CWST Casella Waste Systems Inc

Waste Management Inc. (WM) reported earnings per share (EPS) of 38 cents (excluding special items) in the first quarter, a penny below the year-ago quarter and two cents short of the Zacks Consensus Estimate.

Quarterly results suffered from lower commodity prices at its recycling operations (3 cents), higher fuel prices (1 cent) and a dilutive impact from its waste-to-energy operations (2 cents). 

Including after-tax restructuring charges and integration costs related to the Oakleaf acquisition, EPS in the quarter stood at 37 cents, a 5% drop from the year-ago EPS of 39 cents.

Quarter in Details

Revenues increased 6% to $3.395 billion from $3.103 billion in the year-ago quarter, marginally higher than the Zacks Consensus Estimate of $3.227 billion. Internal revenue growth from volume edged up 1.3% during the quarter, the first time since 2006.  Internal revenue growth from yield for collection and disposal operations was 0.9%.

Revenues from the company’s Collection business increased 3% to $2.1 billion. Landfill revenues rose 6% to $615 million, Transfer revenues dipped 5% to $298 million, Wheelabrator revenues declined 3% to $207 million and Recycling went down 2% to $345 million.

Adjusted operating expenses increased 9% to $2.16 billion, mainly due to an increase in subcontractor costs associated with the Oakleaf operations and increased labor costs. Selling, general and administrative expenses increased 7% to $407 million, compared with the prior-year quarter, again due to the company’s acquisition of Oakleaf, as well as the costs incurred for implementation of cost-saving and sales and marketing initiatives. The company’s adjusted operating profit decreased 5% to $405 million from $427 million a year ago. Operating margin likewise contracted 12.3% from 13.8% in the prior-year quarter.

Financials

Cash and cash equivalents deteriorated to $189 million as of March 31, 2012 from $258 million as of December 31, 2011. Long-term debt marginally decreased to $8.99 billion as of March 31, 2012, compared with $9.1 billion as of December 31, 2011. The debt-to-capitalization ratio was 60.3% as of March 31, 2012, flat from fiscal 2011 end.

During the quarter, cash flow from operations decreased to $475 million from $600 million in the comparable year-ago period. Free cash flow decreased to $102 million in the quarter from $289 million in the prior-year quarter. The company returned $164 million to shareholders as dividends.

Outlook

Waste Management expects 2012 adjusted EPS between $2.22 and $2.30. The company expects recycling and waste-to-energy commodity prices to affect the second quarter, but to moderate in the latter half of the year. The company has factored in benefits from improved pricing, a seasonal pick-up in volumes, procurement and other savings, and the full integration of its acquired Oakleaf operations in the guidance. Free cash flow is projected between $1.1 billion and $1.2 billion.

Waste Management’s recent Oakleaf acquisition is expected to generate a minimum of $80 million in EBITDA on an annualized basis. In addition, the company’s ability to cut costs has helped in maintaining profits despite weak volumes. On a positive note, the company has reversed its trend of negative volumes in the quarter. However, the headwinds include lower trending recycling prices, electricity prices, pressure on pricing, and the integration impact of the Oakleaf acquisition.

Waste Management is the largest provider of comprehensive waste management services in North America. The company provides collection, transfer, recycling and resource recovery, as well as disposal services, to nearly 20 million residential, commercial, industrial and municipal customers. It competes with Republic Services, Inc. (RSG) and Casella Waste Systems Inc. (CWST). Waste Management currently maintains a Zacks #4 Rank (Sell) on its stock for the short term.

 
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