Waste Management 2008 Annual Report Download - page 56
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Please find page 56 of the 2008 Waste Management annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.despite the economic environment. We are committed to our pricing excellence program, and do not intend to take
volumes at prices that do not cover our costs and provide strong operating margins.
Our operating costs increased by $64 million, or less than one percent, in 2008 as compared with 2007. The
largest contributors to the increase were the result of conditions discussed above. The negative effect of these cost
increases was offset, in part, by benefits from our focus on operating efficiencies, managing fixed costs and
reducing variable costs as our volumes decline due to (i) the slowdown in the economy; (ii) our pricing program; and
(iii) divestitures.
Our selling, general and administrative expenses increased by $45 million, or 3.1%, in 2008 as compared with
2007. The increase is largely attributable to increased labor costs as a result of merit increases, headcount increases,
higher compensation costs associated with our equity-based compensation program for our senior employees, and
higher insurance and benefit costs. We have also seen an increase in bad debt expense as a result of the weakened
economy. Finally, we have incurred significant costs for our business development initiatives, which are focused on
gaining new customers and entering new lines of business that are complementary to our core operations. These are
costs that we believe are necessary to position Waste Management as a leading environmental solutions provider.
As is our practice, we are including free cash flow, which is a non-GAAP measure of liquidity, in our
disclosures because we use this measure in the evaluation and management of our business. We also believe it is
indicative of our ability to pay our quarterly dividends, repurchase common stock, fund acquisitions and other
investments and, in the absence of refinancings, to repay our debt obligations. Free cash flow is not intended to
replace “Net cash provided by operating activities,” which is the most comparable GAAP measure. However, we
believe free cash flow gives investors greater insight into how we view our liquidity. Nonetheless, the use of free
cash flow as a liquidity measure has material limitations because it excludes certain expenditures that are required
or that we have committed to, such as declared dividend payments and debt service requirements.
We calculate free cash flow as shown in the table below (in millions), which may not be the same as similarly
titled measures presented by other companies:
2008 2007
Years Ended
December 31,
Net cash provided by operating activities ............................. $2,575 $ 2,439
Capital expenditures ............................................. (1,221) (1,211)
Proceeds from divestitures of businesses (net of cash divested) and other sales
of assets .................................................... 112 278
Free cash flow ................................................. $1,466 $ 1,506
Our free cash flow in 2008 exceeded the $1.4 billion we targeted for the year, which we believe is indicative of
our continued ability to generate strong cash flow from our operations even in a challenging economic environment.
The decrease in our free cash flow when comparing 2008 with 2007 is due to decreased proceeds from divestitures,
which is largely a result of having fewer underperforming operations to sell as part of our fix-or-seek-exit initiative,
offset in large part by growth in our net cash provided by operating activities.
Outlook
In 2008, we experienced challenges associated with changing market conditions, which caused significant
volatility in fuel and recyclable commodity prices, and the tightening of the economy, which has put negative
pressure on both consumer and business spending, resulting in less consumption and waste produced. However, we
are encouraged that our 2008 results demonstrate that the cornerstones of our business are resilient in a difficult
economic environment. We believe we are well positioned to weather the current economic downturn. In 2009, we
will focus on (i) ensuring that we are operating efficiently; and (ii) generating strong and consistent free cash flow.
In February 2009, we announced that we are taking steps to further streamline our organization by consol-
idating many of our Market Areas. As a result of our restructuring, the 45 separate Market Areas that we previously
operated have been consolidated into 25 Areas. We currently estimate that this restructuring will eliminate over
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