Waste Business Journal

Waste Management's Third Quarter Profit Up by 12%

Date: October 30, 2008

Source: Waste Management, Inc.

Waste Management Announces Third Quarter 2008 Earnings

• Company Posts 16.7% Increase in Earnings Per Share

Waste Management, Inc. (NYSE: WMI) today announced financial results for its third quarter ended September 30, 2008. Revenue for the third quarter of 2008 was $3.53 billion compared with $3.40 billion in the year ago period, an increase of 3.6%. Net income for the quarter was $310 million, or $0.63 per diluted share, compared with $278 million, or $0.54 per diluted share, in the prior year period, an increase of 16.7% in earnings per diluted share.

The Company noted several items that impacted the results in the 2007 and 2008 third quarters. Results in the third quarter of 2008 included an after-tax benefit of $0.03 per diluted share due to gains from the divestiture of operations offset by a decrease of $0.03 per diluted share related to the cost of a labor disruption in Milwaukee, including more than a $0.02 per diluted share charge related to the local bargaining unit agreeing to our proposal to withdraw the bargaining unit from the Teamsters' under-funded Central States pension fund.

Results in the third quarter of 2007 included a decrease of $0.03 per diluted share related to the cost of a labor disruption in Oakland offset by a $0.03 per diluted share benefit from income tax items.

Excluding those items, earnings would have been $312 million, or $0.63 per diluted share, in the third quarter of 2008 compared with $280 million, or $0.54 per diluted share, in the third quarter of 2007. (a)

Income from operations as a percent of revenue was 18.0% in the third quarter of 2008, a 60 basis point improvement compared with the third quarter of 2007, both periods adjusted for the items noted above. (a)

For the nine months ended September 30, 2008, Waste Management reported operating revenue of $10.28 billion, compared with $9.95 billion for the same period last year. Net income was $869 million, or $1.75 per diluted share, for the nine months ended September 30, 2008, compared with net income of $854 million, or $1.62 per diluted share, for the same period in 2007.

"We have delivered another solid financial performance, and accomplished our primary goals of earnings growth, operating margin expansion and strong free cash flow," said David P. Steiner, Chief Executive Officer of Waste Management. "Our financial performance continues to be driven by the success of our pricing and operational excellence programs. We are very happy with the 16.7% growth in adjusted earnings per share which demonstrates the strength of our business, even in a slowing economy. (a)

"Revenue grew by 3.6% during the third quarter of 2008. Internal revenue growth from yield on base business was 2.7%. Including the positive impact of higher recycling commodity prices and higher fuel surcharge revenue, internal revenue growth from yield was 6.5%. Internal revenue growth at our landfills was at the highest level since the third quarter of 2006 and internal revenue growth from yield in our municipal solid waste disposal line was at the highest level since 2005.

"Our operational excellence and pricing excellence programs continue to improve operating margins. Excluding a 40 basis point impact from higher diesel fuel prices, our as-adjusted income from operations as a percent of revenue increased to 18.4% in the third quarter of this year. This is a 100 basis point improvement when compared with the as-adjusted income from operations as a percent of revenue for the prior year period. (a) We also overcame the impact of a slowing economy and difficult credit markets during the third quarter of 2008, displaying the defensive nature of our business.

"The recycling commodity markets have become very volatile over the last two weeks. During 2008, we have benefited from high recycling commodity prices. We do not expect a year-over-year benefit in the fourth quarter. In fact, we currently estimate that our recycling line of business could negatively impact earnings per share by as much as $0.03 in the fourth quarter. We expect our solid waste business, with its recession resistant qualities and strong cash flows, to perform very well, just as it has all year."

Key Highlights for the Third Quarter of 2008

• Internal revenue growth from yield on base business was 2.7%. Including the positive impact of higher recycling commodity prices and higher fuel surcharge revenue, internal revenue growth from yield was 6.5%.

• Internal revenue growth from volumes was a negative 3.2% due to our pricing excellence program and the economy.

• Acquisitions contributed 0.8% to higher revenue in the quarter, while divestitures caused a 0.7% decline in revenue in the quarter.

• Operating expenses were 63.0% of revenue in the third quarters of both 2007 and 2008. Excluding the impacts in 2008 of higher diesel fuel prices, higher recycling commodity prices on both operating expenses and revenue, and the impact of the Milwaukee labor disruption costs, operating expenses were 61.1% of revenue in the third quarter of 2008, or a 120 basis point improvement compared with the prior year period as adjusted for the labor disruption costs in Oakland in 2007. (a)

• Depreciation and amortization expenses were 9.2% of revenue, down from 9.7% of revenue in the third quarter of 2007.

• Net cash provided by operating activities was $771 million.

• Free cash flow was $524 million, compared with $550 million in the prior year quarter. (a) Capital expenditures were $301 million, or $61 million more than in the 2007 quarter. Proceeds from divestitures of businesses, net of cash divested, and from other sales of assets, were $54 million, or $35 million higher than the prior year quarter.

• We returned $142 million to shareholders through $133 million in dividend payments and $9 million in common stock repurchases.

(a) This earnings release contains a discussion of non-GAAP measures, as defined in Regulation G of the Securities Exchange Act of 1934, as amended. The Company reports its financial results in compliance with GAAP, but believes that also discussing non-GAAP measures provides investors with (i) additional, meaningful comparisons of current results to prior periods' results by excluding items that the Company does not believe reflect its fundamental business performance and (ii) financial measures the Company uses in the management of its business. GAAP measures that have been adjusted to exclude the impact of certain unusual, non-recurring or otherwise non-operational items include:

• Net income;

• Earnings per diluted share;

• Earnings per diluted share growth;

• Income from operations as a percent of revenue; and

• Operating expenses as a percent of revenue.

The Company also discusses free cash flow, which is a non-GAAP measure, 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, and the payment of dividends. However, free cash flow has material limitations, as it does not represent cash flow available for discretionary expenditures because it excludes certain expenditures that we have committed to such as debt service obligations. 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 quantitative reconciliations of the non-GAAP measures 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 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 "Earnings 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 66401070." 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 30th through 5:00 p.m. Eastern time on November 13th. 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 66401070.

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.

The Company, from time to time, provides estimates of financial and other data, comments on expectations relating to future periods and makes statements of opinion, view or belief about current and future events. Statements relating to future events and performance are "forward-looking statements." The forward-looking statements that the Company makes are the Company's expectations, opinion, view or belief at the point in time of issuance but may change at some future point in time. By issuing estimates or making statements based on current expectations, opinions, views or beliefs, the Company has no obligation, and is not undertaking any obligation, to update such estimates or statements or to provide any other information relating to such estimates or statements. Outlined below are some of the risks that the Company faces and that could affect our financial statements for 2008 and beyond and that could cause actual results to be materially different from those that may be set forth in forward-looking statements made by the Company. However, they are not the only risks that the Company faces. There may be additional risks that we do not presently know or that we currently believe are immaterial which could also impair our business. We caution you not to place undue reliance on any forward-looking statements, which speak only as of their dates. The following are some of the risks that we face:

• competition may negatively affect our profitability or cash flows, our price increases may have negative effects on volumes, and price roll-backs and lower than average pricing to retain and attract customers may negatively affect our yield on base business;

• we may be unable to maintain or expand margins if we are unable to control costs or raise prices;

• we may not be able to successfully execute or continue our operational or other margin improvement plans and programs, including pricing increases, passing on increased costs to our customers, reducing costs due to our operational improvement programs, and divesting under-performing assets and purchasing accretive businesses, any of which could negatively affect our revenues and margins;

• weather conditions cause our quarter-to-quarter results to fluctuate, and harsh weather or natural disasters may cause us to temporarily shut down operations;

• continued volatility and further deterioration in the credit markets, inflation, higher interest rates and other general and local economic conditions may negatively affect the volumes of waste generated, our liquidity, our financing costs and other expenses;

• economic conditions may negatively affect parties with whom we do business, which could result in late payments or the uncollectability of receivables as well as the non-performance of certain agreements, including expected funding under our credit agreement, which could negatively impact our liquidity and results of operations;

• possible changes in our estimates of costs for site remediation requirements, final capping, closure and post-closure obligations, compliance and regulatory developments may increase our expenses;

• regulations may negatively impact our business by, among other things, restricting our operations, increasing costs of operations or requiring additional capital expenditures;

• climate change legislation, including possible limits on carbon emissions, may negatively impact our results of operations by increasing expenses related to tracking, measuring and reporting our greenhouse gas emissions and increasing operating costs and capital expenditures that may be required to comply with any such legislation;

• if we are unable to obtain and maintain permits needed to open, operate, and/or expand our facilities, our results of operations will be negatively impacted;

• limitations or bans on disposal or transportation of out-of-state, cross-border, or certain categories of waste, as well as mandates on the disposal of waste, can increase our expenses and reduce our revenue;

• fuel price increases or fuel supply shortages may increase our expenses or restrict our ability to operate;

• increased costs or the inability to obtain financial assurance or the inadequacy of our insurance coverages could negatively impact our liquidity and increase our liabilities;

• possible charges as a result of shut-down operations, uncompleted development or expansion projects or other events may negatively affect earnings;

• fluctuations in commodity prices may have negative effects on our operating results;

• trends requiring recycling, waste reduction at the source and prohibiting the disposal of certain types of waste could have negative effects on volumes of waste going to landfills and waste-to-energy facilities;

• efforts by labor unions to organize our employees may increase operating expenses and we may be unable to negotiate acceptable collective bargaining agreements with those who have chosen to be represented by unions, which could lead to labor disruptions, including strikes and lock-outs, which could adversely affect our results of operations and cash flows;

• negative outcomes of litigation or threatened litigation or governmental proceedings may increase our costs, limit our ability to conduct or expand our operations, or limit our ability to execute our business plans and strategies;

• problems with the operation of our current information technology or the development and deployment of new information systems could decrease our efficiencies, increase our costs, or lead to an impairment charge;

• the adoption of new accounting standards or interpretations may cause fluctuations in reported quarterly results of operations or adversely impact our reported results of operations; and

• we may reduce or permanently eliminate our dividend or share repurchase program, reduce capital spending and cease acquisitions if cash flows are less than we expect and we are not able to obtain capital needed to refinance our debt obligations, including near-term maturities, on acceptable terms.

Additional information regarding these and/or other factors that could materially affect results and the accuracy of the forward-looking statements contained herein may be found in Part I, Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2007.

For Further Information:
Waste Management, Inc.
Analysts: Jim Alderson - 713.394.2281
Media: Lynn Brown - 713.394.5093
Web site: www.wm.com.

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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,
		2008				2007				2008				2007
Operating revenues		$	3,525			$	3,403			$	10,280			$	9,949
Costs and expenses:
Operating			2,221				2,143				6,494				6,269
Selling, general and administrative			369				365				1,095				1,061
Depreciation and amortization			326				331				941				963
Restructuring			—				—				—				10
(Income) expense from divestitures, asset impairments and unusual items			(23	)			(1	)			(25	)			(33	)
			2,893				2,838				8,505				8,270
Income from operations			632				565				1,775				1,679
Other income (expense):
Interest expense			(114	)			(128	)			(341	)			(395	)
Interest income			5				10				14				39
Equity in net earnings (losses) of unconsolidated entities			—				1				(4	)			(45	)
Minority interest			(13	)			(12	)			(33	)			(33	)
Other, net			1				—				2				2
			(121	)			(129	)			(362	)			(432	)
Income before income taxes			511				436				1,413				1,247
Provision for income taxes			201				158				544				393
Net income		$	310			$	278			$	869			$	854
Basic earnings per common share		$	0.63			$	0.54			$	1.76			$	1.64
Diluted earnings per common share		$	0.63			$	0.54			$	1.75			$	1.62
Cash dividends declared per common share		$	0.27			$	0.24			$	0.81			$	0.72

 

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WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Par Value Amounts)

		September 30,				December 31,
		2008				2007
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	504			$	348
Accounts receivable, net of allowance for doubtful accounts of $39 and $46, respectively			1,670				1,674
Other receivables			146				218
Parts and supplies			113				103
Deferred income taxes			41				51
Other assets			119				86
Total current assets			2,593				2,480
Property and equipment, net of accumulated depreciation and amortization of $13,285 and $12,844, respectively			11,291				11,351
Goodwill			5,493				5,406
Other intangible assets, net			147				124
Other assets			819				814
Total assets		$	20,343			$	20,175
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	666			$	656
Accrued liabilities			1,070				1,151
Deferred revenues			454				462
Current portion of long-term debt			816				329
Total current liabilities			3,006				2,598
Long-term debt, less current portion			7,613				8,008
Deferred income taxes			1,466				1,411
Landfill and environmental remediation liabilities			1,372				1,312
Other liabilities			686				744
Total liabilities			14,143				14,073
Minority interest in subsidiaries and variable interest entities			304				310
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			4,548				4,542
Retained earnings			5,547				5,080
Accumulated other comprehensive income			182				229
Treasury stock at cost, 139,727,949 and 130,163,692 shares, respectively			(4,387	)			(4,065	)
Total stockholders’ equity			5,896				5,792
Total liabilities and stockholders’ equity		$	20,343			$	20,175

 

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WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)

		Nine Months
		Ended
		September 30,
		2008				2007
Cash flows from operating activities:
Net income		$	869			$	854
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for bad debts			32				27
Depreciation and amortization			941				963
Deferred income tax provision			83				53
Minority interest			33				33
Equity in net (earnings) losses of unconsolidated entities, net of distributions			1				33
Net gain from disposal of assets			(25	)			(23	)
Effect of (income) expense from divestitures, asset impairments and unusual items			(25	)			(33	)
Excess tax benefits associated with equity-based transactions			(7	)			(26	)
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
Receivables			35				(16	)
Other current assets			(29	)			(13	)
Other assets			2				6
Accounts payable and accrued liabilities			12				27
Deferred revenues and other liabilities			(20	)			(39	)
Net cash provided by operating activities			1,902				1,846
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired			(230	)			(86	)
Capital expenditures			(787	)			(721	)
Proceeds from divestitures of businesses (net of cash divested) and other sales of assets			92				235
Purchases of short-term investments			—				(1,221	)
Proceeds from sales of short-term investments			—				1,288
Net receipts from restricted trust and escrow accounts			142				121
Other			7				(23	)
Net cash used in investing activities			(776	)			(407	)
Cash flows from financing activities:
New borrowings			1,091				439
Debt repayments			(1,206	)			(658	)
Common stock repurchases			(410	)			(1,059	)
Cash dividends			(399	)			(374	)
Exercise of common stock options and warrants			36				137
Excess tax benefits associated with equity-based transactions			7				26
Minority interest distributions paid			(33	)			(16	)
Other			(56	)			(14	)
Net cash used in financing activities			(970	)			(1,519	)
Effect of exchange rate changes on cash and cash equivalents			—				3
Increase (decrease) in cash and cash equivalents			156				(77	)
Cash and cash equivalents at beginning of period			348				614
Cash and cash equivalents at end of period		$	504			$	537

 

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Waste Management, Inc.
Summary Data Sheet
(Dollar Amounts in Millions)
(Unaudited)

		Quarters Ended
		September 30,				June 30,				September 30,
		2008				2008				2007
Operating Revenues by Lines of Business
Collection		$	2,233			$	2,237			$	2,210
Landfill			787				786				789
Transfer			417				424				426
Wheelabrator			245				225				222
Recycling			344				324				294
Other			55				56				45
Intercompany (a)			(556	)			(563	)			(583	)
Operating revenues		$	3,525			$	3,489			$	3,403
Internal Growth of Operating Revenues from Comparable Prior Periods
Internal growth			3.5	%			3.2	%			0.5	%
Less: Yield changes due to recycling commodities, electricity (IPP), fuel surcharge and mandated fees			4.0	%			3.9	%			2.2	%
Adjusted internal growth			-0.5	%			-0.7	%			-1.7	%
Acquisition Summary (b)
Gross annualized revenue acquired		$	94			$	39			$	39
Total consideration		$	109			$	60			$	44
Cash paid for acquisitions		$	100			$	55			$	38
WMRA Segment Supplemental Data (c)
Operating revenues		$	292			$	270			$	243
Operating expenses		$	247			$	226			$	207

 

		Quarters Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
Free Cash Flow Analysis (d)
Net cash provided by operating activities		$	771			$	771			$	1,902			$	1,846
Capital expenditures			(301	)			(240	)			(787	)			(721	)
Proceeds from divestitures of businesses (net of cash divested) and other sales of assets			54				19				92				235
Free cash flow		$	524			$	550			$	1,207			$	1,360