Waste Management 2007 Annual Report Download - page 67

Operating Expenses
Our operating expenses include (i) labor and related benefits (excluding labor costs associated with main-
tenance and repairs included below), which include salaries and wages, bonuses, related payroll taxes, insurance
and benefits costs and the costs associated with contract labor; (ii) transfer and disposal costs, which include tipping
fees paid to third-party disposal facilities and transfer stations; (iii) maintenance and repairs relating to equipment,
vehicles and facilities and related labor costs; (iv) subcontractor costs, which include the costs of independent
haulers who transport waste collected by us to disposal facilities and are driven by transportation costs such as fuel
prices; (v) costs of goods sold, which are primarily the rebates paid to suppliers associated with recycling
commodities; (vi) fuel costs, which represent the costs of fuel and oil to operate our truck fleet and landfill operating
equipment; (vii) disposal and franchise fees and taxes, which include landfill taxes, municipal franchise fees, host
community fees and royalties; (viii) landfill operating costs, which include landfill remediation costs, leachate and
methane collection and treatment, other landfill site costs and interest accretion on asset retirement obligations;
(ix) risk management costs, which include workers’ compensation and insurance and claim costs and (x) other
operating costs, which include, among other costs, equipment and facility rent and property taxes.
The following table summarizes the major components of our operating expenses, including the impact of
foreign currency translation, for the years ended December 31 (in millions):
2007
Period-to-
Period Change 2006
Period-to-
Period Change 2005
Labor and related benefits ............ $2,412 $ (67) (2.7)% $2,479 $ 8 0.3% $2,471
Transfer and disposal costs ............ 1,148 (100) (8.0) 1,248 (22) (1.7) 1,270
Maintenance and repairs .............. 1,079 (58) (5.1) 1,137 2 0.2 1,135
Subcontractor costs ................. 902 (69) (7.1) 971 34 3.6 937
Cost of goods sold .................. 769 180 30.6 589 (56) (8.7) 645
Fuel............................. 581 2 0.3 579 47 8.8 532
Disposal and franchise fees and taxes .... 602 (39) (6.1) 641 (1) (0.2) 642
Landfill operating costs .............. 261 23 9.7 238 5 2.1 233
Risk management................... 217 (74) (25.4) 291 (21) (6.7) 312
Other ............................ 431 17 4.1 414 (40) (8.8) 454
$8,402 $(185) (2.2)% $8,587 $(44) (0.5)% $8,631
The decreases in operating expenses for both 2007 and 2006 as compared with the prior year periods can be
attributed primarily to (i) our efforts to maximize margin expansion by focusing on managing our fixed costs and
reducing our variable costs; (ii) the divestiture of under-performing and low margin businesses; and (iii) volume
declines due to our pricing program and the slowdown in residential construction. In 2007, our cost containment
efforts had the most significant impact on our risk management and maintenance and repair costs, while the impact
of divestitures and volume declines provided significant reductions in transfer, disposal and subcontractor costs.
The operating expense declines during 2007 were partially offset by increased “Cost of goods sold” due to
significantly higher commodity prices and “Other” operating expenses incurred for labor disputes in Oakland and
Los Angeles, California. These expenses are discussed below.
In addition to lowering overall costs the last two years, our operating expenses as a percentage of revenues
decreased by 1.2 percentage points for 2007, from 64.3% in 2006 to 63.1% in 2007, building on the improvement of
1.7 percentage points during 2006. The improvement in operating expenses as a percentage of revenues reflects our
continued focus on identifying operational efficiencies that translate into cost savings, revenue growth on base
business yield, shedding low margin volumes and divesting operations that are not improving.
As discussed above, the changes in our “Operating” expenses when comparing 2007, 2006 and 2005 can
largely be attributed to our focus on cost control, volume declines and divestitures. Overall, these favorable items
have been slightly offset by the unfavorable effect of changes in Canadian currency exchange rates. However, there
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