Date: July 28, 2006
Source: Waste Management, Inc.
Income from Operations as a Percent of Revenue Continues Expansion Trend
Company Announces Plan to Increase 2006 Stock Repurchases by up to $350 Million, Bringing 2006 Cash Authorized for Return to Shareholders to $1.55 Billion
Waste Management, Inc. (NYSE: WMI) today announced financial results for its second quarter ended June 30, 2006. Revenues for the quarter were $3.41 billion as compared with $3.29 billion in the year ago period, an increase of 3.7%. Net income for the quarter was $417 million, or $0.76 per diluted share, compared with $527 million, or $0.92 per diluted share, in the prior year period. The Company noted several one-time items that impacted the results in the current and prior years' second quarters. Excluding these items, net income would have been $0.45 per diluted share in the second quarter of 2006 compared with $0.38 per diluted share in the prior year quarter, or an 18.4% increase in earnings per diluted share.
The Company noted the following items that impacted the results for the quarter:
A $153 million benefit in net income primarily resulting from income tax audit settlements and Canadian statutory income tax rate reductions.
Net after-tax gains of $15 million related to the previously announced divestiture program. Income/expense from divestitures, asset impairments and unusual items included $23 million in after-tax gains on sales of operations, partially offset by an $8 million after-tax asset impairment charge for a collection operation held for sale.
Combined, these items improved second quarter 2006 after-tax earnings by $168 million. Without the impact of these items, net income for the quarter would have been $249 million, or $0.45 per diluted share.(a)
The prior year's second quarter earnings included a net after-tax benefit of $308 million primarily due to tax audit settlements. Without such benefit, net income in last year's quarter would have been $219 million, or $0.38 per diluted share.(a)
Income from operations as a percent of revenue increased 250 basis points to 16.6% in the second quarter of 2006 as compared with the second quarter of 2005. Income from operations as a percent of revenue, as adjusted for the one-time items, increased 160 basis points to 15.8% in the second quarter of 2006 as compared with the second quarter of 2005.(a)
"We saw the continuation of a number of very positive trends during the second quarter. We again achieved our primary financial goals of solid earnings growth, margin expansion and strong free cash flow," said David P. Steiner, Chief Executive Officer of Waste Management. "Strong pricing was again the key driver of our financial performance and more than offset the decline in volumes. This led to the triple-digit margin expansion in the quarter.
"Our operational improvement programs also contributed to our strong earnings during the second quarter. Operating costs as a percent of revenue declined by 160 basis points in the second quarter of 2006 versus the second quarter of 2005. This marks the fourth consecutive quarter in which our year-over-year operating costs as a percent of revenue have declined. As part of our divestiture program, we have now sold or have definitive agreements to sell operations totaling approximately $240 million in revenue. In addition, we have operations totaling about $230 million in revenue under letters of intent. The divestiture program is progressing well and we are on track to meet our goals for the year.
"We generated $557 million in net cash provided by operating activities and $398 million in free cash flow during this year's second quarter, bringing our free cash flow total to $808 million for the first six months of 2006.(a) We returned $371 million in cash to our shareholders during the second quarter in the form of share repurchases and our quarterly cash dividend payment.
"We ended the quarter with a strong cash balance and we expect to meet our full-year free cash flow and divestiture goals. Consequently, our Board of Directors has authorized us to repurchase up to an additional $350 million in common stock during 2006, which brings the total amount of cash authorized for return to shareholders to $1.55 billion for 2006. We also expect to review our 2007 dividend policy at our December 2006 Board of Directors meeting."
Key Highlights for the Quarter
Internal revenue growth on base business due to yield increased 3.9%. The base business revenue growth from yield was 5.3% including the $46 million obtained through our fuel surcharge program. The yield component excludes a 0.6% reduction in revenue from the combined impact of lower recycling commodity prices and slight increases in electricity rates at independent power production facilities.
Internal revenue growth from volumes decreased 1.1%. Excluding the 0.5% impact of lower non-core volumes, internal revenue growth from volumes decreased 0.6%.
Divestitures net of acquisitions caused a 0.4% decline in revenues in the quarter, and foreign currency translation contributed 0.5% to higher revenues.
Operating expenses were 64.5% of revenue, down from 66.1% of revenue in the same period in 2005. Second quarter 2006 operating expenses included $11 million in costs due primarily to a strike in the New York City area, which ended earlier this week.
Net cash provided by operating activities of $557 million in the second quarter. For the six-month period, net cash provided by operating activities was $1,120 million.
Free cash flow of $398 million. For the six-month period, free cash flow was $808 million.(a)
Capital expenditures of $296 million.
Proceeds from divestitures of businesses and sales of assets, net of cash divested, of $137 million.
$371 million returned to shareholders, consisting of $119 million in cash dividends and $252 million in common stock repurchases.
The recurring effective tax rate in the quarter was 39.3%, which was higher than the 37.1% rate projected in our first quarter 2006 earnings release. This increase in the effective tax rate is due primarily to an estimated phase-out of approximately 78% of our Section 45K tax credits due to higher actual and projected crude oil prices as of June 30, 2006. At the time of our first quarter 2006 earnings release, we estimated the phase-out of our Section 45K tax credits to be approximately 61% based on the level of actual and projected crude oil prices as of March 31, 2006.
Steiner concluded, "We were very pleased with our overall performance during the first and second quarters of this year. We exceeded our expectations despite unexpected headwinds from the phase out of Section 45K tax credits and the costs of the New York strike. We are assuming a 78% phase-out of Section 45K tax credits for the remainder of the year.
"Our achievements this quarter were the result of our field and corporate teams continuing their excellent work on our pricing and operational initiatives. We are confident about our performance for the remainder of the year and expect our full-year earnings to be toward the upper end of the analysts' current full-year range of $1.69 to $1.75 per diluted share."
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(a) This earnings release contains (i) net income, earnings per share, earnings per share growth and income from operations as a percentage of revenue, each as adjusted to exclude the impact of income/expense from divestitures, asset impairments and unusual items and tax related items described and (ii) free cash flow. These measures of financial performance are non-GAAP financial measures as defined in Regulation G of the Securities Exchange Act of 1934, as amended. The Company defines free cash flow as:
Net cash provided by operating activities
Less, capital expenditures
Plus, proceeds from divestitures of businesses, net of cash divested, and other sales of assets.
The Company's definition of free cash flow may not be comparable to similarly titled measures presented by other companies.
The Company believes that providing investors with certain non-GAAP financial measures gives investors additional information to enable them to assess, in the way management assesses, the Company's current and continuing operations. The Company included the non-GAAP financial measure of free cash flow because it uses that measure in the management of its business and because it believes that investors are interested in the cash produced by the Company from non-financing activities that is available for uses such as the Company's acquisitions, its share repurchase program, its scheduled debt reduction and the payment of dividends. A reconciliation of free cash flow to the Company's GAAP reported cash flows from operating activities, which is the most comparable GAAP measure, is included in the accompanying schedules. Reconciliations of adjusted net income and earnings per share to the Company's GAAP reported net income and earnings per share, and the corresponding earnings per share growth percentages, are included in the accompanying schedules. Investors are urged to take into account GAAP measures as well as non-GAAP measures in evaluating the Company.
Waste Management, based in Houston, Texas, is the leading provider of comprehensive waste management services in North America. Our subsidiaries provide collection, transfer, recycling and resource recovery, and disposal services. We are also a leading developer, operator and owner of waste-to-energy and landfill gas-to-energy facilities in the United States. Our customers include residential, commercial, industrial, and municipal customers throughout North America.
For Further Information:
Waste Management, Inc.
Analysts: Greg Nikkel - 713.265.1358
Media: Lynn Brown - 713.394.5093
Web site: www.WM.com
WMI #06-10
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