Waste Management Inc. (WM) delivered adjusted earnings of 60 cents in its fourth quarter 2010, striding ahead of the Zacks Consensus Estimate by 6 cents. Results were 15% above 52 cents earned in the year-ago quarter. Adjusted earnings were $287 million, 11% higher than $257 million in the fourth quarter 2009.
Including $20 million for litigation charge, a $7 million benefit from the accounting effect of higher ten-year Treasury rates and another $7 million tax benefit, the company reported net income of $281 million or 59 cents a share; lower than $315 million or 64 cents per share in the fourth quarter of 2009.
The year-ago quarter included an $81 million benefit from the accounting effect of higher ten-year Treasury rates, divestiture and asset impairment expense of $20 million and restructuring expense of $3 million.
The company posted a good quarter as strong internal revenue growth from yield offset lower-than-expected volumes. Also, its collection, landfill, and recycling businesses continued to perform strongly.
Full-year 2010 adjusted earnings of $2.09 per share outpaced the Zacks Consensus Estimate by 5 cents and the year-ago figure by 9 cents.
Including income form divestitures, asset impairments of $48 million, tax items expense of $34 million, landfill operating costs of $34 million, litigation costs of $20 million, multi-employer pension withdrawal costs of $1 million and labor disruptions costs of $1 million, the company reported net income of $953 million or $1.98 per share, lower than $994 million or $2.01 per share in 2009.
Operational Performance
Waste Management’s revenues of $3.19 billion in the fourth quarter marginally lagged the Zacks Consensus Estimate of $3.20 billion. Revenues, however, eclipsed the year-ago figure by 6%.
Full year 2010 revenues were $12.52 billion, falling behind the Zacks Consensus Estimate of $12.54 billion, though exceeding year-ago results of $11.79 billion.
Internal revenue growth from yield at the company’s collection and disposal operations was 2.6% for the fourth quarter and 2.3% for 2010. Internal revenue growth from volume was negative 1.8% for the fourth quarter and negative 2.6% for 2010.
Collection revenue was $2.1 billion, up 3%; Landfill was $640 million, up 4%; Wheelabrator, the company’s waste-to-energy operational segment, delivered $229 million in revenue, up 7% year over year; and Recycling & Other revenue of $333 million reflected a 44% increase. Transfer revenues however posted a decline of 7% to $313 million in the quarter.
Operating expenses increased 3% year over year to $1.94 billion for the reported quarter and 8% to $7.2 billion for 2010.
Selling, general and administrative (SG&A) expenses increased 8% to $396 million in the quarter. For the full year SG&A increased 7% to $1.5 billion.
Adjusted operating profit went up 20% year over year to $593 million and adjusted operating margin expanded 220 basis points year over year to 18.6% in the fourth quarter of 2010.
Financial Position
Waste Management ended 2010 with cash and cash equivalents of $539 million, substantially down from $1.14 billion as of 2009 end.
Long-term debt increased to $8.7 billion from $8.1 billion as of 2009 end.
The company generated cash flow from operations of $2.26 billion in 2010, lower than $2.36 billion in 2009. Free cash flow was $1.2 billion, almost flat with 2009.
Dividend and Share Repurchase
Waste Management paid back $208 million ??? $150 million through dividends and $58 million through share buyback ??? to shareholders in the fourth quarter.
In 2010, the company returned $1.1 billion to shareholders ??? $604 million through dividends and $501 million through share repurchases.
As of December 31, 2010, the debt-to-capitalization ratio was 57.5%, compared with 57.4% as of December 31, 2009.
Looking Forward
Waste Management guided full-year 2011 adjusted earnings in a range of $2.24 to $2.30 per share. Free cash flow is projected in a range of $1.25 billion to $1.35 billion, with capital expenditures between $1.35 billion and $1.45 billion.
The company expects to pay back $650 million to its shareholder in 2011 in the form of dividends. It also expects to buy back shares worth up to $575 million.
Waste Management forecasts a 2% internal revenue growth from yield on the collection and disposal business. Internal revenue growth from volume is projected to be flat to slightly positive, an improvement of over 260 basis points form 2010.
The company expects higher labor costs will add approximately $65 million to 2011 total expenses. It is also estimates expenses to go up by $50 million primarily for information technology upgrades, customer focused growth initiatives, and other initiatives.
Waste Management expects interest expense to increase approximately $25 million, principally because of higher fees and rates from the revolving credit facility that was executed in June last year.
Peer Comparison
Republic Services Inc. (RSG), which competes with Waste Management, reported fourth quarter 2010 adjusted earnings of 42 cents per share, in tune with the Zacks Consensus Estimate and up 27% from 33 cents per share in the prior-year quarter. Fiscal 2010 adjusted earnings per share were $1.71, up 16% from $1.48 in the prior year and ahead of the Zacks Consensus Estimate by a penny. Results were at the high end of the company’s guidance range of $1.69 to $1.71 per share.
Our Take
Waste Management continues to drive profits by focusing on its pricing programs. Its leading market position enables it to hold onto its pricing power. Moreover, the company is expanding its service offerings and strengthening its market presence through acquisitions.
The company increased its presence in the organics recycling business through the acquisition of a majority equity interest in Garick LLC. The acquisition will boost the processing capacity of Waste Management’s organic recycling business by one million ton.
On the flip side, the company continues to be plagued by lower volumes. Though the company said that volumes are stabilizing, we still see weakness in the market. Given the uncertain economic conditions, we believe it will take more than a couple of quarters before the company sees a substantial improvement in its volumes.
The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the shares over the near term.
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