e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended June 30, 2005 |
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or |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number 1-12154
Waste Management, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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73-1309529 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
1001 Fannin
Suite 4000
Houston, Texas 77002
(Address of principal executive offices)
(713) 512-6200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Securities Exchange
Act of
1934.) Yes þ No o
The number of shares of Common Stock, $0.01 par value, of
the registrant outstanding at July 25, 2005 was 562,101,115
(excluding treasury shares of 68,181,346).
TABLE OF CONTENTS
PART I.
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ITEM 1. |
Financial Statements. |
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Par Value Amounts)
ASSETS
|
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June 30, | |
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December 31, | |
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2005 | |
|
2004 | |
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| |
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| |
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(Unaudited) | |
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Current assets:
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents
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|
$ |
481 |
|
|
$ |
424 |
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|
Accounts receivable, net of allowance for doubtful accounts of
$55 and $61, respectively
|
|
|
1,693 |
|
|
|
1,717 |
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|
Notes and other receivables
|
|
|
229 |
|
|
|
232 |
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|
Parts and supplies
|
|
|
95 |
|
|
|
90 |
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|
Deferred income taxes
|
|
|
55 |
|
|
|
58 |
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|
Prepaid expenses and other assets
|
|
|
274 |
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,827 |
|
|
|
2,819 |
|
Property and equipment, net of accumulated depreciation and
amortization of $10,897 and $10,525, respectively
|
|
|
11,309 |
|
|
|
11,476 |
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Goodwill
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|
5,351 |
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|
|
5,301 |
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Other intangible assets, net
|
|
|
151 |
|
|
|
152 |
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Other assets
|
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|
1,056 |
|
|
|
1,157 |
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|
|
|
|
|
|
|
|
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Total assets
|
|
$ |
20,694 |
|
|
$ |
20,905 |
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|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
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Accounts payable
|
|
$ |
600 |
|
|
$ |
772 |
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|
Accrued liabilities
|
|
|
1,465 |
|
|
|
1,586 |
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|
Deferred revenues
|
|
|
473 |
|
|
|
463 |
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|
Current portion of long-term debt
|
|
|
215 |
|
|
|
384 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,753 |
|
|
|
3,205 |
|
Long-term debt, less current portion
|
|
|
8,216 |
|
|
|
8,182 |
|
Deferred income taxes
|
|
|
1,337 |
|
|
|
1,380 |
|
Landfill and environmental remediation liabilities
|
|
|
1,178 |
|
|
|
1,141 |
|
Other liabilities
|
|
|
719 |
|
|
|
744 |
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|
|
|
|
|
|
|
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Total liabilities
|
|
|
14,203 |
|
|
|
14,652 |
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|
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|
|
|
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Minority interest in subsidiaries and variable interest entities
|
|
|
294 |
|
|
|
282 |
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Commitments and contingencies
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|
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Stockholders equity:
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Common stock, $0.01 par value; 1,500,000,000 shares
authorized; 630,282,461 shares issued
|
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|
6 |
|
|
|
6 |
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|
Additional paid-in capital
|
|
|
4,483 |
|
|
|
4,481 |
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|
Retained earnings
|
|
|
3,453 |
|
|
|
3,004 |
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|
Accumulated other comprehensive income
|
|
|
59 |
|
|
|
69 |
|
|
Restricted stock unearned compensation
|
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|
(2 |
) |
|
|
(4 |
) |
|
Treasury stock at cost, 67,281,721 and 60,069,777 shares,
respectively
|
|
|
(1,802 |
) |
|
|
(1,585 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,197 |
|
|
|
5,971 |
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|
|
|
|
|
|
|
|
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Total liabilities and stockholders equity
|
|
$ |
20,694 |
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|
$ |
20,905 |
|
|
|
|
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
1
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Amounts)
(Unaudited)
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|
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Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
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| |
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| |
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|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
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| |
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| |
|
| |
Operating revenues
|
|
$ |
3,289 |
|
|
$ |
3,138 |
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|
$ |
6,327 |
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|
$ |
6,034 |
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|
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|
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Costs and expenses:
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|
|
|
|
|
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|
|
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Operating (exclusive of depreciation and amortization shown
below)
|
|
|
2,173 |
|
|
|
2,040 |
|
|
|
4,217 |
|
|
|
3,960 |
|
|
Selling, general and administrative
|
|
|
313 |
|
|
|
317 |
|
|
|
643 |
|
|
|
633 |
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|
Depreciation and amortization
|
|
|
346 |
|
|
|
348 |
|
|
|
667 |
|
|
|
673 |
|
|
Asset impairments and unusual items
|
|
|
(6 |
) |
|
|
(9 |
) |
|
|
(29 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,826 |
|
|
|
2,696 |
|
|
|
5,498 |
|
|
|
5,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
463 |
|
|
|
442 |
|
|
|
829 |
|
|
|
786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(128 |
) |
|
|
(119 |
) |
|
|
(244 |
) |
|
|
(232 |
) |
|
Interest income
|
|
|
6 |
|
|
|
7 |
|
|
|
12 |
|
|
|
10 |
|
|
Equity in net losses of unconsolidated entities
|
|
|
(26 |
) |
|
|
(24 |
) |
|
|
(52 |
) |
|
|
(43 |
) |
|
Minority interest
|
|
|
(11 |
) |
|
|
(9 |
) |
|
|
(21 |
) |
|
|
(16 |
) |
|
Other, net
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(158 |
) |
|
|
(145 |
) |
|
|
(304 |
) |
|
|
(283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and cumulative effect of change in
accounting principle
|
|
|
305 |
|
|
|
297 |
|
|
|
525 |
|
|
|
503 |
|
Provision for (benefit from) income taxes
|
|
|
(222 |
) |
|
|
81 |
|
|
|
(152 |
) |
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change in accounting principle
|
|
|
527 |
|
|
|
216 |
|
|
|
677 |
|
|
|
360 |
|
Cumulative effect of change in accounting principle, net of
income tax expense of $5 for the six months ended June 30,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
527 |
|
|
$ |
216 |
|
|
$ |
677 |
|
|
$ |
368 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change in accounting principle
|
|
$ |
0.93 |
|
|
$ |
0.37 |
|
|
$ |
1.19 |
|
|
$ |
0.62 |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.93 |
|
|
$ |
0.37 |
|
|
$ |
1.19 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change in accounting principle
|
|
$ |
0.92 |
|
|
$ |
0.37 |
|
|
$ |
1.18 |
|
|
$ |
0.62 |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.92 |
|
|
$ |
0.37 |
|
|
$ |
1.18 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
|
$ |
0.20 |
|
|
$ |
0.19 |
|
|
$ |
0.40 |
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
2
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
677 |
|
|
$ |
368 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(8 |
) |
|
|
Provision for bad debts
|
|
|
21 |
|
|
|
23 |
|
|
|
Depreciation and amortization
|
|
|
667 |
|
|
|
673 |
|
|
|
Deferred income tax provision
|
|
|
(40 |
) |
|
|
90 |
|
|
|
Minority interest
|
|
|
21 |
|
|
|
16 |
|
|
|
Equity in net losses of unconsolidated entities, net of
distributions
|
|
|
37 |
|
|
|
31 |
|
|
|
Net gain on disposal of assets
|
|
|
(3 |
) |
|
|
(8 |
) |
|
|
Effect of asset impairments and unusual items
|
|
|
(29 |
) |
|
|
(18 |
) |
|
|
Change in operating assets and liabilities, net of effects of
acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
|
|
|
|
(104 |
) |
|
|
|
Prepaid expenses and other current assets
|
|
|
(18 |
) |
|
|
(24 |
) |
|
|
|
Other assets
|
|
|
(10 |
) |
|
|
(10 |
) |
|
|
|
Accounts payable and accrued liabilities
|
|
|
(229 |
) |
|
|
(25 |
) |
|
|
|
Deferred revenues and other liabilities
|
|
|
9 |
|
|
|
15 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,103 |
|
|
|
1,019 |
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired
|
|
|
(91 |
) |
|
|
(98 |
) |
|
Capital expenditures
|
|
|
(493 |
) |
|
|
(526 |
) |
|
Proceeds from divestitures of businesses, net of cash divested,
and other sales of assets
|
|
|
124 |
|
|
|
56 |
|
|
Purchases of short-term investments
|
|
|
(225 |
) |
|
|
(933 |
) |
|
Proceeds from sales of short-term investments
|
|
|
202 |
|
|
|
768 |
|
|
Net receipts from restricted trust and escrow accounts
|
|
|
206 |
|
|
|
176 |
|
|
Other, net
|
|
|
(16 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(293 |
) |
|
|
(545 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
New borrowings
|
|
|
8 |
|
|
|
348 |
|
|
Debt repayments
|
|
|
(234 |
) |
|
|
(369 |
) |
|
Common stock repurchases
|
|
|
(278 |
) |
|
|
(108 |
) |
|
Cash dividends
|
|
|
(228 |
) |
|
|
(218 |
) |
|
Exercise of common stock options and warrants
|
|
|
51 |
|
|
|
120 |
|
|
Minority interest distributions paid
|
|
|
(8 |
) |
|
|
(18 |
) |
|
Other, net
|
|
|
(65 |
) |
|
|
(53 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(754 |
) |
|
|
(298 |
) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
57 |
|
|
|
174 |
|
Cash and cash equivalents at beginning of period
|
|
|
424 |
|
|
|
217 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
481 |
|
|
$ |
391 |
|
|
|
|
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
3
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS
EQUITY
(In Millions, Except Shares in Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
Restricted | |
|
|
|
|
Common Stock | |
|
Additional | |
|
|
|
Other | |
|
Stock | |
|
Treasury Stock | |
|
|
| |
|
Paid-In | |
|
Retained | |
|
Comprehensive | |
|
Unearned | |
|
| |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Earnings | |
|
Income (Loss) | |
|
Compensation | |
|
Shares | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance, December 31, 2003
|
|
|
630,282 |
|
|
$ |
6 |
|
|
$ |
4,501 |
|
|
$ |
2,497 |
|
|
$ |
(14 |
) |
|
$ |
|
|
|
|
(54,164 |
) |
|
$ |
(1,388 |
) |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon exercise of stock options and warrants
and grants of restricted stock, including tax benefit of $37
|
|
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
10,019 |
|
|
|
259 |
|
|
Earned compensation related to restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Common stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,541 |
) |
|
|
(472 |
) |
|
Unrealized losses resulting from changes in fair value of
derivative instruments, net of tax benefit of $11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses on derivative instruments reclassified into
earnings, net of taxes of $6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on marketable securities, net of taxes of $2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment of foreign currency statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
616 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
630,282 |
|
|
|
6 |
|
|
|
4,481 |
|
|
|
3,004 |
|
|
|
69 |
|
|
|
(4 |
) |
|
|
(60,070 |
) |
|
|
(1,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon exercise of stock options and warrants,
including tax benefit of $8
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,411 |
|
|
|
64 |
|
|
Earned compensation related to restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Common stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,942 |
) |
|
|
(290 |
) |
|
Unrealized gains resulting from changes in fair value of
derivative instruments, net of taxes of $6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses on derivative instruments reclassified into
earnings, net of taxes of $3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on marketable securities, net of taxes of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment of foreign currency statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2005
|
|
|
630,282 |
|
|
$ |
6 |
|
|
$ |
4,483 |
|
|
$ |
3,453 |
|
|
$ |
59 |
|
|
$ |
(2 |
) |
|
|
(67,282 |
) |
|
$ |
(1,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
4
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The financial statements presented in this report represent the
consolidation of Waste Management, Inc., a Delaware corporation,
our wholly-owned and majority-owned subsidiaries and certain
variable interest entities for which we have determined that we
are the primary beneficiary. Waste Management, Inc. is a holding
company that conducts all of its operations through
subsidiaries. When the terms the Company,
we, us or our are used in
this document, those terms refer to Waste Management, Inc. and
all of its consolidated subsidiaries. When we use the term
WMI, we are referring only to the parent holding
company.
WMI was incorporated in Oklahoma in 1987 under the name
USA Waste Services, Inc. and was reincorporated as a
Delaware company in 1995. In a 1998 merger, the Illinois-based
waste services company formerly known as Waste Management, Inc.
became a wholly-owned subsidiary of WMI and changed its name to
Waste Management Holdings, Inc. (WM Holdings).
At the same time, our parent holding company changed its name
from USA Waste Services to Waste Management, Inc. Like WMI,
WM Holdings is a holding company that conducts all of its
operations through subsidiaries. For more detail on the
financial position, results of operations and cash flows of WMI,
WM Holdings and their subsidiaries, see Note 11.
The Condensed Consolidated Financial Statements as of and for
the three and six months ended June 30, 2005 are unaudited.
In the opinion of management, these financial statements include
all adjustments, which are generally of a normal recurring
nature, necessary for a fair presentation of the financial
position, results of operations, and cash flows for the periods
presented. The results for interim periods are not necessarily
indicative of results for the entire year. The financial
statements presented herein should be read in connection with
the financial statements included in our Annual Report on
Form 10-K for the year ended December 31, 2004.
In preparing our financial statements, we make numerous
estimates and assumptions that affect the accounting for and
recognition of assets, liabilities, stockholders equity,
revenues and expenses. We must make these estimates and
assumptions because certain information that we use is dependent
on future events, cannot be calculated with a high degree of
precision from data available or simply cannot be readily
calculated based on generally accepted methodologies. In some
cases, these estimates are particularly difficult to determine
and we must exercise significant judgment. Actual results could
differ materially from the estimates and assumptions that we use
in the preparation of our financial statements.
Accounting changes On March 31, 2004,
the Financial Accounting Standards Boards
(FASB) Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46),
became applicable to non-special purpose type variable interest
entities created on or before January 31, 2003. Our
application of FIN 46 to this type of entity resulted in
the consolidation of certain trusts established to support the
performance of closure, post-closure and environmental
remediation activities. On March 31, 2004, we recorded an
increase in our net assets and a credit to cumulative effect of
change in accounting principle of $8 million, net of taxes,
to consolidate these variable interest entities. The
consolidation of these trusts has not had, nor is it expected to
have, a material effect on our financial position, results of
operations or cash flows.
Reclassifications Certain reclassifications
have been made in the accompanying financial statements to
conform prior year financial information with the current period
presentation.
During the first quarter of 2004, we began making investments in
auction rate securities and variable rate demand notes, which
are debt instruments with long-term scheduled maturities and
periodic interest rate reset dates. Through December 31,
2004, we included these investments in Cash and cash
equivalents. As a result of recent guidance associated
with these types of securities, we determined that these
investments were more appropriately classified as short-term
investments, which are a component of Prepaid expenses and
other assets in our Condensed Consolidated Balance Sheets.
Accordingly, in our accompanying Condensed
5
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated Financial Statements we have (i) decreased our
Cash and cash equivalents and increased our
Prepaid expenses and other assets by
$19 million at December 31, 2004 and $162 million
at June 30, 2004; and (ii) reflected the gross
purchases and sales of these investments within Cash flows
from investing activities in our Statements of Cash Flows.
Additionally, in our 2004 Condensed Consolidated Statement of
Cash Flows, relatively insignificant purchases and sales of
other short-term investments were included on a net basis within
Cash flows from investing activities
Other. This additional activity has also been reflected
within purchases and sales of short-term investments in the
accompanying Condensed Consolidated Statements of Cash Flows.
|
|
2. |
Landfill and Environmental Remediation Liabilities |
We have material financial commitments with respect to asset
retirement obligations at our landfills. These obligations
include the following activities:
|
|
|
|
|
Final capping Involves the installation of
flexible membrane and geosynthetic clay liners, drainage
equipment and compacted soil layers and topsoil over areas of a
landfill where total airspace capacity has been consumed. Final
capping asset retirement obligations are recorded on a
units-of-consumption basis as airspace associated with each
discrete capping event is consumed with a corresponding increase
in the landfill asset. |
|
|
|
Closure Includes the construction of the
final portion of methane gas collection systems (when required),
demobilization and routine maintenance costs. These are costs
incurred after the site ceases to accept waste, but before the
landfill is certified as closed by the applicable state
regulatory agency. These costs are accrued as an asset
retirement obligation as airspace is consumed over the life of
the landfill with a corresponding increase in the landfill asset. |
|
|
|
Post-closure Involves the maintenance and
monitoring of a landfill site that has been certified closed by
the applicable regulatory agency. Generally, we are required to
maintain and monitor landfill sites for a 30-year period. These
maintenance and monitoring costs are accrued as an asset
retirement obligation as airspace is consumed over the life of
the landfill with a corresponding increase in the landfill asset. |
We develop our estimates of these obligations using input from
our operations personnel, engineers and accountants. Our
estimates are based on our interpretation of current
requirements and proposed regulatory changes and are intended to
approximate fair value under the provisions of Statement of
Financial Accounting Standards No. 143, Accounting for
Asset Retirement Obligations
(SFAS No. 143). Absent quoted market
prices, the estimate of fair value should be based on the best
available information, including the results of present value
techniques. In general, we contract with third parties to
fulfill our obligations for final capping, closure and
post-closure. Therefore, we have access to quoted and actual
prices paid for similar work on which to base the fair value of
these obligations. We are required to recognize these
obligations at market prices whether we plan to contract with
third parties or perform the work ourselves. In those instances
where we perform the work with internal resources, the added
profit margin is recognized as a component of operating income
when the work is performed.
Additionally, an estimate of fair value should also include the
price that marketplace participants are able to receive for
bearing the uncertainties in cash flows. However, when using
discounted cash flow techniques, reliable estimates of market
premiums may not be obtainable. In the waste industry, there is
generally not a market for selling the responsibility for final
capping, closure and post-closure obligations independent of
selling the landfill in its entirety. Accordingly, we do not
believe that it is possible to develop a methodology to reliably
estimate a market risk premium. We have excluded any such market
risk premium from our determination of expected cash flows for
landfill asset retirement obligations.
6
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Once we have determined the final capping, closure and
post-closure costs, we inflate those costs to the expected time
of payment and discount those expected future costs back to
present value. During the three and six months ended
June 30, 2005 and 2004, we inflated these costs in current
dollars until the expected time of payment using an inflation
rate of 2.5%. We discount these costs to present value using the
credit-adjusted, risk-free rate effective at the time an
obligation is incurred consistent with the expected cash flow
approach. Any changes in expectations that result in an upward
revision to the estimated cash flows are treated as a new
liability and discounted at the current rate while downward
revisions are discounted at the historical weighted-average rate
of the recorded obligation. As a result, the credit-adjusted,
risk-free discount rate used to calculate the present value of
an obligation is specific to that individual asset retirement
obligation. The weighted-average rate applicable to our asset
retirement obligations at June 30, 2005 is between 6.00%
and 7.25%, the range of the credit-adjusted, risk-free discount
rates effective since adopting SFAS No. 143 in 2003.
We record the estimated fair value of final capping, closure and
post-closure liabilities for our landfills based on the capacity
consumed through the current period. The fair value of final
capping obligations is developed based on our estimates of the
airspace consumed to date for each final capping event and the
expected timing of each final capping event. The fair value of
closure and post-closure obligations is developed based on our
estimates of the airspace consumed to date for the entire
landfill and the expected timing of each closure and
post-closure activity. Because these obligations are measured at
estimated fair value using present value techniques, changes in
the estimated cost or timing of future final capping, closure
and post-closure activities could result in a material change in
these liabilities, related assets and results of operations. We
assess the appropriateness of the estimates used to develop our
recorded balances annually, unless there are indications that a
more frequent review is appropriate.
Changes in inflation rates or the estimated cost, timing or
extent of future final capping, closure and post-closure
activities typically result in both (i) a current
adjustment to the recorded liability and landfill asset; and
(ii) a change in liability and asset amounts to be recorded
prospectively over the remaining capacity of either the related
discrete capping event or the landfill. Any changes related to
the capitalized and future cost of the landfill assets are then
recognized in accordance with our amortization policy, which
would generally result in amortization expense being recognized
prospectively over the remaining capacity of the final capping
event or the landfill, as appropriate. Changes in such estimates
associated with airspace that has been fully utilized result in
an adjustment to the recorded liability and a corresponding
adjustment to landfill airspace amortization expense.
Interest accretion on final capping, closure and post-closure
liabilities is recorded using the effective interest method and
is recorded as final capping, closure and post-closure expense,
which is included in Operating costs and expenses
within our Condensed Consolidated Statements of Operations.
In the United States, the final capping, closure and
post-closure requirements are established by the Environmental
Protection Agency (EPA) and applied on a
state-by-state basis. The costs to comply with these
requirements could change materially as a result of future
legislation or regulation.
|
|
|
Environmental Remediation |
We routinely review and evaluate sites that require remediation
and determine our estimated cost for the likely remedy based on
applicable estimates and assumptions. There can sometimes be a
range of reasonable estimates of the costs associated with the
likely remedy of a site. In these cases, we use the amount
within the range that constitutes our best estimate. If no
amount within the range appears to be a better estimate than any
other, we use the amounts that are the low ends of such ranges
in accordance with SFAS No. 5, Accounting for
Contingencies, and its interpretations. If we used the high
ends of such ranges, our aggregate potential liability would be
approximately $170 million higher on a discounted basis
than the $317 million recorded in the Condensed
Consolidated Financial Statements as of June 30, 2005.
7
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Through June 30, 2005, we had been notified that we are a
potentially responsible party (PRP) in connection
with 73 locations listed on the EPAs National Priorities
List (NPL). Of the 73 sites at which claims have
been made against us, 16 are sites we own. Each of the NPL sites
we own were initially developed by others as land disposal
facilities. At each of the owned facilities, we are working in
conjunction with the government to characterize or remediate
identified site problems, and we have either agreed with other
legally liable parties on an arrangement for sharing the costs
of remediation or are pursuing resolution of an allocation
formula. We generally expect to receive any amounts due from
these parties at, or near, the time that we make the remedial
expenditures. The 57 NPL sites at which claims have been made
against us and that we do not own are at different procedural
stages under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, which is
known as CERCLA or Superfund. At some of these sites, our
liability is well defined as a consequence of a governmental
decision as to the appropriate remedy and an agreement among
liable parties as to the share each will pay for implementing
that remedy. At other sites, where no remedy has been selected
or the liable parties have been unable to agree on an
appropriate allocation, our future costs are uncertain. Any of
these matters could potentially have a material adverse effect
on our consolidated financial statements.
Estimating our degree of responsibility for remediation of a
particular site is inherently difficult and determining the
method and ultimate cost of remediation requires that a number
of assumptions be made. Our ultimate responsibility may differ
materially from current estimates. It is possible that
technological, regulatory or enforcement developments, the
results of environmental studies, the inability to identify
other PRPs, the inability of other PRPs to contribute to the
settlements of such liabilities, or other factors could require
us to record additional liabilities that could be material.
Additionally, our ongoing review of our remediation liabilities
could result in revisions that could cause upward or downward
adjustments to operating costs and expenses. These adjustments
could also be material in any given period.
Where we believe that both the amount of a particular
environmental remediation liability and the timing of the
payments are reliably determinable, we inflate the cost in
current dollars (by 2.5% at June 30, 2005 and
December 31, 2004) until the expected time of payment and
discount the cost to present value using a risk-free discount
rate, which is based on the rate for United States Treasury
bonds with a term approximating the weighted average period
until settlement of the underlying obligation (4.25% at both
June 30, 2005 and December 31, 2004). We determine the
risk-free discount rate and the inflation rate on an annual
basis unless interim changes would significantly impact our
results of operations. For remedial liabilities that have been
discounted, we recognize interest accretion on a monthly basis
to the period of settlement, based on the effective interest
method. Periodic interest accretion is included as a component
of Operating costs and expenses in our Condensed
Consolidated Statements of Operations.
8
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Financial Statement Impact of Landfill and Environmental
Remediation Obligations |
Liabilities for landfill and environmental remediation costs are
presented in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
|
|
Environmental | |
|
|
|
|
|
Environmental | |
|
|
|
|
Landfill | |
|
Remediation | |
|
Total | |
|
Landfill | |
|
Remediation | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Current (in accrued liabilities)
|
|
$ |
107 |
|
|
$ |
64 |
|
|
$ |
171 |
|
|
$ |
100 |
|
|
$ |
62 |
|
|
$ |
162 |
|
Long-term
|
|
|
925 |
|
|
|
253 |
|
|
|
1,178 |
|
|
|
879 |
|
|
|
262 |
|
|
|
1,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,032 |
|
|
$ |
317 |
|
|
$ |
1,349 |
|
|
$ |
979 |
|
|
$ |
324 |
|
|
$ |
1,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes to landfill and environmental remediation
liabilities for the year ended December 31, 2004 and the
six months ended June 30, 2005 are reflected in the table
below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental | |
|
|
Landfill | |
|
Remediation | |
|
|
| |
|
| |
December 31, 2003
|
|
$ |
958 |
|
|
$ |
332 |
|
Obligations incurred and capitalized
|
|
|
61 |
|
|
|
|
|
Obligations settled
|
|
|
(83 |
) |
|
|
(31 |
) |
Interest accretion
|
|
|
64 |
|
|
|
11 |
|
Revisions in estimates
|
|
|
(18 |
) |
|
|
8 |
|
Acquisitions, divestitures and other adjustments
|
|
|
(3 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
979 |
|
|
|
324 |
|
Obligations incurred and capitalized
|
|
|
29 |
|
|
|
|
|
Obligations settled
|
|
|
(16 |
) |
|
|
(16 |
) |
Interest accretion
|
|
|
32 |
|
|
|
5 |
|
Revisions in estimates
|
|
|
10 |
|
|
|
4 |
|
Acquisitions, divestitures and other adjustments
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005
|
|
$ |
1,032 |
|
|
$ |
317 |
|
|
|
|
|
|
|
|
At several of our landfills, we provide financial assurance by
depositing cash into restricted escrow accounts or trust funds
that have been established to settle closure, post-closure and
environmental remediation obligations. The fair value of these
escrow accounts and trust funds was $216 million at
June 30, 2005, and is primarily included as a component of
Other assets in our Condensed Consolidated Balance
Sheet. Balances maintained in these trust funds and escrow
accounts will fluctuate based on (i) changes in statutory
requirements; (ii) the ongoing use of funds for qualifying
closure, post-closure and environmental remediation activities;
(iii) acquisitions or divestitures of landfills; and
(iv) changes in the fair value of the financial instruments
held in the trust fund or escrow account.
9
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the major components of debt at
each balance sheet date (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Revolving credit facility
|
|
$ |
|
|
|
$ |
|
|
Senior notes and debentures, maturing through 2032, interest
rates ranging from 5.00% to 8.75% (weighted average interest
rate of 7.0% at June 30, 2005 and at December 31,
2004)(a),(b)
|
|
|
5,235 |
|
|
|
5,344 |
|
Tax-exempt bonds maturing through 2039, fixed and variable
interest rates ranging from 2.2% to 7.4% (weighted average
interest rate of 3.8% at June 30, 2005 and 3.6% at
December 31, 2004)(c)
|
|
|
2,145 |
|
|
|
2,047 |
|
Tax-exempt project bonds, principal payable in periodic
installments, maturing through 2027, fixed and variable interest
rates ranging from 2.3% to 9.3% (weighted average interest rate
of 5.2% at June 30, 2005 and at December 31, 2004)
|
|
|
495 |
|
|
|
496 |
|
5.75% convertible subordinated notes due 2005(d)
|
|
|
|
|
|
|
35 |
|
Capital leases and other, maturing through 2027, interest rates
up to 12%
|
|
|
556 |
|
|
|
644 |
|
|
|
|
|
|
|
|
|
|
|
8,431 |
|
|
|
8,566 |
|
Less current portion
|
|
|
215 |
|
|
|
384 |
|
|
|
|
|
|
|
|
|
|
$ |
8,216 |
|
|
$ |
8,182 |
|
|
|
|
|
|
|
|
|
|
|
|
a) |
On May 15, 2005, $100 million of 7.0% senior
notes and $3 million of 6.65% senior notes matured and
were repaid with cash on hand. |
|
|
b) |
We manage the interest rate risk of our debt portfolio
principally by using interest rate derivatives to achieve a
desired position of fixed and floating rate debt. As of
June 30, 2005, the interest payments on $2.35 billion
of our fixed-rate senior notes have been swapped to variable
rates. There has been a $7 million decrease in the carrying
value of our senior notes from December 31, 2004 as a
result of hedge accounting for our interest rate derivatives. |
|
|
c) |
In April 2005, we issued $100 million of tax-exempt bonds
that mature in 2025. The proceeds from this debt issuance were
deposited directly into a trust fund and may only be used to
fund the acquisition and development of solid waste disposal
facilities. Accordingly, the restricted funds provided by this
financing activity have not been included in New
borrowings in our Condensed Consolidated Statement of Cash
Flows for the six months ended June 30, 2005. |
|
|
d) |
Our 5.75% convertible subordinated notes were repaid with
cash on hand at maturity on January 24, 2005. |
Our revolving credit facility and certain other financing
agreements contain financial covenants. The most restrictive of
these financial covenants are contained in our revolving credit
facility. The following table summarizes the requirements of
these financial covenants and the results of the calculation, as
defined by the revolving credit facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Requirement | |
|
June 30, | |
|
December 31, | |
Covenant |
|
per Facility | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Interest coverage ratio
|
|
>2.75 to 1 |
|
|
3.7 to 1 |
|
|
|
3.5 to 1 |
|
Total debt to EBITDA
|
|
<3.5 to 1 |
|
|
2.7 to 1 |
|
|
|
2.8 to 1 |
|
Our revolving credit facility and senior notes also contain
certain restrictions intended to monitor our level of
indebtedness, types of investments and net worth. We monitor our
compliance with these restrictions, but do not believe that they
significantly impact our ability to enter into investing or
financing arrangements
10
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
typical for our business. As of June 30, 2005, we were in
compliance with the covenants and restrictions under all of our
debt agreements.
The current tax obligations associated with the provision for
income taxes recorded in the Statements of Operations are
reflected in the accompanying Condensed Consolidated Balance
Sheets as a component of Accrued liabilities, and
the deferred tax obligations are reflected in Deferred
income taxes.
The difference between federal income taxes computed at the
federal statutory rate and reported income taxes for the three
and six months ended June 30, 2005 is primarily due to
(i) favorable effects of tax audit settlements; and
(ii) the favorable impact of non-conventional fuel tax
credits; offset in part by (iii) the effect of our expected
repatriation of accumulated earnings from certain of our
Canadian subsidiaries; (iv) state and local income taxes;
and (v) the impact of nondeductible goodwill associated
with our divestitures. The difference between federal income
taxes computed at the federal statutory rate and reported income
taxes for the three and six months ended June 30, 2004 is
primarily due to the favorable impact of non-conventional fuel
tax credits and favorable tax audit settlements, offset in part
by state and local income taxes. We continue to evaluate our
effective tax rate at each interim period and adjust it
accordingly as facts and circumstances warrant.
Tax audit settlements The settlement of
several tax audits resulted in a reduction in income tax expense
of $345 million, or $0.61 per diluted share, for the
three months ended June 30, 2005 and $347 million, or
$0.61 per diluted share, for the six months ended
June 30, 2005. The reduction in income taxes recognized is
primarily attributable to the associated reduction in our
accrued tax and related accrued interest liabilities. These tax
audit settlements resulted in a 113.5 percentage point
reduction in our effective tax rate for the three months ended
June 30, 2005 and a 66.1 percentage point reduction in
our effective tax rate for the six months ended June 30,
2005. For information regarding the status of current audit
activity refer to Note 8.
Non-conventional fuel tax credits The
favorable impact of non-conventional fuel tax credits has been
derived from our landfills and our investments in two
coal-based, synthetic fuel production facilities (the
Facilities), which are discussed in more detail
below. The fuel generated from our landfills and the Facilities
qualifies for tax credits through 2007 pursuant to
section 29 of the Internal Revenue Code, and may be
phased-out if the price of oil exceeds a threshold annual
average price determined by the U.S. Internal Revenue
Service.
The tax credits generated by our landfills are provided by our
Renewable Energy Program, under which we develop, operate and
promote the beneficial use of landfill gas. Our recorded taxes
for the three and six months ended June 30, 2005 include
benefits of $9 million and $13 million, respectively,
from tax credits generated by our landfill gas-to-energy
projects. Our recorded taxes for the three and six months ended
June 30, 2004 also include $8 million and
$13 million, respectively, from tax credits generated by
our landfill gas-to-energy projects.
11
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In the first and second quarters of 2004, we acquired minority
ownership interests in the Facilities, which result in the
recognition of our pro-rata share of the Facilities
losses, the amortization of our initial investments and
additional expense associated with other estimated obligations
being recorded as Equity in net losses of unconsolidated
entities within our Statements of Operations. The
following table summarizes the impact of our investments in the
Facilities on our Statements of Operations for the three and six
months ended June 30, 2005 and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Equity in losses of unconsolidated entities
|
|
$ |
(27 |
) |
|
$ |
(26 |
) |
|
$ |
(55 |
) |
|
$ |
(45 |
) |
Interest expense
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
Benefit from income taxes(a)
|
|
|
38 |
|
|
|
35 |
|
|
|
67 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
9 |
|
|
$ |
7 |
|
|
$ |
8 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a) |
The reduction in our Provision for (benefit from) income
taxes attributable to the Facilities includes benefits
from tax credits of $27 million and $44 million for
the three and six months ended June 30, 2005, respectively,
and $24 million and $35 million for the three and six
months ended June 30, 2004, respectively. |
The equity losses and associated tax benefits would not have
been incurred if we had not acquired the minority ownership
interest in the Facilities. In addition, if the tax credits
generated by the Facilities were no longer allowable under
Section 29 of the Internal Revenue Code, we would no longer
incur these losses.
Repatriation of earnings in foreign
subsidiaries On October 22, 2004, the
American Jobs Creation Act of 2004 (the Act) became
law. A provision of the Act allows U.S. companies to
repatriate earnings from their foreign subsidiaries at a reduced
tax rate during 2005. We have decided to repatriate accumulated
earnings and capital from certain of our Canadian subsidiaries
in accordance with this provision, which were previously
accounted for as permanently reinvested in accordance with APB
Opinion No. 23, Accounting for Income Taxes
Special Areas. Currently, we expect to repatriate
approximately $485 million of our accumulated foreign
earnings and capital under the terms of a domestic reinvestment
plan that was approved by our Chief Executive Officer and Board
of Directors during the second quarter of 2005. Our current
period benefit from taxes has been partially offset by the
accrual of $34 million in tax expense attributable to our
planned repatriation.
12
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive income represents all changes in our equity except
for changes resulting from investments by, and distributions to,
stockholders. Comprehensive income for the three and six months
ended June 30, 2005 and June 30, 2004 was as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net income
|
|
$ |
527 |
|
|
$ |
216 |
|
|
$ |
677 |
|
|
$ |
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) resulting from changes in fair value
of derivative instruments, net of taxes
|
|
|
3 |
|
|
|
(2 |
) |
|
|
9 |
|
|
|
(9 |
) |
|
Realized losses on derivative instruments reclassified into
earnings, net of taxes
|
|
|
3 |
|
|
|
3 |
|
|
|
5 |
|
|
|
5 |
|
|
Unrealized gains (losses) on marketable securities, net of taxes
|
|
|
2 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
|
|
|
Translation adjustment of foreign currency statements
|
|
|
(16 |
) |
|
|
(15 |
) |
|
|
(25 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(8 |
) |
|
|
(16 |
) |
|
|
(10 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
519 |
|
|
$ |
200 |
|
|
$ |
667 |
|
|
$ |
338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accumulated unrealized loss on derivative instruments, net of
tax benefit
|
|
$ |
(35 |
) |
|
$ |
(49 |
) |
Accumulated unrealized gain on marketable securities, net of
taxes
|
|
|
4 |
|
|
|
3 |
|
Cumulative translation adjustment of foreign currency statements
|
|
|
90 |
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
$ |
59 |
|
|
$ |
69 |
|
|
|
|
|
|
|
|
13
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following reconciles the number of shares outstanding at
June 30 of each year to the number of weighted average
basic shares outstanding and the number of weighted average
diluted shares outstanding for the purpose of calculating basic
and diluted earnings per share. The table also provides the
number of shares of common stock potentially issuable at the end
of each period and the number of potentially issuable shares
excluded from the diluted earnings per share computation for
each period (shares in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Six Months | |
|
|
Ended | |
|
Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Number of common shares outstanding at end of period
|
|
|
563.0 |
|
|
|
580.0 |
|
|
|
563.0 |
|
|
|
580.0 |
|
|
Effect of using weighted average common shares outstanding
|
|
|
3.3 |
|
|
|
0.2 |
|
|
|
4.6 |
|
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
566.3 |
|
|
|
580.2 |
|
|
|
567.6 |
|
|
|
578.8 |
|
|
Dilutive effect of equity-based compensation awards, warrants
and other contingently issuable shares
|
|
|
3.8 |
|
|
|
5.2 |
|
|
|
3.7 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
570.1 |
|
|
|
585.4 |
|
|
|
571.3 |
|
|
|
584.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially issuable shares
|
|
|
41.9 |
|
|
|
49.7 |
|
|
|
41.9 |
|
|
|
49.7 |
|
Number of anti-dilutive potentially issuable shares excluded
from diluted common shares outstanding
|
|
|
15.2 |
|
|
|
9.7 |
|
|
|
15.2 |
|
|
|
18.2 |
|
|
|
7. |
Stock-Based Compensation, Common Stock Dividends and Common
Stock Repurchases |
Pursuant to our 2004 Stock Incentive Plan, we have the ability
to issue various forms of equity-based compensation on terms and
conditions determined by the Compensation Committee of our Board
of Directors. As a result of both the changes in accounting for
share-based payments as discussed in Note 12 and a desire
to design our long-term incentive plans in a manner that creates
a stronger link to operating and market performance, our Board
of Directors recently approved a substantial change in the form
of awards that we grant. In prior years, stock option awards
were the primary form of equity-based compensation. Currently,
we do not intend to include stock option awards as a component
of our future long-term incentive plans.
During the six months ended June 30, 2005, we granted
approximately 750,000 restricted stock units and approximately
760,000 performance share units to selected participants under
our 2004 Stock Incentive Plan. The restricted stock units vest
ratably over a four-year period, and unvested units are subject
to forfeiture in the event of voluntary or for-cause
termination. The restricted stock units become immediately
vested in the event of an employees death or disability
and continue to vest for up to 36-months following an
employees retirement. The performance share units are
payable in shares of common stock based on the achievement of
certain financial measures, after the end of a three-year
performance period. The performance share units are also payable
to an employee (or his beneficiary) upon death, disability or
retirement as if that employee had remained employed until the
end of the performance period, but are subject to forfeiture in
the event of voluntary or for-cause termination.
We have accounted for our stock-based compensation using the
intrinsic value method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees, as amended.
Pursuant to APB No. 25, we have not recognized compensation
cost for our stock options because the number of shares
potentially issuable and the exercise price, which is equal to
the fair market value of the underlying stock on the date of
grant, are fixed. Compensation expense associated with
restricted stock and restricted stock units that continue to
vest based on future employment is measured based on the
grant-date fair value of our common stock and is
14
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognized on a straight-line basis over the required employment
period, which is generally the vesting period. Compensation
expense associated with performance share units that continue to
vest based on future performance is measured based on the
fair-value of our common stock at each balance sheet date and
recognized ratably over the performance period based on our
expectations for achieving the defined performance criteria.
Compensation expense included in reported net income associated
with restricted stock, restricted stock units and performance
share units was $5 million, or $3 million net of tax,
for the three months ended June 30, 2005 and
$11 million, or $7 million net of tax, for the six
months ended June 30, 2005. Approximately $5 million,
or $3 million net of tax, of the current years
expense is associated with the recognition of compensation costs
for restricted stock, restricted stock units and performance
share units that were granted to employees who were either
eligible for retirement at the date of grant or have become
eligible for retirement during the vesting period. As discussed
above, the provisions of these awards provide for continued
vesting upon retirement and, as a result, the future vesting is
considered non-substantive. Accordingly, compensation expense
associated with the portion of restricted stock, restricted
stock unit and performance share unit grants that does not
require future service has been recognized immediately. As
restricted stock, restricted stock units and performance share
units were not a significant component of our stock incentive
plan in 2004, compensation costs included in reported net income
for the three and six months ended June 30, 2004 were
approximately $1 million, net of tax.
The following schedule reflects the pro forma impact on net
income and earnings per share of accounting for our equity-based
compensation using SFAS No. 123, Accounting for
Stock-Based Compensation, which would result in the
recognition of compensation expense for the fair value of stock
option grants (in millions, except per share amounts). For
purposes of measuring compensation expense on a pro forma basis,
we have estimated the fair value of stock option grants using
the Black-Scholes option-pricing model.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Reported net income
|
|
$ |
527 |
|
|
$ |
216 |
|
|
$ |
677 |
|
|
$ |
368 |
|
Less: compensation expense per SFAS No. 123, net of
tax benefit
|
|
|
10 |
|
|
|
15 |
|
|
|
24 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
517 |
|
|
$ |
201 |
|
|
$ |
653 |
|
|
$ |
340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net income
|
|
$ |
0.93 |
|
|
$ |
0.37 |
|
|
$ |
1.19 |
|
|
$ |
0.63 |
|
Less: compensation expense per SFAS No. 123, net of
tax benefit
|
|
|
0.02 |
|
|
|
0.03 |
|
|
|
0.04 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
0.91 |
|
|
$ |
0.34 |
|
|
$ |
1.15 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net income
|
|
$ |
0.92 |
|
|
$ |
0.37 |
|
|
$ |
1.18 |
|
|
$ |
0.63 |
|
Less: compensation expense per SFAS No. 123, net of
tax benefit
|
|
|
0.02 |
|
|
|
0.03 |
|
|
|
0.04 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
0.90 |
|
|
$ |
0.34 |
|
|
$ |
1.14 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed above, in accordance with APB No. 25 and its
interpretations, compensation expense attributable to
equity-based awards is recognized on a straight-line basis over
the service or employment period required for an employee to
vest in his award. This attribution method results in the
immediate recognition of compensation expense for the portion of
any equity-based award that does not require future service or
employment. The adjustments for compensation expense per
SFAS No. 123, net of tax benefit
15
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
included in the table above do not reflect this attribution
method. We are currently in the process of assessing the impact
of non-substantive vesting provisions on our pro forma financial
information.
In accordance with SFAS No. 123 (revised 2004),
Share Based Payment, and the Securities and Exchange
Commissions rule amending the compliance dates of the
Statement, we will begin to recognize compensation expense for
equity-based compensation using the fair value method in 2006,
as discussed in Note 12.
|
|
|
Common Stock Dividends and Repurchases |
In October 2004, our Board of Directors approved a capital
allocation program that provides for up to $1.2 billion in
aggregate dividend payments and share repurchases each year
during 2005, 2006 and 2007. Aggregate dividend payments and
share repurchases under this program were $302 million
during the three months ended June 30, 2005 and
$518 million during the six months ended June 30, 2005.
The Board of Directors declared a $0.20 per share dividend
in both the first and second quarters of 2005. The first quarter
dividend was paid on March 24, 2005 to shareholders of
record as of March 1, 2005 for an aggregate of
$114 million. The second quarter dividend was paid on
June 24, 2005 to shareholders of record as of June 1,
2005 for an aggregate of $114 million. In each of the first
and second quarters of 2004, we declared and paid a dividend of
$0.1875 per share, which resulted in aggregate cash
payments of $109 million for the three months ended
June 30, 2004 and $218 million for the six months
ended June 30, 2004.
All future dividend declarations are at the discretion of the
Board of Directors, and depend on various factors, including our
net earnings, financial condition, projected cash requirements
and other factors the Board may deem relevant. Based on shares
outstanding as of June 30, 2005, continued quarterly
dividend declarations by our Board of Directors of
$0.20 per share would result in total dividend payments of
approximately $453 million in 2005.
During the six months ended June 30, 2005, we repurchased
9.9 million shares of our common stock for
$290 million, of which $12 million was settled in July
2005. During the six months ended June 30, 2004, we
repurchased 3.1 million shares of our common stock at a
cost of $89 million, of which $5 million was settled
in July 2004. In addition, we paid $24 million in January
2004 to settle repurchases made in December 2003. Future share
repurchases will be made at the discretion of management, and
will depend on similar factors to those considered by the Board
in making dividend declarations.
|
|
8. |
Commitments and Contingencies |
Financial instruments We have obtained
letters of credit, performance bonds and insurance policies and
have established trust funds and issued financial guarantees to
support tax-exempt bonds, contracts, performance of landfill
closure and post-closure requirements, environmental remediation
and other obligations.
Historically, our revolving credit facilities have been used to
obtain letters of credit to support our bonding and financial
assurance needs. We also have letter of credit and term loan
agreements and a letter of credit facility to provide us with
additional sources of capacity from which we may obtain letters
of credit. We obtain surety bonds and insurance policies from an
affiliated entity that we have an investment in and account for
under the cost method. Additionally in 2003, we guaranteed the
debt of a newly-formed surety company in order to assist in the
establishment of that entity. We are the primary beneficiary of
this entity and consolidate it under the provisions of
FIN 46. The terms of this guarantee are further discussed
within the Guarantees section of this note. We also
obtain insurance from a wholly-owned insurance company, the sole
business of which is to issue policies for the parent holding
company and its other subsidiaries, to secure such performance
obligations. In those instances where our use of captive
insurance is not allowed, we generally have available
alternative bonding mechanisms.
16
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Because virtually no claims have been made against the financial
instruments we use to support our obligations, and considering
our current financial position, management does not expect that
any claims against or draws on these instruments would have a
material adverse effect on our consolidated financial
statements. We have not experienced any unmanageable difficulty
in obtaining the required financial assurance instruments for
our current operations. In an ongoing effort to mitigate risks
of future cost increases and reductions in available capacity,
we continue to evaluate various options to access cost-effective
sources of financial assurance.
Insurance We carry insurance coverage for
protection of our assets and operations from certain risks
including automobile liability, general liability, real and
personal property, workers compensation, directors
and officers liability, pollution legal liability and
other coverages we believe are customary to the industry. Our
exposure to loss for insurance claims is generally limited to
the per incident deductible under the related insurance policy.
Our exposure, however, could increase if our insurers were
unable to meet their commitments on a timely basis.
We have retained a portion of the risks related to our
automobile, general liability and workers compensation
insurance programs. For our self-insured retentions, the
exposure for unpaid claims and associated expenses, including
incurred but not reported losses, is based on an actuarial
valuation and internal estimates. The estimated accruals for
these liabilities could be affected if future occurrences or
loss development significantly differ from utilized assumptions.
For the 14 months ended January 1, 2000, we insured
certain risks, including auto, general liability and
workers compensation, with Reliance National Insurance
Company, whose parent filed for bankruptcy in June 2001. In
October 2001, the parent and certain of its subsidiaries,
including Reliance National Insurance Company, were placed in
liquidation. We believe that because of various state insurance
guarantee funds and probable recoveries from the liquidation,
currently estimated to be $19 million, it is unlikely that
events relating to Reliance will have a material adverse impact
on our financial statements.
We do not expect the impact of any known casualty, property,
environmental or other contingency to have a material impact on
our financial condition, results of operations or cash flows.
Guarantees We have entered into the following
guarantee agreements associated with our operations:
|
|
|
|
|
As of June 30, 2005, WM Holdings, one of WMIs
wholly-owned subsidiaries, has fully and unconditionally
guaranteed WMIs senior indebtedness that matures through
2032. WMI has fully and unconditionally guaranteed the senior
indebtedness of WM Holdings that matures through 2026.
Performance under these guarantee agreements would be required
if either party defaulted on their respective obligations. No
additional liability has been recorded for these guarantees
because the underlying obligations are reflected in our
Condensed Consolidated Balance Sheets. See Note 11 for
further information. |
|
|
|
WMI has guaranteed the tax-exempt bonds of its subsidiaries. If
a subsidiary fails to meet its obligations associated with
tax-exempt bonds as they come due, WMI will be required to
perform under the related guarantee agreement. No additional
liability has been recorded for these guarantees because the
underlying obligations are reflected in our Condensed
Consolidated Balance Sheets. See Note 3 for information
related to the balances and maturities of our tax-exempt bonds. |
|
|
|
We have guaranteed certain financial obligations of
unconsolidated entities. The related obligations, which mature
through 2020, are not recorded on our Condensed Consolidated
Balance Sheets. As of June 30, 2005, our maximum future
obligation associated with these guarantees is approximately
$25 million. However, we have ongoing projects with the
guaranteed entities and believe that it is not likely that we
will be required to perform under these guarantees. |
17
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
We have issued a $28.6 million letter of credit to support
the debt of a surety bonding company. This guarantee was
initially established during the third quarter of 2003, and at
that time we determined that we are the primary beneficiary of
this entity under the provisions of FIN 46. As a result,
since the third quarter of 2003, this entity has been
consolidated into our financial statements and the guaranteed
obligation is included as a component of Long-term
debt in our Condensed Consolidated Balance Sheets. |
|
|
|
WM Holdings has guaranteed all reimbursement obligations of
WMI under its $350 million letter of credit facility and
$295 million letter of credit and term loan agreements.
Under those facilities, WMI must reimburse the entities funding
the facilities for any draw on a letter of credit supported by
the facilities. As of June 30, 2005, we had
$633 million in outstanding letters of credit under these
facilities. |
|
|
|
In connection with the $350 million letter of credit
facility, WMI and WM Holdings guaranteed the interest rate
swaps entered into by the entity funding the letter of credit
facility. The probability of loss for the guarantees was
determined to be remote and the fair value of the guarantees is
immaterial to our financial position and results of operations. |
|
|
|
Certain of our subsidiaries have guaranteed the market value of
certain homeowners properties that are adjacent to our
landfills. These guarantee agreements extend over the life of
the respective landfill. Under these agreements, we would be
responsible for the difference between the sale value and the
guaranteed market value of the homeowners properties, if
any. Generally, it is not possible to determine the contingent
obligation associated with these guarantees, but we do not
believe that these contingent obligations will have a material
effect on our financial position, results of operations or cash
flows. |
|
|
|
We have indemnified the purchasers of businesses or divested
assets for the occurrence of specified events under certain of
our divestiture agreements. Other than certain identified items
that are currently recorded as obligations, we do not believe
that it is possible to determine the contingent obligations
associated with these indemnities. |
|
|
|
WMI and WM Holdings guarantee the service, lease, financial
and general operating obligations of certain of their
subsidiaries. If such a subsidiary fails to meet its contractual
obligations as they come due, the guarantor has an unconditional
obligation to perform on its behalf. No additional liability has
been recorded for service, financial or general operating
guarantees because the subsidiaries obligations are
properly accounted for as costs of operations as services are
provided and liabilities as obligations are incurred. No
additional liability has been recorded for the lease guarantees
because the subsidiaries obligations are properly
accounted for as operating or capital leases, as appropriate. |
We do not currently believe that it is reasonably likely that we
will be required to perform under these guarantee agreements or
that any performance requirement would have a material impact on
our consolidated financial statements.
Environmental matters Our business is
intrinsically connected with the protection of the environment.
As such, a significant portion of our operating costs and
capital expenditures could be characterized as costs of
environmental protection. Such costs may increase in the future
as a result of legislation or regulation. However, we believe
that we generally tend to benefit when environmental regulation
increases, because such regulations increase the demand for our
services, and we have the resources and experience to manage
environmental risk.
Estimates of the extent of our degree of responsibility for
remediation of a particular site and the method and ultimate
cost of remediation require a number of assumptions and are
inherently difficult, and the ultimate outcome may differ
materially from current estimates. However, we believe that our
extensive
18
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
experience in the environmental services industry, as well as
our involvement with a large number of sites, provides a
reasonable basis for estimating our aggregate liability. As
additional information becomes available, estimates are adjusted
as necessary. It is reasonably possible that technological,
regulatory or enforcement developments, the results of
environmental studies, the nonexistence or inability of other
PRPs to contribute to the settlements of such liabilities, or
other factors could necessitate the recording of additional
liabilities which could be material.
We have been identified as a PRP in a number of governmental
investigations and actions relating to waste disposal sites that
may be subject to remedial action under CERCLA or similar state
laws. The majority of these proceedings involve allegations that
certain of our subsidiaries (or their predecessors) transported
hazardous substances to the sites, often prior to our
acquisition of these subsidiaries. CERCLA generally provides for
liability for those parties owning, operating, transporting to
or disposing at the sites. Proceedings arising under Superfund
typically involve numerous waste generators and other waste
transportation and disposal companies and seek to allocate or
recover costs associated with site investigation and cleanup,
which costs could be substantial and could have a material
adverse effect on our consolidated financial statements. At some
of the sites at which weve been identified as a PRP, our
liability is well defined as a consequence of a governmental
decision and an agreement among liable parties as to the
allocation of costs. At others where no remedy has been selected
or the liable parties have been unable to agree on an
appropriate allocation, our future costs are uncertain. Any of
these matters could have a material adverse effect on our
consolidated financial statements.
For more information regarding commitments and contingencies
with respect to environmental matters, see Note 2.
Litigation In December 1999, an individual
brought an action against the Company, five former officers of
WM Holdings, and WM Holdings former independent
auditor, Arthur Andersen LLP, in Illinois state court on behalf
of a proposed class of individuals who purchased
WM Holdings common stock before November 3, 1994, and
who held that stock through February 24, 1998. The action
is for alleged acts of common law fraud, negligence and breach
of fiduciary duty. This case has remained in the pleadings stage
for the last several years due to numerous motions and rulings
by the court related to the viability of these claims. The
defendants removed the case to federal court in Illinois, but a
remand order has been issued. An appeal of that remand has been
filed by the Company. Only limited discovery has occurred and
the defendants continue to defend themselves vigorously. The
extent of possible damages, if any, in this action cannot yet be
determined.
In April 2002, a former participant in WM Holdings
ERISA plans and another individual filed a lawsuit in
Washington, D.C. against WMI, WM Holdings and others,
attempting to increase the recovery of a class of ERISA plan
participants based on allegations related to both the events
alleged in, and the settlements relating to, the securities
class action against WM Holdings that was settled in 1998
and the securities class action against us that was settled in
November 2001. Subsequently, the issues related to the latter
class action have been dropped as to WMI, its officers and
directors. The case is ongoing with respect to WM Holdings
and others, and WM Holdings intends to defend itself
vigorously.
Three groups of stockholders have filed separate lawsuits in
state courts in Texas and federal court in Illinois against us
and certain of our former officers. The lawsuit filed in
Illinois was subsequently transferred to federal court in Texas.
The petitions allege that the plaintiffs are substantial holders
of the Companys common stock who intended to sell their
stock in 1999, or to otherwise protect themselves against loss,
but that the public statements we made regarding our prospects,
and in some instances statements made by the individual
defendants, were false and misleading and induced the plaintiffs
to retain their stock or not to take other protective measures.
The plaintiffs assert that the value of their retained stock
declined dramatically and that they incurred significant losses.
The plaintiffs assert claims for fraud, negligent
misrepresentation, and conspiracy. The first of these cases was
dismissed by summary judgment by a Texas state court in March
19
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2002. That dismissal was ultimately upheld by the appellate
court. The plaintiffs have appealed this decision to the highest
state court in Texas. The second case also filed in state court
is stayed pending resolution of the first case, and we intend to
continue to vigorously defend ourselves against these claims. In
March 2004, the court granted our motion to dismiss the third
case, which was pending in federal court, and the dismissal was
affirmed by the Fifth Circuit Court of Appeal in April 2005.
Finally, another shareholder has sued the Company in Louisiana
making allegations similar to those made in the securities class
action referred to above and by the plaintiff claiming damages
for having held stock. The case has been removed to federal
court and transferred to Texas where we are seeking a dismissal.
The Company is currently defending allegations related generally
to the termination of two separate joint ventures to which one
of our wholly-owned subsidiaries was a party. The claims in both
proceedings involve the value of the joint ventures. The joint
venture relationships have ended and the contributed assets have
been divested by the Company. The Company is defending itself
vigorously in each of these proceedings, in which the parties
are seeking a variety of remedies ranging from monetary damages
to unwinding the transaction. However, the nature and extent of
possible remedies or damages cannot be determined at this time.
Both of these matters have been fully tried and we are awaiting
final rulings.
From time to time, we pay fines or penalties in environmental
proceedings relating primarily to waste treatment, storage or
disposal facilities. As of June 30, 2005, there were four
proceedings involving our subsidiaries where we reasonably
believe that the sanctions could exceed $100,000. The matters
involve allegations that subsidiaries (i) improperly
operated a solid waste landfill by failing to maintain required
records, properly place and cover waste and adhere to proper
leachate levels; (ii) failed to comply with air permit and
emission limit requirements at an operating landfill;
(iii) caused excess odors and exceeded certain sewer
discharge limitations and landfill gas emission limit
requirements at an operating landfill; and (iv) violated
federal and state air pollution control statutes and rules,
state solid waste and ground water protection statutes and rules
and state permits at an operating landfill. We do not believe
that the fines or other penalties in any of these matters will,
individually or in the aggregate, have a material adverse effect
on our financial condition or results of operations.
From time to time, we also are named as defendants in personal
injury and property damage lawsuits, including purported class
actions, on the basis of having owned, operated or transported
waste to a disposal facility that is alleged to have
contaminated the environment or, in certain cases, on the basis
of having conducted environmental remediation activities at
sites. Some of the lawsuits may seek to have us pay the costs of
monitoring and health care examinations of allegedly affected
sites and persons for a substantial period of time even where no
actual damage is proven. While we believe we have meritorious
defenses to these lawsuits, the ultimate resolution is often
substantially uncertain due to the difficulty of determining the
cause, extent and impact of alleged contamination (which may
have occurred over a long period of time), the potential for
successive groups of complainants to emerge, the diversity of
the individual plaintiffs circumstances, and the potential
contribution or indemnification obligations of co-defendants or
other third parties, among other factors. Accordingly, it is
possible such matters could have a material adverse impact on
our consolidated financial statements.
It is not always possible to predict the impact that lawsuits,
proceedings, investigations and inquiries may have on us, nor is
it possible to predict whether additional suits or claims may
arise out of the matters described above in the future. We
intend to defend ourselves vigorously in all the above matters.
However, it is possible that the outcome of any of the matters
described, or others, may ultimately have a material adverse
impact on our financial condition, results of operations or cash
flows in one or more future periods.
Under Delaware law, corporations are allowed to indemnify their
officers, directors and employees against claims arising from
their actions in such capacities if the individuals acted in
good faith and in a manner they believed to be in, or not
opposed to, the best interests of the corporation. Further,
corporations are allowed to advance expenses to the individuals
in such matters, contingent upon the receipt of an
20
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
undertaking by the individuals to repay all expenses if it is
ultimately determined that they did not act in good faith and in
a manner they believed to be in, or not opposed to, the best
interests of the corporation. Like many Delaware companies,
WMIs charter and bylaws require indemnification and
advancement of expenses if these standards have been met.
Additionally, the charter and bylaw documents of certain of
WMIs subsidiaries, including WM Holdings, include
similar indemnification provisions, and some subsidiaries,
including WM Holdings, entered into separate
indemnification agreements with their officers and directors
that provide for even greater rights and protections for the
individuals. The Company has in the past, and may in the future,
incur substantial expenses in connection with the fulfillment of
its advancement of costs and indemnification obligations. The
Companys obligations to indemnify and advance expenses
will continue after individuals leave the Company for claims
related to actions that occurred before their departure from the
Company.
We are involved in routine civil litigation and governmental
proceedings, including litigation involving former employees and
competitors arising in the ordinary course of our business. We
do not believe that any such matters will ultimately have a
material adverse impact on our consolidated financial statements.
Tax matters We are currently under audit by
the IRS and from time to time are audited by other taxing
authorities. We fully cooperate with all audits, but defend our
positions vigorously. Our audits are in various stages of
completion. During the second quarter of 2005, we concluded the
appeals phase of IRS audits for the years 1997 through 2000. The
current period financial statement impact of concluding these
audits is discussed in Note 4. In addition, during the
fourth quarter of 2004, we concluded an IRS audit for 2001. We
are currently in the examination phase of the IRS audit for the
years 2002 and 2003. This audit should be completed within the
next 12 to 18 months. To provide for potential tax
exposures, we maintain an allowance for tax contingencies, the
balance of which management believes is adequate. Results of
audit assessments by taxing authorities could have a material
effect on our quarterly or annual cash flows as audits are
completed, although we do not believe that current tax audit
matters will have a material adverse impact on our results of
operations.
Capitalized software costs We are currently
assessing our options with respect to the implementation of a
revenue management system with an accumulated cost basis at
June 30, 2005 of approximately $80 million. There are
certain reasonably possible implementation alternatives that
could result in a significant impairment of this asset. We
currently expect to conclude our assessment of the
implementation approach for a revenue management system during
the second half of 2005.
|
|
9. |
Segment and Related Information |
We manage and evaluate our operations primarily through our
Eastern, Midwest, Southern, Western, Canadian, Wheelabrator and
Recycling Groups. These seven operating Groups are presented
below as our reportable segments. These reportable segments,
when combined with certain other operations not managed through
the seven operating Groups, comprise our North American Solid
Waste, or NASW, operations. NASW, our core business, provides
integrated waste management services consisting of collection,
disposal (solid waste and hazardous waste landfills), transfer,
waste-to-energy facilities and independent power production
plants that are managed by Wheelabrator, recycling services and
other services to commercial, industrial, municipal and
residential customers throughout the United States and in Puerto
Rico and Canada. The operations not managed through our seven
operating Groups are presented herein as Other NASW.
Early in the third quarter of 2004, we implemented a market
realignment that consisted of moving our Ohio operations to the
Midwest Group and our Kentucky operations to the Southern Group,
both of which were previously in the Eastern Group. As a result
of the realignment, we have reclassified the operating results
of the Ohio and Kentucky Market Areas in the following tables to
provide segment financial information that appropriately
reflects our current approach to managing operations.
21
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized financial information concerning our reportable
segments for the three and six months ended June 30 is
shown in the following tables (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Intercompany | |
|
Net | |
|
|
|
|
Operating | |
|
Operating | |
|
Operating | |
|
Income from | |
Three Months Ended: |
|
Revenues | |
|
Revenues(c) | |
|
Revenues(d) | |
|
Operations(e),(f) | |
|
|
| |
|
| |
|
| |
|
| |
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
|
|
$ |
172 |
|
|
$ |
(15 |
) |
|
$ |
157 |
|
|
$ |
15 |
|
Eastern
|
|
|
945 |
|
|
|
(211 |
) |
|
|
734 |
|
|
|
67 |
|
Midwest
|
|
|
711 |
|
|
|
(133 |
) |
|
|
578 |
|
|
|
104 |
|
Southern
|
|
|
888 |
|
|
|
(142 |
) |
|
|
746 |
|
|
|
186 |
|
Western
|
|
|
723 |
|
|
|
(101 |
) |
|
|
622 |
|
|
|
122 |
|
Wheelabrator
|
|
|
214 |
|
|
|
(15 |
) |
|
|
199 |
|
|
|
69 |
|
Recycling
|
|
|
211 |
|
|
|
(8 |
) |
|
|
203 |
|
|
|
6 |
|
Other NASW(a)
|
|
|
73 |
|
|
|
(23 |
) |
|
|
50 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NASW
|
|
|
3,937 |
|
|
|
(648 |
) |
|
|
3,289 |
|
|
|
562 |
|
Corporate and Other(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,937 |
|
|
$ |
(648 |
) |
|
$ |
3,289 |
|
|
$ |
463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
|
|
$ |
157 |
|
|
$ |
(16 |
) |
|
$ |
141 |
|
|
$ |
19 |
|
Eastern
|
|
|
928 |
|
|
|
(205 |
) |
|
|
723 |
|
|
|
91 |
|
Midwest
|
|
|
700 |
|
|
|
(137 |
) |
|
|
563 |
|
|
|
95 |
|
Southern
|
|
|
838 |
|
|
|
(131 |
) |
|
|
707 |
|
|
|
162 |
|
Western
|
|
|
676 |
|
|
|
(90 |
) |
|
|
586 |
|
|
|
91 |
|
Wheelabrator
|
|
|
211 |
|
|
|
(14 |
) |
|
|
197 |
|
|
|
81 |
|
Recycling
|
|
|
189 |
|
|
|
(5 |
) |
|
|
184 |
|
|
|
12 |
|
Other NASW(a)
|
|
|
56 |
|
|
|
(19 |
) |
|
|
37 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NASW
|
|
|
3,755 |
|
|
|
(617 |
) |
|
|
3,138 |
|
|
|
544 |
|
Corporate and Other(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,755 |
|
|
$ |
(617 |
) |
|
$ |
3,138 |
|
|
$ |
442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Intercompany | |
|
Net | |
|
|
Six Months |
|
Operating | |
|
Operating | |
|
Operating | |
|
Income from | |
Ended: |
|
Revenues | |
|
Revenues(c) | |
|
Revenues(d) | |
|
Operations(e),(f) | |
|
|
| |
|
| |
|
| |
|
| |
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
|
|
$ |
325 |
|
|
$ |
(28 |
) |
|
$ |
297 |
|
|
$ |
67 |
|
Eastern
|
|
|
1,757 |
|
|
|
(378 |
) |
|
|
1,379 |
|
|
|
128 |
|
Midwest
|
|
|
1,340 |
|
|
|
(246 |
) |
|
|
1,094 |
|
|
|
183 |
|
Southern
|
|
|
1,749 |
|
|
|
(276 |
) |
|
|
1,473 |
|
|
|
355 |
|
Western
|
|
|
1,403 |
|
|
|
(200 |
) |
|
|
1,203 |
|
|
|
212 |
|
Wheelabrator
|
|
|
416 |
|
|
|
(31 |
) |
|
|
385 |
|
|
|
124 |
|
Recycling
|
|
|
416 |
|
|
|
(17 |
) |
|
|
399 |
|
|
|
8 |
|
Other NASW(a)
|
|
|
140 |
|
|
|
(43 |
) |
|
|
97 |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NASW
|
|
|
7,546 |
|
|
|
(1,219 |
) |
|
|
6,327 |
|
|
|
1,057 |
|
Corporate and Other(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,546 |
|
|
$ |
(1,219 |
) |
|
$ |
6,327 |
|
|
$ |
829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
|
|
$ |
298 |
|
|
$ |
(30 |
) |
|
$ |
268 |
|
|
$ |
30 |
|
Eastern
|
|
|
1,738 |
|
|
|
(372 |
) |
|
|
1,366 |
|
|
|
153 |
|
Midwest
|
|
|
1,313 |
|
|
|
(249 |
) |
|
|
1,064 |
|
|
|
161 |
|
Southern
|
|
|
1,654 |
|
|
|
(259 |
) |
|
|
1,395 |
|
|
|
325 |
|
Western
|
|
|
1,315 |
|
|
|
(176 |
) |
|
|
1,139 |
|
|
|
183 |
|
Wheelabrator
|
|
|
407 |
|
|
|
(28 |
) |
|
|
379 |
|
|
|
126 |
|
Recycling
|
|
|
361 |
|
|
|
(10 |
) |
|
|
351 |
|
|
|
17 |
|
Other NASW(a)
|
|
|
111 |
|
|
|
(39 |
) |
|
|
72 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NASW
|
|
|
7,197 |
|
|
|
(1,163 |
) |
|
|
6,034 |
|
|
|
983 |
|
Corporate and Other(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,197 |
|
|
$ |
(1,163 |
) |
|
$ |
6,034 |
|
|
$ |
786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a) |
Other NASW revenues are generally generated from services
provided throughout our operating Groups for in-plant services,
methane gas recovery and certain third party sub-contract and
administration revenues managed by our National Accounts and
Upstream organizations. Other NASW operating results reflect the
combined impact of (i) the services described above;
(ii) non-operating entities that provide financial
assurance and self-insurance support for the operating Groups or
financing for our Canadian Group; and (iii) certain
quarter-end adjustments related to the reportable segments that
are not included in the measure of segment profit or loss used
to assess their performance for the periods disclosed. |
|
|
b) |
Corporate operating results reflect the costs incurred for
various support services that are not allocated to our seven
operating Groups. These support services include, among other
things, treasury, legal, information technology, tax, insurance,
centralized service center processes, other administrative
functions and the maintenance of our closed landfills. Income
from operations for Corporate and Other also
includes costs associated with (i) our long-term incentive
program; and (ii) managing our Non-NASW divested
operations, which primarily includes administrative expenses and
the impact of revisions to our estimated obligations. |
|
|
c) |
Intercompany operating revenues reflect each segments
total intercompany sales, including intercompany sales within a
segment and between segments. Transactions within and between
segments are generally made on a basis intended to reflect the
market value of the service. |
|
|
d) |
Our operating revenues tend to be somewhat higher in the summer
months, primarily due to the higher volume of construction and
demolition waste. The volumes of industrial and residential
waste in certain regions also tend to increase during the summer
months. Additionally, certain destructive weather conditions,
such as the hurricanes experienced during the third quarter of
2004, actually increase our revenues in the areas affected,
although these revenues are often low margin due to high
start-up costs and other special circumstances related to
disaster clean-up. Our second and third quarter revenues and
results of operations typically reflect these seasonal trends. |
23
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
e) |
The operating results of our reportable segments generally
reflect the impact the various lines of business and markets in
which we operate can have on the Companys consolidated
operating results. The income from operations provided by our
five geographic segments is generally indicative of the margins
provided by our collection, landfill and transfer businesses,
although these groups do provide recycling and other services
that can affect these trends. The operating margins provided by
our Wheelabrator segment (waste-to-energy facilities) have
historically been higher than the margins provided by our base
business generally due to the combined impact of long-term
disposal and energy contracts and the disposal demands of the
region in which our facilities are concentrated. Income from
operations provided by our Recycling segment generally reflects
operating margins typical of the recycling industry, which tend
to be significantly lower than those provided by our base
business. |
|
|
|
|
f) |
For those items included in the determination of income from
operations, the accounting policies of our segments are
generally the same as those described in the summary of
significant accounting policies included in our
December 31, 2004 Form 10-K. |
The table below shows the total revenues contributed by our
principal lines of business (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Collection
|
|
$ |
2,168 |
|
|
$ |
2,059 |
|
|
$ |
4,225 |
|
|
$ |
4,023 |
|
Landfill
|
|
|
791 |
|
|
|
773 |
|
|
|
1,467 |
|
|
|
1,437 |
|
Transfer
|
|
|
463 |
|
|
|
441 |
|
|
|
850 |
|
|
|
810 |
|
Wheelabrator
|
|
|
214 |
|
|
|
211 |
|
|
|
416 |
|
|
|
407 |
|
Recycling and other(a)
|
|
|
301 |
|
|
|
271 |
|
|
|
588 |
|
|
|
520 |
|
Intercompany(b)
|
|
|
(648 |
) |
|
|
(617 |
) |
|
|
(1,219 |
) |
|
|
(1,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$ |
3,289 |
|
|
$ |
3,138 |
|
|
$ |
6,327 |
|
|
$ |
6,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a) |
In addition to the revenue generated by our Recycling Group, we
have included revenues generated within our five geographic
operating Groups derived from recycling, methane gas operations
and Port-O-Let® services in the recycling and
other line-of-business. |
|
|
b) |
Intercompany revenues between lines of business are eliminated
within the Condensed Consolidated Financial Statements included
herein. |
|
|
10. |
Assets Impairments and Unusual Items |
The following table summarizes the major components of
Asset impairments and unusual items for the three
and six months ended June 30, 2005 and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Asset impairments
|
|
$ |
35 |
|
|
$ |
5 |
|
|
$ |
37 |
|
|
$ |
5 |
|
Net gains on divestitures
|
|
|
(32 |
) |
|
|
(2 |
) |
|
|
(71 |
) |
|
|
(9 |
) |
Other
|
|
|
(9 |
) |
|
|
(12 |
) |
|
|
5 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6 |
) |
|
$ |
(9 |
) |
|
$ |
(29 |
) |
|
$ |
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant transactions and events resulting in asset
impairments, net gains on divestitures and other financial
statement impacts within Asset impairments and unusual
items in our Condensed Consolidated Statements of
Operations during the three and six months ended June 30,
2005 and 2004 are discussed below.
Asset impairments During the second quarter
of 2005, we recorded a $35 million charge for the
impairment of the Pottstown Landfill located in West Pottsgrove
Township, Pennsylvania. We determined that an impairment was
necessary after, on May 18, 2005, the Pennsylvania
Environmental Hearing Board upheld a denial by the Pennsylvania
Department of Environmental Protection of a permit application
for a vertical expansion at the landfill. After the denial was
upheld, the Company reviewed the options available at the
Pottstown Landfill and the likelihood of the possible outcomes
of those options. After such evaluation and considering the
length of time required for the appeal process and the permit
application review, we decided
24
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
not to pursue an appeal of the permit denial. This decision was
primarily due to the expected impact of the permitting delays,
which would hinder our ability to fully utilize the expansion
airspace before the landfills required closure in 2010. We
plan to continue to operate the Pottstown Landfill using
existing permitted airspace through the landfills current
permit expiration date of October 2005. The Pottstown Landfill
has not been a significant contributor to our recent earnings
nor do we expect the expansion denial or the resulting
impairment to have a material adverse effect on our future
results of operations or cash flows.
Net gains on divestitures During the first
quarter of 2005 we recognized a $39 million gain as a
result of the divestiture of a landfill in Ontario, Canada,
which was required as a result of a Divestiture Order from the
Canadian Competition Bureau. During the second quarter of 2005
we recognized $32 million in gains as a result of the
divestiture of certain operations in our Western and Southern
groups. The divestiture of operations during the second quarter
of 2005 was part of our plan to review under-performing or
non-strategic operations and to either improve their performance
or dispose of the operations.
Total proceeds from divestitures completed during the six months
ended June 30, 2005 were $144 million, of which
$112 million was received in cash, $23 million was in
the form of a note receivable and $9 million was in the
form of non-monetary assets. We do not believe that these
divestitures are material either individually or in the
aggregate and we do not expect these divestitures to materially
affect our consolidated financial position or future results of
operations or cash flows.
In the first quarter of 2004, we divested certain Port-O-Let
operations for a gain of $8 million.
Other In February 2005, we recognized a
charge of approximately $16 million for the impact of a
litigation settlement reached with a group of stockholders that
opted not to participate in the settlement of the securities
class action lawsuit against us related to 1998 and 1999
activity. This charge was partially offset by the recognition of
a $9 million benefit recorded during the three months ended
June 30, 2005 for adjustments to our estimated obligations
and receivables for non-solid waste operations divested in 1999
and 2000.
During the second quarter of 2004, we recognized a
$12 million benefit for adjustments to our estimated
obligations associated with non-solid waste services, which were
divested in 1999 and 2000.
|
|
11. |
Condensed Consolidating Financial Statements |
WM Holdings has fully and unconditionally guaranteed
WMIs senior indebtedness. WMI has fully and
unconditionally guaranteed all of WM Holdings senior
indebtedness and its 5.75% convertible subordinated notes
that matured and were repaid in January 2005. None of WMIs
other subsidiaries have guaranteed any of WMIs or
WM Holdings debt. As a result of these guarantee
arrangements, we are required to present the following condensed
consolidating financial information (in millions):
25
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
June 30, 2005
(Unaudited)
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WM | |
|
Non-Guarantor | |
|
|
|
|
|
|
WMI | |
|
Holdings | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
391 |
|
|
$ |
|
|
|
$ |
90 |
|
|
$ |
|
|
|
$ |
481 |
|
|
Other current assets
|
|
|
35 |
|
|
|
|
|
|
|
2,311 |
|
|
|
|
|
|
|
2,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
426 |
|
|
|
|
|
|
|
2,401 |
|
|
|
|
|
|
|
2,827 |
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
11,309 |
|
|
|
|
|
|
|
11,309 |
|
Investments in and advances to affiliates
|
|
|
10,144 |
|
|
|
7,669 |
|
|
|
|
|
|
|
(17,813 |
) |
|
|
|
|
Other assets
|
|
|
41 |
|
|
|
11 |
|
|
|
6,506 |
|
|
|
|
|
|
|
6,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
10,611 |
|
|
$ |
7,680 |
|
|
$ |
20,216 |
|
|
$ |
(17,813 |
) |
|
$ |
20,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$ |
|
|
|
$ |
|
|
|
$ |
215 |
|
|
$ |
|
|
|
$ |
215 |
|
|
Accounts payable and other accrued liabilities
|
|
|
85 |
|
|
|
25 |
|
|
|
2,428 |
|
|
|
|
|
|
|
2,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85 |
|
|
|
25 |
|
|
|
2,643 |
|
|
|
|
|
|
|
2,753 |
|
Long-term debt, less current portion
|
|
|
4,257 |
|
|
|
1,199 |
|
|
|
2,760 |
|
|
|
|
|
|
|
8,216 |
|
Due to affiliates
|
|
|
|
|
|
|
|
|
|
|
4,231 |
|
|
|
(4,231 |
) |
|
|
|
|
Other liabilities
|
|
|
72 |
|
|
|
5 |
|
|
|
3,157 |
|
|
|
|
|
|
|
3,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,414 |
|
|
|
1,229 |
|
|
|
12,791 |
|
|
|
(4,231 |
) |
|
|
14,203 |
|
Minority interest in subsidiaries and variable interest entities
|
|
|
|
|
|
|
|
|
|
|
294 |
|
|
|
|
|
|
|
294 |
|
Stockholders equity
|
|
|
6,197 |
|
|
|
6,451 |
|
|
|
7,131 |
|
|
|
(13,582 |
) |
|
|
6,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
10,611 |
|
|
$ |
7,680 |
|
|
$ |
20,216 |
|
|
$ |
(17,813 |
) |
|
$ |
20,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WM | |
|
Non-Guarantor | |
|
|
|
|
|
|
WMI | |
|
Holdings | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
357 |
|
|
$ |
|
|
|
$ |
67 |
|
|
$ |
|
|
|
$ |
424 |
|
|
Other current assets
|
|
|
25 |
|
|
|
1 |
|
|
|
2,369 |
|
|
|
|
|
|
|
2,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
382 |
|
|
|
1 |
|
|
|
2,436 |
|
|
|
|
|
|
|
2,819 |
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
11,476 |
|
|
|
|
|
|
|
11,476 |
|
Investments in and advances to affiliates
|
|
|
9,962 |
|
|
|
7,051 |
|
|
|
|
|
|
|
(17,013 |
) |
|
|
|
|
Other assets
|
|
|
44 |
|
|
|
12 |
|
|
|
6,554 |
|
|
|
|
|
|
|
6,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
10,388 |
|
|
$ |
7,064 |
|
|
$ |
20,466 |
|
|
$ |
(17,013 |
) |
|
$ |
20,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$ |
|
|
|
$ |
138 |
|
|
$ |
246 |
|
|
$ |
|
|
|
$ |
384 |
|
|
Accounts payable and other accrued liabilities
|
|
|
73 |
|
|
|
27 |
|
|
|
2,721 |
|
|
|
|
|
|
|
2,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
165 |
|
|
|
2,967 |
|
|
|
|
|
|
|
3,205 |
|
Long-term debt, less current portion
|
|
|
4,259 |
|
|
|
1,202 |
|
|
|
2,721 |
|
|
|
|
|
|
|
8,182 |
|
Due to affiliates
|
|
|
|
|
|
|
|
|
|
|
4,954 |
|
|
|
(4,954 |
) |
|
|
|
|
Other liabilities
|
|
|
85 |
|
|
|
6 |
|
|
|
3,174 |
|
|
|
|
|
|
|
3,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,417 |
|
|
|
1,373 |
|
|
|
13,816 |
|
|
|
(4,954 |
) |
|
|
14,652 |
|
Minority interest in subsidiaries and variable interest entities
|
|
|
|
|
|
|
|
|
|
|
282 |
|
|
|
|
|
|
|
282 |
|
Stockholders equity
|
|
|
5,971 |
|
|
|
5,691 |
|
|
|
6,368 |
|
|
|
(12,059 |
) |
|
|
5,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
10,388 |
|
|
$ |
7,064 |
|
|
$ |
20,466 |
|
|
$ |
(17,013 |
) |
|
$ |
20,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2005
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WM | |
|
Non-Guarantor | |
|
|
|
|
|
|
WMI | |
|
Holdings | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Operating revenues
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,289 |
|
|
$ |
|
|
|
$ |
3,289 |
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
2,826 |
|
|
|
|
|
|
|
2,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
463 |
|
|
|
|
|
|
|
463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(67 |
) |
|
|
(21 |
) |
|
|
(34 |
) |
|
|
|
|
|
|
(122 |
) |
|
Equity in subsidiaries, net of taxes
|
|
|
569 |
|
|
|
582 |
|
|
|
|
|
|
|
(1,151 |
) |
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(11 |
) |
|
Equity in net losses of unconsolidated entities and other, net
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502 |
|
|
|
561 |
|
|
|
(70 |
) |
|
|
(1,151 |
) |
|
|
(158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
502 |
|
|
|
561 |
|
|
|
393 |
|
|
|
(1,151 |
) |
|
|
305 |
|
Benefit from income taxes
|
|
|
(25 |
) |
|
|
(8 |
) |
|
|
(189 |
) |
|
|
|
|
|
|
(222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
527 |
|
|
$ |
569 |
|
|
$ |
582 |
|
|
$ |
(1,151 |
) |
|
$ |
527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2004
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WM | |
|
Non-Guarantor | |
|
|
|
|
|
|
WMI | |
|
Holdings | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Operating revenues
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,138 |
|
|
$ |
|
|
|
$ |
3,138 |
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
2,696 |
|
|
|
|
|
|
|
2,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
442 |
|
|
|
|
|
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(66 |
) |
|
|
(23 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
(112 |
) |
|
Equity in subsidiaries, net of taxes
|
|
|
258 |
|
|
|
273 |
|
|
|
|
|
|
|
(531 |
) |
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
(9 |
) |
|
Equity in net losses of unconsolidated entities and other, net
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
|
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192 |
|
|
|
250 |
|
|
|
(56 |
) |
|
|
(531 |
) |
|
|
(145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
192 |
|
|
|
250 |
|
|
|
386 |
|
|
|
(531 |
) |
|
|
297 |
|
Provision for (benefit from) income taxes
|
|
|
(24 |
) |
|
|
(8 |
) |
|
|
113 |
|
|
|
|
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
216 |
|
|
$ |
258 |
|
|
$ |
273 |
|
|
$ |
(531 |
) |
|
$ |
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2005
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WM | |
|
Non-Guarantor | |
|
|
|
|
|
|
WMI | |
|
Holdings | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Operating revenues
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,327 |
|
|
$ |
|
|
|
$ |
6,327 |
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
5,498 |
|
|
|
|
|
|
|
5,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
829 |
|
|
|
|
|
|
|
829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(131 |
) |
|
|
(43 |
) |
|
|
(58 |
) |
|
|
|
|
|
|
(232 |
) |
|
Equity in subsidiaries, net of taxes
|
|
|
760 |
|
|
|
787 |
|
|
|
|
|
|
|
(1,547 |
) |
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
(21 |
) |
|
Equity in net losses of unconsolidated entities and other, net
|
|
|
|
|
|
|
|
|
|
|
(51 |
) |
|
|
|
|
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
629 |
|
|
|
744 |
|
|
|
(130 |
) |
|
|
(1,547 |
) |
|
|
(304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
629 |
|
|
|
744 |
|
|
|
699 |
|
|
|
(1,547 |
) |
|
|
525 |
|
Benefit from income taxes
|
|
|
(48 |
) |
|
|
(16 |
) |
|
|
(88 |
) |
|
|
|
|
|
|
(152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
677 |
|
|
$ |
760 |
|
|
$ |
787 |
|
|
$ |
(1,547 |
) |
|
$ |
677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2004
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WM | |
|
Non-Guarantor | |
|
|
|
|
|
|
WMI | |
|
Holdings | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Operating revenues
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,034 |
|
|
$ |
|
|
|
$ |
6,034 |
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
5,248 |
|
|
|
|
|
|
|
5,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
786 |
|
|
|
|
|
|
|
786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(130 |
) |
|
|
(48 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
(222 |
) |
|
Equity in subsidiaries, net of taxes
|
|
|
450 |
|
|
|
480 |
|
|
|
|
|
|
|
(930 |
) |
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
(16 |
) |
|
Equity in net losses of unconsolidated entities and other, net
|
|
|
|
|
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
320 |
|
|
|
432 |
|
|
|
(105 |
) |
|
|
(930 |
) |
|
|
(283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and cumulative effect of change in
accounting principle
|
|
|
320 |
|
|
|
432 |
|
|
|
681 |
|
|
|
(930 |
) |
|
|
503 |
|
Provision for (benefit from) income taxes
|
|
|
(48 |
) |
|
|
(18 |
) |
|
|
209 |
|
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change in accounting principle
|
|
|
368 |
|
|
|
450 |
|
|
|
472 |
|
|
|
(930 |
) |
|
|
360 |
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
368 |
|
|
$ |
450 |
|
|
$ |
480 |
|
|
$ |
(930 |
) |
|
$ |
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2005
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WM | |
|
Non-Guarantor | |
|
|
|
|
|
|
WMI | |
|
Holdings | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
677 |
|
|
$ |
760 |
|
|
$ |
787 |
|
|
$ |
(1,547 |
) |
|
$ |
677 |
|
|
Equity in earnings of subsidiaries, net of taxes
|
|
|
(760 |
) |
|
|
(787 |
) |
|
|
|
|
|
|
1,547 |
|
|
|
|
|
|
Other adjustments and charges
|
|
|
(8 |
) |
|
|
(5 |
) |
|
|
439 |
|
|
|
|
|
|
|
426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(91 |
) |
|
|
(32 |
) |
|
|
1,226 |
|
|
|
|
|
|
|
1,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(91 |
) |
|
|
|
|
|
|
(91 |
) |
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
(493 |
) |
|
|
|
|
|
|
(493 |
) |
|
Proceeds from divestitures of businesses, net of cash divested,
and other sales of assets
|
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
124 |
|
|
Purchases of short-term investments
|
|
|
(200 |
) |
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
(225 |
) |
|
Proceeds from sales of short-term investments
|
|
|
186 |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
202 |
|
|
Net receipts from restricted trust and escrow accounts and other
|
|
|
|
|
|
|
|
|
|
|
190 |
|
|
|
|
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(14 |
) |
|
|
|
|
|
|
(279 |
) |
|
|
|
|
|
|
(293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New borrowings
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
|
Debt repayments
|
|
|
|
|
|
|
(138 |
) |
|
|
(96 |
) |
|
|
|
|
|
|
(234 |
) |
|
Common stock repurchases
|
|
|
(278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(278 |
) |
|
Cash dividends
|
|
|
(228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(228 |
) |
|
Exercise of common stock options and warrants
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
Minority interest distributions paid and other, net
|
|
|
|
|
|
|
|
|
|
|
(73 |
) |
|
|
|
|
|
|
(73 |
) |
|
(Increase) decrease in intercompany and investments, net
|
|
|
594 |
|
|
|
170 |
|
|
|
(764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
139 |
|
|
|
32 |
|
|
|
(925 |
) |
|
|
|
|
|
|
(754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
34 |
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
57 |
|
Cash and cash equivalents at beginning of period
|
|
|
357 |
|
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
391 |
|
|
$ |
|
|
|
$ |
90 |
|
|
$ |
|
|
|
$ |
481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Six Months Ended June 30, 2004
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WM | |
|
Non-Guarantor | |
|
|
|
|
|
|
|
|
WMI | |
|
Holdings | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
368 |
|
|
$ |
450 |
|
|
$ |
480 |
|
|
$ |
(930 |
) |
|
$ |
368 |
|
|
|
|
Equity in earnings of subsidiaries, net of taxes
|
|
|
(450 |
) |
|
|
(480 |
) |
|
|
|
|
|
|
930 |
|
|
|
|
|
|
|
|
Other adjustments and charges
|
|
|
(7 |
) |
|
|
(5 |
) |
|
|
663 |
|
|
|
|
|
|
|
651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(89 |
) |
|
|
(35 |
) |
|
|
1,143 |
|
|
|
|
|
|
|
1,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(98 |
) |
|
|
|
|
|
|
(98 |
) |
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
(526 |
) |
|
|
|
|
|
|
(526 |
) |
|
|
|
Proceeds from divestitures of businesses, net of cash divested,
and other sales of assets
|
|
|
|
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
56 |
|
|
|
|
Purchases of short-term investments
|
|
|
(910 |
) |
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
(933 |
) |
|
|
|
Proceeds from sales of short-term investments
|
|
|
748 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
768 |
|
|
|
|
Net receipts from restricted trust and escrow accounts
|
|
|
5 |
|
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(157 |
) |
|
|
|
|
|
|
(388 |
) |
|
|
|
|
|
|
(545 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New borrowings
|
|
|
346 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
348 |
|
|
|
|
Debt repayments
|
|
|
(200 |
) |
|
|
(150 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
(369 |
) |
|
|
|
Common stock repurchases
|
|
|
(108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(108 |
) |
|
|
|
Cash dividends
|
|
|
(218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(218 |
) |
|
|
|
Exercise of common stock options and warrants
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
|
Minority interest distributions paid and other
|
|
|
(1 |
) |
|
|
|
|
|
|
(70 |
) |
|
|
|
|
|
|
(71 |
) |
|
|
|
(Increase) decrease in intercompany and investments, net
|
|
|
510 |
|
|
|
185 |
|
|
|
(666 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
449 |
|
|
|
35 |
|
|
|
(753 |
) |
|
|
(29 |
) |
|
|
(298 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
(29 |
) |
|
|
174 |
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
427 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(36 |
) |
|
$ |
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. |
New Accounting Pronouncements |
|
|
|
SFAS No. 123 (revised 2004), Share Based Payment
(SFAS 123(R)) |
In December 2004, the FASB issued SFAS No. 123(R),
which amends SFAS No. 123 and supersedes APB
No. 25. SFAS No. 123(R) requires compensation
expense to be recognized for all share-based payments made to
employees based on the fair value of the award at the date of
grant, eliminating the intrinsic value alternative and narrowing
the non-compensatory exception associated with employee stock
purchase plans allowed by SFAS No. 123. Generally, the
approach to determining fair value under the original
pronouncement has not changed. However, there are revisions to
the accounting guidelines established, such as accounting for
forfeitures, that will change our accounting for stock-based
awards in the future.
The provisions of SFAS No. 123(R) provide for an
effective date of July 1, 2005 for calendar-year public
companies. However, in April 2005, the Securities and Exchange
Commission adopted a rule that amends the compliance dates for
SFAS No. 123(R), making it effective the beginning of
the first fiscal year that begins after June 15, 2005.
Based upon the guidelines established by the SECs rule, we
plan to adopt SFAS No. 123(R) on January 1, 2006.
The adoption of SFAS No. 123(R) is not expected to
materially impact our financial position. However, because we
currently account for share-based payments to our employees
using the intrinsic value method, our results of operations have
not included the recognition of compensation expense for the
issuance of stock option awards. Had we applied the fair-value
criteria established by SFAS No. 123(R) to previous
stock option grants, the impact to our results of operations
would have approximated the impact of applying
30
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 123, which was estimated to be a reduction to
net income of $10 million for the three months ended
June 30, 2005 and $24 million for the six months ended
June 30, 2005. The impact of applying
SFAS No. 123 to previous stock option grants is
further summarized in Note 7.
|
|
|
FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations
(FIN 47) |
In March 2005, the FASB issued FIN 47, which clarifies the
impact that uncertainty surrounding the timing or method of
settling an obligation should have on accounting for that
obligation under SFAS No. 143. FIN 47 is
effective December 31, 2005 for calendar year companies. We
do not expect the provisions of FIN 47 to have a material
impact on our consolidated financial statements.
On July 28, 2005, we announced that we are implementing a
plan to restructure our organization. The restructuring includes
a reduction in the number of our operating groups from seven to
six and the elimination of positions at our field and Corporate
offices.
As part of our restructuring, the Canadian group will no longer
be a separate operating and reporting group. The East, West and
Midwest groups will assume responsibility for our operations in
Canada. Additionally, this restructuring involves a reduction in
force of approximately 600 field and Corporate positions. We
believe these reductions are necessary to streamline business
decisions in the field and to reduce our costs.
As a result of implementing the restructuring, we expect to
record a pre-tax charge of between $20 million and
$30 million in the third quarter of 2005, which is
primarily attributable to employee severance and benefit costs.
Obligations for employee severance payments provided for by this
restructuring will generally not exceed one year.
Additionally, we announced that on July 25, 2005, our Board
of Directors approved a plan to divest of certain
under-performing and non-strategic operations. This divestiture
plan is a result of our previously announced review of
under-performing operations, and will consist mainly of transfer
and collection operations. Currently, we have identified assets
representing over $400 million in annual revenues to be
sold pursuant to the plan. We are continuing to evaluate our
remaining operations for additional divestiture candidates and
are evaluating the effect that these divestitures will have on
our results of operations.
31
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
When we make statements containing projections about our
accounting and finances, plans and objectives for the future,
future economic performance or when we make statements
containing any other projections or estimates about our
assumptions relating to these types of statements, we are making
forward-looking statements. These statements usually relate to
future events and anticipated revenues, earnings, cash flows or
other aspects of our operations or operating results. We make
these statements in an effort to keep stockholders and the
public informed about our business, and have based them on our
current expectations about future events. You should view such
statements with caution. These statements are not guarantees of
future performance or events. All phases of our business are
subject to uncertainties, risks and other influences, many of
which we do not control. Any of these factors, either alone or
taken together, could have a material adverse effect on us and
could change whether any forward-looking statement ultimately
turns out to be true. Additionally, we assume no obligation to
update any forward-looking statement as a result of future
events or developments. The following discussion should be read
together with the Condensed Consolidated Financial Statements
and the notes to the Condensed Consolidated Financial
Statements. Some of the risks that we face and that could affect
our business and financial statements for the remainder of 2005
and beyond include:
|
|
|
|
|
the effects competition may have on our profitability or cash
flows, including the negative impact our price increases may
have on volumes or the negative impact to our yield on base
business resulting from price roll-backs and lower than average
pricing to retain and attract customers; |
|
|
|
our inability to maintain or expand margins as volumes increase
if we are unable to control variable costs or fixed cost base
increases; |
|
|
|
increases in employee-related costs and expenses, including
health care and other employee benefits such as unemployment
insurance and workers compensation, as well as the costs
and expenses associated with attracting and retaining qualified
personnel; |
|
|
|
increases in expenses due to fuel price increases or fuel supply
shortages; |
|
|
|
the effect that fluctuating commodity prices may have on our
operating revenues and expenses; |
|
|
|
the general effects of a weak economy, including the resulting
decreases in volumes of waste generated; |
|
|
|
the impact of external factors beyond our control such as higher
interest rates and the possible inability of insurers to meet
their obligations, both of which may cause increased expenses; |
|
|
|
the effect the weather has on our quarter to quarter results, as
well as the effect of extremely harsh weather on our operations; |
|
|
|
possible changes in our estimates of site remediation
requirements, final capping, closure and post-closure
obligations, compliance and regulatory developments; |
|
|
|
the possible impact of regulations on our business, including
the cost to comply with regulatory requirements and the
potential liabilities associated with disposal operations; |
|
|
|
our ability to obtain and maintain permits needed to operate our
facilities; |
|
|
|
the effect of limitations or bans on disposal or transportation
of out-of-state waste or certain categories of waste; |
|
|
|
possible charges against earnings as a result of shut-down
operations, uncompleted development or expansion projects or
other events; |
|
|
|
the effects that trends toward requiring recycling, waste
reduction at the source and prohibiting the disposal of certain
types of wastes could have on volumes of waste going to
landfills and waste-to-energy facilities; |
|
|
|
possible diversions of managements attention and increases
in operating expenses due to efforts by labor unions to organize
our employees; |
32
|
|
|
|
|
the outcome of litigation or threatened litigation; |
|
|
|
the need for additional capital if cash flows are less than we
expect or capital expenditures are more than we expect, and the
possibility that we cannot obtain additional capital on
acceptable terms if needed; |
|
|
|
possible errors or problems upon implementation of new
information technology systems; and |
|
|
|
possible fluctuations in quarterly results of operations or
adverse impacts on our results of operations as a result of the
adoption of new accounting standards or interpretations. |
These are not the only risks that we face. There may be
additional risks that we do not presently know of or that we
currently believe are immaterial which could also impair our
business and financial position.
General
Our principal executive offices are located at 1001 Fannin
Street, Suite 4000, Houston, Texas 77002. Our telephone
number at that address is (713) 512-6200. Our website
address is http://www.wm.com. Our annual reports on
Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K are all available, free of charge, on
our website as soon as practicable after we file the reports
with the SEC. Our stock is traded on the New York Stock Exchange
under the symbol WMI.
We are the leading provider of integrated waste services in
North America. Through our subsidiaries we provide collection,
transfer, recycling and resource recovery, and disposal
services. We are also a leading developer, operator and owner of
waste-to-energy facilities in the United States. Our customers
include commercial, industrial, municipal and residential
customers, other waste management companies, electric utilities
and governmental entities.
Several aspects of our operating results for the second quarter
of 2005 reflect the revenue growth and margin improvement we
have focused on during the first half of the year. As discussed
below, internal revenue growth was strong as a result of
significant base business yield improvements as well as from
increased volumes. Additionally, excluding the effects of
Asset impairments and unusual items, income from
operations as a percent of revenue has improved at each of our
four major U.S. solid waste groups. However, the current
quarters operating results also reflect margin declines
attributable to continued increases in diesel fuel prices, an
increase in revenue from lower margin business activities and
higher maintenance and repair costs due to the timing of annual
outages at certain of our waste-to-energy facilities.
Our net income for the quarter was $527 million, an
increase of $311 million as compared with the second
quarter 2004. However, current quarter net income included the
net effect of a significant benefit from a settlement of federal
tax audits of $345 million that was partially offset by an
accrual for taxes related to our planned repatriation of certain
Canadian earnings of $34 million. Excluding these tax
matters, our net income was $216 million, or $0.38 per
diluted share, as compared with $216 million, or
$0.37 per diluted share, for the quarter ended
June 30, 2004.
Our revenues are generally higher in the second and third
quarters of our fiscal year, due primarily to increased
construction and demolition, industrial and residential waste in
the summer months. Revenues for the second quarter 2005
increased by 8.3%, or $251 million, as compared with the
first quarter of this year, due largely to the increased waste
produced in the warmer months. As compared with the same period
last year, our second quarter revenues increased by 4.8%, or
$151 million. This increase was largely attributable to
increases in our base business yield, which remains strong. For
the second quarter 2005, base business yield increased by 2.1%
as compared with the prior year period. This is the same
increase we saw last quarter, which continues, for the second
straight quarter, to be the highest base business yield increase
since late 2001. The increase in yield was due mostly to our
collection operations, where we saw improvements in all of our
geographic operating groups. Our volume-related revenue growth
was 1.2% in the quarter as compared with the prior year period,
and is mainly due to a significant increase in recycling
revenues, which have largely been
33
provided by several new brokerage accounts. Also included in
volume-related revenue growth for the current period is revenue
generated from (i) our construction of an integrated waste
facility on behalf of a municipality in Canada and (ii) the
sale of parts and supplies to third parties needed for the
continued operation of landfill gas-to-energy plants that we
operate on their behalf. While collection and disposal volumes
were strong in certain regions, overall, these businesses
reflected only modest volume growth.
Our operating margins for the quarter were essentially flat as
compared with the same quarter last year on an increase of
$151 million in revenues. We were able to achieve a slight
decrease in our selling, general and administrative expenses
both in dollars and as a percentage of revenue by reducing our
professional fees. However, we believe our ability to increase
our operating margins was negatively affected by the following:
|
|
|
(i) increases in both direct and indirect fuel costs that
more than offset the benefit from our fuel surcharge program; |
|
|
(ii) substantial increases in volumes from our recycling
business, which is a lower margin business than our base
business; |
|
|
(iii) increased repair and maintenance costs at our
Wheelabrator facilities that are normally incurred in the first
quarter of each year; and |
|
|
(iv) decreased operating results and margins provided by
our Canadian Group due to costs associated with a labor strike
in Toronto, the low margins generated from revenues provided by
construction of an integrated waste facility on behalf of a
third party and loss of revenue and operating margin due to the
sale of the Ridge Landfill in the first quarter 2005. |
Finally, we generated $314 million of free cash flow for
the quarter and $734 million for the six-month period, an
increase of over 30% in both periods as compared with 2004. Free
cash flow is not a measure of financial performance under
generally accepted accounting principles (GAAP) and
is not intended to replace the Condensed Consolidated Statements
of Cash Flows that were prepared in accordance with GAAP. We
include our free cash flow in our disclosures because we use
this measure to manage our business and we believe that it is an
important measure of our liquidity and operating results, as it
is indicative of our ability to pay our quarterly dividends,
repurchase stock and execute our acquisition program. Our free
cash flow for the three and six-month periods ended
June 30, 2005 and June 30, 2004 is shown in the table
below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net cash provided by operating activities
|
|
$ |
595 |
|
|
$ |
549 |
|
|
$ |
1,103 |
|
|
$ |
1,019 |
|
Capital expenditures
|
|
|
(308 |
) |
|
|
(345 |
) |
|
|
(493 |
) |
|
|
(526 |
) |
Proceeds from divestitures of businesses, net of cash divested,
and other sales of assets
|
|
|
27 |
|
|
|
34 |
|
|
|
124 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$ |
314 |
|
|
$ |
238 |
|
|
$ |
734 |
|
|
$ |
549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of Presentation of Consolidated and Segment
Financial Information |
As discussed in Notes 1 and 9 to the Condensed Consolidated
Financial Statements, the following reclassifications have been
made in our 2004 financial statements in order to conform to the
current year presentation:
Cash balances During the first quarter of
2004, we began making investments in auction rate securities and
variable rate demand notes, which are debt instruments with
long-term scheduled maturities and periodic interest rate reset
dates. Through December 31, 2004, we included these
investments in Cash and cash equivalents. As a
result of recent guidance associated with these types of
securities, we determined that these investments were more
appropriately classified as short-term investments, which are a
component of Prepaid expenses and other assets in
our Condensed Consolidated Balance Sheets. Accordingly, in our
accompanying Condensed Consolidated Financial Statements we have
(i) decreased our Cash and cash equivalents and
increased our Prepaid expenses and other assets by
$19 million at December 31, 2004 and $162 million
at
34
June 30, 2004; and (ii) reflected the gross purchases
and sales of these investments within Cash flows from
investing activities in our Statements of Cash Flows.
Additionally, in our 2004 Condensed Consolidated Statement of
Cash Flows, relatively insignificant purchases and sales of
other short-term investments were included on a net basis within
Cash flows from investing activities
Other. This additional activity has also been reflected
within purchases and sales of short-term investments in the
accompanying Condensed Consolidated Statements of Cash Flows.
Segments Early in the third quarter of 2004,
we implemented a market realignment that consisted of moving our
Ohio operations to the Midwest Group and our Kentucky operations
to the Southern Group, both of which were previously in the
Eastern Group. We believe that the realignment will provide
benefits to each of the operating groups affected. The Ohio
Market Area faces many of the same issues as other industrial
regions in the Midwest Group and the Kentucky Market Areas
rural characteristics make it similar to other markets in the
Southern Group. By balancing the revenues between each of the
Groups, we will enable the Eastern Group leadership team to
focus on the challenges associated with the Northeast corridor.
As a result of the realignment, we have reclassified the
operating results of the Ohio and Kentucky Market Areas for all
periods presented to provide segment financial information that
appropriately reflects our approach to managing operations.
Certain other reclassifications have also been made in the
accompanying financial statements to conform prior year
information with the current period presentation. The
supplementary financial information included in this section has
been updated to reflect these changes.
|
|
|
Critical Accounting Estimates and Assumptions |
In preparing our financial statements, we make several estimates
and assumptions that affect the accounting for and recognition
of our assets, liabilities, stockholders equity, revenues
and expenses. We must make these estimates and assumptions
because certain of the information that we use is dependent on
future events, cannot be calculated with a high degree of
precision from available data or is simply not capable of being
readily calculated based on generally accepted methodologies. In
some cases, these estimates are particularly difficult to
determine and we must exercise significant judgment. The most
difficult, subjective and complex estimates and the assumptions
that deal with the greatest amount of uncertainty relate to our
accounting for landfills, environmental remediation liabilities
and asset impairments, as described in Item 7 of our Annual
Report on Form 10-K for the year ended December 31,
2004.
35
Results of Operations
The following table presents, for the periods indicated, the
period-to-period change in dollars (in millions) and percentages
for the respective Condensed Consolidated Statement of
Operations line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period to Period | |
|
Period to Period | |
|
|
Change For the | |
|
Change For the Six | |
|
|
Three Months | |
|
Months Ended | |
|
|
Ended June 30, | |
|
June 30, | |
|
|
2005 and 2004 | |
|
2005 and 2004 | |
|
|
| |
|
| |
Operating revenues
|
|
$ |
151 |
|
|
|
4.8 |
% |
|
$ |
293 |
|
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (exclusive of depreciation and amortization shown
below)
|
|
|
133 |
|
|
|
6.5 |
|
|
|
257 |
|
|
|
6.5 |
|
|
Selling, general and administrative
|
|
|
(4 |
) |
|
|
(1.3 |
) |
|
|
10 |
|
|
|
1.6 |
|
|
Depreciation and amortization
|
|
|
(2 |
) |
|
|
(0.6 |
) |
|
|
(6 |
) |
|
|
(0.9 |
) |
|
Asset impairments and unusual items
|
|
|
3 |
|
|
|
* |
|
|
|
(11 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130 |
|
|
|
4.8 |
|
|
|
250 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
21 |
|
|
|
4.8 |
|
|
|
43 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(10 |
) |
|
|
(8.9 |
) |
|
|
(10 |
) |
|
|
(4.5 |
) |
|
Equity in net losses of unconsolidated entities
|
|
|
(2 |
) |
|
|
(8.3 |
) |
|
|
(9 |
) |
|
|
(20.9 |
) |
|
Minority interest
|
|
|
(2 |
) |
|
|
(22.2 |
) |
|
|
(5 |
) |
|
|
(31.3 |
) |
|
Other, net
|
|
|
1 |
|
|
|
* |
|
|
|
3 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
(9.0 |
) |
|
|
(21 |
) |
|
|
(7.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and cumulative effect of change in
accounting principle
|
|
$ |
8 |
|
|
|
2.7 |
% |
|
$ |
22 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Percentage change is not meaningful. |
36
The following table presents, for the periods indicated, the
percentage relationship that the respective Condensed
Consolidated Statement of Operations line items bear to
operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Operating revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (exclusive of depreciation and amortization shown
below)
|
|
|
66.1 |
|
|
|
65.0 |
|
|
|
66.7 |
|
|
|
65.6 |
|
|
Selling, general and administrative
|
|
|
9.5 |
|
|
|
10.1 |
|
|
|
10.2 |
|
|
|
10.5 |
|
|
Depreciation and amortization
|
|
|
10.5 |
|
|
|
11.1 |
|
|
|
10.5 |
|
|
|
11.2 |
|
|
Asset impairments and unusual items
|
|
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
(0.5 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85.9 |
|
|
|
85.9 |
|
|
|
86.9 |
|
|
|
87.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14.1 |
|
|
|
14.1 |
|
|
|
13.1 |
|
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(3.7 |
) |
|
|
(3.5 |
) |
|
|
(3.7 |
) |
|
|
(3.7 |
) |
|
Equity in net losses of unconsolidated entities
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
(0.7 |
) |
|
Minority interest
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.8 |
) |
|
|
(4.6 |
) |
|
|
(4.8 |
) |
|
|
(4.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and cumulative effect of change in
accounting principle
|
|
|
9.3 |
% |
|
|
9.5 |
% |
|
|
8.3 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our operating revenues for the three and six months ended
June 30, 2005 were $3.3 billion and $6.3 billion
respectively, compared with $3.1 billion and
$6.0 billion for the three and six months ended
June 30, 2004, respectively. We manage and evaluate our
operations primarily through our Eastern, Midwest, Southern,
Western, Canadian, Wheelabrator and Recycling Groups. These
seven operating Groups are our reportable segments. Shown below
(in millions) is the contribution to revenues during each period
provided by our seven operating Groups and our Other North
American Solid Waste services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Canadian
|
|
$ |
172 |
|
|
$ |
157 |
|
|
$ |
325 |
|
|
$ |
298 |
|
Eastern
|
|
|
945 |
|
|
|
928 |
|
|
|
1,757 |
|
|
|
1,738 |
|
Midwest
|
|
|
711 |
|
|
|
700 |
|
|
|
1,340 |
|
|
|
1,313 |
|
Southern
|
|
|
888 |
|
|
|
838 |
|
|
|
1,749 |
|
|
|
1,654 |
|
Western
|
|
|
723 |
|
|
|
676 |
|
|
|
1,403 |
|
|
|
1,315 |
|
Wheelabrator
|
|
|
214 |
|
|
|
211 |
|
|
|
416 |
|
|
|
407 |
|
Recycling
|
|
|
211 |
|
|
|
189 |
|
|
|
416 |
|
|
|
361 |
|
Other NASW
|
|
|
73 |
|
|
|
56 |
|
|
|
140 |
|
|
|
111 |
|
Intercompany
|
|
|
(648 |
) |
|
|
(617 |
) |
|
|
(1,219 |
) |
|
|
(1,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NASW
|
|
$ |
3,289 |
|
|
$ |
3,138 |
|
|
$ |
6,327 |
|
|
$ |
6,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our North American Solid Waste, or NASW, operating revenues
generally come from fees charged for our collection, disposal,
transfer and recycling services. Some of the fees we charge to
our customers for collection services are billed in advance; a
liability for future service is recorded when we bill the
customer and operating revenues are recognized as services are
actually provided. Revenues from our disposal operations consist
of tipping fees charged to third parties generally based on the
volume and type of waste being disposed of at our disposal
facilities and are normally billed monthly or semi-monthly. Fees
charged at transfer stations are generally based on the volume
of waste deposited, taking into account our cost of loading,
transporting and
37
disposing of the solid waste at a disposal site, and are
normally billed monthly. Recycling revenue, which is generated
by our Recycling Group as well as our five geographic operating
Groups, generally consists of the sale of recyclable commodities
to third parties and tipping fees. Intercompany revenues between
our operations have been eliminated in the consolidated
financial statements. The mix of operating revenues from our
different services is reflected in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Collection
|
|
$ |
2,168 |
|
|
$ |
2,059 |
|
|
$ |
4,225 |
|
|
$ |
4,023 |
|
Landfill
|
|
|
791 |
|
|
|
773 |
|
|
|
1,467 |
|
|
|
1,437 |
|
Transfer
|
|
|
463 |
|
|
|
441 |
|
|
|
850 |
|
|
|
810 |
|
Wheelabrator
|
|
|
214 |
|
|
|
211 |
|
|
|
416 |
|
|
|
407 |
|
Recycling and other
|
|
|
301 |
|
|
|
271 |
|
|
|
588 |
|
|
|
520 |
|
Intercompany
|
|
|
(648 |
) |
|
|
(617 |
) |
|
|
(1,219 |
) |
|
|
(1,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NASW
|
|
$ |
3,289 |
|
|
$ |
3,138 |
|
|
$ |
6,327 |
|
|
$ |
6,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides details associated with the
period-to-period change in NASW revenues (dollars in millions)
along with an explanation of the significant components of the
current period changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period to Period | |
|
Period to Period | |
|
|
Change For the | |
|
Change For the | |
|
|
Three Months | |
|
Six Months | |
|
|
Ended June 30, | |
|
Ended June 30, | |
|
|
2005 and 2004 | |
|
2005 and 2004 | |
|
|
| |
|
| |
Average yield:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base business
|
|
$ |
65 |
|
|
|
2.1 |
% |
|
$ |
125 |
|
|
|
2.1 |
% |
|
Commodity
|
|
|
(9 |
) |
|
|
(0.3 |
) |
|
|
(6 |
) |
|
|
(0.1 |
) |
|
Electricity
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
Fuel surcharge and fees
|
|
|
33 |
|
|
|
1.0 |
|
|
|
56 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
89 |
|
|
|
2.8 |
|
|
|
176 |
|
|
|
2.9 |
|
Volume
|
|
|
36 |
|
|
|
1.2 |
|
|
|
64 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal growth
|
|
|
125 |
|
|
|
4.0 |
|
|
|
240 |
|
|
|
4.0 |
|
Acquisitions
|
|
|
28 |
|
|
|
0.9 |
|
|
|
54 |
|
|
|
0.9 |
|
Divestitures
|
|
|
(15 |
) |
|
|
(0.5 |
) |
|
|
(24 |
) |
|
|
(0.4 |
) |
Foreign currency translation
|
|
|
13 |
|
|
|
0.4 |
|
|
|
23 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
151 |
|
|
|
4.8 |
% |
|
$ |
293 |
|
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Business At 2.1% for the three and six
months ended June 30, 2005, revenue growth attributable to
base business yield is the highest it has been in several years.
These base business yield improvements have been driven by our
collection operations, where we experienced revenue growth in
every geographic operating group. Throughout the year, the most
significant collection yield improvements have been attributable
to industrial and commercial operations in the South and the
West and residential operations in the East, South and Midwest.
The significant base business yield improvements in the
collection line of business are the result of (i) our
continued focus on pricing initiatives as a means of increasing
our margins, cash flows and return on capital and (ii) the
adoption of a 1% environmental cost recovery fee, which
increased revenues by $9 million during the three months
ended June 30, 2005 and $14 million during the six
month period.
During both the three and six months ended June 30, 2005,
we have also received substantial yield contributions from our
transfer business in the East, our waste-to-energy facilities
and municipal solid waste disposal operations in the South.
These revenue improvements have been partially offset by a
general decline in yield in special waste disposal operations
driven principally by our Midwest and Southern Groups.
Fuel surcharges and fees We have experienced
$32 million and $54 million in revenue improvements
during the three and six months ended June 30, 2005,
respectively, due to our continued effort to pass on
38
higher fuel costs to our customers through fuel surcharges.
However, this increase was more than offset by increased
operating costs due to higher diesel fuel prices included within
both Operating Expenses Subcontractor Costs
and Operating Expenses Fuel. During the
last year, we have decreased the impact of higher direct fuel
costs on our operating income by increasing the number of
customers who participate in our fuel surcharge program. We are
currently revising our fuel surcharge program so that in future
periods we will also recover indirect fuel cost increases passed
on to us by subcontracted haulers.
Volume Volume-related revenue increases
during the first six months of 2005 were largely attributable to
increased recycling volumes provided by several new brokerage
contracts. Increases in volumes provided by our collection,
transfer and construction and demolition disposal operations in
the South and the West also provided significant revenue growth
during the three and six month periods. In the South, these
volume increases were driven principally by industrial
collection operations and transfer operations, which continue to
be affected by hurricane re-build efforts. In the West,
residential collection volumes, transfer volumes and
construction and demolition disposal volumes were the primary
drivers of the volume-related revenue improvements, and were
generally attributable to positive economic conditions. These
revenue improvements were partially offset by volume declines
experienced in each line of business in the Eastern portion of
the United States and significant volume declines in the
collection business in the Midwest. We believe volume declines
in our collection and transfer businesses in the East and
Midwest can largely be attributed to our focus on improving base
business yield and the intense price competition typical in
these regions.
Also included as a component of volume-related revenue growth
for the current period is revenue generated from our
construction of an integrated waste facility on behalf of a
municipality in Canada and revenue generated from our sale of
parts and supplies to third parties needed for the continued
operation of their landfill gas-to-energy plants. The revenue
generated by these projects is generally low margin and has been
largely offset by the current period increase in Cost of
Goods Sold.
|
|
|
Operating Expenses (Exclusive of Depreciation and
Amortization Shown Below) |
Our operating expenses include (i) labor and related
benefits (excluding labor costs associated with maintenance and
repairs included below), which include salaries and wages,
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 our waste to disposal
facilities; (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, 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.
39
The following table summarizes the major components of our
operating expenses, including the impact of foreign currency
translation, for the three and six months ended June 30,
2005 and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
|
Six Months Ended | |
|
|
|
|
|
|
June 30, | |
|
|
|
June 30, | |
|
|
|
|
| |
|
Period to Period | |
|
| |
|
Period to Period | |
|
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Labor and related benefits
|
|
$ |
619 |
|
|
$ |
596 |
|
|
$ |
23 |
|
|
|
3.9 |
% |
|
$ |
1,220 |
|
|
$ |
1,174 |
|
|
$ |
46 |
|
|
|
3.9 |
% |
Transfer and disposal costs
|
|
|
334 |
|
|
|
335 |
|
|
|
(1 |
) |
|
|
(0.3 |
) |
|
|
629 |
|
|
|
626 |
|
|
|
3 |
|
|
|
0.5 |
|
Maintenance and repairs
|
|
|
283 |
|
|
|
269 |
|
|
|
14 |
|
|
|
5.2 |
|
|
|
565 |
|
|
|
550 |
|
|
|
15 |
|
|
|
2.7 |
|
Subcontractor costs
|
|
|
231 |
|
|
|
210 |
|
|
|
21 |
|
|
|
10.0 |
|
|
|
436 |
|
|
|
392 |
|
|
|
44 |
|
|
|
11.2 |
|
Cost of goods sold
|
|
|
168 |
|
|
|
147 |
|
|
|
21 |
|
|
|
14.3 |
|
|
|
325 |
|
|
|
282 |
|
|
|
43 |
|
|
|
15.2 |
|
Fuel
|
|
|
127 |
|
|
|
95 |
|
|
|
32 |
|
|
|
33.7 |
|
|
|
239 |
|
|
|
183 |
|
|
|
56 |
|
|
|
30.6 |
|
Disposal and franchise fees and taxes
|
|
|
166 |
|
|
|
157 |
|
|
|
9 |
|
|
|
5.7 |
|
|
|
314 |
|
|
|
298 |
|
|
|
16 |
|
|
|
5.4 |
|
Landfill operating costs
|
|
|
57 |
|
|
|
54 |
|
|
|
3 |
|
|
|
5.6 |
|
|
|
111 |
|
|
|
98 |
|
|
|
13 |
|
|
|
13.3 |
|
Risk management
|
|
|
79 |
|
|
|
83 |
|
|
|
(4 |
) |
|
|
(4.8 |
) |
|
|
154 |
|
|
|
162 |
|
|
|
(8 |
) |
|
|
(4.9 |
) |
Other
|
|
|
109 |
|
|
|
94 |
|
|
|
15 |
|
|
|
16.0 |
|
|
|
224 |
|
|
|
195 |
|
|
|
29 |
|
|
|
14.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,173 |
|
|
$ |
2,040 |
|
|
$ |
133 |
|
|
|
6.5 |
% |
|
$ |
4,217 |
|
|
$ |
3,960 |
|
|
$ |
257 |
|
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor and related benefits These costs have
increased as a result of (i) higher salaries and hourly
wages principally due to annual merit increases;
(ii) increased overtime costs due in part to increased
volumes; (iii) a general increase in employee health care
and benefit costs; (iv) an increase in the costs
attributable to contract labor; and (v) increased payroll
taxes.
For purposes of the above disclosure, (i) labor costs
attributable principally to our fleet and container maintenance
facilities of $103 million and $204 million for the
three and six months ended June 30, 2005, respectively, and
$98 million and $196 million for the three and six
months ended June 30, 2004, respectively, have been
included as a component of the caption entitled
Maintenance and repairs and (ii) workers
compensation costs of $34 million and $64 million for
the three and six months ended June 30, 2005, respectively,
and $34 million and $65 million for the three and six
months ended June 30, 2004 have been included as a
component of the caption entitled Risk management.
These costs were reflected as labor costs in prior periods.
Maintenance and repairs In general, increases
in maintenance and repair costs can be attributed to an increase
in the labor costs associated with these activities. However,
the current quarter increase in these costs is associated with
the timing of annual outages at certain of our Wheelabrator
facilities. Certain annual outages required to maintain our
waste-to-energy facilities occurred during the first quarter of
2004, but were delayed until early in the second quarter of
2005. This year-over-year timing difference resulted in
variances in repair and maintenance costs for our Wheelabrator
group between quarters, but relatively flat costs on a
year-to-date basis.
Subcontractor costs The primary drivers of
these cost increases are (i) continued increases in diesel
fuel prices, which drive the fuel surcharges we pay to third
party subcontractors; (ii) volume increases, particularly
in our transfer operations in the South and our National
Accounts organization; and (iii) an increase in long-haul
transportation needs generally due to the redirection of waste.
Subcontractor cost increases attributable to higher fuel costs
have been partially offset by the revenue generated from our
fuel surcharge program and are reflected as fuel yield increases
within Operating Revenues.
Cost of goods sold These cost increases are
primarily attributable to increased recycling volumes due to
several new brokerage contracts and recent acquisitions, which
have been partially offset by declines in rebates paid to
suppliers due to decreases in market prices of recyclable
commodities. Cost of goods sold for the six months ended
June 30, 2005 also includes costs incurred to construct an
integrated waste facility for a municipality in Canada and the
costs associated with parts and supplies sold by our landfill
gas to energy program during the current period.
40
Fuel When compared with the corresponding
prior year periods, we experienced an average increase in the
cost of fuel of $0.54 per gallon for the current quarter
and $0.51 per gallon for the year-to-date period. While we
recover a significant portion of the cost increases incurred as
a result of higher fuel prices through our fuel surcharges
program, increased fuel costs continue to negatively affect our
operating margins. Revenues generated by our fuel surcharge
program are reflected as fuel yield increases within
Operating Revenues.
Disposal and franchise fees and taxes These
cost increases are the result of increased volumes and increased
rates for mandated fees and taxes. Certain of these cost
increases are passed through to our customers, and have been
reflected as fee yield increases within Operating
Revenues.
Other operating expenses We recognized
$6 million in gains on the sale of certain assets during
the first quarter of 2004 and a $7 million gain as a result
of the recovery of claims against insurers for the reimbursement
of environmental expenses during the second quarter of 2004.
Those 2004 gains and the costs incurred during 2005 attributable
to labor strikes in New Jersey and Canada are the primary
drivers of the increase in other operating costs during the
current year-to-date period.
|
|
|
Selling, General and Administrative |
Our selling, general and administrative expenses consist of
(i) labor costs, which include salaries, related insurance
and benefits, contract labor, and payroll taxes;
(ii) professional fees, which include fees for consulting,
legal, audit, and tax services; (iii) provision for bad
debts, which includes allowances for uncollectible customer
accounts and collection fees; and (iv) other general and
administrative expenses, which include, among other costs,
facility-related expenses, voice and data telecommunications,
advertising, travel and entertainment, rentals, postage, and
printing.
The following table summarizes the major components of our
selling, general and administrative costs for the three and six
months ended June 30, 2005 and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
|
|
Six Months | |
|
|
|
|
|
|
Ended | |
|
|
|
|
|
Ended | |
|
|
|
|
|
|
June 30, | |
|
|
|
June 30, | |
|
|
|
|
| |
|
Period to Period | |
|
| |
|
Period to Period | |
|
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Labor and related benefits
|
|
$ |
189 |
|
|
$ |
186 |
|
|
$ |
3 |
|
|
|
1.6 |
% |
|
$ |
390 |
|
|
$ |
373 |
|
|
$ |
17 |
|
|
|
4.6 |
% |
Professional fees
|
|
|
38 |
|
|
|
41 |
|
|
|
(3 |
) |
|
|
(7.3 |
) |
|
|
74 |
|
|
|
73 |
|
|
|
1 |
|
|
|
1.4 |
|
Provision for bad debts
|
|
|
7 |
|
|
|
10 |
|
|
|
(3 |
) |
|
|
(30.0 |
) |
|
|
21 |
|
|
|
24 |
|
|
|
(3 |
) |
|
|
(12.5 |
) |
Other
|
|
|
79 |
|
|
|
80 |
|
|
|
(1 |
) |
|
|
(1.3 |
) |
|
|
158 |
|
|
|
163 |
|
|
|
(5 |
) |
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
313 |
|
|
$ |
317 |
|
|
$ |
(4 |
) |
|
|
(1.3 |
)% |
|
$ |
643 |
|
|
$ |
633 |
|
|
$ |
10 |
|
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor and related benefits The current year
increases are primarily attributable to (i) an increase in
non-cash compensation costs associated with recent changes in
equity-based compensation provided for by our long-term
incentive plan; (ii) higher salaries and hourly wages
driven by annual merit increases; and (iii) higher group
insurance costs largely due to general health care cost
increases. These cost increases have been partially offset by a
decline in contract labor costs.
Professional fees The current quarter decline
is primarily related to reduced legal fees.
Provision for bad debts The decrease in the
provision for bad debts during the current quarter was driven by
improvements in the aging of our trade receivables from the
comparable prior year period.
|
|
|
Depreciation and Amortization |
Depreciation and amortization includes (i) amortization of
landfill costs, including those incurred and all estimated
future costs for landfill development, construction, closure and
post-closure on a units-of-consumption method as landfill
airspace is consumed over the estimated remaining capacity of a
site; (ii) amortization of landfill asset retirement costs
arising from final capping obligations on a units-of-consumption
method as airspace is consumed over the estimated capacity
associated with each final capping
41
event; (iii) depreciation of property and equipment on a
straight-line basis from three to 50 years; and
(iv) amortization of intangible assets with a definite
life, either using a 150% declining balance approach or a
straight-line basis over the definitive terms of the related
agreements, which are from two to ten years depending on the
type of asset.
Depreciation and amortization expense decreased by
$2 million and $6 million during the three and six
months ended June 30, 2005, respectively, when compared
with the corresponding prior year periods. These decreases are
generally attributable to a decline in landfill airspace
depletion, which has been driven by landfill amortization rate
changes, offset in part by increased information technology
depreciation expense. Depreciation and amortization expense as a
percentage of revenue declined from approximately 11% for both
the three and six months ended June 30, 2004 to 10.5% for
the corresponding 2005 periods. These decreases are due
principally to increases in revenue attributable to base
business yield and, to a lesser extent, the decline in landfill
amortization rates.
|
|
|
Asset Impairments and Unusual Items |
During the first quarter of 2005, we recognized a net gain of
$23 million, or $13 million net of tax, from asset
impairments and unusual items. This gain primarily related to
the divestiture of one of our landfills in Ontario, Canada,
which resulted in a gain of $39 million. This divestiture
was required by a Divestiture Order from the Canadian
Competition Tribunal. This gain on divestiture was partially
offset by a charge of approximately $16 million for the
impact of a litigation settlement reached in February 2005.
During the second quarter of 2005 we recognized a net gain of
$6 million, or $3 million net of tax, from asset
impairments and unusual items. The current quarter net gain is
primarily the result of the impact of $32 million of net
gains on divestitures and the recognition of a $9 million
gain for adjustments to our estimated obligations and
receivables for non-solid waste operations divested in 1999 and
2000, which were partially offset by a $35 million charge
for the impairment of the Pottstown Landfill.
Our net gain on divestitures for the three months ended
June 30, 2005 is attributable to the recognition of a
$20 million gain as a result of the divestiture of
operations in our Western group and a $12 million gain as a
result of the divestiture of operations in our Southern group.
The divestiture of operations during the second quarter of 2005
was part of our plan to review under-performing and
non-strategic operations and to either improve their performance
or dispose of the operations. We do not believe that these
divestitures are material either individually or in the
aggregate and we do not expect these divestitures to materially
affect our consolidated financial position or future results of
operations or cash flows.
We determined that a $35 million impairment of the
Pottstown Landfill, which is located in West Pottsgrove
Township, Pennsylvania, was necessary after the Pennsylvania
Environmental Hearing Board upheld a denial by the Pennsylvania
Department of Environmental Protection of a permit application
for a vertical expansion at the landfill. After the denial was
upheld on May 18, 2005, the Company reviewed the options
available at the Pottstown Landfill and the likelihood of the
possible outcomes of those options. After such evaluation and
considering the length of time required for the appeal process
and the permit application review, we decided not to pursue an
appeal of the permit denial. This decision was primarily due to
the expected impact of permitting delays, which would hinder our
ability to fully utilize the expansion airspace before the
landfills required closure in 2010. We plan to continue to
operate the Pottstown Landfill using existing permitted airspace
through the landfills current permit expiration date of
October 2005. The Pottstown Landfill has not been a significant
contributor to our recent earnings nor do we expect the
expansion denial or the resulting impairment to have a material
adverse effect on our future results of operations or cash flows.
During the six months ended June 30, 2004, we recognized a
net gain of $18 million, or $13 million net of tax,
from asset impairments and unusual items, which was primarily
attributable to an $8 million gain recognized during the
first quarter of 2004 as a result of divestitures of certain
Port-O-Let operations and a net $12 million gain recognized
during the second quarter for adjustments to our estimated
obligations associated with non-solid waste services that were
divested in 1999 and 2000.
42
|
|
|
Income From Operations by Reportable Segment |
The following table summarizes income from operations by
reportable segment for the three and six months ended
June 30, 2005 and 2004 and provides explanations of
significant factors contributing to the identified variances (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
|
|
Six Months | |
|
|
|
|
|
|
Ended | |
|
|
|
|
|
Ended | |
|
|
|
|
|
|
June 30, | |
|
|
|
June 30, | |
|
|
|
|
| |
|
Period to | |
|
| |
|
Period to | |
|
|
2005 | |
|
2004 | |
|
Period Change | |
|
2005 | |
|
2004 | |
|
Period Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Canadian
|
|
$ |
15 |
|
|
$ |
19 |
|
|
$ |
(4 |
) |
|
|
(21.1 |
)% |
|
$ |
67 |
|
|
$ |
30 |
|
|
$ |
37 |
|
|
|
123.3 |
% |
Eastern
|
|
|
67 |
|
|
|
91 |
|
|
|
(24 |
) |
|
|
(26.4 |
) |
|
|
128 |
|
|
|
153 |
|
|
|
(25 |
) |
|
|
(16.3 |
) |
Midwest
|
|
|
104 |
|
|
|
95 |
|
|
|
9 |
|
|
|
9.5 |
|
|
|
183 |
|
|
|
161 |
|
|
|
22 |
|
|
|
13.7 |
|
Southern
|
|
|
186 |
|
|
|
162 |
|
|
|
24 |
|
|
|
14.8 |
|
|
|
355 |
|
|
|
325 |
|
|
|
30 |
|
|
|
9.2 |
|
Western
|
|
|
122 |
|
|
|
91 |
|
|
|
31 |
|
|
|
34.1 |
|
|
|
212 |
|
|
|
183 |
|
|
|
29 |
|
|
|
15.8 |
|
Wheelabrator
|
|
|
69 |
|
|
|
81 |
|
|
|
(12 |
) |
|
|
(14.8 |
) |
|
|
124 |
|
|
|
126 |
|
|
|
(2 |
) |
|
|
(1.6 |
) |
Recycling
|
|
|
6 |
|
|
|
12 |
|
|
|
(6 |
) |
|
|
(50.0 |
) |
|
|
8 |
|
|
|
17 |
|
|
|
(9 |
) |
|
|
(52.9 |
) |
Other NASW
|
|
|
(7 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
(12 |
) |
|
|
(8 |
) |
|
|
(66.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NASW
|
|
|
562 |
|
|
|
544 |
|
|
|
18 |
|
|
|
3.3 |
|
|
|
1,057 |
|
|
|
983 |
|
|
|
74 |
|
|
|
7.5 |
|
Corporate and Other
|
|
|
(99 |
) |
|
|
(102 |
) |
|
|
3 |
|
|
|
2.9 |
|
|
|
(228 |
) |
|
|
(197 |
) |
|
|
(31 |
) |
|
|
(15.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
463 |
|
|
$ |
442 |
|
|
$ |
21 |
|
|
|
4.8 |
% |
|
$ |
829 |
|
|
$ |
786 |
|
|
$ |
43 |
|
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian The significant increase in
operating income on a year-to-date basis was driven primarily by
a pre-tax gain of $39 million resulting from the
divestiture of one of our landfills in Ontario, Canada. This
impact is included in Asset impairments and unusual
items within our Condensed Consolidated Statement of
Operations.
Eastern The significant decline in the
current quarters operating income when compared with the
comparable 2004 quarter is primarily due to the recognition of a
$35 million impairment of the Pottstown Landfill, which is
discussed further in Asset impairments and unusual items
above. This impact was partially offset by the favorable
effect of revenue growth provided by base business yield
improvement, particularly in the collection and transfer lines
of business.
Midwest The current year increase in income
from operations was primarily due to (i) revenue growth
associated with increased base business yield for the collection
line of business, which has been driven principally by
residential collection; (ii) the contribution of recent
acquisitions; (iii) the favorable effect of lower landfill
amortization rates; and (iv) lower bad debt expense.
Southern Approximately $12 million of
the current quarters increase in income from operations is
attributable to gains recognized on the divestiture of
operations. Strong internal revenue growth associated with base
business yield improvements, particularly in the collection line
of business, and industrial and residential collection and
transfer volumes also provided an increase in income from
operations during the current period. These increases were
partially offset by higher subcontractor costs and salaries and
wages.
Western The significant increase in income
from operations for the three and six months ended June 30,
2005 when compared with the corresponding prior year periods can
largely be attributed to the recognition of a $20 million
gain associated with the divestiture of operations. Internal
revenue growth has also provided significant increases in
operating income during the current year, with increases in
yield and volume in each line of business.
Wheelabrator The significant decline in the
current quarters operating income when compared with the
comparable 2004 quarter is primarily due to increased repair and
maintenance costs at our waste to energy facilities. This
variance is generally due to the timing of annual plant outages
at certain facilities, which resulted in offsetting fluctuations
in operating results for the first and second quarters of 2005.
43
Corporate and Other The higher expenses in
the current year were driven primarily by (i) a
$16 million charge for a legal settlement reached in
February 2005; (ii) an increase in non-cash employee
compensation costs of approximately $10 million associated
with recent changes in equity-based compensation;
(iii) increases in employee health care costs;
(iv) salary and wage increases attributable to annual merit
raises; and (v) the recovery of claims against insurers for
the reimbursement of environmental expenses during 2004.
|
|
|
Other Components of Income Before Cumulative Effect of
Change in Accounting Principle |
The following summarizes the other major components of our
income before cumulative effect of change in accounting
principle for the three and six months ended June 30, 2005
and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
|
|
Six Months | |
|
|
|
|
|
|
Ended | |
|
|
|
|
|
Ended | |
|
|
|
|
|
|
June 30, | |
|
|
|
June 30, | |
|
|
|
|
| |
|
Period to Period | |
|
| |
|
Period to Period | |
|
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest expense, net
|
|
$ |
122 |
|
|
$ |
112 |
|
|
$ |
10 |
|
|
|
8.9 |
% |
|
$ |
232 |
|
|
$ |
222 |
|
|
$ |
10 |
|
|
|
4.5 |
% |
Equity in net losses of unconsolidated entities
|
|
|
26 |
|
|
|
24 |
|
|
|
2 |
|
|
|
8.3 |
|
|
|
52 |
|
|
|
43 |
|
|
|
9 |
|
|
|
20.9 |
|
Minority interest
|
|
|
11 |
|
|
|
9 |
|
|
|
2 |
|
|
|
22.2 |
|
|
|
21 |
|
|
|
16 |
|
|
|
5 |
|
|
|
31.3 |
|
Other, net
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
* |
|
|
|
(1 |
) |
|
|
2 |
|
|
|
(3 |
) |
|
|
* |
|
Provision for (benefit from) income taxes
|
|
|
(222 |
) |
|
|
81 |
|
|
|
(303 |
) |
|
|
* |
|
|
|
(152 |
) |
|
|
143 |
|
|
|
(295 |
) |
|
|
* |
|
|
|
|
|
* |
Percentage change is not meaningful. |
Interest expense, net The $10 million
increase during the three months ended June 30, 2005 is a
result of a $9 million increase in interest expense and a
$1 million decline in interest income. The $10 million
increase during the six months ended June 30, 2005 is a
result of a $12 million increase in interest expense,
offset in part by a $2 million increase in interest income.
The current year increases in interest expense are generally
attributable to higher market interest rates, which impact the
interest expense associated with the variable portion of our
debt obligations. As of June 30, 2005, interest expense on
35% of our total debt is driven by variability in market
interest rates.
Equity in net losses of unconsolidated
entities In the first and second quarters of
2004, we acquired an equity interest in two coal-based,
synthetic fuel production facilities. The activities of these
facilities drive our equity in net losses of unconsolidated
entities. Our equity in the losses of these facilities was
$27 million and $55 million for the three and six
months ended June 30, 2005, respectively, and
$26 million and $45 million for the three and six
months ended June 30, 2004, respectively. The
year-over-year increase in these losses is due to the timing of
our initial investments in 2004. These equity losses are more
than offset by the tax benefit realized as a result of these
investments as discussed below within Provision for income
taxes. If, for any reason, the tax credits generated by the
facilities were no longer allowable under Section 29 of the
Internal Revenue Code, we would no longer incur these equity
losses. Additional information related to these investments is
included in Note 4 to the Condensed Consolidated Financial
Statements.
Provision for (benefit from) income taxes The
benefit from income taxes recognized during the three and six
months ended June 30, 2005 is attributable to the
settlement of several tax audits, which have resulted in a
$345 million reduction in income tax expense during the
three months ended June 30, 2005 and a $347 million
reduction in income tax expense during the six months ended
June 30, 2005. These tax audit settlements resulted in a
113.5 percentage point reduction in our effective tax rate
for the three months ended June 30, 2005 and a
66.1 percentage point reduction in our effective tax rate
for the six months ended June 30, 2005.
Our effective tax rate for the three and six months ended
June 30, 2005 has also benefited from the favorable impact
of non-conventional fuel tax credits derived from our landfills
and our investments in two coal-based, synthetic fuel production
facilities discussed in the Equity in net losses of
unconsolidated entities section above. These tax credits are
available through 2007 pursuant to Section 29 of the
Internal Revenue
44
Code, and may be phased out if the price of oil exceeds a
threshold annual average price determined by the IRS. Our
synthetic fuel production facility investments resulted in a
decrease in our tax provision of $38 million and
$67 million for the three and six months ended
June 30, 2005, respectively, and $35 million and
$54 million for the three and six months ended
June 30, 2004, respectively.
These tax benefits have been partially offset by the accrual of
$34 million of taxes during the three months ended
June 30, 2005 associated with our plan to repatriate
approximately $485 million of accumulated earnings and
capital from certain of our Canadian subsidiaries under the
American Jobs Creation Act of 2004.
Refer to Note 4 of our Condensed Consolidated Financial
Statements for additional information regarding current period
tax activity.
|
|
|
Cumulative Effect of Change in Accounting Principle |
On March 31, 2004, we recorded a credit of $8 million,
net of tax, or $0.01 per diluted share, as a cumulative
effect of change in accounting principle as a result of the
consolidation of previously unrecorded trusts as required by
Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities.
Liquidity and Capital Resources
As an organization that has consistently generated cash flows in
excess of its reinvestment needs, our primary source of
liquidity has been cash flows from operations. However, we
operate in a capital-intensive business and continued access to
various financing resources is vital to our continued financial
strength. In the past, we have been successful in obtaining
financing from a variety of sources on terms we consider
attractive. Based on several key factors, which we believe are
considered important by credit rating agencies and financial
markets in determining our access to attractive financing
alternatives, we expect to continue to maintain access to
capital sources in the future. These factors include:
|
|
|
|
|
the essential nature of the services we provide and our large
and diverse customer base; |
|
|
|
our ability to generate strong and consistent cash flows despite
the economic environment; |
|
|
|
our liquidity profile; |
|
|
|
our asset base; and |
|
|
|
our commitment to maintaining a moderate financial profile and
disciplined capital allocation. |
We continually monitor our actual and forecasted cash flows, our
liquidity and our capital resources, enabling us to plan for our
present needs and fund unbudgeted business activities that may
arise during the year as a result of changing business
conditions or new opportunities. In addition to our working
capital needs for the general and administrative costs of our
ongoing operations, we have cash requirements for: (i) the
construction and expansion of our landfills; (ii) additions
to and maintenance of our trucking fleet;
(iii) refurbishments and improvements at waste-to-energy
and materials recovery facilities; (iv) the container and
equipment needs of our operations; and (v) capping, closure
and post-closure activities at our landfills. Our Board of
Directors has approved a capital allocation program that
provides for up to $1.2 billion in aggregate dividend
payments and share repurchases each year during 2005, 2006 and
2007. We also continue to invest in acquisitions that we believe
will be accretive and provide continued growth in our core
business.
A provision of the American Jobs Creation Act of 2004, which was
enacted on October 22, 2004, temporarily reduces the tax
rate on repatriated income if the income is permanently
reinvested in the U.S. We have decided to repatriate
approximately $485 million of accumulated earnings and
capital from certain of our Canadian subsidiaries during the
taxable year ending December 31, 2005, and are currently
evaluating the potential liquidity and capital resource impacts
of this planned repatriation. We expect to draw upon
approximately $115 million of cash resources that are
currently held by our Canadian subsidiaries, and are in the
process of considering the most effective approach for
repatriating the remaining accumulated earnings.
45
|
|
|
Summary of Cash, Restricted Trust and Escrow Accounts and
Debt Obligations |
The following is a summary of our cash, restricted trust and
escrow accounts and debt balances as of June 30, 2005 and
December 31, 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
481 |
|
|
$ |
424 |
|
|
|
|
|
|
|
|
Restricted trust and escrow accounts:
|
|
|
|
|
|
|
|
|
|
Tax-exempt bond funds
|
|
$ |
229 |
|
|
$ |
333 |
|
|
Closure, post-closure and remediation funds
|
|
|
216 |
|
|
|
213 |
|
|
Debt service funds
|
|
|
99 |
|
|
|
83 |
|
|
Other
|
|
|
17 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
Total restricted trust and escrow accounts
|
|
$ |
561 |
|
|
$ |
647 |
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$ |
215 |
|
|
$ |
384 |
|
|
Long-term portion
|
|
|
8,216 |
|
|
|
8,182 |
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$ |
8,431 |
|
|
$ |
8,566 |
|
|
|
|
|
|
|
|
Increase in carrying value of debt due to hedge accounting for
interest rate swaps
|
|
$ |
128 |
|
|
$ |
135 |
|
|
|
|
|
|
|
|
Cash and cash equivalents Cash and cash
equivalents consist primarily of cash on deposit, certificates
of deposit, money market accounts, and investment grade
commercial paper purchased with original maturities of three
months or less.
For discussion regarding the 2004 reclassifications to cash,
refer to Note 1 to the Condensed Consolidated Financial
Statements and the Basis of Presentation of Consolidated and
Segment Financial Information section above.
Restricted trust and escrow accounts
Restricted trust and escrow accounts consist primarily of funds
held in trust for the construction of various facilities or
repayment of debt obligations, funds deposited in connection
with landfill closure, post-closure and remedial obligations and
insurance escrow deposits. These balances are primarily included
within Other assets in our Condensed Consolidated
Balance Sheets.
Revolving credit and letter of credit
facilities We have a five-year,
$2.4 billion syndicated revolving credit facility. This
facility provides us with credit capacity that can be used for
either cash borrowings or to support letters of credit issued
for our financial assurance needs. As of June 30, 2005, no
borrowings were outstanding under the facility, and we had
unused and available credit capacity of $959 million. As of
December 31, 2004, no borrowings were outstanding under the
facility, and we had unused and available capacity of
$1,034 million.
46
The table below summarizes the credit capacity, maturity and
outstanding letters of credit under our various arrangements at
June 30, 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding | |
|
|
Total Credit | |
|
|
|
Letters of | |
Facility |
|
Capacity | |
|
Maturity |
|
Credit | |
|
|
| |
|
|
|
| |
Five-year revolving credit facility
|
|
$ |
2,400 |
|
|
October 2009 |
|
$ |
1,441 |
|
Five-year letter of credit and term loan agreement
|
|
|
15 |
|
|
June 2008 |
|
|
15 |
|
Five-year letter of credit facility
|
|
|
350 |
|
|
December 2008 |
|
|
342 |
|
Seven-year letter of credit and term loan agreement
|
|
|
175 |
|
|
June 2010 |
|
|
175 |
|
Ten-year letter of credit and term loan agreement
|
|
|
105 |
|
|
June 2013 |
|
|
101 |
|
Other
|
|
|
|
|
|
Various |
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,045 |
|
|
|
|
$ |
2,135 |
|
|
|
|
|
|
|
|
|
|
We use each of these facilities to back letters of credit that
we issue to support our insurance programs, certain tax-exempt
bond issuances, municipal and governmental waste management
contracts, closure and post-closure obligations and disposal
site or transfer station operating permits. These facilities
require us to pay fees to the lenders and our obligation is
generally to repay any draws that may occur on the letters of
credit. We expect that similar facilities may continue to serve
as a cost efficient source of letter of credit capacity in the
future, and we continue to assess our financial assurance
requirements to ensure that we have adequate letter of credit
and surety bond capacity in advance of our business needs.
Senior notes As of June 30, 2005, we had
$5.2 billion of outstanding senior notes. The notes have
various maturities, ranging from October 2006 to May 2032, and
interest rates ranging from 5.00% to 8.75%. On May 15,
2005, $100 million of 7.0% senior notes and
$3 million of 6.65% senior notes matured and were
repaid with cash on hand.
Tax-exempt bonds As of June 30, 2005, we
had $2.1 billion of outstanding tax-exempt bonds, of which
$100 million were issued during the three months ended
June 30, 2005. We actively issue tax-exempt bonds as a
means of accessing low-cost financing for capital expenditures.
The proceeds from these financing arrangements are deposited
directly into trust funds and may only be used for the specific
purpose for which the money was raised, which is generally the
construction of collection and disposal facilities and for the
equipment necessary to provide waste management services. As we
spend monies on the specific projects being financed, we are
able to requisition cash from the trust funds. We have
$229 million held in trust for future spending as of
June 30, 2005. During the six months ended June 30,
2005, we received approximately $207 million from these
funds for approved capital expenditures.
As of June 30, 2005, $588 million of our tax-exempt
bonds are remarketed weekly by a remarketing agent to maintain a
variable yield. If the remarketing agent is unable to remarket
the bonds, then the remarketing agent can put the bonds to us.
These bonds are supported by letters of credit that have been
issued under our $2.4 billion, five-year revolving credit
facility, that guarantee repayment of the bonds in the event the
bonds are put to us. Accordingly, these obligations have been
classified as long-term in our Condensed Consolidated Balance
Sheet at June 30, 2005.
Additionally, we have $402 million of fixed rate tax-exempt
bonds subject to repricing within the next twelve months, which
is prior to their scheduled maturities. If the re-offering of
the bonds is unsuccessful, then the bonds can be put to us,
requiring immediate repayment. These bonds are not backed by
letters of credit supported by our long-term facilities that
would serve to guarantee repayment in the event of a failed
re-offering and are, therefore, considered a current obligation.
However, these bonds have been classified as long-term in our
Condensed Consolidated Balance Sheet as of June 30, 2005.
The classification of these obligations as long-term was based
upon our intent to refinance the borrowings with other long-term
financings in the event of a failed re-offering and our ability,
in the event other sources of long-term financing are not
available, to use our five-year revolving credit facility.
Tax-exempt project bonds As of June 30,
2005, we had $495 million of outstanding tax-exempt project
bonds. These debt instruments are primarily used by our
Wheelabrator Group to finance the development of
47
waste-to-energy facilities. The bonds generally require periodic
principal installment payments. As of June 30 2005,
$46 million of these bonds are remarketed either daily or
weekly by a remarketing agent to maintain a variable yield. If
the remarketing agent is unable to remarket the bonds, then the
remarketing agent can put the bonds to us. Repayment of these
bonds has been guaranteed with letters of credit issued under
our five-year revolving credit facility. Approximately
$91 million of these bonds will be repaid with either
available cash or debt service funds within the next twelve
months.
Convertible subordinated notes We had
$35 million of convertible subordinated notes that we
repaid, with cash on hand, upon maturity in January 2005.
Interest rate swaps We manage the interest
rate risk of our debt portfolio principally by using interest
rate derivatives to achieve a desired position of fixed and
floating rate debt. As of June 30, 2005, the interest
payments on $2.35 billion of our fixed rate debt have been
swapped to variable rates, allowing us to maintain 65% of our
debt at fixed interest rates and 35% at variable interest rates.
Fair value hedge accounting for interest rate swap contracts
increased the carrying value of debt instruments by
$128 million at June 30, 2005 and $135 million as
of December 31, 2004. Interest rate swap agreements reduced
net interest expense by $10 million and $26 million
for the three and six months ended June 30, 2005,
respectively, and by $26 million and $50 million for
the three and six months ended June 30, 2004, respectively.
The significant decline in the benefit recognized as a result of
our interest rate swap agreements between 2004 and 2005 is
largely attributable to the increase in short-term market
interest rates. Our periodic interest obligations under our
interest rate swap agreements are based on a spread from the
three-month LIBOR, which has increased from 1.61% at
June 30, 2004 to 3.52% at June 30, 2005. The
significant terms of the interest rate contracts and the
underlying debt instruments are identical and therefore no
ineffectiveness has been realized.
|
|
|
Summary of Cash Flow Activity |
The following is a summary of our cash flows for the six months
ended June 30, 2005 and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net cash provided by operating activities
|
|
$ |
1,103 |
|
|
$ |
1,019 |
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$ |
(293 |
) |
|
$ |
(545 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
$ |
(754 |
) |
|
$ |
(298 |
) |
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities We
generated $1,103 million in cash flows from our operating
activities during the six months ended June 30, 2005
compared with $1,019 million provided in the comparable
prior year period, an increase of $84 million. In general,
our current period operating cash flow was favorably affected by
comparative changes in our trade and other receivables. Our
trade receivables have decreased $24 million from
December 31, 2004 compared with a $98 million increase
in trade receivables during the six months ended June 30,
2004. This significant change can largely be attributed to
(i) the collection of receivables related to hurricane
clean-up services provided in the second half of 2004; and
(ii) overall improvements in our collection efforts.
The reduction in income tax expense attributable to the
settlement of tax audits during the second quarter of 2005
resulted in a significant reduction in liability balances. These
reductions offset the related increase in net income for the six
month period resulting in an insignificant impact to cash flows
from operations attributable to the tax audit settlements.
Net Cash Used in Investing Activities We used
$293 million of our cash resources for investing activities
during the six months ended June 30, 2005, a decrease of
$252 million as compared with the comparable prior year
period. This decrease is primarily due to a $142 million
change in net cash flows associated with purchases and sales of
short-term investments. Net purchases of short-term investments
during the six months ended June 30, 2005 were
$23 million compared with net purchases of $165 million
48
during the comparable prior year period. The year-over-year
decline in purchases of short-term investments can largely be
attributed to the current year increase in cash paid for common
stock repurchases and net debt repayments, which are discussed
below.
Also contributing to the year-over-year decrease were (i) a
$68 million increase in proceeds from divestitures and
other sales of assets, which is largely attributable to the sale
of one of our landfills in Ontario, Canada during the first
quarter of 2005; (ii) a $33 million decrease in
capital expenditures, which went from $526 million in 2004
to $493 million in 2005; and (iii) a $30 million
increase in net receipts from restricted trust and escrow
accounts.
Net Cash Used in Financing Activities The
$456 million increase in cash used for financing activities
during the six months ended June 30, 2005 is primarily
attributable to (i) a $205 million increase in debt
repayments net of borrowings; (ii) a $170 million
increase in cash paid for common stock repurchases; and
(iii) a $69 million decline in cash proceeds from the
exercise of common stock options.
During the six months ended June 30, 2005, we repaid
$234 million of outstanding debt obligations, including
$103 million of senior notes that matured in May 2005, and
$67 million associated with a short-term note obligation
and $35 million of convertible subordinated notes that
matured in January 2005. The $369 million of cash debt
repayments made during the six months ended June 30, 2004
were largely offset by $348 million in net proceeds, which
were primarily provided by the March 2004 issuance of
$350 million of 5.00% senior notes due in 2014.
During the six months ended June 30, 2005, we repurchased
9.9 million shares of our common stock for
$290 million. Approximately $12 million of these share
repurchases was settled in cash in July 2005. Our 2005 common
stock repurchases are pursuant to a capital allocation program
that provides for combined dividend payments and shares
repurchases of up to $1.2 billion each year during 2005,
2006 and 2007. Future share repurchases under this program will
be made at the discretion of management, and will depend on
various factors, including our net earnings, financial condition
and projected cash requirements. We paid $108 million for
share repurchases during the six months ended June 30,
2004, $24 million of which was paid to settle repurchases
made in December 2003.
Cash paid for dividends also increased $10 million during
the six months ended June 30, 2005 due to an increase in
our per share dividend. Our Board of Directors declared a
$0.20 per share dividend in both the first and second
quarters of 2005. The first quarter dividend was paid on
March 24, 2005 to shareholders of record as of
March 1, 2005 for an aggregate of $114 million. The
second quarter dividend was paid on June 24, 2005 to
shareholders of record as of June 1, 2005 for an aggregate
of $114 million. In each of the first and second quarters
of 2004, we declared and paid a dividend of $0.1875 per
share, which resulted in aggregate cash payments of
$218 million for the six months ended June 30, 2004.
All future dividend declarations are at the discretion of the
Board of Directors and depend on factors the Board deems
relevant.
Off-Balance Sheet Arrangements
We are party to guarantee arrangements with unconsolidated
entities as discussed in the Guarantees section of
Note 8 to the Condensed Consolidated Financial Statements.
Our third-party guarantee arrangements are generally established
to support our financial assurance needs and landfill
operations. These arrangements have not materially affected our
financial position, results of operations or liquidity during
the three or six months ended June 30, 2005 nor are they
expected to have a material impact on our future financial
position, results of operations or liquidity.
Seasonal Trends and Inflation
Our operating revenues tend to be somewhat higher in the summer
months, primarily due to the higher volume of construction and
demolition waste. The volumes of industrial and residential
waste in certain regions where we operate also tend to increase
during the summer months. Our second and third quarter revenues
and results of operations typically reflect these seasonal
trends. The operating results of our first
49
quarter also often reflect higher repair and maintenance
expenses because we schedule maintenance at our waste-to-energy
facilities during the slower winter months.
While inflationary increases in costs, including the cost of
fuel, have affected our operating margins in recent periods, we
believe that inflation generally has not had, and in the near
future is not expected to have, any material adverse effect on
our results of operations. However, managements estimates
associated with inflation have had, and will continue to have,
an impact on our accounting for landfill and environmental
remediation liabilities.
|
|
Item 4. |
Controls and Procedures. |
|
|
|
Effectiveness of Controls and Procedures |
We maintain a set of disclosure controls and procedures designed
to ensure that information we are required to disclose in
reports that we file or submit with the SEC is recorded,
processed, summarized and reported within the time periods
specified by the SEC. An evaluation was carried out under the
supervision and with the participation of the Companys
management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO),
of the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this report. Based on
that evaluation, the CEO and CFO have concluded that the
Companys disclosure controls and procedures are effective
to ensure that we are able to collect, process and disclose the
information we are required to disclose in the reports we file
with the SEC within required time periods.
50
PART II.
|
|
Item 1. |
Legal Proceedings. |
Information regarding our legal proceedings can be found under
the Litigation section of Note 8,
Commitments and Contingencies, to the Condensed
Consolidated Financial Statements.
|
|
Item 2. |
Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities. |
In October 2004, the Company announced that its Board of
Directors approved a capital allocation program that included
the authorization of up to $1.2 billion of stock
repurchases and dividend payments annually for each of 2005,
2006 and 2007. All of the common stock repurchases made in 2005
have been pursuant to that program. The following table
summarizes our second quarter 2005 activity:
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of | |
|
|
|
|
Total | |
|
|
|
Shares Purchased as | |
|
Approximate Maximum | |
|
|
Number of | |
|
Average | |
|
Part of Publicly | |
|
Dollar Value of Shares that | |
|
|
Shares | |
|
Price Paid | |
|
Announced Plans or | |
|
May Yet be Purchased Under | |
Period |
|
Purchased | |
|
per Share(a) | |
|
Programs | |
|
the Plans or Programs(b) | |
|
|
| |
|
| |
|
| |
|
| |
April 1 - 30
|
|
|
727,300 |
|
|
$ |
28.59 |
|
|
|
727,300 |
|
|
$ |
849 million |
|
May 1 - 31
|
|
|
2,709,200 |
|
|
$ |
29.24 |
|
|
|
2,709,200 |
|
|
$ |
770 million |
|
June 1 - 30(c)
|
|
|
3,033,200 |
|
|
$ |
29.01 |
|
|
|
3,033,200 |
|
|
$ |
682 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,469,700 |
|
|
$ |
29.06 |
|
|
|
6,469,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a) |
This amount represents the weighted average price paid per share
and includes a per share commission paid for all repurchases. |
|
|
b) |
The disclosure of the maximum approximate dollar value of shares
yet to be purchased under the program is required by the SEC.
These amounts are not necessarily an indication of the amount we
intend to repurchase during the remainder of the year. The
amount of capital approved for share repurchases during 2005 is
$1.2 billion, net of dividends paid. During the six months
ended June 30, 2005, we declared and paid $228 million
in cash dividends under this program. The maximum dollar value
of shares that may be purchased under the program included in
the table above includes the effect of these dividend payments
as if all payments had been made at the beginning of the
earliest period presented. However, this amount does not include
the impact of any dividend payments we expect to make in the
third or fourth quarters of 2005. |
|
|
c) |
Shares purchased in June 2005 include 420,000 shares
purchased for an aggregate of $12 million pursuant to
transactions entered into during the month that were not settled
until July 2005. |
51
|
|
Item 4. |
Submission of Matters to a Vote of Security
Holders. |
We held our 2005 Annual Meeting of Stockholders on May 13,
2005 in Houston, Texas. A total of 500,379,077 shares of
common stock, which is approximately 88% of the common stock
outstanding at that time, were represented either in person or
by proxy. The following information summarizes the matters
submitted for a vote at the 2005 Annual Meeting of Stockholders
and the associated results.
The eight directors listed below were elected to a one-year
term:
|
|
|
|
|
|
|
Director |
|
Shares For |
|
Shares Withheld |
|
|
|
|
|
Pastora San Juan Cafferty
|
|
491,077,364 |
|
|
9,301,713 |
|
Frank M. Clark, Jr.
|
|
492,688,365 |
|
|
7,690,712 |
|
Robert S. Miller
|
|
483,258,324 |
|
|
17,120,753 |
|
John C. Pope
|
|
476,449,259 |
|
|
23,929,818 |
|
W. Robert Reum
|
|
492,657,018 |
|
|
7,722,059 |
|
Steven G. Rothmeier
|
|
491,129,207 |
|
|
9,249,870 |
|
David P. Steiner
|
|
492,791,805 |
|
|
7,587,272 |
|
Thomas H. Weidemeyer
|
|
492,578,276 |
|
|
7,800,801 |
|
The appointment of Ernst & Young LLP as the
Companys Independent Registered Public Accounting Firm was
ratified:
|
|
|
|
|
Shares For |
|
Shares Against |
|
Shares Withheld |
|
|
|
|
|
493,704,167
|
|
3,145,794 |
|
3,529,116 |
A majority of shares voted were voted against a stockholder
proposal requiring us to disclose our strategy on opposition to
privatization:
|
|
|
|
|
Shares For |
|
Shares Against |
|
Shares Withheld |
|
|
|
|
|
13,304,846
|
|
408,158,075 |
|
24,164,762 |
A majority of shares voted were voted against a stockholder
proposal that would have changed our method of electing
directors from plurality voting to majority voting:
|
|
|
|
|
Shares For |
|
Shares Against |
|
Shares Withheld |
|
|
|
|
|
194,614,836
|
|
246,733,337 |
|
4,277,835 |
A majority of shares voted were voted against a stockholder
proposal requiring annual disclosure of our political
contributions and the reasons for such political
contributions:
|
|
|
|
|
Shares For |
|
Shares Against |
|
Shares Withheld |
|
|
|
|
|
25,037,586
|
|
380,228,903 |
|
40,360,994 |
A majority of shares voted were voted for a stockholder
proposal asking the Board of Directors to adopt a policy
limiting the amount of severance payments to executive officers
to 2.99 times the average of the executives W-2 income
over the preceding five years:
|
|
|
|
|
Shares For |
|
Shares Against |
|
Shares Withheld |
|
|
|
|
|
242,833,427
|
|
198,583,771 |
|
4,209,710 |
52
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
No. |
|
|
|
Description |
|
|
|
|
|
|
10 |
.1 |
|
|
|
Employment Agreement between the Company and David A. Aardsma,
dated as of June 16, 2005 (Incorporated by reference to
Exhibit 10.1 of the Form 8-K dated June 16, 2005). |
|
12 |
|
|
|
|
Computation of Ratio of Earnings to Fixed Charges. |
|
31 |
.1 |
|
|
|
Certification Pursuant to Rule 15d 14(a) under
the Securities Exchange Act of 1934, as amended, of David P.
Steiner, Chief Executive Officer. |
|
31 |
.2 |
|
|
|
Certification Pursuant to Rule 15d 14(a) under
the Securities Exchange Act of 1934, as amended, of Robert G.
Simpson, Senior Vice President and Chief Financial Officer. |
|
32 |
.1 |
|
|
|
Certification Pursuant to 18 U.S.C. §1350 of David P.
Steiner, Chief Executive Officer. |
|
32 |
.2 |
|
|
|
Certification Pursuant to 18 U.S.C. §1350 of Robert G.
Simpson, Senior Vice President and Chief Financial Officer. |
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
By: |
/s/ Robert G. Simpson
|
|
|
|
|
|
Robert G. Simpson |
|
Senior Vice President and |
|
Chief Financial Officer |
|
(Principal Financial Officer) |
|
|
Waste Management, Inc.
|
|
|
|
|
By: |
/s/ Greg A. Robertson
|
|
|
|
|
|
Greg A. Robertson |
|
Vice President and |
|
Chief Accounting Officer |
|
(Principal Accounting Officer) |
Date: July 28, 2005
54
INDEX TO EXHIBITS
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
No. | |
|
|
|
Description |
| |
|
|
|
|
|
10 |
.1 |
|
|
|
Employment Agreement between the Company and David A. Aardsma,
dated as of June 16, 2005 (Incorporated by reference to
Exhibit 10.1 of the Form 8-K dated June 16, 2005). |
|
12 |
|
|
|
|
Computation of Ratio of Earnings to Fixed Charges. |
|
31 |
.1 |
|
|
|
Certification Pursuant to Rule 15d 14(a) under
the Securities Exchange Act of 1934, as amended, of David P.
Steiner, Chief Executive Officer. |
|
31 |
.2 |
|
|
|
Certification Pursuant to Rule 15d 14(a) under
the Securities Exchange Act of 1934, as amended, of Robert G.
Simpson, Senior Vice President and Chief Financial Officer. |
|
32 |
.1 |
|
|
|
Certification Pursuant to 18 U.S.C. §1350 of David P.
Steiner, Chief Executive Officer. |
|
32 |
.2 |
|
|
|
Certification Pursuant to 18 U.S.C. §1350 of Robert G.
Simpson, Senior Vice President and Chief Financial Officer. |
exv12
EXHIBIT 12
WASTE MANAGEMENT, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions, Except Ratios)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
Income before income taxes, cumulative
effect of changes in accounting principles,
losses in equity investments and
minority interests |
|
$ |
601 |
|
|
$ |
564 |
|
|
|
|
|
|
|
|
Fixed charges deducted from income: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
244 |
|
|
|
232 |
|
Implicit interest in rents |
|
|
25 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
269 |
|
|
|
257 |
|
|
|
|
|
|
|
|
Earnings available for fixed charges |
|
$ |
870 |
|
|
$ |
821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
244 |
|
|
$ |
232 |
|
Capitalized interest |
|
|
2 |
|
|
|
10 |
|
Implicit interest in rents |
|
|
25 |
|
|
|
25 |
|
|
|
|
|
|
|
|
Total fixed charges |
|
$ |
271 |
|
|
$ |
267 |
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges |
|
|
3.2 x |
|
|
|
3.1 x |
|
|
|
|
|
|
|
|
exv31w1
EXHIBIT 31.1
SECTION 302 CERTIFICATION
I, David P. Steiner, certify that:
|
1. |
|
I have reviewed this report on Form 10-Q of Waste Management, Inc.; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a
(15e) and 15d (15e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15 (f) and 15d 15 (f))for the registrant and have: |
|
a. |
|
designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; |
|
|
b. |
|
designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
|
|
c. |
|
evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
|
|
d. |
|
disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most recent
fiscal quarter (the registrants fourth quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and |
|
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors (or persons performing
the equivalent functions): |
|
a. |
|
all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process, summarize
and report financial information; and |
|
|
b. |
|
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
|
|
|
|
|
Date: July 28, 2005 |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ David P. Steiner |
|
|
|
|
|
|
|
|
|
David P. Steiner
|
|
|
|
|
Chief Executive Officer |
exv31w2
EXHIBIT 31.2
SECTION 302 CERTIFICATION
I, Robert G. Simpson, certify that:
|
1. |
|
I have reviewed this report on Form 10-Q of Waste Management, Inc.; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a
(15e) and 15d (15e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15 (f) and 15d 15 (f)) for the registrant and have: |
|
a. |
|
designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; |
|
|
b. |
|
designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
|
|
c. |
|
evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
|
|
d. |
|
disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most recent
fiscal quarter (the registrants fourth quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and |
|
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors (or persons performing
the equivalent functions): |
|
a. |
|
all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process, summarize
and report financial information; and |
|
|
b. |
|
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
|
|
|
|
|
Date: July 28, 2005 |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Robert G. Simpson |
|
|
|
|
|
|
|
|
|
Robert G. Simpson
|
|
|
|
|
Senior Vice President and
|
|
|
|
|
Chief Financial Officer |
exv32w1
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Waste Management, Inc. (the Company) on Form 10-Q
for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, David P. Steiner, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
|
|
|
|
|
By:
|
|
/s/ David P. Steiner
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David P. Steiner
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Chief Executive Officer |
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July 28, 2005
exv32w2
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Waste Management, Inc. (the Company) on Form 10-Q
for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, Robert G. Simpson, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
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By:
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/s/ Robert G. Simpson
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Robert G. Simpson |
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Senior Vice President and |
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Chief Financial Officer |
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July 28, 2005