Waste Management Announces Second Quarter 2005 Earnings; Company Announces Plans to Divest Non-Strategic Operations and to Streamline Organization
HOUSTON--(BUSINESS WIRE)--July 28, 2005--Waste Management, Inc. (NYSE:WMI) today announced financial results for its second quarter ended June 30, 2005. Revenues for the quarter were $3.29 billion as compared with $3.14 billion in the year ago period, an increase of 4.8%. Net income for the quarter was $527 million, or $0.92 per diluted share, compared with $216 million, or $0.37 per diluted share, in the prior year period.
The Company noted several items that impacted the current quarter's results:
-- A net after-tax benefit of $311 million due to tax expense
reductions from tax audit settlements, partially offset by
higher tax expense resulting from a plan to repatriate
accumulated earnings and capital from Canadian subsidiaries
under the American Jobs Creation Act of 2004.
-- An after-tax charge of $24 million due to the previously
announced impairment of the Pottstown landfill in
Pennsylvania.
-- An after-tax gain of $21 million from the sales of operations
in Alaska, North Carolina and Georgia.
Combined, these items improved second quarter 2005 after-tax earnings by $308 million, or $0.54 per diluted share. Without the impact of these items, net income for the quarter would have been $219 million, or $0.38 per diluted share.
For the six months ended June 30, 2005, Waste Management reported operating revenues of $6.33 billion, as compared with $6.03 billion for the comparable period last year. Net income was $677 million and diluted earnings per share was $1.18 for the six months ended June 30, 2005, as compared with $368 million and $0.63, respectively, for the same period in 2004. The 2004 results include the favorable impact of the cumulative effect of change in accounting principle of $8 million, or $0.01 per diluted share. The cumulative effect of change in accounting principle in 2004 was related to the final implementation of Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities.
"We saw the continuation of a number of encouraging trends during the second quarter. Strong pricing was again a driver of our financial results, as our internal revenue growth on base business due to yield reached 2.1% for the second consecutive quarter. The revenue growth from yield was 3.1% if we include the $32 million obtained through our fuel surcharge program," stated David P. Steiner, Chief Executive Officer of Waste Management. "We continued to make progress in our labor productivity, in our collection fleet maintenance programs and in our safety and risk management costs. As of July 1, we have also implemented a redesigned fuel surcharge program to capture the full impact that fuel prices have on our business. While our previous fuel surcharge program has historically recovered a large percentage of our increased direct fuel costs, it did not recoup the substantial indirect fuel-related cost increases paid to our subcontract haulers. We expect that our new fuel surcharge program will recover increases in subcontractor costs related to higher fuel prices."
Plans for Divesting of Certain Operations and Restructuring
The Company also announced its plan to divest under-performing or non-strategic operations. To date, operations identified for divestiture represent over $400 million in annual revenue. These operations consist primarily of collection businesses and transfer stations. These businesses generated approximately $215 million in gross revenue and $11 million in operating income for the first six months of 2005.
Steiner continued, "Improving the quality of our assets has been one of my top priorities. We have been studying our under-performing business operations with the objective to either fix or sell them. Our extensive reviews have been based on a number of financial and operational criteria and on how operating units fit into our strategic business model. This step is consistent with our plans to increase our internalization rates and improve our operating margins. We will also be looking for opportunities to reinvest the divestiture proceeds to grow our business in areas with higher margins."
The Company also unveiled plans to simplify its organizational structure in order to increase the accountability of its Market Areas, to streamline business decisions and to reduce costs at the Group and Corporate offices. The new organizational structure will place more emphasis on the day-to-day decision making that occurs at the Company's Market Areas, which encompass major metropolitan or geographical regions across the country.
President and Chief Operating Officer Larry O'Donnell stated, "We have essentially eliminated the extra layer between our Corporate office and our field operations. We have also eliminated the Canadian Group office, which reduces the number of our operating groups from seven to six. This restructuring will make us a more nimble organization, bring us closer to our customers and enable us to move our best people into areas where they can directly impact day-to-day business decisions. The standard operating practices that have been implemented across the organization prepare us well for this change. We expect the streamlined structure will enhance our competitiveness and also contribute to the achievement of our financial goals."
Steiner added, "Having the President and Chief Operating Officer position separate from the CEO role enables Larry to spend more time working directly with the Market Areas. This new structure gives corporate a more direct line of sight to the Market Areas, with the goal of providing the Market Areas the support they need to accomplish their business objectives."
The reorganization will eliminate about 600 positions, and the Company anticipates taking a third quarter pre-tax restructuring charge to earnings in the range of $20 to $30 million. The reduction in workforce and other related cost savings, before the restructuring charge, are projected to create pre-tax cost savings estimated to be about $30 million during 2005 and $70 million annually beginning in 2006.
Key Highlights for the Quarter
-- Net cash provided by operating activities of $595 million, up
8.4% over the prior year quarter.
-- Free cash flow (a) of $314 million, an increase of 31.9%
versus the second quarter of last year. For the six-month
period, free cash flow was $734 million, a 33.7% increase as
compared to the first six months of 2004 and is in line to
achieve our full year goal of $1.1 to $1.2 billion.
-- Capital expenditures of $308 million, a decrease of 10.7%
compared with the prior year quarter.
-- Internal revenue growth on base business of 3.3%, with 2.1% of
that from average yield and 1.2% from volume. The yield
component excludes 0.7% from the combined impact of higher
revenues from fuel surcharges, slight increases in electricity
rates at Independent Power Production facilities, and lower
recycling commodity prices.
-- Acquisitions net of divestitures contributed 0.4% to higher
revenues in the quarter, and foreign currency translation
contributed an additional 0.4%.
-- Price increases averaging 4.1% on our commercial customer base
and 3.2% on our total collection customer base.
-- $293 million returned to shareholders, consisting of $114
million in cash dividends and $179 million in common stock
repurchases. This is on pace with our full year objective of
$600 to $700 million in share repurchases.
Steiner continued "During the second quarter, we also maintained the momentum of our pricing initiatives as demonstrated by the results of our internal revenue growth from yield. We saw 1.2% volume growth in the quarter, two-thirds of which occurred in very low margin lines of business, which negatively impacted our overall margins."
Steiner concluded "Our 2005 EPS guidance was predicated on maintaining solid volumes along with our price improvements. We are meeting our expectations with regard to price, but we did see a downturn in volumes in May, June and in the first three weeks of July. If we don't see improvement in volumes, we will have to see accelerated results from our pricing, productivity and other cost initiatives if we are to meet our goals for the third quarter and the year. Given that, we believe that it is more likely that we will be at the lower end of the analysts' current range rather than the mid-to-upper end of the range. It is not uncommon for a price leader to see volumes decrease over the short term, but we believe that our current pricing program is in the best long term interest of our company and our shareholders."
(a) The Company included its free cash flow, which is a non-GAAP
financial measure, herein because it uses that measure in the
management of its business and 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 acquisition program, its share repurchase
program, its scheduled debt reduction and the payment of
dividends. 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
For the purposes of the Company's full year projection, cash costs of the restructuring are not included in full year projections.
The Company's definition of free cash flow may not be comparable to similarly titled measures presented by other companies. The Company has reconciled its free cash flow as presented herein to cash flow from operations, which is the most comparable GAAP measure, in the accompanying schedules.
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 http://www.wm.com, and select "2Q2005 Earnings Report Webcast." You may also listen to the analyst conference call by telephone by contacting the conference call operator 5-10 minutes prior to the scheduled start time and asking for the "Waste Management Conference Call - Call ID 7068485." US/Canada Dial-In #: 877-710-6139. Int'l/Local Dial-In #: 706-643-7398. For those unable to listen to the live call, a replay will be available 24 hours a day beginning at approximately 11:00 a.m. CT July 28th through 5:00 p.m. CT on August 11th. 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 7068485.
Waste Management, Inc. is its industry's leading provider of comprehensive waste management and environmental services. Based in Houston, the Company serves municipal, commercial, industrial, and residential customers throughout North America.
Certain statements contained in this press release include statements that are "forward-looking statements." Outlined below are some of the risks that the Company faces and that could affect our financial statements for 2005 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 these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, the Company, from time to time, provides estimates of financial and other data relating to future periods. Such estimates and other information are the Company's expectations at the point in time of issuance but may change at some future point in time. By issuing such estimates the Company has no obligation, and is not undertaking any obligation, to update such estimates or provide any other information relating to such estimates. The following are some of the risks we face:
-- the effects competition may have on our profitability or cash
flows, including the negative impact our price increases may
have on volumes or the negative impact to our yield on base
business resulting from price roll-backs and lower than
average pricing to retain and attract customers;
-- our inability to maintain or expand margins as volumes
increase if we are unable to control variable costs or our
fixed cost base increases;
-- increases in employee-related costs and expenses, including
health care and other employee benefits such as unemployment
insurance and workers' compensation, as well as the costs and
expenses associated with attracting and retaining qualified
personnel;
-- increases in expenses due to fuel price increases or fuel
supply shortages;
-- the effect that fluctuating commodity prices may have on our
operating revenues and expenses;
-- the general effects of a weak economy, including the resulting
decreases in volumes of waste generated;
-- external factors beyond our control, such as higher interest
rates and the possible inability of insurers to meet their
obligations, both of which may cause increased expenses;
-- the effect the weather has on our quarter to quarter results,
as well as the effect of extremely harsh weather on our
operations;
-- possible changes in our estimates of site remediation
requirements, final capping, closure and post-closure
obligations, compliance and regulatory developments;
-- the possible impact of regulations on our business, including
the cost to comply with regulatory requirements and the
potential liabilities associated with disposal operations;
-- our ability to obtain and maintain permits needed to operate
our facilities;
-- the effect of limitations or bans on disposal or
transportation of out-of-state waste or certain categories of
waste;
-- possible charges against earnings as a result of shut-down
operations, uncompleted development or expansion projects or
other events;
-- the effects that trends toward requiring recycling, waste
reduction at the source and prohibiting the disposal of
certain types of wastes could have on volumes of waste going
to landfills and waste-to-energy facilities;
-- possible diversions of management's attention and increases in
operating expenses due to efforts by labor unions to organize
our employees;
-- the outcome of litigation or threatened litigation;
-- the need for additional capital if cash flows are less than we
expect or capital expenditures are more than we expect, and
the possibility that we cannot obtain additional capital on
acceptable terms if needed;
-- possible errors or problems upon implementation of new
information technology systems; and
-- possible fluctuations in quarterly results of operations or
adverse impacts on our results of operations as a result of
the adoption of new accounting standards or interpretations.
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, 2004 and Part II of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.
Waste Management, Inc.
Condensed Consolidated Statements of Operations
(In Millions, Except Per Share Amounts)
(Unaudited)
Quarters
Ended June 30,
---------------
2005 2004
------- -------
Operating revenues $3,289 $3,138
------- -------
Costs and expenses:
Operating (exclusive of depreciation
and amortization shown below) 2,173 2,040
Selling, general and administrative 313 317
Depreciation and amortization 346 348
Asset impairments and unusual items (6) (9)
------- -------
2,826 2,696
------- -------
Income from operations 463 442
------- -------
Other income (expense):
Interest expense (128) (119)
Interest income 6 7
Equity in net losses of unconsolidated entities (26) (24)
Minority interest (11) (9)
Other, net 1 -
------- -------
(158) (145)
------- -------
Income before income taxes 305 297
Provision for (benefit from) income taxes (222) 81
------- -------
Net income $ 527 $ 216
======= =======
Basic earnings per common share $ 0.93 $ 0.37
======= =======
Diluted earnings per common share $ 0.92 $ 0.37
======= =======
Basic common shares outstanding 566.3 580.2
======= =======
Diluted common shares outstanding 570.1 585.4
======= =======
Cash dividends per common share $ 0.20 $ 0.19
======= =======
Waste Management, Inc.
Earnings Per Share
(In Millions, Except Per Share Amounts)
(Unaudited)
Quarters
Ended June 30,
---------------
2005 2004
------- -------
EPS Calculation:
Diluted net income $ 527 $ 216
======= =======
Number of common shares outstanding at end of period 563.0 580.0
Effect of using weighted average common shares
outstanding 3.3 0.2
------- -------
Weighted average basic common shares outstanding 566.3 580.2
Dilutive effect of equity-based compensation
awards, warrants and other contingently issuable
shares 3.8 5.2
------- -------
Weighted average diluted common shares outstanding 570.1 585.4
======= =======
Basic earnings per common share $ 0.93 $ 0.37
======= =======
Diluted earnings per common share $ 0.92 $ 0.37
======= =======
Waste Management, Inc.
Condensed Consolidated Statements of Operations
(In Millions, Except Per Share Amounts)
(Unaudited)
Six Months
Ended June 30,
---------------
2005 2004
------ ------
Operating revenues $6,327 $6,034
------ ------
Costs and expenses:
Operating (exclusive of depreciation
and amortization shown below) 4,217 3,960
Selling, general and administrative 643 633
Depreciation and amortization 667 673
Asset impairments and unusual items (29) (18)
------ ------
5,498 5,248
------ ------
Income from operations 829 786
------ ------
Other income (expense):
Interest expense (244) (232)
Interest income 12 10
Equity in net losses of unconsolidated entities (52) (43)
Minority interest (21) (16)
Other, net 1 (2)
------ ------
(304) (283)
------ ------
Income before income taxes and cumulative effect of
change in accounting principle 525 503
Provision for (benefit from) income taxes (152) 143
------ ------
Income before cumulative effect of change in
accounting principle 677 360
Cumulative effect of change in accounting principle,
net of income tax expense of $5 in 2004 - 8
------ ------
Net income $ 677 $ 368
====== ======
Basic earnings per common share:
Income before cumulative effect of change in
accounting principle $ 1.19 $ 0.62
Cumulative effect of change in accounting
principle - 0.01
------ ------
Net income $ 1.19 $ 0.63
====== ======
Diluted earnings per common share:
Income before cumulative effect of change in
accounting principle $ 1.18 $ 0.62
Cumulative effect of change in accounting
principle - 0.01
------ ------
Net income $ 1.18 $ 0.63
====== ======
Basic common shares outstanding 567.6 578.8
====== ======
Diluted common shares outstanding 571.3 584.1
====== ======
Cash dividends per common share $ 0.40 $ 0.38
====== ======
Waste Management, Inc.
Earnings Per Share
(In Millions, Except Per Share Amounts)
(Unaudited)
Six Months
Ended June 30,
---------------
2005 2004
------ ------
EPS Calculation:
Income before cumulative effect of change in
accounting principle $ 677 $ 360
Cumulative effect of change in accounting principle - 8
------ ------
Net income $ 677 $ 368
====== ======
Number of common shares outstanding at end of period 563.0 580.0
Effect of using weighted average common shares
outstanding 4.6 (1.2)
------ ------
Weighted average basic common shares outstanding 567.6 578.8
Dilutive effect of equity-based compensation awards,
warrants and other contingently issuable shares 3.7 5.3
------ ------
Weighted average diluted common shares 571.3 584.1
====== ======
Basic earnings per common share:
Income before cumulative effect of change in
accounting principle $ 1.19 $ 0.62
Cumulative effect of change in accounting
principle - 0.01
------ ------
Net income $ 1.19 $ 0.63
====== ======
Diluted earnings per common share:
Income before cumulative effect of change in
accounting principle $ 1.18 $ 0.62
Cumulative effect of change in accounting
principle - 0.01
------ ------
Net income $ 1.18 $ 0.63
====== ======
Waste Management, Inc.
Condensed Consolidated Balance Sheets
(In Millions)
June 30, December 31,
2005 2004
----------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $481 $424
Receivables, net 1,922 1,949
Other 424 446
----------- ------------
Total current assets 2,827 2,819
Property and equipment, net 11,309 11,476
Goodwill 5,351 5,301
Other intangible assets, net 151 152
Other assets 1,056 1,157
----------- ------------
Total assets $20,694 $20,905
=========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, accrued liabilities, and
deferred revenues $2,538 $2,821
Current portion of long-term debt 215 384
----------- ------------
Total current liabilities 2,753 3,205
Long-term debt, less current portion 8,216 8,182
Other liabilities 3,234 3,265
----------- ------------
Total liabilities 14,203 14,652
Minority interest in subsidiaries and
variable interest entities 294 282
Stockholders' equity 6,197 5,971
----------- ------------
Total liabilities and stockholders'
equity $20,694 $20,905
=========== ============
Note: Prior year information has been reclassified to conform to
2005 presentation.
Waste Management, Inc.
Condensed Consolidated Statements of Cash Flows
(In Millions)
(Unaudited)
Six Months
Ended June 30,
---------------
2005 2004
-------- ------
Cash flows from operating activities:
Net income $677 $368
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle - (8)
Depreciation and amortization 667 673
Other 7 134
Change in operating assets and liabilities, net
of effects of acquisitions and divestitures (248) (148)
-------- ------
Net cash provided by operating activities 1,103 1,019
-------- ------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (91) (98)
Capital expenditures (493) (526)
Purchases of short-term investments (225) (933)
Proceeds from sales of short-term investments 202 768
Net receipts from restricted funds, business
divestitures, asset sales and other 314 244
-------- ------
Net cash used in investing activities (293) (545)
-------- ------
Cash flows from financing activities:
New borrowings 8 348
Debt repayments (234) (369)
Common stock repurchases (278) (108)
Cash dividends (228) (218)
Exercise of common stock options and warrants 51 120
Other, net (73) (71)
-------- ------
Net cash used in financing activities (754) (298)
-------- ------
Effect of exchange rate changes on cash and cash
equivalents 1 (2)
-------- ------
Increase in cash and cash equivalents 57 174
Cash and cash equivalents at beginning of period 424 217
-------- ------
Cash and cash equivalents at end of period $481 $391
======== ======
Note: Prior year information has been reclassified to conform to 2005
presentation.
Waste Management, Inc.
Summary Data Sheet
(Dollar amounts in Millions)
(Unaudited)
Quarters Ended
---------------------------
June 30, March 31, June 30,
2005 2005 2004
-------- -------- --------
Operating Revenues by Lines of Business
---------------------------------------
NASW:
Collection $2,168 $2,057 $2,059
Landfill 791 676 773
Transfer 463 387 441
Wheelabrator 214 202 211
Recycling and other 301 287 271
Intercompany (648) (571) (617)
------- ------- -------
Operating revenues $3,289 $3,038 $3,138
======= ======= =======
Internal Growth of Operating Revenues
from Comparable Prior Periods
-------------------------------------
Internal growth 4.0% 4.0% 4.6%
Less: Yield changes due to recycling
commodities, electricity (IPP)
and fuel surcharge 0.7% 0.9% 1.7%
------- ------- -------
Adjusted internal growth 3.3% 3.1% 2.9%
======= ======= =======
Acquisition Summary (a)
-----------------------
Gross annualized revenue acquired $11 $97 $27
======= ======= =======
Total consideration $10 $100 $25
======= ======= =======
Cash paid for acquisitions $2 $85 $23
======= ======= =======
Recycling Segment Supplemental Data (b)
---------------------------------------
Operating revenues $203 $196 $184
======= ======= =======
Operating expenses (exclusive of
depreciation and amortization) $173 $167 $154
======= ======= =======
Quarters Ended Six Months
June 30, Ended June 30,
--------------- ---------------
2005 2004 2005 2004
------- ------- ------- -------
Free Cash Flow Analysis (c)
---------------------------
Net cash provided by operating
activities $595 $549 $1,103 $1,019
Capital expenditures (308) (345) (493) (526)
Proceeds from divestitures of
businesses, net of cash divested,
and other sales of assets 27 34 124 56
------- ------- ------- -------
Free cash flow $314 $238 $734 $549
======= ======= ======= =======
(a) Represents amounts associated with business acquisitions
consummated during the indicated periods.
(b) Information provided is after the elimination of intercompany
revenues and related expenses.
(c) The summary of free cash flows has been prepared to highlight and
facilitate understanding of the principal cash flow elements. Free
cash flow is not a measure of financial performance under
generally accepted accounting principles and is not intended to
replace the consolidated statement of cash flows that was prepared
in accordance with generally accepted accounting principles. Our
current free cash flow forecast confirms our expectations that
full-year 2005 free cash flow will be in the range of $1.1 billion
to $1.2 billion, based on estimated net cash provided by operating
activities in the range of $2.25 billion to $2.35 billion, capital
expenditures of between $1.25 billion and $1.35 billion, and
proceeds from divestitures, net of cash divested and other sales
of assets of $125 million to $150 million.
Waste Management, Inc.
Summary Data Sheet
(Dollar amounts in Millions)
(Unaudited)
Quarters Ended
---------------------------
June 30, March 31, June 30,
2005 2005 2004
------- ------- -------
Balance Sheet Data
------------------
Cash and cash equivalents (a) $ 481 $ 441 $ 391
======= ======= =======
Debt-to-total capital ratio:
Long-term indebtedness, including
current portion $ 8,431 $ 8,386 $ 8,722
Total equity (a) 6,197 5,943 5,792
------- ------- -------
Total capital $14,628 $14,329 $14,514
======= ======= =======
Debt-to-total capital (a) 57.6% 58.5% 60.1%
======= ======= =======
Capitalized interest (b) ($1) $ 3 $ 5
======= ======= =======
Other Operational Data
----------------------
Internalization of waste, based on
disposal costs 65.3% 65.1% 65.0%
======= ======= =======
Total landfill disposal volumes (tons in
millions) (a) 32.3 28.0 31.5
Total waste-to-energy disposal volumes
(tons in millions) (a) 2.0 1.9 2.0
------- ------- -------
Total disposal volumes (tons in
millions) 34.3 29.9 33.5
======= ======= =======
Active landfills 286 285 290
======= ======= =======
Landfills reporting volume 265 264 268
======= ======= =======
Amortization and SFAS No. 143 Expenses
for Landfills Included in Operating
Groups
--------------------------------------
Non - SFAS No. 143 amortization expense $ 102.3 $ 87.7 $ 104.8
Amortization expense related to SFAS No.
143 obligations 19.7 14.0 23.5
------- ------- -------
Total amortization expense 122.0 101.7 128.3
Accretion and other related expense 12.8 13.1 13.0
------- ------- -------
Landfill amortization, accretion and
other related expense $ 134.8 $ 114.8 $ 141.3
======= ======= =======
(a) Prior period information has been reclassified to conform to 2005
presentation.
(b) The quarter ended June 30, 2005 includes the reversal of $5
million of previously recorded capitalized interest associated
with certain projects that did not qualify for interest
capitalization.
CONTACT: Waste Management, Inc.
Greg Nikkel, 713-265-1358 (Analysts)
or
Lynn Brown, 713-394-5093 (Media)
Web site: http://www.WM.com
SOURCE: Waste Management, Inc.