Waste Business Journal

Waste Management 4Q Profits Off 15% from Post-Hurricane Cleanup Results a Year Ago

Date: February 8, 2007

Source: Waste Management, Inc.

Waste Management Announces Fourth Quarter and Full Year 2006 Earnings

Company Generates Cash from Operations of $675 Million for Fourth Quarter and $2.54 Billion for Full Year 2006

Waste Management, Inc. (NYSE: WMI) today announced financial results for its fourth quarter and for the year ended December 31, 2006. Revenues for the quarter were $3.28 billion compared with $3.37 billion in the year ago period. Net income for the quarter was $246 million, or $0.46 per diluted share, compared with $290 million, or $0.52 per diluted share, for the fourth quarter 2005.

For the full year 2006, the Company reported revenues of $13.36 billion compared with $13.07 billion in 2005. Net income for the year was $1.15 billion, or $2.10 per diluted share, compared with $1.18 billion, or $2.09 per diluted share for the year 2005.

The Company noted several items that impacted the results in the current and prior years’ fourth quarters. Excluding these items, net income would have been $252 million, or $0.47 per diluted share, in the fourth quarter of 2006 compared with $255 million, or $0.46 per diluted share, in the prior year quarter. Income from operations as a percent of revenue, as adjusted for these items, increased 30 basis points to 15.4% in the current year’s quarter compared with the prior year’s quarter.(a) Results in the current quarter included:

• After tax charges of $24 million for asset impairments and unusual items due principally to a charge which resulted from the resolution of a buyer’s claim regarding the value of assets sold in a year 2000 transaction and an asset impairment charge at a closed landfill; partially offset by gains from the divestiture of operations.

• An $18 million benefit in net income resulting primarily from favorable income tax audit settlements and an adjustment to deferred tax liabilities resulting from the reduction of our effective state tax rate.

Results in the prior year quarter included:

• A $43 million reduction in income tax expense resulting primarily from favorable income tax audit settlements and an adjustment to deferred tax liabilities arising from the reduction in our effective state income tax rate.

• After-tax charges of $8 million related to asset impairments and unusual items due principally to an asset impairment charge at a landfill and the impairment of two software applications; partially offset by a gain from the divestiture of operations.

“Our solid performance in the fourth quarter completed an excellent year in which we exceeded our internal expectations for earnings growth, margin expansion, and free cash flow. In the fourth quarter, we again expanded our margins and generated higher net cash from operating activities,” said David P. Steiner, Chief Executive Officer of Waste Management. “Our internal revenue growth from yield on base business increased 2.9% in the fourth quarter of this year, which indicates that our pricing excellence initiatives continue to positively impact our financial performance. We lowered our operating costs by $105 million, which contributed to the 140 basis point reduction in our operating costs as a percent of revenue.

“Our ability to generate strong free cash flow and return it to our shareholders remains a cornerstone of our financial objectives. We generated $675 million in net cash from operating activities and $212 million of free cash flow during the quarter. For the year, we produced over $2.5 billion in net cash from operating activities and over $1.4 billion of free cash flow. Our full year free cash flow exceeded the high end of our projection due mainly to strong operating earnings, improved working capital and lower than expected capital expenditures. In 2006, we returned to our shareholders over $1.5 billion in cash, which was comprised of share repurchases of $1.07 billion and cash dividends of $476 million.”

Steiner continued, “Internal revenue growth due to volumes declined by 4.4% during the fourth quarter of 2006 due to the combination of lower hurricane clean-up volumes, 1.3 fewer workdays and lower non-core revenues in this year’s quarter. Absent these three factors, internal revenue growth due to volumes fell by 1.5%. This volume loss occurred primarily in our collection lines of business, which was again driven by our strategy to price our services to achieve acceptable margins and returns on capital. This strategy continued to produce positive results during the fourth quarter as income from operations and margins increased in our commercial, industrial and residential collection lines of business.”

Key Highlights for the Fourth Quarter and the Full Year 2006

• Income from operations as a percent of revenue, adjusted for the divestitures, asset impairments and unusual items, restructuring and non-recurring charges noted in our quarterly earnings releases, was 15.5% for the full year 2006, a 130 basis point improvement when compared with 2005 results on the same basis.

• Operating expenses declined by $105 million, or 4.7%, to $2.11 billion in the fourth quarter of 2006. As a percent of revenue, operating expenses fell to 64.2% during the current year quarter, which is a 140 basis point improvement compared with the prior year quarter. For the full year 2006, operating expenses were 64.3% of revenue, which is a 170 basis point improvement when compared with 2005.

• Net cash provided by operating activities of $675 million in the quarter and $2.54 billion for the full year.

• Free cash flow of $212 million in the quarter and $1.45 billion for the full year.

• Internal revenue growth on base business due to yield increased 2.9% for the fourth quarter of 2006. This excludes the impact of our fuel surcharge revenue, which declined 0.1% during the quarter. For the full year, internal revenue growth on base business due to yield increased 3.6%. This excludes the impact of our fuel surcharge revenue, which increased 0.9% for the full year 2006.

• Internal revenue growth from volumes decreased 4.4% for the fourth quarter of 2006. Fourth quarter 2005 revenue included approximately $50 million in hurricane clean-up work. This did not repeat in 2006 and caused 1.5% of the reduction in revenue due to volumes. The combination of 1.3 fewer workdays and lower non-core volumes contributed about $45 million, or 1.4%, to the decline. The remaining 1.5% decline in internal revenue growth from volumes was caused principally by lower volumes in all three collection lines of business, an expected result from our pricing excellence initiatives. For the full year 2006, internal revenue growth from volumes decreased 1.4%.

• Divestitures net of acquisitions caused a 1.5% decline in revenues in the quarter. Through today, operations with over $325 million in annual revenue have been divested as part of the previously announced divestiture program.

• Capital expenditures of $547 million in the quarter and $1.37 billion for the full year.

• $256 million returned to shareholders during the quarter, consisting of $138 million in common stock repurchases, or 3.5 million shares, and $118 million in cash dividends. For the full year, repurchases of common stock totaled $1.07 billion, or nearly 31 million shares. Dividends paid totaled $476 million for the full year. For the full year, we returned over $1.5 billion to shareholders.

• The effective tax rate in the quarter, adjusted for the non-recurring items noted above, was 29.6%.

Steiner continued, “We produced excellent financial results throughout 2006 and laid a foundation on which we will build during 2007. We remain committed to our financial goals of growing earnings, expanding our operating margins, increasing our return on invested capital, and generating strong free cash flow which we intend to return to our shareholders in the form of cash dividend payments and share repurchases. We will accomplish these objectives by leveraging the same operating strategies that we followed in 2006.

“We expect that our pricing excellence programs will continue to drive value across all of our lines of business and we are expanding our pricing initiatives at our landfills and transfer stations. We also expect our account profitability analysis to lead to improved pricing and cost management across the commercial segment of our collection business. We plan to continue to improve our performance in the areas of productivity, maintenance and safety, with a goal of lowering our operating costs as a percent of revenue. We have plans to deploy our new revenue management system, an investment that is expected to improve the long-term performance of the Company. We will also continue to divest underperforming or non-strategic businesses.

“We enter 2007 amidst an economic environment that is showing modest growth but at a slower pace than we saw in 2006. We expect economic growth to accelerate in the last half of 2007. And as we saw in 2006, we project that our internal revenue growth will be driven by our pricing excellence initiatives. Along with operational improvements and divestitures, we expect this will lead to a significant expansion in our income from operations as a percent of revenue during 2007. As a result, we expect to grow our full-year earnings per diluted share by approximately 8 to 10% during 2007, or within a range of $1.96 to $2.00, when compared to our full-year 2006 results of $1.81 per diluted share as adjusted for the non-recurring items noted in our press releases.”

2007 Outlook

The Company also announced the following in regard to its financial outlook for 2007:
• Income from operations as a percent of revenue projected to increase over 100 basis points, with selling, general and administrative expenses increasing due to higher expenses related to the implementation of our new revenue management system, process improvement initiatives and our long-term incentive plan; offset by continued operating cost improvements and internal revenue growth from yield in excess of CPI.

• Free cash flow projected to be within a range of $1.3 to $1.4 billion. Capital expenditures expected to be within a range of $1.25 to $1.35 billion.

• Expected payment of $0.96 per share in dividends over the course of the year, at an approximate cash cost of $510 million. Projected share repurchases of up to $690 million. Due to our expected free cash flow in 2007 and strong year-end 2006 cash balances and short-term investments, up to an additional $700 million may be allocated to the retirement of debt, acquisition or other business opportunities, or additional share repurchases.

(a) This earnings release contains net income, earnings per share, income from operations as a percentage of revenue and effective tax rate, each as adjusted to exclude the impact of certain unusual, non-recurring or otherwise non-operational items. These are non-GAAP measures as defined in Regulation G of the Securities Exchange Act of 1934, as amended, and are not intended to replace the most comparable GAAP measures that are also presented in this press release. The Company reports its financial results in compliance with GAAP, but believes that also providing non-GAAP measures provides investors additional, meaningful comparisons of current results to prior periods’ results by excluding items that the Company does not believe reflect its fundamental business performance. The Company also discloses its free cash flow and free cash flow forecast, which are non-GAAP measures. 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, and therefore not subject to comparison. The Company includes the non-GAAP financial measure of free cash flow in its disclosures 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.

Quantitative reconciliations of each of the non-GAAP measures presented herein to the most comparable GAAP measures 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.

The Company has scheduled an investor and analyst conference call for later this morning to discuss the results of today’s earnings announcement. The information in this press release should be read in conjunction with the information on the conference call. The call will begin at 10:00 a.m. Eastern time, 9:00 a.m. Central time, and is open to the public. To listen to the conference call, which will be broadcast live over the Internet, go to the Waste Management Website at www.wm.com, and select “4Q2006 Earnings Report Webcast.” You may also listen to the analyst conference call by telephone by contacting the conference call operator 5 to 10 minutes prior to the scheduled start time and asking for the “Waste Management Conference Call — Call ID 5597641.” US/Canada Dial-In Number: (877) 710-6139. Int’l/Local Dial-In Number: (706) 643-7398. For those unable to listen to the live call, a replay will be available 24 hours a day beginning at approximately 11:00 a.m. Central time on February 8th through 5:00 p.m. Central time on February 22nd. To hear a replay of the call over the Internet, access the Waste Management Website at www.wm.com. To hear a telephonic replay of the call, dial (800) 642-1687 or (706) 645-9291 and enter reservation code 5597641.

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, contact:
Waste Management, Inc.
Analysts: Greg Nikkel
713.265.1358
Media: Lynn Brown
713.394.5093
Web site: www.wm.com.