Only $186 million of the revenue decline, or 5.3% of revenue, was related to the impact of lower volumes in the solid waste collection and disposal business. The majority of the decline was due to commodity impacts related to recycling materials, fuel and energy sales, and to foreign currency translation.
The company noted certain items that impacted results in the 2009 and 2008 second quarters. Results in the second quarter of 2009 included a net decrease of $0.02 per diluted share, principally from the combined effects of charges related to the restructuring announced in February 2009 and to the withdrawal from a Teamsters’ under-funded multi-employer pension plan. Results in the second quarter of 2008 included a net $0.01 per diluted share benefit from income tax items.
Excluding those items, earnings would have been $256 million, or $0.52 per diluted share, in the second quarter of 2009 compared with $311 million, or $0.63 per diluted share, in the second quarter of 2008.
David P. Steiner, chief executive officer of Waste Management, commented, “We performed well in the second quarter, despite continued weakness in volumes and unexpected weakness in natural gas markets, which adversely affected the sales price for electricity from some of our Wheelabrator plants. We also had a negative impact of $0.01 per diluted share from development costs incurred in connection with our expansion of our waste-to-energy business.
“Our pricing remained strong at 3.0%. Recycling commodity prices increased each month in the second quarter, and by June had increased over 41% from the lows reached in January. We realized the expected benefit of the reorganization that we announced in the first quarter, and are on track to reduce annual costs by over $120 million. We increased our income from operations margin on an as-adjusted basis by 230 basis points compared to the first quarter of 2009, and by 50 basis points compared to the prior year period. In addition, we continued to generate strong free cash flow.
“Our commercial and residential business lines continued to demonstrate their recession resistant qualities. Commercial revenue, excluding revenue from our fuel surcharge, remained solid, declining only 1.3% compared to the second quarter of 2008. Residential revenue, excluding revenue from our fuel surcharge, performed even better, declining only 0.5% compared to the prior year period. We experienced most of our volume weakness in the more economically sensitive industrial collection, landfill and transfer businesses, though the rate of volume decline in these businesses appears to be stabilizing.
“As we anticipated, we saw a negative impact of $0.07 per diluted share in the second quarter of 2009, compared with the prior year period, as a result of the deterioration of the recycling commodities markets that began in late 2008. Conditions are improving, and we expect to see more modest negative year-over-year impacts from recycling operations in the second half of 2009. For the second half of 2009, we project that the negative impact on earnings per diluted share compared to the prior year, from our recycling operations, will be in the range of $0.02 to $0.04.”
Key Highlights for the Second Quarter 2009:
– Internal revenue growth from yield from our collection and disposal operations was 3.0%.
– Internal revenue growth from volume was negative 8.6%.
– Revenue declined by $537 million. Of this decline, $207 million was due to lower recycling revenues and energy prices, $116 million was related to the decline in fuel surcharge revenue as oil prices declined, and $28 million was due to foreign currency translation.
– Operating expenses declined by $395 million, or about 18.1%, to $1.79 billion in the second quarter of 2009. As a percentage of revenue, second quarter 2009 operating expenses decreased to 60.5%, which is a 200 basis point improvement compared with the same quarter in 2008.
– Cost savings related to the restructuring the company announced in February exceeded $30 million in the second quarter of 2009, and annualized savings are still expected to exceed $120 million. The company incurred a charge of $5 million in the second quarter of 2009 for this restructuring, which brings the total year-to-date charge to $43 million.
– A $10 million benefit to net income resulted from the accounting impact of an increase in the 10-year risk free interest rate, which is used to calculate the present value of our environmental remediation liabilities.
– Selling, general and administrative expenses decreased by $35 million compared with the second quarter of 2008.
– Free cash flow was $297 million in the quarter, and was $496 million for the year to date.
– Capital expenditures were $258 million in the quarter, a $15 million decrease from the prior year period.
– $142 million was returned to shareholders through dividend payments in the quarter.
– The effective tax rate in the quarter was about 37.9%.
Steiner continued, “The second quarter demonstrated the strength of our business model and the effectiveness of the pricing programs and cost controls we have implemented. We had negative impacts of $0.07 from our recycling operations, $0.03 from lower energy sales prices earned at some of our Wheelabrator plants, and $0.01 from foreign currency translation and business development costs. Excluding those mostly uncontrollable items from our earnings, we would have earned $0.63 per diluted share, which would equal our adjusted earnings in the second quarter of 2008. We accomplished this despite an 8.6% drop in internal revenue growth from volumes. This demonstrates that our pricing and cost control programs can offset significant volume losses, and positions us well for when volumes begin to improve.
“We expect the rate of declines in volumes in the second half of the year to be consistent with the rate of decline in the second quarter. We also expect that we will see a year-over-year earnings decrease of about $0.04 in the second half of the year due to continued weakness in energy prices at certain of our Wheelabrator plants. Given this outlook, we expect fully diluted earnings per share on an adjusted basis for the full year to be in the range of $1.95 to $1.99.”
Steiner concluded, “During the economic downturn we have maintained our commitment to returning cash to our shareholders. In the second quarter we paid out over $142 million in dividends. With credit markets now stabilized and our strong cash flow and balance sheet, we have decided to resume our share repurchase program, with authority to spend up to $400 million during the remainder of 2009. Finally, given our focus on free cash flow generation, we continue to expect to generate at least $1.3 billion of free cash flow for the year.”
