci common stock “shortform” merger delaware law acquire 90 3ci’s common stock contemplated intend conduct shortform merger soon practicable determine private antitrust litigation january 2003 sued federal court arizona private plaintiff claiming anticompetitive conduct arizona colorado utah november 1997 present seeking certification lawsuit class action behalf customers browningferris industries inc threestate area period question next three months four similar suits filed federal court utah arizona colorado new mexico february may 2003 two additional suits filed federal court utah arizona claiming substantially anticompetitive conduct seeking class action certification december 2003 eighth suit filed federal court utah claiming monopolistic anticompetitive conduct california prior four years seeking certification suit class action behalf california customers fouryear period eight suits subsequently consolidated judge federal court utah first five suits consolidated one consolidated class action complaint next two suits consolidated discovery purposes eighth suit coordinated discovery purposes june 2004 settled immaterial amount suit filed may 2003 noted seek class action certification proceedings remaining seven suits remain discovery stage believe suits merit vigorously defending litigation australia arbitration stericorp limited etd equipment sold discovery pending proceedings currently expect arbitration hearing held second quarter 2006 2005 arbitration regarding various disputes exclusive marketing distribution license agreement licensor software licensor claimed among things license ceased exclusive failure pay minimum royalties license agreement claimed among things licensor’s actions entitled us rescind license agreement repaid 18 million license fee paid march 1 2006 arbitrator awarded licensor 04 million damages breach license agreement denied parties’ claims including claim rescission license agreement effectively terminated result arbitrator’s decision wroteoff remaining 14 million unamortized portion license intangible asset note 16 products services geographic information fas 131 disclosures segments enterprise related information requires segment information reported based information utilized executive management internally assess performance make operating decisions determining reportable operating segments management stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 determined two reportable segments united states foreign operations based consideration following criteria • services provided • types customers serviced • types medical waste collection transportation treatment methods utilized • regulatory environments similar vary based upon country specific regulations • employ sales marketing techniques activities summary information reportable segments follows revenues attributed countries based location customers intercompany revenues recorded united states work performed canada eliminated prior reporting united states revenues amounts eliminated 01 million 01 million 03 million 2005 2004 2003 respectively accounting principles critical accounting policies used preparation financial statements reporting segments stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 detailed information united states reporting segment follows detailed information foreign reporting segment follows stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 note 17 selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2005 2004 thousands except per share amounts • fourth quarter 2005 includes 365 million 234 million tax 3ci legal settlement expenses 18 million 11 million tax licensing legal settlement 25 million 15 million tax noncash writedown note receivable former joint venture • third quarter 2005 includes 09 million 05 million tax noncash writedown impaired building property • fourth quarter 2004 includes 31 million 19 million tax redemption premium expense 11 million 07 million tax noncash accelerated amortization financing fees see note 5long term debt senior subordinated notes • second quarter 2004 includes 12 million 07 million tax noncash writedown idled incinerator equipment related spare parts • earnings per share calculated quarterly basis amounts may total calculated fullyear earnings per share note 18 subsequent event february 27 2006 completed acquisition sterile technologies group limited leading provider medical waste management services ireland united kingdom approximately 131 million 114 million paid cash 17 million paid assumption debt sterile stericycle inc subsidiaries notes consolidated financial statements continued december 31 2005 technologies group limited headquartered dublin ireland provides medical waste management services customers ireland scotland england wales 2005 arbitration proceedings regarding various disputes exclusive marketing distribution license agreement licensor software see note 15 legal proceedings litigation march 1 2006 announced 2005 results february 7 2006 arbitrator awarded licensor 04 million damages breach agreement denied parties’ claims license agreement effectively terminated result arbitrator’s award required record pretax cash charge 04 million pretax noncash charge 14 million representing writeoff unamortized portion license fee paid although arbitrator’s award subsequent event occurred end year required record charges quarter year ended december 31 2005 result net income quarter year ended december 31 2005 reduced 11 million net tax net income quarter year announced february 7 2006 included new line item licensing legal settlement consolidated statements income made related changes consolidated financial statements notes integral part stericycle inc subsidiaries schedule ii valuation allowance accounts 1 amounts consist primarily costs assumed acquired companies recorded prior date acquisition item 9item 8 consolidated financial statements supplemental data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting internal control financial reporting defined rules 13a15f securities exchange act 1934 process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management assessed effectiveness company’s internal control financial reporting december 31 2006 making assessment management used criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework company’s audited consolidated financial statements include results consolidated operations ireland united kingdom related stericycle ireland ltd operations began march 1 2006 company acquired stock sterile technologies group republic ireland company business stericycle ireland ltd management’s assessment conclusion effectiveness internal control financial reporting include results consolidated operations ireland united kingdom related stericycle ireland ltd operations began march 1 2006 company acquired stock sterile technologies group republic ireland company business stericycle ireland ltd management’s assessment effectiveness company’s internal control financial reporting december 31 2006 include assessment internal control financial reporting company’s consolidated operations stericycle ireland ltd december 31 2006 total assets net assets stericycle ireland ltd including intangibles assets held sale 1676 million 1347 million respectively revenues net income ten months ended december 31 2006 542 million 99 million respectively based assessment criteria management concludes company maintained effective internal control financial reporting december 31 2006 company’s independent auditors issued attestation report management’s assessment company’s internal control financial reporting report appears page 30 stericycle inc lake forest il february 28 2007 report independent registered public accounting firm internal control financial reporting board directors shareholders stericycle inc audited management’s assessment included accompanying management’s report internal control financial reporting stericycle inc maintained effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria stericycle inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include results consolidated operations ireland united kingdom related stericycle ireland ltd operations began march 1 2006 company acquired stock sterile technologies group republic ireland company business stericycle ireland ltd december 31 2006 total assets net assets stericycle ireland ltd including intangibles assets held sale 1676 million 1347 million respectively revenues net income ten months ended december 31 2006 542 million 99 million respectively audit internal control financial reporting stericycle inc also include evaluation internal control financial reporting stericycle ireland ltd subsidiary opinion management’s assessment stericycle inc maintained effective internal control financial reporting december 31 2006 fairly stated material respects based coso criteria also opinion stericycle inc maintained material respects effective internal control financial reporting december 31 2006 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets stericycle inc subsidiaries december 31 2006 2005 related consolidated statements income cash flows changes shareholders’ equity three years period ended december 31 2006 report dated february 28 2007 expressed unqualified opinion thereon ernst young llp chicago illinois february 28 2007 report independent registered public accounting firm board directors shareholders stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2006 2005 related consolidated statements income cash flows changes shareholders’ equity three years period ended december 31 2006 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2006 2005 consolidated results operations cash flows three years period ended december 31 2006 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein disclosed note 2 consolidated financial statements company changed method accounting stockbased compensation accordance guidelines provided statement financial accounting standards 123r “sharebased payment” january 1 2006 also audited accordance standards public company accounting oversight board united states effectiveness stericycle inc’s internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 28 2007 expressed unqualified opinion thereon ernst young llp chicago illinois february 28 2007 stericycle inc subsidiaries consolidated balance sheets thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements income thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes shareholders’ equity years ended december 31 2006 2005 2004 thousands accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 2006 unless context requires otherwise “we” “us” “our” refers stericycle inc subsidiaries consolidated basis note 1description business incorporated 1989 presently serve approximately 351700 customers throughout united states united kingdom mexico canada ireland argentina puerto rico north america fully integrated national network includes 53 processing centers 100 additional transfer collection sites use network provide broad range services customers including regulated medical waste management services regulated return management services regulated medical waste management services include servicing variety customers remove process waste regulated return management services physical services provided companies individual businesses assist handling products removed supply chain due recalls expiration services also included advanced notification technology used communicate specific instructions users product waste treatment technologies include autoclaving incineration chemical treatment proprietary electrothermaldeactivation system united kingdom fully integrated network includes 22 processingcollection centers four additional transfercollection sites argentina one processing facility uses combination incineration autoclave treatments addition technology licensing agreements companies located japan brazil australia note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc wholly owned subsidiaries well 645 ownership medam sa de cv “medam” mexican company significant intercompany accounts transactions eliminated addition 375 ownership medam ba srl argentine company accounted using equity method minority interest expense related majority owned subsidiary equity interest income loss unconsolidated subsidiary included income expense revenue recognition recognize revenue regulated waste services time waste collection revenues regulated returns management services recorded time services performed royalty revenues calculated based measurements specified contract license revenues recognized end reporting period activity measured completed revenues product sales recognized time goods shipped ordering customer software licensing revenues recognized prorated basis term license agreement revenue costs contracts supply proprietary etd treatment equipment recognized based shipment equipment services provided individual contract revenues related etd sales 2006 2005 contracts loss position losses would recorded known estimable contracts go loss position cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows containers weighted average useful life 88 years year ended december 31 2005 recorded noncash impairment charge 09 million related springhill louisiana building property year ended december 31 2004 changed useful lives containers impact change immaterial results goodwill intangibles goodwill indefinite lived intangibles amortized subject annual impairment test according statement financial accounting standards “sfas” 142 intangible assets continue amortized useful lives determined customer relationships useful lives 20 40 years based upon type customer weighted average useful life 389 years noncompete intangibles useful lives one five years weighted average useful life 48 years tradename intangibles useful lives 20 40 years weighted average useful life 394 years software technology intangibles useful lives three five years weighted average useful life 44 years determined permits indefinite lives thus amortized income taxes deferred income tax liabilities assets determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse accounts receivable accounts receivable consist primarily amounts due us normal business activities accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency bad debt expense 42 million 27 million 08 million years ended december 31 2006 2005 2004 respectively financial instruments financial instruments consist cash equivalents shortterm investments derivatives accounts receivable payable longterm debt fair values financial instruments materially different carrying values financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater 2 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses contracts loss positions losses recorded known estimable losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits income tax liabilities accrued auto workers’ compensation insurance claims estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates derivative instruments two forward contracts purchase sterling gbp hedging instruments intercompany loan parent company subsidiary united kingdom stericycle international ltd described fully note 7 subsidiary borrowed funds purchase common stock white rose environmental ltd forward contracts align anticipated repayment schedule loan last contract expires july 2009 stockbased compensation december 2004 financial accounting standards board issued statement financial accounting standards “sfas” 123r sharebased payment “sfas 123r” sfas 123r revision sfas 123 accounting stockbased compensation “sfas 123” supersedes accounting principles board opinion 25 accounting stock issued employees “apb 25” related implementation guidance stock based compensation expense recognized 2005 stock options issued connection stock option plans employee stock purchase plan “espp” “intrinsic value” rules apb 25 january 1 2006 adopted provisions sfas 123r using modified prospective method account stock compensation costs sfas 123r requires measurement recognition compensation expense stockbased payment awards made employees directors fair value recognition provisions sfas 123r stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility expected term riskfree rate expected volatility based upon historical experience expected term stock options based upon historical experience riskfree interest rate assumption based upon average us treasury three fiveyear yield rates factors change employ different assumptions stockbased compensation expense may differ significantly recorded past foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated current exchange rates income statement accounts translated average rates period related translation adjustments reported component comprehensive income shareholders’ equity environmental matters record liability environmental remediation damages cleanup program becomes probable costs damages reasonably estimated environmental liabilities recorded december 31 2006 aware issues facilities could initiate need environmental remediation reclassifications certain amounts 2004 2005 financial statements reclassified conform 2006 presentation new accounting standards september 2006 financial accounting standards board “fasb” issued sfas 157 “fair value measurements “sfas 157”” sfas 157 defines fair value establishes framework measuring fair value requires enhanced disclosures fair value measurements sfas 157 requires companies disclose fair value financial instruments according fair value hierarchy defined standard additionally companies required provide enhanced disclosure regarding financial instruments including reconciliation beginning ending balances separately major category assets liabilities sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years currently evaluating impact adoption sfas 157 however expect material impact consolidated financial statements june 2006 fasb issued interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” interpretation clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 “accounting income taxes” interpretation prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition fin 48 effective fiscal years beginning december 15 2006 currently evaluating impact adoption fin 48 however expect material impact consolidated financial statements note 3income taxes significant components income tax expense years ended december 31 follows thousands reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 follows cash payments income taxes 301 million 281 million 259 million years ended december 31 2006 2005 2004 respectively deferred tax liabilities assets december 31 follows thousands december 31 2006 net operating loss carry forwards us federal income tax purposes fully utilized excluding net operating loss carry forwards related 3ci stericycle acquired 3ci’s net operating loss carry forwards 2006 result remaining net operating loss carry forward federal state purposes 111 million began expire 2006 foreign tax credit approximately 03 million begin expire beginning 2010 undistributed earnings foreign subsidiaries considered permanently invested therefore us deferred taxes recorded thereon cumulative amounts earnings 410 million december 31 2006 practicable estimate us withholding tax thereon assuming repatriation accordance sfas 109 “accounting income taxes” deferred tax liabilities increased reflect differences tax book basis certain intangible assets primarily related acquisition sterile technologies group ltd “stg” net operating loss carry forwards state income tax purposes 39 million expire 2018 currently evaluating impact adoption fin 48 however expect material impact consolidated financial statements note 4acquisitions divestiture year ended december 31 2006 completed 16 acquisitions seven domestic nine international completed one acquisition canada six mexico one ireland one argentina largest acquisitions year sterile technologies group limited ireland “stg” acquired stock stg approximately 1310 million 1140 million paid cash 170 million paid assumption debt none 16 acquisitions 2006 significant operations individually aggregate intend continue seek opportunities acquire businesses expand national networks united states internationally increase customer base believe acquisitions enable us improve operating efficiencies increased utilization service infrastructure aggregate net purchase price acquisitions approximately 1949 million approximately 1640 million paid cash 301 million paid issuance notes payable 08 million paid issuance shares common stock december 31 2006 valuation certain goodwill intangible assets associated acquisitions preliminary finalized year ended december 31 2005 completed 22 acquisitions 13 domestic nine international completed seven acquisitions mexico two united kingdom nnc group llc indiana universal solution international inc “usi” north carolina two largest acquisitions year connection usi acquisition sold selected assets usi’s consumer products division carolina supply chain services llc 123 million 103 million net amount received cash 20 million held escrow none 22 acquisitions 2005 significant operations individually aggregate net purchase price acquisitions approximately 1894 million approximately 1397 million paid cash 497 million paid issuance notes payable year ended december 31 2004 completed six acquisitions two domestic four international completed one acquisition united kingdom three mexico largest acquisitions year white rose environmental ltd united kingdom none six acquisitions 2004 significant operations individually aggregate net purchase price acquisitions approximately 906 million approximately 724 million paid cash 178 million paid issuance notes payable 04 million paid issuance unregistered shares common stock financial reporting purposes acquisition transactions accounted using purchase method accounting total purchase price 2006 2005 2004 1949 million 1894 million 906 million respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market value date acquisition certain cases purchase price subject downwards adjustment revenues customer contracts acquired failed reach certain specified levels excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill recorded amounts 1193 million 1700 million years 2006 2005 respectively results operations acquired businesses included consolidated statements income date acquisition note 5long term debt longterm debt consists following december 31 payments due longterm debt excluding capital lease obligations five years subsequent december 31 2006 follows paid interest 276 million 135 million 115 million years ended december 31 2006 2005 2004 respectively property capital leases included property plant equipment accompanying consolidated balance sheets follows december 31 amortization related capital leases included depreciation expense minimum future lease payments capital leases follows thousands senior credit facility july 2006 certain subsidiaries entered new credit agreement bank america na lenders party credit agreement new credit agreement effect amendment prior senior unsecured credit facility new credit agreement reduces costs borrowing using favorable pricing grid ii increases revolving credit facility 550 million 650 million iii increases “accordion” amount may request increase size revolving credit facility 100 million 200 million iv increases letter credit sublimit 150 million 200 million v increases foreign currency sublimit 125 million 200 million vi increases debttoebitda covenant 300100 375100 vii extends maturity date borrowings june 30 2010 july 31 2011 new credit agreement reduces costs borrowing reducing applicable margin added relevant interest rate charged borrowings bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference “base rate” higher prime rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement new credit agreement applicable margin based consolidated leverage ratio longterm noncredit enhanced debt rated standard poors ii sp debt rating whichever margin favorable us december 31 2006 margin interest rates borrowings new credit facility 00 base rate loans 075 libor loans new credit agreement contains customary events default including failure pay principal interest amount due violation certain affirmative covenants negative covenants breach representations warranties change control upon occurrence event default payment indebtedness may accelerated lending commitments credit agreement may terminated december 31 2006 3873 million borrowings outstanding senior unsecured credit facility includes foreign currency borrowings 93 million addition 488 million committed outstanding letters credit december 31 2006 weighted average rate interest unsecured revolving credit facility 608 per annum june 2005 obtained 4000 million senior unsecured revolving credit facility maturing june 2010 place existing senior secured credit facility new credit facility reduced interest rates charged reducing applicable margin added relevant interest rate new credit facility also allowed us borrow preapproved currencies united states dollars borrowings bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference “base rate” higher prime rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement applicable margin based upon consolidated leverage ratio december 31 2005 margin interest rates borrowings new credit facility 00 base rate loans 075 libor loans unsecured credit facility replaced july 2006 new unsecured credit facility discussed december 31 2005 2917 million borrowings outstanding senior unsecured credit facility includes foreign currency borrowings 52 million addition 659 million committed outstanding letters credit december 31 2005 weighted average rate interest unsecured revolving credit facility 499 per annum notes payable december 31 2006 promissory notes foreign subsidiary bank debt primarily issued result acquisitions totaling 779 million 491 million notes fixed interest rate 288 million floating interest rate weighted average interest rate notes 621 weighted average maturity approximately 44 years december 31 2005 promissory notes foreign subsidiary bank debt primarily issued result acquisitions totaling 680 million 533 million notes fixed rate 147 million variable rate weighted average interest rate notes 530 weighted average maturity approximately 42 years guarantees guaranteed loan aozora bank japan behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding waste management business fiveyear loan current balance 48 million aozora bank expires june 2009 management currently believes amount paid guarantee note 6accrued liabilities accrued liabilities december 31 consist following items thousands note 7derivative instruments july 2004 entered four forward contracts two settled hedge gbp sterlingbased intercompany loan usbased subsidiary stericycle international llc subsidiary united kingdom stericycle international ltd subsidiary borrowed funds purchase white rose forward contracts align anticipated repayment schedule loan last contract expires july 2009 initially elect hedge accounting forward contracts recognizing change value hedges income expense amount generally offset currency adjustment intercompany receivable 2004 cost forward contract immaterial net income october 1 2005 prospectively designated existing forward contracts cash flow hedges using hedge accounting objective cash flow hedges offset foreign exchange risk us dollar equivalent cash inflows settlement gbp denominated intercompany loan expect income related hedge accounting election 01 million recognized remaining life contracts interest income 2006 2005 cost forward contracts recognized immaterial net income december 31 2006 fair market value hedge recorded liability 23 million long term liabilities december 31 2006 total notional amount hedges outstanding gbp 110 million december 31 2006 hedges determined 100 effective note 8goodwill intangible assets june 2001 fasb issued sfas 141 “business combinations” sfas 142 “goodwill intangible assets” sfas 142 goodwill indefinite lived intangibles longer amortized subject annual impairment test frequent testing circumstances indicate may impaired 2006 2005 performed annual impairment evaluations determined impairment december 31 2006 2005 322 million 185 million respectively indefinite lived intangibles consist environmental permits performed annual impairment test determined impairment two geographical reporting segments united states foreign countries goodwill changes carrying amount goodwill years ended december 31 2006 2005 follows thousands according sfas 142 intangible assets continue amortized useful lives year ended december 31 2006 recorded fair value intangibles acquired connection acquisitions universal solutions international inc nnc group llc one source mr shredding waste management ltd stg nicklin associates inc assigned estimate intangible valuation customer relationships respect acquisitions completed fourth quarter 2006 assigned 412 million customer relationships amortization periods 20 40 years 136 million facility environmental permits indefinite lives 03 million noncompete agreements amortization periods one five years 02 million proprietary technology amortization period three years year ended december 31 2005 recorded fair value intangibles acquired connection acquisitions sanford motors iowa regulated waste reduction center automated health technologies horizons biomed tech envirotech bio clean medical systems med trac acquisitions completed united kingdom mexican subsidiaries assigned 133 million customer relationships amortization periods 20 40 years 17 million facility environmental permits indefinite lives 04 million noncompete agreements amortization periods one five years also 18 million writeoff corresponding reduction accumulated amortization 04 million related unamortized portion license agreement effectively terminated year ended december 31 2004 recorded fair value intangibles acquired connection acquisitions pssi american waste industries inc texas environmental services inc white rose environmental ltd sterimed sade cv assigned 117 million customer relationships amortization periods 20 40 years 22 million tradenames amortization period 20 40 years 64 million facility environmental permits indefinite lives 05 million software license amortization period 5 years 02 million noncompete agreements amortization periods one five years december 31 value amortizing intangible assets follows thousands year ended december 31 2006 2005 2004 aggregate amortization expense 30 million 16 million 24 million respectively estimated amortization expense thousands next five years follows years ended december 31 note 9lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next twelve years leases properties contain renewal provisions rent expense 2006 2005 2004 287 million 258 million 212 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2006 next five years aggregate follows note 10net income per common share following table sets forth computation basic diluted net income per share additional information regarding outstanding employee stock options outstanding warrants see note 11 2006 2005 2004 options warrants purchase 782932 shares 33208 shares 55719 shares respectively exercise prices 35057252 44226221 46955114 respectively included computation diluted earnings per share effect would antidilutive note 11stock based compensation stock plans adopted five stock option plans 2005 incentive stock option plan “2005 plan” stockholders approved april 2005 ii 2000 nonstatutory stock option plan “2000 plan” board directors adopted february 2000 iii 1997 stock option plan “1997 plan” stockholders approved april 1997 iv directors stock option plan “directors plan” shareholders approved july 1996 prior initial public offering august 1996 v 1995 incentive compensation plan “1995 plan” stockholders approved september 1995 plan expired july 2005 directors plan expired may 2006 1997 plan expire january 2007 additional options may granted three plans 2005 plan authorizes awards stock options stock appreciation rights total 2400000 shares amended 2000 plan authorizes stock option grants total 3500000 shares 1997 1995 plans authorized stock option grants total 3000000 shares amended directors plan authorized stock option grants total 1170000 shares 2005 plan provides grant nonstatutory stock options “nsos” incentive stock options intended qualify section 422 internal revenue code “isos” well stock appreciation rights 2000 plan provides grant nsos 1997 1995 plans provided grant nsos isos directors plan provided grant nsos 2005 plan authorizes awards officers employees consultants following expiration directors plan may 2006 directors 2000 plan authorizes stock option grants employees consultants officers directors 1997 1995 plans authorized stock option grants officers directors employees consultants directors plan authorized stock option grants outside directors shares include shares available option grants 2005 plan 2000 plan 1997 plan shares granted options five plans yet exercised reserved follows december 31 2006 employee stock purchase plan october 2000 board directors adopted stericycle inc employee stock purchase plan “espp” effective july 1 2001 stockholders approved espp may 2001 espp authorizes 300000 shares common stock purchased employees 15 discount market price stock payroll deductions two sixmonth offerings year employee elects participate offering granted option first day offering number shares equal employee’s payroll deductions espp offering period may exceed 5000 divided option price per share option price per share lower 85 closing price share common stock first trading day offering period 85 closing price last trading day offering period recognized compensation expense espp reflected statement income every employee completed one year’s employment first day offering fulltime employee parttime employee customarily works least 20 hours per week eligible participate offering 2006 2005 2004 20498 shares 18572 shares 20363 shares respectively issued espp stock based compensation expense result adopting sfas 123r net income 2006 65 million less continued account stockbased compensation accounting principles board opinion 25 “accounting stock issued employees” “apb 25” related interpretations basic diluted net income per share year ended december 31 2006 239 233 respectively negatively impacted 015 014 respectively due adoption sfas 123r elected use modified prospective transition method permitted sfas 123r therefore financial results prior periods restated transition method stockbased compensation expense 2006 includes expense equity awards granted prior yet vested january 1 2006 compensation expense based grantdate fair value estimated accordance original provisions sfas 123 “accounting stockbased compensation” “sfas 123” amended sfas 148 “accounting stockbased compensationtransition disclosure” since adoption sfas 123r changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding compensation expense stockbased compensation awards granted subsequent january 1 2006 based grant date fair value determined accordance provisions sfas 123r sfas 123r also requires benefits tax deductions excess recognized compensation expense reported financing cash flow rather operating cash flow prescribed prior accounting rules requirement reduces net operating cash flow increases net financing cash flows periods adoption total cash flow remains unchanged would reported prior accounting rules year ended december 31 2006 recognized compensation expense 103 million stock options 03 million espp reflected statement income significant capitalized stockbased compensation costs december 31 2006 prior january 1 2006 accounted stockbased compensation accordance apb 25 followed disclosure requirements sfas 123 apb 25 accounted stockbased awards employees directors using intrinsic value method allowed sfas 123 intrinsic value method stockbased compensation expense recognized statement income exercise price stock options granted employees directors equaled fair market value underlying stock date grant options granted valued using blackscholes optionpricing model sfas 123 purposes well following pro forma disclosure assuming sfas 123 fair value method used following table sets forth computation basic diluted loss per share illustrates effect net income net income per share applied fair value recognition provisions sfas 123 stockbased compensation plans following table presents total stockbased compensation expense resulting stock option awards espp included consolidated statements income december 31 2006 182 million total unrecognized compensation expense related nonvested option awards expected recognized weightedaverage period 177 years stock options granted officers employees generally vest five years 2006 2005 options granted officers employees generally vested rate 20 option shares first five anniversaries option grant date 2004 options granted officers employees generally vested rate 20 option shares first anniversary option grant date rate 160 option shares next 48 months expense related graded vesting options recognized using straightline method vesting period exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options option activity year ended december 31 2006 summarized follows aggregate intrinsic value represents total pretax intrinsic value difference closing stock price last day trading year ended december 31 2006 exercise price multiplied number inthemoney options would received option holders assuming option holders exercised options december 31 2006 amount changes based fair market value stock total intrinsic value options exercised year ended december 31 2006 340 million outstanding options december 31 2006 weighted average remaining contractual life 70 years aggregate intrinsic value 1181 million exercisable options december 31 2006 weighted average remaining contractual life 56 years aggregate intrinsic value 749 million options outstanding exercisable december 31 2006 price range presented blackscholes optionpricing model used determining fair value option grant expected term options granted based historical experience expected volatility based upon volatility experience expected dividend yield zero riskfree interest rate based average us treasury three fiveyear yield rates assumptions used blackscholes model presented note 12preferred stock warrants preferred stock december 31 2006 2005 1000000 authorized shares preferred stock shares issued outstanding warrants september 2003 connection acquisition issued warrants purchase 1000 shares common stock warrants become exercisable september 2008 exercise price warrants 4725 per share december 31 2006 warrants outstanding october 2006 connection acquisition issued warrants purchase 10000 shares common stock exercise price warrants 7066 per share december 31 2006 warrants outstanding note 13employee benefit plan 401k defined contribution retirement savings plan covering substantially employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee maximum 1500 per annum contributions years ended december 31 2006 2005 2004 approximately 15 million 13 million 13 million respectively note 14nonconsolidating joint ventures investment joint venture medam ba srl argentine corporation formed utilize etd technology treat regulated waste primarily buenos aires market investment joint venture 21 million 26 million december 31 2006 2005 respectively included longterm assets addition intercompany loan balance 16 million 11 million december 31 2006 2005 respectively eliminated consolidation 2006 2005 2004 recorded 05 million 03 million 02 million respectively equity losses related joint venture recorded income expense january 2004 sold minority interest investment evertrade regulated waste pty ltd south african company associated current receivables loans due joint venture reno africa pte ltd cash 81 million note receivable fourth quarter 2005 remaining unpaid note balance 25 million december 2005 determined issuer note would unable generate remaining cash pay note receivable therefore wroteoff remaining 25 million balance uncollectible december 31 2005 note 15legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time united kingdom competition commission june 2006 united kingdom office fair trading “oft” referred united kingdom competition commission “competition commission” acquisition subsidiary stericycle international llc february 2006 stock sterile technologies group limited “stg” irish company providing regulated waste management services ireland united kingdom terms oft’s referral competition commission decide whether result stg acquisition expected substantial lessening competition one markets united kingdom healthcare risk waste services remedial actions taken recommended competition commission october 19 2006 competition commission issued provisional findings stg acquisition resulted may expected result substantial lessening competition market healthcare risk waste services requiring incineration five geographical areas competition commission also issued notice possible remedies including complete divestiture stg’s operations england wales ii complete divestiture stg’s incinerators england wales iii divestiture stg’s incinerators serving customers affected geographical areas december 12 2006 competition commission published final report stg acquisition competition commission confirmed provisional findings concluded stg acquisition resulted may expected continue result substantial lessening competition market healthcare risk waste services requiring incineration five geographical areas england wales northern england north midlands north wales west midlands southeast wales competition commission accepted remedy proposal allowed initial period sell three stg incinerators serving affected geographical areas together associated customer contracts subject competition commission’s approval terms sale suitability purchaser completed sale three incinerators february 2007 within period allowed competition commission 3ci litigation november 2005 entered preliminary settlement resolve class action litigation minority shareholders majorityowned subsidiary 3ci complete compliance corporation “3ci” 3ci joined class plaintiff litigation pending state court louisiana robb et al v stericycle inc et al first judicial district court caddo parish louisiana 467704a terms preliminary settlement agreed pay 325 million cash trust fund established claims administrator approved court purpose settling claims louisiana litigation related litigation state court texas 3ci complete compliance corporation v waste systems inc et al 269th judicial district harris county texas 200346899 together “3ci litigation” ii canceling otherwise acquiring shares 3ci common stock held members plaintiff class iii paying courtapproved administrative expenses legal fees accordance terms preliminary settlement made required 325 million deposit claims administrator following court’s preliminary approval settlement december 2005 recorded settlement new line item 3ci legal settlement “other income expense” consolidated statements income 2005 amount recorded represented 325 million settlement payment plus legal fees expenses 59 million less 19 million allocated shares 3ci common stock transferred us upon final approval settlement recorded goodwill accounted acquisition shares purchase accounting determined fair value shares 19 million basis determination approximately 3161000 shares would transferred us upon court’s final approval settlement value share 060 value 060 per share consistent trading price 3ci common stock months preceding preliminary settlement november 2005 value used court “purchase consideration” described next paragraph december 2005 court preliminarily approved settlement court preliminarily allocated 325 million settlement proceeds principally payment fees expenses counsel plaintiff class approximately 113 million ii distribution class members settlement proceeds approximately 200 million distribution class members “purchase consideration” component 060 per share would distributed class members still owned shares 3ci stock preliminary settlement received final approval “damages consideration” component would distributed class members proportion time held shares 3ci stock class period september 30 1998 february 10 2005 court gave final approval preliminary settlement march 2006 april 2006 following expiration period appeal court’s order could filed completed “shortform” merger subsidiary waste systems inc 3ci surviving corporation result 3ci became direct whollyowned subsidiary 3ci litigation alleged waste systems inc four directors 3ci serving designees also officers directors breached fiduciary duties oppressed minority stockholders unjustly enriched stericycle expense 3ci shareholders plaintiffs alleged wrongfully diverted 3ci’s cash assets manipulated increased 3ci’s debt waste systems inc wrongfully increased direct indirect ownership 3ci forced 3ci declare significant cash dividends preferred stock payable waste systems inc usurped 3ci’s corporate opportunities misappropriated 3ci’s customers unfairly competed 3ci operated 3ci goal maximizing profitability furthering plan integrate operations plaintiffs sought among relief actual punitive damages order requiring buyout 3ci’s minority shareholders litigation australia arbitration stericorp limited etd equipment sold discovery concluding currently expect arbitration hearing held second quarter 2007 2005 arbitration regarding various disputes exclusive marketing distribution license agreement licensor software licensor claimed among things license ceased exclusive failure pay minimum royalties license agreement claimed among things licensor’s actions entitled us rescind license agreement repaid 18 million license fee paid march 1 2006 arbitrator awarded licensor 04 million damages breach license agreement denied parties’ claims including claim rescission license agreement effectively terminated result arbitrator’s decision wroteoff remaining 14 million unamortized portion license intangible asset december 31 2005 note 16products services geographic information sfas 131 “disclosures segments enterprise related information” requires segment information reported based information utilized executive management internally assess performance make operating decisions determined three operating segments based organizational structure company information reviewed operating segments foreign medical waste management services “foreign countries” domestic medical waste management services domestic returns management services aggregated domestic medical waste management services domestic returns management services one reportable segment “united states” based consideration following aggregation criteria • services provided • types customers serviced • types collection transportation processing methods utilized • regulatory environments similar vary based upon country specific regulations • employ sales marketing techniques activities two reportable segments united states foreign countries foreign operations material revenues long lived assets europe consists united kingdom ireland summary information reportable segments follows revenues attributed countries based location customers intercompany revenues recorded united states work performed canada eliminated prior reporting united states revenues accounting principles critical accounting policies used preparation financial statements reporting segments detailed information united states reporting segment follows detailed information foreign countries reporting segment follows note 17selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2006 2005 thousands except per share amounts • fourth quarter 2005 includes 365 million 234 million tax 3ci legal settlement expenses 18 million 11 million tax licensing legal settlement 25 million 15 million tax noncash writedown note receivable former joint venture • earnings per share calculated quarterly basis amounts may total calculated fullyear earnings per share note 18accumulated comprehensive income components accumulated comprehensive income balances follows thousands note 19subsequent event february 17 2007 completed sale three incinerators acquired acquistion stg february 2006 assets part foreign countries operating segments presented balance sheet “asset group held sale” “liability group held sale” include preliminary allocation intangibles divestiture incinerators required united kingdom competition commission see note 15legal proceedings sale price approximately 265 million cash anticipate recording material gain loss quarter ending march 31 2007 stericycle inc subsidiaries schedule iivaluation allowance accounts thousands 1 amounts consist primarily costs assumed acquired companies recorded prior date acquisition currency translation adjustments item 9item 8 consolidated financial statements supplemental data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting internal control financial reporting defined rules 13a15f securities exchange act 1934 process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management assessed effectiveness company’s internal control financial reporting december 31 2007 making assessment management used criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment criteria management concludes company maintained effective internal control financial reporting december 31 2007 company’s independent auditors issued attestation report company’s internal control financial reporting report appears page 29 stericycle inc lake forest il february 27 report independent registered public accounting firm internal control financial reporting board directors shareholders stericycle inc audited stericycle inc’s internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria stericycle inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion stericycle inc maintained material respects effective internal control financial reporting december 31 2007 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets stericycle inc subsidiaries december 31 2007 2006 related consolidated statements income changes shareholders’ equity cash flows three years period ended december 31 2007 report dated february 27 2008 expressed unqualified opinion thereon ernst young llp chicago illinois february 27 2008 report independent registered public accounting firm board directors shareholders stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2007 2006 related consolidated statements income changes shareholders’ equity cash flows three years period ended december 31 2007 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2007 2006 consolidated results operations cash flows three years period ended december 31 2007 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth herein disclosed note 2 consolidated financial statements company changed method accounting stockbased compensation accordance guidelines provided statement financial accounting standards 123r “sharebased payment” january 1 2006 also audited accordance standards public company accounting oversight board united states stericycle inc’s internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 27 2008 expressed unqualified opinion thereon ernst young llp chicago illinois february 27 2008 stericycle inc subsidiaries consolidated balance sheets thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements income thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes equity years ended december 31 2007 2006 2005 thousands accompanying notes integral part financial statements stericycle inc subsidiaries notes condensed consolidated financial statements december 31 2007 unless context requires otherwise “we” “us” “our” refers stericycle inc subsidiaries consolidated basis note 1description business incorporated 1989 presently serve approximately 394600 customers throughout united states united kingdom mexico canada ireland argentina puerto rico north america fully integrated national network includes 53 processing centers 93 additional transfer collection sites use network provide broad range services customers related medical waste management services regulated return management services regulated medical waste management services include servicing variety customers remove process waste regulated return management services physical services provided companies individual businesses assist handling products removed supply chain due recalls expiration services also included advanced notification technology used communicate specific instructions users product waste treatment technologies include autoclaving incineration chemical treatment proprietary electrothermaldeactivation system united kingdom ireland fully integrated network includes 19 processingcollection centers 5 additional transfercollection sites argentina lease 6 processing facilities addition technology licensing agreements companies located japan south africa brazil note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc wholly owned subsidiaries revenue recognition recognize revenues regulated waste services time waste collection payments received advance deferred recognized services provided revenues regulated returns management services recorded time services performed royalty revenues material calculated based measurements specified contract license revenues recognized end reporting period activity measured completed revenues product sales recognized time goods shipped ordering customer software licensing revenues material recognized prorated basis term license agreement contracts loss position losses would recorded known estimable contracts go loss position cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows containers weighted average useful life 89 years ended december 31 2007 2006 wrote 13 million 03 million respectively related equipment permanently idled year ended december 31 2005 recorded noncash impairment charge 09 million related springhill louisiana building property goodwill identifiable intangibles goodwill identifiable indefinite lived intangibles amortized subject annual impairment test according statement financial accounting standards “sfas” 142 intangible assets continue amortized useful lives determined customer relationships useful lives 20 40 years based upon type customer weighted average useful life 379 years noncompete intangibles useful lives one ten years weighted average useful life 48 years tradename intangibles useful lives 20 40 years weighted average useful life 383 years software technology intangibles useful lives three five years weighted average useful life 44 years determined permits indefinite lives thus amortized valuation intangible customer relationships permits derived using discounted income approach financial information revenues costs assets liabilities related intangible asset input standard valuation model determine stream income attributable intangible income stream discounted present arrive valuation perform annual impairment tests accordance sfas 142 indefinite lived intangible assets valuation intangibles permits currently tested impairment annually december 31 frequently circumstances indicate may impaired use discounted income approach model current measurement fair value permits estimate income based upon among things certain assumptions expected future operating performance appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates amortizable identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined regulated waste customer relationships 20year 40year lives based specific type relationship valuation contractual customer relationships derived using discounted income approach valuation model similar method used permit impairment testing mentioned earlier assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows see note 9 consolidated financial statements income taxes deferred income tax liabilities assets determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse accounts receivable accounts receivable consist primarily amounts due us normal business activities require collateral part standard trade credit policy accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency bad debt expense 44 million 42 million 27 million years ended december 31 2007 2006 2005 respectively financial instruments financial instruments consist cash equivalents shortterm investments derivatives accounts receivable payable longterm debt fair values financial instruments materially different carrying values financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater 2 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses contracts loss positions losses recorded known estimable losses incurred within range expectations notes payable financial liabilities carrying values approximate fair value use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits income tax liabilities accrued auto workers’ compensation insurance claims estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates derivative instruments two forward contracts purchase sterling gbp hedging instruments intercompany loan parent company subsidiary united kingdom stericycle international ltd described fully note 8 subsidiary borrowed funds purchase common stock white rose environmental ltd forward contracts align anticipated repayment schedule loan last contract expires july 2009 stockbased compensation december 2004 financial accounting standards board issued sfas 123r sharebased payment “sfas 123r” sfas 123r revision sfas 123 accounting stockbased compensation “sfas 123” supersedes accounting principles board opinion 25 accounting stock issued employees “apb 25” related implementation guidance stock based compensation expense recognized 2005 stock options issued connection stock option plans employee stock purchase plan “espp” “intrinsic value” rules apb 25 january 1 2006 adopted provisions sfas 123r using modified prospective method account stock compensation costs sfas 123r requires measurement recognition compensation expense stockbased payment awards made employees directors fair value recognition provisions sfas 123r stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility expected term riskfree rate expected volatility based upon historical experience expected term stock options based upon historical volatility stock price riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component comprehensive income shareholders’ equity environmental matters record liability environmental remediation damages cleanup program becomes probable costs damages reasonably estimated environmental liabilities recorded december 31 2007 aware issues facilities could initiate need environmental remediation reclassifications certain amounts 2006 financial statements reclassified conform 2007 presentation new accounting standards september 2006 fasb issued sfas 157 “fair value measurements” “sfas 157” sfas 157 defines fair value establishes framework measuring fair value accordance generally accepted accounting principles expands disclosure fair value measurements statement require new fair value measurements rather applies accounting pronouncements require permit fair value measurements well numerous disclosure requirements sfas 157 effective fiscal years beginning november 15 2007 interim periods within fiscal years believe adoption sfas 157 material impact financial position cash flows results operations february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” “sfas 159” sfas 159 allows measurement fair value eligible financial assets liabilities otherwise measured fair value fair value option eligible item elected unrealized gains losses item reported current earnings subsequent reporting date sfas 159 also establishes presentation disclosure requirements designed draw comparisons different measurement attributes elect similar types assets liabilities sfas 159 effective fiscal years beginning november 15 2007 believe adoption sfas 159 material impact financial position cash flows results operations december 2007 fasb issued statement financial accounting standards 141 revised 2007 “business combinations” “sfas 141r” sfas 141r replaces sfas 141 business combinations sfas 141r requires acquiring entity business combination recognize full fair value assets acquired liabilities assumed transaction requires certain contingent assets liabilities acquired recognized fair values acquisition date requires contingent consideration recognized fair value acquisition date changes fair value recognized earnings settled requires expensing transaction restructuring costs generally requires reversals valuation allowances related acquired deferred tax assets changes acquired income tax uncertainties also recognized earnings accounting standard effective financial statements issued fiscal years beginning december 15 2008 currently evaluating provisions sfas 141r determine potential impact adoption financial position results operations note 3acquisitions divestiture 2007 completed 19 acquisitions ten domestic medical waste businesses one domestic assembler distributor containers use mailback program one medical waste business canada six medical waste businesses latin america one medical waste business europe two largest acquisitions medsolutions inc texas commodore medical services lp tennessee addition acquired remaining minority interest medam sa de cv subsidiary mexico became sole owner medam ba subsidiary argentina previously accounted minority interest using equity method accounting aggregate net purchase price acquisitions including adjustments purchase accounting approximately 2410 million 1148 million paid cash 1125 million paid issuance promissory notes 137 million paid issuance shares common stock purchase prices acquisitions primarily allocated identifiable intangible assets goodwill reflecting complementary strategic fit acquired businesses brought us february 2007 sold three incinerators associated customer contracts united kingdom comply remedy accepted united kingdom competition commission reported form 10k 2006 sales price 265 million resulted gain approximately 19 million selected assets included 131 million goodwill related liabilities presented balance sheet december 31 2006 “assets disposal group held sale” “liabilities disposal group held sale” year ended december 31 2006 completed 16 acquisitions seven domestic nine international completed one acquisition canada six mexico one ireland one argentina largest acquisitions year sterile technologies group limited ireland “stg” acquired stock stg approximately 1310 million 1140 million paid cash 170 million paid assumption debt aggregate net purchase price acquisitions approximately 1949 million approximately 1640 million paid cash 301 million paid issuance promissory notes 08 million paid issuance shares common stock year ended december 31 2005 completed 22 acquisitions 13 domestic nine international completed seven acquisitions mexico two united kingdom nnc group llc indiana universal solution international inc “usi” north carolina two largest acquisitions year connection usi acquisition sold selected assets usi’s consumer products division carolina supply chain services llc 123 million 103 million net amount received cash aggregate net purchase price acquisitions approximately 1894 million approximately 1397 million paid cash 497 million paid issuance promissory notes financial reporting purposes acquisitions accounted using purchase method accounting total purchase price 2007 2006 2005 2410 million 1949 million 1894 million respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market value date acquisition certain cases purchase price subject downwards adjustment revenues customer contracts acquired failed reach certain specified levels excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill allocations pending completion certain intangible asset valuations goodwill recorded amounts 2038 million 1193 million 1700 million years 2007 2006 2005 respectively results operations acquired businesses included consolidated statements income date acquisition intend continue seek opportunities acquire businesses expand national networks united states internationally increase customer base believe acquisitions enable us improve operating efficiencies increased utilization service infrastructure note 4property plant equipment property plant equipment december 31 consist following items note 5income taxes significant components income tax expense years ended december 31 2007 2006 2005 follows reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 2007 2006 2005 follows cash payments income taxes 459 million 301 million 281 million years ended december 31 2007 2006 2005 respectively deferred tax liabilities assets december 31 2007 2006 follows december 31 2007 net operating loss carry forwards us federal state income tax purposes fully utilized excluding net operating loss carry forwards related subsidiary 3ci complete compliance corporation “3ci” stericycle acquired 3ci’s net operating loss carry forwards 2006 result remaining net operating loss carry forward federal state purposes 41 million began expire 2006 foreign tax credit approximately 01 million begin expire beginning 2010 undistributed earnings foreign subsidiaries considered permanently invested therefore us deferred taxes recorded thereon cumulative amounts earnings 434 million december 31 2007 practicable estimate us withholding tax thereon assuming repatriation september 2006 financial accounting standards board “fasb” issued fasb interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” interpretation clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance statement financial accounting standards “sfas” 109 “accounting income taxes” interpretation prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition adopted provisions fin 48 january 1 2007 adoption fin 48 material impact consolidated financial statements subsidiaries file us federal income tax returns income tax returns various states foreign jurisdictions exceptions longer subject us federal state local nonus income tax examinations tax authorities years 2001 third quarter 2006 internal revenue service “irs” began examination company’s us income tax return 2004 examination settled second quarter 2007 paid immaterial amount third quarter 2007 additional tax interest respect adjustments deduction state income tax expense currency losses tax years 2005 2006 remain open subject examination irs subsidiaries foreign countries tax years open ranging 2002 2006 total amount unrecognized tax benefit reserve december 31 2007 37 million includes immaterial amounts interest penalties reflected liability balance sheet amount income tax contingency reserve recognized would affect effective tax rate approximately 37 million december 31 2007 balances materially changed expect significant increase decrease balances next twelve months recognize interest penalties accrued related income tax reserves income tax expense method accounting consistent prior years following table shows reconciliation income tax reserves december 31 2007 note 6longterm debt longterm debt consists following december 31 payments due longterm debt excluding capital lease obligations five years subsequent december 31 2007 follows paid interest 318 million 276 million 135 million years ended december 31 2007 2006 2005 respectively property capital leases included property plant equipment accompanying consolidated balance sheets follows december 31 amortization related capital leases included depreciation expense minimum future lease payments capital leases follows senior credit facility august 2007 entered new credit agreement new credit agreement substance amendment existing credit agreement amended credit facility reduces interest rates charged reducing applicable margin added relevant interest rate borrowings bear interest fluctuating interest rates determined election advance quarterly applicable interest period reference “base rate” higher prime rate bank america na 05 rate overnight federal funds transactions ii london interbank offered rate libor plus either case applicable margin within relevant range margins provided credit agreement applicable margin based upon consolidated leverage ratio december 31 2007 margin interest rates borrowings new credit facility 00 base rate loans 0625 libor loans addition change applicable margin facility increased 650 million 850 million additional capacity available 200 million upon request also increased letter credit sublimit alternative currency sublimit 300 million 200 million maturity date extended july 2011 august 2012 december 31 2007 4654 million borrowings outstanding senior unsecured credit facility includes foreign currency borrowings 160 million addition 1394 million committed outstanding letters credit december 31 2007 weighted average rate interest unsecured revolving credit facility 553 per annum july 2006 certain subsidiaries entered credit agreement bank america na lenders party credit agreement credit agreement effect amendment existing senior unsecured credit facility 2006 credit agreement reduced costs borrowing using favorable pricing grid ii increased revolving credit facility 550 million 650 million iii increased “accordion” amount could request increase size revolving credit facility 100 million 200 million iv increased letter credit sublimit 150 million 200 million v increased foreign currency sublimit 125 million 200 million vi increased debttoebitda covenant 300100 375100 vii extended maturity date borrowings june 30 2010 july 31 2011 december 31 2006 3873 million borrowings outstanding senior unsecured credit facility includes foreign currency borrowings 93 million addition 488 million committed outstanding letters credit december 31 2006 weighted average rate interest unsecured revolving credit facility 608 per annum notes payable foreign subsidiary debt december 31 2007 promissory notes foreign subsidiary bank debt primarily issued result acquisitions totaling 1686 million 1686 million 1394 million promissory notes secured letters credit 1686 million 1386 million fixed interest rate 300 million floating interest rate weighted average interest rate 579 weighted average maturity approximately 59 years december 31 2006 promissory notes foreign subsidiary bank debt primarily issued result acquisitions totaling 779 million 779 million 488 million promissory notes secured letters credit 779 million 491 million fixed interest rate 288 million floating interest rate weighted average interest rate 621 weighted average maturity approximately 44 years guarantees guaranteed loan jpmorganchase bank na behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business six month loan jpmorganchase bank na current balance 43 million loan expires may 2008 management currently believes amount paid guarantee note 7accrued liabilities accrued liabilities december 31 consist following items note 8derivative instruments july 2004 entered four forward contracts two settled hedge gbp sterlingbased intercompany loan usbased subsidiary stericycle international llc subsidiary united kingdom stericycle international ltd subsidiary borrowed funds purchase white rose forward contracts align anticipated repayment schedule loan last contract expires july 2009 initially elect hedge accounting forward contracts recognized change value hedges income expense amount generally offset currency adjustment intercompany receivable october 1 2005 prospectively designated existing forward contracts cash flow hedges using hedge accounting objective cash flow hedges offset foreign exchange risk us dollar equivalent cash inflows settlement gbp denominated intercompany loan 2007 2006 cost forward contracts recognized immaterial net income december 31 2007 fair market value hedge recorded liability 26 million 07 million current december 31 2007 total notional amount hedges outstanding gbp 110 million december 31 2007 hedges determined 100 effective note 9goodwill intangible assets sfas 142 “goodwill intangible assets” goodwill indefinite lived intangibles longer amortized subject annual impairment test frequent testing circumstances indicate may impaired two geographical reporting segments “united states” “foreign countries” goodwill changes carrying amount goodwill years ended december 31 2007 2006 follows quarter ended june 30 2007 performed annual goodwill impairment evaluation three operating units domestic regulated medical waste domestic regulated returns management foreign countries determined none recorded goodwill impaired complete annual impairment analysis indefinite lived intangibles facility permits quarter ended december 31 year 2007 wrote 20 million white rose environmental tradename result name change subsidiary united kingdom wrote 02 million permit intangible treatment facility united kingdom longer used intangibles part foreign countries segment write reported statement income impairment intangible assets 2007 2006 performed annual permit impairment evaluation determined noted impairment december 31 2007 2006 528 million 322 million respectively indefinite lived intangibles consist environmental permits performed annual impairment test determined impairment according sfas 142 intangible assets continue amortized useful lives 2007 assigned 159 million customer relationships amortization periods 20 40 years 167 million facility environmental permits indefinite lives 25 million noncompete agreements amortization periods one ten years 01 million proprietary technology amortization periods three five years 2006 assigned 412 million customer relationships amortization periods 20 40 years 136 million facility environmental permits indefinite lives 03 million noncompete agreements amortization periods one five years 02 million proprietary technology amortization period three years december 31 value amortizing intangible assets follows years ended december 31 2007 2006 2005 aggregate amortization expense 37 million 30 million 16 million respectively estimated amortization expense next five years follows years ended december 31 future amortization expense may fluctuate depending changes foreign currency rates estimates amortization expense noted based upon foreign exchange rates december 31 2007 note 10lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next 12 years leases properties contain renewal provisions rent expense 2007 2006 2005 324 million 287 million 258 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2007 next five years aggregate follows note 11net income per common share quarter ended june 30 2007 shareholders approved increase authorized shares common stock 80000000 shares 120000000 shares addition board directors authorized 2for1 stock split stock split form stock dividend one share payable may 31 2007 respect share common stock outstanding record date may 17 2007 historic share per share amounts adjusted reflect stock split following table sets forth computation basic diluted net income per share additional information regarding outstanding employee stock options outstanding warrants see note 12 2007 2006 2005 options warrants purchase 279081 shares 1565864 shares 66416 shares respectively exercise prices 38575970 17533626 22113111 respectively included computation diluted earnings per share “eps” effect would antidilutive note 12stock based compensation share per share data adjusted reflect 2for1 stock split effective may 31 2007 stock plans adopted five stock option plans 2005 incentive stock plan stockholders approved april 2005 ii 2000 nonstatutory stock option plan board directors adopted february 2000 iii 1997 stock option plan expired january 2007 iv directors stock option plan expired may 2006 v 1995 incentive compensation plan expired july 2005 plan authorizes awards stock options stock appreciation rights total 4800000 shares amended 2000 plan authorizes stock option grants total 7000000 shares 1997 1995 plans authorized stock option grants total 6000000 shares amended directors plan authorized stock option grants total 2340000 shares 2005 plan provides grant nonstatutory stock options “nsos” incentive stock options intended qualify section 422 internal revenue code “isos” well stock appreciation rights 2000 plan provides grant nsos 1997 1995 plans provided grant nsos isos directors plan provided grant nsos 2005 plan authorizes awards officers employees consultants following expiration directors plan may 2006 directors 2000 plan authorizes stock option grants employees consultants officers directors 1997 1995 plans authorized stock option grants officers directors employees consultants directors plan authorized stock option grants outside directors december 31 2007 reserved following shares issuance consisting shares available option grants 2005 plan 2000 plan 1997 plan shares granted options five plans yet exercised employee stock purchase plan october 2000 board directors adopted espp effective july 1 2001 stockholders approved espp may 2001 espp authorizes 600000 shares common stock purchased employees 15 discount market price stock payroll deductions two sixmonth offerings year employee elects participate offering granted option first day offering number shares equal employee’s payroll deductions espp offering period may exceed 5000 divided option price per share option price per share lower 85 closing price share common stock first trading day offering period 85 closing price last trading day offering period recognize compensation expense espp reflected statement income every employee completed one year’s employment first day offering fulltime employee parttime employee customarily works least 20 hours per week eligible participate offering 2007 2006 2005 43777 shares 40996 shares 37144 shares respectively issued espp stock based compensation expense result adopting sfas 123r net income 66 million 65 million less 2007 2006 respectively continued account stockbased compensation apb 25 related interpretations basic diluted net income per share years ended december 31 2007 2006 135 132 119 116 respectively negatively impacted 008 007 respectively due adoption sfas 123r elected use modified prospective transition method permitted sfas 123r therefore financial results prior periods restated transition method stockbased compensation expense 2006 includes expense equity awards granted prior yet vested january 1 2006 compensation expense based grantdate fair value estimated accordance original provisions sfas 123 amended sfas 148 “accounting stockbased compensationtransition disclosure” since adoption sfas 123r changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding compensation expense stockbased compensation awards granted subsequent january 1 2006 based grantdate fair value determined accordance provisions sfas 123r years ended december 31 2007 2006 recognized compensation expense 103 million 103 million respectively stock options 04 million 03 million respectively espp reflected statement income significant capitalized stockbased compensation costs december 31 2007 2006 prior january 1 2006 accounted stockbased compensation accordance apb 25 followed disclosure requirements sfas 123 apb 25 accounted stockbased awards employees directors using intrinsic value method allowed sfas 123 intrinsic value method stockbased compensation expense recognized statement income exercise price stock options granted employees directors equaled fair market value underlying stock date grant options granted valued using blackscholes optionpricing model sfas 123 purposes well following pro forma disclosure assuming sfas 123 fair value method used following table sets forth computation basic diluted loss per share illustrates effect net income net income per share applied fair value recognition provisions sfas 123 stockbased compensation plan 2005 following table presents total stockbased compensation expense resulting stock option awards espp included consolidated statements income december 31 2007 203 million total unrecognized compensation expense related nonvested option awards expected recognized weightedaverage period 168 years following table sets forth tax benefits related stock compensation stock options granted officers employees generally vest five years 2007 2006 2005 options granted officers employees generally vested rate 20 option shares first five anniversaries option grant date expense related graded vesting options recognized using straightline method vesting period exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options option activity years ended december 31 2007 2006 2005 summarized follows total intrinsic value options exercised years ended december 31 2007 2006 346 million 340 million respectively total intrinsic value represents total pretax intrinsic value difference closing stock price last day trading year ended december 31 2007 exercise price multiplied number inthemoney options would received option holders assuming option holders exercised options december 31 2007 amount changes based fair market value stock outstanding options december 31 2007 2006 weighted average remaining contractual life 68 years 70 years respectively aggregate intrinsic value 2465 million 1181 million respectively exercisable options december 31 2007 2006 weighted average remaining contractual life 54 years 56 years respectively aggregate intrinsic value 1438 million 749 million respectively options outstanding exercisable december 31 2007 price range presented blackscholes optionpricing model used determining fair value option grant expected term options granted based historical experience expected volatility based upon historical volatility expected dividend yield zero riskfree interest rate based upon us treasury yield rates comparable period assumptions used blackscholes model follows note 13preferred stock warrants preferred stock december 31 2007 2006 1000000 authorized shares preferred stock shares issued outstanding warrants share per share data adjusted reflect 2for1 stock split effective may 31 2007 september 2003 connection acquisition issued warrants purchase 2000 shares common stock warrants become exercisable september 2008 exercise price warrants 2363 per share december 31 2007 warrants outstanding october 2006 connection acquisition issued warrants purchase 20000 shares common stock exercise price warrants 3533 per share december 31 2007 warrants outstanding exercisable note 14employee benefit plan 401k defined contribution retirement savings plan covering substantially employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee maximum 1500 per annum contributions years ended december 31 2007 2006 2005 approximately 16 million 15 million 13 million respectively note 15nonconsolidating joint ventures 2007 became 100 owner former joint venture medam ba srl argentine corporation part legal restructuring business operations medam ba recognized 29 million charge related impairment investment writeoff intercompany loan 2006 2005 recorded 05 million 03 million respectively equity losses related joint venture recorded income expense 2005 wroteoff 25 million note receivable related sale minority interest investment evertrade regulated waste pty ltd south african company note 16legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time november 2007 arbitrator issued final award arbitration proceedings australia stericorp limited arbitrator awarded stericycle 82 million usd claim stericorp payments due certain convertible notes awarded stericorp 145 million usd claim failed supply stericorp equipment conforming specifications equipment supply agreement final award also requires us pay twothirds stericorp’s arbitration costs estimate amounts made accrued consolidated financial statements net effect various components final arbitration award charge 139 million income statement identified “arbitration award related costs” united kingdom subsidiary currently involved arbitration proceedings daniels corporation uk limited white rose sharpsmart limited joint venture subsidiary 50 interest believe proceedings material note 17products services geographic information sfas 131 “disclosures segments enterprise related information” requires segment information reported based information utilized executive management internally assess performance make operating decisions determined three operating segments based organizational structure company information reviewed operating segments foreign medical waste management services “foreign countries” domestic medical waste management services “united states” domestic returns management services aggregated domestic medical waste management services domestic returns management services one reportable segment united states based consideration following aggregation criteria • similar economic characteristics • services provided • types customers serviced • types waste collection transportation treatment methods utilized • regulatory environments similar vary based upon country specific regulations • employ sales marketing techniques activities two reportable segments united states foreign countries foreign operations material revenues long lived assets united kingdom ireland referred “europe” following table summary information reportable segments follows revenues attributed countries based location customers intercompany revenues recorded united states work performed canada eliminated prior reporting united states revenues accounting principles critical accounting policies used preparation financial statements reporting segments detailed information united states reporting segment follows detailed information foreign countries reporting segment follows note 18accumulated comprehensive income components total comprehensive income net income change cumulative currency translation adjustments gains losses derivative instruments qualifying cash flow hedges following table sets forth components total comprehensive income 2007 2006 2005 note 19selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2007 2006 eps calculated quarterly basis amounts may total calculated fullyear eps stericycle inc subsidiaries schedule iivaluation allowance accounts thousands 1 amounts consist primarily costs assumed acquired companies recorded prior date acquisition currency translation adjustments item 9item 8 consolidated financial statements supplemental data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting internal control financial reporting defined rules 13a15f securities exchange act 1934 process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management assessed effectiveness company’s internal control financial reporting december 31 2008 making assessment management used criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment criteria management concludes company maintained effective internal control financial reporting december 31 2008 company’s independent auditors issued attestation report company’s internal control financial reporting report appears page 30 stericycle inc lake forest il february 26 report independent registered public accounting firm internal control financial reporting board directors shareholders stericycle inc audited stericycle inc’s internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria stericycle inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion stericycle inc maintained material respects effective internal control financial reporting december 31 2008 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets stericycle inc subsidiaries december 31 2008 2007 related consolidated statements income changes shareholders’ equity cash flows three years period ended december 31 2008 report dated february 26 2009 expressed unqualified opinion thereon ernst young llp chicago illinois february 26 2009 report independent registered public accounting firm board directors shareholders stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2008 2007 related consolidated statements income changes shareholders’ equity cash flows three years period ended december 31 2008 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2008 2007 consolidated results operations cash flows three years period ended december 31 2008 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth herein also audited accordance standards public company accounting oversight board united states stericycle inc’s internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 26 2009 expressed unqualified opinion thereon ernst young llp chicago illinois february 26 2009 stericycle inc subsidiaries consolidated balance sheets thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements income thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes equity years ended december 31 2008 2007 2006 thousands accompanying notes integral part financial statements stericycle inc subsidiaries notes condensed consolidated financial statements december 31 2008 unless context requires otherwise “we” “us” “our” refers stericycle inc subsidiaries consolidated basis note 1description business incorporated 1989 presently serve approximately 418000 customers throughout united states canada mexico argentina chile united kingdom ireland puerto rico domestically fully integrated national network includes 46 processing centers 80 additional transfer collection sites use network provide broad range services customers related regulated waste management services regulated return management services regulated waste management services include servicing variety customers remove process waste regulated return management services physical services provided companies individual businesses assist handling products removed supply chain due recalls expiration services also included advanced notification technology used communicate specific instructions users product waste treatment technologies include autoclaving incineration chemical treatment proprietary electrothermaldeactivation system internationally fully integrated networks includes 43 processingcollection centers 17 additional transfer collection sites addition technology licensing agreements companies located japan south africa brazil note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc wholly owned subsidiaries revenue recognition recognize revenues regulated waste services time waste collection payments received advance deferred recognized services provided revenues regulated returns management services recorded time services performed royalty revenues material calculated based measurements specified contract license revenues recognized end reporting period activity measured completed revenues product sales recognized time goods shipped ordering customer software licensing revenues material recognized prorated basis term license agreement contracts loss position losses would recorded known estimable contracts go loss position cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows containers weighted average useful life 100 years ended december 31 2008 2007 2006 wrote 05 million 13 million 03 million respectively related equipment permanently idled goodwill identifiable intangibles goodwill identifiable indefinite lived intangibles amortized subject annual impairment test according statement financial accounting standards “sfas” 142 intangible assets continue amortized useful lives determined customer relationships useful lives 20 40 years based upon type customer weighted average useful life 381 years noncompete intangibles useful lives one ten years weighted average useful life 79 years tradename intangibles useful lives 20 40 years weighted average useful life 383 years software technology intangibles useful lives three five years weighted average useful life 44 years determined permits indefinite lives therefore amortized valuation intangible customer relationships permits derived using discounted income approach financial information revenues costs assets liabilities related intangible asset input standard valuation model determine stream income attributable intangible income stream discounted present arrive valuation perform annual impairment tests accordance sfas 142 indefinite lived intangible assets valuation intangibles permits currently tested impairment annually december 31 frequently circumstances indicate may impaired use discounted income approach model current measurement fair value permits estimate income based upon among things certain assumptions expected future operating performance appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates amortizable identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined regulated waste customer relationships 20year 40year lives based specific type relationship valuation contractual customer relationships derived using discounted income approach valuation model similar method used permit impairment testing mentioned earlier assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows see note 10 consolidated financial statements income taxes deferred income tax liabilities assets determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse accounts receivable accounts receivable consist primarily amounts due us normal business activities require collateral part standard trade credit policy accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency bad debt expense 50 million 44 million 42 million years ended december 31 2008 2007 2006 respectively financial instruments financial instruments consist cash equivalents shortterm investments derivatives accounts receivable payable longterm debt december 31 2008 fair value company’s debt obligations estimated 7715 million compared carrying amount 7927 million fair value estimated using market interest rate comparable instruments company current plans retire significant amount debt prior maturity financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater 2 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses contracts loss positions losses recorded known estimable losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits income tax liabilities accrued auto workers’ compensation insurance claims estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates future estimated expenses may fluctuate depending changes foreign currency rates estimates payments due longterm debt lease payments capital leases amortization expense rental payments based upon foreign exchange rates december 31 2008 see notes 7 10 11 consolidated financial statements derivative instruments one forward contract purchase sterling gbp hedging instruments intercompany loan parent company subsidiary united kingdom stericycle international ltd described fully note 9 consolidated financial statements subsidiary borrowed funds purchase common stock white rose environmental ltd forward contract aligns anticipated repayment schedule loan expires july 2009 october 2008 stericycle entered three interest rate swap contracts covering 225 million borrowings outstanding senior credit facility objective swap reduce risk volatile interest expense fixing rate fair market three hedges recorded liability 48 million 21 million current see note 9 consolidated financial statements information fair market value determined using market data inputs calculate expected future interest rates cash streams attributable difference expected future rates fixed rate payable discounted arrive fair value three hedges stockbased compensation january 1 2006 adopted provisions sfas 123r sharebased payment “sfas 123r” using modified prospective method account stock compensation costs sfas 123r requires measurement recognition compensation expense stockbased payment awards made employees directors fair value recognition provisions sfas 123r stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility expected term riskfree rate expected volatility based upon historical experience expected term stock options based upon historical volatility stock price riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component comprehensive income shareholders’ equity environmental matters record liability environmental remediation damages cleanup program becomes probable costs damages reasonably estimated environmental liabilities recorded december 31 2008 aware issues facilities could initiate need environmental remediation new accounting standards effective january 1 2008 adopted sfas 157 “fair value measurements” “sfas 157” financial assets liabilities nonfinancial assets liabilities recognized disclosed fair value financial statements recurring basis financial accounting standards board “fasb” staff position “fsp” 1572 delayed adoption date nonfinancial assets liabilities measured fair value nonrecurring basis goodwill identifiable intangible assets january 1 2009 believe adoption sfas 157 nonfinancial assets liabilities effective january 1 2009 material impact consolidated financial statements adoption sfas 157 require cumulative effect adjustment opening balance retained earnings see note 3 consolidated financial statements february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” “sfas 159” sfas 159 allows measurement fair value eligible financial assets liabilities otherwise measured fair value fair value option eligible item elected unrealized gains losses item reported current earnings subsequent reporting date sfas 159 also establishes presentation disclosure requirements designed draw comparisons different measurement attributes elect similar types assets liabilities sfas 159 became effective fiscal years beginning november 15 2007 financial assets liabilities elected fair value option sfas 159 december 2007 fasb issued sfas 141 revised 2007 “business combinations” “sfas 141r” sfas 141r replaces sfas 141 business combinations sfas 141r requires acquiring entity business combination recognize full fair value assets acquired liabilities assumed transaction requires certain contingent assets liabilities acquired recognized fair values acquisition date requires contingent consideration recognized fair value acquisition date changes fair value recognized earnings settled requires expensing transaction restructuring costs generally requires reversals valuation allowances related acquired deferred tax assets changes acquired income tax uncertainties also recognized earnings new accounting standard require company recognize expenses income statement previously accounted purchase accounting reflected balance sheet accounting standard effective financial statements issued fiscal years beginning december 15 2008 amounts capitalized anticipation business combination completed december 31 2008 expensed january 2009 expenses approximately 06 million inherent uncertainty number structure complexity acquisitions may complete future magnitude transaction expenses may incur completing acquisitions impact adoption sfas 141r reasonably estimable march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities” “sfas 161” enhance disclosure regarding company’s derivative hedging activities improve transparency financial reporting statement effective fiscal years beginning november 15 2008 sfas 161 requires enhanced disclosures standard impact financial position results operations cash flows company note 3fair value measurements adopted sfas 157 january 1 2008 clarifies fair value refers price would received sell asset paid transfer liability orderly transaction market participants market reporting entity transacts sfas 157 fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy requires entity maximize use observable inputs minimize use unobservable inputs measuring fair value observable inputs market participants would use pricing asset liability developed based market data obtained sources independent company unobservable inputs reflect company’s assumptions market participants would use pricing asset liability developed based best information available circumstances three levels fair value hierarchy defined sfas 157 follows • level 1valuations based quoted prices active markets identical assets liabilities entity ability access • level 2valuations based quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable data substantially full term assets liabilities • level 3valuations based inputs supported little market activity significant fair value assets liabilities required sfas 157 financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition sfas 157 fair value measurement liability must reflect nonperformance risk entity december 31 2008 91 million cash equivalents 14 million shortterm investments carry books fair value using level 1 inputs cash flow hedge objective offset foreign currency exchange risk us dollar equivalent cash inflows settlement gbp denominated intercompany loan fair value hedge calculated using level 2 inputs recorded current asset 23 million december 31 2008 three cash flow hedges objective offset variable interest rate expense portion revolver debt fixed rate expense notional amount three hedges 2250 million fair value hedge calculated using level 2 inputs recorded liability 48 million 21 million current december 31 2008 movements items fair value hierarchies note 4acquisitions divestiture 2008 completed 22 acquisitions 12 domestic regulated waste businesses two domestic return management businesses eight international regulated waste businesses canada latin america europe aggregate net purchase price acquisitions including adjustments purchase accounting approximately 1910 million 849 million paid cash 1061 million paid issuance promissory notes purchase prices acquisitions primarily allocated identifiable intangible assets goodwill reflecting complementary strategic fit acquired businesses brought us 2007 completed 19 acquisitions ten domestic regulated waste businesses one domestic assembler distributor containers use mailback program eight international regulated waste businesses canada latin america europe two largest acquisitions united states addition acquired remaining minority interest medam sa de cv subsidiary mexico became sole owner medam ba subsidiary argentina previously accounted minority interest using equity method accounting aggregate net purchase price 2007 acquisitions including adjustments purchase accounting approximately 2410 million 1148 million paid cash 1125 million paid issuance promissory notes 137 million paid issuance shares common stock february 2007 sold three incinerators associated customer contracts united kingdom comply remedy accepted united kingdom competition commission reported form 10k 2006 sales price 265 million resulted gain approximately 19 million year ended december 31 2006 completed 16 acquisitions seven domestic nine international largest acquisitions year sterile technologies group limited ireland “stg” acquired stock stg approximately 1310 million 1140 million paid cash 170 million paid assumption debt aggregate net purchase price acquisitions approximately 1949 million approximately 1640 million paid cash 301 million paid issuance promissory notes 08 million paid issuance shares common stock financial reporting purposes acquisitions accounted using purchase method accounting total purchase price 2008 2007 2006 1910 million 2410 million 1949 million respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market value date acquisition certain cases purchase price subject downward adjustment revenues customer contracts acquired failed reach certain specified levels excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill allocations pending completion certain intangible asset valuations goodwill recorded amounts 1489 million 2038 million 1193 million years 2008 2007 2006 respectively tax deductible goodwill pending final purchase accounting approximately 1078 million 844 million 269 million years 2008 2007 2006 respectively results operations acquired businesses included consolidated statements income date acquisition intend continue seek opportunities acquire businesses expand national networks united states internationally increase customer base believe acquisitions enable us improve operating efficiencies increased utilization service infrastructure note 5property plant equipment property plant equipment december 31 consist following items thousands note 6income taxes significant components income tax expense years ended december 31 2008 2007 2006 follows thousands reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 2008 2007 2006 follows cash payments income taxes 524 million 459 million 301 million years ended december 31 2008 2007 2006 respectively deferred tax liabilities assets december 31 2008 2007 follows thousands december 31 2008 net operating loss carry forwards us federal state income tax purposes fully utilized excluding net operating loss carry forwards related acquisitions remaining net operating loss carry forwards acquisitions approximately 254 million begin expire 2009 2016 expect fully utilize net operating losses would otherwise expire 2009 undistributed earnings foreign subsidiaries considered permanently invested therefore us deferred taxes recorded thereon cumulative amounts earnings 835 million december 31 2008 practicable estimate us withholding tax thereon assuming repatriation september 2006 fasb issued fasb interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” interpretation clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 “accounting income taxes” interpretation prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition adopted provisions fin 48 january 1 2007 adoption fin 48 material impact consolidated financial statements subsidiaries file consolidated us federal income tax returns income tax returns various states foreign jurisdictions exceptions longer subject us federal state local nonus income tax examinations tax authorities years 2002 subsequent tax years remain open subject examination irs addition subsidiaries foreign countries tax years open ranging 2002 2007 total amount unrecognized tax positions december 31 2008 53 million includes immaterial amounts interest penalties reflected liability balance sheet amount unrecognized tax positions recognized would affect effective tax rate approximately 53 million recognize interest penalties accrued related income tax reserves income tax expense method accounting consistent prior years following table summarizes changes unrecognized tax positions year ended december 31 2008 thousands note 7longterm debt longterm debt consists following december 31 thousands payments due longterm debt excluding capital lease obligations five years subsequent december 31 2008 follows thousands paid interest 291 million 318 million 276 million years ended december 31 2008 2007 2006 respectively property capital leases included property plant equipment accompanying consolidated balance sheets follows december 31 thousands amortization related capital leases included depreciation expense minimum future lease payments capital leases follows thousands senior credit facility senior credit facility 8500 million maturing august 2012 requires us comply various financial reporting covenants restrictions including restriction dividend payments december 31 2008 compliance financial debt covenants december 31 2008 margin interest rates borrowings new credit facility 00 base rate loans higher federal funds rate plus 05 ii prime rate 075 libor loans december 31 2008 4398 million borrowings outstanding senior unsecured credit facility includes foreign currency borrowings 113 million addition 2123 million committed outstanding letters credit weighted average rate interest unsecured revolving credit facility 270 per annum includes amounts interest rate hedge december 31 2008 3529 million debt outstanding includes promissory notes issued connection acquisitions 2004 2008 sevenyear 100 million private placement notes fixed rate 564 foreign subsidiary bank debt capital leases april 15 2008 entered note purchase agreement “note purchase agreement” nine institutional purchasers pursuant issued sold purchasers 100 million 564 senior notes due april 15 2015 “notes” notes bear interest fixed rate 564 per annum interest payable arrears semiannually april 15 october 15 beginning october 15 2008 principal payable maturity notes april 15 2015 notes unsecured obligations rank pari passu obligations senior unsecured credit facility pursuant credit agreement bank america na lenders party credit agreement applied proceeds sale notes reduce borrowings revolving credit facility senior unsecured credit facility notes contain customary events default including failure pay principal interest amount due violation affirmative negative covenants breach representations warranties upon occurrence event default payment notes may accelerated holders notes august 2007 entered new credit agreement new credit agreement substance amendment existing credit agreement amended credit facility reduced interest rates charged reducing applicable margin added relevant interest rate ii increased revolving credit facility 650 million 850 million additional capacity available 200 million upon request iii increased letter credit sublimit alternative currency sublimit 300 million 200 million iv maturity date extended july 2011 august 2012 december 31 2007 4654 million borrowings outstanding senior unsecured credit facility includes foreign currency borrowings 160 million addition 1394 million committed outstanding letters credit december 31 2007 weighted average rate interest unsecured revolving credit facility 553 per annum notes payable foreign subsidiary debt december 31 2008 promissory notes foreign subsidiary bank debt primarily issued result acquisitions totaling 3518 million 3518 million 2123 million promissory notes secured letters credit 3518 million 3174 million fixed interest rate 344 million floating interest rate weighted average interest rate 505 weighted average maturity approximately 61 years december 31 2007 promissory notes foreign subsidiary bank debt primarily issued result acquisitions totaling 1686 million 1686 million 1394 million promissory notes secured letters credit 1686 million 1386 million fixed interest rate 300 million floating interest rate weighted average interest rate 579 weighted average maturity approximately 59 years guarantees guaranteed loan jpmorganchase bank na behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding regulated waste management business one year loan current balance 54 million jpmorgan chase bank na expires may 2009 management currently believes amount paid guarantee note 8accrued liabilities accrued liabilities december 31 consist following items thousands note 9derivative instruments july 2004 entered four forward contracts three settled hedge gbp sterlingbased intercompany loan usbased subsidiary stericycle international llc subsidiary united kingdom stericycle international ltd subsidiary borrowed funds purchase white rose remaining forward contract aligns anticipated repayment schedule loan expires july 2009 initially elect hedge accounting forward contracts recognized change value hedges income expense amount generally offset currency adjustment intercompany receivable october 1 2005 prospectively designated existing forward contracts cash flow hedges using hedge accounting objective cash flow hedges offset foreign exchange risk us dollar equivalent cash inflows settlement gbp denominated intercompany loan december 31 2008 fair market value hedge recorded current asset 23 million december 31 2008 total notional amount hedges outstanding gbp 80 million december 31 2008 hedges determined 100 effective october 2008 stericycle entered three interest rate swap contracts covering 225 million borrowings outstanding senior credit facility objective swap reduce risk volatile interest expense fixing rate contracts follows thousands entered interest rate swaps order manage risk interest rate changes interest expense interest rate swaps designated cash flow hedges notional amounts significant terms swap agreement matched provisions terms variable rate debt hedged fair market three hedges recorded liability 48 million 21 million current december 31 2008 hedges determined 100 effective gains losses hedges recognized income expense realized fair market value determined using market data inputs calculate expected future interest rates cash streams attributable difference expected future rates fixed rate payable discounted arrive fair value three hedges note 10goodwill intangible assets sfas 142 goodwill indefinite lived intangibles longer amortized subject annual impairment test frequent testing circumstances indicate may impaired two geographical reporting segments “united states” “foreign countries” goodwill changes carrying amount goodwill years ended december 31 2008 2007 follows thousands quarter ended june 30 2008 performed annual goodwill impairment evaluation three reporting units domestic regulated waste domestic regulated returns management foreign countries determined none recorded goodwill impaired 2007 wrote 20 million white rose environmental tradename result name change subsidiary united kingdom wrote 02 million permit intangible treatment facility united kingdom longer used intangibles part foreign countries segment write reported statement income impairment intangible assets december 31 2008 2007 481 million 528 million respectively indefinite lived intangibles consist environmental permits 2008 2007 performed annual permit impairment evaluation determined noted impairment according sfas 142 intangible assets continue amortized useful lives 2008 assigned 356 million customer relationships amortization periods 20 40 years 34 million facility environmental permits indefinite lives 03 million noncompete agreements amortization periods one ten years 2007 assigned 159 million customer relationships amortization periods 20 40 years 167 million facility environmental permits indefinite lives 25 million noncompete agreements amortization periods one ten years 01 million proprietary technology amortization periods three five years december 31 value amortizing intangible assets follows thousands years ended december 31 2008 2007 2006 aggregate amortization expense 40 million 37 million 30 million respectively estimated amortization expense next five years follows years ended december 31 thousands note 11lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next 16 years leases properties contain renewal provisions rent expense 2008 2007 2006 412 million 324 million 287 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2008 next five years aggregate follows thousands note 12net income per common share quarter ended june 30 2007 shareholders approved increase authorized shares common stock 80000000 shares 120000000 shares addition board directors authorized 2for1 stock split stock split form stock dividend one share payable may 31 2007 respect share common stock outstanding record date may 17 2007 historic share per share amounts adjusted reflect stock split following table sets forth computation basic diluted net income per share thousands except share per share data additional information regarding outstanding employee stock options outstanding warrants see note 13 consolidated financial statements 2008 2007 2006 options warrants purchase 993352 shares 279081 shares 1565864 shares respectively exercise prices 47326053 38575970 17533626 respectively included computation diluted earnings per share “eps” effect would antidilutive december 31 2008 warrants outstanding note 13stock based compensation stock plans adopted six stock option plans 2008 incentive stock plan stockholders approved may 2008 ii 2005 incentive stock plan stockholders approved april 2005 iii 2000 nonstatutory stock option plan board directors adopted february 2000 iv 1997 stock option plan expired january 2007 v directors stock option plan expired may 2006 vi 1995 incentive compensation plan expired july 2005 2008 plan authorized awards stock options stock appreciation rights total 3500000 shares 2005 plan authorizes awards stock options stock appreciation rights total 4800000 shares amended 2000 plan authorizes stock option grants total 7000000 shares 1997 1995 plans authorized stock option grants total 6000000 shares amended directors plan authorized stock option grants total 2340000 shares 2008 plan 2005 plan provide grant nonstatutory stock options “nsos” incentive stock options intended qualify section 422 internal revenue code “isos” well stock appreciation rights addition 2008 plan provides grant restricted stock awards rsu awards 2000 plan provides grant nsos 1997 1995 plans provided grant nsos isos directors plan provided grant nsos 2008 2005 plans authorize awards officers employees consultants following expiration directors plan may 2006 directors 2000 plan authorizes stock option grants employees consultants officers directors 1997 1995 plans authorized stock option grants officers directors employees consultants directors plan authorized stock option grants outside directors december 31 2008 reserved following shares issuance consisting shares available option grants 2008 plan 2005 plan 2000 plan 1997 plan shares granted options five plans yet exercised employee stock purchase plan october 2000 board directors adopted employee stock purchase plan “espp” effective july 1 2001 stockholders approved espp may 2001 espp authorizes 600000 shares common stock purchased employees 15 discount market price stock payroll deductions two sixmonth offerings year employee elects participate offering granted option first day offering number shares equal employee’s payroll deductions espp offering period may exceed 5000 divided option price per share option price per share lower 85 closing price share common stock first trading day offering period 85 closing price last trading day offering period recognize compensation expense espp reflected statement income every employee completed six months employment first day offering fulltime employee parttime employee customarily works least 20 hours per week eligible participate offering 2008 2007 2006 48836 shares 43777 shares 40996 respectively issued espp stock based compensation expense recognized stock compensation expense accordance sfas 123r adopted january 1 2006 since adoption sfas 123r changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding compensation expense stockbased compensation awards granted subsequent january 1 2006 based grantdate fair value determined accordance provisions sfas 123r years ended december 31 2008 2007 recognized compensation expense 112 million 103 million respectively stock options 06 million 04 million respectively espp reflected statement income significant capitalized stockbased compensation costs december 31 2008 2007 following table presents total stockbased compensation expense resulting stock option awards espp included consolidated statements income thousands december 31 2008 201 million total unrecognized compensation expense related nonvested option awards expected recognized weightedaverage period 156 years following table sets forth tax benefits related stock compensation thousands stock options granted officers employees generally vest five years 2008 2007 2006 options granted officers employees generally vested rate 20 option shares first five anniversaries option grant date expense related graded vesting options recognized using straightline method vesting period exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options option activity years ended december 31 2008 2007 2006 summarized follows total intrinsic value options exercised years ended december 31 2008 2007 394 million 346 million respectively total intrinsic value represents total pretax intrinsic value difference closing stock price last day trading year ended december 31 2008 exercise price multiplied number inthemoney options would received option holders assuming option holders exercised options december 31 2008 amount changes based fair market value stock outstanding options december 31 2008 2007 weighted average remaining contractual life 66 years 68 years respectively aggregate intrinsic value 1563 million 2465 million respectively exercisable options december 31 2008 2007 weighted average remaining contractual life 53 years 54 years respectively aggregate intrinsic value 1097 million 1438 million respectively options outstanding exercisable december 31 2008 price range presented blackscholes optionpricing model used determining fair value option grant expected term options granted based historical experience expected volatility based upon historical volatility expected dividend yield zero riskfree interest rate based upon us treasury yield rates comparable period assumptions used blackscholes model follows note 14preferred stock warrants preferred stock december 31 2008 2007 1000000 authorized shares preferred stock shares issued outstanding warrants december 31 2008 warrants outstanding note 15employee benefit plan 401k defined contribution retirement savings plan covering substantially employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee maximum 1500 per annum contributions years ended december 31 2008 2007 2006 approximately 17 million 16 million 15 million respectively company several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2008 2007 2006 total contributions made company plans approximately 07 million 05 million 05 million respectively company additional postretirement postemployment benefit plans note 16joint ventures 2007 became 100 owner former joint venture medam ba srl argentine corporation part legal restructuring business operations medam ba recognized 29 million charge related impairment investment writeoff intercompany loan 2006 recorded 05 million equity losses related joint venture recorded income expense note 17legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time april 2008 stericycle daniels corporation uk limited “daniels uk” subsidiary daniels sharpsmart pty limited “daniels” certain affiliated companies entered settlement arbitration proceedings united kingdom prior award arbitrator time entered settlements subsidiaries daniels resolving various disputes finalized payment legal fees stericorp limited awarded november 2007 arbitrator’s award connection net settlements recognized total pretax expense 56 million aftertax expense 35 million yearended december 31 2008 november 2007 arbitrator issued final award arbitration proceedings australia stericorp limited arbitrator awarded stericycle 82 million usd claim stericorp payments due certain convertible notes awarded stericorp 145 million usd claim failed supply stericorp equipment conforming specifications equipment supply agreement final award also requires us pay twothirds stericorp’s arbitration costs estimate amounts made accrued consolidated financial statements yearended december 31 2007 net effect various components final arbitration award charge 139 million income statement identified “arbitration award related costs” note 18 products services geographic information sfas 131 “disclosures segments enterprise related information” requires segment information reported based information utilized executive management internally assess performance make operating decisions determined three operating segments based organizational structure company information reviewed operating segments foreign regulated waste management services “foreign countries” domestic regulated waste management services “united states” domestic returns management services aggregated domestic regulated waste management services domestic returns management services one reportable segment united states based consideration following aggregation criteria • similar economic characteristics • services provided • types customers serviced • types waste collection transportation treatment methods utilized • regulatory environments similar vary based upon country specific regulations • employ sales marketing techniques activities two operating segments united states foreign countries foreign operations material revenues long lived assets united kingdom ireland referred “europe” following table summary information reportable segments follows thousands revenues attributed countries based location customers intercompany revenues recorded united states work performed canada eliminated prior reporting united states revenues accounting principles critical accounting policies used preparation financial statements reporting segments detailed information united states reporting segment follows thousands detailed information foreign countries reporting segment follows thousands note 19accumulated comprehensive income components total comprehensive income net income change cumulative currency translation adjustments gains losses derivative instruments qualifying cash flow hedges following table sets forth components total comprehensive income 2008 2007 2006 thousands tax impact unrealized loss cash flow hedges accumulated comprehensive income december 31 2008 19 million tax impact december 31 2006 2007 immaterial translation adjustments taxeffected company’s net investment foreign subsidiaries related foreign earnings deemed permanently invested note 20selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2008 2007 thousands except per share data thousands except per share data eps calculated quarterly basis amounts may total calculated fullyear eps stericycle inc subsidiaries schedule iivaluation allowance accounts thousands 1 amounts consist primarily valuation allowances assumed acquired companies currency translation adjustments item 9item 8 consolidated financial statements supplementary data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting internal control financial reporting defined rules 13a15f securities exchange act 1934 process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management assessed effectiveness company’s internal control financial reporting december 31 2009 making assessment management used criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment criteria management concludes company maintained effective internal control financial reporting december 31 2009 company’s independent auditors issued attestation report company’s internal control financial reporting report appears page 31 stericycle inc lake forest il february 26 2010 report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited stericycle inc’s internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria stericycle inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion stericycle inc maintained material respects effective internal control financial reporting december 31 2009 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets stericycle inc subsidiaries december 31 2009 2008 related consolidated statements income changes equity cash flows three years period ended december 31 2009 report dated february 26 2010 expressed unqualified opinion thereon ernst young llp chicago illinois february 26 2010 report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2009 2008 related consolidated statements income changes equity cash flows three years period ended december 31 2009 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2009 2008 consolidated results operations cash flows three years period ended december 31 2009 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements company changed method accounting business combinations adoption guidance originally issued fasb statement 141r business combinations codified fasb asc topic 805 business combinations fasb statement 160 noncontrolling interests consolidated financial statementsan amendment arb no51 codified fasb asc topic 810 consolidation effective january 1 2009 also audited accordance standards public company accounting oversight board united states stericycle inc’s internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 26 2010 expressed unqualified opinion thereon ernst young llp chicago illinois february 26 2010 stericycle inc subsidiaries consolidated balance sheets thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements income thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes equity years ended december 31 2009 2008 2007 thousands accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 2009 unless context requires otherwise “we” “us” “our” refers stericycle inc subsidiaries consolidated basis note 1description business incorporated 1989 presently serve diverse customer base 459000 customers throughout united states canada argentina chile mexico ireland portugal romania united kingdom domestically lease two etd processing facilities 54 facilities provide autoclave incineration processing four facilities use processing technologies processing facilities also serve collection sites lease 108 additional transfer collection sites nine additional salesadministrative sites use fully integrated national network provide broad range services customers including regulated waste management services regulated return recall management services regulated waste management services include regulated waste removal services sharps management services products services infection control safety compliance programs regulated return recall management services physical services provided companies individual businesses assist handling products removed supply chain due recalls expiration services also include advanced notification technology used communicate specific instructions users product waste treatment technologies include autoclaving incineration chemical treatment proprietary electrothermaldeactivation system internationally lease two etd processing facilities 44 facilities provide autoclave incineration processing seven facilities use processing technologies also lease 27 transfer collection sites 15 additional salesadministrative sites lease two landfills accompanying consolidated financial statements prepared pursuant rules regulations securities exchange commission “sec” preparation financial statements conformity accounting principles requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period opinion consolidated financial statements included herein contain adjustments necessary present fairly financial position december 31 2009 2008 results operations three years ended december 31 2009 2008 2007 cash flows three years ended december 31 2009 2008 2007 statement changes equity three years ended december 31 2009 2008 2007 adjustments normal recurring nature evaluated subsequent events february 26 2010 date issuance consolidated financial statements preparation consolidated financial statements conformity accounting principles generally accepted united states requires management make certain estimates assumptions affect amount reported assets liabilities disclosure contingent assets liabilities date consolidated financial statements revenues expenses periods reported actual results may differ estimates consolidated financial statements read conjunction consolidated financial statements notes thereto year ended december 31 2009 filed annual report form 10k year ended december 31 2009 current amounts previously issued financial statements reclassified conform current period presentation note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc wholly owned subsidiaries revenue recognition recognize revenues regulated waste services time waste collection payments received advance deferred recognized services provided revenues regulated returns management services recorded time services performed revenues product sales recognized time goods shipped ordering customer software licensing revenues material recognized prorated basis term license agreement contracts loss position losses would recorded known estimable contracts go loss position cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows containers weighted average remaining useful life 119 years ended december 31 2009 2008 2007 wrote 09 million 05 million 13 million respectively related equipment permanently idled goodwill identifiable intangibles goodwill identifiable indefinite lived intangibles amortized subject annual impairment test intangible assets continue amortized useful lives determined customer relationships useful lives 15 40 years based upon type customer weighted average remaining useful life 375 years noncompete intangibles useful lives two ten years weighted average remaining useful life 57 years tradename intangibles useful lives 20 40 years weighted average remaining useful life 386 years determined permits indefinite lives therefore amortized valuation intangible customer relationships permits derived using discounted income approach financial information revenues costs assets liabilities related intangible asset input standard valuation model determine stream income attributable intangible income stream discounted present arrive valuation perform annual impairment tests indefinite lived intangible assets valuation intangibles permits currently tested impairment annually december 31 frequently circumstances indicate may impaired use discounted income approach model current measurement fair value permits estimate income based upon among things certain assumptions expected future operating performance appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates amortizable identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined regulated waste customer relationships 15 40 year lives based specific type relationship valuation contractual customer relationships derived using discounted income approach valuation model similar method used permit impairment testing mentioned earlier assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows see note 10 consolidated financial statements income taxes deferred income tax liabilities assets determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse accounts receivable accounts receivable consist primarily amounts due us normal business activities require collateral part standard trade credit policy accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency bad debt expense 69 million 50 million 44 million years ended december 31 2009 2008 2007 respectively financial instruments financial instruments consist cash equivalents shortterm investments derivatives accounts receivable payable longterm debt december 31 2009 fair value company’s debt obligations estimated 9850 million compared carrying amount 9889 million fair value estimated using market interest rates comparable instruments company current plans retire significant amount debt prior maturity financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater 2 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses contracts loss positions losses recorded known estimable losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits income tax liabilities accrued auto workers’ compensation insurance claims intangible asset valuations estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates future estimated expenses may fluctuate depending changes foreign currency rates estimates payments due longterm debt lease payments capital leases amortization expense rental payments based upon foreign exchange rates december 31 2009 see notes 7 10 11 consolidated financial statements derivative instruments two interest rate swap contracts covering 100 million borrowings outstanding term loan facility objective swap reduce risk volatile interest expense fixing rate fair market two hedges recorded current liability 12 million see note 9 consolidated financial statements information fair market value determined using market data inputs calculate expected future interest rates cash streams attributable difference expected future rates fixed rate payable discounted arrive fair value two hedges stockbased compensation recognize compensation expense stockbased payment awards made employees directors fair value stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility expected term riskfree rate expected volatility based upon historical experience expected term stock options based upon historical volatility stock price riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component comprehensive income shareholders’ equity environmental matters record liability environmental remediation damages cleanup program becomes probable costs damages reasonably estimated environmental liabilities recorded december 31 2009 aware issues facilities could initiate need environmental remediation new accounting standards accounting standards recently adopted codification september 30 2009 stericycle adopted changes issued financial accounting standards board “fasb” authoritative hierarchy gaap changes establish fasb accounting standards codification “codification” source authoritative accounting principles recognized fasb applied nongovernmental entities preparation financial statements conformity gaap rules interpretive releases sec authority federal securities laws also sources authoritative gaap sec registrants fasb longer issue new standards form statements fasb staff positions emerging issues task force abstracts instead fasb issue accounting standards updates accounting standards updates authoritative right serve update codification changes codification change gaap manner new accounting guidance referenced adoption changes impact financial statements business combinations january 1 2009 adopted update existing accounting standards business combinations update retains underlying concepts original standard business combinations still required accounted fair value acquisition method accounting changes method applying acquisition method number ways acquisition costs longer considered part fair value acquisition generally expensed incurred contingent consideration fairvalued acquisition date changes fair value recognized income statement noncontrolling interests recognized fair value acquisition date inprocess research development recorded fair value indefinite lived intangible asset acquisition date restructuring costs associated business combination generally expensed subsequent acquisition date changes deferred tax asset valuation allowances income tax uncertainties acquisition date generally affect income tax expense net income year 2009 included effect 68 million aftertax charges related change accounting standards inherent uncertainty number structure complexity acquisitions may complete future magnitude transaction expenses may incur completing acquisitions future impact accounting change reasonably estimable effective january 1 2009 stericycle adopted changes issued fasb accounting contingencies acquired business combinations changes apply assets acquired liabilities assumed business combination arise certain contingencies requires acquirer recognize fair value acquisition date asset acquired liability assumed business combination arises contingency acquisitiondate fair value asset liability determined measurement period otherwise asset liability recognized acquisition date certain defined criteria met changes also require contingent consideration arrangements acquire assumed acquirer business combination recognized initially fair value ii subsequent measurements assets liabilities arising contingencies based systematic rational method depending nature contingent consideration arrangements measured subsequently iii disclosures amounts measurement basis assets liabilities nature contingencies consolidation january 1 2009 stericycle adopted changes issued fasb consolidation accounting reporting changes establish accounting reporting noncontrolling interest subsidiary deconsolidation subsidiary guidance defines noncontrolling interest previously called minority interest portion equity subsidiary attributable directly indirectly parent changes require among items noncontrolling interest included consolidated statement financial position within equity separate parent’s equity consolidated net income reported amounts inclusive parent’s noncontrolling interest’s shares separately amounts consolidated net income attributable parent noncontrolling interest consolidated statement operations subsidiary deconsolidated retained noncontrolling equity investment former subsidiary measured fair value gain loss recognized net income based fair value change presentation noncontrolling interests adoption changes impact financial statements presentation disclosure requirements changes applied retrospectively reflect noncontrolling interests certain latin american acquisitions derivatives january 1 2009 stericycle adopted changes issued fasb disclosures derivative instruments hedging activities changes require enhanced disclosures entity’s derivative hedging activities including entity uses derivative instruments ii derivative instruments related hedged items accounted iii derivative instruments related hedged items affect entity’s financial position financial performance cash flows adoption changes material impact financial statements fair value june 30 2009 stericycle adopted changes issued fasb fair value disclosures financial instruments changes require publicly traded company include disclosures fair value financial instruments whenever issues summarized financial information interim reporting periods disclosures include fair value financial instruments practicable estimate value whether recognized statement financial position related carrying amount financial instruments methods significant assumptions used estimate fair value required disclosures adoption changes impact financial statements august 2009 fasb issued changes fair value accounting liabilities changes clarify existing guidance circumstances quoted price active market identical liability available entity required measure fair value using either valuation technique uses quoted price either similar liability quoted price identical similar liability traded asset another valuation technique consistent principles fair value measurements income approach eg present value technique guidance also states quoted price active market identical liability quoted price identical liability traded asset active market adjustments quoted price asset required level 1 fair value measurements adoption accounting standard material impact financial statements subsequent events june 30 2009 stericycle adopted changes issued fasb relating accounting disclosure events occur balance sheet date financial statements issued available issued otherwise known “subsequent events” specifically changes set forth period balance sheet date management reporting entity evaluate events transactions may occur potential recognition disclosure financial statements circumstances entity recognize events transactions occurring balance sheet date financial statements disclosures entity make events transactions occurred balance sheet date adoption changes impact financial statements management already followed similar approach prior adoption new guidance accounting standards yet adopted revenue recognition october 2009 fasb issued update existing guidance revenue recognition arrangements multiple deliverables update allow companies allocate consideration received qualified separate deliverables using estimated selling price delivered undelivered items vendorspecific objective evidence thirdparty evidence unavailable additional disclosures discussing nature multiple element arrangements types deliverables arrangements general timing delivery significant factors estimates used determine estimated selling prices required adopt update new revenue arrangements entered materially modified beginning january 1 2011 generally arrangements multiple deliverables therefore expect material impact financial statements upon adoption consolidation june 2009 fasb issued new accounting standard provides amendments previous guidance consolidation variable interest entities “vie” standard clarifies characteristics identify vie changes reporting entity identifies primary beneficiary would consolidate vie quantitative risk rewards calculation qualitative approach based variable interest holder controlling financial interest ability direct significant activities impact vie’s economic performance statement requires primary beneficiary assessment performed continuous basis also requires additional disclosures entity’s involvement vie restrictions vie’s assets liabilities included reporting entity’s consolidated balance sheet significant risk exposures due entity’s involvement vie involvement vie impacts reporting entity’s consolidated financial statements standard effective fiscal years beginning november 15 2009 adopted standard january 1 2010 expect standard impact financial statements note 3fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy distinguishes 1 market participant assumptions developed based market data obtained independent sources observable inputs 2 entity’s assumptions market participant assumptions developed based best information available circumstances unobservable inputs fair value hierarchy consists three broad levels gives highest priority unadjusted quoted prices active markets identical assets liabilities level 1 lowest priority unobservable inputs level 3 three levels fair value hierarchy described • level 1valuations based quoted prices active markets identical assets liabilities entity ability access • level 2valuations based quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable data substantially full term assets liabilities • level 3valuations based inputs supported little market activity significant fair value assets liabilities financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity level 1 december 31 2009 158 million cash equivalents 11 million shortterm investments carry books fair value using level 1 inputs december 31 2008 91 million cash equivalents 14 million shortterm investments books fair value using market price inputs level 2 october 2008 entered three interest rate swap contracts covering 225 million borrowings outstanding senior credit facility objective swaps reduce risk volatile interest expense fixing rate interest rate swaps designated cash flow hedges notional amounts significant terms swap agreement matched provisions terms variable rate debt hedged apply hedge accounting instruments changes fair value swap agreements recorded component comprehensive income october 2009 settled one interest rate swap notional value 125 million fair value remaining hedges recorded current liability 12 million december 31 2009 december 31 2008 fair value hedges recorded liability 48 million 21 million current fair value determined using market data inputs calculate expected future interest rates cash streams attributable difference expected future rates fixed rate payable discounted arrive fair value two hedges level 3 part acquisition accounting assign fair values identifiable intangible assets primarily customer relationships operating permits use discounted income approach whereby expected tax cash flows acquired entity present valued use financial information provided acquired company management assumptions related future growth determine expected future cash flows use data provided unaffiliated external parties well internal financial information calculate weighted average cost capital “wacc” acquired company expected cash flows calculated wacc significant inputs determining fair value intangibles 2009 assigned 700 million customer relationships 210 million facility environmental permits december 31 2009 fair value company’s debt obligations estimated 9850 million compared carrying amount 9889 million december 31 2008 fair value company’s debt obligations estimated 7715 million compared carrying amount 7927 million fair value estimated using market interest rates comparable instruments company current plans retire significant amount debt prior maturity movements items fair value hierarchies note 4acquisitions divestitures 2009 completed 23 acquisitions 16 domestic regulated waste businesses seven international regulated waste businesses canada latin america europe aggregate purchase price acquisitions year ended december 31 2009 approximately 3500 million approximately 198 million cash payments related transactions closed 2008 distributed 2009 purchase price 2009 acquisitions approximately 3302 2921 million paid cash 381 million paid issuance promissory notes november 30 2009 entered agreement united states department justice states missouri nebraska providing clearance hartscottrodino antitrust improvements act 1976 allowed us complete acquisition medserve inc 1825 million agreement requires us divest certain assets acquired medserve consisting autoclave treatment facility newton kansas four transfer stations kansas oklahoma nebraska missouri certain large customer accounts associated assets related facilities addition agreement requires stericycle period 10 years notify united states department justice states missouri nebraska acquiring business engaged collection treatment infectious waste kansas missouri nebraska oklahoma divestiture completed acquisition accounting medserve yet complete pending certain intangible valuations fixed asset appraisals however estimates made included balance sheet 2008 completed 22 acquisitions 12 domestic regulated waste businesses two domestic return management businesses eight international regulated waste businesses canada latin america europe aggregate net purchase price acquisitions including adjustments purchase accounting approximately 1910 million 849 million paid cash 1061 million paid issuance promissory notes purchase prices acquisitions primarily allocated identifiable intangible assets goodwill reflecting complementary strategic fit acquired businesses brought us 2007 completed 19 acquisitions ten domestic regulated waste businesses one domestic assembler distributor containers use mailback program eight international regulated waste businesses canada latin america europe two largest acquisitions united states addition acquired remaining minority interest medam sa de cv subsidiary mexico became sole owner medam ba subsidiary argentina previously accounted minority interest using equity method accounting aggregate net purchase price 2007 acquisitions including adjustments purchase accounting approximately 2410 million 1148 million paid cash 1125 million paid issuance promissory notes 137 million paid issuance shares common stock february 2007 sold three incinerators associated customer contracts united kingdom comply remedy accepted united kingdom competition commission reported form 10k 2006 sales price 265 million resulted gain approximately 19 million financial reporting purposes 2009 acquisitions accounted using acquisition method accounting 2008 2007 acquisitions accounted using purchase method accounting purchase prices acquisitions excess acquired tangible assets primarily allocated goodwill preliminary pending completion certain intangible asset valuations results operations acquired businesses included consolidated statements income dates acquisition acquisitions resulted recognition goodwill financial statements reflecting complementary strategic fit acquired businesses brought us total purchase price 2009 2008 2007 3500 1910 million 2410 million respectively net cash acquired allocated assets acquired liabilities assumed based estimated fair market value date acquisition excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill allocations pending completion certain intangible asset valuations goodwill recorded amounts 2404 1489 million 2038 million years 2009 2008 2007 respectively see note 10 consolidated financial statements tax deductible goodwill pending final purchase accounting approximately 733 million 1099 million 989 million years 2009 2008 2007 respectively results operations acquired businesses included consolidated statements income date acquisition note 5property plant equipment property plant equipment december 31 consist following items thousands note 6income taxes us foreign components income taxes consist following years ended december 31 2009 2008 2007 thousands significant components income tax expense years ended december 31 2009 2008 2007 follows thousands reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 2009 2008 2007 follows cash payments income taxes 665 million 524 million 459 million years ended december 31 2009 2008 2007 respectively deferred tax liabilities assets december 31 2009 2008 follows thousands december 31 2009 net operating loss carry forwards us federal state income tax purposes fully utilized excluding net operating loss carry forwards related acquisitions remaining net operating loss carry forwards acquisitions approximately 58 million begin expire 2016 expect fully utilize net operating losses would otherwise expire 2016 undistributed earnings foreign subsidiaries considered permanently invested therefore us deferred taxes recorded thereon cumulative amounts earnings 117 million december 31 2009 practicable estimate us withholding tax thereon assuming repatriation subsidiaries file us federal income tax returns income tax returns various states foreign jurisdictions exceptions longer subject us federal state local nonus income tax examinations tax authorities years 2002 internal revenue service “irs” concluded examination company’s us income tax return 2004 subsequent tax years remain open subject examination irs subsidiaries foreign countries tax years open ranging 2002 2009 company recorded accruals cover certain unresolved tax issues contingent liabilities relate additional taxes interest penalties company may required pay various tax jurisdictions course examinations various taxing authorities proposed adjustments may asserted company evaluates items casebycase basis adjusts accrual contingent liabilities deemed necessary total amount unrecognized tax positions december 31 2009 76 million includes immaterial amounts interest penalties reflected liability balance sheet amount unrecognized tax positions recognized would affect effective tax rate approximately 76 million recognize interest penalties accrued related income tax reserves income tax expense method accounting consistent prior years following table summarizes changes unrecognized tax positions years ended december 31 2008 2009 thousands note 7longterm debt longterm debt consists following december 31 thousands payments due longterm debt excluding capital lease obligations five years subsequent december 31 2009 follows thousands paid interest 248 million 291 million 318 million years ended december 31 2009 2008 2007 respectively property capital leases included property plant equipment accompanying consolidated balance sheets follows december 31 thousands amortization related capital leases included depreciation expense minimum future lease payments capital leases follows thousands senior credit facility 850 million senior credit facility maturing august 2012 215 million term loan maturing june 2012 100 million private placement notes maturing april 2015 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility term loan credit agreement private placement notes december 31 2009 compliance financial debt covenants december 31 2009 3816 million borrowings outstanding 850 million senior unsecured credit facility includes foreign currency borrowings 311 million also 2237 million committed outstanding letters credit facility unused portion revolving credit facility december 31 2009 2447 million december 31 2009 interest rates borrowings revolving credit facility • shortterm borrowing less one month federal funds rate plus 05 prime rate whichever higher • borrowing greater one month libor plus 075 weighted average rate interest unsecured revolving credit facility 10 per annum december 31 2009 215 million term loan debt outstanding entered 2009 several lenders maturing june 2012 term loans term loan credit agreement bear interest fluctuating interest rates determined onemonth applicable interest period reference libor plus applicable margin provided term loan agreement applicable margin based consolidated leverage ratio ranges 275 350 december 31 2009 applicable margin 30 weighted average rate interest term loan 58 per annum includes amounts interest rate hedge first year required make quarterly principal payments 25 principal amount outstanding term loans remainder maturity december 31 2009 100 million outstanding 564 private placement notes entered april 15 2008 nine institutional purchasers notes bear interest fixed rate 564 per annum interest payable arrears semiannually april 15 october 15 beginning october 15 2009 principal payable maturity notes april 15 2015 december 31 2009 2922 million debt outstanding includes promissory notes issued connection acquisitions 2004 2009 foreign subsidiary bank debt capital leases notes payable foreign subsidiary debt december 31 2009 private placement notes promissory notes foreign subsidiary bank debt primarily issued result acquisitions totaling 3864 million 3864 million 2237 million promissory notes secured letters credit 3864 million 3346 million fixed interest rate 518 million floating interest rate weighted average interest rate 446 weighted average maturity approximately 49 years december 31 2008 private placement notes promissory notes foreign subsidiary bank debt primarily issued result acquisitions totaling 3518 million 3518 million 2123 million promissory notes secured letters credit 3518 million 3174 million fixed interest rate 344 million floating interest rate weighted average interest rate 505 weighted average maturity approximately 61 years guarantees guaranteed loan jpmorganchase bank na behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business one year loan current balance 52 million jpmorganchase bank na expires may 2010 also notes receivable shiraishi approximately 149 million support medical waste business amounts collateralized assets shiraishi related companies note 8accrued liabilities accrued liabilities december 31 consist following items thousands note 9derivative instruments july 2009 settled remaining gbp sterling forward hedge related intercompany loan notional value contract £80 million sterling settled 139 million usd settlement contract resulted immaterial charge earnings october 2008 stericycle entered three interest rate swap contracts covering 225 million borrowings outstanding senior credit facility objective swap reduce risk volatile interest expense fixing rate october 2009 settled one interest rate swap notional value 125 million remaining two contracts follows thousands entered interest rate swaps order manage risk interest rate changes interest expense interest rate swaps designated cash flow hedges notional amounts significant terms swap agreement matched provisions terms variable rate debt hedged fair market remaining two hedges recorded current liability 12 million december 31 2009 december 31 2009 hedges determined 100 effective gains losses hedges reclassified interest expense effect hedged item recognized earnings fair market value determined using market data inputs calculate expected future interest rates cash streams attributable difference expected future rates fixed rate payable discounted arrive fair value two hedges note 10goodwill intangible assets accordance fasb accounting standards goodwill indefinite lived intangibles amortized subject annual impairment test frequent testing circumstances indicate may impaired two geographical reporting segments “united states” “foreign countries” goodwill changes carrying amount goodwill years ended december 31 2009 2008 follows thousands quarter ended june 30 2009 performed annual goodwill impairment evaluation three reporting units domestic regulated waste domestic regulated returns management foreign countries determined none recorded goodwill impaired december 31 2009 2008 711 million 481 million respectively indefinite lived intangibles consist environmental permits 2009 2008 performed annual permit impairment evaluation determined noted impairment intangible assets indefinite lived goodwill permits continue amortized useful lives 2009 assigned 700 million customer relationships amortization periods 15 40 years 210 million facility environmental permits indefinite lives 77 million noncompete agreements amortization periods two ten years 2008 assigned 356 million customer relationships amortization periods 20 40 years 34 million facility environmental permits indefinite lives 03 million noncompete agreements amortization periods one ten years december 31 value amortizable intangible assets follows thousands years ended december 31 2009 2008 2007 aggregate amortization expense 54 million 40 million 37 million respectively estimated amortization expense next five years assuming additional amortizable intangible assets follows years ended december 31 thousands note 11lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space landfills operating lease agreements expire various dates next 15 years leases properties contain renewal provisions rent expense 2009 2008 2007 458 million 412 million 324 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2009 next five years aggregate follows thousands note 12net income per common share following table sets forth computation basic diluted net income per share thousands except share per share data additional information regarding outstanding employee stock options outstanding warrants see note 13 consolidated financial statements 2009 2008 2007 options warrants purchase 2218914 shares 993352 shares 279081 shares respectively exercise prices 46566053 47326053 38575970 respectively included computation diluted earnings per share “eps” effect would antidilutive december 31 2009 warrants outstanding note 13stock based compensation stock plans adopted six stock option plans 2008 incentive stock plan stockholders approved may 2008 ii 2005 incentive stock plan stockholders approved april 2005 iii 2000 nonstatutory stock option plan board directors adopted february 2000 iv 1997 stock option plan expired january 2007 v directors stock option plan expired may 2006 vi 1995 incentive compensation plan expired july 2005 2008 plan authorized awards stock options stock appreciation rights total 3500000 shares 2005 plan authorizes awards stock options stock appreciation rights total 4800000 shares amended 2000 plan authorizes stock option grants total 7000000 shares 1997 1995 plans authorized stock option grants total 6000000 shares amended directors plan authorized stock option grants total 2340000 shares 2008 plan 2005 plan provide grant nonstatutory stock options “nsos” incentive stock options intended qualify section 422 internal revenue code “isos” well stock appreciation rights addition 2008 plan provides grant restricted stock awards rsu awards 2000 plan provides grant nsos 1997 1995 plans provided grant nsos isos directors plan provided grant nsos 2008 2005 plans authorize awards officers employees consultants following expiration directors plan may 2006 directors 2000 plan authorizes stock option grants employees consultants officers directors 1997 1995 plans authorized stock option grants officers directors employees consultants directors plan authorized stock option grants outside directors december 31 2009 reserved following shares issuance consisting shares available option grants 2008 plan 2005 plan 2000 plan 1997 plan shares granted options five plans yet exercised employee stock purchase plan october 2000 board directors adopted employee stock purchase plan “espp” effective july 1 2001 stockholders approved espp may 2001 espp authorizes 600000 shares common stock purchased employees 15 discount market price stock payroll deductions two sixmonth offerings year employee elects participate offering granted option first day offering number shares equal employee’s payroll deductions espp offering period may exceed 5000 divided option price per share option price per share lower 85 closing price share common stock first trading day offering period 85 closing price last trading day offering period recognize compensation expense espp reflected statement income every employee completed six months employment first day offering fulltime employee parttime employee customarily works least 20 hours per week eligible participate offering 2009 2008 2007 56145 shares 48836 shares 43777 shares respectively issued espp stock based compensation expense recognized stock compensation expense accordance fasb accounting standards 2009 changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding compensation expense stockbased compensation awards granted subsequent january 1 2006 based grantdate fair value determined accordance provisions fasb accounting standards sharebased payments years ended december 31 2009 2008 2007 recognized compensation expense 140 million 112 million 103 million respectively stock options 07 million 06 million 04 million respectively espp reflected statement income significant capitalized stockbased compensation costs december 31 2009 2008 2007 following table presents total stockbased compensation expense resulting stock option awards espp included consolidated statements income thousands december 31 2009 198 million total unrecognized compensation expenses related nonvested option awards expected recognized weightedaverage period 149 years following table sets forth tax benefits related stock compensation thousands stock options granted officers employees generally vest five years 2009 2008 2007 options granted officers employees generally vested rate 20 option shares first five anniversaries option grant date expense related graded vesting options recognized using straightline method vesting period exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options option activity years ended december 31 2009 2008 2007 summarized follows total intrinsic value options exercised years ended december 31 2009 2008 376 million 394 million respectively total intrinsic value represents total pretax intrinsic value difference closing stock price last day trading year ended december 31 2009 exercise price multiplied number inthemoney options would received option holders assuming option holders exercised options december 31 2009 amount changes based fair market value stock outstanding options december 31 2009 2008 weighted average remaining contractual life 65 years 66 years respectively aggregate intrinsic value 1464 million 1563 million respectively exercisable options weighted average remaining contractual life 53 years december 31 2009 2008 aggregate intrinsic value 1036 million 1097 million respectively options outstanding exercisable december 31 2009 price range presented blackscholes optionpricing model used determining fair value option grant expected term options granted based historical experience expected volatility based upon historical volatility expected dividend yield zero riskfree interest rate based upon us treasury yield rates comparable period assumptions used blackscholes model follows note 14preferred stock warrants preferred stock december 31 2009 2008 1000000 authorized shares preferred stock shares issued outstanding warrants december 31 2009 warrants issued outstanding note 15employee benefit plan 401k defined contribution retirement savings plan covering substantially employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee maximum 1750 per annum contributions years ended december 31 2009 2008 2007 approximately 21 million 17 million 16 million respectively company several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2009 2008 2007 total contributions made company plans approximately 06 million 07 million 05 million respectively note 16restructuring costs december 2009 announced consolidation operations within returns management services segment consolidation result closure facilities boynton beach florida conyers georgia operations facilities moved indianapolis indiana location recognized 16 million expense fourth quarter 2009 related restructuring 09 million fixed asset writeoffs 07 primarily severance paid 2010 estimate additional 16 million expense 2010 approximately 08 million related severance employee expenses 08 million related lease related occupancy charges expect restructuring completed end 2010 believe restructuring allow us maximize efficiency returns management services single location management infrastructure note 17legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time november 30 2009 entered agreement united states department justice “doj” states missouri nebraska providing clearance hartscottrodino antitrust improvements act 1976 allowed us complete pending acquisition medserve inc closed december 4 2009 agreement doj states missouri nebraska agreement requires us divest certain assets acquired medserve consisting autoclave treatment facility newton kansas four transfer stations kansas oklahoma nebraska missouri certain large customer accounts associated assets related facilities process complying required divestiture addition agreement requires us period ten years notify doj states missouri nebraska acquiring business engaged collection treatment infectious waste kansas missouri nebraska oklahoma april 2008 stericycle daniels corporation uk limited “daniels uk” subsidiary daniels sharpsmart pty limited “daniels” certain affiliated companies entered settlement arbitration proceedings united kingdom prior award arbitrator time entered settlements subsidiaries daniels resolving various disputes finalized payment legal fees stericorp limited awarded november 2007 arbitrator’s award connection net settlements recognized total pretax expense 56 million aftertax expense 35 million yearended december 31 2008 note 18products services geographic information fasb asc topic 280 requires segment information reported based information utilized executive management internally assess performance make operating decisions determined three operating segments based organizational structure company information reviewed operating segments foreign regulated waste management services “foreign countries” domestic regulated waste management services “united states” domestic returns management services aggregated domestic regulated waste management services domestic returns management services one reportable segment united states based consideration following aggregation criteria • similar economic characteristics • services provided • types customers serviced • types waste collection transportation treatment methods utilized • regulatory environments similar vary based upon country specific regulations • employ sales marketing techniques activities two operating segments united states includes puerto rico foreign countries summary information reportable segments follows thousands revenues attributed countries based location customers intercompany revenues recorded united states work performed canada eliminated prior reporting united states revenues accounting principles critical accounting policies used preparation financial statements reporting segments detailed information united states reporting segment follows thousands detailed information foreign countries reporting segment follows thousands note 19accumulated comprehensive income components total comprehensive income net income change cumulative currency translation adjustments gains losses derivative instruments qualifying cash flow hedges following table sets forth components total comprehensive income 2009 2008 2007 thousands tax impact unrealized loss cash flow hedges accumulated comprehensive income december 31 2009 2008 05 million 19 million respectively tax impact december 31 2007 immaterial translation adjustments taxeffected company’s net investment foreign subsidiaries related foreign earnings deemed permanently invested note 20selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2009 2008 thousands except per share data thousands except per share data eps calculated quarterly basis amounts may total calculated fullyear eps stericycle inc subsidiaries schedule iivaluation allowance accounts thousands 1 amounts consist primarily valuation allowances assumed acquired companies currency translation adjustments item 9item 8 financial statements supplementary data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting internal control financial reporting defined rules 13a15f securities exchange act 1934 process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management assessed effectiveness company’s internal control financial reporting december 31 2010 making assessment management used criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment criteria management concludes company maintained effective internal control financial reporting december 31 2010 company’s independent auditors issued attestation report company’s internal control financial reporting report appears page 31 stericycle inc lake forest il february 28 2011 report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited stericycle inc’s internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria stericycle inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion stericycle inc maintained material respects effective internal control financial reporting december 31 2010 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets stericycle inc subsidiaries december 31 2010 2009 related consolidated statements income changes equity cash flows three years period ended december 31 2010 report dated february 28 2011 expressed unqualified opinion thereon ernst young llp chicago illinois february 28 2011 report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2010 2009 related consolidated statements income changes equity cash flows three years period ended december 31 2010 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2010 2009 consolidated results operations cash flows three years period ended december 31 2010 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements company changed method accounting business combinations adoption guidance originally issued fasb statement 141r business combinations codified fasb asc topic 805 business combinations fasb statement 160 noncontrolling interests consolidated financial statementsan amendment arb no51 codified fasb asc topic 810 consolidation effective january 1 2009 also audited accordance standards public company accounting oversight board united states stericycle inc’s internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 28 2011 expressed unqualified opinion thereon ernst young llp chicago illinois february 28 2011 stericycle inc subsidiaries consolidated balance sheets thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements income thousands except share per share data accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows thousands accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes equity years ended december 31 2010 2009 2008 thousands accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 2010 unless context requires otherwise “we” “us” “our” refers stericycle inc subsidiaries consolidated basis note 1description business incorporated 1989 presently serve diverse customer base 485000 customers throughout united states argentina brazil canada chile ireland japan mexico portugal romania united kingdom domestically lease two etd processing facilities 49 facilities provide autoclave incineration processing 16 facilities use processing technologies processing facilities also serve collection sites lease 99 additional transfer collection sites 12 additional salesadministrative sites use fully integrated national network provide broad range services customers including regulated waste management services regulated return recall management services regulated waste management services include regulated waste removal services sharps management services products services infection control safety compliance programs regulated return recall management services physical services provided companies individual businesses assist handling products removed supply chain due recalls expiration services also include advanced notification technology used communicate specific instructions users product waste treatment technologies include autoclaving incineration chemical treatment proprietary electrothermaldeactivation system internationally lease three etd processing facilities 52 facilities provide autoclave incineration processing 14 facilities use processing technologies also lease 30 transfer collection sites 27 additional salesadministrative sites lease two landfills 6119 employees united states 317 covered collective bargaining agreements 3596 employees various foreign countries approximately 1260 covered collective bargaining agreements primarily latin america accompanying consolidated financial statements prepared pursuant rules regulations securities exchange commission “sec” conformity accounting principles generally accepted united states preparation financial statements conformity accounting principles requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period opinion consolidated financial statements included herein contain adjustments necessary present fairly financial position december 31 2010 2009 results operations three years ended december 31 2010 2009 2008 cash flows three years ended december 31 2010 2009 2008 statement changes equity three years ended december 31 2010 2009 2008 adjustments normal recurring nature evaluated subsequent events date filing annual report form 10k preparation consolidated financial statements conformity accounting principles generally accepted united states requires management make certain estimates assumptions affect amount reported assets liabilities disclosure contingent assets liabilities date consolidated financial statements revenues expenses periods reported actual results may differ estimates certain amounts previously issued financial statements reclassified conform current period presentation note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc wholly owned subsidiaries revenue recognition revenues regulated waste management services sterisafe service recognized time waste collection sterisafe revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues regulated returns recall management services recorded time services performed revenues product sales recognized time goods shipped ordering customer contracts loss position losses would recorded probable estimable contracts would expected go loss position cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows containers weighted average remaining useful life 126 years ended december 31 2010 2009 2008 wrote 01 million 09 million 05 million respectively related equipment permanently idled goodwill identifiable intangibles goodwill identifiable indefinite lived intangible assets amortized subject annual impairment test intangible assets amortized useful lives determined customer relationships useful lives 15 40 years based upon type customer weighted average remaining useful life 305 years covenants nottocompete intangibles useful lives two ten years weighted average remaining useful life 64 years tradename intangibles useful lives 20 40 years weighted average remaining useful life 308 years determined permits indefinite lives due ability renew permits minimal additional cost therefore amortized valuation intangible customer relationships permits derived using discounted income cost savings approach financial information revenues costs assets liabilities related intangible asset input standard valuation model determine stream income attributable intangible income stream discounted present arrive valuation perform annual impairment tests indefinite lived intangible assets valuation intangibles permits currently tested impairment annually december 31 frequently circumstances indicate may impaired use discounted income cost savings model current measurement fair value permits fair value based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates amortizable identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined regulated waste customer relationships 15 40 year lives based specific type relationship valuation contractual customer relationships derived using discounted income approach valuation model assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows see note 12goodwill intangible assets consolidated financial statements income taxes deferred income tax liabilities assets determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse accounts receivable accounts receivable consist amounts due us normal business activities carried estimated collectible amounts require collateral part standard trade credit policy accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency accounts receivables referred third party collection agency written uncollected 120 days single customer accounts 2 revenues bad debt expense 75 million 69 million 50 million years ended december 31 2010 2009 2008 respectively financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt december 31 2010 fair value company’s debt obligations estimated 1105 billion compared carrying amount 1103 billion fair value estimated using market interest rates comparable instruments company current plans retire significant amount debt prior maturity financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater 2 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses contracts loss positions losses recorded probable estimable losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits income tax liabilities accrued auto workers’ compensation insurance claims intangible asset valuations estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates future estimated expenses may fluctuate depending changes foreign currency rates estimates payments due longterm debt lease payments capital leases amortization expense rental payments based upon foreign exchange rates december 31 2010 see notes 12 14 15 consolidated financial statements derivative instruments 2010 settled two outstanding interest rate swap contracts fair value 12 million december 31 2009 entered settled us treasury lock 2010 us treasury lock settlement resulted cash payment 46 million reflected statement cash flows within financing activities settlement amount amortized accumulated comprehensive income life related debt 2010 recognized 01 million interest expense accumulated comprehensive income derivative instruments december 31 2010 stockbased compensation recognize compensation expense stockbased awards made employees directors fair value stockbased compensation cost measured grant date based value award recognized expense vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility stock expected term award riskfree rate stock’s expected volatility based upon historical experience expected term awards based upon historical volatility stock price riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component comprehensive income shareholders’ equity environmental matters record liability environmental remediation damages cleanup program becomes probable costs damages reasonably estimated environmental liabilities recorded december 31 2010 aware issues facilities could initiate need environmental remediation new accounting standards accounting standards recently adopted business combinations january 1 2009 adopted update existing accounting standards business combinations update retains underlying concepts original standard business combinations still required accounted fair value acquisition method accounting changes method applying acquisition method number ways acquisition costs longer considered part fair value acquisition generally expensed incurred contingent consideration fairvalued acquisition date changes fair value recognized income statement noncontrolling interests recognized fair value acquisition date inprocess research development recorded fair value indefinite lived intangible asset acquisition date restructuring costs associated business combination generally expensed subsequent acquisition date changes deferred tax asset valuation allowances income tax uncertainties acquisition date generally affect income tax expense acquisition expenses 95 million 73 million 2010 2009 respectively inherent uncertainty number structure complexity acquisitions may complete future magnitude transaction expenses may incur completing acquisitions future impact accounting change reasonably estimable consolidation january 1 2009 stericycle adopted changes issued fasb consolidation accounting reporting changes establish accounting reporting noncontrolling interest subsidiary deconsolidation subsidiary guidance defines noncontrolling interest previously called minority interest portion equity subsidiary attributable directly indirectly parent changes require among items noncontrolling interest included consolidated statement financial position within equity separate parent’s equity consolidated net income reported amounts inclusive parent’s noncontrolling interest’s shares separately amounts consolidated net income attributable parent noncontrolling interest consolidated statement operations subsidiary deconsolidated retained noncontrolling equity investment former subsidiary measured fair value gain loss recognized net income based fair value change presentation noncontrolling interests adoption changes impact financial statements presentation disclosure requirements changes applied retrospectively reflect noncontrolling interests certain latin american acquisitions january 1 2010 stericycle adopted changes issued financial accounting standards board “fasb” accounting standards update “asu” 200917 “improvements financial reporting enterprises involved variable interest entities” asu related amendments previous guidance consolidation variable interest entities “vie” standard clarifies characteristics identify vie changes reporting entity identifies primary beneficiary would consolidate vie quantitative risk rewards calculation qualitative approach based variable interest holder controlling financial interest ability direct significant activities impact vie’s economic performance statement requires primary beneficiary assessment performed continuing basis also requires additional disclosures entity’s involvement vie restrictions vie’s assets liabilities included reporting entity’s consolidated balance sheet significant risk exposures due entity’s involvement vie involvement vie impacts reporting entity’s consolidated financial statements adoption standard impact financial statements note 3acquisitions divestitures following table summarizes locations acquisitions years ended december 31 2010 2009 2008 following table summarizes aggregate purchase price acquisitions years ended december 31 2010 2009 2008 thousands 2010 acquisitions include 25 million expected paid 2011 reflected table 2010 completed 33 acquisitions 12 domestic regulated waste compliance businesses one domestic returns recall management services business 20 international regulated waste compliance businesses also increased majority share previous acquisition chile 60 75 2010 recognized 2030 million goodwill 1290 million assigned united states reporting segment 740 million assigned foreign countries reporting segment 496 million tax deductible goodwill acquired 2010 recognized 1136 intangible assets 971 million customer relationships amortizable lives 1540 years 165 million operating permits indefinite lives allocation acquisition price preliminary pending completion certain intangible asset valuations completion accounts following table summarizes purchase price allocation acquisitions years ended december 31 2010 2009 2008 thousands acquisition medserve inc december 2009 required us divest certain acquired assets sold 80 million resulting second quarter pretax gain 30 million following table describes assets thousands september 24 2010 entered merger agreement acquisition healthcare waste solutions inc delaware corporation “hws” hws provides resource management assessment consulting program waste streams healthcare providers also engaged collection transportation treatment disposal medical waste universal waste regulated wastes sharps management services safety compliance training related businesses total merger consideration hws 245 million cash subject various adjustments including reduction indebtedness closing date merger subject customary closing conditions regulatory reviews including clearance hartscottrodino antitrust improvements act 1976 amended financial reporting purposes 2010 2009 acquisitions accounted using acquisition method accounting 2008 acquisitions accounted using purchase method accounting acquisitions resulted recognition goodwill financial statements reflecting complementary strategic fit acquired businesses brought company years ended december 31 2010 2009 company incurred 95 million 73 million respectively acquisition related expenses identified condensed consolidated statements income “acquisition expenses” total purchase price acquisitions 2010 2009 2008 allocated assets acquired liabilities assumed based estimated fair market value date acquisition excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill allocations pending completion certain intangible asset valuations goodwill recorded amounts 2030 million 2404 million 1489 million years 2010 2009 2008 respectively see note 12 consolidated financial statements tax deductible goodwill pending final acquisition accounting approximately 496 million 733 million 1099 million years 2010 2009 2008 respectively results operations acquired businesses included consolidated statements income date acquisition note 4fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy distinguishes 1 market participant assumptions developed based market data obtained independent sources observable inputs 2 entity’s assumptions market participant assumptions developed based best information available circumstances unobservable inputs fair value hierarchy consists three broad levels gives highest priority unadjusted quoted prices active markets identical assets liabilities level 1 lowest priority unobservable inputs level 3 three levels fair value hierarchy described • level 1valuations based quoted prices active markets identical assets liabilities entity ability access • level 2valuations based quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable data substantially full term assets liabilities • level 3valuations based inputs supported little market activity significant fair value assets liabilities financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity thousands level 1 december 31 2010 771 million cash equivalents 158 million certificates deposit 27 million money market accounts recorded fair value using level 1 inputs financed portion japan acquisition local borrowings ¥12 billion required us deposit equivalent usd amount 158 million one year certificates deposit affiliated bank located united states december 31 2009 158 million cash equivalents 11 million shortterm investments recorded fair value using market price inputs level 2 december 31 2010 interest rate swap contracts december 31 2009 fair value interest rate hedges recorded current liability 12 million level 3 assets liabilities measured fair value using level 3 inputs december 31 2010 december 31 2009 fair value debt december 31 2010 fair value company’s debt obligations estimated 1105 billion compared carrying amount 1103 billion december 31 2009 fair value company’s debt obligations estimated 9850 million compared carrying amount 9889 million fair value estimated using market interest rates comparable instruments movements items fair value hierarchies note 5derivative instruments december 31 2010 derivative instruments note 6income taxes us foreign components income taxes consisted following years ended december 31 2010 2009 2008 thousands significant components income tax expense years ended december 31 2010 2009 2008 follows thousands reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 2010 2009 2008 follows cash payments income taxes 766 million 665 million 524 million years ended december 31 2010 2009 2008 respectively deferred tax liabilities assets december 31 2010 2009 follows thousands december 31 2010 net operating loss carry forwards us federal state income tax purposes fully utilized excluding net operating loss carry forwards related acquisitions remaining net operating loss carry forwards foreign domestic acquisitions approximately 838 million begin expire 2015 322 million valuation allowance offsetting benefit representing increase 135 million 2009 related acquisitions undistributed earnings foreign subsidiaries considered permanently invested therefore us deferred taxes recorded earnings cumulative amounts earnings 1557 million december 31 2010 practicable estimate us withholding tax earnings assuming repatriation subsidiaries file us federal income tax returns income tax returns various states foreign jurisdictions exceptions longer subject us federal state local nonus income tax examinations tax authorities years 2005 recorded accruals cover certain unresolved tax issues contingent liabilities relate additional taxes interest penalties may required pay various tax jurisdictions course examinations various taxing authorities proposed adjustments may asserted evaluate items casebycase basis adjust accrual contingent liabilities deemed necessary total amount unrecognized tax positions december 31 2010 91 million includes immaterial amounts interest penalties reflected accrued liabilities balance sheet amount unrecognized tax positions recognized would affect effective tax rate approximately 91 million recognize interest penalties accrued related income tax reserves income tax expense method accounting consistent prior years following table summarizes changes unrecognized tax positions years ended december 31 2009 2010 thousands note 7stock based compensation stock plans adopted six stock option plans 2008 incentive stock plan stockholders approved may 2008 ii 2005 incentive stock plan stockholders approved april 2005 iii 2000 nonstatutory stock option plan expired february 2010 iv 1997 stock option plan expired january 2007 v directors stock option plan expired may 2006 vi 1995 incentive compensation plan expired july 2005 2008 plan authorized awards stock options stock appreciation rights total 3500000 shares 2005 plan authorizes awards stock options stock appreciation rights total 4800000 shares amended 2000 plan authorizes stock option grants total 7000000 shares 1997 1995 plans authorized stock option grants total 6000000 shares amended directors plan authorized stock option grants total 2340000 shares 2008 plan 2005 plan provide grant nonstatutory stock options “nsos” incentive stock options intended qualify section 422 internal revenue code “isos” well stock appreciation rights addition 2008 plan provides grant restricted stock awards rsu awards 2000 plan provides grant nsos 1997 1995 plans provided grant nsos isos directors plan provided grant nsos 2008 2005 plans authorize awards officers employees consultants following expiration directors plan may 2006 directors 2000 plan authorizes stock option grants employees consultants officers directors 1997 1995 plans authorized stock option grants officers directors employees consultants directors plan authorized stock option grants outside directors december 31 2010 reserved following shares issuance consisting shares available option grants 2008 plan 2005 plan 2000 plan 1997 plan shares granted options five plans yet exercised employee stock purchase plan october 2000 board directors adopted employee stock purchase plan “espp” effective july 1 2001 stockholders approved espp may 2001 espp authorizes 600000 shares common stock purchased employees 15 discount market price stock payroll deductions two sixmonth offerings year employee elects participate offering granted option first day offering number shares equal employee’s payroll deductions espp offering period may exceed 5000 divided option price per share option price per share lower 85 closing price share common stock first trading day offering period 85 closing price last trading day offering period recognize compensation expense espp reflected statement income every us employee completed six months employment first day offering fulltime employee parttime employee customarily works least 20 hours per week eligible participate offering 2010 2009 2008 61573 shares 56145 shares 48836 shares respectively issued espp stock based compensation expense recognize stock compensation expense accordance fasb accounting standards 2010 changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding compensation expense stockbased compensation awards granted subsequent january 1 2006 based grantdate fair value determined accordance provisions fasb accounting standards sharebased payments years ended december 31 2010 2009 2008 recognized compensation expense 144 million 140 million 112 million respectively stock options 09 million 07 million 06 million respectively espp reflected statement income significant capitalized stockbased compensation costs december 31 2010 2009 2008 following table presents total stockbased compensation expense resulting stock option awards espp included consolidated statements income thousands december 31 2010 220 million total unrecognized compensation expenses related nonvested option awards expected recognized weightedaverage period 154 years following table sets forth tax benefits related stock compensation thousands stock options granted officers employees generally vest five years 2010 2009 2008 options granted officers employees generally vested rate 20 option shares first five anniversaries option grant date expense related graded vesting options recognized using straightline method vesting period exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options option activity years ended december 31 2010 2009 2008 summarized follows 2010 issued 20000 restricted stock units “rsus” weighted average fair value per share 5165 vest end three years 2008 plan includes share reserve related rsus granted increased 40000 21 ratio rsus 2009 2008 total exercise intrinsic value represents total pretax intrinsic value difference sales price trading day year ended december 31 2010 exercise price associated respective option thousands total aggregate intrinsic value represents total pretax intrinsic value difference closing stock price last day trading year ended december 31 2010 exercise price multiplied number inthemoney options would received option holders assuming option holders exercised options december 31 2010 amount changes based fair market value stock following tables set forth information related outstanding options years thousands following tables set forth information related exercisable options years thousands options outstanding exercisable december 31 2010 price range presented blackscholes optionpricing model used determining fair value option grant expected term options granted based historical experience expected volatility based upon historical volatility expected dividend yield zero riskfree interest rate based upon us treasury yield rates comparable period assumptions used blackscholes model follows note 8preferred stock preferred stock december 31 2010 2009 1000000 authorized shares preferred stock shares issued outstanding note 9earnings per common share following table sets forth computation basic diluted earnings per share thousands except share per share data additional information regarding outstanding employee stock options see note 7 consolidated financial statements 2010 2009 2008 options purchase 133535 shares 2218914 shares 993352 shares respectively exercise prices 51558092 46566053 47326053 respectively included computation diluted earnings per share “eps” effect would antidilutive note 10accumulated comprehensive income loss components total comprehensive income net income change cumulative currency translation adjustments gains losses derivative instruments qualifying cash flow hedges following table sets forth components total comprehensive income 2010 2009 2008 thousands tax impact unrealized loss cash flow hedges accumulated comprehensive income december 31 2010 2009 2008 14 million 14 million 19 million respectively translation adjustments taxeffected company’s net investment foreign subsidiaries related foreign earnings deemed permanently invested note 11property plant equipment property plant equipment december 31 consisted following items thousands note 12goodwill intangible assets accordance fasb accounting standards goodwill indefinite lived intangibles amortized subject annual impairment test frequent testing circumstances indicate may impaired two geographical reporting segments “united states” “foreign countries” goodwill changes carrying amount goodwill years ended december 31 2010 2009 follows thousands quarter ended june 30 2010 performed annual goodwill impairment evaluation three reporting units domestic regulated waste domestic regulated returns recall management services foreign countries performed two impairment tests one using market approach using income approach market income approaches indicated impairment goodwill three reporting units market approach market approach begins calculating market capitalization company using average stock price prior 30 days outstanding share count june 30 2010 look company’s earnings interest tax depreciation amortization “ebitda” adjusted stock compensation expense adjustments gain sale divested assets prior twelve months calculated market capitalization divided modified ebitda arrive valuation multiple fair value reporting unit calculated taking product valuation multiple trailing twelve month modified ebitda reporting unit fair value compared reporting units’ book value determined excess book value believe starting fair value company whole reasonable measure fair value allocated reporting unit based reporting unit’s individual earnings sustained drop stock price would negative impact fair value calculations temporary drop earnings reporting unit would negative impact fair value calculations results goodwill impairment test using market approach indicated fair value domestic regulated waste foreign countries reporting units exceeded book value substantial amount excess 100 book value june 30 2010 regulated returns recall management services reporting unit fair value exceeded book value excess 30 1199 million assigned goodwill income approach income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows calculated using management assumptions internal growth capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based company calculated weighted average cost capital adjusted reporting units based risk size premium foreign country premium significant assumptions used income approach include realization future cash flows discount rate used present value cash flows results goodwill impairment test using income approach indicated fair value reporting units exceeded book value substantial amount excess 100 2010 wrote 06 million permit intangibles two redundant domestic treatment facilities december 31 2010 2009 852 million 711 million respectively indefinite lived intangibles consist environmental permits 2010 2009 performed annual permit impairment evaluation determined noted impairment intangible assets indefinite lived goodwill permits amortized useful lives 2010 assigned 971 million customer relationships amortization periods 15 40 years 165 million facility environmental permits indefinite lives 2009 assigned 700 million customer relationships amortization periods 15 40 years 210 million facility environmental permits indefinite lives 77 million covenants nottocompete agreements amortization periods two ten years december 31 values amortizable intangible assets follows thousands years ended december 31 2010 2009 2008 aggregate amortization expense 99 million 54 million 40 million respectively estimated amortization expense next five years assuming additional amortizable intangible assets follows years ended december 31 thousands note 13accrued liabilities accrued liabilities december 31 consisted following items thousands note 14debt new debt october 15 2010 entered note purchase agreement 39 institutional investors sell 175 million new 389 sevenyear unsecured senior notes “series notes” 225 million new 10year 447 unsecured senior notes “series b notes” series notes bear interest fixed rate 389 per annum series b notes bear interest fixed rate 447 per annum interest payable arrears semiannually april 15 october 15 beginning april 15 2011 principal amount 175 million series notes payable maturity notes october 15 2017 principal amount 225 million series b notes payable maturity notes october 15 2020 notes unsecured obligations company longterm debt consisted following december 31 thousands payments due longterm debt excluding capital lease obligations five years subsequent december 31 2010 follows thousands paid interest 286 million 248 million 291 million years ended december 31 2010 2009 2008 respectively property capital leases included property plant equipment accompanying consolidated balance sheets follows december 31 thousands amortization related capital leases included depreciation expense minimum future lease payments capital leases follows thousands 8500 million senior credit facility maturing august 2012 810 million term loan maturing june 2012 1000 million private placement notes maturing april 2015 1750 million private placement notes maturing october 2017 2250 million private placement notes maturing october 2020 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility term loan credit agreement private placement notes december 31 2010 compliance financial debt covenants december 31 2010 2009 1840 million 2237 million respectively committed outstanding letters credit senior credit facility unused portion revolving credit facility december 31 2010 2009 4906 million 2447 million respectively guarantees guaranteed loan jpmorganchase bank na behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business one year loan current balance 61 million jpmorganchase bank na expires may 2011 also extended notes receivable shiraishi approximately 152 million support medical waste business amounts collateralized assets shiraishi related companies note 15lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space landfills operating lease agreements expire various dates next 14 years leases properties contain renewal provisions rent expense 2010 2009 2008 579 million 458 million 412 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2010 next five years aggregate follows thousands note 16products services geographic information fasb asc topic 280 requires segment information reported based information utilized executive management internally assess performance make operating decisions determined three operating segments based organizational structure company information reviewed operating segments foreign regulated waste management services “foreign countries” domestic regulated waste management services “united states” domestic returns recall management services aggregated domestic regulated waste management services domestic returns recall management services one reportable segment united states based consideration following aggregation criteria • similar economic characteristics • services provided • types customers serviced • types waste collection transportation treatment methods utilized • regulatory environments similar vary based upon country specific regulations • employ sales marketing techniques activities two reportable segments united states includes puerto rico foreign countries summary information reportable segments follows thousands revenues attributed countries based location customers intercompany revenues recorded united states work performed canada eliminated prior reporting united states revenues accounting principles critical accounting policies used preparation financial statements reporting segments detailed information united states reporting segment follows thousands detailed information foreign countries reporting segment follows thousands note 17employee benefit plan 401k defined contribution retirement savings plan covering substantially employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee maximum 1750 per annum contributions years ended december 31 2010 2009 2008 approximately 23 million 21 million 17 million respectively company several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2010 2009 2008 total contributions made company plans approximately 07 million 07 million 07 million respectively note 18legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time november 2010 received request additional information us department justice “doj” connection review proposed acquisition healthcare waste solutions inc pursuant hartscottrodino antitrust improvements act 1976 “hsr” complied doj’s request anticipate doj complete review first quarter 2011 although parties may extend hsr waiting period november 30 2009 entered agreement doj states missouri nebraska providing clearance hartscottrodino antitrust improvements act 1976 allowed us complete acquisition medserve inc closed december 4 2009 agreement doj states missouri nebraska agreement required us divest certain assets acquired medserve consisting autoclave treatment facility newton kansas four transfer stations kansas oklahoma nebraska missouri certain large customer accounts associated assets related facilities completed required divestiture may 2010 see note 3acquisitions divestiture addition agreement requires us period ten years notify doj states missouri nebraska acquiring business engaged collection treatment infectious waste kansas missouri nebraska oklahoma note 19restructuring plant closure costs december 2009 announced consolidation operations within returns recall management services “rms” business consolidation resulted closure facilities boynton beach florida conyers georgia operations facilities moved indianapolis indiana location recognized expense 16 million fourth quarter 2009 22 million 2010 accrual balance 03 million related rms restructuring december 31 2010 estimate immaterial additional expense 2011 believe restructuring allow us maximize efficiency rms business single location management infrastructure december 2010 reorganized structure international management group order leverage strong local management recognized 54 million expense related restructuring 33 million related stock options accrual balance 18 million related reorganization december 31 2010 paid primarily 2011 additional disbursements 2012 addition restructuring charges recognized 09 million non cash expenses 2010 related consolidation redundant plant operations following tables highlight pretax charges changes reserves 2010 2009 charges related costs reflected consolidated statement income within “restructuring plant closure costs” costs revenue selling general administrative expenses thousands note 20selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2010 2009 thousands except per share data thousands except per share data eps calculated quarterly basis amounts may total calculated fullyear eps note 21subsequent events evaluated subsequent events date filing annual report form 10k events occurred would require adjustment disclosure consolidated financial statements stericycle inc subsidiaries schedule iivaluation allowance accounts thousands 1 amounts consist primarily valuation allowances assumed acquired companies currency translation adjustments item 9item 8 financial statements supplementary data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting internal control financial reporting defined rules 13a15f securities exchange act 1934 process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles company’s internal control financial reporting includes policies procedures • pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company • provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company • provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management assessed effectiveness company’s internal control financial reporting december 31 2012 making assessment management used criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment criteria management concludes company maintained effective internal control financial reporting december 31 2012 company’s independent registered public accounting firm issued opinion company’s internal control financial reporting report appears page 32 stericycle inc lake forest il february 28 2013 report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited stericycle inc subsidiaries’ internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria stericycle inc subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion stericycle inc subsidiaries maintained material respects effective internal control financial reporting december 31 2012 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets stericycle inc subsidiaries december 31 2012 2011 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2012 report dated february 28 2013 expressed unqualified opinion thereon ernst young llp chicago illinois february 28 2013 report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2012 2011 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2012 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2012 2011 consolidated results operations cash flows three years period ended december 31 2012 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states stericycle inc’s internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 28 2013 expressed unqualified opinion thereon ernst young llp chicago illinois february 28 2013 stericycle inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements income accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements changes equity years ended december 31 2012 2011 2010 accompanying notes integral part consolidated financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 2012 unless context requires otherwise “we” “us” “our” refers stericycle inc subsidiaries consolidated basis note 1description business incorporated 1989 presently serve diverse customer base 541000 customers throughout united states argentina brazil canada chile ireland japan mexico portugal romania spain united kingdom lease office space corporate offices lake forest illinois domestically lease 59 processing facilities majority use autoclave waste processing technology processing facilities also serve collection sites lease 91 additional transfer sites 12 additional salesadministrative sites 54 recall returns communication services facilities internationally lease 94 processing facilities majority use autoclave waste processing technology also lease 50 additional transfer sites 41 additional salesadministrative sites 10 recall returns services facilities lease two landfills use fully integrated national networks provide broad range services customers including regulated waste management services regulated recall returns management services regulated waste management services include regulated waste removal services sharps management services products services infection control safety compliance programs regulated recall returns management services physical services provided companies individual businesses assist handling products removed supply chain due recalls expiration services also include advanced notification technology used communicate specific instructions users product waste treatment technology primarily autoclaving however also use incineration proprietary electrothermaldeactivation “etd” system also provide communication services healthcare providers improve office productivity communications patients 7933 employees united states 437 covered collective bargaining agreements internationally 5312 employees approximately 1600 covered collective bargaining agreements primarily latin america accompanying consolidated financial statements prepared pursuant rules regulations securities exchange commission “sec” conformity accounting principles generally accepted united states preparation financial statements conformity accounting principles requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period opinion consolidated financial statements included herein contain adjustments necessary present fairly financial position december 31 2012 2011 results operations cash flows statement changes equity three years ended december 31 2012 2011 2010 adjustments normal recurring nature evaluated subsequent events date filing annual report form 10k preparation consolidated financial statements conformity accounting principles generally accepted united states requires management make certain estimates assumptions affect amount reported assets liabilities disclosure contingent assets liabilities date consolidated financial statements revenues expenses periods reported actual results may differ estimates note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc subsidiaries revenue recognition revenues regulated waste management services sterisafe service recognized time waste collection sterisafe revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues regulated recall returns management services patient communication services recorded time services performed revenues product sales recognized time goods shipped ordering customer charges related international value added tax “vat” similar pass taxes included revenue cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows containers weighted average remaining useful life 122 years goodwill identifiable intangibles goodwill identifiable indefinite lived intangible assets amortized subject annual impairment test intangible assets amortized useful lives determined customer relationships useful lives 14 40 years based upon type customer weighted average remaining useful life 265 years covenants nottocompete intangibles useful lives 4 14 years weighted average remaining useful life 46 years tradename intangibles useful lives 10 40 years weighted average remaining useful life 96 years determined permits indefinite lives due ability renew permits minimal additional cost therefore amortized valuation intangible customer relationships permits derived using discounted income cost savings approach financial information revenues costs assets liabilities assumptions related intangible asset input standard valuation model determine stream income attributable intangible income stream discounted present arrive valuation perform annual impairment tests indefinite lived intangible assets valuation intangibles permits currently tested impairment annually december 31 frequently circumstances indicate may impaired use discounted income cost savings model current measurement fair value permits fair value based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates amortizable identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined customer relationships 14 40 year lives based specific type relationship valuation contractual customer relationships derived using discounted income approach valuation model assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows see note 11goodwill intangible assets consolidated financial statements share repurchases purchase price par value share repurchases allocated retained earnings income taxes deferred income tax liabilities assets determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse accounts receivable accounts receivable consist amounts due us normal business activities carried estimated collectible amounts accounts receivable balance includes amounts related vat similar international passthrough taxes require collateral part standard trade credit policy accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts 2 accounts receivable bad debt expense 46 million 71 million 75 million years ended december 31 2012 2011 2010 respectively financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt december 31 2012 fair value company’s debt obligations estimated 139 billion compared carrying amount 136 billion fair value estimated using market interest rates comparable instruments company current plans retire significant amount debt prior maturity financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater 2 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses contracts loss positions losses recorded probable estimable losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits stock compensation expense income tax liabilities accrued auto workers’ compensation insurance claims intangible asset valuations estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates future estimated expenses may fluctuate depending changes foreign currency rates estimates payments due longterm debt lease payments capital leases contingent consideration liabilities intangible assets amortization expense rental payments based upon foreign exchange rates december 31 2012 see notes 4 11 13 14 consolidated financial statements stockbased compensation recognize compensation expense stockbased awards made employees directors stockbased compensation cost measured grant date based value award recognized vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility stock expected term award riskfree interest rate stock’s expected volatility based upon historical experience expected term options granted based historical experience riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense new grants may differ significantly recorded past foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component comprehensive income shareholders’ equity environmental matters record liability environmental remediation damages cleanup program becomes probable costs damages reasonably estimated environmental liabilities recorded december 31 2012 aware issues facilities could necessitate environmental remediation new accounting standards accounting standards recently adopted comprehensive income january 1 2012 stericycle adopted changes issued financial accounting standards board “fasb” guidance presentation comprehensive income changes give entity option present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements option present components comprehensive income part statement changes stockholders’ equity eliminated items must reported comprehensive income item comprehensive income must reclassified net income changed additionally changes made calculation presentation earnings per share part adopted standard related presentation reclassification items accumulated comprehensive income deferred change presentation changes impact financial statements goodwill impairment testing january 1 2012 stericycle adopted changes issued fasb guidance testing impairment goodwill previous guidance required entity test goodwill impairment least annual basis comparing fair value reporting unit carrying amount including goodwill step one fair value reporting unit less carrying amount second step test must performed measure amount impairment loss amendments entity option use qualitative assessment likely greater 50 fair value goodwill less carrying amount performed annual test goodwill impairment june 30 2012 chose perform quantitative assessment fair value measurement january 1 2012 stericycle adopted changes issued fasb additional disclosures concerning valuation processes used sensitivity fair value measurement changes unobservable inputs items categorized level 3 reporting entity’s use nonfinancial asset way differs asset’s highest best use categorization level fair value hierarchy items required measured fair value disclosure purposes change presentation impacts accounting standards issued yet adopted testing indefinitelived intangible assets impairment july 27 2012 fasb issued guidance allowing company perform qualitative assessment determining whether indefinite lived intangible asset impaired new guidance similar previously issued guidance allowing qualitative assessment performing annual goodwill impairment testing guidance also changes company perform interim period test impairment allowing positive evidence offset negative evidence determining whether interim impairment test required new guidance affect ultimate outcome impairment test therefore impact financial statements effective date guidance company january 1 2013 however guidance allows early adoption early adopt guidance considering using qualitative approach 2013 perform annual test impairment indefinite lived intangibles december 31 note 3acquisitions divestitures following table summarizes locations acquisitions years ended december 31 2012 2011 2010 following table summarizes aggregate purchase price acquisitions years ended december 31 2012 2011 2010 2012 completed 41 acquisitions 17 domestic 24 international businesses placed amount escrow potential future acquisition also increased majority share previous acquisition brazil 100 chile 90 2012 recognized net increase goodwill 1472 million related current year acquisitions prior year allocation adjustments excluding effect foreign currency translation see note 11goodwill intangible assets consolidated financial statements net 1099 million assigned united states reporting segment 373 million assigned international reporting segment tax deductible goodwill pending final acquisition accounting approximately 804 million 506 million 496 million years 2012 2011 2010 respectively 2012 recognized net increase intangible assets 1501 million excluding effect foreign currency translation changes include 1247 million estimated fair value acquired customer relationships amortizable lives 15 40 years 227 million permits indefinite lives 26 million tradenames amortizable lives 10 15 years 01 million intangible assets amortizable life 10 years allocation acquisition price preliminary pending completion certain intangible asset valuations completion accounts following table summarizes purchase price allocation acquisitions years ended december 31 2012 2011 2010 financial reporting purposes 2012 2011 acquisitions accounted using acquisition method accounting acquisitions resulted recognition goodwill financial statements reflecting premium paid acquire businesses believe complementary existing operations fit strategy company incurred 79 million 167 million acquisition related expenses years ended december 31 2012 2011 respectively expenses included “selling general administrative expenses” “sga” consolidated statements income results operations acquired businesses included consolidated statements income date acquisition integrate acquisitions current structure order achieve cost synergies effect acquisitions net income practical estimate 2012 estimated impact revenues acquisitions 601 million estimated annualized revenues acquisitions approximately 1456 million following consolidated pro forma information impact acquisitions consolidated revenues based assumption acquisitions occurred january 1 2012 2011 july 2012 required united kingdom competition committee divest business acquired 2011 sale price business 07 million resulted pretax loss 49 million included sga following table summarizes assets sold note 4fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy distinguishes 1 market participant assumptions developed based market data obtained independent sources observable inputs 2 entity’s assumptions market participant assumptions developed based best information available circumstances unobservable inputs fair value hierarchy consists three broad levels gives highest priority unadjusted quoted prices active markets identical assets liabilities level 1 lowest priority unobservable inputs level 3 three levels fair value hierarchy described • level 1valuations based quoted prices active markets identical assets liabilities entity ability access • level 2valuations based quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable data substantially full term assets liabilities • level 3valuations based inputs supported little market activity significant fair value assets liabilities financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity contingent consideration liabilities recorded amounts 185 million 136 million current december 31 2012 99 million december 31 2011 using level 3 inputs contingent consideration represents amounts paid part acquisition consideration certain future events occur events usually acquisition targets revenues earnings arrive fair value contingent consideration applying weighted probability potential outcomes maximum possible payout calculation potential outcomes dependent past financial performance management assumptions future performance financial performance measures fully met maximum liability would 208 million contingent consideration liabilities reassessed quarter reflected balance sheet part “other current liabilities” “other liabilities” changes contingent consideration reflected table fair value debt december 31 2012 fair value company’s debt obligations estimated 139 billion compared carrying amount 136 billion december 31 2011 fair value company’s debt obligations estimated using level 2 inputs 141 billion compared carrying amount 138 billion fair values estimated using market interest rates comparable instruments company current plans retire significant amount debt prior maturity movements items fair value hierarchies note 5income taxes us international components income taxes consisted following years ended december 31 2012 2011 2010 significant components income tax expense years ended december 31 2012 2011 2010 follows reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 2012 2011 2010 follows cash payments income taxes 1047 million 766 million 665 million years ended december 31 2012 2011 2010 respectively deferred tax liabilities assets december 31 2012 2011 follows december 31 2012 net operating loss carryforwards us federal state income tax purposes fully utilized excluding net operating loss carryforwards related acquisitions net operating loss carryforwards foreign domestic acquisitions approximately 321 million certain net operating loss carryforwards begin expire 2015 85 million valuation allowance offsetting benefit valuation allowance primarily represents loss carryforwards limitations place utilization expiration uncertain changes valuation allowance 2012 primarily related adjustments acquisition accounting undistributed earnings foreign subsidiaries considered permanently reinvested therefore deferred taxes recorded thereon cumulative amounts earnings 1592 million december 31 2012 practicable estimate amount tax may payable upon distribution assuming repatriation subsidiaries file us federal income tax returns income tax returns various states foreign jurisdictions exceptions longer subject us federal state local nonus income tax examinations tax authorities years 2008 company recorded accruals cover certain uncertain tax positions uncertain tax positions relate additional taxes company may required pay various tax jurisdictions course examinations various taxing authorities proposed adjustments may asserted company evaluates items casebycase basis adjusts accrual uncertain tax positions deemed necessary estimated amount liability associated company’s uncertain tax positions may change within next twelve months cannot reasonably estimated total amount unrecognized tax positions december 31 2012 161 million amount unrecognized tax positions recognized would affect effective tax rate approximately 153 million recognized interest penalties accrued related income tax reserves amount 03 million 07 million years ended december 31 2012 2011 respectively component income tax expense following table summarizes changes unrecognized tax positions years ended december 31 2012 2011 note 6stock based compensation stock plans adopted six stock option plans • 2011 incentive compensation plan expires may 2021 • 2008 incentive stock plan stockholders approved may 2008 • 2005 incentive stock plan stockholders approved april 2005 • 2000 nonstatutory stock option plan expired february 2010 • 1997 stock option plan expired january 2007 • 1996 directors stock option plan expired may 2006 2011 incentive compensation plan authorizes awards stock options stock appreciation rights restricted stock restricted stock units total 3000000 shares 2008 plan authorizes awards stock options stock appreciation rights restricted stock restricted stock units total 3500000 shares 2005 plan authorizes awards stock options stock appreciation rights total 4800000 shares 2000 plan authorizes stock option grants total 7000000 shares 1997 plan authorized stock option grants total 6000000 shares directors plan authorized stock option grants total 2340000 shares terms stock options authorized 2011 plan 2008 plan 2005 plan provide grant nonstatutory stock options “nsos” incentive stock options intended qualify section 422 internal revenue code “isos” 2000 plan provides grant nsos 1997 plan provided grant nsos isos directors plan provided grant nsos 2011 2008 2005 plans authorize awards officers employees consultants following expiration directors plan may 2006 directors 2000 plan authorized awards employees consultants officers directors 1997 plan authorized awards officers directors employees consultants directors plan authorized awards outside directors december 31 2012 reserved following shares issuance consisting shares available awards 2011 plan 2008 plan 2005 plan 2000 plan 1997 plan shares issuable outstanding stock option grants restricted stock unit awards employee stock purchase plan october 2000 board directors adopted employee stock purchase plan “espp” effective july 1 2001 stockholders approved espp may 2001 espp authorizes 600000 shares common stock purchased employees 15 discount market price stock payroll deductions two sixmonth offerings year employee elects participate offering granted option first day offering number shares equal employee’s payroll deductions espp offering period may exceed 5000 divided option price per share option price per share lower 85 closing price share common stock first trading day offering period 85 closing price last trading day offering period recognize compensation expense espp reflected statement income every us employee completed six months employment first day offering fulltime employee parttime employee customarily works least 20 hours per week eligible participate offering 2012 2011 2010 56362 shares 53213 shares 61573 shares respectively issued espp stock based compensation expense 2012 changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding compensation expense stockbased compensation awards granted subsequent january 1 2006 based grantdate fair value determined accordance provisions fasb accounting standards sharebased payments years ended december 31 2012 2011 2010 recognized compensation expense 152 million 144 million 144 million respectively stock options 11 million 10 million 09 million respectively espp reflected statement income significant capitalized stockbased compensation costs december 31 2012 2011 2010 following table presents total stockbased compensation expense resulting stock option awards espp included consolidated statements income december 31 2012 289 million total unrecognized compensation expenses related nonvested option awards expected recognized weightedaverage period 163 years following table sets forth tax benefits related stock compensation stock options granted directors vest one year options granted officers employees generally vest five years expense related graded vesting options recognized using straightline method vesting period exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options option activity years ended december 31 2012 2011 2010 summarized follows total exercise intrinsic value represents total pretax intrinsic value difference sales price trading day year ended december 31 2012 exercise price associated respective option total aggregate intrinsic value represents total pretax intrinsic value difference closing stock price last day trading year ended december 31 2012 exercise price multiplied number inthemoney options would received option holders assuming option holders exercised options december 31 2012 amount changes based fair market value stock following tables set forth information related outstanding options years ended december 31 2012 2011 2010 following tables set forth information related exercisable options outstanding exercisable december 31 2012 price range presented blackscholes optionpricing model used determining fair value option grant expected term options granted based historical experience expected volatility based upon historical volatility expected dividend yield zero riskfree interest rate based upon us treasury yield rates comparable period assumptions used blackscholes model follows restricted stock units restricted stock units “rsus” activity years ended december 31 2012 2011 2010 summarized follows rsus vest end three five years 2008 2011 plans include share reserve related rsus granted 21 ratio per share fair value rsus granted years ended december 31 2012 2011 2010 8624 8500 5165 respectively note 7preferred stock december 31 2012 2011 1000000 authorized shares preferred stock shares issued outstanding note 8earnings per common share following table sets forth computation basic diluted earnings per share additional information regarding outstanding employee stock options see note 6stock based compensation consolidated financial statements 2012 2011 2010 options purchase 1049707 shares 879266 shares 133535 shares respectively exercise prices 77499476 77009424 51558092 respectively included computation diluted earnings per share “eps” effect would antidilutive note 9accumulated comprehensive income loss components total comprehensive income net income change cumulative currency translation adjustments gains losses derivative instruments qualifying cash flow hedges following table sets forth components total comprehensive income 2012 2011 2010 tax impact unrealized gains losses cash flow hedges accumulated comprehensive income december 31 2012 2011 2010 04 million 02 million 14 million respectively translation adjustments taxeffected company’s net investment foreign subsidiaries related foreign earnings deemed permanently invested note 10property plant equipment property plant equipment december 31 2012 2011 consisted following items note 11goodwill intangible assets goodwill indefinite lived intangibles amortized subject annual impairment test frequent testing circumstances indicate may impaired two geographical reporting segments “united states” “international” goodwill changes carrying amount goodwill years ended december 31 2012 2011 follows quarter ended june 30 2012 performed annual goodwill impairment evaluation three reporting units domestic regulated waste domestic regulated recall returns management services international calculate fair value reporting units using two methods one market approach income approach market income approaches indicated impairment goodwill three reporting units market approach market approach begins calculating market capitalization company using average stock price prior 30 days outstanding share count june 30 2012 look company’s earnings interest tax depreciation amortization “ebitda” adjusted stock compensation expense items gain sale divested assets prior twelve months calculated market capitalization divided modified ebitda arrive valuation multiple fair value reporting unit calculated taking product valuation multiple trailing twelve month modified ebitda reporting unit fair value compared reporting units’ book value determined excess book value believe starting fair value company whole reasonable measure fair value allocated reporting unit based reporting unit’s individual earnings sustained drop stock price would negative impact fair value calculations temporary drop earnings reporting unit would negative impact fair value calculations results goodwill impairment test using market approach indicated fair value reporting units exceeded book value substantial amount excess 100 book value income approach income approach uses expected future cash flows reporting unit discounts cash flows present values expected future cash flows calculated using management assumptions internal growth capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based company calculated weighted average cost capital adjusted reporting units based risk size premium foreign country premium significant assumptions used income approach include realization future cash flows discount rate used present value cash flows results goodwill impairment test using income approach indicated fair value reporting units exceeded book value substantial amount excess 100 2012 2011 wrote 17 million 28 million respectively permit intangibles facilities due rationalizing domestic international operations expenses reflected part “selling general administrative expenses” current acquisition accounting fair value must assigned acquired assets based theoretical “market participant” regardless acquirers’ intended use assets accounting treatment lead recognition losses company disposes acquired assets complete annual impairment analysis indefinite lived intangibles facility permits quarter ended december 31 year 2012 2011 performed annual permit impairment evaluation determined noted impairment intangible assets indefinite lived goodwill permits amortized useful lives 2012 assigned 1247 million customer relationships amortizable lives 15 40 years 227 million permits indefinite lives 26 million tradenames amortizable lives 10 15 years 01 million intangible assets amortizable life 10 years 2011 assigned 1904 million customer relationships amortizable lives 14 40 years 145 million permits indefinite lives december 31 values intangible assets follows years ended december 31 2012 2011 2010 aggregate amortization expense 221 million 163 million 99 million respectively estimated amortization expense next five years assuming additional amortizable intangible assets follows years ended december 31 note 12accrued liabilities accrued liabilities december 31 2012 2011 consisted following items note 13debt new debt october 22 2012 entered note purchase agreement 46 institutional purchasers pursuant issued 125 million “series a” sevenyear 268 unsecured senior notes 125 million “series b” 10year 326 unsecured senior notes interest payable arrears semiannually june 12 december 12 beginning june 12 2013 principal series notes payable maturity notes december 12 2019 principal series b notes payable maturity notes december 12 2022 longterm debt consisted following december 31 payments due longterm debt excluding capital lease obligations five years subsequent december 31 2012 follows paid interest 475 million 435 million 286 million years ended december 31 2012 2011 2010 respectively property capital leases included property plant equipment accompanying consolidated balance sheets follows december 31 amortization related capital leases included depreciation expense minimum future lease payments capital leases follows 10 billion senior credit facility maturing september 2016 1000 million private placement notes maturing april 2015 1750 million private placement notes maturing october 2017 1250 million private placement notes maturing december 2019 2250 million private placement notes maturing october 2020 1250 million private placement notes maturing december 2022 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility private placement notes december 31 2012 compliance financial debt covenants december 31 2012 2011 1576 million 1591 million respectively committed outstanding letters credit senior credit facility unused portion revolving credit facility december 31 2012 2011 6165 million 3130 million respectively guarantees guaranteed loan jpmorganchase bank na behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business one year loan current balance 57 million jpmorganchase bank na matures may 2013 also extended loans shiraishi approximately 154 million reflected consolidated balance sheet part long term “other assets” support medical waste business collateral agreement place assets shiraishi related companies support amounts owed note 14lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space landfills operating lease agreements expire various dates next 22 years leases properties contain renewal provisions rent expense 2012 2011 2010 855 million 753 million 579 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2012 next five years aggregate follows note 15products services geographic information fasb asc topic 280 requires segment information reported based information utilized executive management internally assess performance make operating decisions determined three operating segments based organizational structure company information reviewed operating segments international waste management services “international” domestic regulated waste management services “united states” domestic regulated recall returns management services aggregated domestic regulated waste management services domestic regulated recall returns management services one reportable segment united states based consideration following aggregation criteria • similar economic characteristics • services provided • types customers serviced • types waste collection transportation treatment methods utilized • regulatory environments similar vary based upon country specific regulations • employ sales marketing techniques activities two reportable segments united states includes puerto rico international summary information reportable segments follows revenues attributed countries based location customers intercompany revenues recorded united states work performed canada eliminated prior reporting united states revenues accounting principles critical accounting policies used preparation financial statements reporting segments detailed information united states reporting segment follows detailed information international reporting segment follows note 16employee benefit plan 401k defined contribution retirement savings plan covering substantially domestic employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee maximum 1750 per annum contributions years ended december 31 2012 2011 2010 approximately 28 million 26 million 23 million respectively company several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2012 2011 2010 total contributions made company plans approximately 08 million 08 million 07 million respectively note 17legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time note 18selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2012 2011 eps calculated quarterly basis amounts may total calculated fullyear eps note 19subsequent events evaluated subsequent events date filing annual report form 10k events occurred would require adjustment disclosure consolidated financial statements stericycle inc subsidiaries schedule iivaluation qualifying accounts 1 amounts consist primarily valuation allowances assumed acquired companies currency translation adjustments 2 amounts consist primarily valuation allowances acquired deferred tax assets business combinations item 9item 8 financial statements supplementary data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting internal control financial reporting defined rules 13a15f securities exchange act 1934 process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles company’s internal control financial reporting includes policies procedures • pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company • provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company • provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management assessed effectiveness company’s internal control financial reporting december 31 2013 making assessment management used criteria set forth committee sponsoring organizations treadway commission 1992 framework internal controlintegrated framework based assessment criteria management concludes company maintained effective internal control financial reporting december 31 2013 company’s independent registered public accounting firm issued opinion company’s internal control financial reporting report appears page 32 stericycle inc lake forest il february 28 2014 report independent registered public accounting firm internal control financial reporting board directors shareholders stericycle inc subsidiaries audited stericycle inc subsidiaries’ company internal control financial reporting december 31 2013 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework stericycle inc subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion stericycle inc subsidiaries maintained material respects effective internal control financial reporting december 31 2013 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets stericycle inc subsidiaries december 31 2013 2012 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2013 report dated february 28 2014 expressed unqualified opinion thereon ernst young llp chicago illinois february 28 2014 report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2013 2012 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2013 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2013 2012 consolidated results operations cash flows three years period ended december 31 2013 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states stericycle inc subsidiaries internal control financial reporting december 31 2013 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework report dated february 28 2014 expressed unqualified opinion thereon ernst young llp chicago illinois february 28 2014 stericycle inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements income accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements changes equity years ended december 31 2013 2012 2011 accompanying notes integral part consolidated financial statements stericycle inc subsidiaries notes consolidated financial statements unless context requires otherwise “we” “us” “our” refers stericycle inc subsidiaries consolidated basis note 1description business incorporated 1989 presently serve diverse customer base 566000 customers throughout united states argentina brazil canada chile ireland japan mexico portugal romania spain united kingdom lease office space corporate offices lake forest illinois domestically lease 61 processing facilities majority use autoclave waste processing technology processing facilities also serve collection sites lease 97 additional transfer sites 10 additional salesadministrative sites 52 service facilities internationally lease 105 processing facilities majority use autoclave waste processing technology also lease 58 additional transfer sites 34 additional salesadministrative sites 18 service facilities lease two landfills business providing regulated compliance solutions healthcare commercial businesses includes collection processing specialized waste disposal variety training consulting recallreturn communication compliance services regulated solutions provide include medical waste disposal sterisafe® medical waste compliance program clinical services program sharps management service featuring bio systems® reusable sharps containers pharmaceutical waste disposal hazardous waste disposal medical safety products compliance solutions include training consulting inboundoutbound communications data reporting regulatory compliance services addition regulated compliance solutions offer regulated recall returns management solutions encompass number services variety businesses consist primarily managing recall withdrawal return expired recalled products pharmaceuticals 8376 employees united states 424 covered collective bargaining agreements internationally 6548 employees approximately 1940 covered collective bargaining agreements primarily latin america accompanying consolidated financial statements prepared pursuant rules regulations securities exchange commission “sec” conformity accounting principles generally accepted united states preparation financial statements conformity accounting principles requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period opinion consolidated financial statements included herein contain adjustments necessary present fairly financial position december 31 2013 2012 results operations cash flows statement changes equity three years ended december 31 2013 2012 2011 adjustments normal recurring nature evaluated subsequent events date filing annual report form 10k certain amounts previously issued financial statements reclassified conform current period presentation following reclassifications made 2012 balance sheet 2012 2011 statements cash flows • related product reimbursement liabilities ▪ balance sheet december 31 2012 127 million reclassified accrued liabilities current liabilities ▪ statement cash flows 2012 12 million reclassified within operating activities accrued liabilities assets liabilities ▪ statement cash flows 2011 180 million reclassified within operating activities accrued liabilities assets liabilities • reclassifications ▪ balance sheet december 31 2012 67 million reclassified accrued liabilities accounts payable ▪ statement cash flows 2012 05 million reclassified within operating activities accrued liabilities accounts payable 53 million reclassified investing activities financing activities related purchases additional noncontrolling interests ▪ statement cash flows 2011 34 million reclassified within operating activities accrued liabilities accounts payable 105 million reclassified investing activities financing activities related purchases additional noncontrolling interests preparation consolidated financial statements conformity accounting principles generally accepted united states requires management make certain estimates assumptions affect amount reported assets liabilities disclosure contingent assets liabilities date consolidated financial statements revenues expenses periods reported actual results may differ estimates note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc subsidiaries revenue recognition revenues regulated waste management services compliances services sterisafe recognized time waste collection compliance service revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues regulated recall returns management services communication solutions recorded time services performed revenues product sales recognized time goods shipped ordering customer charges related international value added tax “vat” similar pass taxes included revenue cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows containers weighted average remaining useful life 125 years acquisition accounting acquisition accounting requires us recognize assets liabilities fair value process determining fair value requires time complete therefore make estimates time acquisition estimates primarily amortizable intangibles appropriate associated deferred tax liability estimates based historical experience allow us recognize amortization expense final valuation complete goodwill identifiable intangibles goodwill identifiable indefinite lived intangible assets amortized subject annual impairment test finitelived intangible assets amortized useful lives determined customer relationships useful lives 14 40 years based upon type customer weighted average remaining useful life 256 years covenants nottocompete intangibles useful lives 3 14 years weighted average remaining useful life 39 years tradename intangibles useful lives 10 40 years weighted average remaining useful life 157 years license agreements useful life 5 years weighted average remaining useful life 19 years determined permits indefinite lives due ability renew permits minimal additional cost therefore amortized valuation intangible customer relationships permits derived using discounted income cost savings approach financial information revenues costs assets liabilities assumptions related intangible asset input standard valuation model determine stream income attributable intangible income stream discounted present arrive valuation perform annual impairment tests indefinite lived intangible assets valuation intangibles permits currently tested impairment annually december 31 frequently circumstances indicate may impaired use discounted income cost savings model current measurement fair value permits fair value based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates amortizable identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined customer relationships 14 40 year lives based specific type relationship valuation contractual customer relationships derived using discounted income approach valuation model assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows see note 11 goodwill intangible assets notes consolidated financial statements share repurchases purchase price par value share repurchases allocated retained earnings income taxes deferred income tax assets liabilities determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse interest penalties accrued related unrecognized tax benefits recognized component income tax expense accounts receivable accounts receivable consist amounts due us normal business activities carried estimated collectible amounts accounts receivable balance includes amounts related vat similar international passthrough taxes require collateral part standard trade credit policy accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts approximately 2 accounts receivable bad debt expense 48 million 46 million 71 million years ended december 31 2013 2012 2011 respectively financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt december 31 2013 fair value company’s debt obligations estimated 141 billion compared carrying amount 143 billion fair value estimated using market interest rates comparable instruments company current plans retire significant amount debt prior maturity financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater approximately 2 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses contracts loss positions losses recorded probable estimable losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits stock compensation expense income tax liabilities accrued auto workers’ compensation insurance claims intangible asset valuations estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates future estimated expenses may fluctuate depending changes foreign currency rates estimates payments due longterm debt lease payments capital leases accrued liabilities contingent consideration liabilities intangible assets amortization expense rental payments based upon foreign exchange rates december 31 2013 stockbased compensation recognize compensation expense stockbased awards made employees directors stockbased compensation cost measured grant date based value award recognized vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility stock expected term award riskfree interest rate stock’s expected volatility based upon historical experience expected term options granted based historical experience riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense new grants may differ significantly recorded past foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component accumulated comprehensive loss stericycle incs equity environmental matters record liability environmental remediation damages liability becomes probable costs damages reasonably estimated environmental liabilities recorded december 31 2013 aware issues facilities could necessitate environmental remediation new accounting standards accounting standards recently adopted testing indefinitelived intangible assets impairment january 1 2013 adopted guidance allowing company perform qualitative assessment determining whether indefinite lived intangible asset impaired new guidance similar previously issued guidance allowing qualitative assessment performing annual goodwill impairment testing guidance also changes company perform interim period test impairment allowing positive evidence offset negative evidence determining whether interim impairment test required new guidance affect ultimate outcome impairment test therefore impact financial statements perform annual test impairment indefinite lived intangibles fourth quarter accounting standards issued yet adopted presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists july 2013 financial accounting standards board fasb issued guidance presentation unrecognized tax benefits net operating loss carryforward similar tax loss tax credit carryforward exists reporting date unrecognized tax benefit portion unrecognized tax benefit presented financial statements reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward except certain circumstances extent net operating loss carryforward similar tax loss tax credit carryforward available reporting date tax law applicable jurisdiction settle additional income taxes would result disallowance tax position tax law applicable jurisdiction require entity use entity intend use deferred tax asset purpose unrecognized tax benefit presented financial statements liability combined deferred tax assets assessment whether deferred tax asset available based unrecognized tax benefit deferred tax asset exist reporting date made presuming disallowance tax position reporting date example entity evaluate whether deferred tax asset expires statute limitations tax position whether deferred tax asset may used prior unrecognized tax benefit settled prospective retrospective application may applied guidance becomes effective us beginning january 1 2014 time apply guidance prospective basis update affects presentation note 3 acquisitions divestitures following table summarizes locations acquisitions years ended december 31 2013 2012 2011 2013 completed 49 acquisitions 13 domestic 36 international businesses domestically acquired selected assets eleven regulated waste businesses one communication services business 100 stock another communication solutions business internationally argentina acquired 100 stock two regulated waste businesses selected assets one regulated waste business brazil acquired 100 stock one regulated waste business 70 another regulated waste business canada acquired 100 stock two regulated waste businesses selected assets one communication solution business chile acquired 100 stock one regulated waste business japan acquired selected assets three regulated waste businesses mexico acquired 51 stock regulated waste business portugal acquired 100 stock one regulated waste business selected assets another regulated waste business romania acquired 100 stock two regulated waste businesses selected assets four regulated waste businesses spain acquired 100 stock two regulated waste business selected assets another regulated waste business united kingdom acquired 100 stock seven regulated waste businesses one recall returns business two communication solutions businesses selected assets two regulated waste businesses following table summarizes aggregate purchase price paid acquisitions adjustments consideration paid acquisitions years ended december 31 2013 2012 2011 financial reporting purposes acquisitions accounted using acquisition method accounting acquisitions resulted recognition goodwill financial statements reflecting premium paid acquire businesses believe complementary existing operations fit growth strategy twelve months ended december 31 2013 recognized net increase goodwill 1798 million excluding effect foreign currency translation see note 11 goodwill intangible assets notes consolidated financial statements net increase 618 million assigned united states reportable segment 1180 million assigned international reportable segment approximately 846 million goodwill recognized twelve months ended december 31 2013 deductible income taxes twelve months ended december 31 2013 recognized net increase intangible assets 924 million excluding effect foreign currency translation changes include 779 million estimated fair value acquired customer relationships amortizable lives 15 40 years 79 million permits indefinite lives 58 million tradename indefinite life 03 million tradenames amortizable lives 10 20 years 05 million noncompetes amortizable lives 3 5 years purchase prices acquisitions excess acquired tangible assets primarily allocated goodwill intangibles preliminary pending completion certain intangible asset valuations completion accounts following table summarizes preliminary purchase price allocation current period acquisitions adjustments purchase price allocations years ended december 31 2013 2012 2011 twelve months ended december 31 2013 2012 2011 company incurred 103 million 79 million 167 million respectively acquisition related expenses included “selling general administrative expenses” “sga” consolidated statements income results operations acquired businesses included consolidated statements income date acquisition integrate acquisitions current structure order achieve cost synergies effect acquisitions net income practical estimate 2013 estimated impact revenues acquisitions 568 million estimated annualized revenues acquisitions approximately 1543 million following consolidated pro forma information impact acquisitions consolidated revenues based assumption acquisitions occurred january 1 2013 2012 note 4 fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy distinguishes 1 market participant assumptions developed based market data obtained independent sources observable inputs 2 entitys assumptions market participant assumptions developed based best information available circumstances unobservable inputs fair value hierarchy consists three broad levels gives highest priority unadjusted quoted prices active markets identical assets liabilities level 1 lowest priority unobservable inputs level 3 three levels fair value hierarchy described level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities quoted prices identical similar assets liabilities inactive markets inputs observable corroborated observable market data substantially full term assets liabilities level 3 inputs generally unobservable typically reflect management’s estimate assumptions market participants would use pricing asset liability financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity contingent consideration liabilities recorded using level 3 inputs amount 125 million 92 million classified current liabilities december 31 2013 185 million december 31 2012 contingent consideration represents amounts paid part acquisition consideration certain future events occur events usually acquisition targets revenues earnings arrive fair value contingent consideration applying weighted probability potential outcomes maximum possible payout calculation potential outcomes dependent past financial performance management assumptions future performance financial performance measures fully met maximum liability would 160 million december 31 2013 contingent consideration liabilities reassessed quarter reflected consolidated balance sheets part “other current liabilities” “other liabilities” changes contingent consideration reflected table fair value debt december 31 2013 fair value company’s debt obligations estimated using level 2 inputs 141 billion compared carrying amount 143 billion december 31 2012 fair value company’s debt obligations estimated using level 2 inputs 139 billion compared carrying amount 136 billion fair values estimated using income approach applying market interest rates comparable instruments company current plans retire significant amount debt prior maturity movements items fair value hierarchies note 5income taxes us international components income taxes consisted following years ended december 31 2013 2012 2011 significant components income tax expense years ended december 31 2013 2012 2011 follows reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 2013 2012 2011 follows cash payments income taxes 1021 million 1047 million 766 million years ended december 31 2013 2012 2011 respectively deferred tax liabilities assets december 31 2013 2012 follows december 31 2013 net operating loss carryforwards us federal state income tax purposes fully utilized excluding net operating loss carryforwards related acquisitions net operating loss carryforwards foreign domestic acquisitions approximately 218 million certain net operating loss carryforwards begin expire 2016 tax benefit net operating losses approximately 81 million december 31 2013 valuation allowance 11 million recorded offsetting tax benefit valuation allowance primarily relates loss carryforwards limitations place utilization expiration uncertain 2013 reversed valuation allowances previously recorded japan net operating tax loss carryforwards considered likely realized changes valuation allowance 2013 material undistributed earnings foreign subsidiaries considered permanently reinvested therefore deferred taxes recorded thereon cumulative amounts earnings 3727 million december 31 2013 practicable estimate amount tax may payable upon distribution assuming repatriation september 13 2013 irs released final tangible property regulations sections 162a 263a internal revenue code regarding deduction capitalization expenditures related tangible property well dispositions tangible property taxpayers may elect apply tax years beginning january 1 2012 elected implement regulation january 1 2013 resulted immaterial reduction current year tax expense subsidiaries file us federal income tax returns income tax returns various states foreign jurisdictions exceptions longer subject us federal state local nonus income tax examinations tax authorities years 2010 2013 internal revenue service commenced audit 2010 corporate income tax return audit still active date filing expect material changes result examination company recorded accruals cover certain unrecognized tax positions unrecognized tax positions relate additional taxes company may required pay various tax jurisdictions course examinations various taxing authorities proposed adjustments may asserted company evaluates items casebycase basis adjusts accrual unrecognized tax positions deemed necessary estimated amount liability associated company’s unrecognized tax positions may significantly increase decrease within next twelve months cannot reasonably estimated total amount unrecognized tax positions december 31 2013 149 million amount unrecognized tax positions recognized would affect effective tax rate approximately 149 million recognized interest penalties accrued related income tax reserves amount 04 million 03 million years ended december 31 2013 2012 respectively component income tax expense following table summarizes changes unrecognized tax positions years ended december 31 2013 2012 note 6 stock based compensation december 31 2013 following stock option stock purchase plans • 2011 incentive stock plan stockholders approved may 2011 • 2008 incentive stock plan stockholders approved may 2008 • 2005 incentive stock plan stockholders approved april 2005 • 2000 nonstatutory stock option plan expired february 2010 • 1997 stock option plan expired january 2007 • 1996 directors stock option plan expired may 2006 • employee stock purchase plan “espp” stockholders approved may 2001 2011 incentive stock plan authorizes awards stock options stock appreciation rights restricted stock restricted stock units total 3000000 shares 2008 plan authorizes awards stock options stock appreciation rights restricted stock restricted stock units total 3500000 shares 2005 plan authorizes awards stock options stock appreciation rights total 4800000 shares 2000 plan authorizes stock option grants total 7000000 shares 1997 plan authorized stock option grants total 6000000 shares directors plan authorized stock option grants total 2340000 shares terms stock options authorized 2011 plan 2008 plan 2005 plan provide grant nonstatutory stock options “nsos” incentive stock options “isos” intended qualify section 422 internal revenue code 2000 plan provides grant nsos 1997 plan provided grant nsos isos directors plan provided grant nsos 2011 2008 2005 plans authorize awards officers employees consultants following expiration directors plan may 2006 directors 2000 plan authorized awards employees consultants officers directors 1997 plan authorized awards officers directors employees consultants directors plan authorized awards outside directors exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options december 31 2013 reserved following shares issuance consisting shares available awards 2011 plan 2008 plan 2005 plan 2000 plan 1997 plan shares issuable outstanding stock option grants restricted stock unit awards employee stock purchase plan october 2000 board directors adopted employee stock purchase plan espp stock holders approved may 2001 made effective july 1 2001 espp authorizes 900000 shares common stock substantially employees may purchase payroll deductions price equal 85 lower fair market values stock beginning end sixmonth offering periods employees payroll deductions stock purchase may exceed 5000 offering period 2013 2012 2011 52956 shares 56362 shares 53213 shares respectively issued espp stock based compensation expense 2013 changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding compensation expense stockbased compensation awards granted subsequent january 1 2006 based grantdate fair value determined accordance provisions fasb accounting standards sharebased payments following table presents total stockbased compensation expense resulting stock option awards restricted stock units “rsus” espp included consolidated statements income following table sets forth tax benefits related stock compensation stock options granted directors vest one year options granted officers employees generally vest five years expense related graded vesting options recognized using straightline method vesting period stock option activity year ended december 31 2013 summarized follows december 31 2013 272 million total unrecognized compensation expense related nonvested option awards expected recognized weighted average period 149 years total exercise intrinsic value represents total pretax value difference sales price trading day year ended december 31 2013 exercise price associated respective option total aggregate intrinsic value represents total pretax intrinsic value difference closing stock price last day trading year ended december 31 2013 exercise price multiplied number inthemoney options would received option holders assuming option holders exercised options december 31 2013 amount changes based fair market value stock following table sets forth information related outstanding exercisable options years ended december 31 options outstanding exercisable december 31 2013 price range presented company uses historical data estimate expected life volatility estimated fair value stock options time grant using blackscholes model option pricing model follows restricted stock units restricted stock units rsus vest end three five years 2008 2011 plans include share reserve related rsus granted 21 ratio following table sets forth information related rsus years ended december 31 summary status nonvested rsus changes year 2013 follows december 31 2013 36 million total unrecognized compensation expense related rsus expected recognized weighted average period 262 years fair value units vested years ended december 31 2013 2012 12 million 04 million respectively units vested 2011 note 7preferred stock december 31 2013 2012 1000000 authorized shares preferred stock shares issued outstanding note 8 earnings per common share basic earnings per share computed dividing income available common shareholders weightedaverage number shares common stock outstanding period diluted earnings per share computed dividing income available common shareholders weightedaverage number shares common stock outstanding period increased include number additional shares common stock would outstanding potentially dilutive securities issued potentially dilutive securities include outstanding stock options shares purchased company’s employee stock purchase plan rsus dilutive effect potentially dilutive securities reflected diluted earnings per share application treasury stock method treasury stock method increase fair market value company’s common stock result greater dilutive effect potentially dilutive securities following table sets forth computation basic diluted earnings per share additional information regarding outstanding employee stock options see note 6 stock based compensation notes consolidated financial statements 2013 2012 2011 options purchase 846808 shares 1049707 shares 879266 shares respectively exercise prices 947611919 77499476 77009424 included computation diluted earnings per share effect would antidilutive note 9accumulated comprehensive income loss following table sets forth changes components accumulated comprehensive income 2013 2012 2011 tax impact unrealized gains losses cash flow hedges accumulated comprehensive income december 31 2013 2012 2011 02 million 04 million 02 million respectively translation adjustments taxeffected company’s net investment foreign subsidiaries related foreign earnings deemed permanently invested note 10property plant equipment property plant equipment december 31 2013 2012 consisted following items note 11 goodwill intangible assets goodwill identifiable indefinite lived intangibles amortized subject annual impairment test frequent testing circumstances indicate may impaired goodwill two geographical reportable segments “united states” “international” goodwill changes carrying amount goodwill since december 31 2011 reportable segment follows current year adjustments goodwill certain 2012 acquisitions primarily due finalization intangible asset valuations quarter ended june 30 2013 performed annual goodwill impairment evaluation three reporting units domestic regulated compliance services domestic regulated recall returns management services international regulated compliance services calculate fair value reporting units using income method validate results using market approach income market approaches indicated impairment goodwill three reporting units market approach market approach begins calculating market capitalization company using average stock price prior twelve months outstanding share count june 30 2013 look companys earnings interest tax depreciation amortization “ebitda” adjusted stock compensation expense items change fair value contingent consideration restructuring plant closure costs litigation settlement prior twelve months calculated market capitalization divided modified ebitda arrive valuation multiple fair value reporting unit calculated taking product valuation multiple trailing twelve month modified ebitda reporting unit fair value compared reporting units book value determined excess book value believe starting fair value company whole reasonable measure fair value allocated reporting unit based reporting units individual earnings sustained drop stock price would negative impact fair value calculations temporary drop earnings reporting unit would negative impact fair value calculations results goodwill impairment test using market approach indicated fair value reporting units exceeded book value substantial amount excess 100 income approach income approach uses expected future cash flows reporting unit discounts cash flows present values expected future cash flows calculated using management assumptions internal growth capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based company calculated weighted average cost capital adjusted reporting units based size risk premium country risk premium significant assumptions used income approach include realization future cash flows discount rate used present value cash flows results goodwill impairment test using income approach indicated fair value reporting units exceeded book value substantial amount excess 100 intangible assets december 31 2013 2012 values intangible assets follows 2013 2012 wrote 29 million 17 million respectively permit intangibles facilities due rationalizing domestic international operations expenses reflected part selling general administrative expenses current acquisition accounting fair value must assigned acquired assets based theoretical market participant regardless acquirers intended use assets accounting treatment lead recognition losses company disposes acquired assets 2013 wrote 04 million customer relationships due impairment complete annual impairment analysis indefinite lived intangibles quarter ended december 31 year 2013 2012 performed annual permit impairment evaluation determined noted impairment finitelived intangible assets amortized useful lives determined customer relationships useful lives 14 40 years based upon type customer weighted average remaining useful life 256 years covenants nottocompete intangibles useful lives 3 14 years weighted average remaining useful life 39 years tradename intangibles useful lives 10 40 years weighted average remaining useful life 157 years license agreements useful life 5 years weighted average remaining useful life 19 years determined permits indefinite lives due ability renew permits minimal additional cost therefore amortized years ended december 31 2013 2012 2011 aggregate amortization expense 271 million 221 million 163 million respectively estimated amortization expense next five years assuming additional amortizable intangible assets follows years ended december 31 future amortization expense may fluctuate depending changes foreign currency rates future acquisitions changes estimated amortizable life intangibles estimates amortization expense noted based upon foreign exchange rates december 31 2013 note 12accrued liabilities accrued liabilities december 31 2013 2012 consisted following items note 13 debt longterm debt consisted following december 31 payments due longterm debt excluding capital lease obligations five years subsequent december 31 2013 follows paid interest 510 million 475 million 435 million years ended december 31 2013 2012 2011 respectively property capital leases included property plant equipment accompanying consolidated balance sheets follows december 31 amortization related capital leases included depreciation expense minimum future lease payments capital leases follows 10 billion senior credit facility maturing september 2016 1000 million private placement notes maturing april 2015 1750 million private placement notes maturing october 2017 1250 million private placement notes maturing december 2019 2250 million private placement notes maturing october 2020 1250 million private placement notes maturing december 2022 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility private placement notes december 31 2013 compliance financial debt covenants december 31 2013 2012 1550 million 1576 million respectively committed outstanding letters credit senior credit facility unused portion revolving credit facility december 31 2013 2012 5726 million 6165 million respectively guarantees loans shiraishisogyo co ltd “shiraishi” unrelated party japan expanding medical waste management business guaranteed shiriashi’s loan 47 million borrowed jpmorganchase bank na currently due may 31 2014 based information currently available concluded guarantee probable called therefore recorded contingent liability relating guarantee also extended noninterest bearing loans shiraishi approximately 155 million due april 18 2018 reflected consolidated balance sheet part long term assets december 31 2013 2012 collateral agreement place assets shiraishi related companies support amounts owed company note 14lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space landfills operating lease agreements expire various dates next 21 years leases properties contain renewal provisions rent expense 2013 2012 2011 924 million 855 million 753 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2013 next five years aggregate follows note 15 products services geographic information fasb accounting standards codification topic 280 requires segment information reported based information utilized executive management internally assess performance make operating decisions determined three operating segments based organizational structure company information reviewed operating segments domestic regulated compliance services domestic regulated recall returns management services international regulated compliance services “international” aggregated domestic regulated compliance services domestic regulated recall returns management services one reportable segment united states based consideration following aggregation criteria • long term economics • nature products services • nature production processes • type class customer products services • methods used distribute products provide services • nature regulatory environment management determined two reportable segments united states includes puerto rico international revenues attributed countries based location customers accounting principles critical accounting policies used preparation financial statements reportable segments summary information reportable segments follows revenues attributable countries based location customers intercompany revenues recorded united states work performed canada eliminated prior reporting united states revenues accounting principles critical accounting policies used preparation financial statements reportable segments detailed information united states reportable segment follows detailed information international reportable segment follows note 16employee benefit plan 401k defined contribution retirement savings plan covering substantially domestic employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee maximum 1750 per annum contributions years ended december 31 2013 2012 2011 approximately 30 million 28 million 26 million respectively company several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2013 2012 2011 total contributions made company plans approximately 09 million 08 million 08 million respectively note 17 legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time previously disclosed served march 12 2013 class action complaint filed us district court western district pennsylvania individual plaintiff behalf “similarly situated” customers complaint alleges among things imposed unauthorized excessive price increases charges customers breach contracts violation illinois consumer fraud deceptive business practices act complaint sought certification lawsuit class action award class members appropriate damages injunctive relief pennsylvania class action complaint filed wake settlement state new york investigation new york false claims act class action complaint describes length new york investigation arose qui tam “whistle blower” complaint federal false claims act comparable state statutes filed seal us district court northern district illinois april 2008 former employee complaint filed behalf united states 14 states district columbia september 4 2013 filed answer plaintiffrelator’s second amended complaint generally denying allegations therein also previously disclosed tennessee massachusetts virginia north carolina issued civil investigative demands explore allegations made behalf qui tam complaint yet decided whether join illinois action following filing pennsylvania class action complaint served class action complaints filed federal court california florida illinois utah state court california complaints asserted claims allegations substantially similar made pennsylvania class action complaint cases appear followon litigation settlement state new york august 9 2013 judicial panel multidistrict litigation mdl granted motion transfer related actions northern district illinois centralized pretrial proceedings december 10 2013 filed answer amended consolidated class action complaint mdl action generally denying allegations therein believe operated accordance terms customer contracts complaints without merit intend vigorously defend lawsuits may 28 2013 received notice violation order comply state utah division air quality alleging violations certain conditions operating permit incineration facility north salt lake relating emissions testing facility subsequently completed testing accordance protocols approved division air quality demonstrates facility currently operating compliance applicable emissions standards permit conditions filed formal response notice violation september 27 2013 remain discussions division air quality regarding resolution matter note 18selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2013 2012 eps calculated quarterly basis amounts may total calculated fullyear eps note 19subsequent events evaluated subsequent events date filing annual report form 10k events occurred would require adjustment disclosure consolidated financial statements stericycle inc subsidiaries schedule iivaluation qualifying accounts 1 amounts consist primarily valuation allowances assumed acquired companies currency translation adjustments 2 amounts consist primarily valuation allowances acquired deferred tax assets business combinations item 9item 8 financial statements supplementary data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting internal control financial reporting defined rules 13a15f securities exchange act 1934 process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles company’s internal control financial reporting includes policies procedures • pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company • provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company • provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management assessed effectiveness company’s internal control financial reporting december 31 2014 making assessment management used criteria set forth committee sponsoring organizations treadway commission 1992 framework internal controlintegrated framework company acquired psc environmental services llc psc environmental april 22 2014 psc environmental included managements assessment effectiveness internal control financial reporting pursuant secs general guidance assessment recently acquired business may omitted scope assessment year acquisition scope assessment effectiveness internal controls financial reporting include psc environmental psc environmental accounted approximately 7 companys consolidated net sales year ended december 31 2014 approximately 2 companys consolidated total assets december 31 2014 based assessment criteria management concludes company maintained effective internal control financial reporting december 31 2014 company’s independent registered public accounting firm issued opinion company’s internal control financial reporting report appears page 33 stericycle inc lake forest il march 2 2015 report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited stericycle inc subsidiaries’ internal control financial reporting december 31 2014 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting december 31 2014 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets stericycle inc subsidiaries december 31 2014 2013 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2014 report dated march 2 2015 expressed unqualified opinion thereon ernst young llp chicago illinois march 2 2015 report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2014 2013 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2014 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2014 2013 consolidated results operations cash flows three years period ended december 31 2014 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states stericycle inc subsidiaries internal control financial reporting december 31 2014 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework report dated march 2 2015 expressed unqualified opinion thereon ernst young llp chicago illinois march 2 2015 stericycle inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements income accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements changes equity years ended december 31 2014 2013 2012 accompanying notes integral part consolidated financial statements stericycle inc subsidiaries notes consolidated financial statements unless context requires otherwise us refers stericycle inc subsidiaries consolidated basis note 1 description business incorporated 1989 presently serve diverse customer base 600000 customers throughout united states argentina brazil canada chile ireland japan mexico portugal romania republic korea spain united kingdom lease office space corporate offices lake forest illinois domestically lease 64 processing facilities majority use autoclave waste processing technology processing facilities also serve collection sites lease 137 additional transfer sites 19 additional salesadministrative sites 51 service facilities internationally lease 117 processing facilities majority use autoclave waste processing technology also lease 77 additional transfer sites 45 additional salesadministrative sites 46 service facilities 2 landfills business providing regulated compliance solutions healthcare commercial businesses includes collection processing specialized waste disposal variety training consulting recallreturn communication compliance services regulated solutions provide include medical waste disposal hazardous waste management sterisafe® medical waste compliance program clinical services program sharps management service featuring bio systems® reusable sharps containers pharmaceutical waste disposal medical safety products compliance solutions include training consulting inboundoutbound communications data reporting regulatory compliance services addition regulated compliance solutions offer regulated recall returns management solutions encompass number services variety businesses consist primarily managing recall withdrawal return expired recalled products pharmaceuticals 9969 employees united states 456 covered collective bargaining agreements internationally 8687 employees approximately 2209 covered collective bargaining agreements primarily latin america accompanying consolidated financial statements prepared pursuant rules regulations securities exchange commission sec conformity accounting principles generally accepted united states preparation financial statements conformity accounting principles requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period opinion consolidated financial statements included herein contain adjustments necessary present fairly financial position december 31 2014 2013 results operations cash flows statement changes equity three years ended december 31 2014 2013 2012 adjustments normal recurring nature evaluated subsequent events date filing annual report form 10k certain amounts previously issued financial statements reclassified conform current period presentation december 31 2013 company recorded immaterial correction error reclassify 52 million book overdrafts cash equivalents current liabilities consolidated balance sheet adjustment impact previously reported stericycle incs equity net income earnings per share preparation consolidated financial statements conformity accounting principles generally accepted united states requires management make certain estimates assumptions affect amount reported assets liabilities disclosure contingent assets liabilities date consolidated financial statements revenues expenses periods reported actual results may differ estimates note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc subsidiaries revenue recognition revenues regulated waste management services compliances services sterisafe recognized time waste collection compliance service revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues hazardous waste services recorded time waste received processing facility revenues regulated recall returns management services communication solutions recorded time services performed revenues product sales recognized time goods shipped ordering customer charges related international value added tax vat similar pass taxes included revenue cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows containers weighted average remaining useful life 131 years acquisition accounting acquisition accounting requires us recognize assets liabilities fair value process determining fair value requires time complete therefore make estimates time acquisition estimates primarily amortizable intangibles appropriate associated deferred tax liability estimates based historical experience allow us recognize amortization expense final valuation complete goodwill identifiable intangibles goodwill identifiable indefinite lived intangible assets amortized subject annual impairment test see note 11 goodwill intangible assets information goodwill annual impairment test finitelived intangible assets amortized useful lives determined customer relationships useful lives 10 40 years based upon type customer weighted average remaining useful life 238 years covenants nottocompete intangibles useful lives 3 14 years weighted average remaining useful life 47 years tradename intangibles useful lives 10 40 years weighted average remaining useful life 158 years technology useful life 5 years weighted average remaining useful life 10 years determined permits indefinite lives due ability renew permits minimal additional cost therefore amortized also tradename determined indefinite life indefinite lived intangible assets tested impairment annually december 31 frequently circumstances indicate may impaired use qualitative assessment provided fasb accounting standards codification topic 350 intangibles goodwill determine likely asset impaired indication impairment test recoverability asset using either discounted income cost savings model calculate fair value calculated fair value based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates see note 11 goodwill intangible assets information indefinite lived intangible assets valuation intangibles valuation intangible assets goodwill derived using discounted income cost savings approach financial information revenues costs assets liabilities assumptions related intangible asset input standard valuation model determine stream income attributable intangible income stream discounted present arrive valuation perform annual impairment tests indefinite lived intangible assets determined customer relationships lives 10 40 year based specific type relationship valuation contractual customer relationships derived using discounted income approach valuation model assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows see note 11 goodwill intangible assets information intangible assets goodwill share repurchases purchase price par value share repurchases allocated retained earnings income taxes deferred income tax assets liabilities determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse interest penalties accrued related unrecognized tax benefits recognized component income tax expense accounts receivable accounts receivable consist amounts due us normal business activities carried estimated collectible amounts accounts receivable balance includes amounts related vat similar international passthrough taxes require collateral part standard trade credit policy accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts approximately 1 accounts receivable bad debt expense 99 million 48 million 46 million years ended december 31 2014 2013 2012 respectively environmental remediation liabilities record liability environmental remediation liability becomes probable costs damages reasonably estimated accrue environmental remediation costs undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable accruals based currently available information estimated timing remedial actions existing technology enacted laws regulations financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt december 31 2014 fair value company’s debt obligations estimated 167 billion compared carrying amount 166 billion fair value estimated using market interest rates comparable instruments company current plans retire significant amount debt prior maturity financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater approximately 1 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses contracts loss positions losses recorded probable estimable losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits stock compensation expense income tax liabilities accrued auto workers’ compensation insurance claims intangible asset valuations estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates future estimated expenses may fluctuate depending changes foreign currency rates estimates payments due longterm debt lease payments capital leases accrued liabilities contingent consideration liabilities intangible assets amortization expense rental payments based upon foreign exchange rates december 31 2014 stockbased compensation recognize compensation expense stockbased awards made employees directors stockbased compensation cost measured grant date based value award recognized vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility stock expected term award riskfree interest rate stock’s expected volatility based upon historical experience expected term options granted based historical experience riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense new grants may differ significantly recorded past foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component accumulated comprehensive loss stericycle incs equity new accounting standards accounting standards recently adopted presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists january 1 2014 adopted guidance presentation unrecognized tax benefits net operating loss carryforward similar tax loss tax credit carryforward exists reporting date unrecognized tax benefit portion unrecognized tax benefit presented financial statements reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward except certain circumstances extent net operating loss carryforward similar tax loss tax credit carryforward available reporting date tax law applicable jurisdiction settle additional income taxes would result disallowance tax position tax law applicable jurisdiction require entity use entity intend use deferred tax asset purpose unrecognized tax benefit presented financial statements liability combined deferred tax assets assessment whether deferred tax asset available based unrecognized tax benefit deferred tax asset exist reporting date made presuming disallowance tax position reporting date example entity evaluate whether deferred tax asset expires statute limitations tax position whether deferred tax asset may used prior unrecognized tax benefit settled applying guidance prospective basis implementation guidance affect results operations financial liquidity accounting standards issued yet adopted reporting discontinued operations disclosures disposals components entity april 2014 financial accounting standards board fasb issued guidance changes threshold reporting discontinued operations adds new disclosures new guidance defines discontinued operation disposal component group components disposed classified held sale represents strategic shift major effect entitys operations financial results disposals individually significant components qualify discontinued operations entity must disclose pretax earnings disposed component public business entities guidance effective prospectively disposals classifications held sale components entity occur within annual periods beginning december 15 2014 interim periods within years early adoption permitted disposals classifications held sale reported financial statements previously issued available issuance company plans dispose component entity therefore expect adoption guidance material impact company’s financial position results operations revenue contracts customers may 2014 fasb issued guidance provide single comprehensive revenue recognition model contracts customers revenue guidance contains principles entity apply determine measurement revenue timing recognized underlying principle entity recognize revenue depict transfer goods services customers amount entity expects entitled exchange goods services standard effective first interim period within annual reporting periods beginning december 15 2016 public entities early adoption permitted company currently evaluating impact adoption guidance internal processes operating results financial reporting impact currently known reasonably estimable accounting sharebased payment terms award provide performance target could achieved requisite service period june 2014 fasb issued guidance applies reporting entities grant employees sharebased payments terms award provide performance target affects vesting could achieved requisite service period requires performance target affects vesting could achieved requisite service period treated performance condition follows existing accounting guidance treatment performance conditions standard effective annual periods interim periods within annual periods beginning december 15 2015 early adoption permitted company sharebased payments performance target therefore expect adoption guidance material impact company’s financial position results operations note 3 acquisitions divestitures following table summarizes locations acquisitions years ended december 31 twelve months ended december 31 2014 2013 2012 2014 completed 44 acquisitions 17 domestic 27 international businesses domestically acquired 100 stock two regulated waste businesses selected assets eleven regulated waste businesses three communication services business one recall returns business internationally argentina acquired 100 stock two regulated waste businesses brazil acquired 100 stock two regulated waste business selected assets one regulated waste business canada acquired 100 stock two communication solution businesses chile acquired 100 stock two regulated waste businesses 90 stock another japan acquired 100 stock two regulated waste businesses portugal acquired 100 stock five regulated waste business romania acquired selected assets two regulated waste businesses 100 stock another republic korea represents new market us acquired 755 stock one regulated waste business spain acquired 100 stock one regulated waste business selected assets two regulated waste businesses united kingdom acquired 100 stock two regulated waste businesses selected assets another also increased majority share previous acquisition japan 100 following table summarizes aggregate purchase price paid acquisitions adjustments consideration paid acquisitions years ended december 31 2014 2013 2012 financial reporting purposes acquisitions accounted using acquisition method accounting acquisitions resulted recognition goodwill financial statements reflecting premium paid acquire businesses believe complementary existing operations fit growth strategy twelve months ended december 31 2014 recognized net increase goodwill 2356 million excluding effect foreign currency translation see note 11 goodwill intangible assets notes consolidated financial statements net increase 1649 million assigned united states reportable segment net increase 707 million assigned international reportable segment approximately 125 million goodwill recognized twelve months ended december 31 2014 deductible income taxes twelve months ended december 31 2014 recognized net increase intangible assets acquisitions 2768 million excluding effect foreign currency translation changes include 1172 million estimated fair value acquired customer relationships amortizable lives 10 40 years 1581 million permits indefinite lives 12 million tradename amortizable lives 15 20 years 03 million intangibles amortizable life 10 years purchase prices acquisitions excess acquired tangible assets primarily allocated goodwill intangibles preliminary pending completion certain intangible asset valuations completion accounts following table summarizes preliminary purchase price allocation current period acquisitions adjustments purchase price allocations years ended december 31 2014 2013 2012 twelve months ended december 31 2014 2013 2012 company incurred 133 million 103 million 79 million respectively acquisition related expenses included selling general administrative expenses sga consolidated statements income included acquisitions discussed quarter ended june 30 2014 acquisition 100 stock psc environmental services llc psc environmental consummated april 22 2014 subject various adjustments total consideration psc environmental acquisition 2842 million 2482 million paid cash 300 million paid twoyear promissory note 60 million total purchase price represents contingent consideration based stericycles expected future utilization acquired net operating losses portion cash payment applied pay psc environmental’s indebtedness closing date part psc environmental acquisition assumed 324 million environmental remediation liabilities see note 13 environmental remediation liabilities notes consolidated financial statements included acquisitions discussed quarter ended september 30 2014 acquisition 100 stock shiraishisogyo co ltd shiraishi consideration acquisition shiraishi included effective settlement preexisting loans extended shiraishi 157 million assumption shiraishis bank debt 47 million results operations acquired businesses included consolidated statements income date acquisition pro forma revenues twelve months ended december 31 2014 aggregate acquisitions 2014 approximately 3645 million includes 2195 million estimated impact 2014 reported revenues pro forma earnings include estimates intangible asset amortization expense include estimated synergies timing realizability synergies uncertain following consolidated pro forma information impact 2014 acquisitions consolidated revenues based assumption acquisitions occurred january 1 2013 note 4 fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy distinguishes 1 market participant assumptions developed based market data obtained independent sources observable inputs 2 entitys assumptions market participant assumptions developed based best information available circumstances unobservable inputs fair value hierarchy consists three broad levels gives highest priority unadjusted quoted prices active markets identical assets liabilities level 1 lowest priority unobservable inputs level 3 three levels fair value hierarchy described level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities quoted prices identical similar assets liabilities inactive markets inputs observable corroborated observable market data substantially full term assets liabilities level 3 inputs generally unobservable typically reflect management’s estimate assumptions market participants would use pricing asset liability financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity derivative financial instruments use market approach valuation technique based observable market transactions spot forward rates recorded 05 million asset related fair value us dollarcanadian dollar foreign currency swap classified assets december 31 2014 objective swap offset foreign exchange risk us dollar equivalent cash outflows canadian subsidiary recorded 24 million liability related fair value treasury locks classified current liabilities december 31 2014 purpose lock treasury rate issuance expected private placement debt eliminate interest rate risk fair value hedge calculated taking present value difference locked rate forward rates december 31 2014 hedge terminate april 2015 time settlement amount net tax recognized accumulated comprehensive income amortized net interest expense life underlying debt contingent consideration liabilities recorded using level 3 inputs amount 199 million 79 million classified current liabilities december 31 2014 contingent consideration liabilities 125 million december 31 2013 contingent consideration represents amounts expected paid part acquisition consideration certain future events occur events usually targets revenues earnings related business acquired arrive fair value contingent consideration applying weighted probability potential outcomes maximum possible payout calculation potential outcomes dependent past financial performance management assumptions future performance financial performance measures fully met maximum liability would 238 million december 31 2014 contingent consideration liabilities reassessed quarter reflected consolidated balance sheets current liabilities within current liabilities noncurrent liabilities within liabilities changes contingent consideration reflected table fair value debt december 31 2014 fair value company’s debt obligations estimated using level 2 inputs 167 billion compared carrying amount 166 billion december 31 2013 fair value company’s debt obligations estimated using level 2 inputs 141 billion compared carrying amount 143 billion fair values estimated using income approach applying market interest rates comparable instruments company current plans retire significant amount debt prior maturity movements items fair value hierarchies note 5 income taxes us international components income taxes consisted following years ended december 31 2014 2013 2012 significant components income tax expense years ended december 31 2014 2013 2012 follows reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 2014 2013 2012 follows cash payments income taxes 1281 million 1021 million 1047 million years ended december 31 2014 2013 2012 respectively deferred tax liabilities assets december 31 2014 2013 follows december 31 2014 net operating loss carryforwards us federal state income tax purposes fully utilized excluding net operating loss carryforwards related acquisitions net operating loss carryforwards foreign domestic acquisitions approximately 58 million certain net operating loss carryforwards begin expire 2017 tax benefit net operating losses approximately 20 million december 31 2014 valuation allowance 56 thousand recorded offsetting tax benefit 2014 reversed valuation allowances previously recorded japan net operating tax loss carryforwards considered likely realized valuation allowance primarily relates loss carryforwards limitations place utilization expiration uncertain undistributed earnings foreign subsidiaries considered permanently reinvested therefore deferred taxes recorded thereon cumulative amounts earnings approximately 421 million december 31 2014 practicable estimate amount tax may payable upon distribution assuming repatriation subsidiaries file us federal income tax returns income tax returns various states foreign jurisdictions exceptions longer subject us federal state local nonus income tax examinations tax authorities years 2011 2014 internal revenue service concluded audit 2010 corporate income tax return significant adjustments company recorded accruals cover certain unrecognized tax positions unrecognized tax positions relate additional taxes company may required pay various tax jurisdictions course examinations various taxing authorities proposed adjustments may asserted company evaluates items casebycase basis adjusts accrual unrecognized tax positions deemed necessary estimated amount liability associated company’s unrecognized tax positions may significantly increase decrease within next twelve months cannot reasonably estimated total amount unrecognized tax positions december 31 2014 151 million amount unrecognized tax positions recognized would affect effective tax rate approximately 151 million recognized interest penalties accrued related income tax reserves amount 03 million 04 million years ended december 31 2014 2013 respectively component income tax expense following table summarizes changes unrecognized tax positions years ended december 31 2014 2013 note 6 stock based compensation december 31 2014 following stock option plans • 2014 incentive stock plan stockholders approved may 2014 • 2011 incentive stock plan stockholders approved may 2011 • 2008 incentive stock plan stockholders approved may 2008 • 2005 incentive stock plan stockholders approved april 2005 • 2000 nonstatutory stock option plan expired february 2010 • 1997 stock option plan expired january 2007 • 1996 directors stock option plan expired may 2006 december 31 2014 reserved total 9450645 shares issuance plans terms stock options authorized 2014 plan 2011 plan 2008 plan 2005 plan provide grant nonstatutory stock options nsos incentive stock options isos intended qualify section 422 internal revenue code 2000 plan provides grant nsos 1997 plan provided grant nsos isos directors plan provided grant nsos 2014 2011 2008 2005 plans authorize awards officers employees consultants following expiration directors plan may 2006 directors 2000 plan authorized awards employees consultants officers directors 1997 plan authorized awards officers directors employees consultants directors plan authorized awards outside directors exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options employee stock purchase plan october 2000 board directors adopted employee stock purchase plan espp stock holders approved may 2001 made effective july 1 2001 espp authorizes 900000 shares common stock substantially employees may purchase payroll deductions price equal 85 lower fair market values stock beginning end sixmonth offering periods employees payroll deductions stock purchase may exceed 5000 offering period 2014 2013 2012 60189 shares 52956 shares 56362 shares respectively issued espp december 31 2014 259503 shares available issuance espp plan stock based compensation expense 2014 changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding compensation expense stockbased compensation awards granted subsequent january 1 2006 based grantdate fair value determined accordance provisions fasb accounting standards sharebased payments following table presents total stockbased compensation expense resulting stock option awards restricted stock units rsus espp included consolidated statements income following table sets forth tax benefits related stock compensation stock options granted directors vest one year options granted officers employees generally vest five years expense related graded vesting options recognized using straightline method vesting period stock option activity year ended december 31 2014 summarized follows december 31 2014 441 million total unrecognized compensation expense related nonvested option awards expected recognized weighted average period 281 years following table sets forth total intrinsic value options exercised years ended december 31 total exercise intrinsic value represents total pretax value difference sales price trading day option exercised exercise price associated respective option following table sets forth information related outstanding exercisable options years ended december 31 total aggregate intrinsic value represents total pretax intrinsic value difference closing stock price last day trading year ended december 31 2014 exercise price multiplied number inthemoney options would received option holders assuming option holders exercised options december 31 2014 amount changes based fair market value stock options outstanding exercisable december 31 2014 price range presented company uses historical data estimate expected life volatility estimated fair value stock options time grant using blackscholes model option pricing model follows restricted stock units fair value restricted stock units rsus based closing price companys common stock date grant amortized expense service period rsus vest end three five years 2008 2011 2014 plans include share reserve related rsus granted 21 ratio following table sets forth information related rsus years ended december 31 summary status nonvested rsus changes year ended december 31 2014 follows december 31 2014 41 million total unrecognized compensation expense related rsus expected recognized weighted average period 287 years fair value units vested years ended december 31 2014 2013 2012 20 million 12 million 04 million respectively note 7 preferred stock december 31 2014 2013 1000000 authorized shares preferred stock shares issued outstanding note 8 earnings per common share basic earnings per share computed dividing income available common shareholders weightedaverage number shares common stock outstanding period diluted earnings per share computed dividing income available common shareholders weightedaverage number shares common stock outstanding period increased include number additional shares common stock would outstanding potentially dilutive securities issued potentially dilutive securities include outstanding stock options shares purchased company’s employee stock purchase plan rsus effect potentially dilutive securities reflected diluted earnings per share application treasury stock method treasury stock method increase fair market value company’s common stock result greater dilutive effect potentially dilutive securities following table sets forth computation basic diluted earnings per share additional information regarding outstanding employee stock options see note 6 stock based compensation notes consolidated financial statements 2014 2013 2012 options purchase 830755 shares 846808 shares 1049707 shares respectively exercise prices 1051213295 947611919 77499476 included computation diluted earnings per share effect would antidilutive note 9 accumulated comprehensive income loss following table sets forth changes components accumulated comprehensive income 2014 2013 2012 tax impact unrealized gains losses cash flow hedges accumulated comprehensive income december 31 2014 2013 2012 10 million 02 million 04 million respectively translation adjustments taxeffected company’s net investment foreign subsidiaries related foreign earnings deemed permanently invested note 10 property plant equipment property plant equipment december 31 2014 2013 consisted following items note 11 goodwill intangible assets goodwill identifiable indefinite lived intangibles amortized subject annual impairment test frequent testing circumstances indicate may impaired goodwill two geographical reportable segments united states international goodwill changes carrying amount goodwill since january 1 2013 reportable segment follows current year adjustments goodwill certain 2013 acquisitions primarily due finalization intangible asset valuations quarter ended june 30 2014 performed annual goodwill impairment evaluation three reporting units domestic regulated compliance services domestic regulated recall returns management services international regulated compliance services calculated fair value reporting units using income method validated results using market approach income market approaches indicated impairment goodwill three reporting units income approach income approach uses expected future cash flows reporting unit discounts cash flows present values expected future cash flows calculated using management assumptions internal growth capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based company calculated weighted average cost capital adjusted reporting units based size risk premium country risk premium significant assumptions used income approach include realization future cash flows discount rate used present value cash flows results goodwill impairment test using income approach indicated fair value domestic regulated compliance services recall returns management services reporting units exceeded book value substantial amount excess 100 international regulated compliance services reporting units fair value exceeded book value approximately 85 5767 million assigned goodwill june 30 2014 market approach market approach begins calculating market capitalization company using average stock price prior twelve months outstanding share count june 30 2014 look companys earnings interest tax depreciation amortization ebitda adjusted stock compensation expense items changes fair value contingent consideration restructuring plant closure costs litigation settlement prior twelve months calculated market capitalization divided modified ebitda arrive valuation multiple fair value reporting unit calculated taking product valuation multiple trailing twelve months modified ebitda reporting unit fair value compared reporting units book value determined excess book value believe starting fair value company whole reasonable measure fair value allocated reporting unit based reporting units individual earnings sustained drop stock price would negative impact fair value calculations temporary drop earnings reporting unit would negative impact fair value calculations results goodwill impairment test using market approach corroborated results impairment test income approach indicated fair value reporting units exceeded respective book values substantial amounts excess 100 respective book values intangible assets december 31 2014 2013 values intangible assets follows 2014 2013 wrote 99 million 29 million operating permits due rationalizing certain domestic international operations expenses reflected part sga expenses generally accepted accounting principles fair value must assigned acquired assets based theoretical market participant regardless acquirers intended use assets accounting treatment lead recognition losses company disposes acquired assets complete annual impairment analysis indefinite lived intangibles quarter ended december 31 year frequently circumstances indicate may impaired finitelived intangible assets amortized useful lives determined customer relationships useful lives 10 40 years based upon type customer weighted average remaining useful life 238 years covenants nottocompete intangibles useful lives 3 14 years weighted average remaining useful life 47 years tradename intangibles useful lives 10 40 years weighted average remaining useful life 158 years technology useful life 5 years weighted average remaining useful life 10 years determined permits indefinite lives due ability renew permits minimal additional cost therefore amortized years ended december 31 2014 2013 2012 aggregate amortization expense 327 million 271 million 221 million respectively estimated amortization expense next five years assuming additional amortizable intangible assets follows years ended december 31 future amortization expense may fluctuate depending changes foreign currency rates future acquisitions changes estimated amortizable life intangibles estimates amortization expense noted based upon foreign exchange rates december 31 2014 note 12 accrued liabilities accrued liabilities december 31 2014 2013 consisted following items note 13 environmental remediation liabilities record liability environmental remediation liability becomes probable costs damages reasonably estimated accrue environmental remediation costs undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable accruals based currently available information estimated timing remedial actions existing technology enacted laws regulations liability environmental remediation included consolidated balance sheets current liabilities within accrued liabilities noncurrent liabilities within liabilities december 31 2014 total environmental remediation liabilities recorded 326 million 29 million classified accrued liabilities 297 million classified liabilities note 14 debt longterm debt consisted following december 31 payments due longterm debt excluding capital lease obligations five years subsequent december 31 2014 follows paid interest 578 million 510 million 475 million years ended december 31 2014 2013 2012 respectively property capital leases included property plant equipment accompanying consolidated balance sheets follows december 31 amortization related capital leases included depreciation expense minimum future lease payments capital leases follows 12 billion senior credit facility maturing june 2019 1000 million private placement notes maturing april 2015 1750 million private placement notes maturing october 2017 1250 million private placement notes maturing december 2019 2250 million private placement notes maturing october 2020 1250 million private placement notes maturing december 2022 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility private placement notes december 31 2014 compliance financial debt covenants june 3 2014 certain subsidiaries entered second amended restated credit agreement new credit agreement bank america na administrative agent swingline lender letter credit issuer lenders party new credit agreement jpmorgan chase bank na hsbc bank usa national association syndication agents union bank na santander bank national association codocumentation agents new credit agreement amended restated prior amended restated credit agreement dated september 21 2011 new credit agreement increases unsecured revolving credit facility 10 billion 12 billion extends maturity date borrowings september 21 2016 june 3 2019 paid 21 million financing fees amortized interest expense life new credit agreement december 31 2014 2013 1629 million 1550 million respectively committed outstanding letters credit senior credit facility unused portion revolving credit facility 5771 million 5726 million december 31 2014 2013 respectively 1000 million private placement notes mature april 2015 classified longterm debt due intent pay obligation borrowing 12 billion senior credit facility note 15 lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space landfills operating lease agreements expire various dates next 20 years leases properties contain renewal provisions rent expense 2014 2013 2012 1115 million 924 million 855 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2014 next five years aggregate follows note 16 products services geographic information fasb accounting standards codification topic 280 segment reporting requires segment information reported based information utilized executive management internally assess performance make operating decisions determined three operating segments based organizational structure company information reviewed operating segments domestic regulated compliance services domestic regulated recall returns management services international regulated compliance services international aggregated domestic regulated compliance services domestic regulated recall returns management services one reportable segment united states based consideration following aggregation criteria • long term economics • nature products services • nature production processes • type class customer products services • methods used distribute products provide services • nature regulatory environment management determined two reportable segments united states includes puerto rico international revenues attributed countries based location customers accounting principles critical accounting policies used preparation financial statements reportable segments summary information reportable segments follows revenues attributable countries based location customers intercompany revenues recorded united states work performed canada eliminated prior reporting united states revenues accounting principles critical accounting policies used preparation financial statements reportable segments detailed information united states reportable segment follows detailed information international reportable segment follows note 17 employee benefit plan 401k defined contribution retirement savings plan covering substantially domestic employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee maximum 1750 per annum contributions years ended december 31 2014 2013 2012 approximately 36 million 30 million 28 million respectively company several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2014 2013 2012 total contributions made company plans approximately 19 million 09 million 08 million respectively note 18 legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time liabilities litigation accrued known probable estimable class action lawsuits previously disclosed served march 12 2013 class action complaint filed us district court western district pennsylvania individual plaintiff behalf similarly situated customers complaint alleges among things imposed unauthorized excessive price increases charges customers breach contracts violation illinois consumer fraud deceptive business practices act complaint sought certification lawsuit class action award class members appropriate damages injunctive relief pennsylvania class action complaint filed wake settlement state new york investigation new york false claims act class action complaint describes length new york investigation arose qui tam whistle blower complaint federal false claims act comparable state statutes filed seal us district court northern district illinois april 2008 former employee qui tam complaint filed behalf united states 14 states district columbia september 4 2013 filed answer plaintiffrelator’s second amended complaint generally denying allegations therein also previously disclosed tennessee massachusetts virginia north carolina issued civil investigative demands explore allegations made behalf qui tam complaint yet decided whether join illinois action qui tam case early stages discovery following filing pennsylvania class action complaint served class action complaints filed federal court california florida illinois mississippi utah state court california complaints asserted claims allegations substantially similar made pennsylvania class action complaint cases appear followon litigation settlement state new york august 9 2013 judicial panel multidistrict litigation mdl granted motion transfer related actions northern district illinois centralized pretrial proceedings december 10 2013 filed answer amended consolidated class action complaint mdl action generally denying allegations therein mdl action early stages discovery believe operated accordance terms customer contracts complaints without merit intend vigorously defend lawsuits accrued amounts respect lawsuits cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate litigation nature uncertain unpredictable ii proceedings early stage iii judgment comparable proceedings defendants might provide guidance making estimates utah proceedings previously disclosed december 3 2014 entered administrative settlement order settlement state utah division air quality daq concerning notice violation order comply issued daq may 28 2013 superseded amended notice violation order comply issued august 28 2013 nov settlement without admitting allegations contained nov agreed pay civil penalty 2322536 half 1161268 paid within 30 days december 3 2014 remaining 1161268 paid instead credited us supplemental environmental project credit permanently close north salt lake incineration facility required occur later three years receive permits approvals necessary commence construction new incineration facility located tooele county utah settlement provides full final resolution claims authority daq arising allegations contained nov cannot used parties allege violations negligence part litigation proceeding junk fax lawsuit april 2 2014 served class action complaint filed us district court northern district illinois case 114cv02070 individual plaintiff behalf “similarly situated” persons complaint alleges among things sent facsimile transmissions unsolicited advertisements plaintiff others similarly situated violation telephone consumer protection act 1991 amended junk fax prevention act 2005 tcpa complaint seeks certification lawsuit class action award class members greater actual damages sum 500 violation injunctive relief tcpa statutory remedy 500 per violation may trebled court finds violations willful knowing may 22 2014 filed answer complaint generally denying allegations therein discovery case proceeding accrued amounts respect tcpa action cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate proceedings early stage discovery ongoing ii reported tcpa claims resulted broad range outcomes case dependent unique facts circumstances review outstanding legal proceedings counsel quarterly disclose estimate reasonably possible loss range reasonably possible losses able make estimate reasonably possible loss range reasonably possible losses material financial statements environmental matters april 22 2014 completed acquisition psc environmental services llc psc environmental consequently became subject legal proceedings psc environmental party date psc environmental’s operations regulated federal state local laws enacted regulate discharge materials environment remediate contaminated soil groundwater otherwise protect environment result continuing regulation psc environmental frequently becomes party legal administrative proceedings involving various governmental authorities interested parties issues involved proceedings generally relate alleged violations existing permits licenses alleged responsibility federal state superfund laws remediate contamination properties owned either psc environmental parties either psc environmental prior owners certain facilities shipped wastes time psc environmental pays fines penalties regulatory proceedings relating primarily waste treatment storage disposal facilities believe fines penalties psc environmental may pay connection pending regulatory proceedings nature individually aggregate material financial statements september 18 2014 whollyowned subsidiary stericycle specialty waste solutions inc received notice violation nov new mexico environment department nmed concerning 10day transfer facility albuquerque violations alleged nov generally relate management conditionally exempt small quantity generator cesqg waste cesqg agreement nmed well recordkeeping matters met nmed currently discussions regarding resolution matters alleged nov believe penalties ultimately assessed nov could exceed 100000 event material financial statements note 19 selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2014 2013 eps calculated quarterly basis amounts may total calculated fullyear eps note 20 subsequent events evaluated subsequent events date filing annual report form 10k events occurred would require adjustment disclosure consolidated financial statements stericycle inc subsidiaries schedule iivaluation qualifying accounts 1 amounts consist primarily valuation allowances assumed acquired companies currency translation adjustments 2 amounts consist primarily valuation allowances acquired deferred tax assets business combinations item 9item 8 financial statements supplementary data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting internal control financial reporting defined rules 13a15f securities exchange act 1934 process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles company’s internal control financial reporting includes policies procedures •pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company •provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company •provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company acquired shredit international ulc “shredit” october 1 2015 due timing acquisition company excluded acquired operations shredit assessment effectiveness company’s internal control financial reporting shredit represented 32 company’s assets december 31 2015 6 company’s revenues year ended december 31 2015 company’s management assessed effectiveness company’s internal control financial reporting december 31 2015 making assessment management used criteria set forth committee sponsoring organizations treadway commission 2013 framework internal controlintegrated framework “coso framework” based upon evaluation chief executive officer chief financial officer concluded material weaknesses internal controls financial reporting described coso component risk assessment company’s risk assessment process operate effectively resulting material weakness pertaining component coso framework specifically company sufficiently identify risks associated certain routine processes related information systems including revenue certain nonroutine transactions addition company properly design implement appropriate processlevel internal controls environmental solutions component domestic regulated compliance services segment environmental solutions component primarily consists psc environmental services llc component acquired april 22 2014 excluded management assessment internal controls financial reporting december 31 2014 material weakness relating risk assessment component internal control framework contributed material weaknesses described coso component control activities revenue design operating effectiveness revenue control activities inadequate ensure revenue transactions properly measured recorded appropriate period environmental solutions design operating effectiveness control activities environmental solutions component domestic regulated compliance services segment business inadequate ensure component’s financial statements appropriately stated conclusion management concluded reasonable possibility material misstatement could occur consolidated financial statements control deficiencies remediated accordingly management concluded matters described material weaknesses company’s internal control financial reporting company maintain effective internal control financial reporting december 31 2015 company’s independent registered public accounting firm issued opinion company’s internal control financial reporting report appears page 42 stericycle inc lake forest il march 15 2016 report independent registered public accounting firm internal control financial reporting board directors shareholders stericycle inc subsidiaries audited stericycle inc subsidiaries’ company internal control financial reporting december 31 2015 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls shredit international ulc “shredit” included 2015 consolidated financial statements company constituted 32 company’s assets december 31 2015 6 company’s revenues year ended audit internal control financial reporting company also include evaluation internal control financial reporting shredit material weakness deficiency combination deficiencies internal control financial reporting reasonable possibility material misstatement company’s annual interim financial statements prevented detected timely basis following material weaknesses identified included management’s assessment management identified material weaknesses controls related company’s revenue process environmental solutions component domestic regulated compliance services component domestic regulated compliance services segment risk assessment process pertaining component coso framework also audited accordance standards public company accounting oversight board united states consolidated balance sheets stericycle inc subsidiaries december 31 2015 2014 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2015 report dated march 15 2016 expressed unqualified opinion thereon material weaknesses considered determining nature timing extent audit tests applied audit 2015 consolidated financial statements report affect report dated march 15 2016 expressed unqualified opinion financial statements opinion effect material weaknesses described achievement objectives control criteria stericycle inc subsidiaries maintained effective internal control financial reporting december 31 2015 based coso criteria ernst young llp chicago illinois march 15 2016 report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2015 2014 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2015 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2015 2014 consolidated results operations cash flows three years period ended december 31 2015 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states stericycle inc subsidiaries internal control financial reporting december 31 2015 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated march 15 2016 expressed adverse opinion thereon ernst young llp chicago illinois march 15 2016 stericycle inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements income accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements stericycle inc subsidiaries consolidated statements changes equity years ended december 31 2015 2014 2013 accompanying notes integral part consolidated financial statements stericycle inc subsidiaries notes consolidated financial statements unless context requires otherwise us refers stericycle inc subsidiaries consolidated basis note 1 description business incorporated 1989 presently serve diverse customer base 1000000 customers throughout united states argentina austria australia belgium brazil canada chile france germany ireland japan luxembourg mexico netherlands portugal romania republic korea singapore south africa spain united kingdom lease office space corporate offices lake forest illinois domestically lease 114 processing facilities primarily autoclaves medical waste shredders secure information destruction processing facilities also serve collection sites lease 218 additional transfer sites 21 additional salesadministrative sites 83 service facilities internationally lease 139 processing facilities majority use autoclave waste processing technology also lease 140 additional transfer sites 62 additional salesadministrative sites 54 service facilities 3 landfills businesstobusiness services provider focus regulated compliance solutions healthcare retail commercial businesses includes collection processing regulated specialized waste disposal collection personal confidential information secure destruction plus variety training consulting recallreturn communication compliance services solutions regulated specialty waste streams include medical waste disposal pharmaceutical waste disposal hazardous waste management sustainability solutions expired unused inventory secure information destruction documents emedia compliance solutions include training consulting sterisafe® clinical services programs well inboundoutbound communications data reporting regulatory compliance services regulated recall returns management solutions consist communication logistics data management services support recall withdrawal return expired recalled products 14170 employees united states 419 covered collective bargaining agreements internationally 11302 employees approximately 2703 covered collective bargaining agreements primarily latin america note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc subsidiaries revenue recognition revenues regulated medical waste management services compliances services secure information destruction services recognized time waste collection compliance service revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues hazardous waste services recorded time waste received processing facility revenues regulated recall returns management services communication solutions recorded time services performed revenues product sales recognized time goods shipped ordering customer charges related sales taxes international value added tax vat similar pass taxes included revenue acquisition accounting acquisition accounting requires us recognize assets liabilities fair value process determining fair value requires time complete therefore make estimates time acquisition estimates primarily amortizable intangibles appropriate associated deferred tax liability estimates based historical experience allow us recognize amortization expense final valuation complete goodwill identifiable intangible assets goodwill associated excess purchase price fair value net assets acquired amortized subject annual impairment test accordance applicable accounting standards evaluate least annual basis using fair value reporting units whether goodwill impaired determine significant impairment occurred would required incur noncash charges impaired portion goodwill could material adverse effect results operations period impairment charge occurs quarter ended june 30 2015 performed annual goodwill impairment evaluation three reporting units domestic regulated compliance services domestic regulated recall returns management services international regulated compliance services calculate fair value reporting units using income method validate results using market approach income market approaches indicated impairment goodwill three reporting units see note 11 goodwill intangible assets notes consolidated financial statements information goodwill annual impairment test determined permits indefinite lives due ability renew permits minimal additional cost therefore amortized also tradename determined indefinite life indefinite lived intangible assets tested impairment annually december 31 frequently circumstances indicate may impaired use qualitative assessment provided fasb accounting standards codification topic 350 intangibles goodwill determine likely asset impaired indication impairment test recoverability asset using either discounted income cost savings model calculate fair value calculated fair value based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates see note 11 goodwill intangible assets notes consolidated financial statements information indefinite lived intangible assets finitelived intangible assets amortized useful lives using straightline method determined customer relationships useful lives 10 40 years based upon type customer weighted average remaining useful life 192 years covenants nottocompete intangibles useful lives 5 14 years weighted average remaining useful life 37 years tradename intangibles useful lives 15 40 years weighted average remaining useful life 172 years intangibles mainly consist landfill air rights weighted average remaining useful life 191 years assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows see note 11 goodwill intangible assets notes consolidated financial statements information intangible assets goodwill valuation intangibles valuation intangible assets goodwill derived using discounted income cost savings approach financial information revenues costs assets liabilities assumptions related intangible asset input standard valuation model determine stream income attributable intangible income stream discounted present arrive valuation perform annual impairment tests indefinite lived intangible assets customer relationship valuation model using multiperiod excess earnings method assumes straightline revenue loss calculation determining revenue loss rate starts baseline revenue point tracks revenue customer assuming revenue growth point zero revenues calculation baseline revenue zero revenue determines useful life customer relationships determining accurate consumption benefits acquired customer relationships cannot reliably determined services provide acquired customers changes baseline revenues extended period time due factors volume increase price increase complementary service offerings therefore amortize finitelived intangible assets using straightline method consistent valuation model income taxes subject income taxes us numerous foreign jurisdictions compute provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax basis assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected realized settled significant judgments required order determine realizability deferred tax assets assessing need valuation allowance evaluate significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods undistributed earnings foreign subsidiaries considered permanently reinvested therefore deferred taxes recorded thereon provide uncertain tax positions maintain reserve tax benefits assumed meet threshold likely sustained management believes amount provided uncertain tax positions adequate accounts receivable accounts receivable consist amounts due us normal business activities carried estimated collectible amounts accounts receivable balance includes amounts related vat similar international passthrough taxes require collateral part standard trade credit policy accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectability accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts approximately 15 accounts receivable bad debt expense 137 million 99 million 48 million years ended december 31 2015 2014 2013 respectively stockbased compensation issue stock options restricted stock units rsu employees directors integral part compensation programs stock options cost measured grant date using blackscholes model recognized expense vesting period determining fair value stock options grant date requires estimating expected volatility stock expected term award riskfree rate stock’s expected volatility expected term awards based upon historical experience riskfree interest rate assumption based upon us treasury yield rates comparable period fair value rsu based closing price companys common stock date grant amortized expense service period factors change employ different assumptions stockbased compensation expense may differ significantly recorded past litigation operate highly regulated industry deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time liabilities litigation accrued known probable estimable share repurchases purchase price par value share repurchases allocated retained earnings cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows containers weighted average remaining useful life 125 years environmental remediation liabilities record liability environmental remediation liability becomes probable costs damages reasonably estimated accrue environmental remediation costs undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable accruals based currently available information estimated timing remedial actions existing technology enacted laws regulations insurance workers’ compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance policies thirdparty administrator used process claims require workers’ compensation vehicle liability physical damage claims reported within 24 hours result accrue workers’ compensation vehicle physical damage liability based upon claim reserves established thirdparty administrator end reporting period employee health insurance benefit liability based historical claims experience rate earnings would impacted extent actual claims vary historical experience review accruals associated exposure liabilities adequacy end reporting period financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable derivatives longterm debt december 31 2015 fair value company’s debt obligations estimated 322 billion compared carrying amount 321 billion fair value estimated using market interest rates comparable instruments company current plans retire significant amount debt prior maturity financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater approximately 15 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses contracts loss positions losses recorded probable estimable losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits stock compensation expense income tax liabilities accrued auto workers’ compensation insurance claims intangible asset valuations estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates future estimated expenses may fluctuate depending changes foreign currency rates estimates payments due longterm debt lease payments capital leases accrued liabilities contingent consideration liabilities intangible assets amortization expense rental payments based upon foreign exchange rates december 31 2015 foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component accumulated comprehensive loss stericycle incs equity new accounting standards accounting standards recently adopted reporting discontinued operations disclosures disposals components entity january 1 2015 adopted accounting standards update asu 201408 presentation financial statements topic 205 reporting discontinued operations disclosures disposals components entity guidance presentation disclosures reporting discontinued operations new guidance defines discontinued operation disposal component group components disposed classified held sale represents strategic shift major effect entitys operations financial results disposals individually significant components qualify discontinued operations entity must disclose pretax earnings disposed component company disposed component entity therefore implementation guidance affect financial position results operations disclosure requirements simplifying accounting measurementperiod adjustments december 31 2015 early adopted asu 201516 business combinations topic 805 simplifying accounting measurementperiod adjustments guidance eliminates requirement acquirer business combination account measurementperiod adjustments retrospectively instead acquirer recognize measurementperiod adjustments period determines amount adjustment implementation guidance materially impact financial statements balance sheet classification deferred taxes december 31 2015 early adopted asu 201517 income taxes topic 740 balance sheet classification deferred taxes guidance requires companies classify deferred tax assets liabilities noncurrent balance sheet instead separating deferred taxes current noncurrent amounts december 31 2014 reclassified 283 million current deferred tax assets noncurrent deferred tax liabilities conform current period balance sheet presentation change balance sheet presentation impacts accounting cloud december 31 2015 adopted asu 201505 intangible goodwill internaluse software subtotal 35040 customers accounting fees paid cloud computing arrangement guidance determine whether customers cloud computing arrangement account contract software license service contract guidance applies internaluse software customer obtains access hosting arrangement standard effective financial statements issued annual periods beginning december 15 2015 early adoption permitted evaluated contracts determined cloud computing arrangements include software license criteria therefore properly treated service contracts accounting standards issued yet adopted interestimputation interest april 2015 fasb issued asu 201503 interest imputation interest subtopic 83530 simplifying presentation debt issuance costs guidance requires debt issuance costs related recognized debt liability presented balance sheet direct deduction debt liability rather asset recognition measurement guidance debt issuance costs affected accounting standard update standard effective annual periods interim periods within annual periods beginning december 15 2015 early adoption permitted revised standard adopted company january 1 2016 applied retrospectively require reclassifications within company’s consolidated balance sheets statements cash flows revised standard affects presentation therefore impact company’s results operations revenue contracts customers may 2014 fasb issued asu 201409 revenue contracts customers topic 606 guidance provide single comprehensive revenue recognition model contracts customers revenue guidance contains principles entity apply determine measurement revenue timing recognized underlying principle entity recognize revenue depict transfer goods services customers amount entity expects entitled exchange goods services amended authoritative guidance associated revenue recognition effective company january 1 2018 amended guidance may applied retrospectively periods presented retrospectively cumulative effect initially applying amended guidance recognized date initial application process assessing provisions new revenue recognition standard determined whether adoption material impact consolidated financial statements note 3 acquisitions following table summarizes locations acquisitions years ended december 31 2015 2014 2013 2015 completed 43 acquisitions 19 domestic 24 international domestically acquired selected assets eleven regulated waste businesses 100 stock two regulated waste businesses selected assets one communication services business 100 stock another communication services business additionally acquired selected assets four secure information destruction businesses brazil acquired 100 stock two regulated waste businesses canada acquired 100 stock one communication services one secure information destruction business ireland acquired 100 stock one regulated waste business mexico acquired 100 stock two regulated waste businesses selected assets another netherlands represents new market us acquired 100 stock one regulated waste business selected assets another romania acquired selected assets three regulated waste businesses 100 stock another republic korea acquired selected assets six regulated waste businesses spain acquired selected assets four regulated waste businesses following table summarizes aggregate purchase price paid acquisitions adjustments consideration paid acquisitions years ended december 31 2015 2014 2013 financial reporting purposes acquisitions accounted using acquisition method accounting acquisitions resulted recognition goodwill financial statements reflecting premium paid acquire businesses believe complementary existing operations fit growth strategy twelve months ended december 31 2015 recognized net increase goodwill 142 billion excluding effect foreign currency translation see note 11 goodwill intangible assets notes consolidated financial statements net increase 113 billion assigned united states reportable segment net increase 2891 million assigned international reportable segment approximately 5286 million goodwill recognized twelve months ended december 31 2015 deductible income taxes twelve months ended december 31 2015 recognized net increase intangible assets acquisitions 105 billion excluding effect foreign currency translation changes include 5994 million estimated fair value acquired customer relationships amortizable lives 10 40 years 14 million permits indefinite lives 4233 million tradenames indefinite lives 279 million intangibles amortizable lives 3 20 years purchase prices acquisitions excess acquired tangible identifiable intangible assets primarily allocated goodwill preliminary pending completion certain intangible asset valuations completion accounts following table summarizes preliminary purchase price allocation current period acquisitions adjustments purchase price allocations years ended december 31 2015 2014 2013 twelve months ended december 31 2015 2014 2013 company incurred 391 million 133 million 103 million respectively acquisition related expenses included selling general administrative expenses sga consolidated statements income included acquisitions discussed acquisition shredit international ulc alberta unlimited liability corporation sii shredit jv lp ontario limited partnership shredit jv boost gp corp ontario corporation boost gp boost holdings lp ontario limited partnership together sii shredit jv boost gp shredit october 1 2015 acquired shredit aggregate purchase price 23 billion cash shredit global leader secure information destruction highly complementary service regulated waste compliance services provide operational synergies stemming core competencies route logistics lean management systems following table summarizes preliminary purchase price allocation major asset acquired liability assumed well amount goodwill recognized shredit acquisition aggregate 2015 acquisitions amounts table subject change upon finalization asset valuations completion accounts used various techniques determine fair value •for fixed assets used market approach make preliminary estimates fair value •for customer relationships used income approach using multiperiod excess earnings method mpeem make preliminary estimates fair value 5340 million •for shredit tradename used income approach using relief royalties method make preliminary estimates fair value 4210 million results operations acquired businesses included consolidated statements income date acquisition revenues twelve months ended december 31 2015 aggregate acquisitions 2015 approximately 2585 million 1774 million shredit acquisition pro forma earnings include estimates intangible asset amortization expense include estimated synergies timing realizability synergies uncertain pro forma results prepared comparative purposes necessarily indicative results operations would acquisitions occurred assumed dates following consolidated pro forma information impact 2015 acquisitions consolidated revenues net income based assumption acquisitions occurred january 1 2014 note 4 fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy distinguishes 1 market participant assumptions developed based market data obtained independent sources observable inputs 2 entitys assumptions market participant assumptions developed based best information available circumstances unobservable inputs fair value hierarchy consists three broad levels gives highest priority unadjusted quoted prices active markets identical assets liabilities level 1 lowest priority unobservable inputs level 3 three levels fair value hierarchy described level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities quoted prices identical similar assets liabilities inactive markets inputs observable corroborated observable market data substantially full term assets liabilities level 3 inputs generally unobservable typically reflect management’s estimate assumptions market participants would use pricing asset liability financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity movements items fair value hierarchies derivative financial instruments use market approach valuation technique based observable market transactions spot forward rates recorded 12 million asset related fair value us dollarcanadian dollar foreign currency swap classified assets december 31 2015 objective swap offset foreign exchange risk us dollar equivalent cash outflows canadian subsidiary march 2015 cash settled treasury lock hedge 88 million 53 million net 35 million tax recognized accumulated comprehensive income purpose lock interest rate issuance private placement debt july 2015 eliminate interest rate risk contingent consideration liabilities recorded using level 3 inputs amount 254 million 91 million classified current liabilities december 31 2015 contingent consideration liabilities 199 million december 31 2014 contingent consideration represents amounts expected paid part acquisition consideration certain future events occur events usually targets revenues earnings related business acquired arrive fair value contingent consideration applying weighted probability potential outcomes maximum possible payout calculation potential outcomes dependent past financial performance management assumptions future performance financial performance measures fully met maximum liability would 448 million december 31 2015 contingent consideration liabilities reassessed quarter reflected consolidated balance sheets current liabilities within current liabilities noncurrent liabilities within liabilities changes contingent consideration reflected table fair value debt december 31 2015 fair value company’s debt obligations estimated using level 2 inputs 322 billion compared carrying amount 321 billion december 31 2014 fair value company’s debt obligations estimated using level 2 inputs 167 billion compared carrying amount 166 billion fair values estimated using income approach applying market interest rates comparable instruments company current plans retire significant amount debt prior maturity note 5 income taxes us international components income taxes consisted following years ended december 31 2015 2014 2013 significant components income tax expense years ended december 31 2015 2014 2013 follows reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 2015 2014 2013 follows cash payments income taxes 1251 million 1281 million 1021 million years ended december 31 2015 2014 2013 respectively deferred tax liabilities assets december 31 2015 2014 follows december 31 2015 net operating loss carryforwards us federal state income tax purposes fully utilized excluding net operating loss carryforwards related acquisitions net operating loss carryforwards foreign domestic acquisitions approximately 1205 million certain net operating loss carryforwards begin expire 2017 tax benefit net operating losses approximately 380 million december 31 2015 valuation allowance 176 million recorded offsetting tax benefit undistributed earnings foreign subsidiaries considered permanently reinvested therefore deferred taxes recorded thereon cumulative amounts earnings approximately 582 million december 31 2015 practicable estimate amount tax may payable upon distribution assuming repatriation subsidiaries file us federal income tax returns income tax returns various states foreign jurisdictions exceptions longer subject us federal state local nonus income tax examinations tax authorities years 2011 2014 internal revenue service concluded audit 2010 corporate income tax return significant adjustments company recorded accruals cover certain unrecognized tax positions unrecognized tax positions relate additional taxes company may required pay various tax jurisdictions course examinations various taxing authorities proposed adjustments may asserted company evaluates items casebycase basis adjusts accrual unrecognized tax positions deemed necessary estimated amount liability associated company’s unrecognized tax positions may significantly increase decrease within next twelve months cannot reasonably estimated total amount unrecognized tax positions december 31 2015 249 million acquisition activity contributed amount unrecognized tax positions recognized would affect effective tax rate approximately 196 million recognized interest penalties accrued related income tax reserves amount 07 million 03 million years ended december 31 2015 2014 respectively component income tax expense following table summarizes changes unrecognized tax positions years ended december 31 2015 2014 table reflects 53 million gross increases tax positions prior periods relate recently acquired uncertain tax positions securities purchase agreement provides vendor liable indemnified stericycle income tax liabilities periods prior acquisition stericycle responsible unrecognized tax benefits related interest penalties periods acquisition note 6 stock based compensation december 31 2015 following active stock option plans •the 2014 incentive stock plan stockholders approved may 2014 •the 2011 incentive stock plan stockholders approved may 2011 •the 2008 incentive stock plan stockholders approved may 2008 •the 2005 incentive stock plan stockholders approved april 2005 •the 2000 nonstatutory stock option plan expired february 2010 •the employee stock purchase plan espp stockholders approved may 2001 december 31 2015 reserved total 8637762 shares issuance plans terms stock options authorized 2014 plan 2011 plan 2008 plan 2005 plan provide grant nonstatutory stock options nsos incentive stock options isos intended qualify section 422 internal revenue code 2000 plan provides grant nsos 2014 2011 2008 2005 plans authorize awards officers employees consultants following expiration directors plan may 2006 directors 2000 plan authorized awards employees consultants officers directors exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 8 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options employee stock purchase plan october 2000 board directors adopted employee stock purchase plan espp stock holders approved may 2001 made effective july 1 2001 espp authorizes 900000 shares common stock substantially employees may purchase payroll deductions price equal 85 lower fair market values stock beginning end sixmonth offering periods employees payroll deductions stock purchase may exceed 5000 offering period 2015 2014 2013 68039 shares 60189 shares 52956 shares respectively issued espp december 31 2015 191464 shares available issuance espp plan stock based compensation expense 2015 changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding compensation expense stockbased compensation awards granted subsequent january 1 2006 based grantdate fair value determined accordance provisions fasb accounting standards sharebased payments following table presents total stockbased compensation expense resulting stock option awards restricted stock units rsus espp included consolidated statements income following table sets forth tax benefits related stock compensation stock options granted directors vest one year options granted officers employees generally vest five years expense related graded vesting options recognized using straightline method vesting period stock option activity year ended december 31 2015 summarized follows december 31 2015 463 million total unrecognized compensation expense related nonvested option awards expected recognized weighted average period 286 years following table sets forth total intrinsic value options exercised years ended december 31 total exercise intrinsic value represents total pretax value difference sales price trading day option exercised exercise price associated respective option following table sets forth information related outstanding exercisable options years ended december 31 total aggregate intrinsic value represents total pretax intrinsic value difference closing stock price last day trading year ended december 31 2015 exercise price multiplied number inthemoney options would received option holders assuming option holders exercised options december 31 2015 amount changes based fair market value stock options outstanding exercisable december 31 2015 price range presented company uses historical data estimate expected life volatility estimated fair value stock options time grant using blackscholes model option pricing model follows restricted stock units fair value restricted stock units rsus based closing price companys common stock date grant amortized expense service period rsus vest released end three five years 2008 2011 2014 plans include share reserve related rsus granted 21 ratio following table sets forth information related rsus years ended december 31 summary status nonvested rsus changes year ended december 31 2015 follows december 31 2015 38 million total unrecognized compensation expense related rsus expected recognized weighted average period 220 years units vested year ended december 31 2015 fair value units vested years ended december 31 2014 2013 20 million 12 million respectively note 7 preferred stock december 31 2015 1000000 authorized shares preferred stock 770000 shares issued outstanding mandatory convertible preferred stock december 31 2014 1000000 authorized shares preferred stock shares issued outstanding series mandatory convertible preferred stock offering september 15 2015 completed registered public offering 7700000 depositary shares representing 110th interest share 525 series mandatory convertible preferred stock par value 001 per share series preferred stock public offering price 10000 per depository share total gross proceeds 7700 million net proceeds 7469 million deducting underwriting discounts commissions expenses used net proceeds offering fund portion purchase price paid acquisition shredit see note 3 acquisitions notes consolidated financial statements information unless earlier converted redeemed share series preferred stock automatically convert 58716 73394 shares common stock subject antidilution adjustments mandatory conversion date expected september 15 2018 number shares common stock issuable conversion determined based volumeweighted average price common stock 20 trading day period commencing including 23rd scheduled trading day prior september 15 2018 subject certain restrictions time prior september 15 2018 holders series preferred stock may elect convert portion shares common stock minimum conversion rate 58716 shares common stock per share series preferred stock subject adjustment dividends shares series preferred stock payable cumulative basis declared board directors authorized committee thereof annual rate 525 liquidation preference 1000 per share correspondingly 10000 per share respect depositary shares dividends may payable cash subject certain limitations shares common stock combination cash shares common stock march 15 june 15 september 15 december 15 year commencing december 15 2015 including september 15 2018 note 8 earnings per common share basic earnings per share computed dividing income available common shareholders weightedaverage number shares common stock outstanding period diluted earnings per share computed dividing income available common shareholders weightedaverage number shares common stock outstanding period increased include number additional shares common stock would outstanding potentially dilutive securities issued potentially dilutive securities include outstanding stock options shares purchased company’s employee stock purchase plan rsus assumed conversion mandatory convertible preferred stock effect potentially dilutive securities reflected diluted earnings per share application treasury stock method outstanding restricted stock awards stock options treasury stock method increase fair market value company’s common stock result greater dilutive effect potentially dilutive securities issue mandatory convertible preferred stock use ifconverted method ifconverted method preferred dividend applicable convertible preferred stock added back net income attributable stericycle numerator mandatory convertible preferred shares assumed converted common shares beginning period later time issuance resulting common shares included denominator applying ifconverted method conversion shall assumed purposes computing diluted eps effect would antidilutive following table sets forth computation basic diluted earnings per share 1 2015 weighted average common shares issuable upon assumed conversion mandatory convertible preferred stock totaling 1648318 shares excluded computation diluted earnings per share conversion would antidilutive 2015 2014 2013 options purchase 818093 shares 830755 shares 846808 shares respectively exercise prices 1170914156 1051213295 947611919 included computation diluted earnings per share effect would antidilutive additional information regarding outstanding employee stock options see note 6 stock based compensation notes consolidated financial statements note 9 accumulated comprehensive income loss following table sets forth changes components accumulated comprehensive income 2015 2014 2013 net tax impact unrealized gains losses cash flow hedges accumulated comprehensive income december 31 2015 2014 2013 22 million 06 million 02 million respectively translation adjustments taxeffected company’s net investment foreign subsidiaries related foreign earnings deemed permanently invested note 10 property plant equipment property plant equipment december 31 2015 2014 consisted following items note 11 goodwill intangible assets goodwill identifiable indefinite lived intangibles amortized subject annual impairment test frequent testing circumstances indicate may impaired goodwill two geographical reportable segments united states international goodwill retroactively reclassified 43 million goodwill related puerto rico united states segment international segment changes carrying amount goodwill since january 1 2014 reportable segment follows current year adjustments goodwill certain 2014 acquisitions primarily due finalization intangible asset valuations quarter ended june 30 2015 performed annual goodwill impairment evaluation three reporting units domestic regulated compliance services domestic regulated recall returns management services international regulated compliance services calculated fair value reporting units using income method validated results using market approach income market approaches indicated impairment goodwill three reporting units income approach income approach uses expected future cash flows reporting unit discounts cash flows present values expected future cash flows calculated using management assumptions internal growth capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based company calculated weighted average cost capital adjusted reporting units based size risk premium country risk premium significant assumptions used income approach include realization future cash flows discount rate used present value cash flows results goodwill impairment test using income approach indicated fair value domestic regulated compliance services recall returns management services reporting units exceeded book value substantial amount excess 100 international regulated compliance services reporting units fair value exceeded book value approximately 88 5893 million assigned goodwill june 30 2015 market approach market approach begins calculating market capitalization company using average stock price prior twelve months outstanding share count june 30 2015 look companys earnings interest tax depreciation amortization ebitda adjusted stock compensation expense items changes fair value contingent consideration restructuring plant conversion expense litigation settlements prior twelve months calculated market capitalization divided modified ebitda arrive valuation multiple fair value reporting unit calculated taking product valuation multiple trailing twelve months modified ebitda reporting unit fair value compared reporting units book value determined excess book value believe starting fair value company whole reasonable measure fair value allocated reporting unit based reporting units individual earnings sustained drop stock price would negative impact fair value calculations temporary drop earnings reporting unit would negative impact fair value calculations results goodwill impairment test using market approach corroborated results impairment test income approach indicated fair value reporting units exceeded respective book values substantial amounts intangible assets december 31 2015 2014 values intangible assets follows changes carrying amount intangible assets since january 1 2014 follows 2015 2014 42 million 99 million intangibles impaired respectively due rationalizing certain domestic international operations intangibles impaired 2015 included 02 million customer relationships 13 million tradenames 27 million operating permits expenses reflected part sga consolidated statements income generally accepted accounting principles fair value must assigned acquired assets based theoretical market participant regardless acquirers intended use assets accounting treatment lead recognition losses company disposes acquired assets complete annual impairment analysis indefinite lived intangibles quarter ended december 31 year frequently circumstances indicate may impaired finitelived intangible assets amortized useful lives determined customer relationships useful lives 10 40 years based upon type customer weighted average remaining useful life 192 years covenants nottocompete intangibles useful lives 5 14 years weighted average remaining useful life 37 years tradename intangibles useful lives 15 40 years weighted average remaining useful life 172 years intangibles mainly consist landfill air rights weighted average remaining useful life 191 years determined permits indefinite lives due ability renew permits minimal additional cost therefore amortized also tradename determined indefinite life years ended december 31 2015 2014 2013 aggregate amortization expense 455 million 327 million 271 million respectively estimated amortization expense next five years assuming additional amortizable intangible assets follows years ended december 31 future amortization expense may fluctuate depending changes foreign currency rates future acquisitions changes estimated amortizable life intangibles estimates amortization expense noted based upon foreign exchange rates december 31 2015 note 12 accrued liabilities accrued liabilities december 31 2015 2014 consisted following items note 13 environmental remediation liabilities record liability environmental remediation liability becomes probable costs damages reasonably estimated accrue environmental remediation costs undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable accruals based currently available information estimated timing remedial actions existing technology enacted laws regulations liability environmental remediation included consolidated balance sheets current liabilities within accrued liabilities noncurrent liabilities within liabilities december 31 2015 total environmental remediation liabilities recorded 308 million 21 million classified accrued liabilities 287 million classified liabilities note 14 debt longterm debt consisted following december 31 120 billion senior credit facility maturing june 2019 125 billion term loan maturing august 2020 1750 million private placement notes maturing october 2017 1250 million private placement notes maturing december 2019 2250 million private placement notes maturing october 2020 1500 million private placement maturing october 2021 1250 million private placement notes maturing december 2022 2000 million private placement notes maturing july 2022 1000 million private placement notes maturing july 2023 1500 million private placement notes maturing october 2023 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility term loan private placement notes december 31 2015 compliance financial debt covenants senior credit facility term loan private placement notes rank pari passu unsecured debt obligations december 31 2015 2014 1604 million 1629 million respectively committed outstanding letters credit senior credit facility unused portion revolving credit facility 6858 million 5771 million december 31 2015 2014 respectively april 30 2015 entered note purchase agreement several institutional purchasers pursuant issued sold purchasers 2000 million new sevenyear 272 unsecured senior notes series 1000 million new eightyear 279 unsecured senior notes series b closing issuance sale notes occurred july 31 2015 series notes bear interest fixed rate 272 per annum series b notes bear interest fixed rate 279 per annum interest payable arrears semiannually january 1 july 1 beginning january 1 2016 principal series notes payable maturity notes july 1 2022 principal series b notes payable maturity notes july 1 2023 notes unsecured obligations company entered term loan credit agreement dated august 21 2015 term loan credit agreement bank america na administrative agent maturing august 21 2020 term loan credit agreement provides term loan credit facility term loan credit facility company may obtain loans aggregate amount 15 billion borrowings term loan credit facility may bear interest base rate eurodollar rate respectively plus applicable rate base rate day fluctuating rate per annum equal highest federal funds rate plus 12 100 ii rate interest effect day publicly announced time bank america prime rate iii eurodollar rate plus 100 applicable rate depends consolidated leverage ratio company subsidiaries set forth recent compliance certificate received administrative agent used proceeds term loan fund portion purchase price paid shredit acquisition see note 3 acquisitions notes consolidated financial statements information october 1 2015 issued sold purchasers 1500 million new sixyear 289 unsecured senior notes 1500 million new eightyear 318 unsecured senior notes collectively notes bear interest unpaid principal thereof october 1 2015 respective stated rates interest payable arrears semiannually first 1st day april october year maturity commencing april 1 2016 notes unsecured obligations used proceeds unsecured senior notes fund portion purchase price paid shredit acquisition see note 3 acquisitions notes consolidated financial statements information payments due longterm debt excluding capital lease obligations five years subsequent december 31 2015 follows paid interest 680 million 578 million 510 million years ended december 31 2015 2014 2013 respectively property capital leases included property plant equipment accompanying consolidated balance sheets follows december 31 amortization related capital leases included depreciation expense minimum future lease payments capital leases follows note 15 lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space landfills operating lease agreements expire various dates next 20 years leases properties contain renewal provisions rent expense 2015 2014 2013 1390 million 1115 million 924 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2015 next five years aggregate follows note 16 products services geographic information fasb accounting standards codification topic 280 segment reporting requires segment information reported based information utilized executive management internally assess performance make operating decisions determined two operating reportable segments based organizational structure company information reviewed chief operating decision maker operating reportable segments domestic regulated compliance services domestic international regulated compliance services international process determining integration shredit organization within stericycle currently operations shredit part domestic regulated compliance services international operating segments based location revenue producing customer retroactively reclassified immaterial amounts related puerto rico united states segment international segment summary information reportable segments follows revenues attributable countries based location customers intercompany revenues recorded united states work performed canada eliminated prior reporting united states revenues accounting principles critical accounting policies used preparation financial statements reportable segments detailed information united states reportable segment follows detailed information international reportable segment follows note 17 restructuring charges first quarter 2015 management began executing realignment operations reduce labor redundancies facility costs part realignment company recorded charges related severance fixed asset intangible assets impairments recognition lease expense properties longer used contractual obligation recorded restructuring liabilities expected paid primarily within current year company believes recorded restructuring liabilities adequate revisions current estimates may recorded future periods based new information becomes available could additional initiatives future streamline operations company expects expenses related workforce reductions facility rationalization costs restructuring plans finalized related expenses estimable following table highlights 191 million pretax restructuring charges reporting segment year ended december 31 2015 reflected part sga consolidated statements income following table summarizes restructuring activity 2015 reflected consolidated balance sheets part accrued liabilities note 18 employee benefit plan two 401k defined contribution retirement savings plans “plans” one part recent shredit acquisition covering substantially domestic employees following describes two domestic plans •each participant may elect defer portion compensation subject certain limitations company may contribute 50 first 5 compensation contributed plan employee maximum 1750 contributions years ended december 31 2015 2014 2013 48 million 36 million 30 million respectively •each participant may elect defer portion compensation subject certain limitations company may contribute 100 first 3 employees eligible earnings plus 50 next 2 employees eligible earnings subject irs limits contribution fourth quarter 2015 09 million company several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2015 2014 2013 total contributions made company plans approximately 21 million 19 million 09 million respectively note 19 legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time review outstanding legal proceedings counsel quarterly disclose estimate reasonably possible loss range reasonably possible losses able make estimate reasonably possible loss range reasonably possible losses material financial statements qui tam action disclosed current report form 8k filed october 14 2015 entered settlement agreement october 8 2015 resolve claims made us previously disclosed qui tam whistle blower action filed united states district court northern district illinois captioned united states america ex rel jennifer perez v stericycle inc case 108cv2390 qui tam action originally filed seal april 28 2008 former employee relator behalf federal government qui tam action amended june 28 2010 add states california delaware florida illinois indiana nevada new hampshire new jersey new york north carolina rhode island tennessee commonwealths massachusetts virginia district columbia except new hampshire new york government entities qui tam action amended july 23 2013 allege certain claims behalf government entities drop claims behalf state new hampshire state new york pursued investigation new york false claims act resulting settlement announced new york attorney general’s office january 8 2013 brought federal false claims act comparable state statutes qui tam action alleged january 1 2003 june 30 2014 improperly increased service price certain government customers without consent contractual authorization denied liability claims made qui tam action agreed settle avoid expense burden inherent risk uncertainty litigation terms settlement agreement entered relator settlement paid 2675 million thirdparty administrator allocated among government entities determined government entities without involvement us ii 175 million full satisfaction claims relator’s counsel attorneys’ fees expenses costs admit settlement allegations qui tam action settlement cannot used admission wrongdoing liability part addition completely released claims brought relator government entities view settlement recorded pretax charge 285 million third quarter 2015 included sga expenses consolidated statement income made payments described october 21 2015 accordance terms settlement agreement february 1 2016 qui tam action dismissed prejudice pursuant settlement class action lawsuits previously disclosed served march 12 2013 class action complaint filed us district court western district pennsylvania individual plaintiff behalf similarly situated customers complaint alleges among things imposed unauthorized excessive price increases charges customers breach contracts violation illinois consumer fraud deceptive business practices act complaint sought certification lawsuit class action award class members appropriate damages injunctive relief pennsylvania class action complaint filed wake settlement state new york investigation new york false claims act arose qui tam action described following filing pennsylvania class action complaint served class action complaints filed federal court california florida illinois mississippi utah state court california complaints asserted claims allegations substantially similar made pennsylvania class action complaint cases appear followon litigation settlement state new york august 9 2013 judicial panel multidistrict litigation granted motion transfer related actions united states district court northern district illinois centralized pretrial proceedings mdl action december 10 2013 filed answer amended consolidated class action complaint mdl action generally denying allegations therein january 29 2016 plaintiffs’ attorneys filed second amended consolidated complaint motion class certification mdl action motion requests court certify class plaintiffs consisting certain small quantity customers received rate increases intend strongly contest motion believe operated accordance terms customer contracts complaints without merit continue vigorously defend lawsuits accrued amounts respect class action lawsuits cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate litigation nature uncertain unpredictable ii know whether court certify class plaintiffs class certified class would defined iii judgment comparable proceedings defendants might provide guidance making estimates junk fax lawsuit previously disclosed may 20 2015 entered settlement agreement resolve claims made us certain subsidiaries sawyer v stericycle et al case 2015 ch 07190 tcpa action class action complaint filed circuit court cook county illinois court tcpa action successor lawsuit class action complaint filed us district court northern district illinois case 114cv02070 previously disclosed dismissed pursuant parties’ joint stipulation dismissal tcpa action alleged 2010 2014 violated telephone consumer protection act 1991 amended junk fax prevention act 2005 sending facsimile advertisements plaintiffs putative class members either unsolicited andor contain valid optout notice denied liability claims made tcpa action agreed settle avoid expense burden inherent risk uncertainty litigation terms settlement agreement entered two class representatives agreed make available fund 450 million settlement fund pay class members submit valid claim form within 90day period pay incentive award class representatives pay attorneys’ fees expenses plaintiffs’ attorneys pay fees costs thirdparty settlement administrator tcpa settlement plaintiffs’ attorneys sought attorneys’ fees onethird settlement fund plus outofpocket expenses paid settlement fund part tcpa settlement admit allegations tcpa action completely released claims related faxes sent us behalf march 25 2010 april 30 2015 august 27 2015 tcpa action dismissed prejudice based claims filed connection tcpa settlement recorded pretax charge 282 million 2015 included sga expenses consolidated statement income made payments totaling 152 million respect incentive awards class representatives attorneys’ fees expenses plaintiffs’ attorneys august 2015 december 2015 paid total 130 million respect valid claims submitted class members within claims period environmental matters april 22 2014 completed acquisition psc environmental services llc psc environmental consequently became subject legal proceedings psc environmental party date psc environmental’s operations regulated federal state local laws enacted regulate discharge materials environment remediate contaminated soil groundwater otherwise protect environment result continuing regulation psc environmental frequently becomes party legal administrative proceedings involving various governmental authorities interested parties issues involved proceedings generally relate alleged violations existing permits licenses alleged responsibility federal state superfund laws remediate contamination properties owned either psc environmental parties either psc environmental prior owners certain facilities shipped wastes time psc environmental may subject fines penalties regulatory proceedings relating primarily waste treatment storage disposal facilities believe fines penalties psc environmental may pay connection pending regulatory proceedings nature individually aggregate material financial statements february 29 2016 entered statute limitations tolling agreement united states attorney’s office district utah relating office’s investigation facts underlying notice violation nov issued state utah division air quality daq resulted december 2014 settlement daq previously disclosed us attorney’s office investigating whether matters forming basis nov constitute violations clean air act federal statutes tolling agreement period march 1 2016 july 31 2016 excluded calculation time purpose determining statute limitations concerning charges violated federal statutes agreement constitute admission guilt wrongdoing part cannot construed waiver rights defenses may resulting action proceeding continue cooperate investigation note 20 selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2015 2014 eps calculated quarterly basis amounts may total calculated fullyear eps stericycle inc subsidiaries schedule iivaluation qualifying accounts 1 amounts consist primarily valuation allowances assumed acquired companies currency translation adjustments 2 amounts consist primarily valuation allowances acquired deferred tax assets business combinations item 9item 8 financial statements supplementary data report independent registered public accounting firm shareholders board directors stericycle inc opinion financial statements audited accompanying consolidated balance sheets stericycle inc company december 31 2017 2016 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2017 related notes financial statement schedule listed index item 15a collectively referred “financial statements” opinion financial statements present fairly material respects financial position company december 31 2017 2016 results operations cash flows three years period ended december 31 2017 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2017 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 23 2018 expressed adverse opinion thereon basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures include examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion ernst young llp served stericycle inc’s auditor since 1991 chicago illinois february 23 2018 2017 10k annual report stericycle inc • 59 part ii stericycle inc consolidated statements income see accompanying notes consolidated financial statements 2017 10k annual report stericycle inc • 60 part ii stericycle inc consolidated statements comprehensive income see accompanying notes consolidated financial statements 2017 10k annual report stericycle inc • 61 part ii stericycle inc consolidated balance sheets see accompanying notes consolidated financial statements 2017 10k annual report stericycle inc • 62 part ii stericycle inc consolidated statements cash flows see accompanying notes consolidated financial statements 2017 10k annual report stericycle inc • 63 part ii stericycle inc consolidated statements changes equity see accompanying notes consolidated financial statements 2017 10k annual report stericycle inc • 64 part ii stericycle inc notes consolidated financial statements millions except per share data unless otherwise indicated unless context requires otherwise “company” “stericycle” us refers stericycle inc subsidiaries consolidated basis note 1 basis presentation summary significant accounting policies description business businesstobusiness services provider focus regulated compliance solutions healthcare retail commercial businesses includes collection processing regulated specialized waste disposal collection personal confidential information secure destruction plus variety training consulting recallreturn communication compliance services incorporated 1989 presently serve diverse customer base one million customers throughout united states argentina austria australia belgium brazil canada chile france germany ireland japan luxembourg mexico netherlands portugal republic korea romania singapore spain united kingdom information company’s business segments services see part item 1 business note 16 segment reporting summary significant accounting policies basis presentation accompanying consolidated financial statements include accounts stericycle inc subsidiaries intercompany accounts transactions eliminated consolidation companys consolidated financial statements prepared accordance us gaap include assets liabilities revenue expenses whollyowned subsidiaries majorityowned subsidiaries company exercises control outside stockholders interests subsidiaries shown consolidated financial statements “noncontrolling interests use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits environmental liabilities stock compensation expense income tax liabilities accrued auto workers’ compensation insurance claims intangible asset valuations goodwill impairment estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates revenue recognition revenues regulated medical waste management services compliances services secure information destruction services recognized time waste collection compliance service revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues hazardous waste services recorded time waste received processing facility delivered third party revenues regulated recall returns management services communication 2017 10k annual report stericycle inc • 65 part ii solutions recorded time services performed revenues product sales recognized time goods shipped ordering customer charges related sales taxes international value added tax vat similar pass taxes included revenue effective january 1 2018 company adopt asu 201409 “revenue contracts customers topic 606 using modified retrospective method company apply certain practical expedients including right invoice criteria met company concluded material change revenue recognition new standard certain costs associated obtaining contracts customers capitalized amortized expected economic life contract process finalizing measurement cumulative effect adopting new guidance primarily related capitalizing commission costs recognition first quarter 2018 10q filing cash equivalents consider highly liquid investments maturity less three months purchased cash equivalents cash equivalents carried cost accounts receivable allowance doubtful accounts receivable consist amounts due us normal business activities accounts receivable balance includes amounts related vat similar international passthrough taxes require collateral part standard trade credit policy accounts receivable balances determined past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectability accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts approximately 10 accounts receivable year ended december 31 2017 2016 2015 bad debt expense 323 million 418 million 137 million respectively financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable derivatives longterm debt financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater approximately 10 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses property plant equipment property plant equipment stated cost depreciation amortization includes depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows capitalized interest capitalize interest incurred associated projects construction duration asset construction period year ended december 31 2017 capitalized interest 16 million capitalized interest 2016 2015 2017 10k annual report stericycle inc • 66 part ii goodwill identifiable intangible assets goodwill amortized subject annual impairment test perform october 1 whenever indicators impairment exist indefinite lived intangibles may assessed using either qualitative quantitative approach qualitative approach first determines morelikelythannot fair value asset less carrying value determination made impairment test complete however determined likely impairment quantitative assessment must made one determination whether use qualitative approach time since last quantitative approach fourth quarter 2017 company performed annual impairment test indefinite lived intangibles goodwill using qualitative approach certain assets quantitative approach remaining assets used quantitative approach assess goodwill impairment fair value reporting unit calculated using income approach including discounted cash flows validated using market approach income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows calculated using management assumptions growth rates including longterm growth rates capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based calculated weighted average cost capital adjusted reporting units based size country company specific risk premiums market approach compares valuation multiples similar companies associated reporting unit reconcile calculated fair values market capitalization fair value compared carrying value including goodwill fair value excess carrying value related goodwill impaired fair value less carrying value recognize impairment loss amount carrying value exceeds fair value performed annual good impairment test october 1 2017 recognized 650 million noncash goodwill impairment charges latin america reporting unit discussion see note 5 goodwill intangible assets impairment longlived assets longlived assets property plant equipment intangible assets amortized reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable circumstances require longlived asset group held used tested possible impairment company first compares undiscounted cash flows expected generated longlived asset group carrying amount carrying amount longlived asset group recoverable undiscounted cash flow basis impairment recognized extent carrying amount exceeds fair value longlived assets disposal groups classified held sale recorded lower carrying amount fair value less estimated selling costs longlived assets depreciated amortized classified held sale insurance workers’ compensation autofleet property employeerelated health care benefits obtained using high deductible insurance policies thirdparty administrator used process claims require workers’ compensation autofleet property claims reported within 24 hours result accrue liabilities based upon claim reserves established thirdparty administrator end reporting period accruals include estimate 2017 10k annual report stericycle inc • 67 part ii claims incurred yet reported workers compensation autofleet employee health insurance benefit liability based historical claims experience restructuring charges involuntary termination benefits accrued upon commitment termination plan benefit arrangement communicated affected employees liabilities determined probable estimable depending existence substantive plan severance termination costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contract termination costs recorded contracts terminated cease use leased facility longer derive economic benefit contract exit costs expensed incurred discussion see note 3 restructuring divestitures assets held sale stockbased compensation company recognizes stockbased compensation expense based estimate grantdate fair value stockbased awards include stock options restricted stock units performance stock units expense generally recognized straightline basis service period awards expected vest present stockbased compensation expense within consolidated statements income based classification respective employees cash compensation discussion see note 12 stockbased compensation income taxes subject income taxes us numerous foreign jurisdictions compute provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax basis assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected realized settled significant judgments required order determine realizability deferred tax assets assessing need valuation allowance evaluate significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods tax liabilities recorded management’s judgment tax position meet likely ie likelihood fifty percent threshold recognition tax positions meet likely threshold tax liability may still recorded depending management’s assessment tax position ultimately settled company records interest penalties unrecognized tax benefits provision income taxes discussion see note 8 income taxes lease asset retirement obligations company classifies leases inception either operating capital leases may receive renewal expansion options rent holidays leasehold improvement incentives certain lease agreements company recognizes operating lease costs straightline basis taking account adjustments free escalating rental payments deferred payment terms additionally lease incentives accounted reduction lease costs lease term rent expense associated operating lease obligations relate delivery services presented cost revenues “cor” remaining classified within selling general administrative expenses “sga” consolidated statements income minimum lease payments made capital leases apportioned interest expense reduction related capital lease obligations classified within accrued liabilities current portion longterm debt consolidated balance sheets 2017 10k annual report stericycle inc • 68 part ii company establishes assets liabilities present value estimated future costs retire longlived assets termination expiration lease assets amortized lease term recorded liabilities accreted future value estimated retirement costs related amortization accretion expenses presented within cor leased asset used delivery services remaining expenses presented within sga consolidated statements income foreign currency assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component accumulated comprehensive loss consolidated balance sheets foreign currency gains losses resulting transactions denominated currencies entity’s functional currency including foreign currency gains losses intercompany balances longterm investment nature included within expenseincome net consolidated statements income reclassifications certain amounts previously issued financial statements reclassified conform current period presentation 2017 presented certain rent utility depreciation expenses cor historically classified sga year ended december 31 2016 reclassified 150 million 73 million rent utility expenses 77 million depreciation expenses sga cor conform current year presentation year ended december 31 2015 reclassified 114 million 72 million rent utility expenses 42 million depreciation expenses sga cor conform current year presentation conform current period cash flows presentation reclassified 136 million net repayments bank overdrafts operating activities financing activities year ended december 31 2016 43 million net proceeds bank overdrafts operating activities financing activities year ended december 31 2015 new accounting standards adoption new accounting standards intangibles goodwill simplifying test goodwill impairment effective january 2017 company early adopted asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment guidance eliminates step 2 goodwill impairment test requires goodwill impairment measured amount reporting unit’s carrying amount exceeds fair value exceed carrying amount goodwill applied standard measure goodwill impairment recognized related latin america reporting unit statement cash flows effective january 2017 company early adopted guidance asu 201615 “statement cash flows” topic 230 guidance clarifies diversity practice statement cash flows recognize certain transactions including classification payment contingent consideration acquisitions financing operating activities based results company’s analysis 2017 10k annual report stericycle inc • 69 part ii impact financial statements treatment relevant affected items within consolidated statement cash flows consistent requirements guidance accounting standards issued yet adopted revenue contracts customers may 2014 fasb issued asu 201409 revenue contracts customers topic 606 guidance provide single comprehensive revenue recognition model contracts customers revenue guidance contains principles entity apply determine measurement revenue timing recognized underlying principle entity recognize revenue depict transfer goods services customers amount entity expects entitled exchange goods services amended authoritative guidance associated revenue recognition effective company january 1 2018 company adopt asu using modified retrospective method company apply certain practical expedients including right invoice criteria met company concluded material change revenue recognition new standard company capitalize incremental costs obtaining revenue generating contracts sales commissions paid connection multiyear service contracts amortized economic life contract process finalizing measurement cumulative effect adopting new guidance primarily related capitalizing commission costs recognition first quarter 2018 form 10q filing definition business january 5 2017 fasb issued asu 201701 “clarifying definition business” topic asc 805 guidance clarify definition business objective adding guidance assist entities evaluating whether transactions accounted acquisitions disposals assets businesses amendments asu provide screen determine integrated set assets activities collectively referred “set” business screen requires substantially fair value gross assets acquired disposed concentrated single identifiable asset group similar identifiable assets set business screen reduces number transactions need evaluated screen met amendments require considered business set must include minimum input substantive process together significantly contribute ability create output remove evaluation whether market participant could replace missing elements asu effective public business entities annual periods beginning december 15 2017 including interim periods therein due number acquisitions company completes year may instances acquisition determined acquisition assets instead business company believes minority acquisitions completed year material impact financial statements leases february 2016 fasb issued asu 201602 “leases” topic 842 guidance require lessees record rightofuse asset lease liability balance sheet leases terms 12 months asu also requires certain quantitative qualitative disclosures accounting guidance lessors largely unchanged guidance applied modified retrospective basis asu effective company beginning january 1 2019 second quarter 2017 company engaged third party service provider assist us implementation new leases standard company currently gathering documenting analyzing lease agreements related asu anticipates recognizing material rightofuse assets related liabilities upon 2017 10k annual report stericycle inc • 70 part ii adoption additionally company continuing monitor industry activities additional guidance provided changed regulators standards setters accounting profession adjust company’s assessment implementation plans accordingly intraentity transfers assets inventory october 2016 fasb issued asu 201616 “intraentity transfers assets inventory” asu requires income tax consequences intraentity transfer asset inventory recognized transfer occurs instead asset sold outside party asu effective annual reporting periods beginning december 15 2017 including interim reporting periods within annual reporting periods early adoption permitted company expect adoption material impact financial statements compensation stock compensation may 2017 fasb issued asu 201709 “compensation stock compensation” topic 718 scope modification accounting asu clarifies account change terms conditions sharebased payment award modification new guidance modification accounting required fair value vesting conditions classification award equity liability changes result change terms conditions asu effective prospectively annual period ending december 31 2018 interim periods within annual period early adoption permitted company expect adoption material impact financial statements derivatives hedging august 2017 fasb issued asu 201712 derivatives hedging topic 815 targeted improvements accounting hedging activities asu 201712 asu 201712 amends hedge accounting recognition presentation requirements objective improving financial reporting hedging relationships better portray economic results entity’s risk management activities financial statements enhance transparency understandability hedge transactions addition asu 201712 makes improvements simplify application hedge accounting guidance asu 201712 effective us january 1 2019 early adoption permitted company expect adoption materially impact financial statements note 2 acquisitions years ended december 31 2017 2016 2015 company completed 30 31 43 acquisitions respectively acquisitions considered business combinations current guidance 2017 10k annual report stericycle inc • 71 part ii following table summarizes locations services type acquisitions following table summarizes acquisition date fair value consideration transferred acquisitions completed years ended december 31 2017 2016 2015 respectively 2017 10k annual report stericycle inc • 72 part ii financial reporting purposes acquisitions accounted using acquisition method accounting acquisitions resulted recognition goodwill financial statements reflecting premium paid acquire businesses believe complementary existing operations fit growth strategy year ended december 31 2017 recognized increase goodwill 465 million related current year acquisitions excluding effect foreign currency translation approximately 445 million goodwill recognized year ended december 31 2017 deductible income taxes year ended december 31 2017 recognized increase estimated fair value acquired customer relationships current year acquisitions 282 million excluding effect foreign currency translation amortizable lives 10 30 years fair value consideration transferred business combination allocated tangible intangible assets assumed acquisition date remaining unallocated amount recorded goodwill allocations acquisition price recent acquisitions prepared preliminary basis pending completion certain intangible asset valuations finalization opening balance sheet following table summarizes preliminary purchase price allocation current period acquisitions adjustments purchase price allocations years ended december 31 2017 2016 2015 results operations acquired businesses included consolidated statements income date acquisition pro forma results operations acquisitions presented pro forma effects individually aggregate material company’s consolidated results operations december 31 2017 purchase accounting completed 2016 acquisitions following table summarizes adjustments consideration transferred prior year acquisitions 2017 10k annual report stericycle inc • 73 part ii following table summarizes various adjustments prior year acquisitions 2017 note 3 restructuring divestitures assets held sale restructuring business transformation stericycle focused driving longterm growth profitability delivering enhanced shareholder value part business strategy third quarter 2017 initiated comprehensive multiyear business transformation objective improve longterm operational financial performance business transformation based strategic vision build bestinclass enterprise performance management “epm” operating model enable company operate efficiently provide enhanced experience customers better capitalize future growth opportunities establish greater controls oversight drive consistent results additionally key component business transformation implementation enterprise resource planning “erp” system leverage standard processes throughout organization accelerate decision making expedite acquisition integration remediate compliance control issues enable realtime analytics key initiatives business transformation include • portfolio rationalization executing comprehensive review company’s global service lines identify pursue divestiture nonstrategic assets • operational optimization standardizing route planning logistics modernizing field operations driving network efficiency across facilities • organizational excellence efficiency redesigning company’s organizational structure optimize resources align around global shared business services model • commercial excellence aligning sales service organizations around customer standardizing customer relationship management process expanding customer selfservice options • strategic sourcing reducing spend global procuretopay processes leveraging organizational scale year ended december 31 2017 incurred restructuring charges 139 million related employee termination benefits 115 million noncash longlived assets impairment charges 24 million costs incurred across segments december 31 2017 remaining liability unpaid employee termination costs 22 million related business transformation expected paid within current year employee termination payments complete december 31 2017 company believes 2017 10k annual report stericycle inc • 74 part ii recorded restructuring liability adequate revisions current estimates may recorded future periods based new information becomes available could additional initiatives future streamline operations company expects expenses related workforce reductions facility rationalization costs restructuring plans finalized related expenses estimable divestitures fourth quarter 2017 sold certain assets liabilities south africa 73 million resulting nontaxable gain 30 million included sga consolidated statements income second quarter 2017 sold certain assets uk 12 million resulting pretax loss 57 million 46 million net tax included sga consolidated statements income fourth quarter 2016 sold certain assets uk 08 million resulting pretax loss 16 million 13 million net tax included sga consolidated statements income divestitures 2015 divestiture activity 2017 2016 recorded within international rcs segment assets liabilities held sale december 31 2017 certain international operations met criteria classified held sale recorded 68 million noncash impairment charge sga consolidated statements income related changes fair value assets held sale uk assets liabilities disposal groups presented assets held sale liabilities held sale consolidated balance sheet december 31 2016 certain international operations met criteria classified held sale recorded 255 million impairment charge sga consolidated statements income adjust carrying value asset group fair value less estimated costs sell following table presents information related major classes assets liabilities classified held sale consolidated balance sheet december 31 determined operations included table meet criteria classified discontinued operations applicable guidance 2017 10k annual report stericycle inc • 75 part ii note 4 property plant equipment property plant equipment december 31 2017 2016 consisted following 2017 2015 impaired 73 million 39 million respectively property plant equipment due rationalizing certain operations primarily international rcs segment property plant equipment impairments 2016 note 5 goodwill intangible assets goodwill changes carrying amount goodwill years ended december 31 2017 2016 reportable segment “other” category follows form 10q quarter ended september 30 2017 disclosed process completing valuation reporting units assistance external valuation specialist time evaluating impact prolonged declining market trends latin america continued softness company’s manufacturing industrial regional hazardous waste business experienced cost pressures latin america due strength local competition resulting increasing inability pass along inflationary price increases customers addition cost savings initiatives anticipated 2017 taken longer expected implement 2017 10k annual report stericycle inc • 76 part ii extending 2018 fourth quarter 2017 finalized long rang plan lrp reflect challenging conditions latin america partially offset incorporating impact business transformation prospective results result recorded 650 million noncash goodwill impairment charge related company’s latin america reporting unit reflected part sga consolidated statements income impairment charge recognized amount carrying value latin america reporting unit exceeded fair value result factors described lrp overall decline forecasted financial information included income approach valuation model fair value reporting unit classified level 3 measurement within fair value hierarchy due significant unobservable inputs discount rates projections revenue cost revenue operating expense growth rates longterm growth rates income tax rates current period adjustments goodwill certain prior year acquisitions primarily due finalization intangible asset valuations among opening balance sheet adjustments intangible assets december 31 2017 2016 values intangible assets follows 2017 10k annual report stericycle inc • 77 part ii changes carrying amount intangible assets since january 1 2016 follows indefinitelived intangible assets include permits certain tradenames determined permits certain tradenames indefinite lives due ability renew minimal additional cost therefore amortized perform annual impairment test october 1 2017 2016 2015 impaired 210 million 14 million 42 million respectively intangibles impaired 2017 included 140 million operating permits 58 million tradenames 12 million customer relationships due rationalizing certain operations across segments finitelived intangible assets amortized useful lives using straightline method customer relationships useful lives ranging 5 30 years based upon type customer weighted average remaining useful life 119 years covenants nottocompete useful lives ranging 5 14 years weighted average remaining useful life 26 years tradenames useful lives ranging 4 40 years weighted average remaining useful life 155 years intangibles mainly consist landfill air rights weighted average remaining useful life 167 years evaluate useful life intangible assets annually determine whether events circumstances warrant revision remaining useful life changes reflected prospectively intangible asset amortized revised remaining useful life fourth quarter 2017 company performed annual assessment useful life finitelived intangibles concluded domestic medical waste customer relationship intangibles revised 40 years 30 years due change mix small large quantity customer relationships change life change estimate accounted prospectively estimated increase amortization expense approximately 70 million annually years ended december 31 2017 2016 2015 aggregate intangible asset amortization expense 1184 million 1293 million 455 million respectively 2017 10k annual report stericycle inc • 78 part ii estimated amortization expense next five years based upon foreign exchange rates december 31 2017 follows years ended december 31 note 6 accrued liabilities accrued liabilities december 31 2017 2016 consisted following items note 7 debt longterm debt consisted following december 31 2017 10k annual report stericycle inc • 79 part ii senior credit facility term loan private placement notes require us comply financial reporting covenants restrictions including restriction dividend payments december 31 2017 compliance financial debt covenants senior credit facility term loan private placement notes rank pari passu unsecured debt obligations december 31 2017 2016 1308 million 1380 million respectively committed outstanding letters credit senior credit facility unused portion revolving credit facility 5975 million 6549 million december 31 2017 2016 respectively company entered credit agreement “credit agreement” dated november 17 2017 amended restated consolidated company’s existing revolver agreement dated june 4 2014 company’s existing term loan credit agreement dated august 15 2015 credit agreement provided term loan facility 9500 million revolving credit facility 12 billion proceeds credit agreement used closing date refinance loans credit extensions made existing revolver term loan credit facilities company applied provisions asc 47050 “modifications extinguishments” accounted refinance modification obligations credit agreement unsecured credit agreement contains financial covenant maintain consolidated leverage ratio 375 100 end fiscal quarter may increased 400 100 2 consecutive quarters fiscal quarter ending september 30 2018 company’s option following settlement payment respect pending small quantity customer class action lawsuit see note 18 legal proceedings consolidated leverage ratio pro forma basis greater 350 100 credit agreement matures november 17 2022 payments due longterm debt excluding capital lease obligations five years subsequent december 31 2017 follows years ended december 31 2017 2016 2015 paid interest 858 million 888 million 680 million respectively 2017 10k annual report stericycle inc • 80 part ii property capital leases included within property plant equipment consolidated balance sheets follows december 31 amortization related capital leases included within depreciation expense minimum future lease payments capital leases follows note 8 income taxes us international components income taxes consisted following years ended december 31 2017 2016 2015 2017 10k annual report stericycle inc • 81 part ii significant components income tax expense years ended december 31 2017 2016 2015 follows reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 2017 2016 2015 follows cash payments income taxes 1289 million 1115 million 1251 million years ended december 31 2017 2016 2015 respectively deferred tax liabilities assets december 31 2017 2016 follows 2017 10k annual report stericycle inc • 82 part ii december 22 2017 us tax cuts jobs act 2017 “tax act” signed law making significant changes internal revenue code changes include limited corporate income tax rate decrease 35 21 effective tax years beginning december 31 2017 transition us international taxation worldwide tax system territorial system onetime transition tax mandatory deemed repatriation cumulative foreign earnings december 31 2017 tax act results related change assertion expected foreign withholding taxes sec staff issued staff accounting bulletin 118 sab 118 december 2017 address application us gaap situations registrant necessary information available prepared analyzed including computations reasonable detail complete accounting certain income tax effects tax act guidance specifies income tax effects tax act reasonably estimated accounting measurement analysis yet complete entities report provisional amounts reporting period includes enactment date provisional amounts adjusted measurement period exceed one year enactment date additionally income tax effects tax act cannot reasonably estimated entities report provisional amounts income tax effects first reporting period reasonable estimate determined exceed one year enactment date accordance sab 118 understanding tax act guidance available date filing company calculated best estimate impact tax act year end 2017 income tax benefitprovision result recorded income tax benefit 1298 million fourth quarter 2017 period legislation enacted provisional amount related remeasurement certain deferred tax assets liabilities based rates expected reverse future onetime transition tax mandatory deemed repatriation foreign earnings related expected foreign withholding taxes earnings reflected table provisional estimates may impacted need analysis future clarification guidance regarding available tax accounting methods elections earnings profits computations clarification definition cash equivalents state tax conformity federal tax changes net tax benefit recognized related tax act follows section 965 transition tax based deemed repatriation foreign earnings profits 1492 million december 31 2017 result tax act company reevaluated assertion related indefinite reinvestment unremitted foreign earnings recorded provisional deferred tax liability amount 136 million expected withholding taxes related remittances certain foreign subsidiaries although company recorded deferred tax liability company still evaluating tax act affect company’s accounting position related indefinite reinvestment unremitted foreign earnings measurement period company may reflect adjustments provisional amount upon obtaining preparing analyzing necessary information complete accounting asc 740 income taxes subsequent adjustment 2017 10k annual report stericycle inc • 83 part ii amounts recorded current tax expense quarter 2018 analysis complete tax act also establishes global intangible lowtaxed income gilti provisions impose tax foreign income excess deemed return intangible assets foreign corporations company process evaluating impact prospective taxes gilti yet determined whether accounting policy recognize deferred taxes basis differences expected affect amount gilti inclusion upon reversal recognize taxes gilti expense period incurred company still evaluating prospective accounting policy taxes gilti provisional estimates tax effects tax act reported basis taxes gilti recognized tax expense year incurred period expense december 31 2017 net operating loss carryforwards us federal state income tax purposes fully utilized excluding net operating loss carryforwards related acquisitions certain limitations placed december 31 2017 net operating loss carryforwards foreign domestic acquisitions approximately 1182 million certain net operating loss carryforwards begin expire 2018 tax benefit net operating losses approximately 383 million december 31 2017 valuation allowance 86 million recorded offsetting tax benefit december 31 2017 company recorded valuation allowance 75 million tax deductible goodwill file income tax returns united states various states certain foreign jurisdictions exceptions longer subject us federal state local nonus income tax examinations tax authorities years prior 2012 us internal revenue service currently conducting audit 2014 corporate income tax return significant adjustments anticipated company recorded liabilities cover certain uncertain tax positions uncertain tax positions relate additional taxes company may required pay various tax jurisdictions course examinations various taxing authorities proposed adjustments may asserted company evaluates items casebycase basis adjusts accrual uncertain tax positions deemed necessary estimated amount liability associated company’s uncertain tax positions may significantly increase decrease within next twelve months cannot reasonably estimated total amount unrecognized tax benefit december 31 2017 274 million amount uncertain tax positions recognized would affect effective tax rate approximately 222 million recognized interest penalties related income tax reserves amount 03 million 13 million 07 million years ended december 31 2017 2016 2015 respectively component income tax expense 2017 10k annual report stericycle inc • 84 part ii following table summarizes aggregate changes unrecognized tax benefits years ended december 31 2017 2016 table includes amounts relate uncertain tax positions acquired companies purchase agreements acquire stock target generally provide seller liable indemnified stericycle income tax liabilities periods prior acquisition stericycle responsible unrecognized tax benefits related interest penalties periods acquisition note 9 fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy distinguishes 1 market participant assumptions developed based market data obtained independent sources observable inputs 2 entitys assumptions market participant assumptions developed based best information available circumstances unobservable inputs fair value hierarchy consists three broad levels described level 1 quoted prices active markets identical assets liabilities highest priority level 2 observable inputs quoted prices active markets identical assets liabilities quoted prices identical similar assets liabilities inactive markets inputs observable corroborated observable market data substantially full term assets liabilities level 3 inputs generally unobservable typically reflect management’s estimate assumptions market participants would use pricing asset liability lowest priority financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness nonperformance risk considered fair value measurements noted movements items fair value hierarchies periods presented 2017 10k annual report stericycle inc • 85 part ii following table summarizes basis used measure financial assets liabilities carried fair value recurring basis consolidated balance sheets derivative financial instruments use market approach valuation technique based observable market transactions spot forward rates recorded 04 million asset related fair value us dollarcanadian dollar foreign currency swap classified assets december 31 2017 objective swap offset foreign exchange risk us dollar equivalent cash outflows canadian subsidiary contingent consideration liabilities recorded using level 3 inputs 124 million december 31 2017 46 million classified current liabilities contingent consideration liabilities 241 million december 31 2016 81 million classified current liabilities contingent consideration represents amounts expected paid part acquisition consideration certain future events occur events usually targets revenues earnings milestones related business acquired arrive fair value contingent consideration applying weighted probability potential payment outcomes calculation potential outcomes dependent past financial performance management assumptions future performance financial performance measures fully met maximum liability would 157 million december 31 2017 contingent consideration liabilities reassessed reporting period reflected consolidated balance sheets part current liabilities 2017 10k annual report stericycle inc • 86 part ii changes contingent consideration reflected table addition assets liabilities recorded fair value recurring basis company required record certain assets liabilities fair value nonrecurring basis generally result acquisitions remeasurement assets resulting impairment charges see note 2 acquisitions divestitures assets held sale note 3 restructuring divestitures assets held sale discussion fair value assets liabilities associated acquisitions assets held sale fair value debt december 31 2017 fair value company’s debt obligations estimated using level 2 inputs 274 billion compared carrying amount 275 billion december 31 2016 fair value company’s debt obligations estimated using level 2 inputs 297 billion compared carrying amount 296 billion fair values estimated using income approach applying market interest rates comparable instruments accounts receivable accounts payable accrued liabilities financial assets liabilities respectively carrying values approximate fair value using level 3 inputs note 10 commitments contingencies environmental remediation liabilities record liability environmental remediation liability becomes probable costs damages reasonably estimated accrue environmental remediation costs undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable accruals based currently available information estimated timing remedial actions existing technology enacted laws regulations liability environmental remediation included consolidated balance sheets current liabilities within accrued liabilities noncurrent liabilities within liabilities december 31 2017 2016 total environmental remediation liabilities recorded 308 million 309 million 57 million 24 million respectively presented accrued liabilities consolidated balance sheets respectively project payments approximately 30 years 2017 10k annual report stericycle inc • 87 part ii year ended december 31 2017 recorded environmental liability 20 million related portion hazardous waste facility mexico continue assess level remediation well potentially responsible parties adjust estimate future appropriate operating lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space landfills operating lease agreements expire various dates latest maturity 2043 leases properties contain renewal provisions years ended december 31 2017 2016 2015 rent expense 1862 million 1816 million 1390 million respectively included within cor sga consolidated statements income minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2017 next five years aggregate follows asset retirement obligations asset retirement obligations required perform law contract asset permanently taken service obligations expected paid many years future expected funded general company resources time removal december 31 2017 2016 total asset retirement obligation liabilities recorded 182 million 101 million respectively included noncurrent liabilities within liabilities unconditional purchase commitments company entered noncancelable arrangements thirdparties primarily related information technology products services december 31 2017 future payments contractual obligations recognized consolidated balance sheets follows 2017 10k annual report stericycle inc • 88 part ii note 11 retirement employee benefit programs defined contribution plans 401k defined contribution retirement savings plan “plan” covering substantially domestic employees participant may elect defer portion compensation subject certain limitations company may contribute 50 compensation contributed plan employee maximum 3000 per annum years ended december 31 2017 2016 2015 contributions 89 million 59 million 48 million respectively employees associated 2015 shredit acquisition allowed continue participate former shredit 401k defined contribution retirement savings plan years ended december 31 2016 2015 contributions 34 million 09 million respectively shredit plan officially closed employees converted plan effective january 1 2017 company also several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2017 2016 2015 total contributions made company plans approximately 34 million 26 million 21 million respectively multiemployer defined benefit pension plans participate two trusteemanaged multiemployer defined benefit pension plans “multiemployer pension plans” employees covered collective bargaining agreements risks participating multiemployer pension plans different singleemployer plans assets contributed multiemployer pension plan one employer may used provide benefits employees former employees participating employers ii participating employer stops contributing plan unfunded obligations plan may required assumed remaining participating employers iii choose stop participating multiemployer pension plans event significantly reduce eliminate need participate employee layoffs closure location may required pay plans withdrawal amount based underfunded status plan based upon recent information available one plans participate “critical” status due accumulated funding deficiency adopted rehabilitation plan address funding deficiency position following table outlines participation multiemployer pension plans 1 zone status defined department labor pension protection act 2006 represents level plan funded plans red zone less 65 funded plans green zone least 80 funded status based information received pension plans certified pension plans actuary 2017 10k annual report stericycle inc • 89 part ii 2 fiprp status column indicates plans funding improvement plan fip” rehabilitation plan rp implemented pending recent pension protection act zone status available 2017 2016 plans’ yearend december 31 2016 2015 respectively 3 multiemployer defined benefit pension plan certified endangered seriously endangered critical may begin levy statutory surcharge contribution rates authorized surcharge rate 5 first 12 months 10 periods thereafter certain conditions met contributing employers however may eliminate surcharge entering collective bargaining agreement meets requirements applicable fip rp 4 company listed form 5500 pension plan private sanitation union local 813 ibt individually significant contributing 5 total contributions plan years ended december 31 2016 2015 date financial statements issued forms 5500 available plans year 2017 note 12 stock based compensation december 31 2017 following incentive stock plans • 2017 incentive stock plan stockholders approved may 2017 • 2014 incentive stock plan stockholders approved may 2014 • 2011 incentive stock plan stockholders approved may 2011 • 2008 incentive stock plan stockholders approved may 2008 • 2005 incentive stock plan stockholders approved april 2005 • 2000 nonstatutory stock option plan expired february 2010 • employee stock purchase plan espp stockholders approved may 2001 amended restated may 2017 • canadian employee stock purchase plan “canada espp” stockholders approved may 2016 december 31 2017 reserved total 9295973 shares issuance incentive stock plans terms stock options authorized 2017 plan 2014 plan 2011 plan 2008 plan 2005 plan provide grant nonstatutory stock options nsos incentive stock options isos restricted stock units “rsus” performancebased restricted stock units “psus” intended qualify section 422 internal revenue code 2000 plan provides grant nsos plans authorize awards officers employees consultants directors exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 8 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options employee stock purchase plan october 2000 board directors adopted employee stock purchase plan espp stockholders approved may 2001 made effective july 1 2001 espp authorizes 2017 10k annual report stericycle inc • 90 part ii 1299999 shares common stock substantially employees may purchase payroll deductions price equal 85 fair market values stock end sixmonth offering period employees payroll deductions stock purchase may exceed 5000 offering period 2017 2016 2015 111528 shares 89100 shares 68039 shares respectively issued espp may 2017 shareholders approved ‘amended restated espp plan’ authorizes issuance additional 300000 shares december 31 2017 390835 shares available issuance espp plan march 2016 board directors approved canadian employee stock purchase plan “canada espp” stockholders approved may 2016 canada espp authorizes 100000 shares common stock substantially canadian employees may purchase payroll deductions price equal 95 fair market values stock end sixmonth offering period employees payroll deductions stock purchase may exceed 5000 offering period 2017 2016 1766 shares 756 shares respectively issued canada espp december 31 2017 97478 shares available issuance canada espp plan stock based compensation expense 2017 changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding following table presents total stockbased compensation expense resulting stock option awards rsus psus espp included consolidated statements income stock options granted directors vest one year options granted officers employees generally vest five years expense related options graded vesting recognized using straightline method vesting period stock option activity year ended december 31 2017 summarized follows december 31 2017 281 million total unrecognized compensation expense related stock options expected recognized weighted average period 264 years 2017 10k annual report stericycle inc • 91 part ii following table sets forth intrinsic value options exercised years ended december 31 exercise intrinsic value represents total pretax intrinsic value difference fair value trading day option exercised exercise price associated respective option following table sets forth information related outstanding exercisable options years ended december 31 company uses historical data estimate expected life volatility estimated fair value stock options time grant using blackscholes option pricing model follows restricted stock units fair value rsus based closing price companys common stock date grant amortized expense service period rsus vest end three five years 2017 plan includes share reserve rsus granted 11 ratio 2008 2011 2014 plans reserve 21 ratio rsus granted 2005 plan following table sets forth information related rsus years ended december 31 2017 10k annual report stericycle inc • 92 part ii summary status nonvested rsus changes year ended december 31 2017 follows december 31 2017 177 million total unrecognized compensation expense related rsus expected recognized weighted average period 355 years fair value units vested year ended december 31 2017 29 million units vested years ended december 31 2016 2015 performancebased restricted stock units executive officers granted psus 2017 psus vest three equal annual installments based achievement predetermined annual earnings per share performance goals approved compensation committee units granted represent right receive one share company’s common stock specified future date maximum number common shares issuable upon vesting psus first installment 11149 shares weighted average fair value grant date 8285 per share total fair value 09 million year ended december 31 2017 25 performance goal met result 2787 shares vest february 2018 note 13 preferred stock december 31 2017 1000000 authorized shares preferred stock 673380 shares issued outstanding mandatory convertible preferred stock december 31 2016 1000000 authorized shares preferred stock 726500 shares issued outstanding series mandatory convertible preferred stock offering september 15 2015 completed registered public offering 7700000 depositary shares representing 110th interest share 525 series mandatory convertible preferred stock par value 001 per share series preferred stock public offering price 10000 per depository share total gross proceeds 7700 million unless earlier converted redeemed share series preferred stock automatically convert 58716 73394 shares common stock subject antidilution adjustments mandatory conversion date expected september 15 2018 number shares common stock issuable conversion determined based volumeweighted average price common stock 20 trading day period commencing including 23rd scheduled trading day prior september 15 2018 subject certain restrictions time prior september 15 2018 holders series preferred stock may elect convert portion shares common stock minimum conversion rate 58716 shares common stock per share series preferred stock subject adjustment dividends shares series preferred stock payable cumulative basis declared board directors authorized committee thereof annual rate 525 2017 10k annual report stericycle inc • 93 part ii liquidation preference 1000 per share correspondingly 10000 per share respect depositary shares dividends may payable cash subject certain limitations shares common stock combination cash shares common stock march 15 june 15 september 15 december 15 year commencing december 15 2015 including september 15 2018 declared paid dividends 363 million 394 million 101 million preferred stock shareholders 2017 2016 2015 respectively following table provides information repurchases depository shares mandatory convertible preferred stock year ended december 31 2017 years 2017 2016 repurchases mandatory convertible preferred stock resulted 173 million 113 million respectively increase retained earnings redeemed preferred stock discount 531200 depository shares equivalent 53120 units preferred stock note 14 earnings per common share basic earnings per share computed dividing income available common shareholders weightedaverage number shares common stock outstanding period diluted earnings per share computed dividing income available common shareholders weightedaverage number shares common stock outstanding period increased include number additional shares common stock would outstanding potentially dilutive securities issued potentially dilutive securities include outstanding stock options shares purchased company’s employee stock purchase plan rsus psus assumed conversion mandatory convertible preferred stock effect potentially dilutive securities reflected diluted earnings per share application treasury stock method outstanding stockbased compensation awards treasury stock method increase fair market value company’s common stock result greater dilutive effect potentially dilutive securities issue mandatory convertible preferred stock use ifconverted method ifconverted method preferred dividend applicable convertible preferred stock added back adjustment numerator mandatory convertible preferred shares assumed converted common shares beginning period later time issuance resulting 2017 10k annual report stericycle inc • 94 part ii common shares included denominator applying ifconverted method conversion shall assumed purposes computing diluted eps effect would antidilutive numerator also adjusted premium discount arising redemption preferred stock following table sets forth computation basic diluted earnings per share 1 2017 2016 2015 weighted average common shares thousands issuable upon assumed conversion mandatory convertible preferred stock totaling 5104 5528 1648 respectively excluded computation diluted earnings per share conversion would antidilutive 2017 2016 2015 options purchase shares thousands 4724 3411 818 respectively exercise prices 625014156 834914156 1170914156 included computation diluted earnings per share effect would antidilutive 2017 2016 rsus thousands 218 48 respectively included computation diluted earnings per share effect would antidilutive 2017 company outstanding psus eligible vest maximum 11 thousand shares common stock subject achievement specified performance conditions contingently issuable shares excluded computation diluted earnings per share based current period results shares would issuable end reporting period end contingency period outstanding psus excluded earnings per share calculation 2017 performance conditions satisfied end respective periods 2017 10k annual report stericycle inc • 95 part ii note 15 accumulated comprehensive loss following table sets forth changes components accumulated comprehensive loss 2017 2016 2015 years ended december 31 2017 2016 2015 net tax impact unrealized losses gains cash flow hedges accumulated comprehensive income 07 million 08 million 22 million respectively note 16 segment reporting three reportable segments • domestic canada rcs • international rcs • includes domestic crs corporate shared services domestic canada international regulated waste compliance services segments include medical waste disposal pharmaceutical waste disposal hazardous waste management sustainability solutions expired unused inventory secure information destruction documents emedia training consulting sterisafe® clinical services programs regulatory compliance services segment includes domestic communication related services operations consists services including inboundoutbound communication automated patient reminders online scheduling notifications product retrievals product returns quality audits well expenses related corporate support shared services functions stockbased compensation 2017 10k annual report stericycle inc • 96 part ii following tables show financial information companys reportable segments following table reconciles companys primary measure segment profitability adjusted ebita income operations 2017 10k annual report stericycle inc • 97 part ii note 17 geographic area services information following table presents consolidated revenues longlived assets geographic region following table presents consolidated revenues service note 18 legal proceedings operate highly regulated industries must deal regulatory inquiries investigations time may initiated variety reasons also involved variety civil litigation time company establishes accrued liability loss contingencies related legal regulatory matters loss probable reasonably estimable loss probable loss reasonably estimable liability recorded accruals represent managements best estimate probable losses cases may exposure loss excess amounts accrued legal regulatory matters inherently involve significant uncertainties based among factors stage proceedings developments applicable facts law unpredictability ultimate determination merits claim defenses company may assert claim amount damages may awarded companys accrued liabilities loss contingencies related legal regulatory matters may change future result new developments including limited occurrence new legal matters changes law regulatory environment adverse favorable rulings newly discovered facts relevant matter changes strategy matter regardless outcome litigation adverse impact 2017 10k annual report stericycle inc • 98 part ii company defense settlement costs diversion management resources factors contract class action lawsuits served march 12 2013 class action complaint filed us district court western district pennsylvania individual plaintiff behalf “similarly situated” customers complaint alleged among things imposed unauthorized excessive price increases charges customers breach contracts violation illinois consumer fraud deceptive business practices act complaint sought certification lawsuit class action award class members appropriate damages injunctive relief pennsylvania class action complaint filed wake settlement state new york investigation new york false claims act arose qui tam “whistle blower” action captioned united states america ex rel jennifer perez v stericycle inc case 108cv2390 settled fourth quarter 2015 previously disclosed following filing pennsylvania class action complaint served class action complaints filed federal state courts several jurisdictions complaints asserted claims allegations substantially similar made pennsylvania class action complaint cases appear followon litigation settlement state new york august 9 2013 judicial panel multidistrict litigation granted motion transfer related actions united states district court northern district illinois centralized pretrial proceedings “mdl action” december 10 2013 filed answer amended consolidated class action complaint mdl action generally denying allegations therein plaintiffs subsequently filed second amended consolidated complaint march 8 2016 filed answer pleading march 25 2016 generally denying allegations therein asserting variety affirmative defenses plaintiffs filed motion class certification january 29 2016 february 16 2017 court entered order granting plaintiffs’ motion class certification court certified class “all persons entities march 8 2003 date trial resided united states except washington alaska identified stericycle ‘small quantity’ ‘sq’ customer charged paid contractuallyagreed price stericycle’s medical waste disposal goods services pursuant stericycle’s automated price increase policy governmental entities whose claims asserted united states ex rel perez v stericycle inc shall excluded class” march 2 2017 stericycle filed motion reconsideration clarification relating court’s class certification decision parties engaged discussions overseen mediator regarding potential resolution matter reached agreement principle settlement july 2017 “proposed mdl settlement” disclosed current report form 8k filed august 2 2017 terms proposed mdl settlement establish common fund 2950 million paid compensation members settlement class attorneys’ fees class counsel incentive awards named class representatives costs notice administration existing contracts customers remain force also establish part proposed mdl settlement guidelines future price increases provide customers additional transparency regarding increases proposed mdl settlement also addresses additional matters including availability alternative dispute resolution members settlement class proposed mdl settlement admitting fault wrongdoing whatsoever entering proposed mdl settlement order avoid cost uncertainty litigation 2017 10k annual report stericycle inc • 99 part ii view proposed mdl settlement recorded pretax accrual 2950 million accrued liabilities consolidated balance sheet december 31 2017 pretax charge 2950 million sga consolidated statements income year ended december 31 2017 october 17 2017 company executed definitive written settlement agreement “settlement” incorporates terms agreement principle announced august 2017 settlement incorporates terms proposed mdl settlement described proposes global resolution cases claims company mdl action including allegation price increases implemented company allegedly violated contracts company customers well various state consumer protection statutes terms settlement company admitting fault wrongdoing whatsoever entering settlement order avoid cost uncertainty litigation settlement upon final approval court following fairness hearing fully finally resolve claims company alleged mdl action october 17 2017 plaintiffs mdl action filed plaintiffs’ unopposed motion preliminary approval class settlement approval notice plan following hearing october 26 2017 court granted preliminary approval settlement set certain deadlines including notification class terms settlement submission optouts objections settlement deadlines passed january 12 2018 mdl action reassigned honorable robert w gettleman february 12 2018 plaintiffs filed motion final approval class settlement court fairness hearing settlement currently anticipated held march 2018 securities class action lawsuit july 11 2016 two purported stockholders filed putative class action complaint us district court northern district illinois plaintiffs purported sue behalf purchasers publicly traded securities february 7 2013 april 28 2016 inclusive purchased securities public offering depositary shares representing 110th interest share mandatory convertible preferred stock around september 15 2015 complaint named defendants company directors certain current former officers certain underwriters public offering complaint purports assert claims sections 11 12a2 15 securities act 1933 sections 10b 20a securities exchange act 1934 well sec rule 10b5 promulgated thereunder complaint alleges among things company imposed unauthorized excessive price increases charges customers breach contracts defendants failed disclose alleged practices public filings statements issued proposed class period beginning february 7 2013 ending april 28 2016 august 4 2016 plaintiffs filed amended complaint purports assert additional misrepresentations public statements july 28 2016 therefore change putative class period february 7 2013 july 28 2016 inclusive october 21 2016 plaintiffs filed corrected amended complaint adding company named defendant plaintiff’s claim section 11 securities act previously asserted underwriters certain officers directors november 1 2016 court appointed public employees’ retirement system mississippi arkansas teacher retirement system lead plaintiffs counsel lead counsel february 1 2017 lead plaintiff filed consolidated amended complaint additional purported factual material supporting legal claims prior complaints class period february 7 2013 2017 10k annual report stericycle inc • 100 part ii september 18 2016 defendants filed motion dismiss consolidated amended complaint april 1 2017 may 19 2017 plaintiffs filed response opposition motion dismiss june 19 2017 defendants filed reply brief support motion dismiss currently pending intend vigorously defend lawsuit accrued amounts respect lawsuit cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate litigation nature uncertain unpredictable ii know whether court certify class plaintiffs class certified class would defined iii judgment factual legal allegations asserted plaintiffs sufficiently unique unable identify proceedings circumstances sufficiently comparable provide guidance making estimates shareholder derivative lawsuits september 1 2016 purported stockholder filed putative derivative action complaint circuit court cook county illinois certain officers directors company naming company nominal defendant complaint alleges defendants breached fiduciary duties company stockholders causing company allegedly overcharge certain customers breach customers’ contracts otherwise provide unsatisfactory customer service injure customer relationships make materially false misleading statements omissions regarding company’s business operational compliance policies february 7 2013 present march 1 2017 another purported stockholder filed putative derivative action complaint containing substantially similar allegations circuit court cook county illinois certain officers directors company naming company nominal defendant company notes among things addition failing make required demand board directors filings violation company’s bylaws require actions brought court delaware june 29 2017 court entered agreed order consolidating two putative derivative actions purposes caption kausal shah v charles alutto et al july 11 2017 court entered agreed order appointing lead counsel plaintiffs staying action pending resolution motion dismiss securities class action discussed pursuant agreed order defendants reserve potential defenses actions stay lifted intend vigorously defend consolidated lawsuit accrued amounts respect lawsuits cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate litigation nature uncertain unpredictable ii judgment factual legal allegations asserted plaintiffs sufficiently unique unable identify proceedings circumstances sufficiently comparable provide guidance making estimates shareholder demand letter october 18 2016 company received letter attorney purporting represent current stockholder company demanding pursuant del ct ch r 231 company’s board directors take action remedy alleged breaches fiduciary duties certain officers directors company factual allegations set forth letter similar asserted securities class action lawsuit shareholder derivative lawsuit letter 2017 10k annual report stericycle inc • 101 part ii asserts breaches fiduciary duty connection management operation oversight company’s business connection alleged false misleading andor incomplete statements regarding company’s business practices company’s board directors constituted special demand review committee investigate claims made demand letter committee retained independent counsel assist investigation committee’s investigation ongoing tcpa lawsuit june 3 2016 plaintiff filed putative class action captioned ibrahim v stericycle inc 16cv4294 nd ill us whollyowned subsidiary stericycle communication solutions inc telephone consumer protection act “tcpa” asserting defendants called plaintiff others violation statute plaintiff challenges use prerecorded messages urge owners recalled products return obtain repairs products plaintiff seeks certification two nationwide classes one class includes people received one cellular telephone calls stericycle featuring prerecorded artificial voice message relating product recall called party individual according stericycle’s records intended recipient call second class includes people received one cellular telephone calls stericycle featuring prerecorded artificial voice message relating product recall person communicated stericycle consent make calls cellular telephone number july 28 2016 answered complaint denying material allegations raising certain affirmative defenses among asserted defenses “emergency” exception tcpa exempts calls made promote public health safety december 19 2016 substantial discovery case filed motion summary judgment primarily basis “emergency” exception february 1 2017 plaintiff responded motion requesting additional discovery court permitted plaintiff obtain requested discovery provided additional documents response order april 5 2017 plaintiff sought leave file amended complaint would add claim illinois automatic telephone dialers act include “emergency” exception certain additional allegations filed opposition motion april 28 2017 contending proposed amendments futile entitled summary judgment june 27 2017 court permitted plaintiff file amended complaint answered plaintiff’s amended complaint denying liability light amended complaint withdrawn motion summary judgment without prejudice parties currently conducting discovery deadline completion fact discovery may 15 2018 intend vigorously defend lawsuit accrued amounts respect lawsuit cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate litigation nature uncertain unpredictable ii know whether court certify class plaintiffs class certified class would defined iii judgment factual legal allegations asserted plaintiff sufficiently unique unable identify proceedings circumstances sufficiently comparable provide guidance making estimates 2017 10k annual report stericycle inc • 102 part ii fcpa investigation june 12 2017 sec issued subpoena company requesting documents information relating company’s compliance foreign corrupt practices act “fcpa” foreign domestic anticorruption laws respect certain company’s operations latin america addition department justice notified company investigating matter parallel sec company cooperating agencies company also conducting internal investigation matters including outside latin america oversight audit committee board directors assistance outside counsel investigation found evidence improper conduct accrued amounts respect matter cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate based know judgment factual legal issues presented matter sufficiently unique unable identify circumstances sufficiently comparable provide guidance making estimates environmental matters environmental solutions business regulated federal state local laws enacted regulate discharge materials environment remediate contaminated soil groundwater otherwise protect environment result continuing regulation frequently become party legal administrative proceedings involving various governmental authorities interested parties issues involved proceedings generally relate alleged violations existing permits licenses alleged responsibility federal state superfund laws remediate contamination properties owned either us parties either prior owners certain facilities shipped wastes time may subject fines penalties regulatory proceedings relating primarily waste treatment storage disposal facilities north salt lake utah united states attorney’s office district utah “usao” criminal investigation division us environmental protection agency “epa” conducting investigation facts underlying notice violation “nov” issued state utah division air quality “daq” resulted december 2014 settlement daq previously disclosed usao epa investigated whether matters forming basis nov constitute criminal civil violations clean air act federal statutes february 2018 usao advised us would pursue criminal penalties matter intend continue cooperating epa doj resolve matter civilly company accrued estimate probable loss matter accrued liabilities material rancho cordova california department toxic substances control “dtsc” alleged violations california’s hazardous waste control law hazardous waste facility rancho cordova california years 2011 2017 dtsc referred matter california attorney general’s office march 3 2016 entered tolling agreement attorney general’s office subsequently extended october 30 2017 tolling agreement extended period february 29 2016 october 30 2017 excluded calculation time purpose determining statute limitations concerning charges violated hazardous waste control law tolling agreement constitute admission guilt wrongdoing part cannot construed waiver rights defenses may resulting action proceeding 2017 10k annual report stericycle inc • 103 part ii october 26 2017 dtsc filed complaint california superior court sacramento county civil penalties injunctive relief alleged violations californias hazardous waste control law continue engage discussions dtsc regarding parties’ current factual legal positions continue evaluate dtsc’s position explore number potential alternatives including negotiated resolution potential litigation company accrued estimate probable loss matter accrued liabilities material tabasco mexico national agency industrial security protection environment hydrocarbon sector mexico “asea” conducted permit compliance inspection hazardous waste treatment facility acquired one subsidiaries dos bocas tabasco mexico asea claimed contaminated soil treatment process described treatment permit followed properly issued order imposing fine directing facility closed alleged contamination certain portion facility remediated subsidiary engaged firm environmental technicians assess contamination described asea order conduct broader environmental assessment facility preliminary estimate remediation costs necessary address asea order 20 million review assessment overall facility ongoing november 2017 asea issued order revoking prior order imposing fine requiring asea reassess evidence arguments presented time unable reasonably estimate future cost remedial obligations facility beyond preliminary estimate recorded pretax charge 20 million matter accrued liabilities consolidated balance sheet december 31 2017 note 19 quarterly financial information unaudited following table summarizes unaudited consolidated quarterly results operations reported 2017 2016 2017 10k annual report stericycle inc • 104 part ii eps calculated quarterly basis amounts may total calculated fullyear eps 2017 10k annual report stericycle inc • 105 part ii stericycle inc schedule ii valuation qualifying accounts 1 amounts consist primarily currency translation adjustments 2 2017 amount consists primarily release valuation allowance net operating losses ceased upon merger 2016 2015 amounts consist primarily valuation allowances acquired deferred tax assets business combinations item 9item 8 financial statements supplementary data report independent registered public accounting firm shareholders board directors stericycle inc opinion financial statements audited accompanying consolidated balance sheets stericycle inc company december 31 2018 2017 related consolidated statements loss income comprehensive loss income changes equity cash flows three years period ended december 31 2018 related notes financial statement schedule listed index item 15a collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2018 2017 results operations cash flows three years period ended december 31 2018 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2018 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 28 2019 expressed adverse opinion thereon basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures include examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion ernst young llp served company’s auditor since 1991 chicago illinois february 28 2019 2018 10k annual report stericycle inc • 66 part ii stericycle inc consolidated statements loss income see accompanying notes consolidated financial statements 2018 10k annual report stericycle inc • 67 part ii stericycle inc consolidated statements comprehensive loss income see accompanying notes consolidated financial statements 2018 10k annual report stericycle inc • 68 part ii stericycle inc consolidated balance sheets see accompanying notes consolidated financial statements 2018 10k annual report stericycle inc • 69 part ii stericycle inc consolidated statements cash flows see accompanying notes consolidated financial statements 2018 10k annual report stericycle inc • 70 part ii stericycle inc consolidated statements changes equity see accompanying notes consolidated financial statements 2018 10k annual report stericycle inc • 71 part ii stericycle inc notes consolidated financial statements millions except per share data unless otherwise indicated unless context requires otherwise “company” “stericycle” us refers stericycle inc subsidiaries consolidated basis note 1 basis presentation summary significant accounting policies description business company provides regulated compliance services include collection processing regulated specialized waste disposal collection personal confidential information secure destruction recall returns “expert solutions” communication services incorporated 1989 today serve diverse customer base across 50 states united states “us” puerto rico 21 countries information company’s business segments services see part item 1 business note 17 segment reporting summary significant accounting policies basis presentation accompanying consolidated financial statements include accounts stericycle inc subsidiaries intercompany accounts transactions eliminated consolidation companys consolidated financial statements prepared accordance us gaap include assets liabilities revenue expenses whollyowned subsidiaries majorityowned subsidiaries company exercises control outside stockholders interests subsidiaries shown consolidated financial statements “noncontrolling interests use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits environmental liabilities stock compensation expense income tax liabilities accrued auto workers’ compensation insurance claims intangible asset valuations goodwill impairment estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates revenue contracts customers accordance asu 201419 “revenue contracts customers” “asc 606” revenue recognized customer obtains control promised goods services amount revenue recognized reflects consideration company expects entitled receive exchange good services revenue recognized net revenuebased taxes assessed governmental authorities 2018 10k annual report stericycle inc • 72 part ii company provides regulated compliance services include collection processing regulated specialized waste disposal collection personal confidential information secure destruction expert solutions communication services associated activities series distinct services substantially pattern transfer time therefore respective services treated single performance obligation company recognizes revenue applying right invoice practical expedient right consideration corresponds directly value provided customer performance date revenues medical waste solutions secure information destruction services recognized upon waste collection compliance solution revenues recognized contractual service period revenues hazardous waste solutions manufacturing industrial services recognized time waste received facility appropriate permit either processing facility third party revenues communication services expert solutions recognized services performed revenues recycling shredded paper recognized upon delivery accounts receivable allowance doubtful accounts receivable recorded billed goods services provided carrying value receivables presented net allowance doubtful accounts estimate allowance doubtful accounts based past collection history specific risks identified among uncollected amounts events changes circumstances indicate specific receivable balances may impaired consideration given collectability balances allowance adjusted accordingly pastdue receivable balances written internal collection efforts exhausted single customer accounts approximately 10 accounts receivable approximately 11 total revenues year ended december 31 2018 2017 2016 bad debt expense 249 million 323 million 418 million respectively contract liability record contract liability cash payments received due advance services performed classified current liabilities consolidated balance sheets since amounts earned within year substantially contract liabilities outstanding december 31 2017 presented deferred revenues consolidated balance sheets prior adoption asc 606 recognized revenues 2018 contract liability december 31 2018 150 million substantial portion expected recognized revenue 2019 contract acquisition costs incremental direct costs obtaining contract primarily represent sales incentives deferred amortized selling general administrative expenses “sga” estimated period benefit derived cost cash equivalents consider highly liquid investments maturity less three months purchased cash equivalents cash equivalents carried cost financial instruments financial instruments consist cash equivalents accounts receivable payable derivatives longterm debt financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base low concentration performance ongoing credit evaluations customers also maintain allowances potential credit losses 2018 10k annual report stericycle inc • 73 part ii property plant equipment property plant equipment stated cost expenditures software purchases software developed internal use capitalized included software developed internal use external direct costs materials services certain internal payroll related fringe benefit costs capitalized costs computer software developed obtained internal use depreciation amortization includes depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows upon completion deployment costs associated enterprise resource planning system amortized estimated useful life 10 years capitalized interest capitalize interest incurred associated projects construction duration asset construction period years ended december 31 2018 2017 capitalized interest 29 million 16 million respectively amounts capitalized 2016 goodwill identifiable intangible assets goodwill represents excess purchase price related costs fair value assigned net tangible identifiable tangibles business acquired intangible assets definite lives amortized straightline basis estimated useful lives impairment long indefinite lived assets • property equipment intangible assets definitelives net longlived assets property plant equipment amortizing intangible assets reviewed whenever events changes circumstances indicate related carrying amounts may recoverable impairment assets definitelives generally determined comparing projected undiscounted cash flows generated asset appropriate grouping assets carrying value impairment identified loss recognized equal excess assets net book value fair value cost basis adjusted determining extent impairment typically requires various estimates assumptions including using managements judgment cash flows directly attributable asset useful life asset residual value necessary company uses internal cash flow estimates quoted market prices appraisals appropriate determine fair value actual results could vary estimates addition remaining useful life impaired asset revised necessary • intangible assets indefinitelives net indefinite lived intangibles may assessed using either qualitative quantitative approach qualitative approach first determines morelikelythannot fair value asset less carrying value determination made impairment test complete however determined likely impairment quantitative assessment must made one determination whether use qualitative approach time since last quantitative approach fourth quarter 2018 company performed annual impairment test indefinite lived intangibles 2018 10k annual report stericycle inc • 74 part ii goodwill using qualitative approach certain assets quantitative approach remaining assets • goodwill tested impairment least annually october 1 year frequently event occurs circumstances change would reduce fair value reporting unit carrying value used quantitative approach assess goodwill impairment fair value reporting unit calculated using income approach including discounted cash flows “dcf” validated using market approach involvement third party valuation specialist companys reporting units domestic healthcare compliance services domestic secure information destruction domestic crs domestic environmental solutions canada europe asia pacific latin america income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows calculated using management assumptions growth rates including longterm growth rates capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based calculated weighted average cost capital adjusted reporting units based size country company specific risk premiums market approach compares valuation multiples similar companies associated reporting unit reconcile calculated fair values market capitalization fair value compared carrying value including goodwill fair value excess carrying value related goodwill impaired fair value less carrying value recognize impairment charge amount carrying value exceeds fair value goodwill impairment testing process involves use significant assumptions estimates judgments subject inherent uncertainties subjectivity determination fair value reporting units estimating reporting units projected cash flows involves use significant assumptions estimates judgments respect numerous factors including longterm growth rates operating margin including sga expense rates working capital expenditures allocation shared corporate items among factors estimates based internal current operating plans longterm forecasts reporting unit projected cash flow estimates discounted necessitates selection appropriate discount rate discount rates selected reflect marketbased estimates risks associated projected cash flows reporting unit also include company specific risk premium market value comparisons fair value require selection appropriate peer group companies addition analyze differences sum fair value reporting units total market capitalization reasonableness taking account certain factors including control premiums use different assumptions estimates judgments goodwill impairment testing process may significantly increase decrease estimated fair value reporting unit generally changes dcf estimates would similar effect estimated fair value reporting unit believe estimated fair value used measuring impairment based reasonable assumptions future changes underlying assumptions could differ due inherent judgment making estimates goodwill impairment charges may recognized future periods extent changes factors circumstances occur including deterioration macroeconomic environment equity 2018 10k annual report stericycle inc • 75 part ii markets including market value common shares deterioration performance future projections changes companys plans one reporting units discussion see note 6 goodwill intangible assets longlived assets disposal groups classified held sale valued lower carrying amount fair value less estimated selling costs longlived assets depreciated amortized classified held sale insurance workers’ compensation autofleet property employeerelated health care benefits obtained using high deductible insurance policies thirdparty administrator used process claims accrue liabilities based upon claim reserves established thirdparty administrator operating oversight end reporting period accruals include estimate claims incurred yet reported workers compensation autofleet employee health insurance benefit liability based historical claims experience restructuring charges involuntary termination benefits accrued upon commitment termination plan benefit arrangement communicated affected employees liabilities determined probable estimable depending existence substantive plan severance termination costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contract termination costs recognized contracts terminated cease use leased facility longer derive economic benefit contract exit costs expensed incurred discussion see note 4 restructuring divestitures assets held sale stockbased compensation company recognizes stockbased compensation expense based estimate grantdate fair value stockbased awards include stock options restricted stock units performance stock units expense generally recognized straightline basis service period awards expected vest present stockbased compensation expense within consolidated statements loss income based classification respective employees cash compensation discussion see note 13 stock based compensation income taxes subject income taxes us numerous foreign jurisdictions compute provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax basis assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected realized settled significant judgments required order determine realizability deferred tax assets assessing need valuation allowance evaluate significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods tax liabilities recognized management’s judgment tax position meet likely ie likelihood fifty percent threshold recognition tax positions meet likely threshold tax liability may still recognized depending management’s assessment tax position ultimately settled company records 2018 10k annual report stericycle inc • 76 part ii interest penalties unrecognized tax benefits provision income taxes discussion see note 9 income taxes lease asset retirement obligations company classifies leases inception either operating capital leases may receive renewal expansion options rent holidays leasehold improvement incentives certain lease agreements company recognizes operating lease costs straightline basis taking account adjustments free escalating rental payments deferred payment terms additionally lease incentives accounted reduction lease costs lease term rent expense associated operating lease obligations relate delivery services presented cost revenues “cor” remaining classified within sga consolidated statements loss income company excludes portion executory costs connected leased asset purposes determining minimum lease payments accounting standard codification section 840 “leases” “asc 840” minimum lease payments made capital leases apportioned interest expense reduction related capital lease obligations classified within accrued liabilities current portion longterm debt consolidated balance sheets company establishes assets liabilities present value estimated future costs retire longlived assets termination expiration lease assets amortized lease term recognized liabilities accreted future value estimated retirement costs related amortization accretion expenses presented within cor leased asset used delivery services remaining expenses presented within sga consolidated statements loss income foreign currency assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component accumulated comprehensive loss consolidated balance sheets foreign currency gains losses resulting transactions denominated currencies entity’s functional currency including foreign currency gains losses intercompany balances longterm investment nature included within expense net consolidated statements loss income highly inflationary economy effective july 1 2018 result threeyear cumulative inflation exceeding 100 argentina classified highly inflationary economy accordingly company recognized expense net foreign exchange loss 38 million year ended december 31 2018 arising remeasurement argentinian peso denominated net monetary assets nonmonetary assets liabilities related expenses measured using historical exchange rates fluctuate changes local exchange rate reclassifications material reclassifications current year 2018 10k annual report stericycle inc • 77 part ii new accounting standards adoption new accounting standards revenue recognition effective january 1 2018 company adopted asc 606 using modified retrospective method contracts completed date adoption results operations reported periods january 1 2018 presented amended guidance prior period amounts reported accordance asc 605 “revenue recognition” also referred herein “legacy us gaap” historical guidance impact adopting asc 606 relates deferral certain costs associated obtaining contracts customers previously expensed incurred new guidance capitalized current assets amortized sga expected period benefit received ii write deferred installation costs capitalized prepaid expenses legacy us gaap expensed incurred asc 606 iii increase deferred income tax liabilities respect tax impact associated items recognized net increase retained earnings 130 million january 1 2018 cumulative effect adopting asc 606 comprised 229 million associated capitalization contract acquisition costs offset 49 million write deferred installation costs 50 million recognize deferred income tax liabilities impact loss income operations adoption asc 606 decrease sga 88 million year ended december 31 2018 definition business effective january 1 2018 company adopted asu 201701 “clarifying definition business” “asu 201701” provides guidance clarify definition business objective adding guidance assist entities evaluating whether transactions accounted acquisitions disposals assets businesses amendments asu 201701 provide screen determine integrated set assets activities collectively referred “set” business screen requires substantially fair value gross assets acquired disposed concentrated single identifiable asset group similar identifiable assets set business screen reduces number transactions need evaluated screen met amendments require considered business set must include minimum input substantive process together significantly contribute ability create output remove evaluation whether market participant could replace missing elements guidance asu 201701 applied evaluating transactions discussed note 3 acquisitions otherwise impact accompanying consolidated financial statements due number acquisitions company completes year may instances acquisition determined acquisition assets instead business company expects majority acquisitions completed year meet definition business asu 201701 material impact consolidated financial statements 2018 10k annual report stericycle inc • 78 part ii intraentity transfers assets inventory january 1 2018 company adopted guidance asu 201616 “intraentity transfers assets inventory” “asu 201616” asu 201616 requires income tax consequences intraentity transfer asset inventory recognized transfer occurs instead asset sold outside party company’s adoption asu 201616 impact accompanying consolidated financial statements compensation stock compensation january 1 2018 company adopted asu 201709 “compensation stock compensation topic 718 scope modification accounting” “asu 201709” asu 201709 clarifies account change terms conditions sharebased payment award modification new guidance modification accounting required fair value vesting conditions classification award equity liability changes result change terms conditions company’s adoption asu 201709 impact accompanying consolidated financial statements accounting standards issued yet adopted leases february 2016 financial accounting standards board “fasb” issued asu 201602 “leases” topic 842 “asu 201602” amended guidance effective company january 1 2019 requires recognition lease assets lease liabilities balance sheet leases terms excess 12 months currently classified operating leases disclosure key information leasing arrangements also required company elected optional transition method allows entities continue apply historical accounting guidance comparative periods presented year adoption transition lessees lessors may elect apply package practical expedients permitting entities reassess whether expired existing contracts contain leases ii lease classification expired existing leases iii whether initial direct costs expired existing leases qualify capitalization amended guidance practical expedients must elected package consistently applied company elected apply package practical expedients upon adoption company identified leases contracts impacted new standard process finalizing implementation software solution manage account leases new standard ii updating business processes related policies systems controls support recognition disclosure new standard connection adoption standard company expects record rightofuse assets primarily related buildings vehicles amounting approximately 3900 million contracts contain operating leases currently expect amended guidance material impacts financial statements 2018 10k annual report stericycle inc • 79 part ii derivatives hedging august 2017 fasb issued asu 201712 “derivatives hedging” topic 815 targeted improvements accounting hedging activities “asu 201712” asu 201712 amends hedge accounting recognition presentation requirements objective improving financial reporting hedging relationships better portray economic results entity’s risk management activities financial statements enhance transparency understandability hedge transactions addition asu 201712 makes improvements simplify application hedge accounting guidance asu 201712 effective us january 1 2019 early adoption permitted company expect adoption materially impact consolidated financial statements financial instrument credit losses june 2016 fasb issued asu 201613 “financial instruments credit losses” “asu 201613” associated measurement credit losses financial instruments asu 201613 replaces current incurred loss impairment methodology recognizing credit losses loss probable methodology reflects expected credit losses requires consideration broader range reasonable supportable information assess credit loss estimates amended guidance effective us january 1 2020 early adoption permitted beginning january 1 2019 evaluating impact consolidated financial statements implementation costs incurred cloud computing arrangement august 2018 fasb issued asu 201815 “goodwill intangibles internal use software customer’s accounting implementation costs incurred cloud computing arrangement service contract” “asu 201815” asu 201815 aligns requirements capitalizing implementation costs incurred hosting arrangement service contract requirements capitalizing implementation costs internaluse software accounting hosting contract unchanged asu 201815 effective us january 1 2020 early adoption permitted including adoption interim period evaluating impact consolidated financial statements note 2 revenues contracts customers company provides regulated compliance services include collection processing regulated specialized waste disposal collection personal confidential information secure destruction expert solutions communication services associated activities series distinct services substantially pattern transfer time therefore respective services treated single performance obligation customers typically enter contract provision services regular scheduled basis eg weekly monthly needed basis contract term contract terms company receives fees based monthly quarterly annual rate fees based contractual rates depending upon measures including volume weight type waste number size bins collected weight type shredded paper type recall service number call minutes amounts invoiced based terms underlying contract either regular basis eg monthly quarterly services performed generally due within short period time 2018 10k annual report stericycle inc • 80 part ii invoicing based upon normal terms conditions business type geography services performed disaggregation revenues following table presents revenues disaggregated service primary geographical regions year ended december 31 2018 includes reconciliation disaggregated revenue reported reportable segments domestic canada regulated waste compliance services “rcs” international rcs contract liabilities contract liability december 31 2018 2017 150 million 179 million respectively balance contract liability december 31 2017 recognized revenue year ended december 31 2018 contract acquisition costs 85 million 233 million contract acquisition costs included current assets respectively consolidated balance sheets december 31 2018 year ended december 31 2018 amortized 69 million sales incentives sga contract acquisition costs amortized sga weighted average life 63 years note 3 acquisitions years ended december 31 2018 2017 2016 company completed 21 30 31 acquisitions respectively acquisitions completed 2018 met definition business asu 201701 acquisitions detailed considered complementary existing operations fit growth strategy accounted business combinations applicable guidance 2018 10k annual report stericycle inc • 81 part ii following table summarizes locations services acquisitions year results operations acquired businesses included consolidated statements loss income date acquisition pro forma results operations acquisitions presented pro forma effects individually aggregate material company’s consolidated results operations following table summarizes acquisition date fair value consideration transferred acquisitions completed years ended december 31 2018 2017 2016 fair value consideration transferred business combination allocated net tangible intangible assets assumed acquisition date remaining unallocated amount recognized goodwill allocations acquisition price recent acquisitions prepared preliminary basis pending completion certain intangible asset valuations finalization opening balance sheet following table summarizes preliminary purchase price allocations current year acquisitions adjustments purchase price allocations prior year acquisitions december 31 2018 purchase accounting completed acquisitions closed prior july 1 2018 10k annual report stericycle inc • 82 part ii year ended december 31 2018 recognized increase estimated fair value acquired customer relationships current year prior year acquisitions 335 million 91 million respectively excluding effect foreign currency translation amortizable lives 10 25 years note 4 restructuring divestitures assets held sale restructuring business transformation stericycle focused driving longterm growth profitability delivering enhanced shareholder value part business strategy third quarter 2017 initiated comprehensive multiyear business transformation objective improve longterm operational financial performance business transformation based strategic vision build bestinclass enterprise performance management “epm” operating model enable company operate efficiently provide enhanced experience customers better capitalize future growth opportunities establish greater controls oversight drive consistent results additionally key component business transformation implementation enterprise resource planning “erp” system leverage standard processes throughout organization accelerate decision making expedite acquisition integration remediate compliance control issues enable realtime analytics key initiatives business transformation include • portfolio rationalization executing comprehensive review company’s global service lines identify pursue divestiture nonstrategic assets • operational optimization standardizing route planning logistics modernizing field operations driving network efficiency across facilities • organizational excellence efficiency redesigning company’s organizational structure optimize resources align around global shared business services model • commercial excellence aligning sales service organizations around customer standardizing customer relationship management process expanding customer selfservice options • strategic sourcing reducing spend global procuretopay processes leveraging organizational scale anticipate incur approximately 200 million employee termination charges connection business transformation 80 million 10 million expected impact domestic canada rcs international reportable segments respectively remaining 110 million impacting see note 17 segment reporting 2018 10k annual report stericycle inc • 83 part ii year ended december 31 2018 incurred 37 million employee termination charges related business transformation domestic canada rcs international rcs reportable segments incurred 30 million 03 million respectively remaining 04 million impacting amounts fully paid december 31 2018 addition year ended december 31 2018 incurred noncash impairment charges 91 million 74 million related software 03 million related longterm assets domestic canada rcs reportable segment included cor 14 million related included sga see note 5 property plant equipment fourth quarter 2017 incurred employee termination charges 115 million noncash impairment charges 24 million related software domestic canada rcs international rcs reportable segments incurred 55 million 33 million respectively remaining 51 million impacting remaining liability 22 million december 31 2017 paid first quarter 2018 restructuring charges year ended december 31 2018 recognized sga employee termination benefits approximately 13 million associated reductions headcount undertaken part nonbusiness transformation related operational optimization charges incurred primarily within reporting segment paid end fourth quarter 2018 could additional initiatives future streamline operations company expects record charges related workforce reductions andor facility rationalization initiatives become probable related charges estimable divestitures company incurred following noncash impairment charges gains losses included sga consolidated statements loss income associated divestitures executed years ended december 31 2018 2017 2016 respectively 2018 10k annual report stericycle inc • 84 part ii details associated amounts follows domestic canada rcs segment 2018 completed part portfolio rationalization sale noncore clean room business realizing proceeds 170 million recognized noncash impairment charges related goodwill 58 million customer list intangibles 05 million reduction fair value net assets 06 million connection reclassifying assets liabilities held sale international rcs segment 2018 completed sale hazardous waste business uk consideration approximately 115 million 82 million received cash 33 million held escrow subject release upon renewal lease held sold business prior sale recognized noncash impairment charges connection reclassifying assets liabilities held sale subsequent changes fair value assets 42 million 68 million 38 million years ended december 31 2018 2017 2016 respectively 2017 sold certain assets liabilities south africa proceeds 73 million resulting gain 30 million 2017 sold certain assets associated patient transport business uk proceeds 12 million resulting net loss 57 million noncash impairment charges 217 million recognized 2016 business initially classified held sale fourth quarter 2016 sold certain assets uk proceeds 08 million resulting loss sale 16 million assets liabilities held sale december 31 2017 certain international operations met criteria classified held sale business subsequently sold 2018 see divestitures following table presents information related major classes assets liabilities classified held sale consolidated balance sheet december 31 2017 2018 10k annual report stericycle inc • 85 part ii determined operations included table meet criteria classified discontinued operations applicable guidance subsequent event february 28 2019 company announced closed agreement divestiture ukbased texting business part communication related services note 5 property plant equipment property plant equipment december 31 2018 2017 consisted following net book value assets held capital lease 225 million 112 million december 31 2018 2017 respectively majority assets included building improvements machinery equipment vehicles year ended december 31 2018 recognized 331 million noncash impairment charges related software property plant equipment charges recognized related following reportable segments noncash impairment charges related software connection evolving future information systems strategy including implementation global erp system it’s impact 2018 10k annual report stericycle inc • 86 part ii currently deployed software well rationalization applications used within reportable segment noncash impairment charges related property plant equipment result rationalization operations 2017 recognized noncash impairment charges sga 73 million related property plant equipment due rationalizing certain operations primarily international rcs segment property plant equipment impairments 2016 note 6 goodwill intangible assets goodwill changes carrying amount goodwill years ended december 31 2018 2017 reportable segment “all other” category follows accumulated noncash impairment charges segment december 31 2018 2017 follows form 10q quarter ended september 30 2018 disclosed process completing october 1 annual goodwill impairment assessment certain reporting units including domestic crs latin america potentially risk impairment based preliminary review long range plan “lrp” process finalized also evaluating recent declines stock price market capitalization impact reconciliation aggregate fair values reporting units market capitalization 2018 10k annual report stericycle inc • 87 part ii performed annual goodwill assessment october 1 2018 continued update assumptions reflect certain business strategic developments fourth quarter negatively impacted estimated cash flows certain reporting units resulted decision also complete interim assessment december 31 2018 company determined domestic crs latin america reporting units’ carrying values excess estimated fair values factors contributed estimated fair value reporting units carrying value include • domestic crs experienced progressive decrease revenues operating margins 2018 due continued declines large recall events leading higher level uncertainty occurring future periods ii recall events smaller number units significantly lower revenue per event experienced recent years iii continued decline volume inboundoutbound call volumes live voice services also gathered insights process evaluating strategic alternatives initiated 2018 • latin america continue experience prolonged challenges volatility certain markets due declining market trends cost pressures revenue increases manufacturing industrial “mi” business due inflationary price increases argentina offset impact currency devaluation continuing declines several local economies challenges factored updates forecasted cashflow assumptions fourth quarter reflect current outlook made certain adjustments discount rates used present value forecasted cashflows result impairment assessments recognized 2863 million noncash goodwill impairment charges fully impair domestic crs reporting unit addition recognized 724 million noncash goodwill impairment charges related latin america reporting unit following impairment remaining latin america reporting unit’s goodwill 20 million performed annual goodwill assessment october 1 2017 evaluated impact prolonged declining market trends latin america continued softness company’s manufacturing industrial regional hazardous waste business estimated cash flows updated reflect challenging conditions latin america result impairment assessment recognized 650 million noncash goodwill impairment charge impairment charge recognized amount carrying value latin america reporting unit exceeded fair value fair value reporting units used annual interim goodwill impairment assessments classified level 3 measurements within fair value hierarchy due significant unobservable inputs discount rates projections revenue cost revenue operating expense growth rates longterm growth rates income tax rates fair value methodology described note 1 basis presentation summary significant accounting policies current year adjustments goodwill certain prior year acquisitions primarily due finalization intangible asset valuations among opening balance sheet adjustments 2018 10k annual report stericycle inc • 88 part ii intangible assets december 31 2018 2017 values intangible assets follows changes carrying amount intangible assets since january 1 2017 follows indefinitelived intangible assets include operating permits certain tradenames determined operating permits certain tradenames indefinite lives due ability renew minimal additional cost therefore amortized perform annual impairment test october 1 2018 2017 2016 recognized noncash impairment charges 160 million 210 million 14 million respectively noncash impairment charges recognized year ended december 31 2018 included 103 million related customer relationship permit intangibles impaired result actual forecasted business declines remaining noncash impairment charges incurred year ended december 31 2018 charges year ended december 2018 10k annual report stericycle inc • 89 part ii 31 2017 recognized due rationalizing certain operations across segments recognized following reportable segments finitelived intangible assets amortized estimated useful lives using straightline method category weighted average remaining useful life follows evaluate useful life intangible assets annually determine whether events circumstances warrant revision remaining useful life changes reflected prospectively intangible asset amortized revised remaining useful life fourth quarter 2018 company performed annual assessment useful life finitelived intangibles company updated useful life customer relationship intangibles result analyzing recent quantitative qualitative observations market factors impacting business change estimate accounted prospectively approximately 510 increase annual amortization expense going forward years ended december 31 2018 2017 2016 aggregate intangible asset amortization expense 1303 million 1184 million 1293 million respectively estimated intangible asset amortization expense next five years based upon foreign exchange rates december 31 2018 follows years ended december 31 2018 10k annual report stericycle inc • 90 part ii note 7 accrued liabilities long term liabilities accrued liabilities consisted follow december 31 long term liabilities consisted following december 31 note 8 debt longterm debt consisted following december 31 2018 10k annual report stericycle inc • 91 part ii senior credit facility term loan private placement notes require us comply financial reporting covenants restrictions including restriction dividend payments december 31 2018 compliance financial debt covenants senior credit facility term loan private placement notes rank pari passu unsecured debt obligations weighted average interest rates longterm debt excluding capital leases december 31 2018 2017 follows second quarter 2018 accordance amended terms see company triggered increase 05 interest rates charged private placement notes third quarter 2018 accordance amended terms see company triggered increase 025 applicable interest rate charged senior credit facility fourth quarter 2018 accordance amended terms see company triggered increase 025 applied interest rates charged private placement notes amounts committed outstanding letters credit unused portion senior credit facility december 31 2018 2017 follows company entered credit agreement “credit agreement” dated november 17 2017 amended restated consolidated company’s existing revolver agreement dated june 4 2014 company’s existing term loan credit agreement dated august 15 2015 credit agreement provided term loan facility 9500 million revolving credit facility 12 billion proceeds credit agreement used closing date refinance loans credit extensions made existing revolver term loan credit facilities company applied provisions asc 47050 “modifications extinguishments” accounted refinance modification obligations credit agreement unsecured credit agreement contained financial covenant maintain consolidated leverage ratio 375 100 end fiscal quarter could increased 400 100 two consecutive quarters fiscal quarter ending september 30 2018 company’s option following settlement payment 2018 10k annual report stericycle inc • 92 part ii respect small quantity “sq” customer class action lawsuit see note 19 legal proceedings consolidated leverage ratio pro forma basis greater 350 100 company exercised option third quarter 2018 credit agreement matures november 17 2022 company entered amendments credit agreement various note purchase agreements associated private placement notes year ended december 31 2018 follows • amendment dated march 23 2018 changed definition ebitda defined credit agreements allow certain addbacks maximum 2000 million trailing twelve month basis related cash charges associated business transformation operational optimization litigation matters calculation ebitda debt covenant compliance purposes amendment also provided certain circumstances adjustment interest rates charged senior credit facility term loan private placement notes • amendment dated november 15 2018 applies credit agreement amended covenant respect permitted acquisitions dispositions • amendment dated december 19 2018 increases allowable consolidated leverage ratio 400 100 continues allow 2000 million add backs quarter ending december 31 2019 add back extended first quarter 2020 allow maximum 900 million aggregate expenses incurred december 31 2019 added back addition amendment requires consolidated leverage ratio greater 375 100 fiscal quarter ending december 31 2019 addition interest rate charged private placement notes subject adjustment follows end fiscal quarter unadjusted consolidated leverage ratio prior taking effect addbacks discussed exceeds 375 100 per annum interest rate applicable series notes shall increase 050 “adjusted leverage elevated interest rate” b end fiscal quarter ending march 31 2020 unadjusted consolidated leverage ratio exceeds 375 100 perannum interest rate applicable series notes shall increased follows “unadjusted leverage elevated interest rate” company rating bbb better sp equivalent rating another rating agency unadjusted leverage elevated interest rate additional 050 ii company rating bbb sp equivalent rating another rating agency unadjusted leverage elevated interest rate additional 075 iii company rating bbb sp equivalent rating another rating agency unadjusted leverage elevated interest rate additional 125 iv company rating bb worse sp equivalent rating another rating agency unadjusted leverage elevated interest rate additional 200 2018 10k annual report stericycle inc • 93 part ii c adjusted leverage elevated interest rate unadjusted leverage elevated interest rate cumulative greater two increases apply given time company accounted refinancings modifications result recognized year ended december 31 2018 28 million debt modification charges interest expense company ability intends use availability revolving credit facility refinance 125 million private placement notes due 2019 accordingly presented balance notes within longterm portion total debt december 31 2018 amount however presented part payments due 2019 table payments due longterm debt excluding capital lease obligations five years subsequent december 31 2018 follows minimum future lease payments capital leases follows note 9 income taxes us international components loss income taxes benefit expense consisted following years ended december 31 2018 2017 2016 2018 10k annual report stericycle inc • 94 part ii significant components income tax benefit expense years ended december 31 2018 2017 2016 follows reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 2018 2017 2016 follows deferred tax liabilities assets december 31 2018 2017 follows december 22 2017 us tax cuts jobs act 2017 “tax act” signed law making significant changes internal revenue code changes include limited corporate 2018 10k annual report stericycle inc • 95 part ii income tax rate decrease 35 21 effective tax years beginning december 31 2017 transition us international taxation worldwide tax system territorial system onetime transition tax mandatory deemed repatriation cumulative foreign earnings december 31 2017 tax act results related change assertion expected foreign withholding taxes accordance sab 118 understanding tax act guidance available company calculated provisional estimate tax impact tax act year end 2017 income tax benefitprovision result recognized income tax benefit 1298 million fourth quarter 2017 period legislation enacted provisional amount related remeasurement certain deferred tax assets liabilities based rates expected reverse future onetime transition tax mandatory deemed repatriation foreign earnings related expected foreign withholding taxes earnings reflected table net tax benefit recognized year ended december 31 2017 related tax act follows year ended december 31 2018 adjusted provisional amounts recognized december 31 2017 onetime transition tax deferred taxes foreign withholding taxes adjustments resulted net charge tax provision 88 million december 31 2018 accounting various elements tax act complete adjustments may necessary future periods due potential technical corrections tax act andor regulatory guidance may issued us internal revenue service beginning fiscal 2019 tax act also establishes provision known global intangible lowtaxed income gilti imposes tax certain earnings foreign subsidiaries company made accounting policy election treat gilti taxes current period expense prior enactment tax act company treated undistributed earnings foreign subsidiaries indefinitely reinvested company continues assert permanent reinvestment first tier subsidiaries lifts assertion deferred foreign earnings taxed tax act lower tier subsidiaries withholding tax accrual recorded appropriate company provided deferred taxes outside basis differences investments foreign subsidiaries unrelated unremitted earnings basis differences indefinitely reinvested determination unrecognized deferred taxes related components outstanding basis difference practicable calculate december 31 2018 net operating loss carryforwards foreign domestic operations approximately 3503 million certain net operating loss carryforwards began expire 2021 tax benefit net operating losses approximately 889 million december 31 2018 valuation allowance 249 million recognized offsetting tax benefit file income tax returns united states various states certain foreign jurisdictions 2018 10k annual report stericycle inc • 96 part ii exceptions longer subject us federal state local nonus income tax examinations tax authorities years prior 2012 us internal revenue service completed audit 2014 corporate income tax return made changes reported tax company recognized liabilities cover certain uncertain tax positions uncertain tax positions relate additional taxes company may required pay various tax jurisdictions course examinations various taxing authorities proposed adjustments may asserted company evaluates items casebycase basis adjusts accrual uncertain tax positions deemed necessary estimated amount liability associated company’s uncertain tax positions may significantly increase decrease within next twelve months cannot reasonably estimated total amount unrecognized tax benefit december 31 2018 647 million amount uncertain tax positions recognized would affect effective tax rate approximately 618 million recognized interest penalties related income tax reserves amount 08 million 03 million 13 million years ended december 31 2018 2017 2016 respectively component income tax expense following table summarizes aggregate changes unrecognized tax benefits years ended december 31 2018 2017 table includes amounts relate uncertain tax positions acquired companies purchase agreements acquire stock target generally provide seller liable indemnified company income tax liabilities periods prior acquisition company responsible unrecognized tax benefits related interest penalties periods acquisition company considering claim internal revenue code section 1341 concerning tax rate applied small quantity customer class action settlement company’s 2018 tax return company may request prefiling agreement “pfa” us internal revenue service related treatment item pfa settled positive income tax benefit resulting pfa recognized time company established long term receivable amount within unrecognized tax positons reflect estimate potential refund claim successful assurance amount recovered result claim 2018 10k annual report stericycle inc • 97 part ii note 10 fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy distinguishes 1 market participant assumptions developed based market data obtained independent sources observable inputs 2 entitys assumptions market participant assumptions developed based best information available circumstances unobservable inputs fair value hierarchy consists three broad levels described level 1 quoted prices active markets identical assets liabilities highest priority level 2 observable inputs quoted prices active markets identical assets liabilities quoted prices identical similar assets liabilities inactive markets inputs observable corroborated observable market data substantially full term assets liabilities level 3 inputs generally unobservable typically reflect management’s estimate assumptions market participants would use pricing asset liability lowest priority financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness nonperformance risk considered fair value measurements noted movements items fair value hierarchies periods presented december 31 2018 2017 recognized 03 million 04 million respectively asset related fair value established using level 2 inputs us dollarcanadian dollar foreign currency swap classified assets objective swap offset foreign exchange risk us dollar equivalent cash outflows canadian subsidiary contingent consideration liabilities recorded using level 3 inputs total amounts classified current liabilities follows december 31 contingent consideration represents amounts expected paid part acquisition consideration certain future events occur events usually targets revenues earnings milestones related business acquired arrive fair value contingent consideration applying weighted probability potential payment outcomes calculation potential outcomes dependent past financial performance management assumptions future performance 2018 10k annual report stericycle inc • 98 part ii financial performance measures fully met maximum aggregate liability would 134 million december 31 2018 contingent consideration liabilities reassessed reporting period reflected consolidated balance sheets part current liabilities changes contingent consideration reflected table addition assets liabilities recorded fair value recurring basis company required record certain assets liabilities fair value nonrecurring basis generally result acquisitions remeasurement assets resulting impairment charges see note 3 acquisitions note 4 restructuring divestitures assets held sale note 6 goodwill intangible assets discussion fair value assets liabilities associated acquisitions assets held sale fair value debt december 31 2018 2017 estimated fair value company’s debt obligations using level 2 inputs compared carrying amount follows fair values estimated using income approach applying market interest rates comparable instruments accounts receivable accounts payable accrued liabilities financial assets liabilities respectively carrying values approximate fair value using level 3 inputs note 11 commitments contingencies environmental remediation liabilities record liability environmental remediation liability becomes probable costs damages reasonably estimated accrue environmental remediation costs undiscounted basis associated identified sites assessment indicated cleanup costs probable 2018 10k annual report stericycle inc • 99 part ii reasonably estimated timing payments fixed determinable accruals based currently available information estimated timing remedial actions existing technology enacted laws regulations liability environmental remediation included consolidated balance sheets current liabilities within accrued liabilities noncurrent liabilities within liabilities see note 7 accrued liabilities long term liabilities december 31 2018 2017 total environmental remediation liabilities recognized 335 million 308 million respectively 53 million 57 million respectively presented accrued liabilities consolidated balance sheets project estimated payments approximately 30 years asset retirement obligations asset retirement obligations required perform law contract asset permanently taken service obligations expected paid many years future expected funded general company resources time removal december 31 2018 2017 total asset retirement obligation liabilities recognized 191 million 182 million respectively included noncurrent liabilities within liabilities see note 7 accrued liabilities long term liabilities operating lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space landfills operating lease agreements leases varying terms leasesmay contain renewal purchase options escalation clauses restrictions penalties obligations consider determining minimum lease payments years ended december 31 2018 2017 2016 rent expense including lease related costs monthtomonth rentals leases initial lease term less one year 1921 million 1862 million 1816 million respectively 1787 million 1737 million 1698 million respectively included within cor remainder included sga consolidated statements loss income minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2018 including leases inception date yet commenced next five years aggregate follows 2018 10k annual report stericycle inc • 100 part ii unconditional purchase commitments company entered noncancelable arrangements thirdparties primarily related information technology products services december 31 2018 future payments contractual obligations recognized consolidated balance sheets follows letters credit surety bonds bank guarantees december 31 2018 2017 631 million 1308 million respectively standby letters credit outstanding senior credit facility see note 8 debt december 31 2018 also 522 million standby letters credit outstanding another facility entered 2018 addition december 31 2018 2017 637 million 190 million respectively surety bonds 195 million 157 million respectively bank guarantees bank guarantees issued mostly international subsidiaries various purposes including leases seller notes contracts permits surety bonds used performance financial guarantees neither bank guarantees surety bonds affect ability use various lines credit note 12 retirement employee benefit programs defined contribution plans 401k defined contribution retirement savings plan “plan” covering substantially domestic employees participant may elect defer portion compensation subject certain limitations company may contribute 50 compensation contributed plan employee maximum 3000 per annum years ended december 31 2018 2017 2016 contributions 106 million 89 million 59 million respectively employees associated 2015 shredit acquisition allowed continue participate former shredit 401k defined contribution retirement savings plan “shredit plan” year ended december 31 2016 made contributions 34 million shredit plan officially closed employees converted plan effective january 1 2017 company also several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2018 2017 2016 total contributions made company plans approximately 31 million 34 million 26 million respectively 2018 10k annual report stericycle inc • 101 part ii multiemployer defined benefit pension plans participate two trusteemanaged multiemployer defined benefit pension plans “multiemployer pension plans” employees covered collective bargaining agreements risks participating multiemployer pension plans different singleemployer plans assets contributed multiemployer pension plan one employer may used provide benefits employees former employees participating employers ii participating employer stops contributing multiemployer pension plans unfunded obligations multiemployer pension plan may required assumed remaining participating employers iii choose stop participating multiemployer pension plans event significantly reduce eliminate need participate employee layoffs closure location may required pay plans withdrawal amount based underfunded status plan based upon recent information available one plans participate “critical” status due accumulated funding deficiency adopted rehabilitation plan address funding deficiency position following table outlines participation multiemployer pension plans 1 zone status defined department labor pension protection act 2006 represents level plan funded plans red zone less 65 funded plans green zone least 80 funded status based information received multiemployer pension plans certified pension plans actuary 2 fiprp status column indicates multiemployer pension plans funding improvement plan fip” rehabilitation plan rp implemented pending recent pension protection act zone status available 2018 2017 plans’ yearend december 31 2017 2016 respectively 3 multiemployer pension plan certified endangered seriously endangered critical may begin levy statutory surcharge contribution rates authorized surcharge rate 5 first 12 months 10 periods thereafter certain conditions met contributing employers however may eliminate surcharge entering collective bargaining agreement meets requirements applicable fip rp 4 company listed form 5500 pension plan private sanitation union local 813 ibt individually significant contributing 5 total contributions plan years ended december 31 2017 2016 date financial statements 2018 10k annual report stericycle inc • 102 part ii issued forms 5500 available multiemployer pension plans year ended december 31 2018 note 13 stock based compensation december 31 2018 following incentive stock plans • 2017 incentive stock plan stockholders approved may 2017 • 2014 incentive stock plan stockholders approved may 2014 • 2011 incentive stock plan stockholders approved may 2011 • 2008 incentive stock plan stockholders approved may 2008 • 2005 incentive stock plan stockholders approved april 2005 • 2000 nonstatutory stock option plan expired february 2010 • employee stock purchase plan espp stockholders approved may 2001 amended restated may 2017 • canadian employee stock purchase plan “canada espp” stockholders approved may 2016 december 31 2018 reserved total 2709476 shares issuance incentive stock plans terms stock options authorized 2017 plan 2014 plan 2011 plan 2008 plan 2005 plan provide grant nonstatutory stock options nsos incentive stock options isos restricted stock units “rsus” performancebased restricted stock units “psus” intended qualify section 422 internal revenue code 2000 plan provides grant nsos plans authorize awards officers employees consultants directors exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted incentive stock plan may exceed 8 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options employee stock purchase plan october 2000 board directors adopted espp stockholders approved may 2001 made effective july 1 2001 espp authorizes 1299999 shares common stock substantially employees may purchase payroll deductions price equal 85 fair market values stock end sixmonth offering period employees payroll deductions stock purchase may exceed 5000 offering period 2018 2017 2016 131959 shares 109762 shares 88344 shares respectively issued espp may 2017 shareholders approved amendment espp authorizes issuance additional 300000 shares december 31 2018 161372 shares available issuance espp plan 2018 10k annual report stericycle inc • 103 part ii march 2016 board directors approved canada espp stockholders approved may 2016 canada espp authorizes 100000 shares common stock substantially canadian employees may purchase payroll deductions price equal 95 fair market values stock end sixmonth offering period employees payroll deductions stock purchase may exceed 5000 offering period 2018 2017 2016 2283 shares 1766 shares 756 shares respectively issued canada espp december 31 2018 95195 shares available issuance canada espp plan stockbased compensation expense 2018 changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding following table presents total stockbased compensation expense resulting stock option awards rsus psus espp canada espp included consolidated statements loss income stock options granted nonemployee directors vest one year options granted officers employees generally vest five years expense related options graded vesting recognized using straightline method vesting period stock option activity year ended december 31 2018 summarized follows 2018 10k annual report stericycle inc • 104 part ii december 31 2018 190 million total unrecognized compensation expense related stock options expected recognized weighted average period 259 years following table sets forth intrinsic value options exercised years ended december 31 2018 2017 2016 exercise intrinsic value represents total pretax intrinsic value difference fair value trading day option exercised exercise price associated respective option company uses historical data estimate expected life volatility estimated fair value stock options time grant using blackscholes option pricing model follows restricted stock units fair value rsus based closing price companys common stock date grant amortized expense service period rsus vest end three five years 2017 plan includes share reserve rsus granted 11 ratio 2008 2011 2014 plans reserve 21 ratio rsus granted 2005 plan rsus activity year ended december 31 2018 follows december 31 2018 231 million total unrecognized compensation expense related rsus expected recognized weighted average period 352 years fair value units vested years ended december 31 2018 2017 42 million 29 million respectively units vested year ended december 31 2016 2018 10k annual report stericycle inc • 105 part ii performancebased restricted stock units executive officers psu program introduced 2017 psus vest three equal annual installments based achievement predetermined annual earnings per share performance goals approved compensation committee psu’s granted represent right receive one share company’s common stock specified future date addition certain employees granted psus vest four equal annual installments based achievement performance goals related business transformation approved compensation committee compensation cost executive business transformation psu’s recognized based estimated achievement underlying goals number psu’s recipients ultimately receive based upon compensation committee’s review actual achievement goals psu’s granted represent right receive one share company’s common stock specified future date psus activity year ended december 31 2018 follows table reflects maximum number shares could granted upon vesting executive business transformation psu’s performance goals related 2018 established december 31 2018 approximately 311000 additional psus exist vest tranches based upon achievement performance goals established fiscal years 2019 2021 note 14 preferred stock december 31 2018 1000000 authorized shares preferred stock zero shares issued outstanding december 31 2017 1000000 authorized shares preferred stock 673380 shares issued outstanding series mandatory convertible preferred stock offering september 15 2015 completed registered public offering 7700000 depositary shares representing 110th interest share 525 series mandatory convertible preferred stock par value 001 per share series preferred stock public offering price 10000 per depository share total gross proceeds 7700 million september 14 2018 accordance terms issue 638190 shares company’s series preferred stock representing preferred stock outstanding date converted 2018 10k annual report stericycle inc • 106 part ii total 47 million shares company’s common stock ratio 73394 shares common stock share series preferred stock prior conversion referenced dividends shares series preferred stock payable cumulative basis declared board directors authorized committee thereof annual rate 525 liquidation preference 1000 per share correspondingly 10000 per share respect depositary shares dividends payable cash subject certain limitations shares common stock combination cash shares common stock march 15 june 15 september 15 december 15 year commencing december 15 2015 including september 15 2018 declared paid dividends 255 million 363 million 394 million series preferred stock shareholders years ended december 31 2018 2017 2016 respectively following table provides information repurchases depository shares series preferred stock prior conversion referenced year ended december 31 2018 years ended december 31 2018 2017 2016 repurchases depository shares resulted increases retained earnings 169 million 173 million 113 million respectively redeemed depository shares discount 351900 depository shares repurchased 2018 equivalent 35190 shares series preferred stock note 15 loss earnings per common share basic loss earnings per share computed dividing loss income available common shareholders weightedaverage number shares common stock outstanding period diluted earnings per share computed dividing income available common shareholders weightedaverage number shares common stock outstanding period increased include number additional shares common stock would outstanding potentially dilutive securities issued potentially dilutive securities include outstanding stock options shares purchased company’s espp canadian espp rsus psus impact series preferred stock prior conversion september 14 2018 effect potentially dilutive securities reflected diluted earnings per share application treasury stock method outstanding 2018 10k annual report stericycle inc • 107 part ii stockbased compensation awards treasury stock method increase fair market value company’s common stock result greater dilutive effect potentially dilutive securities issue series preferred stock used ifconverted method weighted period prior conversion ifconverted method preferred dividend applicable series preferred stock added back adjustment numerator series preferred stock shares assumed converted common shares beginning period later time issuance conversion september 14 2018 year ended december 31 2018 common shares weighted period series preferred stock outstanding resulting weighted average common shares included denominator applying ifconverted method conversion assumed purposes computing diluted earnings per share effect would antidilutive numerator also adjusted premium discount arising redemption series preferred stock following table sets forth computation basic diluted loss earnings per share 1 year ended december 31 2018 denominator basic loss earnings per share includes 14 million shares representing weightedaverage impact common shares outstanding result series preferred stock conversion september 14 2018 2 2018 options purchase shares thousands 124 excluded computation diluted loss earnings per share due net loss incurred year 3 2018 2017 2016 weighted average common shares thousands issuable upon assumed conversion series preferred stock totaling 3367 5104 5528 respectively excluded computation diluted loss earnings per share conversion would antidilutive 2018 2017 2016 options purchase shares thousands 4664 4724 3411 respectively exercise prices 475214156 625014156 834914156 respectively included computation diluted loss earnings per share effect would antidilutive 2018 2017 2016 rsus thousands 169 218 48 respectively included computation diluted loss earnings per share effect would antidilutive 2018 10k annual report stericycle inc • 108 part ii 2018 2017 company outstanding psus thousands eligible vest maximum 116 11 shares common stock respectively subject achievement specified performance conditions contingently issuable shares excluded computation diluted earnings per share based current period results shares would issuable end reporting period end contingency period company incurred net loss attributable common shareholders outstanding psus excluded loss earnings per share calculation 2018 2017 performance conditions satisfied end respective periods note 16 accumulated comprehensive loss following table sets forth changes components accumulated comprehensive loss 2018 2017 2016 years ended december 31 2018 2017 2016 unrealized gains cash flow hedges accumulated comprehensive income stated presented net tax impacts 04 million 07 million 08 million respectively note 17 segment reporting evaluate oversee manage financial performance three operating segments domestic canada regulated waste compliance international regulated waste compliance domestic communication related services domestic canada international regulated waste compliance services segments include medical waste disposal pharmaceutical waste disposal hazardous waste management sustainability solutions expired unused inventory secure information destruction documents emedia training consulting sterisafe® clinical services programs regulatory compliance services domestic communication related services segment includes inboundoutbound communication automated patient reminders online scheduling notifications product retrievals product returns quality audits domestic communication related services consistently meet quantitative criteria separate reportable segment therefore included “all other” reporting segment along costs related corporate support shared services functions stockbased compensation 2018 10k annual report stericycle inc • 109 part ii beginning first quarter 2018 changed measure segment profitability adjusted earnings interest tax depreciation amortization “adjusted ebitda” adjusted ebitda income operations excluding certain specified items depreciation intangible amortization result change segment reporting applicable historical segment information revised conform new presentation following tables show financial information companys reportable segments 2018 10k annual report stericycle inc • 110 part ii following table reconciles companys primary measure segment profitability adjusted ebitda loss income operations note 18 geographic area services information following table presents consolidated revenues longlived assets geographic region following table presents consolidated revenues service 2018 10k annual report stericycle inc • 111 part ii note 19 legal proceedings operate highly regulated industries respond regulatory inquiries investigations time may initiated variety reasons given time company matters various stages resolution applicable government authorities also routinely involved actual threatened legal actions including involving alleged personal injuries commercial employment environmental tax issues outcomes matters within company’s complete control may known prolonged periods time actions claimants seek damages well relief including injunctive relief could require significant expenditures result lost revenue accordance applicable accounting standards company establishes accrued liability loss contingencies related legal regulatory matters loss probable reasonably estimable reasonable estimate probable loss range amount within range better estimate minimum amount range accrued loss probable loss reasonably estimable liability recorded determining estimated loss range loss significant judgment required estimate amount timing loss recorded accruals represent management’s best estimate probable losses cases may exposure loss excess amounts accrued estimates probable losses resulting litigation regulatory proceedings difficult predict legal regulatory matters inherently involve significant uncertainties based among factors jurisdiction stage proceedings developments applicable facts law unpredictability ultimate determination merits claim defenses company may assert claim amount damages may awarded company’s accrued liabilities loss contingencies related legal regulatory matters may change future result new developments including limited occurrence new legal matters changes law regulatory environment adverse favorable rulings newly discovered facts relevant matter changes strategy matter regardless outcome litigation adverse impact company defense settlement costs diversion management resources factors contract class action lawsuits beginning march 12 2013 served several class action complaints filed federal state courts several jurisdictions complaints asserted among things imposed unauthorized excessive price increases charges customers breach contracts violation illinois consumer fraud deceptive business practices act complaints sought certification lawsuit class action award class members appropriate damages injunctive relief related actions ultimately transferred united states district court northern district illinois centralized pretrial proceedings “mdl action” february 16 2017 court entered order granting plaintiffs’ motion class certification court certified class “all persons entities march 8 2003 date trial resided united states except washington alaska identified stericycle ‘small quantity’ ‘sq’ customer charged paid contractuallyagreed price stericycle’s medical waste disposal goods services pursuant stericycle’s automated price increase policy governmental entities whose claims asserted united states ex rel perez v stericycle inc shall excluded class” 2018 10k annual report stericycle inc • 112 part ii parties engaged discussions overseen mediator regarding potential resolution matter reached agreement principle settlement july 2017 subsequently documented definitive settlement agreement “settlement” october 17 2017 settlement provided global resolution cases claims company mdl action also provided company would establish common fund 2950 million would paid compensation members settlement class attorneys’ fees class counsel incentive awards named class representatives costs notice administration also provided existing contracts customers would remain force would also establish part settlement guidelines future price increases provide customers additional transparency regarding increases terms settlement company admitted fault wrongdoing whatsoever entered settlement avoid cost uncertainty litigation settlement provided upon final approval court following fairness hearing would fully finally resolve claims company alleged mdl action court granted preliminary approval settlement following hearing october 26 2017 fairness hearing held march 8 2018 court granted approval proposed mdl settlement day court entered final judgment may 8 2018 appeal filed proposed mdl settlement became finally effective june 7 2018 “final settlement” company funded final settlement july 6 2018 certain class members opted final settlement filed lawsuits company defend resolve actions company accrued estimate probable loss collective matters material securities class action lawsuit july 11 2016 two purported stockholders filed putative class action complaint us district court northern district illinois plaintiffs purported sue behalf purchasers publicly traded securities february 7 2013 april 28 2016 inclusive purchased securities public offering depositary shares representing 110th interest share mandatory convertible preferred stock around september 15 2015 complaint named defendants company directors certain current former officers certain underwriters public offering complaint purports assert claims sections 11 12a2 15 securities act 1933 sections 10b 20a securities exchange act 1934 well sec rule 10b5 promulgated thereunder complaint alleges among things company imposed unauthorized excessive price increases charges customers breach contracts defendants failed disclose alleged practices public filings statements issued proposed class period beginning february 7 2013 ending april 28 2016 august 4 2016 plaintiffs filed amended complaint purports assert additional misrepresentations public statements july 28 2016 therefore change putative class period february 7 2013 july 28 2016 inclusive october 21 2016 plaintiffs filed corrected amended complaint adding company named defendant plaintiff’s claim section 11 securities act previously asserted underwriters certain officers directors november 1 2016 court appointed public employees’ retirement system mississippi arkansas teacher retirement system lead plaintiffs counsel lead counsel february 1 2017 lead plaintiff filed consolidated amended complaint additional purported factual 2018 10k annual report stericycle inc • 113 part ii material supporting legal claims prior complaints class period february 7 2013 september 18 2016 defendants filed motion dismiss consolidated amended complaint april 1 2017 may 19 2017 plaintiffs filed response opposition motion dismiss june 19 2017 defendants filed reply brief support motion march 31 2018 plaintiffs filed amended complaint alleging additional corrective disclosures extending purported class period february 21 2018 defendants filed motion dismiss consolidated amended complaint may 25 2018 motion fully briefed july 13 2018 awaited ruling court parties engaged discussions overseen mediator regarding potential resolution matter reached agreement principle settlement december 2018 “proposed securities class action settlement” disclosed current report form 8k filed december 20 2018 terms proposed securities class action settlement provide company establish common fund 45 million paid compensation members settlement class attorneys’ fees class counsel incentive awards named class representatives costs notice administration large majority 45 million common fund established pursuant proposed securities class action settlement paid company’s insurers proposed securities class action settlement admitted fault wrongdoing whatsoever entered proposed securities class action settlement order avoid cost uncertainty litigation february 14 2019 company executed definitive written settlement agreement “settlement” incorporated terms agreement principle announced december 2018 settlement incorporated terms proposed securities class action settlement described proposes global resolution cases claims company securities class action terms settlement company admitted fault wrongdoing whatsoever entered settlement avoid cost uncertainty litigation settlement provided upon final approval court following fairness hearing would fully finally resolve claims company alleged securities class action february 25 2019 plaintiffs securities class action filed plaintiffs’ unopposed motion order preliminarily approving class settlement authorizing dissemination notice settlement “preliminary approval motion” preliminary approval motion asks court preliminarily approve settlement approve manner content notice given potential class members set schedule among things deadlines potential class members file claims object settlement seek exclusion settlement class preliminary approval motion pending court shareholder derivative lawsuits september 1 2016 purported stockholder filed putative derivative action complaint circuit court cook county illinois certain officers directors company naming company nominal defendant complaint alleges defendants breached fiduciary duties company stockholders causing company allegedly overcharge certain customers breach customers’ contracts otherwise provide unsatisfactory customer service injure customer relationships make materially false misleading statements omissions regarding company’s business operational compliance policies february 7 2013 present 2018 10k annual report stericycle inc • 114 part ii march 1 2017 another purported stockholder filed putative derivative action complaint containing substantially similar allegations circuit court cook county illinois certain officers directors company naming company nominal defendant company notes among things addition failing make required demand board directors filings violation company’s bylaws require actions brought court delaware june 29 2017 court entered agreed order consolidating two putative derivative actions purposes caption kausal shah v charles alutto et al july 11 2017 court entered agreed order appointing lead counsel plaintiffs staying action pending resolution motion dismiss securities class action discussed pursuant agreed order defendants reserved potential defenses actions stay lifted february 14 2019 court entered agreed order lift stay set briefing schedule court lifted stay litigation granted plaintiffs leave file amended complaint april 15 2019 set briefing schedule motion dismiss company march 26 2018 alvin janklow v charles alutto et al filed federal district court district delaware april 16 2018 john brennan v charles alutto et al filed court may 16 2018 court entered order consolidating brennan janklow april 18 2018 company filed motion stay combined janklow brennan cases court granted company’s motion january 11 2019 parties stipulated court entered order lifting stay allow company file motion dismiss setting briefing schedule motion january 25 2019 stericycle filed motion dismiss february 25 2019 plaintiffs filed opposition motion company march 12 2019 file reply april 12 2018 rick siu v mark c miller et al filed delaware chancery court agreement parties siu case stayed order court may 24 2018 pending resolution motion dismiss securities class action discussed parties subsequently engaged discussions overseen mediator regarding potential resolution matter february 25 2019 parties executed filed court written stipulation agreement settlement compromise release “siu settlement” siu settlement defendants implement andor maintain certain corporate governance changes period four years following approval settlement addition company receive payment applicable insurance amount 75 million less amounts ordered court paid plaintiff’s attorneys’ fees expenses service award plaintiff neither company defendants admitted fault wrongdoing whatsoever connection siu settlement entered siu settlement order avoid cost uncertainty litigation siu settlement remains subject court approval final hearing court yet scheduled october 18 2016 company received letter attorney purporting represent current stockholder company demanding pursuant del ct ch r 231 company’s board directors take action remedy alleged breaches fiduciary duties certain officers directors company factual allegations set forth letter similar asserted securities class action lawsuit shareholder derivative lawsuits 2018 10k annual report stericycle inc • 115 part ii company’s board directors constituted special demand review committee investigate claims made demand letter committee retained independent counsel assist investigation conclusion investigation committee’s counsel advised stockholder board completed investigation determined pursue legal action july 30 2018 purported stockholder whose behalf demand letter sent filed stockholder derivative action damon turney v mark c miller et al federal district court northern district illinois alleging demand wrongfully refused company moved dismiss action december 5 2018 motion fully briefed february 8 2019 currently pending court january 22 2019 company received letter attorney purporting represent another current stockholder company setting forth allegations demands substantially similar previously presented october 18 2016 demand letter securities class action lawsuit shareholder derivative lawsuits company’s board directors referred letter special demand review committee independent counsel consideration committee considered january 22 2019 letter light prior investigation committee’s counsel advised stockholder board determined pursue legal action accrued amounts respect lawsuits cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate litigation nature uncertain unpredictable ii judgment factual legal allegations asserted plaintiffs sufficiently unique unable identify proceedings circumstances sufficiently comparable provide guidance making estimates intend vigorously defend derivative lawsuits tcpa lawsuit june 3 2016 plaintiff filed putative class action captioned ibrahim v stericycle inc 16cv4294 nd ill us whollyowned subsidiary stericycle communication solutions inc telephone consumer protection act “tcpa” asserting defendants called plaintiff others violation statute plaintiff challenges use prerecorded messages urge owners recalled products return obtain repairs products plaintiff seeks certification two nationwide classes one class includes people received one cellular telephone calls stericycle featuring prerecorded artificial voice message relating product recall called party individual according stericycle’s records intended recipient call second class includes people received one cellular telephone calls stericycle featuring prerecorded artificial voice message relating product recall person communicated stericycle consent make calls cellular telephone number july 28 2016 answered complaint denying material allegations raising certain affirmative defenses among asserted defenses “emergency” exception tcpa exempts calls made promote public health safety december 19 2016 substantial discovery case filed motion summary judgment primarily basis “emergency” exception february 1 2017 plaintiff responded motion requesting additional discovery court permitted plaintiff obtain requested discovery provided additional documents response order 2018 10k annual report stericycle inc • 116 part ii april 5 2017 plaintiff sought leave file amended complaint would add claim illinois automatic telephone dialers act include “emergency” exception certain additional allegations filed opposition motion april 28 2017 contending proposed amendments futile entitled summary judgment june 27 2017 court permitted plaintiff file amended complaint answered plaintiff’s amended complaint denying liability light amended complaint withdrew motion summary judgment without prejudice parties conducted discovery closed may 15 2018 september 25 2018 parties stipulated dismissal case prejudice court dismissed case prejudice october 23 2018 fcpa investigation june 12 2017 sec issued subpoena company requesting documents information relating company’s compliance fcpa foreign domestic anticorruption laws respect certain company’s operations latin america addition doj notified company investigating matter parallel sec company cooperating agencies company also conducting internal investigation matters including outside latin america oversight audit committee board directors assistance outside counsel investigation found evidence improper conduct accrued amounts respect matter cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate based know judgment factual legal issues presented matter sufficiently unique unable identify circumstances sufficiently comparable provide guidance making estimates environmental matters environmental solutions business regulated federal state local laws enacted regulate discharge materials environment generation transportation disposal waste cleanup contaminated soil groundwater protection environment highly regulated nature business frequently become party legal administrative proceedings involving various governmental authorities interested parties issues involved proceedings generally relate alleged violations existing permits licenses alleged responsibility federal state superfund laws remediate contamination properties owned either us parties either prior owners certain facilities shipped wastes time may subject fines penalties regulatory proceedings relating primarily waste treatment storage disposal facilities north salt lake utah continued toll statute limitations united states attorney’s office district utah “usao” relating investigation us environmental protection agency “epa” past clean air act emissions permit requirements previously alleged notice violation “nov” issued state utah division air quality “daq” nov resulted december 2014 settlement daq previously disclosed government indicated matter resolved civilly criminally parties reached agreement principle documented form civil consent decree company undertake supplemental environmental project pay civil penalty clean air act 2018 10k annual report stericycle inc • 117 part ii company accrued total amount agreement principle rancho cordova california department toxic substances control “dtsc” alleged violations california’s hazardous waste control law hazardous waste facility rancho cordova california years 2011 2017 dtsc referred matter california attorney general’s office march 3 2016 entered tolling agreement attorney general’s office subsequently extended parties negotiated resolution matter october 26 2017 dtsc filed complaint california superior court sacramento county civil penalties injunctive relief alleged violations californias hazardous waste control law october 15 2018 parties entered stipulation entry order final judgment consent entered superior court state california sacramento county october 19 2018 associated penalty paid company november 2018 tabasco mexico late 2016 national agency industrial security protection environment hydrocarbon sector mexico “asea” conducted permit compliance inspection hazardous waste treatment facility acquired one subsidiaries dos bocas tabasco mexico asea subsequently claimed soil treatment process described facility’s treatment permit followed properly issued order imposing fine directing facility closed alleged contamination certain portion facility remediated subsidiary engaged firm environmental technicians assess contamination described asea order conduct broader environmental assessment facility preliminary estimate remediation costs necessary address asea order 20 million review assessment overall facility ongoing november 2017 asea rescinded prior order imposing fine reassessing evidence arguments presented asea issued new resolution march 9 2018 containing lower revised fine including remedial obligations march 2018 company submitted proposal remedial measures april 26 2018 company appealed fines recent order december 2018 asea approved company’s remedial plan facility involve amendment facility’s permit allow onsite insitu remediation one treatment cell subject asea’s original order june 2018 company instituted civil criminal legal proceedings mexico company acquired relevant facility seeking hold seller liable remediation well lost profits damages defendants named civil complaint filed answers september 2018 company accrued estimate probable loss costs necessary comply asea order remediate treatment cell material 2018 10k annual report stericycle inc • 118 part ii note 20 quarterly financial information unaudited following table summarizes unaudited consolidated quarterly results operations reported 2018 2017 eps calculated quarterly basis amounts may total calculated fullyear eps 2018 10k annual report stericycle inc • 119 part ii stericycle inc schedule ii valuation qualifying accounts 1 amounts consist primarily currency translation adjustments 2 2018 amount consists primarily release valuation allowance net operating losses ceased upon merger 2017 2016 amounts consist primarily valuation allowances acquired deferred tax assets business combinations item 9item 8 financial statements supplementary data report independent registered public accounting firm shareholders board directors stericycle inc opinion financial statements audited accompanying consolidated balance sheets stericycle inc company december 31 2019 2018 related consolidated statements loss income comprehensive loss income changes equity cash flows three years period ended december 31 2019 related notes financial statement schedule listed index item 15a collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2019 2018 results operations cash flows three years period ended december 31 2019 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2019 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 28 2020 expressed adverse opinion thereon basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures include examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit consolidated financial statements communicated required communicated audit committee 1 relate accounts disclosures material consolidated financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate 2019 10k annual report stericycle inc • 67 part ii valuation goodwill description matter december 31 2019 company’s goodwill 29822 million disclosed note 7 consolidated financial statements goodwill tested impairment reporting unit level annually october 1 frequently triggering event occurs company recognized 209 million 1266 million 808 million goodwill impairment related latin america canada domestic environmental solutions reporting units 2019 latin america included international regulated waste compliance services segment canada domestic environmental solutions reporting units included north america regulated waste compliance services segment auditing management’s goodwill impairment assessments resulting impairment complex highly judgmental due significant estimation required determining fair value company’s reporting units particular fair value estimate sensitive significant assumptions discount rates projections revenue cost revenue operating expense growth rates longterm growth rates affected expectations future market economic conditions particularly markets challenging economic conditions addressed matter audit test estimated fair value company’s reporting units performed audit procedures included among others assessing methodologies testing significant assumptions discussed underlying data used company analysis involved valuation specialists review company’s model methods sensitive assumptions utilized discount rate longterm growth assumptions compared significant assumptions used management current industry economic trends changes company’s business model customer base relevant factors particular focus reporting units impairment charge recorded current year assessed historical accuracy management’s estimates performed sensitivity analyses significant assumptions evaluate changes fair value reporting units would result changes assumptions reconciled fair value reporting units carrying values testing company’s determination assets liabilities used within reporting units basis carrying values addition tested management’s reconciliation fair value reporting units market capitalization company assessed adequacy company’s goodwill valuation disclosures 2019 10k annual report stericycle inc • 68 part ii measurement environmental remediation liability description matter december 31 2019 company’s environmental remediation liability totaled 319 million disclosed note 12 consolidated financial statements company’s liability environmental remediation based undiscounted costs associated identified sites assessment indicated cleanup costs probable reasonably estimated liabilities based currently available information estimated timing remedial actions existing technology enacted laws regulations auditing environmental remediation liabilities complex due highly judgmental nature assumptions used estimate company considers several assumptions estimate ultimate liability sites including nature extent contamination required remediation methods timing expenditures apportionment responsibility among potentially responsible parties financial viability parties addressed matter audit test liability environmental remediation performed audit procedures included among others assessing methodologies used company testing significant assumptions discussed also compared significant assumptions used management historical trends available notifications decisions regulatory agencies specifying remedial plans action required addition evaluated management’s thirdparty environmental engineers service providers charged developing assumptions involved environmental engineering specialists assist us evaluating work performed company’s internal resources thirdparty external environmental engineering specialists company engaged help develop estimates specifically utilized environmental engineering specialists evaluate reasonableness costs estimated environmental remediation activities assess remediation progress relation regulatory requirements corroborate analysis relevant management personnel thirdparty environmental engineers service providers also tested completeness accuracy data utilized development environmental liability assessed adequacy environmental remediation liabilities disclosures ernst young llp served company’s auditor since 1991 chicago illinois february 28 2020 2019 10k annual report stericycle inc • 69 part ii stericycle inc consolidated statements loss income see accompanying notes consolidated financial statements 2019 10k annual report stericycle inc • 70 part ii stericycle inc consolidated statements comprehensive loss income see accompanying notes consolidated financial statements 2019 10k annual report stericycle inc • 71 part ii stericycle inc consolidated balance sheets see accompanying notes consolidated financial statements 2019 10k annual report stericycle inc • 72 part ii stericycle inc consolidated statements cash flows see accompanying notes consolidated financial statements 2019 10k annual report stericycle inc • 73 part ii stericycle inc consolidated statements changes equity see accompanying notes consolidated financial statements 2019 10k annual report stericycle inc • 74 part ii stericycle inc notes consolidated financial statements millions except per share data unless otherwise indicated unless context requires otherwise “company” “stericycle” us refers stericycle inc subsidiaries consolidated basis note 1 basis presentation summary significant accounting policies description business incorporated 1989 stericycle protects people safeguards communities reduces risk highly specialized medical hazardous waste management secure information destruction services company serves customers us 18 countries concentration growing healthcare industry company’s core business focus regulated medical waste secure information destruction leading provider services terms revenue operational infrastructure information company’s business segments services see part item 1 business note 18 segment reporting february 6 2020 entered agreement pursuant agreed sell esol disposal group cash consideration 4625 million subject regulatory approval satisfaction customary closing conditions discussion see note 4 restructuring divestitures summary significant accounting policies basis presentation accompanying consolidated financial statements include accounts stericycle inc subsidiaries intercompany accounts transactions eliminated consolidation companys consolidated financial statements prepared accordance us gaap include assets liabilities revenue expenses whollyowned subsidiaries majorityowned subsidiaries company exercises control outside stockholders interests subsidiaries shown consolidated financial statements “noncontrolling interests use estimates preparation financial statements conformity generally accepted accounting principles requires company make estimates assumptions affect amounts reported financial statements accompanying notes areas company makes estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits environmental liabilities asset retirement obligations stock compensation expense income tax assets liabilities accrued auto workers’ compensation insurance claims leases intangible asset valuations longlived asset goodwill impairment estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates revenue contracts customers accordance asc 606 revenue recognized customer obtains control promised goods services amount revenue recognized reflects consideration company expects entitled receive exchange good services revenue recognized net revenuebased taxes assessed governmental authorities 2019 10k annual report stericycle inc • 75 part ii company provides regulated waste compliance services provide collection processing regulated specialized waste including medical pharmaceutical hazardous waste disposal compliance programs secure information destruction services provide collection personal confidential information secure destruction recycling shredded paper manufacturing industrial services provides collection processing disposal hazardous waste manufacturing industrial companies communication related services includes expert solutions communication services appointment reminders secure messaging event registration communications hospitals idn’s associated activities series distinct services substantially pattern transfer time therefore respective services treated single performance obligation company recognizes revenue applying right invoice practical expedient company’s right consideration corresponds directly value provided customer performance date revenues company’s medical waste management services secure information destruction services recognized upon waste collection company’s compliance program revenues recognized contractual service period revenues retail healthcare hazardous waste solutions recognized time waste received facility appropriate permit either company’s processing facility third party revenues communication services expert solutions recognized services performed accounts receivable allowance doubtful accounts receivable recorded billed goods services provided carrying value company’s receivables presented net allowance doubtful accounts company estimates allowance doubtful accounts based past collection history specific risks identified among uncollected amounts current economic trends events changes circumstances indicate specific receivable balances may impaired consideration given collectability balances allowance adjusted accordingly pastdue receivable balances written company’s internal collection efforts exhausted single customer accounts approximately 12 company’s accounts receivable approximately 14 total revenues year ended december 31 2019 2018 2017 bad debt expense 257 million 249 million 323 million respectively contract liability company records contract liability cash payments received advance company’s services performed classified current liabilities consolidated balance sheets since amounts earned within year contract acquisition costs incremental direct costs obtaining contract primarily represent sales incentives deferred amortized sga estimated period benefit derived cost cash equivalents company considers highly liquid investments maturity less three months purchased cash equivalents cash equivalents carried cost financial instruments company’s financial instruments consist cash equivalents accounts receivable payable derivatives longterm debt financial instruments potentially subject company concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size company’s customer base low 2019 10k annual report stericycle inc • 76 part ii concentration performance ongoing credit evaluations customers company also maintains allowances potential credit losses property plant equipment property plant equipment stated cost expenditures software purchases software developed internal use capitalized included software developed internal use external direct costs materials services certain internal payroll related fringe benefit costs capitalized costs computer software developed obtained internal use depreciation amortization computed using straightline method estimated useful lives assets follows upon deployment capitalized costs associated erp system amortized estimated useful life 10 years capitalized interest company capitalizes interest incurred associated projects construction duration asset construction period years ended december 31 2019 2018 2017 company capitalized interest 54 million 29 million 16 million respectively goodwill identifiable intangible assets goodwill represents excess purchase price fair value assigned net tangible identifiable tangibles business acquired intangible assets definite lives amortized straightline basis estimated useful lives impairment long indefinite lived assets property equipment intangible assets definitelives net longlived assets property plant equipment amortizing intangible assets reviewed whenever events changes circumstances indicate related carrying amounts may recoverable impairment assets definitelives generally determined comparing projected undiscounted cash flows expected generated asset groups carrying value carrying value longlived asset group recoverable undiscounted basis impairment recognized extent fair value exceeds carrying value determining extent impairment typically requires various estimates assumptions including cash flows directly attributable asset useful life asset residual value necessary company uses internal cash flow estimates quoted market prices appraisals appropriate determine fair value actual results could vary estimates addition remaining useful life impaired asset revised necessary intangible assets indefinitelived intangibles consist primarily permits tradenames indefinitelived intangibles assessed impairment annually october 1 frequently event occurs circumstances change using either qualitative quantitative approach qualitative approach first determines morelikelythannot fair value asset less carrying value determination made impairment test complete however determined likely impairment quantitative assessment 2019 10k annual report stericycle inc • 77 part ii performed company performs annual impairment test indefinitelived intangibles using qualitative approach certain assets quantitative approach remaining assets goodwill assessed impairment least annually october 1 year frequently event occurs circumstances change would reduce fair value reporting unit carrying value company used quantitative approach assess goodwill impairment fair value reporting unit calculated using income approach including dcf validated using market approach involvement thirdparty valuation specialist companys reporting units domestic healthcare compliance services domestic secure information destruction domestic crs domestic environmental solutions canada europe asia pacific latin america income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows estimated using management assumptions growth rates including longterm growth rates capital expenditures cost efficiencies future acquisitions included expected future cash flows company uses discount rate based calculated weighted average cost capital adjusted reporting units based size country company specific risk premiums market approach compares valuation multiples similar companies associated reporting unit company reconciles calculated fair values market capitalization fair value compared carrying value including goodwill fair value excess carrying value related goodwill impaired fair value less carrying value impairment charge recognized equivalent amount carrying value exceeds fair value exceed carrying value goodwill use different assumptions estimates judgments goodwill impairment testing process may significantly increase decrease estimated fair value reporting unit generally changes dcf estimates would similar effect estimated fair value reporting unit company believes estimated fair value used measuring impairment based reasonable assumptions future changes underlying assumptions could differ due inherent judgment making estimates goodwill impairment charges may recognized future periods extent changes factors circumstances occur including deterioration macroeconomic environment equity markets including market value company’s common shares deterioration performance future projections changes plans one reporting units discussion see note 7 goodwill intangible assets liabilities heldforsale longlived assets disposal groups classified heldforsale management appropriate authority generally company’s board directors certain executive officers commits plan sale disposal group ready immediate sale active program locate buyer initiated sale probable expected completed within one year classified heldforsale disposal groups valued lower carrying amount fair value less estimated selling costs disposal group constitutes substantially operations country balance cumulative translation adjustment associated country included carrying value disposal group carrying value including amount associated cumulative translation adjustment exceeds fair value less estimated selling costs heldforsale impairment charge recorded reduce carrying value 2019 10k annual report stericycle inc • 78 part ii estimate fair value reviewed end every reporting period disposal group classified heldforsale carrying value adjusted whenever estimated fair value less costs sell less carrying value insurance selfinsurance company’s insurance workers’ compensation autofleet general liability property employeerelated health care benefits obtained using high deductible insurance policies meaning company retained significant portion risks related claims associated programs estimated exposure unpaid claims associated expenses including incurred reported losses based calculation performed third party actuarial specialist using company’s historical claims experience accruals liabilities could revised future occurrences loss developments significantly differ assumptions used estimated recoveries associated insured claims recognized assets receipt amounts probable restructuring charges involuntary termination benefits accrued upon commitment termination plan benefit arrangement communicated affected employees liabilities determined probable estimable depending existence substantive plan severance termination costs onetime termination benefits employee required render service beyond minimum retention period order receive benefits recognized ratably future service period contract termination costs recognized contracts terminated company ceases use leased facility longer derive economic benefit contract exit costs expensed incurred discussion see note 4 restructuring divestitures stockbased compensation company recognizes stockbased compensation expense based estimated grantdate fair value grantdate fair value stock options estimated using black scholes option valuation model fair value restricted stock units performance stock units based closing price company’s common stock date grant expense generally recognized straightline basis service period awards expected vest company presents stockbased compensation expense within consolidated statements loss income based classification respective employees cash compensation discussion see note 14 stock based compensation income taxes company subject income taxes us numerous foreign jurisdictions company computes provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax basis assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected reverse significant judgments required order determine realizability deferred tax assets assessing need valuation allowance company evaluates significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods tax liabilities recognized management’s judgment uncertain tax position meet likely ie likelihood fifty percent threshold recognition tax positions meet likely threshold tax liability may still recognized depending management’s assessment tax position ultimately 2019 10k annual report stericycle inc • 79 part ii settled company records interest penalties unrecognized tax benefits provision income taxes discussion see note 10 income taxes leases accounted january 1 2019 thereafter asc 842 operating leases included operating lease rou assets operating lease liabilities longterm operating lease liabilities company’s consolidated balance sheets finance leases included property plant equipment current portion longterm debt longterm debt consolidated balance sheets operating lease rou assets operating lease liabilities longterm operating lease liabilities recognized based present value future minimum lease payments lease term commencement date nearly company’s lease contracts provide readily determinable implicit rate contracts company uses estimated incremental borrowing rate based information available lease commencement upon adoption asc 842 company used estimated incremental borrowing rates january 1 2019 operating leases commenced prior date company’s leases generally contain material variable lease payments generally contain options purchase leased property material residual value guarantees material restrictive covenants commencement operating lease rou asset equal lease liability adjusted lease incentives initial direct costs incurred company reviews options extend terminate purchase rou assets commencement lease ongoing basis accounts options reasonably certain exercised lease expense recognized straightline basis lease term company lease agreements lease nonlease components including payments common area maintenance vehicle maintenance costs accounted separately based underlying nature class underlying assets addition company applies shortterm lease recognition exemption leases terms commencement greater 12 months asset retirement obligations company establishes assets liabilities present value estimated future costs retire longlived assets termination expiration lease assets amortized lease term recognized liabilities accreted future value estimated retirement costs related amortization accretion expenses presented within cor leased asset used delivery company’s services remaining expenses presented within sga consolidated statements loss income foreign currency assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component accumulated comprehensive loss consolidated balance sheets foreign currency gains losses resulting transactions denominated currencies entity’s functional currency including foreign currency gains losses intercompany balances longterm investment nature included within expense net consolidated statements loss income highly inflationary economy effective july 1 2018 result threeyear cumulative inflation exceeding 100 argentina classified highly inflationary economy accordingly company 2019 10k annual report stericycle inc • 80 part ii recognized expense net foreign exchange loss 33 million 38 million years ended december 31 2019 2018 respectively arising remeasurement argentinian peso denominated net monetary assets nonmonetary assets liabilities related expenses measured using historical exchange rates fluctuate changes local exchange rate adoption new accounting standards leases february 2016 fasb issued asc 842 amended guidance effective company january 1 2019 requires recognition right use lease assets lease liabilities balance sheet leases terms excess 12 months previously classified operating leases company elected optional transition method allows entities continue apply historical accounting guidance comparative periods presented company elected apply package practical expedients allowed reassess transition whether expired existing contracts contain leases ii lease classification expired existing leases iii whether initial direct costs expired existing leases qualify capitalization amended guidance standard material impact company’s consolidated balance sheets significant impact recognition rou assets lease liabilities operating leases company’s accounting finance leases remained substantially unchanged see note 6 leases derivatives hedging august 2017 fasb issued asu 201712 “derivatives hedging” topic 815 targeted improvements accounting hedging activities “asu 201712” asu 201712 amends hedge accounting recognition presentation requirements objective improving financial reporting hedging relationships better portray economic results entity’s risk management activities financial statements enhance transparency understandability hedge transactions addition asu 201712 makes improvements simplify application hedge accounting guidance asu 201712 effective company january 1 2019 adoption material impact consolidated financial statements stranded tax effects february 2018 fasb issued asu 201802 “income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income” “asu 201802” allows stranded tax effects accumulated comprehensive income resulting tax act reclassified retained earnings asu 201802 effective company january 1 2019 material impact consolidated financial statements stock compensation june 2018 fasb issued asu 201807 “compensation stock compensation topic 718 improvements nonemployee sharebased payment accounting” “asu 201807” asu 201807 extends scope topic 718 include sharebased payment transactions acquiring goods services nonemployees asu 201807 effective company january 1 2019 adoption asu 201807 material impact consolidated financial statements 2019 10k annual report stericycle inc • 81 part ii accounting standards issued yet adopted financial instrument credit losses june 2016 fasb issued asu 201613 associated measurement credit losses financial instruments asu 201613 replaces current incurred loss impairment methodology recognizing credit losses loss probable methodology reflects expected credit losses requires consideration broader range reasonable supportable information assess credit loss estimates amended guidance effective company january 1 2020 company expects record upon adoption asu 201613 adjustment allowance doubtful accounts adjustment currently estimated less 50 million implementation costs incurred cloud computing arrangement august 2018 fasb issued asu 201815 “intangibles goodwill internal use software subtopic 25040 customer’s accounting implementation costs incurred cloud computing arrangement service contract” “asu 201815” asu 201815 aligns requirements capitalizing implementation costs incurred hosting arrangement service contract requirements capitalizing implementation costs internaluse software accounting hosting contract unchanged asu 201815 effective january 1 2020 early adoption permitted including adoption interim period adoption asu 201815 expected material impact company’s consolidated financial statements simplifying accounting income taxes december 2019 fasb issued asu 201912 income taxes topic 740 simplifying accounting income taxes “asu 201912” asu 201912 attempts simplify aspects accounting franchise taxes enacted changes tax laws rates clarifies accounting transactions result stepup tax basis goodwill asu 201912 effective public business entities fiscal years beginning december 15 2020 including interim periods within fiscal year early adoption permitted entities company currently assessing effect guidance may consolidated financial statements note 2 revenues contracts customers company provides regulated waste compliance services provide collection processing regulated specialized waste including medical pharmaceutical hazardous waste disposal compliance programs secure information destruction services provide collection personal confidential information secure destruction recycling shredded paper communication related services includes expert solutions communication services appointment reminders secure messaging event registration communications hospitals idn’s company’s customers typically enter contract provision services regular scheduled basis eg weekly monthly needed basis contract term contract terms company receives fees based monthly quarterly annual rate fees based contractual rates depending upon measures including volume weight type waste number size bins collected weight type shredded paper type recall service number call minutes 2019 10k annual report stericycle inc • 82 part ii amounts invoiced based terms underlying contract either regular basis eg monthly quarterly services performed generally due within short period time invoicing based upon normal terms conditions business type geography services performed disaggregation revenues contract liabilities contract liability december 31 2019 2018 122 million 150 million respectively substantially contract liability december 31 2019 expected recognized revenue year ended december 31 2020 substantially balance december 31 2018 recognized revenue year ended december 31 2019 contract acquisition costs company’s incremental direct costs obtaining contract consist primarily sales incentives deferred amortized sga weighted average estimated period benefit 63 years year ended december 31 2019 2018 company amortized 91 million 69 million respectively deferred sales incentives sga 2019 10k annual report stericycle inc • 83 part ii total contract acquisition costs net accumulated amortization classified follows note 3 acquisitions years ended december 31 2019 2018 2017 company completed 1 21 30 acquisitions respectively acquisitions detailed considered complementary existing operations fit company’s growth strategy accounted business combinations applicable guidance following table summarizes locations services acquisitions year results operations acquired businesses included consolidated statements loss income date acquisition pro forma results operations acquisitions presented pro forma effects individually aggregate material company’s consolidated results operations 2019 10k annual report stericycle inc • 84 part ii following table summarizes acquisition date fair value consideration transferred acquisitions completed years ended december 31 fair value consideration transferred business combination allocated net tangible identifiable intangible assets acquisition date remaining unallocated amount recognized goodwill following table summarizes purchase price allocations current year acquisitions adjustments purchase price allocations prior year acquisitions december 31 2019 purchase accounting completed acquisitions year ended december 31 2019 company recognized increase estimated fair value acquired customer relationships current year prior year acquisitions 05 million 42 million respectively excluding effect foreign currency translation amortizable lives 10 years note 4 restructuring divestitures restructuring business transformation stericycle focused driving longterm growth profitability delivering enhanced shareholder value part overall business strategy third quarter 2017 company initiated comprehensive multiyear business transformation december 31 2019 company incurred originally anticipated employee termination charges including incremental charges related principally executive management connection initial restructuring estimate year ended december 31 2019 company recognized 55 million charges related executive employee termination costs 48 million recognized within 07 million recognized within international rwcs reportable segment amounts included sga paid approximately two years december 31 2019 approximately 30 million future payments remained accrued year ended december 31 2018 company recognized 37 million employee termination charges related business transformation north america rwcs international 2019 10k annual report stericycle inc • 85 part ii rwcs reportable segments incurred 30 million 03 million respectively remaining 04 million impacting amounts fully paid december 31 2018 addition year ended december 31 2018 company recognized noncash impairment charges 91 million 74 million related software 03 million related longterm assets north america rwcs reportable segment included cor 14 million related included sga see note 5 property plant equipment year ended december 31 2017 company recognized employee termination charges 115 million noncash impairment charges 24 million related software north america rwcs international rwcs reportable segments incurred 55 million 33 million respectively remaining 51 million impacting remaining liability 22 million december 31 2017 paid first quarter 2018 restructuring operational optimization aim achieve culture continuous improvement enhance efficiency effectiveness competitiveness improve cost base cash flow taken number actions reduce operating costs optimize operations part efforts seek reduce network redundancies consolidating facilities restructuring operations efficiency 2019 actions operational optimization restructuring charges segment follows charges north america rwcs reportable segment related primarily site relocation charges international rwcs reportable segment relate site closures facility exits undertaken emea latam employee termination charges within represent employee severance arising reductions headcount undertaken company’s domestic crs business noncash impairment intangibles recognized result exit business line employee termination payments paid 2019 10k annual report stericycle inc • 86 part ii 2018 actions operational optimization restructuring charges segment follows charges north america rwcs reportable segment related primarily optimizing overall logistics sales functions lease exit costs consolidation call centers canadian crs locations noncash charges relate accelerated depreciation associated software charges international rwcs reportable segment primarily related closure contract exit cleanup costs associated various sites emea latin america apac non cash impairment charges related longlived assets customer relationships operating permits intangibles primarily latin america apac rationalization tradename europe charges related headcount reduction undertaken year lease exit costs consolidation call centers domestic crs locations employee termination payments paid end fourth quarter 2018 divestitures losses net gains company incurred following divestiture losses net gains included consolidated statements loss income 2019 10k annual report stericycle inc • 87 part ii details associated amounts follows crs businesses year ended december 31 2019 company completed sales tas business north america retail pharmaceutical returns business us puerto rico total cash consideration 364 million resulting total losses 455 million 65 million related north america rwcs 390 million related connection sale agreement tas business company entered tsa buyer period 15 months company allocated deferred 51 million proceeds recognized duration tsa period offsetting expenses incurred deliver tsa services reimbursed buyer north america rwcs segment year ended december 31 2018 company completed sale noncore clean room business realizing proceeds 170 million resulting impairment charges subsequent loss disposal totaling 69 million international rwcs segment year ended december 31 2019 company following divestiture activity • uk based texting business proceeds 148 million resulting gain approximately 51 million • substantially company’s operations mexico nominal consideration resulting impairment charges subsequent loss disposal totaling 432 million including realization loss approximately 189 million related balance cumulative currency translation adjustment • company’s operations chile net proceeds 307 million resulting loss 190 million including realization loss approximately 168 million related balance cumulative currency translation adjustment • reduction provision loan receivable originally arising sale uk patient transport business resulting 03 million gain year ended december 31 2018 company completed sale hazardous waste business uk proceeds 115 million 82 million received cash 30 million held escrow received august 2019 company recognized impairment charges subsequent loss disposal totaling 165 million including impairment charges 38 million 2016 year ended december 31 2017 company completed divestiture operations south africa proceeds 73 million resulting gain 30 million addition year ended december 31 2017 company completed divestiture certain assets associated patient transport business uk proceeds 12 million resulting net loss 57 million environmental solutions business february 6 2020 company entered purchase agreement sell domestic environmental solutions business harsco corporation exclusive retained business 2019 10k annual report stericycle inc • 88 part ii subject terms conditions purchase agreement buyer agreed purchase outstanding equity interests company’s domestic environmental solutions subsidiary company buyer agreed indemnify party losses arising certain breaches purchase agreement liabilities subject certain limitations purchase price transaction approximately 4625 million subject adjustment based esol disposal group’s net working capital closing adjustments defined purchase agreement transaction anticipated result loss currently estimable expected charge based company’s current estimate proceeds allocated disposal transaction evaluates terms hsa agreement negotiated buyer concurrently transaction net assets disposed allocation goodwill based relative fair value esol disposal group domestic environmental solutions reporting unit remaining goodwill allocated retained business company anticipates become part domestic healthcare compliance services reporting unit transaction closes purchase agreement contains customary representations warranties covenants related business transaction date purchase agreement completion transaction company agreed conduct ordinary course esol disposal group business consistent past practices material respects agreed certain operating covenants respect esol disposal group business set forth fully purchase agreement purchase agreement includes customary termination provisions including closing transaction occurred november 6 2020 may extended february 6 2021 needed obtain applicable regulatory approvals company buyer agreed indemnify party losses arising certain breaches purchase agreement liabilities subject certain limitations connection closing transaction company buyer enter certain additional ancillary agreements including transition services agreement company buyer also enter longterm subcontracted hsa respect companys retained business company currently provides integrated waste compliance services healthcare customers including medical hazardous waste disposal services company continue integrated waste services provider customers subcontracted buyer performed hazardous waste services including collection transportation disposal company necessary 2019 10k annual report stericycle inc • 89 part ii note 5 property plant equipment property plant equipment consisted following december 31 depreciation expense 1276 million 1256 million 1311 million years ended december 31 2019 2018 2017 respectively 2019 impairments noncash impairment charges related software property plant equipment reportable segment follows 2019 10k annual report stericycle inc • 90 part ii 2019 noncash impairment charges related software connection rationalization applications within crs business noncash impairment charges cor related property plant equipment arose result site move north america rationalization company’s operations emea latam addition company recognized noncash impairment charges 36 million cor related property plant equipment associated impairment review operations brazil see note 7 goodwill intangible assets 2018 impairments noncash impairment charges related software property plant equipment reportable segment follows 2018 noncash impairment charges related software connection company’s evolving future information systems strategy including implementation global erp system impact currently deployed software well rationalization applications used within reportable segment noncash impairment charges related property plant equipment result rationalization company’s operations 2017 impairments 2017 noncash impairment charges sga 73 million related property plant equipment due rationalizing certain operations primarily international rwcs segment 2019 10k annual report stericycle inc • 91 part ii note 6 leases company operating leases vehicles transfer sites processing facilities communication centers corporate regional offices certain equipment components net lease cost follows shortterm lease cost variable lease cost sublease income significant period supplemental cash flow information related leases follows finance lease assets net accumulated amortization 301 million december 31 2019 included property plant equipment net consolidated balance sheet information regarding lease terms discount rates follows 2019 10k annual report stericycle inc • 92 part ii maturities lease liabilities december 31 2019 follows december 31 2019 company additional operating leases 140 million yet commenced operating leases expected commence fiscal year 2020 lease terms 3 15 years december 31 2018 prior adoption asc 842 future minimum payments operating leases initial noncancelable lease terms excess one year including leases inception date yet commenced payments due capital leases follows 2019 10k annual report stericycle inc • 93 part ii note 7 goodwill intangible assets goodwill changes carrying amount goodwill follows accumulated noncash impairment charges segment december 31 2019 2018 follows 2019 impairments company performed annual goodwill assessment october 1 2019 determined domestic environmental solutions canada reporting units’ carrying values excess estimated fair value factors contributed estimated fair value reporting units carrying values included • domestic environmental solutions 2019 experienced higher operating costs particularly related hazardous waste disposal costs addition anticipate timeline achieving betterment plans revenue quality cost improvements extended company also gathered insights process evaluating domestic environmental solutions part company’s portfolio rationalization criteria • canada 2019 experienced competitive pricing pressure sid services regulated medical waste solutions lower sop pricing higher medical hazardous waste costs including canada based operating costs due reliance thirdparty disposal usbased enabling support costs expect challenges prolonged impact adjusted current year longrange plan 2019 10k annual report stericycle inc • 94 part ii challenges factored updates company’s longrange plan forecasted cashflow assumptions company also made certain adjustments risk premiums within discount rates used present value forecasted cashflows result company recognized 808 million noncash impairment charges related domestic environmental solutions reporting unit 1266 million fully impair goodwill associated canada reporting unit first quarter 2019 business market developments insights gathered company’s portfolio rationalization considerations negatively impacted estimated cash flows company’s latin america reporting unit triggered interim assessment march 31 2019 company determined latin america reporting unit’s carrying value excess estimated fair value recognized 209 million noncash goodwill impairment charges related latin america reporting unit following impairment latin america reporting unit remaining goodwill 2018 impairments company performed annual goodwill assessment october 1 2018 interim assessment december 31 2018 company determined domestic crs latin america reporting units’ carrying values excess estimated fair values factors contributed estimated fair value reporting units carrying value included • domestic crs company experienced progressive decrease revenues operating margins 2018 due continued declines large recall events leading higher level uncertainty occurring future periods ii recall events smaller number units significantly lower revenue per event experienced recent years iii continued decline volume inboundoutbound call volumes live voice services company also gathered insights portfolio rationalization considerations initiated 2018 • latin america company continued experience prolonged challenges volatility certain markets due declining market trends cost pressures revenue increases mi business due inflationary price increases argentina offset impact currency devaluation continuing declines several local economies challenges factored updates company’s forecasted cashflow assumptions fourth quarter 2018 reflect current outlook company made certain adjustments discount rates used present value forecasted cashflows result impairment assessments company recognized 2863 million noncash goodwill impairment charges fully impair domestic crs reporting unit addition company recognized 724 million noncash goodwill impairment charges related latin america reporting unit 2017 impairments company performed annual goodwill assessment october 1 2017 evaluated impact prolonged declining market trends latin america continued softness company’s mi regional hazardous waste business estimated cash flows updated reflect challenging conditions latin america result impairment assessment company recognized 650 million noncash goodwill impairment charge impairment charge recognized amount carrying value latin america reporting unit exceeded fair value fair value reporting units used annual interim goodwill impairment assessments 2019 2018 2017 classified level 3 measurements within fair value hierarchy due significant unobservable inputs discount rates projections revenue cost revenue 2019 10k annual report stericycle inc • 95 part ii operating expense growth rates longterm growth rates income tax rates fair value methodology described note 1 basis presentation summary significant accounting policies current year adjustments goodwill certain prior year acquisitions primarily due finalization intangible asset valuations among opening balance sheet adjustments intangible assets december 31 values intangible assets follows changes carrying amount intangible assets since january 1 2018 follows company’s indefinitelived intangible assets include operating permits certain tradenames company determined certain operating permits certain tradenames indefinite lives due ability renew minimal additional cost therefore amortized 2019 10k annual report stericycle inc • 96 part ii company recognized noncash impairment charges relating customer lists permits tradenames following reportable segments 2019 company recognized noncash impairment charges 147 million writeoff customer relationship permits tradenames intangibles presented table 36 million respect certain property plant equipment see note 5 property plant equipment related company’s brazilian operations brazil continued experience challenges including commercial pricing pressure higher customer attrition contributed actual forecasted declines cash flows reflected longrange plan finalized fourth quarter 2019 remaining 30 million 2019 relates writeoff various customer relationship permit intangibles emea latam north america result rationalizing certain operations noncash impairment charges recognized year ended december 31 2018 included 103 million related customer relationship permit intangibles impaired result actual forecasted business declines primarily latam remaining noncash impairment charges incurred year ended december 31 2018 2017 recognized due rationalizing certain operations across segments finitelived intangible assets amortized estimated useful lives using straightline method category weighted average remaining useful lives follows useful life intangible assets assessed annually determine whether events circumstances warrant revision remaining useful life changes reflected prospectively intangible asset amortized revised remaining useful life fourth quarter 2019 performed annual assessment useful life finitelived intangibles changes required years ended december 31 2019 2018 2017 aggregate intangible asset amortization expense 1452 million 1303 million 1184 million respectively estimated intangible asset amortization expense next five years based upon foreign exchange rates december 31 2019 follows years ended december 31 2019 10k annual report stericycle inc • 97 part ii note 8 accrued liabilities long term liabilities accrued liabilities consisted following december 31 longterm liabilities consisted following december 31 note 9 debt longterm debt consisted following december 31 weighted average interest rates longterm debt excluding finance leases december 31 2019 2018 follows 2019 10k annual report stericycle inc • 98 part ii credit agreement company entered credit agreement amended provided term loan facility 9500 million revolving credit facility 12 billion obligations credit agreement secured company required meet certain covenants including requirement maintain consolidated leverage ratio maximum threshold february 25 2020 company executed fifth amendment amended credit agreement among things • increase maximum allowable consolidated leverage ratio 500 100 end first quarter 2022 450 100 thereafter • upon consummation divesture esol disposal group foregoing maximum permitted consolidated leverage ratio levels step 475 100 425 100 respectively • allow continuation 200 million cash add backs ebitda december 31 2020 addbacks 100 million december 31 2021 addbacks thereafter • increase leverage ratio pricing tier greater 450 100 0125 • grant firstpriority security interest administrative agent benefit lenders substantially personal property company certain material domestic subsidiaries including certain equity interests held entities expect incur facility fees approximately 20 million connection execution fifth amendment december 31 2019 company compliance consolidated leverage ratio covenant actual ratio 445 100 allowed maximum ratio 500 100 set forth fifth amendment senior notes 2019 company issued 6000 million par aggregate principal senior notes due july 2024 unsecured bear interest 5375 per annum payable january 15 july 15 year senior notes fully unconditionally guaranteed company’s current domestic subsidiaries guarantee company’s senior credit facility indenture limits ability company subsidiaries incur certain liens enter certain sale leaseback transactions consolidate merge sell substantially assets senior notes redeemable option company whole part time 2019 10k annual report stericycle inc • 99 part ii july 15 2021 redemption prices specified indenture along accrued interest time prior july 15 2021 senior notes may redeemed option company whole part redemption price 100 principal amount thereof plus “makewhole” premium accrued unpaid interest addition company may redeem 40 senior notes time july 15 2021 net cash proceeds certain equity offerings redemption price equal 105375 plus accrued unpaid interest event change control company rating downgrade rating agencies company required offer repurchase outstanding senior notes 101 principal amount plus accrued unpaid interest indenture contains customary events default include subject certain cases customary grace cure periods nonpayment principal interest breach agreements indenture failure pay certain indebtedness certain events bankruptcy insolvency failure pay certain final judgments failure certain guarantees enforceable connection issuance senior notes company incurred 71 million direct issuance costs capitalized unamortized debt issuance costs amortized interest expense net term senior notes private placement notes addition 2019 company repaid full 1075 billion outstanding private placement notes using net proceeds senior notes incremental term loan together additional borrowings senior credit facility connection repayment private placement notes company incurred loss early extinguishment debt 231 million comprising make whole premiums payable terms certain private placement notes 204 million writeoff 27 million unamortized debt issuance costs associated private placement notes addition 34 million representing unamortized portion premiums associated interest rate locks executed connection issuance certain private placement notes recorded interest expense net amounts previously included accumulated comprehensive loss consolidated balance sheet matters amounts committed outstanding letters credit unused portion senior credit facility december 31 follows 2019 10k annual report stericycle inc • 100 part ii payments due longterm debt excluding finance lease obligations five years subsequent december 31 2019 follows note 10 income taxes us international components loss income taxes consisted following years ended december 31 significant components company’s income tax benefit expense years ended december 31 follows 2019 10k annual report stericycle inc • 101 part ii reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 follows deferred tax liabilities assets december 31 follows valuation allowance increased 41 million year ended december 31 2019 primarily due nonbenefited foreign losses december 22 2017 tax act signed law making significant changes internal revenue code changes included limited corporate income tax rate decrease 35 21 effective tax years beginning december 31 2017 transition us international taxation worldwide tax system territorial system onetime transition tax mandatory deemed repatriation cumulative foreign earnings december 31 2017 2019 10k annual report stericycle inc • 102 part ii accordance sab 118 company’s understanding tax act guidance available company calculated provisional estimate tax impact tax act year end 2017 income tax benefitprovision result recognized income tax benefit 1298 million fourth quarter 2017 period legislation enacted provisional amount related remeasurement certain deferred tax assets liabilities based rates expected reverse future onetime transition tax mandatory deemed repatriation foreign earnings related expected foreign withholding taxes earnings reflected table net tax benefit recognized year ended december 31 2017 related tax act follows year ended december 31 2018 company adjusted provisional amounts recognized december 31 2017 onetime transition tax deferred taxes foreign withholding taxes adjustments resulted net charge tax provision 88 million december 31 2018 accounting various elements tax act complete adjustments may necessary future periods due potential technical corrections tax act andor regulatory guidance may issued us internal revenue service prior enactment tax act company treated undistributed earnings foreign subsidiaries indefinitely reinvested company continues assert permanent reinvestment first tier subsidiaries lifts assertion deferred foreign earnings taxed tax act lower tier subsidiaries withholding tax accrual recorded appropriate company provided deferred taxes outside basis differences investments foreign subsidiaries unrelated unremitted earnings basis differences indefinitely reinvested determination unrecognized deferred taxes related components outstanding basis difference practicable calculate december 31 2019 net operating loss carryforwards foreign domestic operations approximately 3794 million certain net operating loss carryforwards begin expire 2021 tax benefit net operating losses approximately 1162 million december 31 2019 valuation allowance 308 million recognized offsetting tax benefit file income tax returns united states various states certain foreign jurisdictions exceptions longer subject us federal state local nonus income tax examinations tax authorities years prior 2015 company recognized liabilities cover certain uncertain tax positions uncertain tax positions relate additional taxes company may required pay various tax jurisdictions course examinations various taxing authorities proposed adjustments may asserted company evaluates items casebycase basis adjusts accrual uncertain tax positions deemed necessary estimated amount liability associated company’s uncertain tax positions may significantly increase decrease within next twelve months cannot reasonably estimated total amount unrecognized tax benefit december 31 2019 627 million amount uncertain tax positions recognized would affect effective tax rate approximately 613 2019 10k annual report stericycle inc • 103 part ii million recognized interest penalties related income tax reserves amount 07 million 08 million 03 million years ended december 31 2019 2018 2017 respectively component income tax expense following table summarizes aggregate changes unrecognized tax benefits years ended december 31 2019 2018 table includes amounts relate uncertain tax positions acquired companies purchase agreements acquire stock target generally provide seller liable indemnified company income tax liabilities periods prior acquisition company responsible unrecognized tax benefits related interest penalties periods acquisition company filed pfa irs related claim internal revenue code section 1341 concerning tax rate applied sq settlement company’s 2018 tax return irs agreed review position discussions ongoing december 31 2019 2018 company established longterm receivable amount within uncertain tax positions reflect estimate potential refund claim successful positive income tax benefit resulting claim future period recognized appropriate accordance guidance asc 740 accounting uncertain tax positions assurance amount recovered result claim note 11 fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy distinguishes 1 market participant assumptions developed based market data obtained independent sources observable inputs 2 entitys assumptions market participant assumptions developed based best information available circumstances unobservable inputs fair value hierarchy consists three broad levels described level 1 quoted prices active markets identical assets liabilities highest priority level 2 observable inputs quoted prices active markets identical assets liabilities quoted prices identical similar assets liabilities inactive markets inputs observable corroborated observable market data substantially full term assets liabilities level 3 inputs generally unobservable typically reflect management’s estimate assumptions market participants would use pricing asset liability lowest priority 2019 10k annual report stericycle inc • 104 part ii financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness nonperformance risk considered fair value measurements noted movements items fair value hierarchies periods presented december 31 2018 company recognized 03 million asset related fair value established using level 2 inputs us dollarcanadian dollar foreign currency swap classified assets objective swap offset foreign exchange risk us dollar equivalent cash outflows canadian subsidiary swap fully amortized december 31 2019 contingent consideration liabilities reassessed end every reporting period recorded using level 3 inputs amounts classified either current liabilities presented follows december 31 contingent consideration represents amounts expected paid part acquisition consideration certain future events occur company arrives fair value contingent consideration applying weighted probability potential payment outcomes calculation potential outcomes dependent past financial performance management assumptions future performance financial performance measures fully met maximum aggregate liability would 107 million december 31 2019 changes contingent consideration reflected table addition assets liabilities recorded fair value recurring basis company required record certain assets liabilities fair value nonrecurring basis generally result acquisitions classification disposal groups heldforsale remeasurement assets resulting impairment charges see note 3 acquisitions note 4 restructuring divestitures note 5 property plant equipment note 7 goodwill intangible assets discussion fair value assets liabilities associated acquisitions assets held sale values generated using level 3 inputs fair value debt estimated fair value company’s debt obligations using level 2 inputs compared carrying amount december 31 follows 2019 10k annual report stericycle inc • 105 part ii fair values estimated using income approach applying market interest rates comparable instruments accounts receivable accounts payable accrued liabilities financial assets liabilities respectively carrying values approximate fair value using level 3 inputs note 12 commitments contingencies environmental remediation liabilities company records liability environmental remediation liability becomes probable costs damages reasonably estimated company accrues environmental remediation costs undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable liabilities based currently available information estimated timing remedial actions existing technology enacted laws regulations environmental remediation liabilities total december 31 presented follows project estimated payments approximately 30 years asset retirement obligations company asset retirement obligations required perform law contract asset permanently taken service obligations expected paid many years future expected funded general company resources time removal december 31 2019 2018 total asset retirement obligation liabilities recognized 194 million 191 million respectively included long term liabilities consolidated balance sheets see note 8 accrued liabilities long term liabilities 2019 10k annual report stericycle inc • 106 part ii unconditional purchase commitments company entered noncancelable arrangements thirdparties primarily related information technology products services december 31 2019 future payments contractual obligations recognized consolidated balance sheets follows letters credit surety bonds bank guarantees december 31 2019 2018 company 330 million 631 million respectively standby letters credit outstanding senior credit facility see note 9 debt december 31 2019 2018 also 523 million 522 million respectively standby letters credit outstanding another facility entered 2018 addition december 31 2019 2018 723 million 637 million respectively surety bonds 193 million 195 million respectively bank guarantees bank guarantees issued mostly company’s international subsidiaries various purposes including leases seller notes contracts permits surety bonds used performance financial guarantees neither bank guarantees surety bonds affect company’s ability use various lines credit note 13 retirement employee benefit programs defined contribution plans company 401k defined contribution retirement savings plan “plan” covering substantially domestic employees participant may elect defer portion compensation subject certain limitations company may contribute 50 compensation contributed plan employee maximum 3000 per annum years ended december 31 2019 2018 2017 contributions 110 million 106 million 89 million respectively company also several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2019 2018 2017 total contributions made company plans approximately 50 million 31 million 34 million respectively multiemployer defined benefit pension plans company participates two trusteemanaged multiemployer defined benefit pension plans “multiemployer pension plans” employees covered collective bargaining agreements risks participating multiemployer pension plans different singleemployer plans assets contributed multiemployer pension plan one employer may used provide benefits employees former employees participating employers ii participating employer stops contributing multiemployer pension plans unfunded obligations multiemployer pension plan may required assumed remaining participating employers iii company chooses stop participating multiemployer pension plans event significantly reduce eliminate need participate employee layoffs closure 2019 10k annual report stericycle inc • 107 part ii location company may required pay plans withdrawal amount based underfunded status plan based upon recent information available one plans company participates “critical” status due accumulated funding deficiency adopted rehabilitation plan address funding deficiency position following table outlines company’s participation multiemployer pension plans 1 zone status defined department labor pension protection act 2006 represents level plan funded plans red zone less 65 funded plans green zone least 80 funded status based information received multiemployer pension plans certified pension plans actuary 2 fiprp status column indicates multiemployer pension plans funding improvement plan fip” rehabilitation plan rp implemented pending recent pension protection act zone status available 2019 2018 plans’ yearend december 31 2018 2017 respectively 3 multiemployer pension plan certified endangered seriously endangered critical may begin levy statutory surcharge contribution rates authorized surcharge rate 5 first 12 months 10 periods thereafter certain conditions met contributing employers however may eliminate surcharge entering collective bargaining agreement meets requirements applicable fip rp 4 company listed form 5500 pension plan private sanitation union local 813 ibt individually significant contributing 5 total contributions plan years ended december 31 2018 2017 date financial statements issued forms 5500 available multiemployer pension plans year ended december 31 2019 note 14 stock based compensation december 31 2019 company following incentive stock plans • 2017 plan • 2014 plan • 2011 plan • 2008 plan • 2005 plan • 2000 plan 2019 10k annual report stericycle inc • 108 part ii december 31 2019 company reserved total 3043981 shares issuance incentive stock plans provide grant nsos isos rsus psus intended qualify section 422 internal revenue code 2000 plan provides grant nsos plans authorize awards company’s officers employees consultants company’s directors exercise price per share option granted plans may less closing price share company’s common stock date grant maximum term option granted plans may exceed 8 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options employee stock purchase plan october 2000 board directors adopted espp stockholders approved may 2001 made effective july 1 2001 espp authorizes 1299999 shares common stock substantially employees may purchase payroll deductions price equal 85 fair market values stock end sixmonth offering period employees payroll deductions stock purchase may exceed 5000 offering period 2019 2018 2017 97669 shares 131959 shares 109762 shares respectively issued espp may 2017 shareholders approved amendment espp authorizes issuance additional 300000 shares december 31 2019 63703 shares available issuance espp plan march 2016 board directors approved canada espp stockholders approved may 2016 canada espp authorizes 100000 shares common stock substantially canadian employees may purchase payroll deductions price equal 95 fair market values stock end sixmonth offering period employees payroll deductions stock purchase may exceed 5000 offering period 2019 2018 2017 1073 shares 2283 shares 1766 shares respectively issued canada espp december 31 2019 94122 shares available issuance canada espp plan stockbased compensation expense 2019 changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding following table presents total stockbased compensation expense resulting stock option awards rsus psus espp canada espp included consolidated statements loss income 2019 10k annual report stericycle inc • 109 part ii years ended december 31 2019 2018 2017 impact forfeitures stock option plans rsus reduction expense 67 million 35 million 18 million respectively stock options granted nonemployee directors vest one year options granted officers employees generally vest five years expense related options graded vesting recognized using straightline method vesting period stock option activity year ended december 31 2019 summarized follows december 31 2019 89 million total unrecognized compensation expense related stock options expected recognized weighted average period 22 years following table sets forth intrinsic value options exercised years ended december 31 exercise intrinsic value represents total pretax intrinsic value difference fair value trading day option exercised exercise price associated respective option company uses historical data estimate expected life volatility estimated fair value stock options time grant using blackscholes option pricing model follows restricted stock units fair value rsus based closing price companys common stock date grant amortized expense service period rsus vest end three five years 2017 plan includes share reserve rsus granted 11 ratio 2008 2011 2014 plans reserve 21 ratio rsus granted 2005 plan 2019 10k annual report stericycle inc • 110 part ii rsus activity year ended december 31 2019 follows december 31 2019 182 million total unrecognized compensation expense related rsus expected recognized weighted average period 25 years fair value units vested years ended december 31 2019 2018 2017 53 million 42 million 29 million respectively performancebased restricted stock units executive officers psu program introduced 2017 psus vest three equal annual installments based achievement predetermined annual earnings per share performance goals approved compensation committee psu’s granted represent right receive one share company’s common stock specified future date addition certain employees granted psus vest four equal annual installments based achievement performance goals related business transformation approved compensation committee compensation cost executive business transformation psu’s recognized based estimated achievement underlying goals number psu’s recipients ultimately receive based upon compensation committee’s review actual achievement goals psu’s granted represent right receive one share company’s common stock specified future date psus activity year ended december 31 2019 follows table reflects maximum number shares could granted upon vesting executive business transformation psu’s performance goals related 2019 established december 31 2019 approximately 213000 additional psus exist vest tranches based upon achievement performance goals established fiscal years 2020 2021 note 15 preferred stock december 31 2019 company 1000000 authorized shares preferred stock zero shares issued outstanding 2019 10k annual report stericycle inc • 111 part ii series mandatory convertible preferred stock offering september 15 2015 company completed registered public offering 7700000 depositary shares representing 110th interest share 525 series mandatory convertible preferred stock par value 001 per share series preferred stock public offering price 10000 per depository share total gross proceeds 7700 million september 14 2018 accordance terms issue 638190 shares company’s series preferred stock representing preferred stock outstanding date converted total 47 million shares company’s common stock ratio 73394 shares common stock share series preferred stock prior conversion referenced dividends shares series preferred stock payable cumulative basis declared company’s board directors authorized committee thereof annual rate 525 liquidation preference 1000 per share correspondingly 10000 per share respect depositary shares dividends payable cash subject certain limitations shares common stock combination cash shares common stock march 15 june 15 september 15 december 15 year commencing december 15 2015 including september 15 2018 company declared paid dividends 255 million 363 million series preferred stock shareholders years ended december 31 2018 2017 respectively following table provides information company’s repurchases depository shares series preferred stock prior conversion referenced year ended december 31 2018 year ended december 31 2018 repurchases company’s depository shares resulted increases retained earnings 169 million company redeemed depository shares discount 351900 depository shares repurchased 2018 equivalent 35190 shares series preferred stock note 16 loss earnings per common share basic loss earnings per share computed dividing loss income available common shareholders weightedaverage number shares common stock outstanding period diluted earnings per share computed dividing income available common shareholders weighted 2019 10k annual report stericycle inc • 112 part ii average number shares common stock outstanding period increased include number additional shares common stock would outstanding potentially dilutive securities issued potentially dilutive securities include outstanding stock options shares purchased company’s espp canada espp rsus psus impact series preferred stock prior conversion september 14 2018 effect potentially dilutive securities reflected diluted earnings per share application treasury stock method outstanding stockbased compensation awards treasury stock method increase fair market value company’s common stock result greater dilutive effect potentially dilutive securities issue series preferred stock used ifconverted method weighted period prior conversion ifconverted method preferred dividend applicable series preferred stock added back adjustment numerator series preferred stock shares assumed converted common shares beginning period later time issuance conversion september 14 2018 year ended december 31 2018 common shares weighted period series preferred stock outstanding resulting weighted average common shares included denominator applying ifconverted method conversion assumed purposes computing diluted earnings per share effect would antidilutive numerator also adjusted premium discount arising redemption series preferred stock following table sets forth computation basic diluted loss earnings per share 1 year ended december 31 2018 denominator basic loss earnings per share includes 14 million shares representing weightedaverage impact common shares outstanding result series preferred stock conversion september 14 2018 2 years ended december 31 2019 2018 options purchase shares awards thousands 74 124 respectively excluded computation diluted loss earnings per share due net loss incurred year 3 years ended december 31 2018 2017 weighted average common shares thousands issuable upon assumed conversion series preferred stock totaling 3367 5104 respectively excluded computation diluted loss earnings per share conversion would antidilutive 2019 10k annual report stericycle inc • 113 part ii years ended december 31 2019 2018 2017 options purchase shares thousands 4507 4664 4724 respectively exercise prices 440114156 475214156 625014156 respectively included computation diluted loss earnings per share effect would antidilutive years ended december 31 2019 2018 2017 rsus thousands 98 169 218 respectively included computation diluted loss earnings per share effect would antidilutive years ended december 31 2019 2018 2017 company outstanding psus thousands eligible vest maximum 116 11 shares common stock respectively subject achievement specified performance conditions contingently issuable shares excluded computation diluted earnings per share based current period results shares would issuable end reporting period end contingency period company incurred net loss attributable common shareholders outstanding psus excluded loss earnings per share calculation years ended december 31 2019 2018 2017 performance conditions satisfied end respective periods note 17 accumulated comprehensive loss following table sets forth changes components accumulated comprehensive loss note 18 segment reporting company evaluates oversees manages financial performance three operating segments north america rwcs formerly domestic canada rwcs international rwcs domestic communication related services north america international regulated waste compliance services segments offer following services medical waste management services including reusable sharps disposal management services pharmaceutical waste services compliance programs sterisafe® clinical services first practice management segurimed enviroassure brand names retail healthcare hazardous 2019 10k annual report stericycle inc • 114 part ii waste compliance solutions industrial manufacturing hazardous waste management secure information destruction domestic communication related services segment offers appointment reminders secure messaging event registration communications specifically hospitals idn’s well regulated recall returns management communication logistics data management services expired withdrawn recalled products domestic communication related services consistently meet quantitative criteria separate reportable segment therefore included “all other” reporting segment along costs related corporate support shared services functions stockbased compensation company’s measure segment profitability adjusted earnings interest tax depreciation amortization “adjusted ebitda” adjusted ebitda income operations excluding certain specified items depreciation intangible amortization following tables show financial information companys reportable segments 2019 10k annual report stericycle inc • 115 part ii following table reconciles companys primary measure segment profitability adjusted ebitda loss operations 1 excludes depreciation 18 million year ended december 31 2019 included part business transformation note 19 geographic area services information following table presents consolidated revenues longlived assets geographic region following table presents analysis consolidated revenues service 2019 10k annual report stericycle inc • 116 part ii note 20 legal proceedings company operates highly regulated industries responds regulatory inquiries investigations time may initiated variety reasons given time company matters various stages resolution applicable government authorities company also routinely involved actual threatened legal actions including involving alleged personal injuries commercial employment environmental tax issues outcomes matters within company’s complete control may known prolonged periods time actions claimants seek damages well relief including injunctive relief could require significant expenditures result lost revenue accordance applicable accounting standards company establishes accrued liability loss contingencies related legal regulatory matters loss probable reasonably estimable reasonable estimate probable loss range amount within range better estimate minimum amount range accrued loss probable loss reasonably estimable liability recorded determining estimated loss range loss significant judgment required estimate amount timing loss recorded accruals represent management’s best estimate probable losses cases may exposure loss excess amounts accrued estimates probable losses resulting litigation regulatory proceedings difficult predict legal regulatory matters inherently involve significant uncertainties based among factors jurisdiction stage proceedings developments applicable facts law unpredictability ultimate determination merits claim defenses company may assert claim amount damages may awarded company’s accrued liabilities loss contingencies related legal regulatory matters may change future result new developments including limited occurrence new legal matters changes law regulatory environment adverse favorable rulings newly discovered facts relevant matter changes strategy matter regardless outcome litigation adverse impact company defense settlement costs diversion management resources factors contract class action opt lawsuits beginning march 12 2013 company served several class action complaints filed federal state courts several jurisdictions complaints asserted among things company imposed unauthorized excessive price increases charges customers breach contracts violation illinois consumer fraud deceptive business practices act complaints sought certification lawsuit class action award class members appropriate damages injunctive relief related actions ultimately transferred united states district court northern district illinois centralized pretrial proceedings “mdl action” 2019 10k annual report stericycle inc • 117 part ii parties engaged discussions overseen mediator regarding potential resolution matter reached settlement agreement previously disclosed settlement agreement obtained court approval march 8 2018 “settlement” terms settlement company admitted fault wrongdoing whatsoever entered settlement avoid cost uncertainty litigation certain class members opted final settlement filed lawsuits company defend resolve actions company accrued estimate probable loss collective matters material securities class action opt lawsuits july 11 2016 two purported stockholders filed putative class action complaint us district court northern district illinois subsequently amended complaint purported assert claims behalf purchasers company’s publicly traded securities february 7 2013 february 21 2018 inclusive purchased securities company’s public offering depositary shares around september 15 2015 complaint named defendants company directors certain current former officers certain underwriters public offering complaint purported assert claims sections 11 12a2 15 securities act 1933 sections 10b 20a securities exchange act 1934 well sec rule 10b5 promulgated thereunder complaint alleged among things company imposed unauthorized excessive price increases charges customers breach contracts defendants failed disclose alleged practices public filings statements issued proposed class period defendants filed motion dismiss court ruled pending motion dismiss parties engaged discussions overseen mediator regarding potential resolution matter reached settlement agreement previously disclosed “securities class action settlement” court held final fairness hearing july 22 2019 granted final approval settlement took advisement amount attorneys’ fees awarded plaintiffs’ counsel settlement fund terms settlement company admitted fault wrongdoing whatsoever entered settlement avoid cost uncertainty litigation certain class members opted final settlement filed lawsuits company defend resolve actions company accrued amounts respect lawsuits cannot estimate reasonably possible loss range reasonably possible losses company may incur government investigations june 12 2017 sec issued subpoena company requesting documents information relating company’s compliance fcpa foreign domestic anticorruption laws respect certain company’s operations latin america addition doj notified company investigating matter parallel sec company cooperating agencies certain foreign authorities company also conducting internal investigation matters including outside latin america oversight audit committee board directors assistance outside counsel investigation found evidence improper conduct part fcpa investigation discussed sec requested certain additional information company july 29 2019 sec issued subpoena company requesting documents relating company’s pricing practices concerning small quantity customers alleged contract class actions securities class action company cooperating sec’s request 2019 10k annual report stericycle inc • 118 part ii company accrued amounts respect matter cannot estimate reasonably possible loss range reasonably possible losses company may incur company unable make estimate based company knows company’s judgment factual legal issues presented matter sufficiently unique company unable identify circumstances sufficiently comparable provide guidance making estimates environmental regulatory matters company’s environmental solutions business regulated federal state local laws enacted regulate discharge materials environment generation transportation disposal waste cleanup contaminated soil groundwater protection environment highly regulated nature business company frequently becomes party legal administrative proceedings involving various governmental authorities interested parties issues involved proceedings generally relate alleged violations existing permits licenses alleged responsibility federal state superfund laws remediate contamination properties owned either company parties either company prior owners certain facilities shipped wastes time company may subject fines penalties regulatory proceedings relating primarily waste treatment storage disposal facilities north salt lake utah company continued toll statute limitations united states attorney’s office district utah “usao” relating investigation us environmental protection agency “epa” past clean air act emissions permit requirements previously alleged notice violation “nov” issued state utah division air quality “daq” nov resulted company’s december 2014 settlement daq previously disclosed parties reached agreement principle documented form civil consent decree company undertake supplemental environmental project pay civil penalty clean air act company accrued total amount agreement principle tabasco mexico late 2016 national agency industrial security protection environment hydrocarbon sector mexico “asea” conducted permit compliance inspection hazardous waste treatment facility acquired one company’s subsidiaries dos bocas tabasco mexico asea subsequently claimed soil treatment process described facility’s treatment permit followed properly issued order imposing fine directing facility closed alleged contamination certain portion facility remediated company’s subsidiary engaged firm environmental technicians assess contamination described asea order conduct broader environmental assessment facility company’s review assessment overall facility ongoing november 2017 asea rescinded prior order imposing fine reassessing evidence arguments presented asea issued new resolution march 9 2018 containing lower revised fine including remedial obligations march 2018 company submitted proposal remedial measures april 26 2018 company appealed fines recent order december 2018 asea approved company’s remedial plan facility involve amendment facility’s permit allow onsite insitu remediation one treatment cell subject asea’s original order june 2018 company instituted civil criminal legal proceedings mexico company acquired relevant facility seeking hold seller liable remediation 2019 10k annual report stericycle inc • 119 part ii well lost profits damages defendants named civil complaint filed answers september 2018 evidence heard matter company accrued estimate probable loss costs necessary comply asea order remediate treatment cell material tacoma washington october 7 2019 state washington department ecology “washington ecology” issued administrative order alleging violations washington regulations facility operating permit hazardous waste facility tacoma washington 2018 ordering compliance chapter 70105 revised code washington hazardous waste management act chapter 173303 washington administrative code dangerous waste regulations dangerous waste management facility permit wad020257945 effective march 22 2012 administrative order identified certain alleged violations associated corrective actions tacoma facility take upon receipt order washington ecology also issued associated notice penalty assessing fine 19 million november 5 2019 company appealed fine state pollution control hearings board hearing scheduled take place november 2020 company intends vigorously defend allegations company accrued estimate probable loss collective matters material rancho cordova california june 25 26 2018 california department toxic substances control “dtsc” conducted compliance enforcement inspection company’s facility rancho cordova california october 7 2019 company learned dtsc referred alleged violations california’s hazardous waste control law facility’s hazardous waste permit arising inspection environmental section california attorney general’s office enforcement separately august 15 2019 company received dtsc written intent deny hazardous waste facility permit application rancho cordova facility public hearing held september 22 2019 public comment period closed october 25 2019 company entered written submission part process next dtsc issue final permit decision dtsc deny permit renewal company right file administrative appeal company accrued amounts respect alleged violations cannot estimate reasonably possible loss range reasonably possible losses may incur company unable make estimate litigation nature uncertain unpredictable ii company’s judgment factual legal allegations asserted plaintiffs sufficiently unique unable identify proceedings circumstances sufficiently comparable provide guidance making estimates dea investigation rancho cordova california indianapolis indiana february 11 2020 company received administrative subpoena dea executed search warrant rancho cordova facility administrative inspection warrant company’s facility indianapolis indiana materials related stericycle’s business shipping destroying controlled substances day agents dtsc executed separate search warrant rancho cordova facility company cooperating fully dea dtsc response investigations stericycle including government’s activity company’s rancho cordova indianapolis facilities company accrued amounts respect investigations cannot estimate reasonably possible loss range reasonably possible losses may incur company 2019 10k annual report stericycle inc • 120 part ii unable make estimate litigation nature uncertain unpredictable ii company’s judgment factual legal allegations asserted plaintiffs sufficiently unique unable identify proceedings circumstances sufficiently comparable provide guidance making estimates company intends vigorously defend allegations actions note 21 quarterly financial information unaudited following table summarizes unaudited consolidated quarterly results operations reported 2019 2018 eps calculated quarterly basis amounts may total calculated fullyear eps 2019 10k annual report stericycle inc • 121 part ii stericycle inc schedule ii valuation qualifying accounts 1 amounts consist primarily currency translation adjustments 41 million relating divestitures undertaken 2019 1 2019 amount includes valuation allowance capital losses related divestitures 2 2019 amount consists primarily release valuation allowance divestitures mexico chile 2018 2017 amounts consist primarily valuation allowances acquired deferred tax assets business combinations item 9item 8 financial statements supplementary data report independent registered public accounting firm shareholders board directors stericycle inc opinion financial statements audited accompanying consolidated balance sheets stericycle inc company december 31 2020 2019 related consolidated statements loss comprehensive income loss changes equity cash flows three years period ended december 31 2020 related notes financial statement schedule listed index item 15a collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2020 2019 results operations cash flows three years period ended december 31 2020 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2020 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 25 2021 expressed unqualified opinion thereon basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures include examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matter critical audit matter communicated matter arising current period audit consolidated financial statements communicated required communicated audit committee 1 relates accounts disclosures material consolidated financial statements 2 involved especially challenging subjective complex judgments communication critical audit matter alter way opinion consolidated financial statements taken whole communicating critical audit matter providing separate opinions critical audit matter account disclosure relates part ii valuation goodwill description matterat december 31 2020 company’s goodwill 28193 million disclosed note 7 consolidated financial statements goodwill tested impairment reporting unit level annually october 1 frequently triggering event occurs company determined reporting unit’s carrying value excess respective fair value auditing management’s goodwill impairment assessment complex highly judgmental due significant estimation required determining fair value company’s reporting units particular fair value estimates sensitive significant assumptions discount rates projections revenue cost revenue operating expense growth rates longterm growth rates affected expectations future market economic conditions particularly markets challenging economic conditions addressed matter auditwe obtained understanding evaluated design tested operating effectiveness controls company’s goodwill impairment review process example tested controls managements review significant assumptions discussed used develop fair value estimates also tested managements controls completeness accuracy underlying data used valuation test estimated fair value company’s reporting units performed audit procedures included among others assessing methodologies testing significant assumptions discussed underlying data used company analysis involved valuation specialists review company’s model methods sensitive assumptions utilized discount rate longterm growth assumptions compared significant assumptions used management current industry economic trends changes company’s business model customer base relevant factors assessed historical accuracy management’s estimates performed sensitivity analyses significant assumptions evaluate changes fair value reporting units would result changes assumptions reconciled fair value reporting units carrying values testing company’s determination assets liabilities used within reporting units basis carrying values addition tested management’s reconciliation fair value reporting units market capitalization company assessed adequacy company’s goodwill valuation disclosures ernst young llp served company’s auditor since 1991 chicago illinois february 25 2021 part ii stericycle inc consolidated statements loss see accompanying notes consolidated financial statements part ii stericycle inc consolidated statements comprehensive income loss see accompanying notes consolidated financial statements stericycle inc consolidated balance sheets see accompanying notes consolidated financial statements part ii stericycle inc consolidated statements cash flows see accompanying notes consolidated financial statements part ii stericycle inc consolidated statements changes equity see accompanying notes consolidated financial statements part ii stericycle inc notes consolidated financial statements millions except per share data unless otherwise indicated unless context requires otherwise “company” “stericycle” us refers stericycle inc subsidiaries consolidated basis note 1 basis presentation summary significant accounting policies description business incorporated 1989 stericycle protects people safeguards communities reduces risk highly specialized waste management secure information destruction services company serves customers us 17 countries concentration growing healthcare industry company’s core business focus regulated waste compliance services secure information destruction leading provider services terms revenue operational infrastructure information company’s business segments services see note 18 segment reporting summary significant accounting policies basis presentation accompanying consolidated financial statements include accounts stericycle inc subsidiaries intercompany accounts transactions eliminated consolidation companys consolidated financial statements prepared accordance us gaap include assets liabilities revenue expenses whollyowned subsidiaries majorityowned subsidiaries company exercises control outside stockholders interests subsidiaries shown consolidated financial statements “noncontrolling interests use estimates preparation financial statements conformity generally accepted accounting principles requires company make estimates assumptions affect amounts reported financial statements accompanying notes areas company makes estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits contingent liabilities asset retirement obligations stock compensation expense income tax assets liabilities accrued auto workers’ compensation insurance claims leases intangible asset valuations longlived asset goodwill held sale impairment estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates revenue contracts customers revenue recognized customer obtains control promised goods services amount revenue recognized reflects consideration company expects entitled receive exchange good services revenue recognized net revenuebased taxes assessed governmental authorities company provides rwcs provide collection processing regulated specialized waste including medical pharmaceutical hazardous waste disposal compliance programs sid services provide collection personal confidential information secure destruction recycling shredded paper crs includes communication services appointment reminders secure messaging event registration communications hospitals idn’s associated activities series distinct services substantially pattern transfer time therefore respective services treated single performance obligation company recognizes revenue applying right invoice practical expedient company’s right consideration corresponds directly value provided customer performance date revenues company’s regulated waste secure information destruction services recognized upon waste collection company’s compliance services revenues recognized contractual service period revenues communication services recognized services performed part ii accounts receivable allowance doubtful accounts receivable recorded billed goods services provided carrying value company’s receivables presented net allowance doubtful accounts company estimates allowance doubtful accounts based past collection history specific risks identified among uncollected amounts well management’s expectation future economic conditions current expected future economic trends events changes circumstances indicate specific receivable balances may impaired consideration given collectability balances allowance adjusted accordingly pastdue receivable balances written company’s internal collection efforts exhausted single customer accounts approximately 21 company’s accounts receivable approximately 15 total revenues year ended december 31 2020 2019 2018 bad debt expense 217 million 257 million 249 million respectively contract liability company records contract liability cash payments received advance company’s services performed classified current liabilities consolidated balance sheets since amounts earned within year contract acquisition costs incremental direct costs obtaining contract primarily represent sales incentives deferred amortized sga estimated period benefit derived cost cash equivalents company considers highly liquid investments maturity less three months purchased cash equivalents cash equivalents carried cost financial instruments company’s financial instruments consist cash equivalents accounts receivable payable longterm debt financial instruments potentially subject company concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size company’s customer base low concentration performance ongoing credit evaluations customers company also maintains allowances potential credit losses property plant equipment property plant equipment stated cost expenditures software purchases software developed internal use capitalized included software developed internal use external direct costs materials services certain internal payroll related fringe benefit costs capitalized costs computer software developed obtained internal use depreciation amortization computed using straightline method estimated useful lives assets follows capitalized interest company capitalizes interest incurred associated projects construction duration asset construction period years ended december 31 2020 2019 2018 company capitalized interest 18 million 54 million 29 million respectively goodwill identifiable intangible assets goodwill represents excess purchase price fair value assigned net tangible identifiable tangibles business acquired intangible assets definite lives amortized straightline basis estimated useful lives certain permit indefinitelived intangible assets may become definitelived extent event circumstance warrant impairment long lived assets property equipment intangible assets definitelives net longlived assets property plant equipment amortizing intangible assets reviewed whenever events changes circumstances indicate related carrying amounts may recoverable impairment assets definitelives generally determined comparing projected undiscounted cash flows expected generated asset groups carrying value carrying value longlived asset group recoverable undiscounted basis impairment recognized extent fair part ii value exceeds carrying value determining extent impairment typically requires various estimates assumptions including cash flows directly attributable asset useful life asset residual value necessary company uses internal cash flow estimates quoted market prices appraisals appropriate determine fair value actual results could vary estimates addition remaining useful life impaired asset revised necessary intangible assets indefinitelived intangibles consist primarily permits tradenames indefinitelived intangibles assessed impairment annually october 1 frequently event occurs circumstances change using either qualitative quantitative approach qualitative approach first determines morelikelythannot fair value asset less carrying value determination made impairment test complete however determined likely impairment quantitative assessment performed company performs annual impairment test indefinitelived intangibles using qualitative approach certain assets quantitative approach remaining assets goodwill assessed impairment least annually october 1 year frequently event occurs circumstances change would reduce fair value reporting unit carrying value company uses quantitative approach assess goodwill impairment fair value reporting unit calculated using income approach including dcf validated using market approach involvement thirdparty valuation specialist companys reporting units domestic rwcs domestic sid domestic crs canada europe asia pacific latin america income approach uses expected future cash flows reporting unit discounts cash flows present value expected future cash flows estimated using management assumptions growth rates including longterm growth rates capital expenditures cost efficiencies future acquisitions divestitures included expected future cash flows company uses discount rate based calculated weighted average cost capital adjusted reporting units based size country company specific risk premiums market approach compares valuation multiples similar companies associated reporting unit company reconciles calculated fair values market capitalization fair value compared carrying value including goodwill fair value excess carrying value related goodwill impaired fair value less carrying value impairment charge recognized equivalent amount carrying value exceeds fair value exceed carrying value goodwill use different assumptions estimates judgments goodwill impairment testing process may significantly increase decrease estimated fair value reporting unit generally changes dcf estimates would similar effect estimated fair value reporting unit company believes estimated fair value used measuring impairment based reasonable assumptions future changes underlying assumptions could differ due inherent judgment making estimates goodwill impairment charges may recognized future periods extent changes factors circumstances occur including deterioration macroeconomic environment equity markets including market value company’s common shares deterioration performance future projections changes plans one reporting units assets liabilities heldforsale longlived assets disposal groups classified heldforsale management appropriate authority generally company’s board directors certain executive officers commits plan sale disposal group ready immediate sale active program locate buyer initiated sale probable expected completed within one year classified heldforsale disposal groups valued lower carrying amount fair value less estimated selling costs disposal group constitutes substantially operations foreign country balance cumulative translation adjustment associated country included carrying value disposal group carrying value including amount associated cumulative translation adjustment exceeds fair value less estimated selling costs heldforsale impairment charge recorded reduce carrying value part ii estimate fair value reviewed end every reporting period disposal group classified heldforsale carrying value adjusted whenever estimated fair value less costs sell less carrying value insurance selfinsurance company’s insurance workers’ compensation autofleet general liability property employeerelated health care benefits obtained using high deductible insurance policies meaning company retained significant portion risks related claims associated programs estimated exposure unpaid claims associated expenses including incurred reported losses based calculation performed third party actuarial specialist using company’s historical claims experience accruals liabilities could revised future occurrences loss developments significantly differ assumptions used estimated recoveries associated insured claims recognized assets receipt amounts probable restructuring charges involuntary termination benefits accrued upon commitment termination plan benefit arrangement communicated affected employees liabilities determined probable estimable depending existence substantive plan severance termination costs onetime termination benefits employee required render service beyond minimum retention period order receive benefits recognized ratably future service period contract termination costs recognized contracts terminated company ceases use leased facility longer derive economic benefit contract exit costs expensed incurred stockbased compensation company recognizes stockbased compensation expense based estimated grantdate fair value expense generally recognized straightline basis service period awards expected vest company presents stockbased compensation expense within consolidated statements loss based classification respective employees cash compensation income taxes company subject income taxes us numerous foreign jurisdictions company computes provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax basis assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected reverse significant judgments required order determine realizability deferred tax assets assessing need valuation allowance company evaluates significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods tax liabilities recognized management’s judgment uncertain tax position meet likely ie likelihood fifty percent threshold recognition tax positions meet likely threshold tax liability may still recognized depending management’s assessment tax position ultimately settled company records interest penalties unrecognized tax benefits provision income taxes leases operating leases included operating lease rou assets operating lease liabilities longterm operating lease liabilities company’s consolidated balance sheets finance leases included property plant equipment current portion longterm debt longterm debt consolidated balance sheets operating lease rou assets operating lease liabilities longterm operating lease liabilities recognized based present value future minimum lease payments lease term commencement date nearly company’s lease contracts provide readily determinable implicit rate contracts company uses estimated incremental borrowing rate based information available lease commencement company’s leases generally contain material variable lease payments generally contain options purchase leased property material residual value guarantees material restrictive covenants commencement operating lease rou asset equal lease liability adjusted lease incentives initial direct costs incurred company reviews options extend terminate purchase rou assets commencement lease ongoing basis accounts options reasonably certain exercised lease expense recognized straightline basis lease term part ii company lease agreements lease nonlease components including payments common area maintenance vehicle maintenance costs accounted separately based underlying nature class underlying assets addition company applies shortterm lease recognition exemption leases terms commencement greater 12 months asset retirement obligations company establishes assets liabilities present value estimated future costs retire longlived assets termination expiration lease assets amortized lease term recognized liabilities accreted future value estimated retirement costs related amortization accretion expenses presented within cor leased asset used delivery company’s services remaining expenses presented within sga consolidated statements loss foreign currency assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component accumulated comprehensive loss consolidated balance sheets foreign currency gains losses resulting transactions denominated currencies entity’s functional currency including foreign currency gains losses intercompany balances longterm investment nature included within expense net consolidated statements loss highly inflationary economy effective july 1 2018 result threeyear cumulative inflation exceeding 100 argentina classified highly inflationary economy accordingly company recognized expense net foreign exchange loss 12 million 33 million 38 million years ended december 31 2020 2019 2018 respectively arising remeasurement argentinian peso denominated net monetary assets argentina operations divested august 2020 nonmonetary assets liabilities related expenses measured using historical exchange rates fluctuate changes local exchange rate adoption new accounting standards financial instrument credit losses june 2016 fasb issued asu 201613 “financial instruments credit losses topic 326 measurement credit losses financial instruments” “asu 201613” associated measurement credit losses financial instruments asu 201613 replaces prior incurred loss impairment methodology recognizing credit losses loss probable methodology reflects expected credit losses requires consideration broader range reasonable supportable information assess credit loss estimates amended guidance effective company january 1 2020 company recognized net decrease retained earnings consolidated financial statements 25 million january 1 2020 cumulative effect adopting asu 201613 implementation costs incurred cloud computing arrangement august 2018 fasb issued asu 201815 “intangibles goodwill internal use software subtopic 35040 customer’s accounting implementation costs incurred cloud computing arrangement service contract” “asu 201815” asu 201815 aligns requirements capitalizing implementation costs incurred hosting arrangement service contract requirements capitalizing implementation costs internaluse software accounting hosting contract unchanged asu 201815 effective january 1 2020 adopted prospectively implementation costs incurred date adoption asu 201815 material impact consolidated financial statements accounting standards issued yet adopted simplifying accounting income taxes december 2019 fasb issued asu 201912 “income taxes topic 740 simplifying accounting income taxes” “asu 201912” asu 201912 attempts simplify aspects accounting franchise taxes enacted changes tax laws rates clarifies accounting transactions result stepup tax part ii basis goodwill asu 201912 effective public business entities fiscal years beginning december 15 2020 including interim periods within fiscal year company adopt asu 201912 effective january 1 2021 asu expected material impact upon adoption january 1 2021 consolidated financial statements note 2 revenues contracts customers company provides rwcs provide collection processing regulated specialized waste including medical pharmaceutical hazardous waste disposal compliance programs sid services provide collection personal confidential information secure destruction recycling shredded paper crs includes communication services appointment reminders secure messaging event registration communications hospitals idn’s company’s customers typically enter contract provision services regular scheduled basis eg weekly monthly needed basis contract term contract terms company receives fees based monthly quarterly annual rate fees based contractual rates depending upon measures including volume weight type waste number size bins collected weight type shredded paper number call minutes amounts invoiced based terms underlying contract either regular basis eg monthly quarterly services performed generally due within short period time invoicing based upon normal terms conditions business type geography services performed disaggregation revenue contract liabilities contract liabilities december 31 2020 2019 88 million 122 million respectively substantially contract liabilities december 31 2020 expected recognized revenue year ending december 31 2021 substantially balance december 31 2019 recognized revenue year ended december 31 2020 contract acquisition costs company’s incremental direct costs obtaining contract consist primarily sales incentives deferred amortized sga weighted average estimated period benefit 64 years year ended december 31 2020 2019 2018 company amortized 106 million 91 million 69 million respectively deferred sales incentives sga total contract acquisition costs net accumulated amortization classified follows december 31 part ii note 3 acquisitions year ended december 31 2020 years ended december 31 2019 2018 company completed 1 21 acquisitions respectively acquisitions primarily north america segment revenues sid service line considered complementary existing operations fit company’s growth strategy accounted business combinations applicable guidance results operations acquired businesses included consolidated statements loss date acquisition pro forma results operations acquisitions presented pro forma effects individually aggregate material company’s consolidated results operations following table summarizes acquisition date fair value consideration transferred acquisitions completed years ended december 31 fair value consideration transferred business combination allocated net tangible identifiable intangible assets acquisition date remaining unallocated amount recognized goodwill note 4 restructuring divestitures impairments stericycle focused driving longterm growth profitability delivering enhanced shareholder value restructuring business transformation 2017 company initiated comprehensive multiyear business transformation december 31 2019 company incurred originally anticipated employee termination charges including incremental charges related principally executive management connection initial restructuring estimate year ended december 31 2019 2018 company recognized 55 million 37 million charges related executive employee termination costs majority 2019 2018 north america segment addition year ended december 31 2018 company recognized noncash impairment charges 91 million 74 million related software 03 million related longterm assets north america reportable segment included cor 14 million related included sga restructuring operational optimization company aims achieve culture continuous improvement enhance efficiency effectiveness competitiveness improve cost base cash flow company taken number actions reduce operating costs optimize operations part efforts company seeks reduce network redundancies consolidating facilities restructuring operations efficiency part ii year ended december 31 2020 company recognized 31 million operational optimization costs within international segment related discontinuation service line uk year ended december 31 2019 company recognized 145 million operational optimization costs north america segment recognized 38 million costs rwcs operations primarily related site relocation costs domestic crs operations related headcount reduction noncash impairment intangible assets result exit business line international segment recognized 107 million costs related site closures facility exit charges across emea latam regions divestitures company incurred following impairments divestiture losses gains net included consolidated statements loss north america segment december 1 2020 company entered agreement completed sale companys global product recall business expert solutions cash consideration approximately 780 million expert solutions business revenues approximately 754 million year ended december 31 2019 primarily reported north america part communication related services company recognized gain divestment 388 million north america 40 million international inclusive 27 million related deal costs transaction connection closing company entered certain additional ancillary agreements including tsa april 6 2020 company completed sale outstanding equity interests environmental solutions business approximately 4625 million pursuant purchase agreement dated february 6 2020 purchase agreement provided divestiture company’s environmental solutions business exclusive company’s healthcare hazardous waste services unused consumer pharmaceutical takeback services environmental solutions business generated revenue 2019 5596 million including approximately 1000 million related retained business included rwcs revenue category within north america segment connection purchase agreement company entered hsa tsa buyer period 7 years 6 months respectively company allocated deferred portion transaction proceeds 177 million related hsa 15 million related tsa recognized applicable duration hsa tsa periods subject specific agreement provisions thereby offsetting expenses incurred deliver respective services allocated proceeds reflected operating cash flow consolidated statement cash flows advances received services provided prospectively 2020 company recognized impairment charges subsequent loss disposal 538 million inclusive 111 million related deal costs transaction company released 17 million benefit part ii associated contingent consideration related prior acquisition agreement connected divested business fair value level 3 reported sga company’s consolidated statements loss 2019 company completed sale tas business retail pharmaceutical returns business us puerto rico total cash consideration 364 million resulting total losses 455 million connection sale agreement tas business company entered tsa buyer period 15 months company allocated deferred 51 million proceeds recognized duration tsa period offsetting expenses incurred deliver tsa services reimbursed buyer 2018 company completed sale noncore clean room business realizing proceeds 170 million resulting impairment charges subsequent loss disposal totaling 69 million international segment august 2020 company entered agreement completed sale operations argentina proceeds approximately 39 million revenue argentina operations approximately 1 consolidated annual revenues 2019 transaction resulted loss disposal 1124 million 872 million related balance cumulative currency translation adjustment additionally december 2020 company recognized 49 million gain related divestiture subsidiary mexico 51 million charge associated divested business chile see note 12 commitments contingencies consolidated financial statements 2019 company following divestiture activity •uk based texting business proceeds 148 million resulting gain approximately 51 million •a reduction provision loan receivable originally arising sale uk patient transport business resulting 03 million gain •substantially company’s operations mexico nominal consideration resulting impairment charges subsequent loss disposal totaling 432 million including realization loss approximately 189 million related balance cumulative currency translation adjustment •the company’s operations chile net proceeds 307 million resulting loss 190 million including realization loss approximately 168 million related balance cumulative currency translation adjustment 2018 company completed sale hazardous waste business uk proceeds 115 million 82 million received cash 30 million held escrow received august 2019 company recognized impairment charges subsequent loss disposal totaling 165 million including additional charges 07 million 2019 impairments part ii operational optimization impairments associated companys actions reduce operating costs optimize operations year ended december 31 2020 companys international reportable segment includes charges primarily related discontinuation service line uk year ended december 31 2019 companys international reportable segment includes charges related impairments permits longlived assets europe latin america north america reportable segment charges associated site movement year ended december 31 2018 noncash impairment charges related customer relationship permit intangibles impaired result actual forecasted business declines primarily latam asset impairments year ended december 31 2020 companys north america reportable segment includes charges associated rationalization software application assets intangible assets result discontinuation certain service line companys international reportable segment includes charges associated certain property plant equipment assets permits primarily uk year ended december 31 2019 companys international reportable segment included noncash impairment charges related customer lists longlived assets brazil associated impairment review operations year ended december 31 2018 noncash impairment charges related software connection companys evolving future information systems strategy including implementation global erp system impact currently deployed software well rationalization applications used within reportable segment part ii note 5 property plant equipment property plant equipment consisted following december 31 depreciation expense 1086 million 1276 million 1256 million years ended december 31 2020 2019 2018 respectively property plant equipment impairment charges included sga cor years ended december 31 2020 2019 2018 respectively described note 4 restructuring divestitures impairments consolidated financial statements note 6 leases company operating leases vehicles transfer sites processing facilities communication centers corporate regional offices certain equipment components net lease cost follows years ended december 31 shortterm lease cost variable lease cost sublease income significant years ended december 31 2020 2019 supplemental cash flow information related leases follows years ended december 31 part ii finance lease assets net accumulated amortization 248 million 301 million december 31 2020 2019 respectively included property plant equipment net consolidated balance sheet information regarding lease terms discount rates december 31 follows maturities lease liabilities december 31 2020 follows december 31 2020 company additional operating leases 16 million yet commenced operating leases expected commence fiscal year 2021 lease terms 10 years note 7 goodwill intangible assets goodwill changes carrying amount goodwill follows accumulated noncash impairment charges segment december 31 follows part ii 2020 impairments company performed annual goodwill impairment assessment october 1 2020 determined reporting units carrying values excess estimated fair value 2019 impairments company performed annual goodwill impairment assessment october 1 2019 determined environmental solutions canada reporting units’ carrying values excess estimated fair value factors contributed estimated fair value reporting units carrying values included •environmental solutions 2019 experienced higher operating costs particularly related hazardous waste disposal costs addition anticipate timeline achieving betterment plans revenue quality cost improvements extended company also gathered insights process evaluating environmental solutions part company’s portfolio rationalization criteria •canada 2019 experienced competitive pricing pressure sid rwcs lower sop pricing higher regulated waste costs including canada based operating costs due reliance thirdparty disposal usbased enabling support costs company expects challenges prolonged impact company adjusted current year longrange plan challenges factored updates company’s longrange plan forecasted cashflow assumptions company also made certain adjustments risk premiums within discount rates used present value forecasted cashflows result company recognized 808 million noncash impairment charges related environmental solutions reporting unit 1266 million fully impair goodwill associated canada reporting unit first quarter 2019 business market developments insights gathered company’s portfolio rationalization considerations negatively impacted estimated cash flows company’s latin america reporting unit triggered interim assessment march 31 2019 company determined latin america reporting unit’s carrying value excess estimated fair value recognized 209 million noncash goodwill impairment charges related latin america reporting unit following impairment latin america reporting unit goodwill fully impaired 2018 impairments company performed annual goodwill impairment assessment october 1 2018 interim assessment december 31 2018 company determined domestic crs latin america reporting units’ carrying values excess estimated fair values factors contributed estimated fair value reporting units carrying value included •domestic crs company experienced progressive decrease revenues operating margins 2018 due continued declines large recall events leading higher level uncertainty occurring future periods ii recall events smaller number units significantly lower revenue per event experienced recent years iii continued decline volume inboundoutbound call volumes live voice services company also gathered insights portfolio rationalization considerations initiated 2018 •latin america company continued experience prolonged challenges volatility certain markets due declining market trends cost pressures revenue increases mi business due inflationary price increases argentina offset impact currency devaluation continuing declines several local economies part ii challenges factored updates company’s forecasted cashflow assumptions fourth quarter 2018 reflect current outlook company made certain adjustments discount rates used present value forecasted cashflows result impairment assessments company recognized 2863 million noncash goodwill impairment charges fully impair domestic crs reporting unit addition company recognized 724 million noncash goodwill impairment charges related latin america reporting unit fair value reporting units used annual interim goodwill impairment assessments 2020 2019 2018 classified level 3 measurements within fair value hierarchy due significant unobservable inputs discount rates projections revenue cost revenue operating expense growth rates longterm growth rates income tax rates fair value methodology described note 1 basis presentation summary significant accounting policies intangible assets december 31 values intangible assets follows changes carrying amount intangible assets follows company’s indefinitelived intangible assets include operating permits certain tradenames company determined certain operating permits certain tradenames indefinite lives due ability renew minimal additional cost therefore amortized impairment charges included sga cor years ended december 31 2020 2019 2018 respectively described note 4 restructuring divestitures impairments part ii finitelived intangible assets amortized estimated useful lives using straightline method category weighted average remaining useful lives follows useful life intangible assets assessed annually determine whether events circumstances warrant revision remaining useful life changes reflected prospectively intangible asset amortized revised remaining useful life fourth quarter 2020 performed annual assessment useful life finitelived intangibles changes required years ended december 31 2020 2019 2018 aggregate intangible asset amortization expense 1249 million 1452 million 1303 million respectively estimated intangible asset amortization expense next five years follows years ended december 31 note 8 accrued liabilities accrued liabilities consisted following december 31 part ii note 9 debt longterm debt consisted following december 31 weighted average interest rates longterm debt excluding finance leases december 31 follows senior notes november 9 2020 company issued 5000 million par aggregate principal senior notes due january 2029 unsecured bear interest 3875 per annum payable january 15 july 15 year senior notes fully unconditionally guaranteed issuer’s current subject certain exceptions future domestic subsidiaries guarantee issuer’s senior credit facility term loan facility certain debt issuer subsidiary guarantors 2020 senior notes redeemable whole part time november 15 2023 redemption prices specified “description notesoptional redemption” plus accrued unpaid interest excluding redemption date time prior november 15 2023 notes may redeemed whole part redemption price 100 principal amount thereof plus “makewhole” premium plus accrued unpaid interest excluding redemption date addition issuer may redeem 40 notes time november 15 2023 net cash proceeds certain equity offerings redemption price equal 103875 plus accrued unpaid interest excluding redemption date connection issuance 2020 senior notes company incurred 58 million direct issuance costs capitalized unamortized debt issuance costs amortized interest expense net term 2020 senior notes 2019 company issued 6000 million par aggregate principal senior notes due july 2024 unsecured bear interest 5375 per annum payable january 15 july 15 year senior notes fully unconditionally guaranteed company’s current domestic subsidiaries guarantee company’s senior credit facility indenture limits ability company subsidiaries incur certain liens enter certain sale leaseback transactions consolidate merge sell substantially assets part ii 2019 senior notes redeemable option company whole part time july 15 2021 redemption prices specified indenture along accrued interest time prior july 15 2021 senior notes may redeemed option company whole part redemption price 100 principal amount thereof plus “makewhole” premium accrued unpaid interest addition company may redeem 40 senior notes time july 15 2021 net cash proceeds certain equity offerings redemption price equal 105375 plus accrued unpaid interest connection issuance 2019 senior notes company incurred 71 million debt issuance costs capitalized unamortized debt issuance costs amortized interest expense net term 2019 senior notes event change control company rating downgrade rating agencies company required offer repurchase outstanding 2020 2019 senior notes 101 principal amount plus accrued unpaid interest indentures contains customary events default include subject certain cases customary grace cure periods nonpayment principal interest breach agreements indenture failure pay certain indebtedness certain events bankruptcy insolvency failure pay certain final judgments failure certain guarantees enforceable credit agreement company maintains credit agreement amended provided term loan facility 950 million revolving credit facility 12 billion february 25 2020 company executed fifth amendment amended credit agreement among things •increase maximum allowable consolidated leverage ratio 500 100 december 31 2021 450 100 thereafter •upon consummation divestiture environmental solutions business foregoing maximum permitted consolidated leverage ratio levels reduced 475 100 december 31 2021 425 100 thereafter •allow continuation 2000 million cash add backs ebitda december 31 2020 addbacks 1000 million december 31 2021 addbacks thereafter •increase leverage ratio pricing tier greater 450 100 0125 •grant firstpriority security interest administrative agent benefit lenders substantially personal property company certain material domestic subsidiaries including certain equity interests held entities year ended december 31 2020 connection fifth amendment company incurred issuance costs 17 million 04 million charged interest expense net remainder capitalized unamortized debt issuance costs amortized interest expense net remaining term credit agreement company may make prepayments amended senior credit facility whole part without premium penalty company would required prepay certain outstanding amounts event certain circumstances transactions december 31 2020 company compliance credit agreement debt leverage ratio covenant actual ratio 354 100 allowed maximum ratio 475 100 set forth fifth amendment april 6 2020 company completed divestiture environmental solutions business therefore effective april 6 2020 consolidated leverage ratio decreased 025 475 100 fiscal quarters ending december 31 2021 425 100 fiscal quarters ending march 31 2022 given current leverage position believe able operate within covenant thresholds due unpredictability covid19 pandemic situations outside control reasonably likely could exceed consolidated leverage ratio threshold point next 12 months risk mitigated potentially managed appropriate spending controls divestitures restructuring company’s existing indebtedness amending credit agreement seeking temporary relief consolidated leverage ratio covenant company’s lenders part ii failure comply covenant provisions could result event default upon event default unless waived lenders could elect terminate commitments cease making loans andor cause loans become due payable full foreclose assets securing debt credit agreement force us subsidiaries bankruptcy liquidation matters amounts committed outstanding letters credit unused portion senior credit facility december 31 follows payments due longterm debt excluding finance lease obligations five years subsequent december 31 2020 follows note 10 income taxes us international components income loss income taxes consisted following years ended december 31 significant components company’s income tax benefit expense years ended december 31 follows reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 follows part ii deferred tax liabilities assets december 31 follows valuation allowance increased 126 million year ended december 31 2020 primarily due nonbenefited foreign losses march 27 2020 president signed law cares act substantial taxandspending package intended provide additional economic stimulus address impact covid19 pandemic result cares act tax law changes year ended december 31 2020 recognized 444 million tax benefit related ability carryback net operating losses prior years higher tax rates july 2020 company received cash refund 480 million december 2020 company received 642 million 620 million cash refund claim 22 million interest income remaining carryback claim associated finalization 2019 us federal income tax return currently filed irs anticipated refund less 10 million additionally response covid19 pandemic december 27 2020 president signed caa 2021 provides several business tax relief provisions including 1 extension cfc lookthrough rule 2025 2 temporary 100 deduction business meals paid incurred 2021 2022 3 extension wotc 2025 provisions generally significant companys current tax footprint however company continue assess caa 2021 ongoing basis december 22 2017 tax act signed law making significant changes internal revenue code changes included limited corporate income tax rate decrease 35 21 effective tax years beginning december 31 2017 transition us international taxation worldwide tax system territorial system onetime transition tax mandatory deemed repatriation cumulative foreign earnings december 31 2017 part ii accordance sab 118 company’s understanding tax act guidance available company calculated provisional estimate tax impact tax act year end 2017 income tax benefitprovision result recognized income tax benefit 1298 million fourth quarter 2017 period legislation enacted provisional amount related remeasurement certain deferred tax assets liabilities based rates expected reverse future onetime transition tax mandatory deemed repatriation foreign earnings related expected foreign withholding taxes earnings reflected table net tax benefit recognized year ended december 31 2017 related tax act follows year ended december 31 2018 company adjusted tax act provisional amounts recognized december 31 2017 onetime transition tax deferred taxes foreign withholding taxes adjustments resulted net charge tax provision 88 million december 31 2018 accounting various elements tax act complete adjustments may necessary future periods due potential technical corrections tax act andor regulatory guidance may issued us internal revenue service december 31 2020 company plans repatriate undistributed earnings firsttier foreign subsidiaries back us extent previously taxed tax act future repatriations may take form distributions previously taxed earnings profits andor return capital distributions undistributed earnings extent remain permanently reinvested support existing working capital needs foreign subsidiaries withholding tax unrealized foreign exchange gain state income tax accrual recorded applicable company provided deferred taxes outside basis differences investments foreign subsidiaries unrelated unremitted earnings basis differences indefinitely reinvested determination unrecognized deferred taxes related components outstanding basis difference practicable calculate december 31 2020 net operating loss carryforwards foreign domestic operations approximately 1619 million certain net operating loss carryforwards begin expire 2021 tax benefits net operating losses approximately 490 million december 31 2020 valuation allowances 253 million recognized offsetting tax benefits company files income tax returns us various states certain foreign jurisdictions generally longer subject us federal state local nonus income tax examinations tax authorities years prior 2015 company recognized liabilities cover certain uncertain tax positions uncertain tax positions relate additional taxes company may required pay various tax jurisdictions course examinations various taxing authorities proposed adjustments may asserted company evaluates items casebycase basis adjusts accrual uncertain tax positions deemed necessary total amount unrecognized tax benefit december 31 2020 243 million amount uncertain tax positions recognized would affect effective tax rate approximately 232 million recognized interest penalties related income tax reserves benefit amount 15 million 07 million charge 08 million years ended december 31 2020 2019 2018 respectively component income tax expense reasonably possible unrecognized tax benefits decrease much 50 million 100 million next 12 months primarily due progress federal state international audits following table summarizes aggregate changes unrecognized tax benefits part ii table includes amounts relate uncertain tax positions acquired companies purchase agreements acquire stock target generally provide seller liable indemnified company income tax liabilities periods prior acquisition company responsible unrecognized tax benefits related interest penalties periods acquisition company filed pfa irs related claim internal revenue code section 1341 concerning tax rate applied sq settlement company’s 2018 tax return result enactment cares act company able realize benefit higher tax rate portion sq settlement 2020 consideration cares act revised pfa portion longterm receivable previously established section 1341 claim reclassified current income tax receivable related uncertain tax position released part tax benefit 2020 subsequently amended 2018 tax return reduce section 1341 benefit result discussions irs part pfa program consequently remaining longterm receivable established section 1341 claim corresponding uncertain tax position reclassified current income tax receivable current income tax liability respectively expected settle within one year respect uncertain tax position settle cash additional income tax benefit resulting claim future period may recognized appropriate accordance guidance asc 740 accounting uncertain tax positions assurance amount recovered result claim note 11 fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy distinguishes 1 market participant assumptions developed based market data obtained independent sources observable inputs 2 entitys assumptions market participant assumptions developed based best information available circumstances unobservable inputs fair value hierarchy consists three broad levels described level 1 quoted prices active markets identical assets liabilities highest priority level 2 observable inputs quoted prices active markets identical assets liabilities quoted prices identical similar assets liabilities inactive markets inputs observable corroborated observable market data substantially full term assets liabilities level 3 inputs generally unobservable typically reflect management’s estimate assumptions market participants would use pricing asset liability lowest priority financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness nonperformance risk considered fair value measurements noted movements items fair value hierarchies years presented part ii contingent consideration liabilities reassessed end every reporting period recorded using level 3 inputs amounts classified either current liabilities presented follows december 31 contingent consideration represents amounts expected paid part acquisition consideration certain future events occur company arrives fair value contingent consideration applying weighted probability potential payment outcomes calculation potential outcomes dependent past financial performance management assumptions future performance financial performance measures fully met maximum aggregate liability would 82 million december 31 2020 changes contingent consideration reflected table addition assets liabilities recorded fair value recurring basis company required record certain assets liabilities fair value nonrecurring basis generally result acquisitions classification disposal groups heldforsale remeasurement assets resulting impairment charges see note 3 acquisitions note 4 restructuring divestitures impairments note 5 property plant equipment note 7 goodwill intangible assets discussion fair value assets liabilities associated acquisitions assets held sale values generated using level 3 inputs fair value debt estimated fair value company’s debt obligations using level 2 inputs compared carrying amount december 31 follows fair values estimated using income approach applying market interest rates comparable instruments accounts receivable accounts payable accrued liabilities financial assets liabilities respectively carrying values approximate fair value using level 3 inputs note 12 commitments contingencies environmental remediation liabilities company records liability environmental remediation liability becomes probable costs damages reasonably estimated company accrues environmental remediation costs undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable liabilities based currently available information estimated timing remedial actions existing technology enacted laws regulations part ii environmental remediation liabilities total december 31 presented follows reduction environmental liabilities relates primarily environmental solutions business sold april 6 2020 included 275 million environmental remediation liabilities see note 4 restructuring divestitures impairments asset retirement obligations company asset retirement obligations required perform law contract asset permanently taken service obligations expected paid many years future expected funded general company resources time removal december 31 2020 2019 total asset retirement obligation liabilities recognized 197 million 194 million respectively included longterm liabilities consolidated balance sheets letters credit surety bonds bank guarantees december 31 2020 2019 company 795 million 330 million respectively standby letters credit outstanding senior credit facility see note 9 debt december 31 2019 523 million standby letters credit outstanding another facility entered 2019 december 31 2020 amounts standby letters credit outstanding addition december 31 2020 2019 379 million 723 million respectively surety bonds 212 million 193 million respectively bank guarantees bank guarantees issued mostly company’s international subsidiaries various purposes including leases seller notes contracts permits surety bonds used performance financial guarantees neither bank guarantees surety bonds affect company’s ability use various lines credit indemnifications ordinary course business connection sale assets businesses transactions often indemnify counterparties certain liabilities may arise connection transaction related events activities prior following transaction see note 4 restructuring divestitures impairments indemnified party make successful claim pursuant terms indemnification may required reimburse loss indemnifications generally subject various restrictions limitations historically paid material amounts provisions december 31 2020 indemnifications obligations material note 13 retirement employee benefit programs defined contribution plans company 401k defined contribution retirement savings plan covering substantially domestic employees participant may elect defer portion compensation subject certain limitations company may contribute 50 compensation contributed plan employee maximum 3000 per annum years ended december 31 2020 2019 2018 companys contributions 87 million 110 million 106 million respectively company also several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2020 2019 2018 companys total contributions 46 million 50 million 31 million respectively multiemployer defined benefit pension plans company participates two trusteemanaged multiemployer defined benefit pension plans “multiemployer pension plans” employees covered collective bargaining agreements risks participating multiemployer pension plans different singleemployer plans assets contributed multiemployer pension plan one employer may used provide benefits employees former employees part ii participating employers ii participating employer stops contributing multiemployer pension plans unfunded obligations multiemployer pension plan may required assumed remaining participating employers iii company chooses stop participating multiemployer pension plans event significantly reduce eliminate need participate employee layoffs closure location company may required pay plans withdrawal amount based underfunded status plan based upon recent information available one plans company participates “critical” status due accumulated funding deficiency adopted rehabilitation plan address funding deficiency position following table outlines company’s participation multiemployer pension plans 1zone status defined department labor pension protection act 2006 represents level plan funded plans red zone less 65 funded plans green zone least 80 funded status based information received multiemployer pension plans certified pension plans actuary 2the fiprp status column indicates multiemployer pension plans funding improvement plan fip” rehabilitation plan rp implemented pending recent pension protection act zone status available 2020 2019 plans’ yearend december 31 2019 3a multiemployer pension plan certified endangered seriously endangered critical may begin levy statutory surcharge contribution rates authorized surcharge rate 5 first 12 months 10 periods thereafter certain conditions met contributing employers however may eliminate surcharge entering collective bargaining agreement meets requirements applicable fip rp 4the company listed form 5500 pension plan private sanitation union local 813 ibt individually significant contributing 5 total contributions plan years ended december 31 2019 date financial statements issued forms 5500 available multiemployer pension plans year ended december 31 2020 note 14 stock based compensation december 31 2020 company following incentive stock plans •the 2017 plan •the 2014 plan •the 2011 plan •the 2008 plan •the 2005 plan december 31 2020 company reserved total 3016597 shares issuance incentive stock plans provide grant nsos isos rsus psus intended qualify section 422 internal revenue code 2000 plan provides grant nsos plans authorize awards company’s officers employees consultants company’s directors exercise price per share option granted plans may less closing price share company’s common stock date grant maximum term option granted plans may exceed 8 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options employee stock purchase plan october 2000 board directors adopted espp stockholders approved may 2001 made effective july 1 2001 espp authorizes 1799999 shares common stock substantially us employees may purchase payroll deductions price equal 85 fair market values stock end 6 months offering period employees payroll deductions stock purchase may exceed 5000 offering period 2020 2019 2018 70120 shares 97669 shares 131959 shares respectively issued espp december 31 2020 587705 shares available issuance espp plan stockbased compensation expense 2020 changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding following table presents total stockbased compensation expense resulting stock option awards rsus psus espp canada espp included consolidated statements loss years ended december 31 2020 2019 2018 impact forfeitures reduction expense 49 million 67 million 35 million respectively stock options granted nonemployee directors vest one year options granted officers employees generally vest five years expense related options graded vesting recognized using straightline method vesting period stock option activity year ended december 31 2020 summarized follows december 31 2020 36 million total unrecognized compensation expense related stock options expected recognized weighted average period 16 years following table sets forth intrinsic value options exercised years ended december 31 exercise intrinsic value represents total pretax intrinsic value difference fair value trading day option exercised exercise price associated respective option stock options granted year ended december 31 2020 company uses historical data estimate expected life volatility fair value stock options time grant using blackscholes option pricing model follows restricted stock units fair value rsus based closing price companys common stock date grant amortized expense service period rsus vest end three five years 2017 plan includes share reserve rsus granted 11 ratio 2008 2011 2014 plans reserve 21 ratio rsus granted 2005 plan rsus activity year ended december 31 2020 follows december 31 2020 193 million total unrecognized compensation expense related rsus expected recognized weighted average period 19 years fair value units vested years ended december 31 2020 2019 2018 182 million 53 million 42 million respectively performancebased restricted stock units executive officers psu program introduced 2017 psus issued executive officers 2018 2019 vest three equal annual installments based achievement predetermined annual earnings per share performance goals approved compensation committee psu’s granted represent right receive one share company’s common stock specified future date psu program expanded 2020 include employees additional levels executive officer psus issued beginning 2020 vest end threeyear period following grant date based achievement predetermined annual earnings per share annual return invested capital performance goals approved compensation committee metric weighted 50 whole end threeyear period results three years averaged calculate one achievement percentage number relative total shareholder return rtsr modifier applied number order determine final share amount based stericycle’s stock’s market performance relative performance sp midcap 400 index modifier adjust final shares issued applying multiplier 75 125 addition certain employees granted psus vest four equal annual installments based achievement performance goals related business transformation approved compensation committee compensation cost executive business transformation psu’s recognized based estimated achievement underlying goals number psu’s recipients ultimately receive based upon compensation committee’s review actual achievement goals psu’s granted represent right receive one share company’s common stock specified future date psus activity year ended december 31 2020 follows table reflects number shares target could granted upon vesting executive business transformation psu’s performance goals related 2020 established december 31 2020 approximately 224000 additional psus exist vest tranches based upon achievement performance goals established fiscal years 2021 2022 note 15 preferred stock december 31 2020 company 1000000 authorized shares preferred stock zero shares issued outstanding series mandatory convertible preferred stock offering september 15 2015 company completed registered public offering 7700000 depository shares representing 110th interest share 525 series mandatory convertible preferred stock par value 001 per share series preferred stock public offering price 1000 per depository share total gross proceeds 7700 million september 14 2018 accordance terms issue 638190 shares company’s series preferred stock representing preferred stock outstanding date converted total 47 million shares company’s common stock ratio 73394 shares common stock share series preferred stock prior conversion referenced dividends shares series preferred stock payable cumulative basis declared company’s board directors authorized committee thereof annual rate 525 liquidation preference 1000 per share correspondingly 1000 per share respect depository shares dividends payable cash subject certain limitations shares common stock combination cash shares common stock march 15 june 15 september 15 december 15 year commencing december 15 2015 including september 15 2018 company declared paid dividends 255 million series preferred stock shareholders year ended december 31 2018 following table provides information company’s repurchases depository shares series preferred stock prior conversion referenced year ended december 31 2018 year ended december 31 2018 repurchases company’s depository shares resulted increases retained earnings 169 million company redeemed depository shares discount 351900 depository shares repurchased 2018 equivalent 35190 shares series preferred stock note 16 loss per common share basic loss per share computed dividing loss available common shareholders weightedaverage number shares common stock outstanding period diluted earnings per share computed dividing income available common shareholders weightedaverage number shares common stock outstanding period increased include number additional shares common stock would outstanding potentially dilutive securities issued potentially dilutive securities include outstanding stock options shares purchased company’s espp canada espp rsus psus impact series preferred stock prior conversion september 14 2018 effect potentially dilutive securities reflected diluted earnings per share application treasury stock method outstanding stockbased compensation awards treasury stock method increase fair market value company’s common stock result greater dilutive effect potentially dilutive securities issue series preferred stock used ifconverted method weighted period prior conversion ifconverted method preferred dividend applicable series preferred stock added back adjustment numerator series preferred stock shares assumed converted common shares beginning period later time issuance conversion september 14 2018 year ended december 31 2018 common shares weighted period series preferred stock outstanding resulting weighted average common shares included denominator applying ifconverted method conversion assumed purposes computing diluted earnings per share effect would antidilutive numerator also adjusted premium discount arising redemption series preferred stock following table sets forth computation basic diluted loss earnings per share part ii 1for year ended december 31 2018 denominator basic loss earnings per share includes 14 million shares representing weightedaverage impact common shares outstanding result series preferred stock conversion september 14 2018 2for years ended december 31 2020 2019 2018 options purchase shares awards thousands 264 74 124 respectively excluded computation diluted loss earnings per share due net loss incurred year periods net loss options rsus psus antidilutive therefore excluded earnings per share calculation 3for year ended december 31 2018 weighted average common shares thousands issuable upon assumed conversion series preferred stock totaling 3367 excluded computation diluted loss earnings per share conversion would antidilutive following table presents options rsus included computation diluted loss per share effect would antidilutive treasury stock method psus offered key employees subject achievement specified performance conditions contingently issuable shares excluded computation diluted earnings per share based current period results shares would issuable end reporting period end contingency period goals met compensation expense recognized previously recognized compensation expense reversed part ii note 17 accumulated comprehensive loss following table sets forth changes components accumulated comprehensive loss note 18 segment reporting company evaluates oversees manages financial performance two operating segments north america international north america international segments offer following services rwcs provide collection processing regulated specialized waste including medical including reusable sharps disposal management services pharmaceutical hazardous waste disposal compliance programs sterisafe® clinical services first practice management segurimed enviroassure brand names sid services provide collection personal confidential information secure destruction recycling shredded paper crs includes communication services appointment reminders secure messaging event registration communications hospitals idn’s beginning 2020 changed measure segment profitability adjusted income operations adjusted income operations income loss operations excluding certain specified items including intangible amortization also beginning 2020 presented operations puerto rico historically reported international reportable segment north america reportable segment also 2020 presented us crs historically reported north america reportable segment result changes segment reporting applicable historical segment information recast conform new presentation segments updated reflect chief operating decision maker evaluates performance determines resource allocation develops executes strategies drive growth profitability result changes segment reporting applicable historical segment information recast conform new presentation reportable segments •north america •international includes costs related corporate enabling shared services functions annual incentive compensation stockbased compensation part ii following tables show financial information companys reportable segments 1 excludes depreciation 20 million 18 million year ended december 31 2020 2019 respectively included part business transformation following table reconciles companys primary measure segment profitability adjusted income operations income loss operations part ii note 19 geographic area following table presents consolidated revenues longlived assets geographic region note 20 legal proceedings company operates highly regulated industries responds regulatory inquiries investigations time may initiated variety reasons given time company matters various stages resolution applicable government authorities company also routinely involved actual threatened legal actions including involving alleged personal injuries commercial employment environmental tax issues outcomes matters within company’s complete control may known prolonged periods time actions claimants seek damages well relief including injunctive relief could require significant expenditures result lost revenue accordance applicable accounting standards company establishes accrued liability loss contingencies related legal regulatory matters loss probable reasonably estimable reasonable estimate probable loss range amount within range better estimate minimum amount range accrued loss probable loss reasonably estimable liability recorded determining estimated loss range loss significant judgment required estimate amount timing loss recorded accruals represent management’s best estimate probable losses cases may exposure loss excess amounts accrued estimates probable losses resulting litigation regulatory proceedings difficult predict legal regulatory matters inherently involve significant uncertainties based among factors jurisdiction stage proceedings developments applicable facts law unpredictability ultimate determination merits claim defenses company may assert claim amount damages may awarded company’s accrued liabilities loss contingencies related legal regulatory matters may change future result new developments including limited occurrence new legal matters changes law regulatory environment adverse favorable rulings newly discovered facts relevant matter changes strategy matter regardless outcome litigation adverse impact company defense settlement costs diversion management resources factors contract class action opt lawsuits beginning march 12 2013 company served several class action complaints filed federal state courts several jurisdictions complaints asserted among things company imposed unauthorized excessive price increases charges customers breach contracts violation illinois consumer fraud deceptive business practices act complaints sought certification lawsuit class action award class members part ii appropriate damages injunctive relief related actions ultimately transferred united states district court northern district illinois centralized pretrial proceedings parties engaged discussions overseen mediator regarding potential resolution matter reached settlement agreement previously disclosed settlement agreement obtained court approval march 8 2018 “sq settlement” terms sq settlement company admitted fault wrongdoing whatsoever entered sq settlement avoid cost uncertainty litigation certain class members opted final sq settlement filed lawsuits company defending expects resolve actions company made accrual respect collective matters consistent accrual policies described material securities class action opt lawsuits july 11 2016 two purported stockholders filed putative class action complaint us district court northern district illinois subsequently amended complaint purported assert claims behalf purchasers company’s publicly traded securities february 7 2013 february 21 2018 inclusive purchased securities company’s public offering depository shares around september 15 2015 complaint named defendants company directors certain current former officers certain underwriters public offering complaint purported assert claims sections 11 12a2 15 securities act 1933 sections 10b 20a securities exchange act 1934 well sec rule 10b5 promulgated thereunder complaint alleged among things company imposed unauthorized excessive price increases charges customers breach contracts defendants failed disclose alleged practices public filings statements issued proposed class period defendants filed motion dismiss court ruled pending motion dismiss parties engaged discussions overseen mediator regarding potential resolution matter reached settlement agreement previously disclosed “securities class action settlement” court held final fairness hearing july 22 2019 granted final approval securities class action settlement took advisement amount attorneys’ fees awarded plaintiffs’ counsel settlement fund terms securities class action settlement company admitted fault wrongdoing whatsoever entered securities class action settlement avoid cost uncertainty litigation certain class members opted final securities class action settlement filed lawsuits company march 6 2020 company filed motions dismiss actions courts ruled pending motions dismiss parties engaged discussions overseen mediator reached settlement material fully paid december 2020 us government investigations june 12 2017 sec issued subpoena company requesting documents information relating company’s compliance fcpa foreign domestic anticorruption laws respect certain company’s operations latin america addition doj notified company investigating matter parallel sec company cooperating agencies certain foreign authorities company also conducted internal investigation matters including outside latin america oversight audit committee board directors assistance outside counsel investigation found evidence improper conduct part fcpa investigation discussed sec requested certain additional information company july 29 2019 sec issued subpoena company requesting documents relating company’s pricing practices concerning small quantity customers alleged contract class actions securities class action company cooperating sec’s request company informed office united states attorney southern district new york conducting false claims act investigation related stericycle’s collection transportation disposal hazardous waste company cooperating investigation company separately informed state california department justice opened investigation related stericycle’s collection transportation disposal waste generated government customers california company cooperating investigation company accrued amounts respect foregoing matters cannot estimate reasonably possible loss range reasonably possible losses company may incur company unable make estimate based company knows company’s judgment part ii factual legal issues presented matter sufficiently unique company unable identify circumstances sufficiently comparable provide guidance making estimates environmental regulatory matters company regulated federal state local laws enacted regulate discharge materials environment generation transportation disposal waste cleanup contaminated soil groundwater protection environment highly regulated nature business company frequently becomes party legal administrative proceedings involving various governmental authorities interested parties issues involved proceedings generally relate alleged violations existing permits licenses alleged responsibility federal state superfund laws remediate contamination properties owned either company parties either company prior owners certain facilities shipped waste time company may subject fines penalties regulatory proceedings relating primarily waste treatment storage disposal facilities effective april 6 2020 company completed divestiture environmental solutions business including facility rancho cordova california harsco corporation pursuant purchase agreement company may subject certain indemnification claims matters relating environmental solutions facilities north salt lake utah company united states doj reached settlement principle subject court approval resolve investigation epa alleged past clean air act permit violations previously alleged nov issued state utah daq nov resulted company’s december 2014 settlement daq previously disclosed federal settlement documented form proposed civil consent decree filed united states district court district utah january 29 2021 court approves settlement company undertake supplemental environmental project provide funds local davis county school district replace older higheremission school buses new efficient buses reduce pollution protect local environment pay civil penalty clean air act company accrued total amount agreement principle material tabasco mexico 2016 asea mexico conducted permit compliance inspection hazardous waste treatment facility acquired one company’s subsidiaries dos bocas tabasco mexico asea subsequently claimed company’s subsidiary comply facility’s treatment permit issued order imposing fine directing facility closed alleged contamination remediated company’s subsidiary engaged firm environmental technicians assess contamination described asea order conduct broader environmental assessment facility november 2017 asea rescinded prior order imposing fine reassessing evidence arguments presented asea issued new resolution march 9 2018 containing lower fine including remedial obligations march 2018 company submitted proposal remedial measures april 26 2018 company appealed fines order december 2018 asea approved company’s remediation plan june 2018 company instituted civil criminal legal proceedings mexico company acquired relevant facility seeking hold seller liable remediation well damages november 2020 company entered agreement prior owners facility included transfer divestment facility entire subsidiary including related obligations back prior owners resolving pending litigation parties transaction closed december 11 2020 result transaction company recognized disposal subsidiary including prior accrual costs necessary comply asea order material rancho cordova california june 25 26 2018 california dtsc conducted compliance enforcement inspection company’s former environmental solutions facility rancho cordova california february 14 2020 dtsc filed action superior court state california sacramento county division alleging violations california’s hazardous waste control law facility’s hazardous waste permit arising inspection action ongoing separately august 15 2019 company received dtsc written intent deny hazardous waste facility permit application rancho cordova facility public hearing held september 22 2019 public comment period closed october 25 2019 company entered written submission part process august 27 2020 dtsc issued notice denial hazardous waste facility permit application september 25 2020 company filed petition review instituted administrative appeal dtsc’s action currently pending part ii company accrued amounts respect alleged violations cannot estimate reasonably possible loss range reasonably possible losses may incur company unable make estimate litigation nature uncertain unpredictable ii company’s judgment factual legal allegations asserted dtsc sufficiently unique unable identify proceedings circumstances sufficiently comparable provide guidance making estimates dea investigation rancho cordova california indianapolis indiana february 11 2020 company received administrative subpoena dea executed search warrant company’s former environmental solutions facility rancho cordova california administrative inspection warrant company’s former facility indianapolis indiana materials related former environmental solutions business shipping destroying controlled substances day agents dtsc executed separate search warrant rancho cordova facility company cooperating dea dtsc response investigations including government’s activity rancho cordova indianapolis facilities company accrued amounts respect investigations cannot estimate reasonably possible loss range reasonably possible losses company may incur company unable make estimate based company knows company’s judgment factual legal issues presented matter sufficiently unique company unable identify circumstances sufficiently comparable provide guidance making estimates company intends vigorously defend allegations actions european retrovirus investigations conjunction europol governmental authorities spain portugal romania conducted coordinated inspections large number medical waste management facilities including stericycle facilities relating transportation management disposal waste may infected covid19 virus related matters inspections resulted proceedings spain portugal company intends vigorously defend proceedings company accrued amounts respect investigations cannot estimate reasonably possible loss range reasonably possible losses company may incur company unable make estimate based company knows company’s judgment factual legal issues presented matter sufficiently unique company unable identify circumstances sufficiently comparable provide guidance making estimates note 21 quarterly financial information unaudited following table summarizes unaudited consolidated quarterly results operations reported 2020 2019 part ii eps calculated quarterly basis amounts may total calculated fullyear eps part ii stericycle inc schedule ii valuation qualifying accounts 1amounts consist primarily currency translation adjustments 93 million relating divestitures undertaken 2020 12020 amount includes valuation allowances business operations including uk brazil 22020 amount consists primarily currency translation adjustments 2019 amount consists primarily divestiture valuation allowances mexico chile 2018 amount consists primarily valuation allowances acquired deferred tax assets business combinations item 9item 8 financial statements supplementary data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting internal control financial reporting defined rules 13a15f securities exchange act 1934 process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate company’s management assessed effectiveness company’s internal control financial reporting december 31 2011 making assessment management used criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment criteria management concludes company maintained effective internal control financial reporting december 31 2011 company’s independent auditors issued attestation report company’s internal control financial reporting report appears page 33 stericycle inc lake forest il february 28 2012 report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited stericycle inc subsidiaries’ internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria stericycle inc subsdiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion stericycle inc subsidiaries maintained material respects effective internal control financial reporting december 31 2011 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets stericycle inc subsidiaries december 31 2011 2010 related consolidated statements income changes equity cash flows three years period ended december 31 2011 report dated february 28 2012 expressed unqualified opinion thereon ernst young llp chicago illinois february 28 2012 report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2011 2010 related consolidated statements income changes equity cash flows three years period ended december 31 2011 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2011 2010 consolidated results operations cash flows three years period ended december 31 2011 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states stericycle inc’s internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 28 2012 expressed unqualified opinion thereon ernst young llp chicago illinois february 28 2012 stericycle inc subsidiaries consolidated balance sheets accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements income accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes equity years ended december 31 2011 2010 2009 accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 2011 unless context requires otherwise “we” “us” “our” refers stericycle inc subsidiaries consolidated basis note 1description business incorporated 1989 presently serve diverse customer base 522000 customers throughout united states argentina brazil canada chile ireland japan mexico portugal romania spain united kingdom domestically lease two etd processing facilities 58 facilities provide autoclave incineration processing 23 facilities use processing technologies processing facilities also serve collection sites lease 111 additional transfer collection sites 12 additional salesadministrative sites use fully integrated national network provide broad range services customers including regulated waste management services regulated return recall management services regulated waste management services include regulated waste removal services sharps management services products services infection control safety compliance programs regulated return recall management services physical services provided companies individual businesses assist handling products removed supply chain due recalls expiration services also include advanced notification technology used communicate specific instructions users product waste treatment technologies include autoclaving incineration chemical treatment proprietary electrothermaldeactivation system internationally lease three etd processing facilities 70 facilities provide autoclave incineration processing 19 facilities use processing technologies also lease 43 transfer collection sites 24 additional salesadministrative sites lease two landfills 6877 employees united states 413 covered collective bargaining agreements internationally 4245 employees approximately 1140 covered collective bargaining agreements primarily latin america accompanying consolidated financial statements prepared pursuant rules regulations securities exchange commission “sec” conformity accounting principles generally accepted united states preparation financial statements conformity accounting principles requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period opinion consolidated financial statements included herein contain adjustments necessary present fairly financial position december 31 2011 2010 results operations cash flows statement changes equity three years ended december 31 2011 2010 2009 adjustments normal recurring nature evaluated subsequent events date filing annual report form 10k preparation consolidated financial statements conformity accounting principles generally accepted united states requires management make certain estimates assumptions affect amount reported assets liabilities disclosure contingent assets liabilities date consolidated financial statements revenues expenses periods reported actual results may differ estimates certain amounts previously issued financial statements reclassified conform current period presentation following adjustments made 2010 balance sheet • 22 million reclassified “shortterm investments” “cash equivalents” determined investments misclassified 2010 maturity date less 90days therefore according accounting policy classified “cash equivalents” • 05 million reclassified “accounts receivable” “other current assets” conform 2011 presentation amounts related product reimbursements due us trade receivables therefore believe appropriate classify amounts “other current assets” • 160 million reclassified accrued liabilities either “other current liabilities” “current portion longterm debt” conform 2011 presentation amounts related acquisition payments primarily contingent consideration believe appropriately classified either component debt amount subject adjustment liabilities may subject adjustment adjustments impact 2010 “net cash provided operating activities” note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc wholly owned subsidiaries revenue recognition revenues regulated waste management services sterisafe service recognized time waste collection sterisafe revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues regulated returns recall management services patient communications recorded time services performed revenues product sales recognized time goods shipped ordering customer contracts loss position losses would recorded probable estimable contracts would expected go loss position cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization include depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows containers weighted average remaining useful life 125 years goodwill identifiable intangibles goodwill identifiable indefinite lived intangible assets amortized subject annual impairment test intangible assets amortized useful lives determined customer relationships useful lives 14 40 years based upon type customer weighted average remaining useful life 295 years covenants nottocompete intangibles useful lives two ten years weighted average remaining useful life 54 years tradename intangibles useful lives 15 40 years weighted average remaining useful life 206 years determined permits indefinite lives due ability renew permits minimal additional cost therefore amortized valuation intangible customer relationships permits derived using discounted income cost savings approach financial information revenues costs assets liabilities assumptions related intangible asset input standard valuation model determine stream income attributable intangible income stream discounted present arrive valuation perform annual impairment tests indefinite lived intangible assets valuation intangibles permits currently tested impairment annually december 31 frequently circumstances indicate may impaired use discounted income cost savings model current measurement fair value permits fair value based upon among things certain assumptions expected future operating performance internal external processing costs appropriate discount rate determined management estimates discounted income may differ actual income due among things inaccuracies economic estimates amortizable identifiable intangible assets customer relationships tradenames covenants nottocompete currently amortized using straightline method estimated useful lives determined customer relationships 14 40 year lives based specific type relationship valuation contractual customer relationships derived using discounted income approach valuation model assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may less undiscounted estimated future cash flows see note 11goodwill intangible assets consolidated financial statements share repurchases purchase price par value share repurchases allocated additional paidin capital additional paidin capital reaches zero remainder allocated retained earnings income taxes deferred income tax liabilities assets determined based differences financial statement income tax basis assets liabilities using enacted tax rates effect year differences expected reverse accounts receivable accounts receivable consist amounts due us normal business activities carried estimated collectible amounts require collateral part standard trade credit policy accounts receivable balances determined past due amount overdue based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectibility accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts 2 accounts receivable bad debt expense 71 million 75 million 69 million years ended december 31 2011 2010 2009 respectively financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt december 31 2011 fair value company’s debt obligations estimated 141 billion compared carrying amount 138 billion fair value estimated using market interest rates comparable instruments company current plans retire significant amount debt prior maturity financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater 2 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses contracts loss positions losses recorded probable estimable losses incurred within range expectations use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits income tax liabilities accrued auto workers’ compensation insurance claims intangible asset valuations estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates future estimated expenses may fluctuate depending changes foreign currency rates estimates payments due longterm debt lease payments capital leases amortization expense rental payments based upon foreign exchange rates december 31 2011 see notes 11 13 14 consolidated financial statements stockbased compensation recognize compensation expense stockbased awards made employees directors stockbased compensation cost measured grant date based value award recognized vesting period determining fair value stockbased awards grant date requires considerable judgment including estimating expected volatility stock expected term award riskfree rate stock’s expected volatility based upon historical experience expected term options granted based historical experience riskfree interest rate assumption based upon us treasury yield rates comparable period factors change employ different assumptions stockbased compensation expense new grants may differ significantly recorded past foreign currency translation assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component comprehensive income shareholders’ equity environmental matters record liability environmental remediation damages cleanup program becomes probable costs damages reasonably estimated environmental liabilities recorded december 31 2011 aware issues facilities could initiate need environmental remediation new accounting standards accounting standards recently adopted revenue recognition january 1 2011 stericycle adopted changes issued financial accounting standards board “fasb” guidance revenue recognition arrangements multiple deliverables update allows companies allocate consideration received qualified separate deliverables using estimated selling price delivered undelivered items vendorspecific objective evidence thirdparty evidence unavailable additional disclosures discussing nature multiple element arrangements types deliverables arrangements general timing delivery significant factors estimates used determine estimated selling prices required new guidance material impact financial statements accounting standards issued yet adopted comprehensive income june 2011 fasb issued changes presentation comprehensive income changes give entity option present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements option present components comprehensive income part statement changes stockholders’ equity eliminated items must reported comprehensive income item comprehensive income must reclassified net income changed additionally changes made calculation presentation earnings per share changes become effective stericycle january 1 2012 change presentation changes impact financial statements goodwill impairment testing september 2011 fasb issued changes testing impairment goodwill previous guidance topic 350 required entity test goodwill impairment least annual basis comparing fair value reporting unit carrying amount including goodwill step one fair value reporting unit less carrying amount second step test must performed measure amount impairment loss amendments entity required calculate fair value reporting unit unless entity determines using qualitative assessment likely greater 50 fair value less carrying amount changes become effective stericycle january 1 2012 although early adoption permitted changes affect outcome impairment analysis reporting unit management determined changes impact financial statements note 3acquisitions divestitures following table summarizes locations acquisitions years ended december 31 2011 2010 2009 following table summarizes aggregate purchase price acquisitions years ended december 31 2011 2010 2009 2011 completed 45 acquisitions 20 domestic regulated waste compliance businesses one domestic returns management services business 24 international regulated waste businesses mexico sold 55 majority ownership regulated waste business approximately 33 million resulting immaterial gain also increased majority share previous acquisition brazil 70 825 2011 recognized 3425 million goodwill related current year acquisitions prior year allocation adjustments 2334 million assigned united states reporting segment 1091 million assigned international reporting segment see note 11goodwill intangible assets consolidated financial statements tax deductible goodwill pending final acquisition accounting approximately 506 million 496 million 733 million years 2011 2010 2009 respectively 2011 recognized 2068 million intangible assets 1904 million represents estimated fair value acquired customer relationships amortizable lives 1440 years 145 million permits indefinite lives 13 million tradename amortizable life 15 years 06 million covenants nottocompete amortizable lives 5 years allocation acquisition price preliminary pending completion certain intangible asset valuations completion accounts following table summarizes purchase price allocation acquisitions years ended december 31 2011 2010 2009 financial reporting purposes 2011 2010 acquisitions accounted using acquisition method accounting acquisitions resulted recognition goodwill financial statements reflecting premium paid acquire businesses believe complementary existing operations fit strategy company incurred 167 million 95 million acquisition related expenses years ended december 31 2011 2010 respectively expenses identified consolidated statements income part “selling general administrative expenses” results operations acquired businesses included consolidated statements income date acquisition integrate acquisitions current structure order achieve cost synergies effect acquisitions net income practical estimate 2011 estimated impact revenues acquisitions 893 million estimated annualized revenues acquisitions approximately 1845 million following consolidated pro forma information based assumption acquisitions occurred january 1 2011 2010 note 4fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy distinguishes 1 market participant assumptions developed based market data obtained independent sources observable inputs 2 entity’s assumptions market participant assumptions developed based best information available circumstances unobservable inputs fair value hierarchy consists three broad levels gives highest priority unadjusted quoted prices active markets identical assets liabilities level 1 lowest priority unobservable inputs level 3 three levels fair value hierarchy described • level 1valuations based quoted prices active markets identical assets liabilities entity ability access • level 2valuations based quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable data substantially full term assets liabilities • level 3valuations based inputs supported little market activity significant fair value assets liabilities financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness considered fair value measurements noted addition fair value measurement liability must reflect nonperformance risk entity level 1 december 31 2011 225 million cash equivalents 04 million money market accounts recorded fair value using level 1 inputs december 31 2010 793 million cash equivalents 158 million certificates deposit 04 million money market accounts 2010 financed portion japan acquisitions local borrowings ¥12 billion required us deposit equivalent usd amount 158 million one year certificates deposit affiliated bank located united states redeemed september 2011 level 2 assets liabilities measured fair value using level 2 inputs december 31 2011 december 31 2010 level 3 contingent consideration liabilities recorded amounts 99 million december 31 2011 165 million december 31 2010 contingent consideration represents amounts paid part acquisition consideration certain future events occur events usually acquisition targets revenues earnings arrive fair value contingent consideration applying weighted probability potential outcomes maximum possible payout calculation potential outcomes dependent past financial performance management assumptions future performance contingent consideration liabilities reassessed quarter reflected balance sheet part “other current liabilities” “other liabilities” changes contingent consideration reflected table fair value debt december 31 2011 fair value company’s debt obligations estimated 141 billion compared carrying amount 138 billion december 31 2010 fair value company’s debt obligations estimated 1108 billion compared carrying amount 1106 billion fair values estimated using market interest rates comparable instruments company current plans retire significant amount debt prior maturity movements items fair value hierarchies note 5income taxes us international components income taxes consisted following years ended december 31 2011 2010 2009 significant components income tax expense years ended december 31 2011 2010 2009 follows reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 2011 2010 2009 follows cash payments income taxes 744 million 766 million 665 million years ended december 31 2011 2010 2009 respectively deferred tax liabilities assets december 31 2011 2010 follows december 31 2011 net operating loss carry forwards us federal state income tax purposes fully utilized excluding net operating loss carry forwards related acquisitions remaining net operating loss carry forwards foreign domestic acquisitions approximately 389 million begin expire 2015 34 million valuation allowance offsetting benefit valuation allowance primarily represents loss carryforwards limitations place utilization uncertain expiration changes valuation allowance 2011 primarily related adjustments acquisition accounting undistributed earnings foreign subsidiaries considered permanently reinvested therefore deferred taxes recorded thereon cumulative amounts earnings 7070 million december 31 2011 practicable estimate amount tax may payable upon distribution assuming repatriation subsidiaries file us federal income tax returns income tax returns various states foreign jurisdictions exceptions longer subject us federal state local nonus income tax examinations tax authorities years 2006 company recorded accruals cover certain uncertain tax positions uncertain tax positions relate additional taxes company may required pay various tax jurisdictions course examinations various taxing authorities proposed adjustments may asserted company evaluates items casebycase basis adjusts accrual uncertain tax positions deemed necessary estimated amount liability associated company’s uncertain tax positions may change within next twelve months cannot reasonably estimated total amount unrecognized tax positions december 31 2011 107 million amount unrecognized tax positions recognized would affect effective tax rate approximately 107 million recognized interest penalties accrued related income tax reserves amount 07 million 01 million years ended december 31 2011 2010 respectively component income tax expense following table summarizes changes unrecognized tax positions years ended december 31 2011 2010 note 6stock based compensation stock plans adopted six stock option plans 2011 incentive compensation plan expires may 2021 ii 2008 incentive stock plan stockholders approved may 2008 iii 2005 incentive stock plan stockholders approved april 2005 iv 2000 nonstatutory stock option plan expired february 2010 v 1997 stock option plan expired january 2007 vi 1996 directors stock option plan expired may 2006 2011 incentive compensation plan authorizes awards stock options stock appreciation rights restricted stock restricted stock units total 3000000 shares 2008 plan authorizes awards stock options stock appreciation rights restricted stock restricted stock units total 3500000 shares 2005 plan authorizes awards stock options stock appreciation rights total 4800000 shares 2000 plan authorizes stock option grants total 7000000 shares 1997 plan authorized stock option grants total 6000000 shares directors plan authorized stock option grants total 2340000 shares terms stock options authorized 2011 plan 2008 plan 2005 plan provide grant nonstatutory stock options “nsos” incentive stock options intended qualify section 422 internal revenue code “isos” 2000 plan provides grant nsos 1997 plan provided grant nsos isos directors plan provided grant nsos 2011 2008 2005 plans authorize awards officers employees consultants following expiration directors plan may 2006 directors 2000 plan authorized awards employees consultants officers directors 1997 plan authorized awards officers directors employees consultants directors plan authorized awards outside directors december 31 2011 reserved following shares issuance consisting shares available awards 2011 plan 2008 plan 2005 plan 2000 plan 1997 plan shares issuable outstanding stock option grants restricted stock unit awards employee stock purchase plan october 2000 board directors adopted employee stock purchase plan “espp” effective july 1 2001 stockholders approved espp may 2001 espp authorizes 600000 shares common stock purchased employees 15 discount market price stock payroll deductions two sixmonth offerings year employee elects participate offering granted option first day offering number shares equal employee’s payroll deductions espp offering period may exceed 5000 divided option price per share option price per share lower 85 closing price share common stock first trading day offering period 85 closing price last trading day offering period recognize compensation expense espp reflected statement income every us employee completed six months employment first day offering fulltime employee parttime employee customarily works least 20 hours per week eligible participate offering 2011 2010 2009 53213 shares 61573 shares 56145 shares respectively issued espp stock based compensation expense 2011 changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding compensation expense stockbased compensation awards granted subsequent january 1 2006 based grantdate fair value determined accordance provisions fasb accounting standards sharebased payments years ended december 31 2011 2010 2009 recognized compensation expense 144 million 144 million 140 million respectively stock options 10 million 09 million 07 million respectively espp reflected statement income significant capitalized stockbased compensation costs december 31 2011 2010 2009 following table presents total stockbased compensation expense resulting stock option awards espp included consolidated statements income december 31 2011 245 million total unrecognized compensation expenses related nonvested option awards expected recognized weightedaverage period 149 years following table sets forth tax benefits related stock compensation stock options granted directors vest one year options granted officers employees generally vest five years expense related graded vesting options recognized using straightline method vesting period exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options option activity years ended december 31 2011 2010 2009 summarized follows total exercise intrinsic value represents total pretax intrinsic value difference sales price trading day year ended december 31 2011 exercise price associated respective option total aggregate intrinsic value represents total pretax intrinsic value difference closing stock price last day trading year ended december 31 2011 exercise price multiplied number inthemoney options would received option holders assuming option holders exercised options december 31 2011 amount changes based fair market value stock following tables set forth information related outstanding options years ended december 31 2011 2010 2009 following tables set forth information related exercisable options outstanding exercisable december 31 2011 price range presented blackscholes optionpricing model used determining fair value option grant expected term options granted based historical experience expected volatility based upon historical volatility expected dividend yield zero riskfree interest rate based upon us treasury yield rates comparable period assumptions used blackscholes model follows restricted stock units restricted stock units “rsus” activity years ended december 31 2011 2010 summarized follows rsus vest end three years 2008 plan includes share reserve related rsus granted 21 ratio grant rsus 2009 per share fair value rsus years ended december 31 2011 2010 8500 5165 respectively note 7preferred stock preferred stock december 31 2011 2010 1000000 authorized shares preferred stock shares issued outstanding note 8earnings per common share following table sets forth computation basic diluted earnings per share additional information regarding outstanding employee stock options see note 6stock based compensation consolidated financial statements 2011 2010 2009 options purchase 879266 shares 133535 shares 2218914 shares respectively exercise prices 77009424 51558092 46566053 respectively included computation diluted earnings per share “eps” effect would antidilutive note 9accumulated comprehensive income loss components total comprehensive income net income change cumulative currency translation adjustments gains losses derivative instruments qualifying cash flow hedges following table sets forth components total comprehensive income 2011 2010 2009 tax impact unrealized loss cash flow hedges accumulated comprehensive income december 31 2011 2010 2009 02 million 14 million 14 million respectively translation adjustments taxeffected company’s net investment foreign subsidiaries related foreign earnings deemed permanently invested following table summarizes amounts related cash flow hedges reclassified interest expense consolidated statements income note 10property plant equipment property plant equipment december 31 consisted following items note 11goodwill intangible assets goodwill indefinite lived intangibles amortized subject annual impairment test frequent testing circumstances indicate may impaired two geographical reporting segments “united states” “international” goodwill changes carrying amount goodwill years ended december 31 2011 2010 follows quarter ended june 30 2011 performed annual goodwill impairment evaluation three reporting units domestic regulated waste domestic regulated returns recall management services international calculate fair value reporting units using two methods one market approach income approach market income approaches indicated impairment goodwill three reporting units market approach market approach begins calculating market capitalization company using average stock price prior 30 days outstanding share count june 30 2011 look company’s earnings interest tax depreciation amortization “ebitda” adjusted stock compensation expense items gain sale divested assets prior twelve months calculated market capitalization divided modified ebitda arrive valuation multiple fair value reporting unit calculated taking product valuation multiple trailing twelve month modified ebitda reporting unit fair value compared reporting units’ book value determined excess book value believe starting fair value company whole reasonable measure fair value allocated reporting unit based reporting unit’s individual earnings sustained drop stock price would negative impact fair value calculations temporary drop earnings reporting unit would negative impact fair value calculations results goodwill impairment test using market approach indicated fair value reporting units exceeded book value substantial amount excess 100 book value income approach income approach uses expected future cash flows reporting unit discounts cash flows present values expected future cash flows calculated using management assumptions internal growth capital expenditures cost efficiencies future acquisitions included expected future cash flows use discount rate based company calculated weighted average cost capital adjusted reporting units based risk size premium foreign country premium significant assumptions used income approach include realization future cash flows discount rate used present value cash flows results goodwill impairment test using income approach indicated fair value reporting units exceeded book value substantial amount excess 100 2011 2010 wrote 28 million 06 million respectively permit intangibles facilities due rationalizing domestic operations expenses reflected part “selling general administrative expenses” current acquisition accounting fair value must assigned acquired assets based theoretical “market participant” regardless acquirers’ intended use assets accounting treatment lead recognition losses company disposes acquired assets complete annual impairment analysis indefinite lived intangibles facility permits quarter ended december 31 year 2011 2010 performed annual permit impairment evaluation determined noted impairment intangible assets indefinite lived goodwill permits amortized useful lives 2011 assigned 1904 million customer relationships amortization periods 14 40 years 145 million facility environmental permits indefinite lives 2010 assigned 971 million customer relationships amortization periods 15 40 years 165 million facility environmental permits indefinite lives december 31 values intangible assets follows years ended december 31 2011 2010 2009 aggregate amortization expense 163 million 99 million 54 million respectively estimated amortization expense next five years assuming additional amortizable intangible assets follows years ended december 31 note 12accrued liabilities accrued liabilities december 31 consisted following items note 13debt new debt september 21 2011 certain subsidiaries entered amended restated credit agreement “new credit agreement” bank america na administrative agent swingline lender letter credit issuer lenders party new credit agreement jpmorgan chase bank na syndication agent hsbc bank usa national association lloyds securities inc union bank na codocumentation agents new credit agreement amended restated prior credit agreement dated august 24 2007 amended new credit agreement increases unsecured revolving credit facility 8500 million 10 billion extends maturity date borrowings august 24 2012 september 21 2016 paid 37 million financing fees amortized interest expense life loan agreement longterm debt consisted following december 31 payments due longterm debt excluding capital lease obligations five years subsequent december 31 2011 follows paid interest 435 million 286 million 248 million years ended december 31 2011 2010 2009 respectively property capital leases included property plant equipment accompanying consolidated balance sheets follows december 31 amortization related capital leases included depreciation expense minimum future lease payments capital leases follows 10 billion senior credit facility maturing september 2016 1000 million private placement notes maturing april 2015 1750 million private placement notes maturing october 2017 2250 million private placement notes maturing october 2020 require us comply various financial reporting covenants restrictions including restriction dividend payments financial debt covenants senior credit facility private placement notes december 31 2011 compliance financial debt covenants december 31 2011 2010 1591 million 1840 million respectively committed outstanding letters credit senior credit facility unused portion revolving credit facility december 31 2011 2010 3130 million 4906 million respectively guarantees guaranteed loan jpmorganchase bank na behalf shiraishisogyo co ltd “shiraishi” shiraishi customer japan expanding medical waste management business one year loan current balance 64 million jpmorganchase bank na expires may 2012 also extended loans shiraishi approximately 152 million support medical waste business amounts collateralized assets shiraishi related companies note 14lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space landfills operating lease agreements expire various dates next 19 years leases properties contain renewal provisions rent expense 2011 2010 2009 753 million 579 million 458 million respectively minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2011 next five years aggregate follows note 15products services geographic information fasb asc topic 280 requires segment information reported based information utilized executive management internally assess performance make operating decisions determined three operating segments based organizational structure company information reviewed operating segments international waste management services “international” domestic regulated waste management services “united states” domestic returns recall management services aggregated domestic regulated waste management services domestic returns recall management services one reportable segment united states based consideration following aggregation criteria • similar economic characteristics • services provided • types customers serviced • types waste collection transportation treatment methods utilized • regulatory environments similar vary based upon country specific regulations • employ sales marketing techniques activities two reportable segments united states includes puerto rico international summary information reportable segments follows revenues attributed countries based location customers intercompany revenues recorded united states work performed canada eliminated prior reporting united states revenues accounting principles critical accounting policies used preparation financial statements reporting segments detailed information united states reporting segment follows detailed information international reporting segment follows note 16employee benefit plan 401k defined contribution retirement savings plan covering substantially domestic employees participant may elect defer portion compensation subject certain limitations may contribute 50 first 5 compensation contributed plan employee maximum 1750 per annum contributions years ended december 31 2011 2010 2009 approximately 26 million 23 million 21 million respectively company several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2011 2010 2009 total contributions made company plans approximately 08 million 07 million 07 million respectively note 17legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may instituted variety reasons also involved variety civil litigation time note 18restructuring plant closure costs december 2010 reorganized structure international management group order leverage strong local management resulting employee severance charges third quarter 2011 expanded program include consolidation administrative facilities united kingdom reorganization international legal structure accrual balance 09 million december 2011 expect pay primarily first quarter 2012 immaterial additional expense following tables highlight pretax charges changes reserves 2011 2010 charges except fiftyfour thousand reflected “costs revenues” reflected consolidated statement income within “selling general administrative expenses” addition restructuring charges recognized 28 million 09 million non cash expenses 2011 2010 respectively related rationalization domestic plant operations note 19selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2011 2010 eps calculated quarterly basis amounts may total calculated fullyear eps note 20subsequent events evaluated subsequent events date filing annual report form 10k events occurred would require adjustment disclosure consolidated financial statements stericycle inc subsidiaries schedule iivaluation allowance accounts 1 amounts consist primarily valuation allowances assumed acquired companies currency translation adjustments item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders stericycle inc subsidiaries audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 2016 2015 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2016 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 2016 2015 consolidated results operations cash flows three years period ended december 31 2016 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states stericycle inc subsidiaries internal control financial reporting december 31 2016 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated march 14 2017 expressed adverse opinion thereon ernst young llp chicago illinois march 14 2017 2016 10k annual report stericycle inc • 43 part ii stericycle inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements 2016 10k annual report stericycle inc • 44 part ii stericycle inc subsidiaries consolidated statements income accompanying notes integral part consolidated financial statements 2016 10k annual report stericycle inc • 45 part ii stericycle inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements 2016 10k annual report stericycle inc • 46 part ii stericycle inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements 2016 10k annual report stericycle inc • 47 part ii stericycle inc subsidiaries consolidated statements changes equity years ended december 31 2016 2015 2014 accompanying notes integral part consolidated financial statements 2016 10k annual report stericycle inc • 48 part ii stericycle inc subsidiaries notes consolidated financial statements unless context requires otherwise us refers stericycle inc subsidiaries consolidated basis note 1 description business businesstobusiness services provider focus regulated compliance solutions healthcare retail commercial businesses includes collection processing regulated specialized waste disposal collection personal confidential information secure destruction plus variety training consulting recallreturn communication compliance services incorporated 1989 presently serve diverse customer base 1000000 customers throughout united states argentina austria australia belgium brazil canada chile france germany ireland japan luxembourg mexico netherlands portugal romania republic korea singapore south africa spain united kingdom note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc subsidiaries intercompany accounts transactions eliminated consolidation companys consolidated financial statements prepared accordance us gaap include assets liabilities revenue expenses whollyowned subsidiaries majorityowned subsidiaries company exercises control outside stockholders interests subsidiaries shown consolidated financial statements “noncontrolling interests revenue recognition revenues regulated medical waste management services compliances services secure information destruction services recognized time waste collection compliance service revenues recognized evenly contractual service period payments received advance deferred recognized services provided revenues hazardous waste services recorded time waste received processing facility delivered third party revenues regulated recall returns management services communication solutions recorded time services performed revenues product sales recognized time goods shipped ordering customer charges related sales taxes international value added tax vat similar pass taxes included revenue goodwill identifiable intangible assets historically evaluated goodwill impairment annually june 30 indicator impairment exists 2016 changed date annual goodwill impairment assessment reporting units october 1st voluntary change annual goodwill testing date change accounting principle believe preferable better aligns timing assessment timing company’s annual strategic planning forecasting process change assessment date applied prospectively delay accelerate avoid potential impairment charge evaluated retrospective application impractical would require significant estimates assumptions use hindsight company option assess goodwill impairment first performing qualitative assessment determine whether morelikelythannot fair value reporting unit less carrying amount company determines morelikelythannot fair value reporting unit less 2016 10k annual report stericycle inc • 49 part ii carrying amount twostep goodwill impairment test required performed company determines morelikelythannot fair value reporting unit less carrying amount company elect option perform initial qualitative assessment company performs twostep goodwill impairment test first step fair value reporting unit compared book value including goodwill fair value reporting unit excess book value related goodwill impaired analysis necessary fair value reporting unit less book value indication potential impairment second step performed required second step testing involves calculating implied fair value goodwill reporting unit implied fair value goodwill determined manner goodwill recognized business combination excess fair value reporting unit determined step one fair value net assets including identifiable intangible assets reporting unit acquired carrying value reporting units goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess historically tested indefinite lived intangible assets impairment annually december 31 frequently circumstances indicate may impaired 2016 changed date annual indefinitelived intangible asset impairment assessment october 1st voluntary change testing date change accounting principle believe preferable better aligns timing assessment timing company’s annual strategic planning forecasting process aligns testing indefinitelived impairment testing consistent date change assessment date applied prospectively delay accelerate avoid potential impairment charge evaluated retrospective application impractical would require significant estimates assumptions use hindsight impairment longlived assets longlived assets property plant equipment intangible assets amortized reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable circumstances require longlived asset group held used tested possible impairment company first compares undiscounted cash flows expected generated longlived asset group carrying amount carrying amount longlived asset group recoverable undiscounted cash flow basis impairment recognized extent carrying amount exceeds fair value longlived assets disposal groups classified held sale recorded lower carrying amount fair value less estimated selling costs longlived assets depreciated amortized classified held sale income taxes subject income taxes us numerous foreign jurisdictions compute provision income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting tax basis assets liabilities operating loss tax credit carryforwards deferred tax assets liabilities measured using currently enacted tax rates expected apply taxable income years tax assets liabilities expected realized settled significant judgments required order determine realizability deferred tax assets assessing need valuation allowance evaluate significant available positive negative evidence including historical operating results estimates future taxable income existence prudent feasible tax planning strategies changes expectations regarding realization deferred tax assets could materially impact income tax expense future periods undistributed earnings foreign subsidiaries considered permanently reinvested therefore deferred taxes recorded outside basis differences tax liabilities recorded management’s judgment tax position meet likely threshold recognition tax positions meet likely threshold tax liability may still recorded depending management’s assessment tax position ultimately settled company records interest penalties unrecognized tax benefits provision income taxes 2016 10k annual report stericycle inc • 50 part ii accounts receivable accounts receivable consist amounts due us normal business activities accounts receivable balance includes amounts related vat similar international passthrough taxes require collateral part standard trade credit policy accounts receivable balances determined past due based contractual terms customer maintain allowance doubtful accounts reflect expected uncollectability accounts receivable based past collection history specific risks identified among uncollected accounts receivable written allowance doubtful accounts determined receivable collected andor account referred third party collection agency single customer accounts approximately 14 accounts receivable years ended december 31 2016 2015 2014 bad debt expense 418 million 137 million 99 million respectively stockbased compensation measure stockbased compensation cost fair value expense generally recognized straightline basis service period awards expected vest present stockbased compensation expense within consolidated statements income based classification respective employees cash compensation cash equivalents shortterm investments consider highly liquid investments maturity less three months purchased cash equivalents shortterm investments consist certificates deposit mature less one year property plant equipment property plant equipment stated cost depreciation amortization includes depreciation assets recorded capital leases computed using straightline method estimated useful lives assets follows containers weighted average remaining useful life 122 years lease asset retirement obligations company classifies leases inception either operating capital leases may receive renewal expansion options rent holidays leasehold improvement incentives certain lease agreements company recognizes operating lease costs straightline basis taking account adjustments free escalating rental payments deferred payment terms additionally lease incentives accounted reduction lease costs lease term rent expense associated operating lease obligations relate delivery services presented cost revenues “cor” remaining classified within selling general administrative expenses “sga” consolidated statements income minimum lease payments made capital leases apportioned interest expense reduction related capital lease obligations classified within accrued liabilities current portion longterm debt consolidated balance sheets company establishes assets liabilities present value estimated future costs retire longlived assets termination expiration lease assets amortized lease term recorded liabilities accreted future value estimated retirement costs related amortization accretion expenses presented within cor leased asset used delivery services remaining expenses presented within sga consolidated statements income insurance workers’ compensation vehicle liability physical damage employeerelated health care benefits obtained using high deductible insurance policies thirdparty administrator used process claims require workers’ compensation vehicle liability physical damage claims reported within 24 hours result accrue workers’ compensation vehicle physical damage liability 2016 10k annual report stericycle inc • 51 part ii based upon claim reserves established thirdparty administrator end reporting period includes estimate claims incurred yet reported employee health insurance benefit liability based historical claims experience financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable derivatives longterm debt financial instruments potentially subject us concentrations credit risk consist principally accounts receivable credit risk trade receivables minimized result large size customer base single customer represents greater approximately 14 total accounts receivable perform ongoing credit evaluation customers maintain allowances potential credit losses use estimates preparation financial statements conformity generally accepted accounting principles requires us make estimates assumptions affect amounts reported financial statements accompanying notes areas make estimates include allowance doubtful accounts credit memo reserve accrued employee health welfare benefits environmental liabilities stock compensation expense income tax liabilities accrued auto workers’ compensation insurance claims intangible asset valuations estimates based historical trends various assumptions believed reasonable circumstances actual results could differ estimates foreign currency assets liabilities foreign affiliates use local currency functional currency translated exchange rate last day accounting period income statement accounts translated average rates period related translation adjustments reported component accumulated comprehensive loss consolidated balance sheets foreign currency gains losses resulting transactions denominated currencies entity’s functional currency including foreign currency gains losses intercompany balances longterm investment nature included within expenseincome net consolidated statements income reclassifications certain amounts previously issued financial statements reclassified conform current period presentation new accounting standards adoption new accounting standards going concern company adopted guidance accounting standards update “asu” 201415 presentation financial statements going concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern december 31 2016 asu requires management assess company’s ability continue going concern provide related disclosures certain circumstances based results company’s analysis additional disclosures required compensation stock compensation january 1 2016 company adopted guidance accounting standards update asu 201609 “compensation stock compensation topic 718 improvements employee sharebased payment accounting” asu entities permitted make accounting policy election either estimate forfeitures sharebased payment awards previously required recognize forfeitures occur company elected recognize forfeitures occur impact change accounting policy evaluated determined insignificant resulted cumulativeeffect change company’s retained earnings additionally asu 201609 requires income tax effects related settlements sharebased payment awards reported earnings increase decrease income tax expense benefit net 2016 10k annual report stericycle inc • 52 part ii previously income tax benefits settlement award reported increase decrease additional paidin capital extent benefits greater less income tax benefits reported earnings awards vesting period requirement report income tax effects earnings applied prospective basis settlements occurring january 1 2016 impact applying guidance 60 million company’s consolidated statements income year ended december 31 2016 asu 201609 also requires income taxrelated cash flows resulting sharebased payments reported operating activities statement cash flows previously income tax benefits settlement award reported reduction operating cash flows increase financing cash flows extent benefits exceeded income tax benefits reported earnings awards vesting period company elected apply change cash flow classification prospective basis leaving previously reported net cash provided operating activities net cash used financing activities accompanying consolidated statements cash flows period ended december 31 2015 2014 unchanged remaining provisions asu 201609 material impact accompanying consolidated financial statements interestimputation interest company adopted guidance asu 201503 interest imputation interest subtopic 83530 simplifying presentation debt issuance costs requires debt issuance costs related recognized debt liability presented balance sheet direct deduction debt liability rather asset guidance recognition measurement debt issuance costs affected accounting standard update revised standard affects presentation therefore impact company’s results operations adoption resulted reclassification reduced assets longterm debt 123 million consolidated balance sheet december 31 2015 accounting standards issued yet adopted revenue contracts customers may 2014 fasb issued asu 201409 revenue contracts customers topic 606 guidance provide single comprehensive revenue recognition model contracts customers revenue guidance contains principles entity apply determine measurement revenue timing recognized underlying principle entity recognize revenue depict transfer goods services customers amount entity expects entitled exchange goods services amended authoritative guidance associated revenue recognition effective company january 1 2018 company currently anticipates adopting asu using modified retrospective method company continues evaluate impacts asu consolidated financial statements company currently expects incremental contract acquisition costs obtaining revenue generating contracts sales commissions paid connection multiyear service contracts would capitalized amortized economic life contract current guidance company expenses costs incurred accordingly amount contract consideration allocated performance obligations contracts would different new standard amount allocated current standard company completes evaluation new standard new information may arise could change companys current understanding impact revenue expense recognized additionally company continue monitor industry activities additional guidance provided regulators standards setters accounting profession adjust company’s assessment implementation plans accordingly leases february 2016 fasb issued asu 201602 “leases” topic 842 guidance require lessees record rightofuse asset lease liability balance sheet leases terms 12 2016 10k annual report stericycle inc • 53 part ii months recognition measurement presentation expenses depend classification finance operating lease asu also requires certain quantitative qualitative disclosures accounting guidance lessors largely unchanged amendments applied modified retrospective basis asu 201602 effective us beginning january 1 2019 yet begun evaluate impact adoption asu 201602 consolidated financial statements related disclosures begin evaluation adoption new standard 2017 statement cash flows august 2016 fasb issued asu 201615 “statement cash flows” topic 230 guidance clarifies diversity practice statement cash flows recognize certain transactions including classification payment contingent consideration acquisitions financing operating activities asu 201615 effective us beginning january 1 2018 adoption guidance expected significant impact financial statements treatment relevant affected items within consolidated statement cash flows consistent requirements guidance intraentity transfers assets inventory october 2016 fasb issued asu 201616 “intraentity transfers assets inventory” guidance requires income tax consequences intraentity transfer asset inventory recognized transfer occurs instead asset sold outside party pronouncement effective annual reporting periods beginning december 15 2017 including interim reporting periods within annual reporting periods early adoption permitted expect adoption material impact financial statements intangibles goodwill simplifying test goodwill impairment january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment guidance eliminates step 2 goodwill impairment test requires goodwill impairment measured amount reporting unit’s carrying amount exceeds fair value exceed carrying amount goodwill asu effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 expect adoption material impact financial statements note 3 acquisitions divestitures assets held sale acquisitions domestically acquired selected assets liabilities fifteen secure information destruction businesses selected assets liabilities three regulated waste businesses one communication services business 100 stock two regulated waste businesses internationally acquired selected assets liabilities regulated waste businesses one republic korea two spain two romania one united kingdom also acquired selected assets liabilities three secure information destruction businesses australia 100 stock another spain acquisitions considered business combinations guidance 2016 10k annual report stericycle inc • 54 part ii following table summarizes locations acquisitions years ended december 31 2016 2015 2014 following table summarizes acquisition date fair value consideration transferred acquisitions completed years ended december 31 2016 2015 2014 financial reporting purposes acquisitions accounted using acquisition method accounting acquisitions resulted recognition goodwill financial statements reflecting premium paid acquire businesses believe complementary existing operations fit growth strategy year ended december 31 2016 recognized increase goodwill 528 million related current year acquisitions excluding effect foreign currency translation approximately 403 million goodwill recognized year ended december 31 2016 deductible income taxes year ended december 31 2016 recognized increase intangible assets current year acquisitions 356 million excluding effect foreign currency translation recognized 346 million estimated fair value acquired customer relationships amortizable lives 10 40 years 10 million covenant nottocompete agreements amortizable lives 5 years fair value consideration transferred business combination allocated tangible intangible assets assumed acquisition date remaining unallocated amount recorded goodwill allocations acquisition price recent acquisitions prepared preliminary basis pending completion certain intangible asset valuations finalization opening balance sheet following table summarizes preliminary purchase price allocation current period acquisitions year ended december 31 2016 10k annual report stericycle inc • 55 part ii years ended december 31 2016 2015 2014 company incurred 96 million 391 million 133 million respectively acquisition related expenses included within sga consolidated statements income results operations acquired businesses included consolidated statements income date acquisition pro forma results operations acquisitions presented pro forma effects individually aggregate material company’s consolidated results operations october 1 2015 acquired shredit international ulc alberta unlimited liability corporation sii shredit jv lp ontario limited partnership shredit jv boost gp corp ontario corporation boost gp boost holdings lp ontario limited partnership together sii shredit jv boost gp shredit global leader secure information destruction highly complementary service regulated waste compliance services provides operational synergies stemming core competencies route logistics lean management systems aggregate purchase price 23 billion cash following table summarizes adjustments consideration transferred prior year acquisitions primarily includes 95 million additional cash consideration paid march 2016 part final working capital adjustments 2015 shredit acquisition 2016 recorded various adjustments provisional amounts related shredit prior year acquisitions following table summarizes adjustments major assets acquired liabilities assumed 2016 10k annual report stericycle inc • 56 part ii following table summarizes completed purchase price allocation major asset acquired liabilities assumed acquisition shredit december 31 2016 purchase accounting completed 2015 acquisitions divestitures q4 2016 sold certain assets united kingdom 08 million resulting pretax loss 16 million 13 million net tax included sga consolidated statements income assets liabilities held sale december 31 2016 certain international operations met criteria classified held sale recorded 255 million impairment charge sga consolidated statements income adjust carrying value asset groups fair value less estimated costs sell assets liabilities disposal groups presented assets held sale liabilities held sale consolidated balance sheet following table presents information related major classes assets liabilities classified held sale consolidated balance sheet december 31 2016 determined operations included table meet criteria classified discontinued operations applicable guidance 2016 10k annual report stericycle inc • 57 part ii note 4 fair value measurements fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy distinguishes 1 market participant assumptions developed based market data obtained independent sources observable inputs 2 entitys assumptions market participant assumptions developed based best information available circumstances unobservable inputs fair value hierarchy consists three broad levels gives highest priority unadjusted quoted prices active markets identical assets liabilities level 1 lowest priority unobservable inputs level 3 three levels fair value hierarchy described level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities quoted prices identical similar assets liabilities inactive markets inputs observable corroborated observable market data substantially full term assets liabilities level 3 inputs generally unobservable typically reflect management’s estimate assumptions market participants would use pricing asset liability financial assets liabilities classified entirety based lowest level input significant fair value measurement assessment significance particular input fair value measurement requires judgment may affect valuation assets liabilities placement within fair value hierarchy levels impact creditworthiness nonperformance risk considered fair value measurements noted movements items fair value hierarchies following table summarizes bases used measure financial assets liabilities carried fair value recurring basis consolidated balance sheets derivative financial instruments use market approach valuation technique based observable market transactions spot forward rates 2016 10k annual report stericycle inc • 58 part ii recorded 08 million asset related fair value us dollarcanadian dollar foreign currency swap classified assets december 31 2016 objective swap offset foreign exchange risk us dollar equivalent cash outflows canadian subsidiary contingent consideration liabilities recorded using level 3 inputs 241 million december 31 2016 81 million classified current liabilities contingent consideration liabilities 254 million december 31 2015 91 million classified current liabilities contingent consideration represents amounts expected paid part acquisition consideration certain future events occur events usually targets revenues earnings related business acquired arrive fair value contingent consideration applying weighted probability potential payment outcomes calculation potential outcomes dependent past financial performance management assumptions future performance financial performance measures fully met maximum liability would 254 million december 31 2016 contingent consideration liabilities reassessed reporting period reflected consolidated balance sheets part current liabilities changes contingent consideration reflected table fair value debt december 31 2016 fair value company’s debt obligations estimated using level 2 inputs 297 billion compared carrying amount 296 billion december 31 2015 fair value company’s debt obligations estimated using level 2 inputs 322 billion compared carrying amount 321 billion fair values estimated using income approach applying market interest rates comparable instruments note 5 income taxes us international components income taxes consisted following years ended december 31 2016 2015 2014 2016 10k annual report stericycle inc • 59 part ii significant components income tax expense years ended december 31 2016 2015 2014 follows reconciliation income tax provision computed federal statutory rate effective tax rate years ended december 31 2016 2015 2014 follows cash payments income taxes 1115 million 1251 million 1281 million years ended december 31 2016 2015 2014 respectively deferred tax liabilities assets december 31 2016 2015 follows december 31 2016 net operating loss carryforwards us federal state income tax purposes fully utilized excluding net operating loss carryforwards related acquisitions net operating loss carryforwards foreign domestic acquisitions approximately 1217 million certain net operating loss carryforwards begin expire 2017 tax benefit net operating losses approximately 382 million december 31 2016 valuation allowance 154 million recorded offsetting tax benefit 2016 10k annual report stericycle inc • 60 part ii undistributed earnings foreign subsidiaries considered permanently reinvested therefore deferred taxes recorded thereon cumulative amounts earnings approximately 5422 million december 31 2016 practicable estimate amount tax may payable upon distribution assuming repatriation subsidiaries file us federal income tax returns income tax returns various states foreign jurisdictions exceptions longer subject us federal state local nonus income tax examinations tax authorities years 2011 2014 internal revenue service concluded audit 2010 corporate income tax return significant adjustments company recorded accruals cover certain unrecognized tax positions unrecognized tax positions relate additional taxes company may required pay various tax jurisdictions course examinations various taxing authorities proposed adjustments may asserted company evaluates items casebycase basis adjusts accrual unrecognized tax positions deemed necessary estimated amount liability associated company’s unrecognized tax positions may significantly increase decrease within next twelve months cannot reasonably estimated total amount unrecognized tax positions december 31 2016 267 million acquisition activity contributed amount unrecognized tax positions recognized would affect effective tax rate approximately 214 million recognized interest penalties accrued related income tax reserves amount 13 million 07 million years ended december 31 2016 2015 respectively component income tax expense following table summarizes changes unrecognized tax positions years ended december 31 2016 2015 table includes amounts relate acquired uncertain tax positions securities purchase agreement provides seller liable indemnified stericycle income tax liabilities periods prior acquisition stericycle responsible unrecognized tax benefits related interest penalties periods acquisition note 6 stock based compensation december 31 2016 following incentive stock plans • 2014 incentive stock plan stockholders approved may 2014 • 2011 incentive stock plan stockholders approved may 2011 • 2008 incentive stock plan stockholders approved may 2008 • 2005 incentive stock plan stockholders approved april 2005 2016 10k annual report stericycle inc • 61 part ii • 2000 nonstatutory stock option plan expired february 2010 • employee stock purchase plan espp stockholders approved may 2001 december 31 2016 reserved total 8054670 shares issuance plans terms stock options authorized 2014 plan 2011 plan 2008 plan 2005 plan provide grant nonstatutory stock options nsos incentive stock options isos restricted stock units “rsus” intended qualify section 422 internal revenue code 2000 plan provides grant nsos 2014 2011 2008 2005 plans authorize awards officers employees consultants following expiration directors plan may 2006 directors 2000 plan authorized awards employees consultants officers directors exercise price per share option granted stock option plans may less closing price share common stock date grant maximum term option granted plan may exceed 8 10 years option may exercised vested case option granted employee including officer remains employee limited period following termination employment new shares issued upon exercise stock options employee stock purchase plan october 2000 board directors adopted employee stock purchase plan espp stock holders approved may 2001 made effective july 1 2001 espp authorizes 1000000 shares common stock substantially employees may purchase payroll deductions price equal 85 lower fair market values stock beginning end sixmonth offering periods employees payroll deductions stock purchase may exceed 5000 offering period 2016 2015 2014 89100 shares 68039 shares 60189 shares respectively issued espp december 31 2016 202364 shares available issuance espp plan stock based compensation expense 2016 changes stock compensation plans modifications outstanding stockbased awards would change value awards outstanding following table presents total stockbased compensation expense resulting stock option awards rsus espp included consolidated statements income stock options granted directors vest one year options granted officers employees generally vest five years expense related options graded vesting recognized using straightline method vesting period 2016 10k annual report stericycle inc • 62 part ii stock option activity year ended december 31 2016 summarized follows december 31 2016 380 million total unrecognized compensation expense related stock options expected recognized weighted average period 288 years following table sets forth intrinsic value options exercised years ended december 31 exercise intrinsic value represents total pretax intrinsic value difference fair value trading day option exercised exercise price associated respective option following table sets forth information related outstanding exercisable options years ended december 31 aggregate intrinsic value represents total pretax intrinsic value difference closing stock price last day trading year ended december 31 2016 exercise price multiplied number inthemoney options would received option holders assuming option holders exercised options december 31 2016 options outstanding exercisable december 31 2016 price range presented 2016 10k annual report stericycle inc • 63 part ii company uses historical data estimate expected life volatility estimated fair value stock options time grant using blackscholes model option pricing model follows restricted stock units fair value rsus based closing price companys common stock date grant amortized expense service period rsus vest end three five years 2008 2011 2014 plans include share reserve related rsus granted 21 ratio following table sets forth information related rsus years ended december 31 summary status nonvested rsus changes year ended december 31 2016 follows december 31 2016 74 million total unrecognized compensation expense related rsus expected recognized weighted average period 286 years units vested years ended december 31 2016 2015 fair value units vested year ended december 31 2014 20 million note 7 preferred stock december 31 2016 1000000 authorized shares preferred stock 726500 shares issued outstanding mandatory convertible preferred stock december 31 2015 1000000 authorized shares preferred stock 770000 shares issued outstanding series mandatory convertible preferred stock offering september 15 2015 completed registered public offering 7700000 depositary shares representing 110th interest share 525 series mandatory convertible preferred stock par value 001 per share series preferred stock public offering price 10000 per depository share total gross proceeds 7700 million unless earlier converted redeemed share series preferred stock automatically convert 58716 73394 shares common stock subject antidilution adjustments mandatory conversion date expected september 15 2018 number shares common 2016 10k annual report stericycle inc • 64 part ii stock issuable conversion determined based volumeweighted average price common stock 20 trading day period commencing including 23rd scheduled trading day prior september 15 2018 subject certain restrictions time prior september 15 2018 holders series preferred stock may elect convert portion shares common stock minimum conversion rate 58716 shares common stock per share series preferred stock subject adjustment dividends shares series preferred stock payable cumulative basis declared board directors authorized committee thereof annual rate 525 liquidation preference 1000 per share correspondingly 10000 per share respect depositary shares dividends may payable cash subject certain limitations shares common stock combination cash shares common stock march 15 june 15 september 15 december 15 year commencing december 15 2015 including september 15 2018 declared paid dividends 394 million preferred stock shareholders 2016 following table provides information repurchases depository shares mandatory convertible preferred stock year ended december 31 2016 repurchases mandatory convertible preferred stock resulted 113 million increase retained earnings redeemed preferred stock discount 435000 depository shares equivalent 43500 units preferred stock note 8 earnings per common share basic earnings per share computed dividing income available common shareholders weightedaverage number shares common stock outstanding period diluted earnings per share computed dividing income available common shareholders weightedaverage number shares common stock outstanding period increased include number additional shares common stock would outstanding potentially dilutive securities issued potentially dilutive securities include outstanding stock options shares purchased company’s employee stock purchase plan rsus assumed conversion mandatory convertible preferred stock effect potentially dilutive securities reflected diluted earnings per share application treasury stock method outstanding restricted stock awards stock options treasury stock method increase fair market value company’s common stock result greater dilutive effect potentially dilutive securities issue mandatory convertible preferred stock use ifconverted method ifconverted method preferred dividend applicable convertible preferred stock added back adjustment numerator mandatory convertible preferred shares assumed converted common shares beginning period later time issuance resulting common shares included denominator applying ifconverted method conversion shall assumed purposes computing diluted eps effect would antidilutive numerator also adjusted premium discount arising redemption preferred stock 2016 10k annual report stericycle inc • 65 part ii following table sets forth computation basic diluted earnings per share 1 2016 weighted average common shares issuable upon assumed conversion mandatory convertible preferred stock totaling 5528257 shares excluded computation diluted earnings per share conversion would antidilutive 2016 2015 2014 options purchase 3411370 shares 818093 shares 830755 shares respectively exercise prices 834914156 1170914156 1051213295 included computation diluted earnings per share effect would antidilutive 2016 48042 rsus included computation diluted earnings per share effect would antidilutive note 9 accumulated comprehensive income loss following table sets forth changes components accumulated comprehensive income 2016 2015 2014 years ended december 31 2016 2015 2014 net tax impact unrealized gains losses cash flow hedges accumulated comprehensive income 08 million 22 million 06 million respectively translation adjustments taxeffected company’s net investment foreign subsidiaries related foreign earnings deemed permanently invested 2016 10k annual report stericycle inc • 66 part ii note 10 property plant equipment property plant equipment december 31 2016 2015 consisted following note 11 goodwill intangible assets goodwill discussed note 15 segment reporting changed composition operating segments due changes part domestic regulated waste compliance services operating segment combined legacy domestic regulated recall returns management services operating segment form new operating segment domestic communication related services “domestic crs” q2 2016 domestic regulated waste compliance solutions operating segment “domestic rcs become domestic canada regulated waste compliance services operations canada previously reported part international rcs operating segment q4 determined former international rcs reporting unit disaggregated three new reporting units goodwill impairment testing purposes one level operating segment referred “component” addition four components domestic canada rcs operating segment reporting units primarily result business economic challenges recently faced mi internationally result changes goodwill former international rcs reporting unit reallocated four new reporting units including canada based relative fair values completed similar reallocation goodwill new domestic canada rcs reporting units due establishment new reporting units q4 2016 change annual goodwill impairment testing date discussed note 2 summary significant accounting policies performed goodwill impairment evaluation reporting units october 1 2016 impairment goodwill fair value reporting units exceeded carrying values also tested former reporting units goodwill impairment immediately prior establishment new reporting units impairment goodwill 2016 10k annual report stericycle inc • 67 part ii changes carrying amount goodwill since january 1 2015 reportable segment “other” category follows 1 january 1 2015 balances recast reflect new organizational structure domestic canada rcs goodwill international rcs includes resulting changes described intangible assets december 31 2016 2015 values intangible assets follows 2016 10k annual report stericycle inc • 68 part ii changes carrying amount intangible assets since january 1 2015 follows indefinitelived intangible assets include permits certain tradenames determined permits certain tradenames indefinite lives due ability renew minimal additional cost therefore amortized changed annual impairment testing date indefinitelived intangibles december 31 october 1 described note 2 summary significant accounting policies 2016 2015 recognized 14 million 42 million respectively impairment charge part sga consolidated statements income result testing performed finitelived intangible assets amortized useful lives determined customer relationships useful lives ranging 5 40 years based upon type customer weighted average remaining useful life 152 years covenants nottocompete intangibles useful lives ranging 5 14 years weighted average remaining useful life 35 years tradename intangibles useful lives ranging 10 40 years weighted average remaining useful life 176 years intangibles mainly consist landfill air rights weighted average remaining useful life 174 years ended december 31 2016 2015 2014 aggregate intangible amortization expense 1293 million 455 million 327 million respectively estimated amortization expense next five years follows years ended december 31 estimates amortization expense noted based upon foreign exchange rates december 31 2016 10k annual report stericycle inc • 69 part ii note 12 accrued liabilities accrued liabilities december 31 2016 2015 consisted following items note 13 debt longterm debt consisted following december 31 senior credit facility term loan private placement notes require us comply financial reporting covenants restrictions including restriction dividend payments december 31 2016 compliance financial debt covenants senior credit facility term loan private placement notes rank pari passu unsecured debt obligations december 31 2016 2015 1380 million 1604 million respectively committed outstanding letters credit senior credit facility unused portion revolving credit facility 6549 million 6858 million december 31 2016 2015 respectively classified 1750 million private placement notes mature october 2017 longterm debt due intent settle obligation borrowing available unused capacity 12 billion senior credit facility due 2019 2016 10k annual report stericycle inc • 70 part ii payments due longterm debt excluding capital lease obligations five years subsequent december 31 2016 follows years ended december 31 2016 2015 2014 paid interest 888 million 680 million 578 million respectively property capital leases included within property plant equipment consolidated balance sheets follows december 31 amortization related capital leases included within depreciation expense minimum future lease payments capital leases follows note 14 commitments contingencies environmental remediation liabilities record liability environmental remediation liability becomes probable costs damages reasonably estimated accrue environmental remediation costs undiscounted basis associated identified sites assessment indicated cleanup costs probable reasonably estimated timing payments fixed determinable accruals based currently available information estimated timing remedial actions existing technology enacted laws 2016 10k annual report stericycle inc • 71 part ii regulations liability environmental remediation included consolidated balance sheets current liabilities within accrued liabilities noncurrent liabilities december 31 2016 2015 total environmental remediation liabilities recorded 309 million 308 million 24 million 21 million presented accrued liabilities consolidated balance sheets respectively project costs approximately 30 years operating lease commitments lease various plant equipment office furniture equipment motor vehicles office warehouse space landfills operating lease agreements expire various dates operating lease obligations expire various dates latest maturity 2035 leases properties contain renewal provisions years ended december 31 2016 2015 2014 rent expense 1816 million 1390 million 1115 million respectively included within cor sga consolidated statements income minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 2016 next five years aggregate follows unconditional purchase commitments company entered noncancelable arrangements thirdparties primarily related information technology products services december 31 2016 future payments contractual obligations recognized consolidated balance sheets follows note 15 segment reporting 2016 made certain changes organizational structure integrate domestic international operations 2015 shredit acquisition q2 2016 also changed composition operating segments align compliance communication services due change part domestic regulated waste compliance services operating segment combined legacy domestic regulated recall returns management services operating segment form new operating segment domestic communication related services “domestic crs” 2016 10k annual report stericycle inc • 72 part ii q4 2016 made additional change organizational structure management reporting result changes domestic regulated waste compliance services “domestic rcs” segment also responsible operations canada operations canada previously reported part international rcs operating segment result changes domestic rcs operating segment become “domestic canada rcs” domestic crs meet quantitative criteria separate reportable segment therefore included beginning q4 2016 costs related corporate headquarter functions also included three operating segments • domestic canada rcs • domestic crs • international rcs domestic canada international regulated waste compliance services segments include medical waste disposal pharmaceutical waste disposal hazardous waste management sustainability solutions expired unused inventory secure information destruction documents emedia training consulting sterisafe® clinical services programs regulatory compliance services domestic communication related services segment consists inboundoutbound communication automated patient reminders online scheduling notifications product retrievals product returns quality audits two reportable segments • domestic canada rcs • international rcs connection changes made management reporting align new operating segments also changed measure segment profit earnings interest tax amortization “ebita” adjusted various items result changes segment reporting historical segment information revised conform new presentation 2016 10k annual report stericycle inc • 73 part ii following tables show financial information companys reportable segments following table reconciles companys primary measure segment profitability ebita income operations 2016 10k annual report stericycle inc • 74 part ii following table shows consolidated revenue service geographic data following table shows consolidated revenue property plant equipment split geographically note 16 employee benefit plan two 401k defined contribution retirement savings plans “plans” one part recent shredit acquisition covering substantially domestic employees following describes two domestic plans • participant may elect defer portion compensation subject certain limitations company may contribute 50 compensation contributed plan employee maximum 2000 years ended december 31 2016 2015 2014 contributions 59 million 48 million 36 million respectively • participant may elect defer portion compensation subject certain limitations company may contribute 100 first 3 employees eligible earnings plus 50 next 2 employees eligible earnings subject irs limits contributions years ended december 31 2016 2015 33 million 09 million respectively company several foreign defined contribution plans require company contribute percentage participating employee’s salary according local regulations years ended december 31 2016 2015 2014 total contributions made company plans approximately 26 million 21 million 19 million respectively 2016 10k annual report stericycle inc • 75 part ii note 17 legal proceedings operate highly regulated industry must deal regulatory inquiries investigations time may initiated variety reasons also involved variety civil litigation time company establishes accrued liability loss contingencies related legal regulatory matters loss probable reasonably estimable loss probable loss reasonably estimable liability recorded accruals represent managements best estimate probable losses cases may exposure loss excess amounts accrued legal regulatory matters inherently involve significant uncertainties based among factors stage proceedings developments applicable facts law unpredictability ultimate determination merits claim defenses company may assert claim amount damages may awarded companys accrued liabilities loss contingencies related legal regulatory matters may change future result new developments including limited occurrence new legal matters changes law regulatory environment adverse favorable rulings newly discovered facts relevant matter changes strategy matter regardless outcome litigation adverse impact company defense settlement costs diversion management resources factors class action lawsuits previously disclosed served march 12 2013 class action complaint filed us district court western district pennsylvania individual plaintiff behalf “similarly situated” customers complaint alleges among things imposed unauthorized excessive price increases charges customers breach contracts violation illinois consumer fraud deceptive business practices act complaint sought certification lawsuit class action award class members appropriate damages injunctive relief pennsylvania class action complaint filed wake settlement state new york investigation new york false claims act arose qui tam “whistle blower” action captioned united states america ex rel jennifer perez v stericycle inc case 108cv2390 settled fourth quarter 2015 previously disclosed following filing pennsylvania class action complaint served class action complaints filed federal state courts several jurisdictions complaints asserted claims allegations substantially similar made pennsylvania class action complaint cases appear followon litigation settlement state new york august 9 2013 judicial panel multidistrict litigation granted motion transfer related actions united states district court northern district illinois centralized pretrial proceedings “mdl action” december 10 2013 filed answer amended consolidated class action complaint mdl action generally denying allegations therein plaintiffs subsequently filed second amended consolidated complaint march 8 2016 filed answer pleading march 25 2016 generally denying allegations therein asserting variety affirmative defenses plaintiffs filed motion class certification january 29 2016 february 16 2017 court entered order granting plaintiffs’ motion class certification court certified class “all persons entities march 8 2003 date trial resided united states except washington alaska identified stericycle ‘small quantity’ ‘sq’ customer charged paid contractuallyagreed price stericycle’s medical waste disposal good services pursuant stericycle’s automated price increase policy governmental entities whose claims asserted united states ex rel perez v stericycle inc shall excluded class” case remains ongoing 2016 10k annual report stericycle inc • 76 part ii believe operated accordance terms customer contracts complaints without merit continue vigorously defend lawsuits accrued amounts respect class action lawsuits cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate litigation nature uncertain unpredictable ii know whether class currently certified court remain certified trial judgment whether class definition might altered iii know many individual plaintiffs determined meet court’s definition class iv know ultimate disposition merits class claim well defenses claim may v judgment factual legal allegations asserted plaintiffs sufficiently unique unable identify proceedings circumstances sufficiently comparable provide guidance making estimates securities class action lawsuit july 11 2016 two purported stockholders filed putative class action complaint us district court northern district illinois plaintiffs purported sue behalf purchasers publicly traded securities february 7 2013 april 28 2016 inclusive purchased securities public offering depositary shares representing 110th interest share mandatory convertible preferred stock around september 15 2015 complaint named defendants company directors certain current former officers certain underwriters public offering complaint purports assert claims sections 11 12a2 15 securities act 1933 sections 10b 20a securities exchange act 1934 well sec rule 10b5 promulgated thereunder complaint alleges among things company imposed unauthorized excessive price increases charges customers breach contracts defendants failed disclose alleged practices public filings statements issued proposed class period beginning february 7 2013 ending april 28 2016 august 4 2016 plaintiffs filed amended complaint purports assert additional misrepresentations public statements july 28 2016 therefore change putative class period february 7 2013 july 28 2016 inclusive october 21 2016 plaintiffs filed corrected amended complaint adding company named defendant plaintiff’s claim section 11 securities act previously asserted underwriters certain officers directors november 1 2016 court appointed public employees’ retirement system mississippi arkansas teacher retirement system lead plaintiffs counsel lead counsel february 1 2017 lead plaintiff filed consolidated amended complaint additional purported factual material supporting legal claims prior complaints court’s current schedule defendants april 1 2017 answer file motion dismiss action intend vigorously defend lawsuit accrued amounts respect lawsuit cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate litigation nature uncertain unpredictable ii know whether court certify class plaintiffs class certified class would defined iii judgment factual legal allegations asserted plaintiffs sufficiently unique unable identify proceedings circumstances sufficiently comparable provide guidance making estimates shareholder derivative lawsuit september 1 2016 purported stockholder filed putative derivative action complaint circuit court cook county illinois certain officers directors company naming company nominal defendant complaint alleges defendants breached fiduciary duties company stockholders causing company allegedly overcharge certain customers breach customers’ contracts otherwise provide unsatisfactory customer service injure customer relationships make materially false misleading statements omissions regarding company’s business operational compliance policies february 7 2013 present march 1 2017 2016 10k annual report stericycle inc • 77 part ii another purported stockholder filed putative derivative action complaint containing substantially similar allegations circuit court cook county illinois certain officers directors company naming company nominal defendant company notes among things filings violation company’s bylaws require actions brought court delaware none defendants either derivative actions served applicable complaint accrued amounts respect lawsuits cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate litigation nature uncertain unpredictable ii judgment factual legal allegations asserted plaintiffs sufficiently unique unable identify proceedings circumstances sufficiently comparable provide guidance making estimates shareholder demand letter october 18 2016 company received letter attorney purporting represent current stockholder company demanding pursuant del ct ch r 231 company’s board directors take action remedy alleged breaches fiduciary duties certain officers directors company factual allegations set forth letter similar asserted securities class action lawsuit shareholder derivative lawsuit letter asserts breaches fiduciary duty connection management operation oversight company’s business connection alleged false misleading andor incomplete statements regarding company’s business practices company’s board directors constituted special demand review committee investigate claims made demand letter investigation ongoing tcpa lawsuit june 3 2016 plaintiff filed putative class action captioned ibrahim v stericycle inc 16cv4294 nd ill us whollyowned subsidiary stericycle communication solutions inc telephone consumer protection act “tcpa” asserting defendants called plaintiff others violation statute plaintiff challenges use prerecorded messages urge owners recalled products return obtain repairs products plaintiff seeks certification two nationwide classes one class includes people received one cellular telephone calls stericycle featuring prerecorded artificial voice message relating product recall called party individual according stericycle’s records intended recipient call second class includes people received one cellular telephone calls stericycle featuring prerecorded artificial voice message relating product recall person communicated stericycle consent make calls cellular telephone number july 28 2016 answered complaint denying material allegations raising certain affirmative defenses among asserted defenses “emergency” exception tcpa exempts calls made promote public health safety december 19 2016 substantial discovery case filed motion summary judgment primarily basis “emergency” exception february 1 2017 plaintiff responded motion requesting additional discovery court responded permit requested discovery accrued amounts respect lawsuit cannot estimate reasonably possible loss range reasonably possible losses may incur unable make estimate litigation nature uncertain unpredictable ii know whether court certify class plaintiffs class certified class would defined iii judgment factual legal allegations asserted plaintiff sufficiently unique unable identify proceedings circumstances sufficiently comparable provide guidance making estimates environmental matters environmental solutions business regulated federal state local laws enacted regulate discharge materials environment remediate contaminated soil groundwater otherwise protect environment result continuing regulation frequently become party legal 2016 10k annual report stericycle inc • 78 part ii administrative proceedings involving various governmental authorities interested parties issues involved proceedings generally relate alleged violations existing permits licenses alleged responsibility federal state superfund laws remediate contamination properties owned either us parties either prior owners certain facilities shipped wastes time may subject fines penalties regulatory proceedings relating primarily waste treatment storage disposal facilities believe fines penalties may pay connection pending regulatory proceedings nature individually aggregate material financial statements february 29 2016 entered statute limitations tolling agreement united states attorney’s office district utah relating office’s investigation facts underlying notice violation “nov” issued state utah division air quality “daq” resulted december 2014 settlement daq previously disclosed us attorney’s office investigating whether matters forming basis nov constitute violations clean air act federal statutes february 7 2017 extended tolling agreement april 30 2017 tolling agreement extended period march 1 2016 april 30 2017 excluded calculation time purpose determining statute limitations concerning charges violated federal statutes agreement constitute admission guilt wrongdoing part cannot construed waiver rights defenses may resulting action proceeding continue cooperate investigation april 8 2016 state missouri department natural resources “mdnr” filed amended verified petition circuit court city st louis missouri alleging violated certain provisions solid waste permit relating facility located st louis failing treat transport certain waste within 24 hours transfer certain waste within 24 hours petition also alleged certain record keeping requirements met may 27 2016 first amended verified petition filed essentially allegations mdnr originally filed petition october 16 2014 october 31 2016 entered consent judgment requires us timely treat transfer waste received keep proper records pay civil penalty 130000 november 22 2016 paid civil penalty 130000 note 18 selected quarterly financial data unaudited following table summarizes unaudited consolidated quarterly results operations reported 2016 2015 2016 10k annual report stericycle inc • 79 part ii 1 2016 charges incurred exit contracts uk patient transport services business 2 q4 2016 charges mostly writedown certain assets uk either sold loss classified assets held sale 3 q1 2015 expenses mostly due 285 million settlement qui tam action 282 million settlement junk fax lawsuit eps calculated quarterly basis amounts may total calculated fullyear eps stericycle inc subsidiaries schedule iivaluation qualifying accounts 1 amounts consist primarily currency translation adjustments 2 amounts consist primarily valuation allowances acquired deferred tax assets business combinations 2016 10k annual report stericycle inc • 80 part ii item 9item 8 financial statements supplementary data report independent auditors board directors shareholders stericycle inc audited accompanying consolidated balance sheets stericycle inc subsidiaries december 31 1995 1996 related consolidated statements operations changes shareholders equity net capital deficiency cash flows years threeyear period ended december 31 1996 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position stericycle inc subsidiaries december 31 1995 1996 consolidated results operations cash flows years threeyear period ended december 31 1996 conformity generally accepted accounting principles ernst young llp chicago illinois march 7 1997 stericycle inc subsidiaries consolidated balance sheets accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements operations thousands except share per share information accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements changes shareholders equity net capital deficiency years ended december 31 1994 1995 1996 thousands common stock accompanying notes integral part financial statements stericycle inc subsidiaries consolidated statements cash flows accompanying notes integral part financial statements stericycle inc subsidiaries notes consolidated financial statements december 31 1996 note 1description business stericycle inc company incorporated delaware march 1989 purpose providing collection transportation treatment disposal reduction reuse recycling services regulated medical waste hospitals healthcare providers united states canada note 2summary significant accounting policies principles consolidation consolidated financial statements include accounts stericycle inc whollyowned subsidiaries stericycle arkansas inc stericycle washington inc swd acquisition corporation significant intercompany accounts transactions eliminated revenue recognition company recognizes revenue treatment infectious medical waste completed onsite waste shipped offsite processing disposal waste shipped offsite associated costs recognized time shipment cash equivalent shortterm investments company considers highly liquid instruments maturity less three months purchased cash equivalents shortterm investments consist highly liquid investments corporate debt obligations mature less one year classified heldtomaturity since management positive intent ability hold securities maturity obligations stated amortized cost approximates fair market value interest income recognized earned property plant equipment property plant equipment stated cost depreciation amortization includes amortization assets recorded capital leases computed using straightline method estimated useful lives assets follows buildings improvements10 30 years machinery equipment3 10 years office equipment furniture5 10 years goodwill amortized using straightline method 15 25 years company periodically assesses whether change circumstances occurred subsequent acquisition would indicate future useful life carrying value goodwill revised company considers future earnings potential acquired business assessing recoverability goodwill new plant development permitting costs company expenses costs associated operations new plants prior commencement services customers initial ongoing costs related permitting stericycle inc subsidiaries notes consolidated financial statements continued december 31 1996 note 2summary significant accounting policies continued research development costs company expenses costs associated research development incurred research development expense 1994 1995 1996 1082000 975000 194000 respectively income taxes deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes deferred tax liabilities assets determined based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected reverse longlived assets march 1995 financial accounting standards board issued statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed fas 121 requires impairment losses recorded longlived assets used operations indicators impairment present undiscounted cash flows estimated generated assets less assets carrying amount fas 121 also addresses accounting longlived assets expected disposed company adopted fas 121 1996 effect material companys financial position results operations financial instruments companys financial instruments consist cash equivalents shortterm investments accounts receivable payable longterm debt fair values financial instruments materially different carrying values except longterm debt discussed note 6 financial instruments potentially subject company concentrations credit risk consist principally accounts receivable company performs ongoing credit evaluations customers maintains allowances potential credit losses incurred within range managements expectations use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates net loss per common share net loss per common share computed based upon weightedaverage number common shares outstanding common equivalent shares issued 12month period prior august 23 1996 initial public offering included calculation outstanding periods presented using treasury stock method initial public offering price 9 per share effect give common equivalent shares issued subsequent august 23 1996 initial public offering effect would antidilutive stericycle inc subsidiaries notes consolidated financial statements continued december 31 1996 note 3initial public offering august 28 august 30 1996 company successfully completed initial public offering 3450000 shares common stock 9 per share company received total proceeds offering net offering costs approximately 27621000 note 4income taxes december 31 1996 company net operating loss carryforwards income tax purposes approximately 38000000 expiring beginning 2004 based internal revenue code 1986 amended changes ownership company utilization net operating loss carryforwards may subject annual limitations could significantly restrict partially eliminate utilization net operating losses companys deferred tax liabilities assets december 31 1995 1996 follows note 5acquisitions divestitures december 1996 company purchased customer lists vehicles certain assets major portion medical waste business waste management inc wmi 5450000 cash note payable 5210000 note payable subject adjustment based final appraised value vehicles december 31 1996 vehicles preliminarily valued 1760000 reflected effect resulting adjustments purchase price based actual revenues achieved company acquired customers purchase price increased amount equal 20 acquired customer revenues exceed 15170000 year ended december 31 1997 event average actual monthly revenues january march 1997 less 1264000 purchase price decreased seven times deficiency additionally event significant acquired customer defined lost prior july 1997 purchase price decreased decrease measured seven times actual average monthly revenues achieved wmi significant acquired customer september november 1996 less 20 actual revenues stericycle inc subsidiaries notes consolidated financial statements continued december 31 1996 note 5acquisitions divestitures continued achieved company significant acquired customer adjustment made goodwill note payable may 1996 company purchased customer list certain assets doctors environmental control inc 400000 cash notes payable issued 600000 payable may 1 1998 interest rate 6 per annum addition company assumed two vehicle leases totaling 77000 paid may 1996 delivered option agreements shareholders seller giving option purchase total 53816 shares companys common stock price purchase common stock upon exercise option surrender cancellation note payable options exercised august 1996 april 1996 company purchased customer list certain assets sharps incinerator fort inc 757000 cash 562000 payable closing balance plus interest paid november 1996 january 1996 company purchased customer list certain assets wmi medical services new england inc 100000 cash 492000 notes payable issued seller notes bear interest rate 75 per annum 150000 payable 1996 157000 payable january 1997 185000 payable january 1998 july 1995 company sold selected customer lists related assets 248000 company recognized gain 50000 transaction included 1995 consolidated statement operations selling general administrative expense june 1995 company purchased customer list transportation equipment assumed certain contract obligations safetech health care 160000 april 1995 company sold st louis portion business competitor company received 544000 payment customer list concurrently agreed resolve antitrust lawsuit brought competitor company recognized gain transaction 408000 included 1995 consolidated statement operations selling general administrative expense september 1994 swd acquisition corporation wholly owned subsidiary company purchased selected assets assumed certain liabilities safe way disposal systems inc safe way assets purchased consisted safe ways customer list containers transportation equipment office equipment payment company issued 2480000 note 25228 shares preferred stock liquidation value 100 per share company assumed liabilities 2271000 related acquisition march 1994 company purchased customer list containers transportation equipment recovery corporation illinois 630000 cash 5000 shares preferred stock liquidation value 100 per share financial reporting purposes acquisition accounted purchase price allocated assets acquired liabilities assumed based estimated fair market value date acquisition excess purchase price fair market value net assets acquired reflected accompanying consolidated balance sheets goodwill wmi purchase stericycle inc subsidiaries notes consolidated financial statements continued december 31 1996 note 5acquisitions divestitures continued price allocation based preliminary information subject adjustment results operations acquired businesses included consolidated statements operations date acquisition effect acquisitions would significant effect companys operations except safe way wmi acquisitions following unaudited pro forma results operations assumes acquisition safe way occurred january 1 1994 acquisition wmi occurred january 1 1995 giving effect certain adjustments including amortization goodwill case wmi increased interest expense debt incurred connection acquisition adjustment record incremental recurring costs associated consolidation operations historical statement revenue direct expenses wmi reflect costs pro forma financial information purport indicative results operations would occurred transactions taken place beginning periods indicated future results operations note 6longterm debt longterm debt consists following december 31 connection companys december 1996 purchase wmis medical waste business note payable totaling 5210000 issued wmi note payable two equal installments due december 20 1997 december 20 1998 note bears interest rate 7 per annum october 31 1995 company entered revolving line credit silicon valley bank secure line credit company granted bank lien companys assets borrowings line credit limited lesser 2500000 specified percentage companys eligible receivables defined loan security agreement outstanding borrowings bear interest stericycle inc subsidiaries notes consolidated financial statements continued december 31 1996 note 6longterm debt continued banks prime rate plus 30 agreement maturity date october 31 1997 subject automatic renewal additional one year periods unless 60 days written notice provided either party advance maturity date terms loan security agreement company among things restricted paying dividends required maintain minimum levels tangible net worth debt tangible net worth company borrowings line credit december 31 1996 1995 agreement reached rhode island department environmental management regarding two notices violation issued 1994 1995 although company believed allegations meritless agreement entered order resolve matter best interests company customers timely manner company agreed pay 35000 year 1995 1998 50000 1999 60000 2000 150000 2001 rhode island air water protection fund addition company agreed perform community services conduct seminars fiveyear period company recorded obligation based discounted cash flows expected paid term agreement using discount rate 1175 recorded obligation 245000 december 31 1996 included mortgage payable longterm debt expense 458000 included 1995 consolidated statement operations selling general administrative expense amount reflects recorded obligation legal fees incurred settlement 1994 noninterest bearing note amount 2480000 issued part purchase net assets safe way result companys initial public offering august 1996 portion note converted 98001 shares common stock remainder paid cash 1992 company entered obligation finance development woonsocket rhode island facility development purchase substantially property equipment woonsocket rhode island facility financed issuance industrial development revenue bonds due various amounts 2017 fixed interest rates ranging 60 7375 collateralized property equipment woonsocket rhode island facility terms agreement entered connection issuance bonds contain among provisions requirements maintaining defined levels working capital various financial ratios including debt net worth payments due longterm debt excluding capital lease obligations five years subsequent december 31 1996 follows company paid interest 271000 262000 352000 years ended december 31 1994 1995 1996 respectively stericycle inc subsidiaries notes consolidated financial statements continued december 31 1996 note 6longterm debt continued fair value companys long term debt estimated using discounted cash flow analysis based companys current incremental borrowing rates similar types borrowing arrangements december 31 1996 fair value companys debt approximately 7791000 capital leases february 1994 company entered sale leaseback transaction equipment acquisitions yorkville wisconsin facility amount 882000 gain loss recognized sale leaseback lease arrangement term 60 months end lease company option renew lease return equipment purchase equipment fair market value exceed 11 original purchase price january 1996 company entered capital lease obligation 364000 equipment lease expires 1998 december 31 property capital leases included property plant equipment accompanying consolidated balance sheets follows minimum future lease payments capital leases follows note 7lease commitments company leases various plant equipment office furniture equipment motor vehicles office warehouse space operating lease agreements expire various dates next six years leases properties contain renewal provisions rent expense 1994 1995 1996 1643000 1739000 2462000 respectively stericycle inc subsidiaries notes consolidated financial statements continued december 31 1996 note 7lease commitments continued minimum future rental payments noncancelable operating leases initial remaining terms excess one year december 31 1996 next five years aggregate follows note 8common preferred stock august 1995 board directors adopted plan recapitalization approved companys stockholders september 1995 pursuant company reclassified outstanding convertible redeemable preferred stock common stock part plan recapitalization conversion redemption liquidation rights associated convertible redeemable preferred stock terminated exchange issuance shares common stock common shares per share weighted average shares outstanding stock option warrant data adjusted reflect 1for53089 reverse stock split effective august 19 1996 connection reverse stock split outstanding share companys class b stock redesignated share common stock companys authorized common stock reduced 58000000 shares 30000000 shares also effective august 19 1996 shares companys common stock reserved issuance upon exercise warrants options shares reserved follows december 31 1996 note 9stock options warrants stock options september 1993 companys shareholders approved amended restated stock option plan 1993 plan provided granting options purchase 113018 shares common stock november 1995 outstanding options current employees canceled conjunction companys recapitalization stericycle inc subsidiaries notes consolidated financial statements continued december 31 1996 note 9stock options warrants continued following table summarizes option activity 1993 plan december 31 1996 1995 companys board directors shareholders approved incentive compensation plan 1995 plan provides granting 1500000 shares common stock form stock options restricted stock employees officers directors consultants company exercise price options granted 1995 plan must least equal fair market value common stock date grant 1995 board directors authorized grant officers employees options purchase 923292 shares companys common stock exercise price 53 per share options granted date 10 year terms vest periods 4 years date grant following table summarizes stock option activity related information 1995 plan december 31 1996 weighted average exercise price options outstanding december 31 1996 100 per share weighted average contractual life options outstanding december 31 1996 9 years stericycle inc subsidiaries notes consolidated financial statements continued december 31 1996 note 9stock options warrants continued june 1996 companys board directors adopted directors stock option plan authorizes stock options total 285000 shares common stock granted eligible directors company consisting directors neither officers employees company six incumbent eligible directors automatically received option date closing companys initial public offering 8195 shares common stock exercise price 1025 annual meeting companys stockholders incumbent eligible director reelected director annual meeting automatically receive option grant based predetermined formula exercise price option closing price date grant term option six years date grant vest 16 equal quarterly installments may exercised vested holder option remains director company 90day period following date ceases serve director company elected follow accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations accounting employee stock options discussed alternative fair value accounting provided statement financial accounting standards 123 accounting stockbased compensation fas 123 requires use option valuation models developed use valuing employee stock options apb 25 exercise price companys employee stock options approximates market price underlying stock date grant compensation expense recognized pro forma information regarding net loss net loss per common share required fas 123 company accounted employee stock options granted subsequent december 31 1994 fair value method statement fair value options estimated date grant using minimum value method following assumptions 1995 1996 riskfree interest rates ranging 55 57 1995 51 67 1996 dividend yield 0 weightedaverage expected life option 31 months weightedaverage fair values options granted 1995 1996 09 per share 79 per share respectively option value models require input highly subjective assumptions companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing method necessarily provide reliable single measure fair value employee stock options purposes pro forma disclosures estimated fair value options amortized expense option vesting period companys pro forma information follows thousands except net loss per common share information fas 123 applicable options granted subsequent december 31 1994 pro forma affect fully reflected 1997 stericycle inc subsidiaries notes consolidated financial statements continued december 31 1996 note 9stock options warrants continued warrants company conjunction lease financing agreement issued lessor warrants purchase 15064 shares common stock 1858 per share december 31 1996 warrants outstanding expire march 3 1998 company connection issuance preferred stock subsequently reclassified common stock issued warrants purchase 6773 shares common stock exercise price 6902 per share december 31 1996 warrants outstanding warrants expire march 16 1999 1995 several companys shareholders directors provided bridge loan company loan totaled 830000 interest prime plus 3 repaid addition interest lenders received warrants purchase 220559 shares common stock 159 per share warrants expire july 31 2000 1996 lenders exercised warrants purchase 166749 shares common stock december 31 1996 warrants purchase 53810 shares common stock remained outstanding may 1996 company obtained 1000000 bridge loan certain shareholders directors officers provide working capital finance additional acquisitions bridge loan repaid august 1996 connection loan company issued warrants members lending group purchase aggregate 226036 shares common stock 796 per share warrants expire may 2001 december 31 1996 warrants outstanding note 10employee stock purchase plan 1996 approved board directors employees stericycle could purchase shares common stock price 212 per share terms plan employees allowed purchase shares december 31 1995 pay stock 1996 employees elected purchase total 30232 shares common stock note 11registration agreement company party registration agreement gives certain shareholders company registration rights shares parties registration agreement original holders companys prior class b c e f h preferred stock holder warrant purchase 15064 shares common stock company issued conjunction lease financing agreement companys 1995 recapitalization registration agreement amended provide registration rights applied shares common stock parties registration agreement received pursuant recapitalization shares issuable certain warrants issued purchasers companys prior class f preferred stock shares issuable warrant issued conjunction lease financing agreement common stock delivered company payment safe way note total 5227608 shares according registration agreement time holders majority shares subject registration rights request registration shares form s1 longform registration holders least 25 shares request registration shares form s2 s3 stericycle inc subsidiaries notes consolidated financial statements continued december 31 1996 note 11registration agreement continued ii time one shareholder party registration agreement may request long form registration iii time another shareholder party registration agreement request long form registration iv parties registration agreement right include shares registration requested registration company may otherwise undertake registration requested company use best efforts effect requested registration expense note 12employee benefit plan company defined contribution retirement savings plan covering substantially employees company participant may elect defer portion compensation subject certain limitations company may match 30 first 1000 contributed retirement savings plan employee companys contributions years ended december 31 1994 1995 1996 approximately 13000 14000 respectively note 13related parties october 1993 company entered alliance agreement alliance investor company purpose alliance develop new technologies procedures recycling regulated medical waste company devoted resources alliance research development program first 18 months alliance investor rights respect development alliance technology part research development program initial 18 months alliance company provided 1 million research development costs agreement license agreement effective upon nonrenewal alliance grants investor license use alliance technology subject certain conditions alliance investor company ongoing relationship provide services products healthcare market place item 9 nannannannannanitem 15 exhibits financial statements schedules reports form 8k financial statements items 15a1 2 filed following financial statements schedules report exhibits item 15a3 filed following exhibits report previously filed  management contract compensatory plan required filed pursuant item 601 regulation sk references “1996 form s1” registration statement form s1 declared effective august 22 1996 registration 33305665 references “1999 form s3” registration statement form s3 declared effective february 4 1999 registration 33360591 references “1999 form s4” registration statement form s4 declared effective december 15 1999 registration 33391831 reports form 8k item 15b filed one current report form 8k fourth quarter 2002 filed current report form 8k october 28 2002 report october 19 2002 whollyowned subsidiary sharps acquisition corporation “merger sub” entered agreement plan merger scherer healthcare inc delaware corporation “scherer” pursuant merger agreement merger sub would merged scherer upon completion merger scherer would become whollyowned subsidiary signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 24 2003 pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated name title date jack w schuler chairman board directors march 24 2003 jack w schuler mark c miller mark c miller president chief executive officer director principal executive officer march 24 2003 frank jm ten brink frank jm ten brink executive vice president chief financial officer principal financial accounting officer march 24 2003 john p connaughton director march 24 2003 john p connaughton rod f dammeyer director march 24 2003 rod f dammeyer patrick f graham director march 24 2003 patrick f graham john patience director march 24 2003 john patience thomas r reusché director march 24 2003 thomas r reusché l john wilkerson phd director march 24 2003 l john wilkerson phd peter vardy director march 24 2003 peter vardy certification mark c miller president chief executive officer mark c miller certify 1 reviewed annual report form 10k stericycle inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operation cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusion effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 24 2003 mark c miller mark c miller president chief executive officer stericycle inc certification frank jm ten brink executive vice president chief financial officer frank jm ten brink certify 1 reviewed annual report form 10k stericycle inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operation cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusion effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 24 2003 frank jm ten brink frank jm ten brink executive vice president chief financial officer stericycle incitem 15 exhibits financial statements schedules reports form 8k financial statements items 15a1 2 filed following financial statements schedules report page report independent auditors ernst young llp consolidated financial statementsstericycle inc subsidiaries consolidated balance sheets december 31 2002 2003 consolidated statements income years threeyear period ended december 31 2003 consolidated statements cash flows years threeyear period ended december 31 2003 consolidated statements changes shareholders’ equity years threeyear period ended december 31 2003 notes consolidated financial statements schedule iivaluation allowance accounts exhibits item 15a3 filed following exhibits report previously filed  management contract compensatory plan required filed pursuant item 601 regulation sk references “1996 form s1” registration statement form s1 declared effective august 22 1996 registration 33305665 references “1999 form s3” registration statement form s3 declared effective february 4 1999 registration 33360591 references “1999 form s4” registration statement form s4 declared effective december 15 1999 registration 33391831 reports form 8k item 15b filed one current report form 8k fourth quarter 2003 filed form 8k october 30 2003 report earnings release day report included exhibit earnings release accompanying financial statements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 15 2004 pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicateditem 15 exhibits financial statement schedules list financial statements financial statement schedules exhibits filed following financial statements financial statement schedules part report page report independent registered public accounting firm internal control financial reportingernst young llp report independent registered public accounting firmernst young llp consolidated financial statementsstericycle inc subsidiaries consolidated balance sheets december 31 2003 2004 consolidated statements income years threeyear period ended december 31 2004 consolidated statements cash flows years threeyear period ended december 31 2004 consolidated statements changes shareholders’ equity years threeyear period ended december 31 notes consolidated financial statements schedule iivaluation allowance accounts financial statement schedules omitted applicable filed following exhibits report previously filed  management contract compensatory plan required filed pursuant item 601 regulation sk references “1996 form s1” registration statement form s1 declared effective august 22 1996 registration 33305665 references “1999 form s3” registration statement form s3 declared effective february 4 1999 registration 33360591 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 11 2005 pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicateditem 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report filed following exhibits report previously filed  management contract compensatory plan required filed pursuant item 601 regulation sk references “1996 form s1” registration statement form s1 declared effective august 22 1996 registration 33305665 references “1999 form s3” registration statement form s3 declared effective february 4 1999 registration 33360591 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stericycle inc mark c miller mark c miller president chief executive officer date march 6 2006 pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicateditem 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report page report independent registered public accounting firm internal control financial reporting report independent registered public accounting firm consolidated financial statementsstericycle inc subsidiaries consolidated balance sheets december 31 2006 2005 consolidated statements income years threeyear period ended december 31 2006 consolidated statements cash flows years threeyear period ended december 31 2006 consolidated statements changes shareholders’ equity years threeyear period ended december 31 2006 notes consolidated financial statements schedule iivaluation allowance accounts financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report previously filed  management contract compensatory plan required filed pursuant item 601 regulation sk references “1996 form s1” registration statement form s1 declared effective august 22 1996 registration 33305665 references “1999 form s3” registration statement form s3 declared effective february 4 1999 registration 33360591 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 1 2007 pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicateditem 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report previously filed  management contract compensatory plan required filed pursuant item 601 regulation sk references “1996 form s1” registration statement form s1 declared effective august 22 1996 registration 33305665 references “1999 form s3” registration statement form s3 declared effective february 4 1999 registration 33360591 signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 29 2008item 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report previously filed  management contract compensatory plan required filed pursuant item 601 regulation sk references “1996 form s1” registration statement form s1 declared effective august 22 1996 registration 33305665 references “1999 form s3” registration statement form s3 declared effective february 4 1999 registration 33360591 signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 27 2009item 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report previously filed  management contract compensatory plan required filed pursuant item 601 regulation sk signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 26 2010item 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report previously filed  management contract compensatory plan required filed pursuant item 601 regulation sk signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 28 2011item 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report x filed herewith previously filed  management contract compensatory plan required filed pursuant item 601 regulation sk signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized stericycle inc registrant frank jm ten brink frank jm ten brink executive vice president chief financial officer principal financial accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated dated february 28 2013item 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report x filed herewith previously filed † management contract compensatory plan required filed pursuant item 601 regulation sk signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 28 2014 stericycle inc registrant frank jm ten brink frank jm ten brink executive vice president chief financial officer principal financial accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated dated february 28 2014item 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report x filed herewith previously filed † management contract compensatory plan required filed pursuant item 601 regulation sk signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated march 2 2015 stericycle inc registrant daniel v ginnetti daniel v ginnetti executive vice president chief financial officer principal financial accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated dated march 2 2015item 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report x filed herewith previously filed † management contract compensatory plan required filed pursuant item 601 regulation sk signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated march 15 2016 stericycle inc registrant daniel v ginnetti daniel v ginnetti executive vice president chief financial officer principal financial accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated dated march 15 2016item 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report page report independent registered public accounting firm consolidated financial statements stericycle inc subsidiaries consolidated statements income years threeyear period ended december 31 2017 consolidated statements comprehensive income years threeyear period ended december 31 2017 consolidated balance sheets december 31 2017 2016 consolidated statements cash flows years threeyear period ended december 31 2017 consolidated statements changes equity years threeyear period ended december 31 2017 notes consolidated financial statements schedule ii valuation qualifying accounts report independent registered public accounting firm internal control financial reporting 2017 10k annual report stericycle inc • 114 part iv financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report 2017 10k annual report stericycle inc • 115 part iv 2017 10k annual report stericycle inc • 116 part iv 2017 10k annual report stericycle inc • 117 part iv 2017 10k annual report stericycle inc • 118 part iv 2017 10k annual report stericycle inc • 119 part iv x filed herewith previously filed † management contract compensatory plan required filed pursuant item 601 regulation sk item 16 form 10k summary none 2017 10k annual report stericycle inc • 120 signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 23 2018 stericycle inc registrant daniel v ginnetti daniel v ginnetti executive vice president chief financial officer stericycle inc registrant richard j hoffman richard hoffman senior vice president chief accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated dated february 23 2018 name title date charles alutto president chief executive officer director principal executive officer february 23 2018 charles alutto daniel v ginnetti executive vice president chief financial officer principal financial accounting officer february 23 2018 daniel v ginnetti richard j hoffman senior vice president chief accounting officer principal accounting officer february 23 2018 richard j hoffman mark c miller chairman board directors february 23 2018 mark c miller jack w schuler lead director board directors february 23 2018 jack w schuler brian p anderson director february 23 2018 brian p anderson lynn bleil director february 23 2018 lynn bleil thomas brown director february 23 2018 thomas brown 2017 10k annual report stericycle inc • 121 signatures thomas f chen director february 23 2018 thomas f chen robert murley director february 23 2018 robert murley john patience director february 23 2018 john patience mike zafirovski director february 23 2018 mike zafirovski 2017 10k annual report stericycle inc • 122item 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report page report independent registered public accounting firm consolidated financial statements stericycle inc subsidiaries consolidated statements loss income years threeyear period ended december 31 2018 consolidated statements comprehensive loss income years threeyear period ended december 31 2018 consolidated balance sheets december 31 2018 2017 consolidated statements cash flows years threeyear period ended december 31 2018 consolidated statements changes equity years threeyear period ended december 31 2018 notes consolidated financial statements schedule ii valuation qualifying accounts report independent registered public accounting firm internal control financial reporting financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report 2018 10k annual report stericycle inc • 128 part iv 2018 10k annual report stericycle inc • 129 part iv 2018 10k annual report stericycle inc • 130 part iv 2018 10k annual report stericycle inc • 131 part iv 2018 10k annual report stericycle inc • 132 part iv 2018 10k annual report stericycle inc • 133 part iv 2018 10k annual report stericycle inc • 134 part iv x filed herewith previously filed † management contract compensatory plan required filed pursuant item 601 regulation sk item 16 form 10k summary none 2018 10k annual report stericycle inc • 135 signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 28 2019 stericycle inc registrant daniel v ginnetti daniel v ginnetti executive vice president chief financial officer stericycle inc registrant richard j hoffman richard hoffman senior vice president chief accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated dated february 28 2019 name title date charles alutto chief executive officer director principal executive officer february 28 2019 charles alutto daniel v ginnetti executive vice president chief financial officer principal financial officer february 28 2019 daniel v ginnetti richard j hoffman senior vice president chief accounting officer principal accounting officer february 28 2019 richard j hoffman robert murley chairman board directors february 28 2019 robert murley brian p anderson director february 28 2019 brian p anderson lynn bleil director february 28 2019 lynn bleil thomas brown director february 28 2019 thomas brown thomas f chen director february 28 2019 thomas f chen 2018 10k annual report stericycle inc • 136 signatures veronica hagen director february 28 2019 veronica hagen cindy j miller director february 28 2019 cindy j miller mark c miller director february 28 2019 mark c miller kay g priestly director february 28 2019 kay g priestly mike zafirovski director february 28 2019 mike zafirovski 2018 10k annual report stericycle inc • 137item 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report page report independent registered public accounting firm consolidated financial statements stericycle inc subsidiaries consolidated statements loss income years threeyear period ended december 31 2019 consolidated statements comprehensive loss income years threeyear period ended december 31 2019 consolidated balance sheets december 31 2019 2018 consolidated statements cash flows years threeyear period ended december 31 2019 consolidated statements changes equity years threeyear period ended december 31 2019 notes consolidated financial statements schedule ii valuation qualifying accounts report independent registered public accounting firm internal control financial reporting 2019 10k annual report stericycle inc • 130 part iv financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report 2019 10k annual report stericycle inc • 131 part iv 2019 10k annual report stericycle inc • 132 part iv x filed herewith previously filed † management contract compensatory plan required filed pursuant item 601 regulation sk item 16 form 10k summary none 2019 10k annual report stericycle inc • 133 signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 28 2020 stericycle inc registrant janet h zelenka janet h zelenka executive vice president chief financial officer stericycle inc registrant richard j hoffman richard j hoffman senior vice president chief accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated dated february 28 2020 name title date cindy j miller chief executive officer director principal executive officer february 28 2020 cindy j miller janet h zelenka executive vice president chief financial officer principal financial officer february 28 2020 janet h zelenka richard j hoffman senior vice president chief accounting officer principal accounting officer february 28 2020 richard j hoffman robert murley chairman board directors february 28 2020 robert murley brian p anderson director february 28 2020 brian p anderson lynn bleil director february 28 2020 lynn bleil thomas f chen director february 28 2020 thomas f chen j joel hackney jr director february 28 2020 j joel hackney jr 2019 10k annual report stericycle inc • 134 signatures veronica hagen director february 28 2020 veronica hagen stephen c hooley director february 28 2020 stephen c hooley kay g priestly director february 28 2020 kay g priestly mike zafirovski director february 28 2020 mike zafirovski 2019 10k annual report stericycle inc • 135item 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report page report independent registered public accounting firm consolidated financial statements stericycle inc subsidiaries consolidated statements loss consolidated statements comprehensive income loss consolidated balance sheets consolidated statements cash flows consolidated statements changes equity 62 notes consolidated financial statements schedule ii valuation qualifying accounts report independent registered public accounting firm internal control financial reporting part iv financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report part iv part iv x filed herewith previously filed † management contract compensatory plan required filed pursuant item 601 regulation sk item 16 form 10k summary none signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 25 2021 stericycle inc registrant janet h zelenka janet h zelenka executive vice president chief financial officer chief information officer stericycle inc registrant richard j hoffman richard j hoffman senior vice president chief accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated dated february 25 2021 signaturesitem 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report previously filed  management contract compensatory plan required filed pursuant item 601 regulation sk signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 28 2012item 15 exhibits financial statement schedules list financial statements financial statement schedule exhibits filed following financial statements financial statement schedule part report page report independent registered public accounting firm consolidated financial statements stericycle inc subsidiaries consolidated balance sheets december 31 2016 2015 consolidated statements income years threeyear period ended december 31 2016 consolidated statements comprehensive income years threeyear period ended december 31 2016 consolidated statements cash flows years threeyear period ended december 31 2016 consolidated statements changes equity years threeyear period ended december 31 2016 notes consolidated financial statements schedule ii valuation qualifying accounts report independent registered public accounting firm internal control financial reporting financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto filed following exhibits report 2016 10k annual report stericycle inc • 88 part iv 2016 10k annual report stericycle inc • 89 part iv 2016 10k annual report stericycle inc • 90 part iv 2016 10k annual report stericycle inc • 91 part iv xfiled herewith previously filed †management contract compensatory plan required filed pursuant item 601 regulation sk 2016 10k annual report stericycle inc • 92 signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated march 14 2017 stericycle inc registrant daniel v ginnetti daniel v ginnetti executive vice president chief financial officer principal financial accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated dated march 14 2017 name title date charles alutto president chief executive officer director principal executive officer march 14 2017 charles alutto daniel v ginnetti executive vice president chief financial officer principal financial accounting officer march 14 2017 daniel v ginnetti mark c miller chairman board directors march 14 2017 mark c miller jack w schuler lead director board directors march 14 2017 jack w schuler brian p anderson director march 14 2017 brian p anderson lynn bleil director march 14 2017 lynn bleil thomas brown director march 14 2017 thomas brown thomas f chen director march 14 2017 thomas f chen rod f dammeyer director march 14 2017 rod f dammeyer william k hall director march 14 2017 william k hall robert murley director march 14 2017 robert murley john patience director march 14 2017 john patience mike zafirovski director march 14 2017 mike zafirovski 2016 10k annual report stericycle inc • 93nan