Waste Business Journal

Waste Management Profit Off on Lower Volume and Recycling Demand

Date: October 29, 2009

Source: Waste Management, Inc.

Waste Management Announces Diluted Earnings per Share of $0.56 for the 2009 Third Quarter

• Pricing Remains Strong and Company Reaffirms Full Year EPS Guidance

Waste Management, Inc. (NYSE: WM) today announced financial results for its third quarter ended September 30, 2009. Net income(a) for the quarter was $277 million, or $0.56 per diluted share, compared with $310 million, or $0.63 per diluted share, for the third quarter of 2008. Revenues for the third quarter of 2009 were $3.02 billion compared with $3.53 billion for the same 2008 period. Results in the 2009 third quarter included a net benefit of $0.02 per diluted share from the combined effects of certain favorable income tax adjustments and charges related to our restructuring announced in February 2009. Excluding those items, earnings would have been $265 million, or $0.54 per diluted share.(b)

David P. Steiner, Chief Executive Officer of Waste Management, commented, "The third quarter once again shows the strength of our strategy to maintain pricing while reducing costs. Our collection and disposal pricing remained strong, with internal revenue growth from yield of 2.9%. Recycling commodity prices increased each month in the third quarter, and have increased over 80% from the lows reached in January of 2009. On the cost side, the company-wide restructuring we announced in February produced savings consistent with the prior quarter, and we expect to exceed our original forecast of annualized savings of $120 million.

"Our commercial and residential business lines continued to demonstrate their recession-resistant qualities. Commercial revenue, excluding revenue from our fuel surcharge, remained solid, declining just 0.7% compared with the third quarter of 2008. Residential revenue, excluding revenue from our fuel surcharge, performed even better, declining only 0.4% compared with the prior year period."

Key Highlights for the Third Quarter 2009

• Internal revenue growth from yield from our collection and disposal operations was 2.9%.

• Internal revenue growth from volume was negative 8.9%.

• Revenue declined by $502 million. Of this decline, $189 million was due to lower recycling revenues and electricity sales prices, $108 million was related to the decline in fuel surcharge revenue as crude oil prices declined, and $10 million was due to foreign currency translation.

• Operating expenses declined by $365 million, or approximately 16.4%, to $1.86 billion in the third quarter of 2009. Operating expenses, adjusted for labor disruption costs of $26 million that occurred in the third quarter of 2008, declined $339 million, or approximately 15.4%. As a percentage of revenue, third quarter 2009 operating expenses decreased to 61.4%, which is a 90 basis point improvement compared with the same quarter in 2008, as adjusted.(b)

• Selling, general and administrative expenses decreased by $30 million compared with the third quarter of 2008.

• Average recycling commodity prices were down 40% in the third quarter of 2009 compared with the prior year period. This decline caused a negative year-over-year impact to earnings of $0.05 per diluted share in the third quarter, compared with the prior year period.

• Natural gas markets adversely affected electricity sales prices at some of our waste-to-energy plants in the third quarter of 2009, causing a decline in earnings per diluted share of $0.04 compared with the prior year period.

• Free cash flow was $343 million in the quarter, and is $839 million for the first three quarters.(b)

• Capital expenditures were $240 million in the quarter.

• $208 million was returned to shareholders in the third quarter, consisting of $143 million in cash dividends and $65 million in common stock repurchases.

• The effective tax rate in the quarter was approximately 31.2%. The reduction in the effective tax rate for the quarter is due principally to the favorable impacts of finalizing our 2008 tax returns, tax audit settlements, currently recognizing the benefit of state net operating loss carry forwards, and updating our 2009 effective tax rate.

Steiner continued, "Economic conditions and our volumes have stabilized. So, as we look to the fourth quarter of this year, we expect the rate of decline in volumes to be slightly better than the rate of decline in the third quarter of 2009. In addition, our recycling business has shown consistent improvement since the lows in commodity prices reached during January 2009, and we expect a positive $0.02 to $0.04 impact on earnings per diluted share from our recycling operations in the fourth quarter of 2009, compared with the prior year period. On the other hand, we expect lower year-over-year natural gas prices to cause lower electricity sales prices in the fourth quarter of 2009, which would cause earnings per diluted share to decline $0.02 to $0.04 compared with the prior year period. So, we expect the negative effect from lower electricity sales prices to be offset by the positive effect from recycled commodities prices. Given these factors, we are comfortable we can achieve our previously issued full year 2009 earnings guidance of $1.95 to $1.99 per diluted share on an as adjusted basis. This is consistent with the current Wall Street earnings consensus of $0.48 per share for the fourth quarter of 2009. We continue to target full-year free cash flow of approximately $1.3 billion."(b)

Steiner concluded, "During the economic downturn we have maintained our commitment to returning cash to our shareholders. In the third quarter we paid out $143 million in dividends and repurchased $65 million of common stock. We also closed $82 million of acquisitions in the quarter. The recession-resistant qualities and strong cash flows of our solid waste business, combined with our focus on pricing and cost reduction, give us confidence that we will continue to generate strong cash returns for our shareholders and emerge from this economic downturn as a stronger, leaner company that is positioned to grow."

(a) For purposes of this press release, all references to "Net income" refers to the financial statement line item "Net income attributable to Waste Management, Inc."

(b) 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. The Company has adjusted net income, earnings per diluted share, projected earnings per diluted share and operating expense as a percent of revenue in this press release to exclude the impact of certain unusual, non-recurring or otherwise non-operational items.

The Company also discusses free cash flow and projected free cash flow, each of 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 full year adjusted earnings projection of $1.95 to $1.99 per diluted share announced by the Company excludes (i) the first quarter impact of (A) a $23 million after-tax restructuring charge and (B) a $30 million after-tax asset impairment related to our revenue management software; (ii) the second quarter impact of (A) a restructuring charge of $3 million after-tax and (B) a $6 million after-tax charge related to our withdrawal from an underfunded multi-employer pension plan; and (iii) the third quarter impact of (A) a restructuring charge of $2 million after tax and, (B) a $14 million benefit related to tax items. GAAP net earnings per diluted share for the fourth quarter of 2009 may include other items that are not currently determinable, but may be significant, such as asset impairment and unusual items, charges, gains or losses from divestitures, or resolution of income tax items. The full year 2009 adjusted projected earnings announced today excludes the impact of any such items that may occur. GAAP net earnings per diluted share projected for the full year would require inclusion of the projected impact of these items. Due to the uncertainty of the likelihood, amount and timing of any such items, we do not believe we have the information available to provide projected full year GAAP net earnings per diluted share and the quantitative reconciliation to our current adjusted earning per diluted share projection.

The quantitative reconciliations of each of the other 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 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 "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 30064951." 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 29th through 5:00 p.m. Eastern time on November 12th. 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 30064951.

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 2009 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. 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:

• volatility and 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;

• 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 average yield on collection and disposal 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; and divesting under-performing assets and purchasing accretive businesses, any failures 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;

• 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 and increase our costs;

• 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 or 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, 2008.

 

		September 30,				December 31,
		2009				2008
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	612			$	480
Accounts receivable, net of allowance for doubtful accounts of $32 and $39, respectively			1,459				1,463
Other receivables			154				147
Parts and supplies			106				110
Deferred income taxes			56				39
Other assets			123				96
Total current assets			2,510				2,335
Property and equipment, net of accumulated depreciation and amortization of $13,929 and $13,273, respectively			11,356				11,402
Goodwill			5,575				5,462
Other intangible assets, net			206				158
Other assets			745				870
Total assets		$	20,392			$	20,227
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	554			$	716
Accrued liabilities			1,062				1,034
Deferred revenues			447				451
Current portion of long-term debt			742				835
Total current liabilities			2,805				3,036
Long-term debt, less current portion			7,504				7,491
Deferred income taxes			1,518				1,484
Landfill and environmental remediation liabilities			1,361				1,360
Other liabilities			683				671
Total liabilities			13,871				14,042
Commitments and contingencies
Equity:
Waste Management, Inc. 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			4,534				4,558
Retained earnings			5,880				5,631
Accumulated other comprehensive income			178				88
Treasury stock at cost, 139,719,246 and 139,546,915 shares, respectively			(4,382	)			(4,381	)
Total Waste Management, Inc. stockholders’ equity			6,216				5,902
Noncontrolling interests			305				283
Total equity			6,521				6,185
Total liabilities and equity		$	20,392			$	20,227

 

		Three Months								Nine Months
		Ended								Ended
		September 30,								September 30,
		2009				2008				2009				2008
Operating revenues		$	3,023			$	3,525			$	8,785			$	10,280
Costs and expenses:
Operating			1,856				2,221				5,367				6,494
Selling, general and administrative			339				369				999				1,095
Depreciation and amortization			301				326				892				941
Restructuring			3				—				46				—
(Income) expense from divestitures, asset impairments and unusual items			(1	)			(23	)			50				(25	)
			2,498				2,893				7,354				8,505
Income from operations			525				632				1,431				1,775
Other income (expense):
Interest expense			(104	)			(114	)			(316	)			(341	)
Interest income			3				5				10				14
Other, net			1				1				1				(2	)
			(100	)			(108	)			(305	)			(329	)
Income before income taxes			425				524				1,126				1,446
Provision for income taxes			133				201				397				544
Consolidated net income			292				323				729				902
Less: Net income attributable to noncontrolling interests			(15	)			(13	)			(50	)			(33	)
Net income attributable to Waste Management, Inc.		$	277			$	310			$	679			$	869
Basic earnings per common share		$	0.56			$	0.63			$	1.38			$	1.76
Diluted earnings per common share		$	0.56			$	0.63			$	1.37			$	1.75
Cash dividends declared per common share		$	0.29			$	0.27			$	0.87			$	0.81

 

		Nine Months
		Ended
		September 30,
		2009				2008
Cash flows from operating activities:
Consolidated net income		$	729			$	902
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Depreciation and amortization			892				941
Deferred income tax provision			(10	)			83
Interest accretion on landfill liabilities			59				57
Interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets			(28	)			6
Provision for bad debts			37				32
Equity-based compensation expense			19				38
Net gain on disposal of assets			(6	)			(25	)
Effect of (income) expense from divestitures, asset impairments and unusual items			50				(25	)
Excess tax benefits associated with equity-based transactions			(2	)			(7	)
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
Receivables			(17	)			35
Other current assets			(19	)			(29	)
Other assets			1				3
Accounts payable and accrued liabilities			2				(26	)
Deferred revenues and other liabilities			(65	)			(83	)
Net cash provided by operating activities			1,642				1,902
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired			(127	)			(230	)
Capital expenditures			(823	)			(787	)
Proceeds from divestitures of businesses (net of cash divested) and other sales of assets			20				92
Net receipts from restricted trust and escrow accounts			98				142
Other			2				7
Net cash used in investing activities			(830	)			(776	)
Cash flows from financing activities:
New borrowings			1,026				1,091
Debt repayments			(1,142	)			(1,206	)
Common stock repurchases			(65	)			(410	)
Cash dividends			(428	)			(399	)
Exercise of common stock options			10				36
Excess tax benefits associated with equity-based transactions			2				7
Distributions paid to noncontrolling interests			(35	)			(33	)
Other			(51	)			(56	)
Net cash used in financing activities			(683	)			(970	)
Effect of exchange rate changes on cash and cash equivalents			3				—
Increase in cash and cash equivalents			132				156
Cash and cash equivalents at beginning of period			480				348
Cash and cash equivalents at end of period		$	612			$	504

 

										Waste Management, Inc. Stockholders’ Equity
																										Accumulated
																										Other
																		Additional								Comprehensive
						Comprehensive				Common Stock								Paid-In				Retained				Income				Treasury Stock								Noncontrolling
		Total				Income				Shares				Amounts				Capital				Earnings				(Loss)				Shares				Amounts				Interests
Balance, December 31, 2008		$	6,185								630,282			$	6			$	4,558			$	5,631			$	88				(139,547	)		$	(4,381	)		$	283
Comprehensive Income:
Net income			729			$	729				—				—				—				679				—				—				—				50
Other comprehensive income (loss), net of taxes:
Unrealized losses resulting from changes in fair value of derivative instruments, net of taxes of $16			(27	)			(27	)			—				—				—				—				(27	)			—				—				—
Realized losses on derivative instruments reclassified into earnings, net of taxes of $17			28				28				—				—				—				—				28				—				—				—
Unrealized gains on marketable securities, net of taxes of $2			8				8				—				—				—				—				3				—				—				5
Foreign currency translation adjustments			86				86				—				—				—				—				86				—				—				—
Other comprehensive income (loss)			95				95
Comprehensive income			824			$	824
Cash dividends declared			(428	)							—				—				—				(428	)			—				—				—				—
Equity-based compensation transactions, including dividend equivalents, net of taxes			43								—				—				(24	)			(2	)			—				2,182				69				—
Common stock repurchases			(70	)							—				—				—				—				—				(2,362	)			(70	)			—
Distributions paid to noncontrolling interests			(35	)							—				—				—				—				—				—				—				(35	)
Other			2								—				—				—				—				—				8				—				2
Balance, September 30, 2009		$	6,521								630,282			$	6			$	4,534			$	5,880			$	178				(139,719	)		$	(4,382	)		$	305