Waste Management Reports Drop in Second Quarter Profits

Date: July 30, 2007

Source: Waste Management, Inc.

Waste Management Announces Second Quarter 2007 Earnings

-- Income from Operations as a Percent of Revenue Expands by over 200 Basis Points
-- Company Raises Full-Year 2007 Earnings Guidance

Waste Management, Inc. (NYSE: WMI) today announced financial results for its second quarter ended June 30, 2007. Net income for the quarter was $338 million, or $0.64 per diluted share, compared with $417 million, or $0.76 per diluted share in the prior year period. The Company noted several items that impacted the results in the current and prior years' second quarters. Excluding these items, net income would have been $0.56 per diluted share in the second quarter of 2007 compared with $0.45 per diluted share in the prior year quarter, or a 24% increase in earnings per diluted share.(a)

The Company noted the following items that impacted the results for the quarter:

-- A $24 million benefit in net income primarily resulting from income tax audit settlements and adjustments to deferred taxes arising from legislative changes.

-- An after-tax benefit of $18 million due to gains on the divestitures of operations.

Combined, these items improved second quarter 2007 after-tax earnings by $42 million. Without the impact of these items, net income for the quarter would have been $296 million, or $0.56 per diluted share.(a)

The prior year's second quarter earnings included a net after-tax benefit of $168 million primarily due to tax audit settlements. Without such benefit, net income in last year's second quarter would have been $249 million, or $0.45 per diluted share.(a)

Income from operations as a percent of revenue improved 230 basis points to 18.9% in the second quarter of 2007 as compared with the second quarter of 2006. Income from operations as a percent of revenue, as adjusted for the items noted above, increased 210 basis points to 17.9% in the second quarter of 2007 as compared with the second quarter of 2006.(a)

"We are pleased with our second quarter 2007 financial performance, as we again accomplished our primary goals of adjusted earnings growth, operating margin expansion and strong free cash flow," said David P. Steiner, Chief Executive Officer of Waste Management. "Our strong financial performance continues to be driven by the success of our pricing and operational excellence programs."

Revenues for the quarter were $3.36 billion as compared with $3.41 billion in the year ago period, a decline of $52 million, as the Company continued to execute its strategy to divest underperforming operations and accounts. Excluding the divestiture of underperforming operations representing $104 million of second quarter 2006 revenues, second quarter 2007 revenues would have been up $52 million on a year-over-year basis. (a)

Steiner continued, "Our internal revenue growth due to yield on base business was 3.4%. If we include the 2.2% benefit from higher recycling commodity prices, internal revenue growth from yield was 5.6%. The internal revenue growth from yield in our combined commercial, industrial and residential lines of business was 4.6%. Our strategy to price work in order to achieve acceptable margins and returns again worked very well in the second quarter, as the volume loss in our collection line of business was about 4.8%, but the income from operations in our collection business grew 20%.

"The internal revenue growth from yield at our landfills and transfer stations improved in the second quarter of 2007, and we expect that to continue as we further implement our disposal pricing excellence program throughout the Company."

As for the Company's operational excellence programs, Steiner noted, "Our operating expense results continued to improve during the second quarter of 2007. We lowered our operating costs by $107 million during this year's quarter, which is a 4.9% improvement in absolute dollars when compared with the prior year's quarter. Operating expenses as a percent of revenue in the second quarter of 2007 stood at 62.3%, a 220 basis point improvement when compared with the second quarter of 2006. This marks the eighth consecutive quarter in which our year-over-year operating costs as a percent of revenue have improved.

"Net cash provided by operating activities and free cash flow were both strong for the quarter. We returned $321 million to shareholders in the form of our $0.24 per share quarterly dividend and our share repurchase program."

Key Highlights for the Second Quarter of 2007

-- Income from operations as adjusted was $600 million, or 17.9% of revenue, an increase of 210 basis points compared with the prior year second quarter as adjusted.

-- Internal revenue growth from yield on base business of 3.4%. Including the positive impact of higher recycling commodity prices, internal revenue growth from yield was 5.6%.

-- Higher recycling commodity prices contributed approximately $0.02 per diluted share to the year-over-year improvement in earnings per diluted share.

-- Internal revenue growth from volume was negative 4.4%. The volume component included a 4.8% reduction in collection volumes and a 4.4% reduction in landfill volumes.

-- Divestitures caused a 3.1% decline in revenues in the quarter, while acquisitions contributed 0.2% to higher revenues.

-- Operating expenses were 62.3% of revenue, down from 64.5% of revenue in the same period in 2006.

-- Capital expenditures of $209 million, compared with $296 million in the second quarter of 2006.

-- Free cash flow of $475 million, compared with $398 million in the second quarter of 2006.(a)

-- A total of $321 million in cash returned to shareholders in the form of $196 million in common stock repurchases and $125 million in dividend payments.

The effective tax rate in the quarter, after adjusting for the income tax items noted above, was 34%, which reflects an estimated phase-out of 29% of our Section 45K tax credits due to the level of actual and projected crude oil prices.(a) Section 45K tax credits generated an additional $0.02 per diluted share benefit to net income in the second quarter of 2007 compared with the second quarter of 2006.

Steiner concluded, "Our overall performance during the first and second quarters of this year was very strong. The continued success of our pricing and operational excellence strategies is clearly reflected in our results. Our first and second quarter results give us confidence that we will achieve our earnings expectations for the remaining two quarters of 2007. As a result, we now project our full-year 2007 earnings to be within the range of $2.07 to $2.11 per diluted share, without considering the financial impact associated with the recently ended labor disruption in the Oakland, California area and certain other items.(a) This is an increase from our previous projection of $2.03 to $2.07 per diluted share. On the same basis, we now project that we will meet or exceed our previously projected free cash flow range of $1.30 to $1.40 billion for the full-year 2007."

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 "2Q2007 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 4344708." 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 noon. Central time on July 31 through 5:00 p.m. Central time on August 14. 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 4344708.

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.

For Further Information:
Waste Management, Inc.
Analysts: Greg Nikkel - 713.265.1358
Media: Lynn Brown - 713.394.5093
Web site: www.wm.com.


(In Millions, Except Share and Par Value Amounts)
    June 30,
    December 31,
    2007     2006  
Current assets:
Cash and cash equivalents
  $ 570     $ 614  
Accounts receivable, net of allowance for doubtful accounts of $45 and $51, respectively
    1,669       1,650  
Other receivables
    154       208  
Parts and supplies
    102       101  
Deferred income taxes
    80       82  
Other assets
    286       527  
Total current assets
    2,861       3,182  
Property and equipment, net of accumulated depreciation and amortization of $12,432 and $11,993, respectively
    11,096       11,179  
    5,359       5,292  
Other intangible assets, net
    118       121  
Other assets
    750       826  
Total assets
  $ 20,184     $ 20,600  
Current liabilities:
Accounts payable
  $ 563     $ 693  
Accrued liabilities
    1,151       1,298  
Deferred revenues
    451       455  
Current portion of long-term debt
    526       822  
Total current liabilities
    2,691       3,268  
Long-term debt, less current portion
    7,723       7,495  
Deferred income taxes
    1,315       1,365  
Landfill and environmental remediation liabilities
    1,292       1,234  
Other liabilities
    809       741  
Total liabilities
    13,830       14,103  
Minority interest in subsidiaries and variable interest entities
    284       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
    4,524       4,513  
Retained earnings
    4,739       4,410  
Accumulated other comprehensive income
    180       129  
Treasury stock at cost, 111,430,680 and 96,598,567 shares, respectively
    (3,379 )     (2,836 )
Total stockholders’ equity
    6,070       6,222  
Total liabilities and stockholders’ equity
  $ 20,184     $ 20,600  
(In Millions, Except Per Share Amounts)
    Three Months Ended
                    Six Months Ended
    June 30,     June 30,  
    2007     2006     2007     2006  
Operating revenues
  $ 3,358     $ 3,410     $ 6,546     $ 6,639  
Costs and expenses:
    2,092       2,199       4,126       4,299  
Selling, general and administrative
    343       328       696       696  
Depreciation and amortization
    322       345       632       673  
    1             10        
(Income) expense from divestitures, asset impairments and unusual items
    (33 )     (27 )     (32 )     (29 )
      2,725       2,845       5,432       5,639  
Income from operations
    633       565       1,114       1,000  
Other income (expense):
Interest expense
    (132 )     (138 )     (267 )     (274 )
Interest income
    11       20       29       29  
Equity in net earnings (losses) of unconsolidated entities
    (22 )     10       (46 )     2  
Minority interest
    (11 )     (10 )     (21 )     (22 )
Other, net
    1             2       1  
      (153 )     (118 )     (303 )     (264 )
Income before income taxes
    480       447       811       736  
Provision for income taxes
    142       30       235       133  
Net income
  $ 338     $ 417     $ 576     $ 603  
Basic earnings per common share
  $ 0.65     $ 0.77     $ 1.10     $ 1.11  
Diluted earnings per common share
  $ 0.64     $ 0.76     $ 1.09     $ 1.09  
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     $ 0.48     $ 0.22  
(In Millions)
    Six Months
    June 30,  
    2007     2006  
Cash flows from operating activities:
Net income
  $ 576     $ 603  
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for bad debts
    16       19  
Depreciation and amortization
    632       673  
Deferred income tax provision
    (38 )     3  
Minority interest
    21       22  
Equity in net (earnings) losses of unconsolidated entities, net of distributions
    21       12  
Net gain from disposal of assets
    (16 )     (11 )
Effect of (income) expense from divestitures, asset impairments and unusual items
    (32 )     (29 )
Excess tax benefits associated with equity-based transactions
    (20 )     (31 )
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
    5       (31 )
Other current assets
    (19 )     (8 )
Other assets
    7       (4 )
Accounts payable and accrued liabilities
    (48 )     (91 )
Deferred revenues and other liabilities
    (30 )     53  
Net cash provided by operating activities
    1,075       1,180  
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired
    (46 )     (27 )
Capital expenditures
    (481 )     (527 )
Proceeds from divestitures of businesses (net of cash divested) and other sales of assets
    216       155  
Purchases of short-term investments
    (743 )     (1,707 )
Proceeds from sales of short-term investments
    803       1,499  
Net receipts from restricted trust and escrow accounts
    81       86  
    (14 )     (38 )
Net cash used in investing activities
    (184 )     (559 )
Cash flows from financing activities:
New borrowings
    315       96  
Debt repayments
    (452 )     (149 )
Common stock repurchases
    (683 )     (627 )
Cash dividends
    (251 )     (240 )
Exercise of common stock options and warrants
    111       202  
Excess tax benefits associated with equity-based transactions
    20       31  
Minority interest distributions paid
    (12 )     (8 )
    15       (23 )
Net cash used in financing activities
    (937 )     (718 )
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
    (44 )     (97 )
Cash and cash equivalents at beginning of period
    614       666  
Cash and cash equivalents at end of period
  $ 570     $ 569  

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