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Strongest Quarter in Six Years for Waste Management

Date: October 25, 2006

Source: Waste Management, Inc.

Waste Management Announces Third Quarter 2006 Earnings Company Raises Full-Year 2006 Earnings Guidance

Waste Management, Inc. (NYSE: WMI) today announced financial results for its third quarter ended September 30, 2006. Revenues for the quarter were $3.44 billion as compared with $3.38 billion in the year ago period, an increase of 2.0%. Net income for the quarter was $300 million, or $0.55 per diluted share, compared with $215 million, or $0.38 per diluted share, in the prior year period, which represents a 45% increase in earnings per diluted share.

The Company noted one-time items that impacted the results in the current and prior years' third quarters. Results in the current quarter included:

  • A $20 million benefit in net income resulting primarily from favorable income tax audit settlements and adjustments required for the finalization of our 2005 tax returns; and

  • A $16 million reduction in net income due mainly to asset impairment charges and losses on sales of operations related to the previously announced divestiture program.

Results in the prior year's third quarter included a net $40 million reduction in net income due primarily to combined charges of $96 million after-tax in asset impairments and unusual items, restructuring charges and additional landfill amortization expense. Partially offsetting these charges was a $56 million after-tax reduction in income tax expense resulting mainly from favorable tax audit settlements.

Excluding these items, net income would have been $296 million, or $0.55 per diluted share, in the third quarter of 2006 compared with $255 million, or $0.45 per diluted share, in the prior year quarter, which represents a 22% increase in earnings per diluted share.

Income from operations as a percent of revenue was 16.2% in the third quarter of 2006. Income from operations as a percent of revenue, as adjusted for the items noted above, increased 150 basis points to 16.8% in the current year's quarter compared with the prior year's quarter.

"We were very pleased with our results during the quarter as we again exceeded our internal expectations and achieved our primary financial goals of strong earnings growth, margin expansion and strong free cash flow," said David P. Steiner, Chief Executive Officer of Waste Management. "We accomplished these objectives in the third quarter of this year due to the success of our pricing programs combined with a $21 million reduction in our operating expenses compared with the prior year's quarter. As a percent of revenue, we lowered our operating expenses by 180 basis points compared with the third quarter of 2005.

"Our internal revenue growth due to yield on base business of 3.6% indicates that our pricing excellence initiatives continue to generate positive results. This higher yield more than offset the 1.8% volume loss that we experienced during the quarter, about half of which resulted from the combination of nearly one less workday and lower non-core revenues. The remaining volume loss was primarily in our collection lines of business, which is driven mainly by our strategy to price our work in order to achieve acceptable margins and returns. This pricing strategy is the primary factor leading to our robust margin expansion. Also contributing to the margin expansion are our operational excellence programs and the reduction in operating expenses as we flexed down costs due to lower volume. This marks the fifth consecutive quarter in which our year-over-year operating costs as a percent of revenue have declined.

Steiner also highlighted the Company's strong cash position: "We generated $745 million in net cash provided by operating activities and $431 million in free cash flow during this year's third quarter, bringing our free cash flow total to $1.24 billion for the first nine months of 2006. (a) We returned $425 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 $1.55 billion to our shareholders for the full-year. Although we expect sequential capital expenditures to increase significantly during the fourth quarter, we project that our full-year free cash flow will meet or exceed the range of $1.2 to $1.3 billion."

Key Highlights for the Quarter

  • Internal revenue growth on base business due to yield increased 3.6%. Including $31 million obtained through our fuel surcharge program, the base business revenue growth from yield was 4.6%.

  • Internal revenue growth from volumes decreased 1.8%. Approximately one-half of this decline resulted from the impact of nearly one less workday and lower non-core volumes.

  • Divestitures net of acquisitions caused a 1.1% decline in revenues in the quarter and foreign currency translation caused a 0.3% increase in revenues. Operating expenses declined by $21 million, or approximately 1%, to $2.18 billion in the third quarter of 2006. As a percent of revenue, operating expenses fell to 63.4% during the current year quarter, which is a 180 basis point improvement compared with the prior year quarter.

  • Net cash provided by operating activities of $745 million in the third quarter. For the nine-month period, net cash provided by operating activities was $1.87 billion. oFree cash flow of $431 million. For the nine-month period, free cash flow was $1.24 billion.

  • Capital expenditures of $357 million in the third quarter. For the nine-month period, capital expenditures totaled $824 million.

  • $425 million returned to shareholders in the third quarter, consisting of $118 million in cash dividends and $307 million in common stock repurchases.

  • The effective tax rate in the third quarter of 2006 was 27.4%. This is lower than the 39.3% rate projected in the Company's second quarter 2006 earnings release, primarily due to $20 million in tax items noted above, the reduction in the estimated phase-out of Section 45K tax credits and the third quarter resumption of operations of the synthetic fuel partnerships in which the Company invests. At the end of the second quarter, the Company estimated the full year phase-out of its Section 45K tax credits to be 78%. It has now reduced the estimated full-year phase-out to 35% due to its outlook for average full-year crude oil prices. Based on an estimated 35% phase-out, the Company recorded a benefit of approximately $0.05 per diluted share during the third quarter, which includes $0.02 of additional tax credits attributable to the first two quarters of the year. At the revised 35% phase-out estimate, the Company projects a benefit from Section 45K tax credits of approximately $0.01 per diluted share in the fourth quarter of 2006. The Company's fourth quarter effective tax rate is projected to be 36.0%.

Steiner concluded, "Our nearly 50,000 employees produced the best quarter I have seen at Waste Management. As a result of our strong performance through the first nine months of the year and our expectations for the fourth quarter, we are raising our full year earnings guidance. As part of our second quarter 2006 earnings release, we projected our full-year 2006 earnings to be at the upper end of the analysts' then current full-year range of $1.69 to $1.75 per diluted share. Adjusting for the non-recurring items noted in our 2006 quarterly earnings releases, we now expect our full year earnings to be within the range of $1.78 to $1.81 per diluted share."

A replay of the investor conference call that occurred on October 25th, 2006 to discuss these results will be available through November 8. 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 7044631.

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.

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