Waste Management 2006 Annual Report Download - page 58

dividends. The most comparable GAAP financial measure to free cash flow is “Net cash provided by operating
activities.” We calculate free cash flow as shown in the table below (in millions):
2006 2005
Years Ended
December 31,
Net cash provided by operating activities ............................. $2,540 $ 2,391
Capital expenditures ............................................. (1,329) (1,180)
Proceeds from divestitures of businesses (net of cash divested) and other sales
of assets .................................................... 240 194
Free cash flow ................................................. $1,451 $ 1,405
The growth in our 2006 operating and free cash flow reflects the current year improvements in our operating
results, particularly those contributed by our increase in revenue from yield, which is discussed below.
Revenue Growth — Our revenues for the year increased over 2%, from $13,074 million in 2005 to
$13,363 million in 2006. The overall increase was largely a result of internal revenue growth, or IRG. IRG is
an important indicator of our performance as it is a measure of our ability to increase revenues from our existing
operations. Our IRG for the year was 2.7% and consisted primarily of improvement in yield on base business and an
increase in revenues related to our fuel surcharge program. Our revenue growth from improved yield on base
business for 2006 was 3.6%, which is an increase of 0.9 percentage points from the prior year. In addition, our fuel
surcharge program contributed $117 million to revenue growth in 2006 compared with $157 million in 2005. The
revenues generated by the program in 2006 recovered the increase in our operating costs attributable to fuel. The
increases in revenue from improved yield on base business and our fuel surcharge program were partially offset by
decreased revenues due to lower volumes. Additionally, the positive effect IRG had on overall revenue growth was
offset by divestitures during the year. We have divested of under-performing operations, which resulted in lower
revenues in the year. Although we continue to seek appropriate acquisitions, in 2006 we lost more revenue as a result
of divestitures than we gained from acquisitions. As discussed below, we believe that the negative impact
divestitures had on revenues resulted in improvements in our operating margins.
Margin Improvement — In 2006, our income from operations improved by $319 million, or 18.7%, as
compared with 2005. Income from operations as a percentage of revenues was 15.2% for the year ended
December 31, 2006 compared with 13.1% for the year ended December 31, 2005. Several items that negatively
affected our 2005 results and are not part of our ongoing operations significantly impact the comparability of our
2006 and 2005 operating results. When focusing on our core operating costs (which are Operating; Selling, general
and administrative; and Depreciation and amortization expenses) as a percentage of revenues, our margin
improvement was considerable, increasing 1.6 percentage points from 13.8% in 2005 to 15.4% in 2006. The
year-over-year decrease in our operating expenses as a percentage of revenue is largely a result of our increased
revenue provided by base business yield, but is also due to the success of our cost control initiatives, which have
focused on improving productivity and standardizing our practices, and the divestitures of under-performing
operations. Our selling, general and administrative expenses in 2006 increased by $112 million, and as a percentage
of revenue increased by 0.6 percentage points to 10.4%. The increase in selling, general and administrative
expenses is due largely to higher bonus expense as a result of the significant improvement in the Company’s
performance, non-capitalizable costs incurred to support the development of our revenue management system and a
$20 million charge to record estimated unrecorded obligations associated with unclaimed property audits.
2007 Objectives — In 2007, we will continue to pursue our goal of improving our profitability by focusing on
revenue growth through pricing, eliminating our less profitable work, lowering our operating expenses, managing
our selling, general and administrative expenses and generating strong and consistent cash flows that can be
returned to our shareholders.
Late in 2006, we began to see a decline in our revenue growth due to decreases in volumes. We believe that this
decline can be attributed to our pricing strategy and an economic softening in certain lines of our business in certain
parts of the country. Even when considering these volume declines, which may continue in 2007, we have seen that
our focus on increasing revenue through yield and shedding our less profitable volumes has been positive for our
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