Waste Management Inc. (WM) delivered adjusted earnings per share (EPS) of 54 cents in its second quarter ended June 30, 2010, in line with the Zacks Consensus Estimate and a 4% increase from 52 cents in the year-ago quarter. The year-over-year improvement was driven by growth in all of its businesses, disciplined focus on pricing and higher average recycling commodity prices.
The EPS of 54 cents however excluded a litigation settlement benefit of 10 cents that occurred in April 2010 to settle all claims relating to a revenue management system, expense of 8 cents from tax related items and 5 cents pertaining to increased environmental remediation reserves. EPS in the year-ago quarter excluded multi-employer pension withdrawal costs and restructuring charges of 1 cent each. Including all these items, EOS in the reported quarter stood at 51 cents compared with 50 cents in the year ago quarter.
Waste Management’s revenues of $3.16 billion however, outpaced the Zacks Consensus Estimate of $3.09 billion. Lower Volumes had a negative impact of 2.9% on the company’s internal revenue growth in the quarter, while yield on collection and disposal business contributed 2.3% to internal growth. However, on a positive note, the second quarter marked the third consecutive quarter in which volume declines have moderated.
Collection revenue was $2.08 billion, up 5% y/y, Landfill and Transfer revenues were $664 million and $351 million, up 18% and 13% y/y, respectively. Wheelabrator, the company’s waste-to-energy operational segment, delivered $217 million in revenue, up 5% y/y. Recycling & Other revenue of $357 million reflected a 7% increase.
Operating expenses increased $178 million year over year (excluding special items) primarily from $77 million of increased cost of goods sold related to recycling commodity rebates, $29 million for increased fuel costs related to higher fuel prices and $15 million related to foreign currency translation.
Selling, general and administrative expenses increased by $22 million compared with the year-ago quarter mainly due to hike in advertising expenses for the national rollout of the company’s new Bagster product and expenses for growth initiatives and information technology upgrade. However, as a percentage of revenue it remained unchanged at 10.9%.
Financial Position
Waste Management had cash and cash equivalents of $1,169 million as of June 30 2010, substantially up from $871 million as of March 31, 2010. The company generated operating cash flows of $480 million compared with $548 million in the year-ago quarter.
As of June 30, 2010, debt-to-capitalization ratio was 61% compared to 59% as of March 31, 2010.
Outlook
Based on current volume and pricing trends, Waste Management expects continuing improvement during the second half of 2010. The company expects average commodity prices during the second half of 2010 to be above the comparable year-ago period levels.
The company affirmed its fiscal 2010 earnings per share guidance range of $2.09 to $2.13 per share. The guidance however excludes the second quarter impact of an after-tax charge of $25 million due to increases in environmental remediation reserves for two closed landfill sites, a $48 million after-tax benefit from a litigation settlement that occurred in April 2010; a $1 million after-tax expense from resolution of a brief labor dispute in Seattle, Washington; and a $37 million tax expense.
The company targets free cash flows in the range of $1.2 billion to $1.3 billion for the year.
Our Take
The company continues to drive profits by focusing on its pricing programs and cost reductions. 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 continues to be plagued by lower volumes. Though the company said that the volumes are stabilizing, we still see weakness in the market. Given the uncertain economic conditions, we believe it will be more than a couple of quarters before the company sees a substantial improvement in its volumes.
Houston, Texas-based Waste Management is the largest provider of comprehensive waste management services in North America. The company provides collection, transfer, recycling and resource recovery and disposal services to nearly 20 million residential, commercial, industrial and municipal customers. It is also a leading developer, operator and owner of waste-to-energy and landfill gas-to-energy facilities in the U.S.
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