Date: October 26, 2007
Source: Waste Management, Inc.
* Company Generates Cash from Operations of $771 Million in Third Quarter 2007 And Raises Full-Year Free Cash Flow Guidance
* Income from Operations as a Percent of Revenue Expands
Waste Management, Inc. (NYSE: WMI) today announced financial results for its third quarter ended September 30, 2007. Revenues for the quarter were $3.40 billion as compared with $3.44 billion in the year ago period. Net income for the quarter was $278 million, or $0.54 per diluted share, compared with $300 million, or $0.55 per diluted share, in the prior year period.
The Company noted a $16 million after-tax decrease, or approximately $0.03 per diluted share, in the current quarter's net income related primarily to the cost of the labor disruption in the Oakland, California area.
Income from operations as a percent of revenue was 16.6% in the third quarter of 2007. Income from operations as a percent of revenue, as adjusted for the item noted above, was 17.4% in the current year's quarter. (a)
"The Company overcame a number of challenges during the third quarter of 2007. We successfully responded to the labor disruption in Oakland, but at a cost of $0.03 per diluted share. We also saw a sharp run-up in crude oil prices, which eliminated our expected earnings per diluted share benefit from Section 45K tax credits in the quarter. We had expected to receive a $0.02 per share benefit coming into the third quarter. I would note that the $0.55 per diluted share earnings in the third quarter of 2006 included a $0.05 per diluted share benefit from Section 45K tax credits," said David P. Steiner, Chief Executive Officer of Waste Management.
"As compared to our expectations for the quarter, third party volumes were weaker than we anticipated. Our earnings were also below the expectations that we had entering the quarter. But we don't believe that the 5.0% reduction in volumes in the third quarter was the primary driver of that result. There are certain types of costs, such as health and welfare, litigation settlement costs and bad debt expense, that tend to be uneven through the year. The fluctuation in these costs and Section 45K tax credits were benefits in the first and second quarter of the year, and worked against us in the third quarter. These items were the primary reason earnings did not meet our expectations for the third quarter.
"Despite these challenges, we expanded our operating margins and generated very strong free cash flow, which was $1.36 billion for the first nine months of the year. Because of this, we are raising our free cash flow projection for the full-year to approximately $1.5 billion, which is $100 million above the high end of our previously projected range. (a) Our internal revenue growth due to yield on base business was strong at 3.3% and, on a year-over-year basis, we lowered operating costs as a percent of revenue for the ninth consecutive quarter. These accomplishments are evidence of the success of our pricing and operational excellence programs.
"Our collection line of business continues to perform very well despite lower volumes. The combined internal revenue growth from yield in our commercial, industrial and residential lines of business was 4.5%. The driving factor behind this was internal revenue growth from yield in our commercial collection line of business of 6.0% in the quarter, which is the highest level we have achieved in the recent past. The volume loss in our collection business was 5.4% and was driven in part by our strategy to review low margin accounts and either increase prices or cull those accounts. Our collection volumes were also impacted by lower roll-off activity related mainly to the downturn in residential construction. Our ability to flex down costs as we have lost volumes, combined with the success of our pricing program, led to a 14% growth in income from operations in our collection business."
Steiner continued, "Internal revenue growth from volumes was a decrease of 4.5% at our landfills due mainly to the decline in third party construction and demolition tons, which is largely a result of the weakness in residential construction. We did achieve positive internal revenue growth from yield at our landfills and transfer stations during the third quarter of 2007, marking the ninth consecutive quarter in which we have shown year-over-year improvement."
Steiner also highlighted the Company's strong cash position: "We generated $771 million in net cash provided by operating activities and $550 million in free cash flow during this year's third quarter, bringing our free cash flow total to $1.36 billion for the first nine months of 2007. (a) We returned $499 million in cash to our shareholders during the third quarter in the form of share repurchases and our quarterly cash dividend payment and remain on track to return nearly $1.8 billion to our shareholders for the full-year. Although we expect sequential capital expenditures to increase during the fourth quarter, we now project that free cash flow will be approximately $1.5 billion for the full-year 2007."(a)
Key Highlights for the Quarter
* Internal revenue growth on base business due to yield was an increase of 3.3%.
* Including the positive impact of higher recycling commodity prices, internal revenue growth from yield was 5.6%.
* Net cash provided by operating activities of $771 million in the third quarter. For the nine-month period, net cash provided by operating activities was $1.85 billion.
* Free cash flow of $550 million. For the nine-month period, free cash flow was $1.36 billion. (a)
* $499 million returned to shareholders in the third quarter, consisting of $123 million in cash dividends and $376 million in common stock repurchases. During the first nine-months of 2007, over $1.4 billion in cash was returned to shareholders.
* Operating expenses declined by $38 million, or approximately 1.7%, to $2.14 billion in the third quarter of 2007. Excluding the pre-tax $24 million impact of the California labor disruption costs, operating expenses declined by $62 million, or approximately 2.8%. On the same basis, operating expenses as a percent of revenue fell to 62.3% during the current year quarter, which is a 110 basis point improvement compared with the same quarter in 2006. (a)
* Divestitures net of acquisitions caused a 2.0% decline in revenues in the quarter and foreign currency translation caused a 0.4% increase in revenues.
* Lower fuel surcharge revenue caused a 0.1% decline in internal revenue growth.
* Internal revenue growth reflected a decline of 5.0% due to lower volumes. The volume component included a 5.4% reduction in collection revenues and a 4.5% reduction in third party landfill revenue.
* Revenue decreased $38 million in the third quarter of this year. Adjusting for the $80 million in divested revenues, revenues would have increased $42 million, or about 1.2%. (a)
* Capital expenditures of $240 million in the third quarter. For the nine-month period, capital expenditures totaled $721 million.
* The effective tax rate in the third quarter of 2007 was 36.2%. This is higher than the 34% rate projected in the Company's second quarter 2007 earnings release due to higher taxes as a result of the increase in the estimated phase-out of Section 45K tax credits partially offset by $14 million in tax benefits resulting primarily from adjustments required for the finalization of our 2006 tax returns. At the end of the second quarter, the Company estimated the full year phase-out of its Section 45K tax credits to be 29%. At the end of the third quarter, the estimated full-year phase-out increased to 52%. Consequently, earnings per share did not benefit from Section 45K tax credits in the third quarter of 2007. This compares with a benefit of $0.05 per diluted share from Section 45K tax credits during the third quarter of 2006. Given our outlook for crude oil prices for the full-year 2007, the Company would not expect to record any earnings per diluted share benefit from Section 45K tax credits during the fourth quarter of 2007. The full year outlook projected in the Company's second quarter 2007 earnings release had assumed a $0.04 benefit for the second half of the year, consisting of a $0.02 benefit in each of the third and fourth quarters.
Steiner concluded, "Our collection and recycling businesses continue to grow income from operations at double digit rates, and we will continue to follow our strategy of pricing work to generate acceptable margins and returns on our business. We are meeting our expectations with regard to our pricing program and continue to produce a positive price-volume trade-off in our collection business. We remain committed to this approach and expect it to continue to drive earnings growth and margin expansion. As we have done in the collection line of business, we intend to follow a disciplined approach to landfill pricing and to pursue cost cutting at our landfills to offset the earnings impact of the loss in volumes.
"In looking at our full year 2007 earnings projections, the previously projected range of $2.07 to $2.11 per diluted share included a Section 45K tax credit benefit of $0.04 per diluted share in the second half of the year. We no longer expect to receive that $0.04 per diluted share benefit. After reducing the range by this $0.04 per diluted share non-operational tax item, we are confident we can meet the revised 2007 full-year earnings projection. And we have raised our full-year free cash flow by $100 million over the high end of our previously projected range of $1.3 billion to $1.4 billion." (a)
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 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 http://www.wm.com, and select "3Q2007 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 16948617." 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 1:00 p.m. Eastern time on October 26 through 5:00 p.m. Eastern time on November 9th. To hear a replay of the call over the Internet, access the Waste Management Website at http://www.wm.com. To hear a telephonic replay of the call, dial (800) 642-1687 or (706) 645-9291 and enter reservation code 16948617.
Waste Management, Inc., based in Houston, Texas, is the leading provider of comprehensive waste management services in North America. Through its subsidiaries, the Company provides collection, transfer, recycling and resource recovery, and disposal services. It is also a leading developer, operator and owner of waste-to-energy and landfill gas-to-energy facilities in the United States. The Company's customers include residential, commercial, industrial, and municipal customers throughout North America.
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Par Value Amounts)
| September 30, |
December 31, |
|||||||
| 2007 | 2006 | |||||||
| (Unaudited) | ||||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 537 | $ | 614 | ||||
|
Accounts receivable,
net of allowance for doubtful accounts of $44 and $51, respectively
|
1,687 | 1,650 | ||||||
|
Other receivables
|
208 | 208 | ||||||
|
Parts and supplies
|
104 | 101 | ||||||
|
Deferred income taxes
|
73 | 82 | ||||||
|
Other assets
|
252 | 527 | ||||||
|
Total current assets
|
2,861 | 3,182 | ||||||
|
Property and equipment,
net of accumulated depreciation and amortization of $12,723 and $11,993,
respectively
|
11,162 | 11,179 | ||||||
|
Goodwill
|
5,400 | 5,292 | ||||||
|
Other intangible assets,
net
|
128 | 121 | ||||||
|
Other assets
|
724 | 826 | ||||||
|
Total assets
|
$ | 20,275 | $ | 20,600 | ||||
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 574 | $ | 693 | ||||
|
Accrued liabilities
|
1,235 | 1,298 | ||||||
|
Deferred revenues
|
450 | 455 | ||||||
|
Current portion of long-term
debt
|
481 | 822 | ||||||
|
Total current liabilities
|
2,740 | 3,268 | ||||||
|
Long-term debt, less
current portion
|
7,797 | 7,495 | ||||||
|
Deferred income taxes
|
1,414 | 1,365 | ||||||
|
Landfill and environmental
remediation liabilities
|
1,317 | 1,234 | ||||||
|
Other liabilities
|
774 | 741 | ||||||
|
Total liabilities
|
14,042 | 14,103 | ||||||
|
Minority interest in
subsidiaries and variable interest entities
|
301 | 275 | ||||||
|
Commitments and contingencies
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Common stock, $0.01 par
value; 1,500,000,000 shares authorized; 630,282,461 shares issued
|
6 | 6 | ||||||
|
Additional paid-in capital
|
4,535 | 4,513 | ||||||
|
Retained earnings
|
4,894 | 4,410 | ||||||
|
Accumulated other comprehensive
income
|
222 | 129 | ||||||
|
Treasury stock at cost,
120,499,379 and 96,598,567 shares, respectively
|
(3,725 | ) | (2,836 | ) | ||||
|
Total stockholders’
equity
|
5,932 | 6,222 | ||||||
|
Total liabilities and
stockholders’ equity
|
$ | 20,275 | $ | 20,600 | ||||
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Amounts)
(Unaudited)
| Three Months |
Nine Months |
|||||||||||||||
| Ended |
Ended |
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
|
Operating revenues
|
$ | 3,403 | $ | 3,441 | $ | 9,949 | $ | 10,080 | ||||||||
|
Costs and expenses:
|
||||||||||||||||
|
Operating
|
2,143 | 2,181 | 6,269 | 6,480 | ||||||||||||
|
Selling, general and
administrative
|
365 | 344 | 1,061 | 1,040 | ||||||||||||
|
Depreciation and amortization
|
331 | 340 | 963 | 1,013 | ||||||||||||
|
Restructuring
|
— | — | 10 | — | ||||||||||||
|
(Income) expense from
divestitures, asset impairments and unusual items
|
(1 | ) | 19 | (33 | ) | (10 | ) | |||||||||
| 2,838 | 2,884 | 8,270 | 8,523 | |||||||||||||
|
Income from operations
|
565 | 557 | 1,679 | 1,557 | ||||||||||||
|
Other income (expense):
|
||||||||||||||||
|
Interest expense
|
(128 | ) | (138 | ) | (395 | ) | (412 | ) | ||||||||
|
Interest income
|
10 | 24 | 39 | 53 | ||||||||||||
|
Equity in net earnings
(losses) of unconsolidated entities
|
1 | (20 | ) | (45 | ) | (18 | ) | |||||||||
|
Minority interest
|
(12 | ) | (11 | ) | (33 | ) | (33 | ) | ||||||||
|
Other, net
|
— | 1 | 2 | 2 | ||||||||||||
| (129 | ) | (144 | ) | (432 | ) | (408 | ) | |||||||||
|
Income before income
taxes
|
436 | 413 | 1,247 | 1,149 | ||||||||||||
|
Provision for income
taxes
|
158 | 113 | 393 | 246 | ||||||||||||
|
Net income
|
$ | 278 | $ | 300 | $ | 854 | $ | 903 | ||||||||
|
Basic earnings per
common share
|
$ | 0.54 | $ | 0.56 | $ | 1.64 | $ | 1.66 | ||||||||
|
Diluted earnings per
common share
|
$ | 0.54 | $ | 0.55 | $ | 1.62 | $ | 1.65 | ||||||||
|
Cash dividends declared
per common share (1st quarter 2006 dividend of $0.22 per share declared
in December 2005, paid in March 2006)
|
$ | 0.24 | $ | 0.22 | $ | 0.72 | $ | 0.44 | ||||||||
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
| Nine Months |
||||||||
| Ended |
||||||||
| September 30, | ||||||||
| 2007 | 2006 | |||||||
|
Cash flows from operating
activities:
|
||||||||
|
Net income
|
$ | 854 | $ | 903 | ||||
|
Adjustments to reconcile
net income to net cash provided by operating activities:
|
||||||||
|
Provision for bad
debts
|
27 | 33 | ||||||
|
Depreciation and amortization
|
963 | 1,013 | ||||||
|
Deferred income tax
provision
|
53 | (46 | ) | |||||
|
Minority interest
|
33 | 33 | ||||||
|
Equity in net (earnings)
losses of unconsolidated entities, net of distributions
|
33 | 34 | ||||||
|
Net gain from disposal
of assets
|
(23 | ) | (16 | ) | ||||
|
Effect of (income)
expense from divestitures, asset impairments and unusual items
|
(33 | ) | (10 | ) | ||||
|
Excess tax benefits
associated with equity-based transactions
|
(26 | ) | (34 | ) | ||||
|
Change in operating
assets and liabilities, net of effects of acquisitions and divestitures:
|
||||||||
|
Receivables
|
(16 | ) | (62 | ) | ||||
|
Other current assets
|
(13 | ) | (13 | ) | ||||
|
Other assets
|
6 | (5 | ) | |||||
|
Accounts payable and
accrued liabilities
|
27 | 47 | ||||||
|
Deferred revenues
and other liabilities
|
(39 | ) | 10 | |||||
|
Net cash provided
by operating activities
|
1,846 | 1,887 | ||||||
|
Cash flows from investing
activities:
|
||||||||
|
Acquisitions of businesses,
net of cash acquired
|
(86 | ) | (32 | ) | ||||
|
Capital expenditures
|
(721 | ) | (846 | ) | ||||
|
Proceeds from divestitures
of businesses (net of cash divested) and other sales of assets
|
235 | 198 | ||||||
|
Purchases of short-term
investments
|
(1,221 | ) | (2,381 | ) | ||||
|
Proceeds from sales
of short-term investments
|
1,288 | 2,355 | ||||||
|
Net receipts from
restricted trust and escrow accounts
|
121 | 156 | ||||||
|
Other
|
(23 | ) | (41 | ) | ||||
|
Net cash used in investing
activities
|
(407 | ) | (591 | ) | ||||
|
Cash flows from financing
activities:
|
||||||||
|
New borrowings
|
439 | 118 | ||||||
|
Debt repayments
|
(658 | ) | (236 | ) | ||||
|
Common stock repurchases
|
(1,059 | ) | (934 | ) | ||||
|
Cash dividends
|
(374 | ) | (358 | ) | ||||
|
Exercise of common
stock options and warrants
|
137 | 219 | ||||||
|
Excess tax benefits
associated with equity-based transactions
|
26 | 34 | ||||||
|
Minority interest
distributions paid
|
(16 | ) | (11 | ) | ||||
|
Other
|
(14 | ) | (48 | ) | ||||
|
Net cash used in financing
activities
|
(1,519 | ) | (1,216 | ) | ||||
|
Effect of exchange
rate changes on cash and cash equivalents
|
3 | — | ||||||
|
Increase (decrease)
in cash and cash equivalents
|
(77 | ) | 80 | |||||
|
Cash and cash equivalents
at beginning of period
|
614 | 666 | ||||||
|
Cash and cash equivalents
at end of period
|
$ | 537 | $ | 746 | ||||
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In Millions, Except Shares in Thousands)
(Unaudited)
| Accumulated |
Restricted |
|||||||||||||||||||||||||||||||
| Additional |
Other |
Stock |
||||||||||||||||||||||||||||||
| Common Stock | Paid-In |
Retained |
Comprehensive |
Unearned |
Treasury Stock | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Income (Loss) | Compensation | Shares | Amount | |||||||||||||||||||||||||
|
Balance, December 31,
2005
|
630,282 | $ | 6 | $ | 4,486 | $ | 3,615 | $ | 126 | $ | (2 | ) | (78,029 | ) | $ | (2,110 | ) | |||||||||||||||
|
Net income
|
— | — | — | 1,149 | — | — | — | — | ||||||||||||||||||||||||
|
Cash dividends declared
|
— | — | — | (355 | ) | — | — | — | — | |||||||||||||||||||||||
|
Cash dividends adjustment
|
— | — | — | 1 | — | — | — | — | ||||||||||||||||||||||||
|
Equity-based compensation
transactions, net of taxes
|
— | — | 24 | — | — | 2 | 11,483 | 321 | ||||||||||||||||||||||||
|
Common stock repurchases
|
— | — | — | — | — | — | (30,965 | ) | (1,073 | ) | ||||||||||||||||||||||
|
Unrealized losses resulting
from changes in fair values of derivative instruments, net of taxes
of $7
|
— | — | — | — | (11 | ) | — | — | — | |||||||||||||||||||||||
|
Realized losses on
derivative instruments reclassified into earnings, net of taxes of $3
|
— | — | — | — | 5 | — | — | — | ||||||||||||||||||||||||
|
Unrealized gains on
marketable securities, net of taxes of $3
|
— | — | — | — | 5 | — | — | — | ||||||||||||||||||||||||
|
Translation adjustment
of foreign currency statements
|
— | — | — | — | 3 | — | — | — | ||||||||||||||||||||||||
|
Underfunded post-retirement
benefit obligations, net of taxes of $3
|
— | — | — | — | 1 | — | — | — | ||||||||||||||||||||||||
|
Other
|
— | — | 3 | — | — | — | 912 | 26 | ||||||||||||||||||||||||
|
Balance, December 31,
2006
|
630,282 | $ | 6 | $ | 4,513 | $ | 4,410 | $ | 129 | $ | — | (96,599 | ) | $ | (2,836 | ) | ||||||||||||||||
|
Net income
|
— | — | — | 854 | — | — | — | — | ||||||||||||||||||||||||
|
Cash dividends declared
|
— | — | — | (374 | ) | — | — | — | — | |||||||||||||||||||||||
|
Equity-based compensation
transactions, net of taxes
|
— | — | 23 | — | — | — | 5,877 | 176 | ||||||||||||||||||||||||
|
Common stock repurchases
|
— | — | — | — | — | — | (30,078 | ) | (1,074 | ) | ||||||||||||||||||||||
|
Unrealized losses resulting
from changes in fair values of derivative instruments, net of taxes
of $23
|
— | — | — | — | (36 | ) | — | — | — | |||||||||||||||||||||||
|
Realized losses on
derivative instruments reclassified into earnings, net of taxes of $28
|
— | — | — | — | 44 | — | — | — | ||||||||||||||||||||||||
|
Unrealized losses on
marketable securities, net of taxes of $2
|
— | — | — | — | (4 | ) | — | — | — | |||||||||||||||||||||||
|
Translation adjustment
of foreign currency statements
|
— | — | — | — | 89 | — | — | — | ||||||||||||||||||||||||
|
Cumulative effect of
change in accounting principle
|
— | — | — | 4 | — | — | — | — | ||||||||||||||||||||||||
|
Other
|
— | — | (1 | ) | — | — | — | 301 | 9 | |||||||||||||||||||||||
|
Balance, September 30,
2007
|
630,282 | $ | 6 | $ | 4,535 | $ | 4,894 | $ | 222 | $ | — | (120,499 | ) | $ | (3,725 | ) | ||||||||||||||||
For more information, contact:
Waste Management, Inc.
Analysts: Greg Nikkel - 713.265.1358
Media: Lynn Brown - 713.394.5093
www.wm.com
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