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Waste Management Inc. (WM - Analyst Report) reported earnings per share (EPS) of 61 cents (excluding special items) in the third quarter of 2012, down 3% from the year-ago quarter but a penny ahead of the Zacks Consensus Estimate. The year-over-year fall was due to a decline in recycling commodity prices in the quarter.

Including asset impairment of 8 cents and restructuring charges of 8 cents per share and a charge of 1 cent per share related to a labor dispute, EPS in the quarter stood at 46 cents, a 21% drop from the year-ago EPS of 58 cents.
 
Quarter in Detail
 
Revenues decreased 2% to $3.461 billion from $3.522 billion in the year-ago quarter, missing the Zacks Consensus Estimate of $3.512 billion. Work-day adjusted volumes inched up 0.5% for the quarter. Internal revenue growth from yield for collection and disposal operations was 0.8%.
 
Revenues from the company’s Collection business dipped 1.4% to $2.1 billion. Landfill revenues edged up 2% to $705 million, Transfer revenues declined 1% to $332 million, Wheelabrator revenues fell 4% to $218 million and Recycling revenues went down 28% to $316 million.
 
Operating expenses improved 1% to $2.22 billion, as reductions in commodity rebates and landfill operating costs helped offset higher expenses for third party haulers and maintenance. Selling, general and administrative expenses increased 12% year over year to $335 million. The company’s adjusted operating profit remained flat annually at $575 million. Operating margin expanded 30 basis points from the prior-year quarter to 16.6%.
 
Financials
 
Cash and cash equivalents increased to $398 million as of September 30, 2012 from $237 million as of June 30, 2012. Long-term debt increased to $9.17 billion as of September 30, 2012, from $8.97 billion as of June 30, 2012. The debt-to-capitalization ratio remained flat at 61.4% as of September 30, 2012 compared with June 30, 2012.
 
During the nine months of fiscal 2012, cash flow from operations increased to $1.72 billion from $1.74 billion in the comparable year-ago period. Free cash flow for the period decreased to $614 million from $867 million in the prior-year. The company returned $164 million to shareholders as dividends in the quarter.
 
Outlook
 
Waste Management now expects 2012 adjusted EPS between $2.08 and $2.13, down from the previous guidance of $2.15 and $2.20. The company expects headwinds to the tune of 14 cents per share from lower commodity prices in fiscal 2012. Free cash flow is projected between $1.1 billion and $1.2 billion.
 
For 2013, the company expects commodity prices to remain relatively stable. Savings from recent restructuring activities and focus on pricing are expected to deliver improved results in 2013.
 
Our Take
 
Waste Management’s recent Oakleaf acquisition is expected to generate a minimum of $80 million in EBITDA on an annualized basis. The company has reversed the trend of negative volumes by delivering positive volumes in 2012.
 
Waste Management has also announced a restructuring plan that will result in about 100 basis points expansion in margins in 2013. However, lower trending average commodity prices, electricity prices and a challenging pricing scenario are expected to remain headwinds for the balance of 2012, affecting its earnings.
 
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 #3 Rank (Hold) on its stock for the short term.

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