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Waste Management Inc. (WM - Analyst Report) reported earnings per share (EPS) of 52 cents (excluding special items) in the first quarter, a 4% increase from the year-ago quarter and 1 cent short of the Zacks Consensus Estimate.

Improvement in the core collection and disposal business helped offset  lower earnings from the recycling and waste-to-energy operations and a negative impact from an under-recovery of fuel surcharge.

Including asset impairment and restructuring charges of 6 cents per share and a charge of 1 cent per share related to the partial withdrawal from a Teamsters’ multiemployer pension plan, EPS in the quarter stood at 45 cents, a 10% drop from the year-ago EPS of 50 cents.

Quarter in Details

Revenues increased 3.3% to $3.459 billion from $3.347 billion in the year-ago quarter, missing the Zacks Consensus Estimate of $3.52 billion. Internal revenue growth from volume edged up 0.6% during the quarter.  Internal revenue growth from yield for collection and disposal operations was 0.6%.

Revenues from the company’s Collection business dipped 0.4% to $2.1 billion. Landfill revenues rose 1% to $676 million, Transfer revenues declined 1% to $331 million, Wheelabrator revenues declined 9% to $206 million and Recycling went down 12% to $369 million.

Adjusted operating expenses increased 6% to $2.26 billion, mainly due to an increase in subcontractor costs associated with the Oakleaf operations and increased labor costs. Selling, general and administrative expenses improved 2% to $374 million, compared with the prior-year quarter. The company’s adjusted operating profit decreased 1% to $502 million from $506 million a year ago. Operating margin likewise contracted 60 basis points to 14.5% from 15.1% in the prior-year quarter.

Financials

Cash and cash equivalents increased to $237 million as of June 30, 2012 from $189 million as of March 31, 2012. Long-term debt marginally decreased to $8.97 billion as of June 30, 2012, from $8.99 billion as of March 31, 2012. The debt-to-capitalization ratio increased to 61.4% as of June 30, 2012 compared with 60.3% as of March 31, 2012.

During the first half of fiscal 2012, cash flow from operations increased to $1.1 billion from $1.08 billion in the comparable year-ago period. Free cash flow for the period decreased to $434 million from $495 million in the prior-year quarter. The company returned $165 million to shareholders as dividends.

Restructuring

Waste Management has also announced a restructuring plan to reorganize its operations and reduce approximately 100 basis points of costs in 2013. The company will be eliminating around 700 jobs. The company expects to record a pre-tax charge in the range of $50 million to $60 million, primarily related to employee separation costs.

Outlook

Waste Management expects 2012 adjusted EPS between $2.15 and $2.22. The company expects headwinds to the tune of 7 cents per share from recycling and waste-to-energy in the next half of fiscal 2012. Free cash flow is projected between $1.1 billion and $1.2 billion.

Our Take

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 an optimistic note, the company has witnessed positive volumes in its recent two quarters, for the first time since 2006, reversing its streak of negative volumes. However, the headwinds include lower trending recycling prices, electricity prices, 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 - Analyst Report) and Casella Waste Systems Inc. (CWST - Snapshot Report). Waste Management currently maintains a Zacks #4 Rank (Sell) on its stock for the short term.

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