Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included under Item 1 and our Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021.
This Quarterly Report on Form 10-Q contains certain forward-looking statements that are made subject to the safe harbor protections provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “forecast,” “project,” “estimate,” “intend,” and words of a similar nature and include estimates or projections of financial and other data; comments on expectations relating to future periods; plans or objectives for the future; and statements of opinion, view or belief about current and future events, circumstances or performance. You should view these statements with caution. They are based on the facts and circumstances known to us as of the date the statements are made. These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those set forth in such forward-looking statements, including but not limited to failure to implement our optimization, growth, and cost savings initiatives and overall business strategy; failure to identify acquisition targets, consummate and integrate acquisitions; failure to obtain the results anticipated from acquisitions; environmental and other regulations, including developments related to emerging contaminants, gas emissions and renewable fuel; significant environmental, safety or other incidents resulting in liabilities or brand damage; failure to obtain and maintain necessary permits; failure to attract, hire and retain key team members and a high quality workforce; changes in wage and labor related regulations; significant storms and destructive climate events; public health risk and other impacts of COVID-19 or similar pandemic conditions, including related regulations, resulting in increased costs and social, labor and commercial disruption; macroeconomic pressures and market disruption resulting in labor, supply chain and transportation constraints and inflationary cost pressure; increased competition; pricing actions; commodity price fluctuations; impacts from Russia’s invasion of Ukraine and the resulting geopolitical conflict and international response, including increased risk of cyber incidents and exacerbation of market disruption, inflationary cost pressure and changes in commodity prices, fuel and other energy costs; international trade restrictions; disposal alternatives and waste diversion; declining waste volumes; weakness in general economic conditions and capital markets; adoption of new tax legislation; fuel shortages; failure to develop and protect new technology; failure of technology to perform as expected, including implementation of a new enterprise resource planning and human capital management system; failure to prevent, detect and address cybersecurity incidents or comply with privacy regulations; negative outcomes of litigation or governmental proceedings; decisions or developments that result in impairment charges and other risks discussed in our filings with the SEC, including Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. We assume no obligation to update any forward-looking statement, including financial estimates and forecasts, whether as a result of future events, circumstances or developments or otherwise.
Overview
We are North America’s leading provider of comprehensive environmental solutions, providing services throughout the United States (“U.S.”) and Canada. We partner with our residential, commercial, industrial, and municipal customers and the communities we serve to manage and reduce waste at each stage from collection to disposal, while recovering valuable resources and creating clean, renewable energy. We own or operate the largest network of landfills throughout the U.S. and Canada. In order to make disposal more practical for larger urban markets, where the distance to landfills is typically farther, we manage transfer stations that consolidate, compact and transport waste efficiently and economically. We are also a leading developer, operator and owner of landfill gas-to-energy facilities in the U.S. and Canada that produce renewable electricity and renewable natural gas, which is a significant source of fuel for our natural gas fleet. Additionally, we are a leading recycler in the U.S. and Canada, handling materials that include paper, cardboard, glass, plastic and metal. Our “Solid Waste” business is operated and managed locally by our subsidiaries that focus on distinct geographic areas and provide collection, transfer, disposal, and recycling and resource recovery services. Consistent with our Company’s long-standing commitment to sustainability and environmental stewardship, we published our 2021 Sustainability Report, which details our people-first commitment to help make the communities in which we live and work safe, resilient, and
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sustainable. The information in this report can be found at https://sustainability.wm.com but it does not constitute a part of, and is not incorporated by reference into, this Quarterly Report on Form 10-Q.
In 2021, our senior management began evaluating, overseeing, and managing the financial performance of our Solid Waste operations through two operating segments. Our East Tier primarily consists of geographic areas located in the Eastern U.S., the Great Lakes region and substantially all of Canada. Our West Tier primarily includes geographic areas located in the Western U.S., including the upper Midwest region, and British Columbia, Canada. Each of our Solid Waste operating segments provides integrated environmental services, including collection, transfer, recycling, and disposal.
Our Solid Waste operating revenues are primarily generated from fees charged for our collection, transfer, disposal, and recycling and resource recovery services, and from sales of commodities by our recycling and landfill gas-to-energy operations. Revenues from our collection operations are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the disposal facility or material recovery facility and our disposal costs. Revenues from our landfill operations consist of tipping fees, which are generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, considering our cost of loading, transporting, and disposing of the solid waste at a disposal site. Recycling revenues generally consist of tipping fees and the sale of recycling commodities to third parties. The fees we charge for our services generally include our environmental, fuel surcharge and regulatory recovery fees which are intended to pass through to customers direct and indirect costs incurred. We also provide additional services that are not managed through our Solid Waste business, described under Results of Operations below.
Strategy
Our fundamental strategy has not changed; we remain dedicated to providing long-term value to our stockholders by successfully executing our core strategy of focused differentiation and continuous improvement. As North America’s leading provider of comprehensive environmental solutions, sustainability and environmental stewardship is embedded in all that we do. We have enabled a people-first, technology-led focus to drive our mission to maximize resource value, while minimizing environmental impact, so that both our economy and our environment can thrive. Our strategy leverages and sustains the strongest asset network in the industry to drive best-in-class customer experience and growth. Our strategic planning processes appropriately consider that the future of our business and the industry can be influenced by changes in economic conditions, the competitive landscape, the regulatory environment, asset and resource availability and technology. We believe that focused differentiation, which is driven by capitalizing on our unique and extensive network of assets, will deliver profitable growth and position us to leverage competitive advantages. Simultaneously, we believe the combination of cost control and investing in automation to improve processes and drive operational efficiency will yield an attractive total cost structure and enhanced service quality. While we continue to improve existing diversion technologies, such as through investments in our recycling operations, we are also evaluating and pursuing emerging diversion technologies that may generate additional value.
Business Environment
The waste industry is a comparatively mature and stable industry. However, customers increasingly expect more of their waste materials to be recovered and those waste streams are becoming more complex. In addition, many state and local governments mandate diversion, recycling and waste reduction at the source and prohibit the disposal of certain types of waste at landfills. We monitor these developments to adapt our service offerings. As companies, individuals and communities look for ways to be more sustainable, we promote our comprehensive services that go beyond our core business of collecting and disposing of waste in order to meet their needs. This includes expanding traditional recycling services, increasing organics collection, and processing, and expanding our renewable energy projects to meet the evolving needs of our diverse customer base. As the leading waste management environmental services provider in North America, we are taking big, bold steps to catalyze positive change – change that will impact our Company as well as the communities we serve. Our sustainability agenda includes expanding recycling and focuses on meeting or exceeding specific 2025 and 2038 sustainability goals around people, customers, the environment, and community, which align with eight of the United Nations Sustainable Development Goals.
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We encounter intense competition from governmental, quasi-governmental and private service providers based on pricing, and to a much lesser extent, the nature of service offerings, particularly in the residential line of business. Our industry is directly affected by changes in general economic factors, including increases and decreases in consumer spending, business expansions and construction activity. These factors generally correlate to volumes of waste generated and impact our revenue. Negative economic conditions, including the impact of COVID-19 and other macroeconomic trends, can and have caused customers to reduce their service needs. Such negative economic conditions, in addition to competitor actions, can impact our strategy to negotiate, renew, or expand service contracts and grow our business. We also encounter competition for acquisitions and growth opportunities. General economic factors and the market for consumer goods, in addition to regulatory developments, can also significantly impact commodity prices for the recyclable materials we sell. Significant components of our operating expenses vary directly as we experience changes in revenue due to volume and a heightened pace of inflation. Volume changes can fluctuate dramatically by line of business and volume changes in higher margin businesses, such as what we saw with COVID-19, can impact key financial metrics. We must dynamically manage our cost structure in response to volume changes and cost inflation.
We believe the Company’s industry-leading asset network and strategic focus on investing in our people and our digital platform will give the Company the necessary tools to address the evolving challenges impacting the Company and our industry. In line with our commitment to continuous improvement and a differentiated customer experience, we remain focused on our customer service digitalization initiative to change the way we interact with our customers. Enhancements made through this initiative are intended to seamlessly and digitally connect all the Company’s functions required to service our customers in order to provide the best experience and service. In late 2021, we began to execute on the next phase of this technology enablement strategy to automate and optimize certain elements of our service delivery model. This next phase will prioritize reduced labor dependency on certain high-turnover jobs, particularly in customer experience, recycling and residential collection. We continue to make these investments to further digitalize our customer self-service and implement technologies to further enhance the safety, reliability and efficiency of our collection operations. Additionally, in early 2022, we implemented our new enterprise resource planning system that will contribute to operational and service excellence by empowering our people through a modern, simplified and connected finance and accounting platform.
Certain macroeconomic pressures and market disruption, driven in part by the COVID-19 pandemic and other external events and conditions, intensified during the second half of 2021 and have continued through the first half of 2022. The constrained labor market has resulted in increased costs for wage adjustments, overtime hours and training new hires to address frontline employee turnover, increased volume, and operational challenges. The COVID-19 pandemic and other external events and conditions have also contributed to significant global supply chain disruption and inflationary pressure for the goods and services we purchase, with a particular impact on our repair and maintenance costs. Supply chain constraints have also caused delayed delivery of fleet, steel containers and other purchases. Aspects of our business rely on third-party transportation providers, and such services have become more limited and expensive. Additionally, we are currently experiencing margin pressures from commodity-driven business impacts, particularly from higher fuel prices and recycling brokerage rebates. The extent and duration of the impact of these labor market, supply chain and transportation challenges are subject to numerous external factors beyond our control, including broader macroeconomic conditions; size, location, and qualifications of the labor pool; behavioral changes; wage and price structures; adoption of new or revised regulations; future resurgence in pandemic conditions and restrictions and geopolitical conflicts and responses. As costs increase, we focus on our strategic pricing efforts, as well as operating efficiencies and cost controls, to maintain and grow our earnings and cash flow. With increased pressure from the strong economic recovery, particularly on labor, we remain focused on putting our people first to ensure that they are well positioned to execute our daily operations diligently and safely. We are encouraged by our results in 2022 and remain focused on delivering outstanding customer service, managing our variable costs with changing volumes and investing in technology that will enhance our customers’ experience and reduce our cost to serve.
Current Quarter Financial Results
During the second quarter of 2022, we delivered strong revenue, income from operations and operating cash flows as we continued to experience yield and volume improvement in our commercial and industrial collection businesses and at our landfills. We remain diligent in the execution of our disciplined pricing programs to effectively overcome inflationary
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cost pressures, and we remain focused on driving operating efficiencies and reducing discretionary spend. We continue to invest in our people through market wage adjustments, investments in our digital platform and training for new team members. We also continue to make investments in recycling automation technology and customer service digitalization to enhance our operational efficiency and improve labor productivity for all lines of business. During the second quarter of 2022, we allocated $550 million of available cash to capital expenditures, both as a continuing investment in our traditional solid waste business and to support growth in our sustainability asset network. We also allocated $539 million to our shareholders through dividends and common stock repurchases.
Key elements of our financial results for the second quarter include:
● Revenues of $5,027 million, compared with $4,476 million in the prior year period, an increase of $551 million, or 12.3%. The increase is primarily attributable to (i) higher yield in our collection and disposal lines of business; (ii) increases from our fuel surcharge program; (iii) increases in the market prices for recycling commodities we sell and (iv) volume growth;
● Operating expenses of $3,142 million, or 62.5% of revenues, compared with $2,736 million, or 61.1% of revenues, in the prior year period. The $406 million increase is primarily attributable to (i) commodity-driven business impacts, particularly from higher fuel prices and recycling brokerage rebates, which also significantly impacted our operating expense as a percentage of revenue; (ii) inflationary cost pressures and (iii) labor cost pressure from frontline employee wage adjustments, increased hiring driving up training costs and higher overtime due to driver shortages and volume growth;
● Selling, general and administrative expenses were $487 million, or 9.7% of revenues, compared with $445 million, or 9.9% of revenues, in the prior year period. The $42 million increase is primarily attributable to (i) labor costs from higher incentive compensation and merit increases; (ii) strategic investments in our digital platform and sustainability initiatives and related supporting technology and (iii) an increase in provision for bad debts driven by higher revenues;
● Income from operations was $890 million, or 17.7% of revenues, compared with $791 million, or 17.7% of revenues, in the prior year period. The increase in the current quarter was driven by strong revenue growth allowing us to overcome cost pressures from the inflationary cost environment;
● Net income attributable to Waste Management, Inc. was $587 million, or $1.41 per diluted share, compared with $351 million, or $0.83 per diluted share, in the prior year period. With the increase in income from operations, as discussed above, there was also an increase in our income tax expense impacting our net income. Additionally, the Company incurred a $220 million loss on early extinguishment of debt in the prior year period;
● Net cash provided by operating activities was $1,047 million compared with $1,043 million in the prior year period. Our net cash provided by operating activities was relatively flat when compared to the prior year period, primarily due to the effect of increased tax payments and the timing of receivable collections in the current year; and
● Free cash flow was $503 million compared with $649 million in the prior year period. The decrease in free cash flow is primarily attributable to an increase in capital spending, primarily driven by timing differences in our fixed asset purchases, as well as our intentional investment in sustainability and growth in recycling and renewable energy projects. Free cash flow is a non-GAAP measure of liquidity. Refer to Free Cash Flow below for our definition of free cash flow, additional information about our use of this measure, and a reconciliation to net cash provided by operating activities, which is the most comparable GAAP measure.
Results of Operations
Operating Revenues
We evaluate, oversee and manage the financial performance of our Solid Waste business subsidiaries through our East and West Tiers. We also provide additional services that are not managed through our Solid Waste business, including both our Strategic Business Solutions (“WMSBS”) and Sustainability and Environmental Solutions (“SES”) businesses,
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recycling brokerage services, landfill gas-to-energy services and certain other expanded service offerings and solutions. The mix of operating revenues from our major lines of business is reflected in the table below (in millions):
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Commercial
$
1,355
$
1,178
$
2,642
$
2,309
Industrial
942
811
1,778
1,554
Residential
832
794
1,637
1,576
Other collection
181
135
334
251
Total collection
3,310
2,918
6,391
5,690
Landfill
1,194
1,075
2,245
1,990
Transfer
554
532
1,040
997
Recycling
468
397
921
739
Other (a)
596
513
1,171
990
Intercompany (b)
(1,095)
(959)
(2,080)
(1,818)
Total
$
5,027
$
4,476
$
9,688
$
8,588
(a) The “Other” line of business includes (i) certain services provided by our WMSBS business; (ii) our landfill gas to energy operations managed by our WM Renewable Energy business; (iii) certain services within our SES business, including our construction and remediation services and our services associated with the disposal of fly ash and (iv) certain other expanded service offerings and solutions. In addition, our “Other” line of business reflects the results of non-operating entities that provide financial assurance and self-insurance support for our Solid Waste business, net of intercompany activity. Revenue attributable to collection, landfill, transfer and recycling services provided by our “Other” businesses has been reflected as a component of the relevant line of business for purposes of presentation in this table.
(b) Intercompany revenues between lines of business are eliminated in the Condensed Consolidated Financial Statements included within this report.
The following table provides details associated with the period-to-period changes in revenues and average yield (dollars in millions):
Period-to-Period Change for the
Three Months Ended
June 30, 2022 vs. 2021
Period-to-Period Change for the
Six Months Ended
June 30, 2022 vs. 2021
As a % of
As a % of
As a % of
As a % of
Related
Total
Related
Total
Amount
Business(a)
Amount
Company(b)
Amount
Business(a)
Amount
Company(b)
Collection and disposal
$
241
6.2
%
$
442
5.9
%
Recycling (c)
96
25.5
212
30.2
Fuel surcharges and other (d)
153
70.0
243
58.9
Total average yield (e)
$
490
10.9
%
$
897
10.4
%
Volume (d)
73
1.6
217
2.5
Internal revenue growth
563
12.5
1,114
12.9
Acquisitions
2
0.1
5
0.1
Divestitures
(6)
(0.1)
(11)
(0.1)
Foreign currency translation
(8)
(0.2)
(8)
(0.1)
Total
$
551
12.3
%
$
1,100
12.8
%
(a) Calculated by dividing the increase or decrease for the current year period by the prior year period’s related business revenue adjusted to exclude the impacts of divestitures for the current year period.
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(b) Calculated by dividing the increase or decrease for the current year period by the prior year period’s total Company revenue adjusted to exclude the impacts of divestitures for the current year period.
(c) Includes combined impact of commodity price variability and changes in fees.
(d) Beginning in the fourth quarter of 2021, includes changes in our revenue attributable to our WM Renewable Energy business from yield, which is included in Fuel Surcharges and Other, and Volume. We have revised our prior year results to conform with the current year presentation.
(e) The amounts reported herein represent the changes in our revenue attributable to average yield for the total Company.
The following provides further details about our period-to-period change in revenues:
Average Yield-
Collection and Disposal Average Yield — This measure reflects the effect on our revenue from the pricing activities of our collection, transfer and landfill operations, exclusive of volume changes. Revenue growth from collection and disposal average yield includes not only base rate changes and environmental and service fee fluctuations, but also (i) certain average price changes related to the overall mix of services, which are due to the types of services provided; (ii) changes in average price from new and lost business and (iii) price decreases to retain customers.
The details of our revenue growth from collection and disposal average yield are as follows (dollars in millions):
Period-to-Period Change for the
Period-to-Period Change for the
Three Months Ended
Six Months Ended
June 30, 2022 vs. 2021
June 30, 2022 vs. 2021
As a % of
As a % of
Related
Related
Amount
Business
Amount
Business
Commercial
$
91
8.3
%
$
175
8.1
%
Industrial
81
10.6
135
9.2
Residential
40
5.3
78
5.1
Total collection
212
7.8
388
7.3
Landfill
19
2.8
36
2.9
Transfer
10
3.7
18
3.5
Total collection and disposal
$
241
6.2
%
$
442
5.9
%
Our overall strategic pricing efforts are focused on recovering inflationary cost increases we experience in our business by increasing our average unit rate. We continue to experience strong average yield growth in our collection line of business of 7.8% and 7.3% for the three and six months ended June 30, 2022, respectively, as compared with the prior year periods, illustrating our focus on our pricing efforts in this inflationary environment. We are also continuing to see growth in our landfill business with our municipal solid waste business experiencing 5.8% and 5.9% average yield growth for the three and six months ended June 30, 2022, respectively, as compared with the prior year periods.
Recycling — Recycling revenue increased $96 million and $212 million for the three and six months ended June 30, 2022, respectively, as compared with the prior year periods, primarily from higher market prices for recycling commodities. Strong demand for recycled materials strengthened through 2021, continuing into the first half of 2022, driven by e-commerce retailers and manufacturers committing to use more recycled content in their packaging. During the three and six months ended June 30, 2022, average market prices for recycling commodities at the Company’s facilities were approximately 30% and 40% higher, respectively, as compared to the prior year periods. The year-over-year favorable trend moderated in the second quarter of 2022 as compared with the first quarter of 2022. We currently expect the year-over-year pricing comparison to be slightly lower for the remainder of 2022 due to the strong pricing we experienced in the second half of 2021 when we saw demand for recycled materials outpacing supply.
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Fuel Surcharges and Other — These fees, which include (i) our fuel surcharge program; (ii) yield from our WM Renewable Energy business and (iii) other mandated fees, increased $153 million and $243 million for the three and six months ended June 30, 2022, respectively, as compared with the prior year periods. Fuel surcharge revenues are based on and fluctuate in response to changes in the national average prices for diesel fuel, and also vary with changes in our volume-based revenue activity. Revenue from our fuel surcharge program increased $129 million and $201 million for the three and six months ended June 30, 2022, respectively, as compared with the prior year periods. Market prices for diesel fuel increased approximately 70% and 60% for the three and six months ended June 30, 2022, respectively, as compared with the prior year periods. Revenue from yield growth in our WM Renewable Energy business increased $22 million and $38 million for the three and six months ended June 30, 2022, respectively, as compared with the prior year periods. This increase was primarily driven by increases in the value for electricity, renewable natural gas and environmental credits. The mandated fees are primarily related to fees and taxes assessed by various state, county and municipal government agencies at our landfills and transfer stations. These amounts have not significantly impacted the change in revenue for the three and six months ended June 30, 2022, as compared with the prior year periods.
Volume
Our revenues from volumes (excluding volumes from acquisitions and divestitures) increased $73 million, or 1.6%, and $217 million, or 2.5%, for the three and six months ended June 30, 2022, respectively, as compared with the prior year periods. Our collection and disposal business volumes grew 2.3% and 3.2% for the three and six months ended June 30, 2022, respectively, as compared with the prior year periods.
Recovery in our volumes from COVID-related impacts continued during the second quarter of 2022, although the pace has moderated somewhat, as volume recoveries accelerated in the prior year period. Special waste volumes at our landfills and our commercial collection business have been the most significant drivers of volume growth during the first half of 2022, primarily due to an increase in event-driven projects and organic revenue growth from improvement in the overall business environment. In addition, our WMSBS business volumes grew as a result of our continued focus on a differentiated service model for national accounts customers.
Operating Expenses
The following table summarizes the major components of our operating expenses (in millions of dollars and as a percentage of revenues):
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Labor and related benefits
$
869
17.3
%
$
791
17.7
%
$
1,683
17.4
%
$
1,537
17.9
%
Transfer and disposal costs
314
6.3
298
6.7
596
6.1
572
6.7
Maintenance and repairs
454
9.0
395
8.8
876
9.0
769
8.9
Subcontractor costs
503
10.0
446
10.0
960
9.9
837
9.7
Cost of goods sold
268
5.3
211
4.7
531
5.5
392
4.6
Fuel
172
3.4
95
2.1
306
3.2
181
2.1
Disposal and franchise fees and taxes
190
3.8
177
3.9
357
3.7
333
3.9
Landfill operating costs
107
2.1
107
2.4
203
2.1
203
2.3
Risk management
85
1.7
81
1.8
180
1.9
154
1.8
Other
180
3.6
135
3.0
353
3.6
272
3.2
$
3,142
62.5
%
$
2,736
61.1
%
$
6,045
62.4
%
$
5,250
61.1
%
Our operating expenses increased primarily due to (i) commodity-driven business impacts, particularly from higher fuel prices and recycling brokerage rebates; (ii) inflationary cost pressures and (iii) labor cost pressure from frontline employee wage adjustments, increased hiring driving up training costs and higher overtime due to driver shortages and volume growth. These impacts were partially offset by our continued focus on operating efficiency and efforts to control costs.
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Significant items affecting the comparison of operating expenses for the reported periods include:
Labor and Related Benefits — The increase in labor and related benefits costs was largely driven by (i) merit and proactive market wage adjustments to hire and retain talent; (ii) intentional headcount growth as volume increases, particularly in our commercial and industrial collection businesses, which when combined with continued driver shortages and turnover in certain markets increased overtime and training hours and (iii) increases in health and welfare costs attributable to our intentional investment in delivering a leading benefits program for our employees and increases in medical care activity.
Transfer and Disposal Costs — The increase in transfer and disposal costs was largely driven by (i) increased disposal fees at third-party disposal sites; (ii) inflationary cost increases, which includes higher fuel, from our third-party haulers and (iii) increased commercial and industrial collection volumes.
Maintenance and Repairs — The increase in maintenance and repairs costs was largely driven by (i) inflationary cost increases for parts, supplies and third-party services; (ii) additional fleet maintenance driven by supply chain constraints which have delayed deliveries of new trucks; (iii) labor cost increases for our technicians, including higher overtime; (iv) an increase in container repairs driven by volume increases in our commercial and industrial collection businesses and delays in normal course capital expenditures for steel containers due to both steel costs and supply chain constraints and (v) commercial and industrial collection volume increases.
Subcontractor Costs — The increase in subcontractor costs was largely driven by (i) inflationary cost increases, particularly for fuel and labor costs from third-party haulers and (ii) an increase in volumes in our WMSBS business, which relies more extensively on subcontracted hauling than our collection and disposal business.
Cost of Goods Sold — The increase in cost of goods sold was primarily driven by the approximate 30% and 40% increase in recycling commodity prices during three and six months ended June 30, 2022, respectively, as compared to the prior year periods.
Fuel — The increase in fuel costs was primarily due to increases in market diesel and natural gas fuel prices during the three and six months ended June 30, 2022, respectively, as compared to the prior year periods. This increase is also due to the cessation of federal natural gas fuel tax credits received in 2021 that have yet to be extended into 2022.
Disposal and Franchise Fees and Taxes — The increase in disposal and franchise fees and taxes was primarily driven by higher franchise fees paid to certain municipalities where we operate and overall rate increases in our fees and taxes paid on our volumes.
Risk Management — Risk management costs increased for three and six months ended June 30, 2022 as compared with the prior year periods, primarily due to inflation in premiums. The six months ended June 30, 2022 was also impacted by an increase in claims costs due to unfavorable cost development on a limited population of severe cases during the first quarter of 2022.
Other — Other operating cost increases were primarily due to (i) inflationary cost pressures; (ii) a favorable litigation settlement in the second quarter of 2021; (iii) higher equipment rental costs attributable, in part, to increased volumes and supply chain constraints slowing normal course fleet and equipment orders and (iv) an increase in business travel in 2022.
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Selling, General and Administrative Expenses
The following table summarizes the major components of our selling, general and administrative expenses (in millions of dollars and as a percentage of revenues):
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Labor and related benefits
$
312
6.2
%
$
297
6.6
%
$
617
6.4
%
$
594
6.9
%
Professional fees
62
1.2
56
1.2
128
1.3
105
1.2
Provision for bad debts
14
0.3
7
0.2
24
0.2
17
0.2
Other
99
2.0
85
1.9
209
2.2
187
2.2
$
487
9.7
%
$
445
9.9
%
$
978
10.1
%
$
903
10.5
%
Selling, general and administrative expenses have increased primarily due to (i) increased labor costs from higher incentive compensation costs and merit increases; (ii) strategic investments in our digital platform and sustainability initiatives and related supporting technology and (iii) an increase in provision for bad debts. Although our costs increased, the significant revenue increases in our high-margin businesses, which include our landfill and commercial and industrial collection businesses, positioned us to reduce our overall selling, general and administrative expenses as a percentage of revenues when compared with the prior year periods.
Significant items affecting the comparison of our selling, general and administrative expenses for the reported periods include:
Labor and Related Benefits — The increase in labor and related benefits costs was primarily related to (i) higher incentive compensation costs; (ii) annual merit increases for our employees; (iii) increases in health and welfare costs attributable to our intentional investment in delivering a leading benefits program for our employees and increases in medical care activity. These increases are partially offset by a decline in contract labor costs related to the integration of Advanced Disposal Services, Inc. (“Advanced Disposal”).
Professional Fees — The increase in professional fees was primarily driven by the strategic investments in our digital platform and our sustainability initiatives. Partially offsetting these increases were lower integration costs related to our acquisition of Advanced Disposal.
Provision for Bad Debts — The increase in provision for bad debts is primarily related to our increased revenue.
Other — The increase in other expenses was primarily driven by costs associated with an increase in technology infrastructure to support our strategic investments in our digital platform and an increase in business travel in 2022.
Depreciation and Amortization Expenses
The following table summarizes the components of our depreciation and amortization expenses (in millions of dollars and as a percentage of revenues):
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Depreciation of tangible property and equipment
$
289
5.7
%
$
279
6.3
%
$
572
5.9
%
$
558
6.5
%
Amortization of landfill airspace
188
3.8
184
4.1
355
3.7
341
4.0
Amortization of intangible assets
31
0.6
37
0.8
63
0.6
73
0.8
$
508
10.1
%
$
500
11.2
%
$
990
10.2
%
$
972
11.3
%
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The increase in depreciation of tangible property and equipment was primarily driven by investments in capital assets to service our customers, such as heavy equipment and containers. The increase in amortization of landfill airspace was driven primarily by landfill volume increases and changes in amortization rates driven by revisions in landfill estimates, which includes changes in the anticipated timing of capping, closure and post-closure activities. The decrease in amortization of intangible assets was primarily driven by the reduction in amortization of acquired intangible assets from the acquisition of Advanced Disposal.
(Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net
For the six months ended June 30, 2022, we recognized a $17 million charge in the first quarter in our Corporate and Other segment to adjust an indirect wholly-owned subsidiary’s estimated potential share of the liability for a proposed environmental remediation plan at a closed site, as discussed in Note 6 to the Condensed Consolidated Financial Statements.
For the six months ended June 30, 2021, we recognized net charges of $17 million in the first quarter consisting of (i) a $19 million charge pertaining to reserves for loss contingencies in our Corporate and Other segment and (ii) $6 million of asset impairment charges primarily related to our WM Renewable Energy business within our Other segment, which were partially offset by an $8 million gain from divestitures of certain ancillary operations in our Other segment.
Income from Operations
The following table summarizes income from operations for our reportable segments (dollars in millions):
Three Months Ended
Six Months Ended
June 30,
Period-to-Period
June 30,
Period-to-Period
2022
2021(c)
Change
2022
2021(c)
Change
Solid Waste:
East Tier
$
581
$
512
$
69
13.5
%
$
1,112
$
965
$
147
15.2
%
West Tier
608
553
55
9.9
1,157
1,028
129
12.5
Solid Waste
1,189
1,065
124
11.6
2,269
1,993
276
13.8
Other (a)
18
6
12
*
19
26
(7)
*
Corporate and Other (b)
(317)
(280)
(37)
13.2
(630)
(578)
(52)
9.0
Total
$
890
$
791
$
99
12.5
%
$
1,658
$
1,441
$
217
15.1
%
Percentage of revenues
17.7
%
17.7
%
17.1
%
16.8
%
*Percentage change does not provide a meaningful comparison.
(a) “Other” includes (i) elements of our WMSBS business that are not included in the operations of our reportable segments; (ii) elements of our landfill gas-to-energy operations managed by our WM Renewable Energy business and not included in the operations of our reportable segments; (iii) elements of our third-party subcontract and administration revenues managed by our SES business and not included in the operations of our reportable segments; (iv) our recycling brokerage services; (v) certain other expanded service offerings and solutions and (vi) the results of non-operating entities that provide financial assurance and self-insurance support for our Solid Waste business, net of intercompany activity.
(b) “Corporate and Other” operating results reflect certain costs incurred for various support services that are not allocated to our reportable segments. These support services include, among other things, treasury, legal, digital, tax, insurance, centralized service center processes, other administrative functions and the maintenance of our closed landfills. Income from operations for “Corporate and Other” also includes costs associated with our long-term incentive program.
(c) In the fourth quarter of 2021, we discontinued certain allocations from our Corporate and Other segment to our Solid Waste operating segments and Other segment. Reclassifications have been made to our prior period information for comparability purposes.
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The significant items affecting income from operations for our segments during the three and six months ended June 30, 2022, as compared with the prior year periods, are summarized below:
● Solid Waste — Income from operations in our Solid Waste business increased primarily due to revenue growth in our collection and disposal businesses driven by both yield and volume. These increases were partially offset by inflationary cost pressures and labor cost pressure from frontline employee wage adjustments, increased hiring driving up training costs and higher overtime due to driver shortages and volume growth.
● Corporate and Other — The decrease in income from operations from our Corporate and Other segment was primarily driven by increased costs for (i) labor, particularly due to higher incentive compensation costs and merit increases; (ii) strategic investments in our digital platform and (iii) investments in our sustainability initiatives. The impact of these higher costs was partially offset by lower integration costs related to our acquisition of Advanced Disposal and the impact of adjustments from closure and post-closure activity at our closed landfills in the prior year periods.
Interest Expense, Net
Our interest expense, net was $93 million and $178 million for the three and six months ended June 30, 2022, respectively, compared to $98 million and $195 million for the three and six months ended June 30, 2021, respectively. The decrease in the first half of 2022 is primarily due to the retirement of $1.3 billion of certain high-coupon senior notes and concurrent issuance of $950 million of lower coupon senior notes in May 2021 and, to a lesser extent, the impacts that lower interest rates have had on the cost of certain of our tax-exempt debt primarily during the first quarter of 2022. In the second half of 2022, we expect that interest costs will increase compared to 2021 as a result of incremental debt issued in the second quarter of 2022 and the effect of rising interest rates primarily on borrowings under our commercial paper program and $1.0 billion, two-year, U.S. term credit agreement (“Term Loan”).
Loss on Early Extinguishment of Debt
The loss on early extinguishment of debt during the three and six months ended June 30, 2022 resulting from the redemption of our $500 million 2.9% senior notes due September 2022 in advance of their maturity was immaterial.
In May 2021, WMI issued $950 million of senior notes. We used the net proceeds from the newly issued senior notes of $942 million and available cash on hand to retire $1.3 billion of certain high-coupon senior notes through a tender offer. The loss on early extinguishment of debt for the three and six months ended June 30, 2021 includes $220 million of charges related to the tender offer, including $211 million of premiums and other third-party costs and $9 million primarily related to unamortized discounts and debt issuance costs.
Equity in Net Losses of Unconsolidated Entities
We recognized equity in net losses of unconsolidated entities of $17 million and $32 million during the three and six months ended June 30, 2022, respectively, compared to $11 million and $20 million for the three months and six months ended June 30, 2021, respectively. The losses for each period were primarily related to our noncontrolling interests in entities established to invest in and manage low-income housing properties. We generate tax benefits, including tax credits, from the losses incurred from these investments which are discussed in Note 4 to the Condensed Consolidated Financial Statements.
Income Tax Expense
Our income tax expense was $189 million and $346 million for the three and six months ended June 30, 2022, respectively, compared to $105 million and $229 million for the three and six months ended June 30, 2021, respectively. Our effective income tax rate was 24.3% and 23.9% for the three and six months ended June 30, 2022, respectively, compared to 22.9% and 22.8% for the three and six months ended June 30, 2021, respectively.
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The increase in our income tax expense and effective income tax rate when comparing the three and six months ended June 30, 2022 and 2021 was primarily driven by an increase in pre-tax income in 2022, resulting in a decreased rate benefit from federal income tax credits. See Note 4 to the Condensed Consolidated Financial Statements for more information related to income taxes.
Liquidity and Capital Resources
The Company consistently generates cash flow from operations that meets and exceeds our working capital needs, payment of our dividends, investment in the business through capital expenditures and tuck-in acquisitions, and funding of strategic sustainability growth investments. We continually monitor our actual and forecasted cash flows, our liquidity and our capital resources, enabling us to plan for our present needs and fund unbudgeted business requirements that may arise during the year. The Company believes that its investment grade credit ratings, large value of unencumbered assets and modest leverage enable it to obtain adequate financing to meet its ongoing capital, operating, strategic and other liquidity requirements.
Summary of Cash and Cash Equivalents, Restricted Funds and Debt Obligations
The following is a summary of our cash and cash equivalents, restricted funds and debt balances (in millions):
June 30,
December 31,
2022
2021
Cash and cash equivalents
$
894
$
118
Restricted funds:
Insurance reserves
$
363
$
305
Final capping, closure, post-closure and environmental remediation funds
114
118
Other
—
5
Total restricted funds (a)
$
477
$
428
Debt:
Current portion
$
231
$
708
Long-term portion
14,046
12,697
Total debt
$
14,277
$
13,405
(a) As of June 30, 2022 and December 31, 2021, $80 million of these account balances was included in other current assets in our Condensed Consolidated Balance Sheets.
Cash and cash equivalents — Cash and cash equivalents at June 30, 2022 include proceeds from borrowings under our Term Loan and from the May 2022 issuance of senior notes, which were partially offset by the redemption of our $500 million 2.9% senior notes due September 2022 in advance of their scheduled maturity, discussed further in Note 3 to the Condensed Consolidated Financial Statements.
Debt — As of June 30, 2022, we had approximately $2.4 billion of debt maturing within the next 12 months, including (i) $1.0 billion of short-term borrowings under our commercial paper program (net of related discount on issuance); (ii) $625 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities; (iii) $500 million of 2.4% senior notes that mature in May 2023 and (iv) $226 million of other debt with scheduled maturities within the next 12 months, including $111 million of tax-exempt bonds. As of June 30, 2022, we have classified $2.1 billion of debt maturing in the next 12 months as long term because we have the intent and ability to refinance these borrowings on a long-term basis as supported by the forecasted available capacity under our $3.5 billion long-term U.S. and Canadian revolving credit facility (“$3.5 billion revolving credit facility”). The remaining $231 million of debt maturing in the next 12 months is classified as current obligations.
Additionally, as of June 30, 2022, we also had $54 million of variable-rate tax-exempt bonds with long-term scheduled maturities supported by letters of credit under our $3.5 billion revolving credit facility. The interest rates on our variable-rate tax-exempt bonds reset on a weekly basis through a remarketing process. All recent tax-exempt bond
34
remarketings have successfully placed Company bonds with investors at market-driven rates and we currently expect future remarketings to be successful. However, if the remarketing agent is unable to remarket our bonds, the remarketing agent can put the bonds to us. In the event of a failed remarketing, we have the availability under our $3.5 billion revolving credit facility to fund these bonds until they are remarketed successfully. Accordingly, we have classified the $54 million of variable-rate tax-exempt bonds with maturities of more than one year as long-term in our Condensed Consolidated Balance Sheet.
In May 2022, WMI issued $1.0 billion of 4.15% senior notes due April 15, 2032, the net proceeds of which were $992 million. We used the net proceeds to redeem our $500 million of 2.9% senior notes due September 2022 in advance of their scheduled maturity, to repay a portion of outstanding borrowings under our commercial paper program and for general corporate purposes.
In May 2022, we entered into a Term Loan to be used for general corporate purposes and as of June 30, 2022, we had $1.0 billion of outstanding borrowings. WM Holdings guarantees all of the obligations under the Term Loan.
Amendment and Extension of Revolving Credit Facility
In May 2022, we amended and restated our $3.5 billion U.S. and Canadian revolving credit facility extending the term through May 2027. The agreement includes a $1.0 billion accordion feature that may be used to increase total capacity in future periods, and we have the option to request up to two one-year extensions. Waste Management of Canada Corporation and WM Quebec Inc., each an indirect wholly-owned subsidiary of WMI, are borrowers under the $3.5 billion revolving credit facility, and the agreement permits borrowing in Canadian dollars up to the U.S. dollar equivalent of $375 million, with such borrowings to be repaid in Canadian dollars. WM Holdings, a wholly-owned subsidiary of WMI, guarantees all the obligations under the $3.5 billion revolving credit facility. Refer to Note 3 to the Condensed Consolidated Financial Statements for additional information.
Guarantor Financial Information
WM Holdings has fully and unconditionally guaranteed all of WMI’s senior indebtedness. WMI has fully and unconditionally guaranteed all of WM Holdings’ senior indebtedness. None of WMI’s other subsidiaries have guaranteed any of WMI’s or WM Holdings’ debt. In lieu of providing separate financial statements for the subsidiary issuer and guarantor (WMI and WM Holdings), we have presented the accompanying supplemental summarized combined balance sheet and income statement information for WMI and WM Holdings on a combined basis after elimination of intercompany transactions between WMI and WM Holdings and amounts related to investments in any subsidiary that is a non-guarantor (in millions):
June 30,
December 31,
2022
2021
Balance Sheet Information:
Current assets
$
822
$
6
Noncurrent assets
15
13
Current liabilities
106
590
Noncurrent liabilities:
Advances due to affiliates (a)
19,623
18,599
Other noncurrent liabilities
12,014
10,778
(a) The amount reported as Advances due to affiliates as of December 31, 2021 was understated in our Annual Report on Form 10-K for the year ended December 31, 2021 and subsequently corrected in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022.
35
Six Months Ended
June 30, 2022
Income Statement Information:
Revenue
$
—
Operating income
—
Net loss
41
Summary of Cash Flow Activity
The following is a summary of our cash flows for the six months ended June 30 (in millions):
Six Months Ended
June 30,
2022
2021
Net cash provided by operating activities
$
2,305
$
2,163
Net cash used in investing activities
$
(1,100)
$
(708)
Net cash used in financing activities
$
(407)
$
(1,810)
Net Cash Provided by Operating Activities — Our operating cash flows increased by $142 million as compared with the prior year period, as a result of an increase in earnings attributable to our collection and disposal, recycling and WM Renewable Energy lines of business, as well as lower interest payments due to the timing of certain interest payments and refinancing activities in 2021 that reduced our overall interest rate, partially offset by higher income tax payments and higher annual incentive compensation payments in the current year period.
Net Cash Used in Investing Activities — The most significant items included in our investing cash flows for the six months ended June 30, 2022 and 2021 are summarized below:
● Capital Expenditures — We used $968 million and $666 million for capital expenditures during the six months ended June 30, 2022 and 2021, respectively. The increase in capital spending is primarily driven by timing differences in our fixed asset purchases, as well as our intentional investment in sustainability growth projects. The Company continues to maintain a disciplined focus on capital management to prioritize investments in the long-term growth of our business and for the replacement of aging assets.
● Other, Net — During the six months ended June 30, 2022 and 2021, we used $60 million and $56 million, respectively, of cash from restricted cash and cash equivalents to invest in available-for-sale securities within our investment portfolio associated with a wholly-owned insurance captive. Additionally, we used $28 million in 2022 to make an initial cash payment associated with a new low-income housing investment.
36
Net Cash Used in Financing Activities — The most significant items affecting the comparison of our financing cash flows for the six months ended June 30, 2022 and 2021 are summarized below:
● Debt Borrowings (Repayments) — The following summarizes our cash borrowings and repayments of debt for the six months ended June 30 (in millions):
2022
2021
Borrowings :
Commercial paper
$
3,368
$
640
Term loan
1,000
—
Senior notes
992
942
Tax-exempt bonds
—
125
$
5,360
$
1,707
Repayments :
Commercial paper
$
(4,141)
$
(954)
Senior notes
(500)
(1,289)
Tax-exempt bonds
—
(24)
Other debt
(42)
(59)
$
(4,683)
$
(2,326)
Net cash borrowings (repayments)
$
677
$
(619)
Refer to Note 3 to the Condensed Consolidated Financial Statements for additional information related to our debt borrowings and repayments.
● Premiums and Other Paid on Early Extinguishment of Debt — During the six months ended June 30, 2021, we paid premiums and other third-party costs of $211 million to retire certain high-coupon senior notes.
● Common Stock Repurchase Program — During the six months ended June 30, 2022, we repurchased $524 million of our common stock, consisting of $500 million pursuant to two accelerated share repurchase (“ASR”) agreements and $24 million repurchased in open market transactions, of which $4 million was paid in July 2022. See Note 10 to the Condensed Consolidated Financial Statements for additional information. During the six months ended June 30, 2021, we repurchased $500 million of our common stock pursuant to two ASR agreements.
● Cash Dividends — For the periods presented, all dividends have been declared by our Board of Directors. We paid cash dividends of $544 million and $489 million during the six months ended June 30, 2022 and 2021, respectively. The increase in dividend payments is primarily due to our quarterly per share dividend increasing from $0.575 in 2021 to $0.65 in 2022.
Free Cash Flow
We are presenting free cash flow, which is a non-GAAP measure of liquidity, in our disclosures because we use this measure in the evaluation and management of our business. We define free cash flow as net cash provided by operating activities, less capital expenditures, plus proceeds from divestitures of businesses and other assets, net of cash divested. We believe it is indicative of our ability to pay our quarterly dividends, repurchase common stock, fund acquisitions and other investments and, in the absence of refinancings, to repay our debt obligations. Free cash flow is not intended to replace net cash provided by operating activities, which is the most comparable GAAP measure. We believe free cash flow gives investors useful insight into how we view our liquidity, but the use of free cash flow as a liquidity measure has material limitations because it excludes certain expenditures that are required or that we have committed to, such as declared dividend payments and debt service requirements.
37
Our calculation of free cash flow and reconciliation to net cash provided by operating activities is shown in the table below (in millions), and may not be calculated the same as similarly-titled measures presented by other companies:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Net cash provided by operating activities
$
1,047
$
1,043
$
2,305
$
2,163
Capital expenditures to support the business
(485)
(387)
(856)
(646)
Capital expenditures - sustainability growth investments (a)
(65)
(9)
(112)
(20)
Total capital expenditures
(550)
(396)
(968)
(666)
Proceeds from divestitures of businesses and other assets, net of cash divested
6
2
11
17
Free cash flow
$
503
$
649
$
1,348
$
1,514
(a) These growth investments are intended to further our sustainability leadership position by increasing recycling volumes and growing renewable natural gas generation. We expect they will deliver circular solutions for our customers and drive environmental value to the communities we serve.
Critical Accounting Estimates and Assumptions
In preparing our financial statements, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with precision from available data or simply cannot be calculated. In some cases, these estimates are difficult to determine and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that present the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, long-lived asset impairments, intangible asset impairments and the fair value of assets and liabilities acquired in business combinations, as described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
Seasonal Trends
Our operating revenues tend to be somewhat higher in summer months, primarily due to higher construction and demolition waste volumes. The volumes of industrial and residential waste in certain regions where we operate also tend to increase during the summer months. Our second and third quarter revenues and results of operations typically reflect these seasonal trends.
Service disruptions caused by severe storms, extended periods of inclement weather or climate events can significantly affect the operating results of the geographic areas affected. On the other hand, certain destructive weather and climate conditions, such as wildfires in the Western U.S. and hurricanes that most often impact our operations in the Southern and Eastern U.S. during the second half of the year, can increase our revenues in the geographic areas affected as a result of the waste volumes generated by these events. While weather-related and other event-driven special projects can boost revenues through additional work for a limited time, due to significant start-up costs and other factors, such revenue can generate earnings at comparatively lower margins.
Inflation
Accelerated and pronounced economic pressures, particularly related to inflationary cost pressures on labor and the goods and services we rely upon to deliver service to our customers, have continued to have a significant impact on our cost structure and capital expenditures in the first half of 2022. We are taking proactive steps to recover and/or mitigate inflationary cost pressures through our overall strategic pricing efforts and by managing our costs through efficiency, labor productivity and investments in technology to automate certain aspects of our business. A significant portion of our
38
revenue is tied to a price escalation index with a lookback provision, which has resulted in a timing lag in our ability to recover increased costs under these contracts during this period of rapid inflation. Separately, for many of our customers we provide services under multi-year contracts that can restrict our ability to increase prices and the timing of such increases. As we entered 2022, many of these contract lookback provisions began to capture the inflationary cost increases experienced in the second half of 2021 in the price escalation calculation; however, due to continued inflation as well as the relatively low inflationary cost environment of the first half of 2021, such timing lag persists.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information about market risks as of June 30, 2022 does not materially differ from that discussed under Item 3 in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.