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, 2022.
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, automation, growth, and cost savings initiatives and overall business strategy; failure to obtain the results anticipated from strategic initiatives, investments, acquisitions or new lines of business; failure to identify acquisition targets, consummate and integrate acquisitions; environmental and other regulations, including developments related to emerging contaminants, gas emissions, renewable energy and environmental, social and governance (“ESG”) performance and disclosure; significant environmental, safety or other incidents resulting in liabilities or brand damage; failure to obtain and maintain necessary permits due to land scarcity, public opposition or otherwise; diminishing landfill capacity, resulting in increased costs and the need for disposal alternatives; failure to attract, hire and retain key team members and a high quality workforce; increases in labor costs due to union organizing activities or changes in wage and labor related regulations; disruption and costs resulting from extreme weather and destructive climate events; failure to achieve our sustainability goals or execute on our sustainability-related strategy and initiatives; public health risk, increased costs and disruption due to a future resurgence of pandemic conditions and restrictions; macroeconomic conditions, geopolitical conflict and market disruption resulting in labor, supply chain and transportation constraints, inflationary cost pressures and fluctuations in commodity prices, fuel and other energy costs; increased competition; pricing actions; impacts from international trade restrictions; competitive disposal alternatives, diversion of waste from landfills and declining waste volumes; weakness in general economic conditions and capital markets, including potential for an economic recession; instability of financial institutions; adoption of new tax legislation; fuel shortages; failure to develop and protect new technology; failure of technology to perform as expected; failure to prevent, detect and address cybersecurity incidents or comply with privacy regulations; negative outcomes of litigation or governmental proceedings; and 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, 2022 as updated by Part II, Item 1A. Risk Factors , included in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023. 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 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. Through our subsidiaries, including our Waste Management Renewable Energy (“WM Renewable Energy”) business, 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
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and managed locally by our subsidiaries that focus on distinct geographic areas and provide collection, transfer, disposal, and recycling and resource recovery services.
Our senior management evaluates, oversees and manages 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. We have enabled a people-first, technology-led focus to drive our mission to maximize resource value, while minimizing environmental impact, and sustainability and environmental stewardship is embedded in all that we do. 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 that investing in automation to improve processes and drive operational efficiency combined with a focus on the cost to serve our customer will yield an attractive profit margin and enhanced service quality. We are furthering our strategy of focused differentiation and continuous improvement beyond our traditional waste operations through our sustainability growth strategy that includes significant planned investments in our WM Renewable Energy and recycling businesses, while increasing automation and reducing labor dependency. 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 North America’s leading provider of comprehensive environmental solutions, we are taking big, bold steps to catalyze positive change – change that will impact our Company as well as the communities we serve. Consistent with our Company’s long-standing commitment to sustainability and environmental stewardship, we published our 2022 Sustainability Report providing details on our ESG performance and outlining new 2030 ESG goals.
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The Sustainability Report conveys the strong linkage between the Company’s ESG goals and our growth strategy, inclusive of the planned expansion of the Company’s recycling and WM Renewable Energy businesses. 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.
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 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 significantly by line of business and volume changes in higher margin businesses 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 automation and optimization investments to enhance our operational efficiency and change the way we interact with our customers. Enhancements made through these initiatives 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. Our next and ongoing phase is to prioritize reduced labor dependency on certain high-turnover jobs, particularly in customer experience, recycling and residential collection, while further elevating our customer self-service through digitalization and implementing technologies to enhance the safety, reliability and efficiency of our collection operations. Additionally, in 2022, we implemented a new general ledger accounting system, complementary finance enterprise resource planning system and a human capital management system, which will drive operational and service excellence by empowering our people through a modern, simplified and connected employee experience.
Macroeconomic pressures, including inflation and rising interest rates, and market disruption, resulting in labor, supply chain and transportation constraints, are continuing. Significant global supply chain disruption and the heightened pace of inflation have reduced availability and increased costs for the goods and services we purchase, with a particular impact on our repair and maintenance costs, as well as subcontractor 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.
With the significant decline in commodity prices that started in the second half of 2022 and have continued into 2023, we are currently experiencing margin pressures from our commodity-driven businesses, specifically within our recycling and WM Renewable Energy businesses. While there may be short-term fluctuations in our commodity-driven businesses as prices change, we continue to focus on adjusting our business models to protect against the down-side risk by spreading the inherent risk of changes in commodity prices across the vertically integrated value chain. The extent and duration of the impact of labor, supply chain, transportation and commodity price challenges are subject to numerous external factors beyond our control, including broader macroeconomic conditions; recessionary fears and/or an economic recession; size, location, and qualifications of the labor pool; wage and price structures; adoption of new or revised regulations; future resurgence of pandemic conditions and restrictions; geopolitical conflicts and responses and supply and demand for commodities. As we experience inflationary cost pressures, we focus on our pricing efforts, as well as operating efficiencies and cost controls to maintain our earnings and cash flow and facilitate growth. With these macroeconomic pressures, we remain committed to putting our people first to ensure that they are well positioned to execute our daily
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operations diligently and safely. We 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 provide operating efficiencies intended to reduce our cost to serve.
Current Quarter Financial Results
During the first quarter of 2023, we continued to focus on our priorities to advance our strategy—enhancing employee engagement, improving our operations through the use of technology and automation, and investing in growth through our recycling and WM Renewable Energy businesses. This strategic focus, combined with strong operational execution resulted in increased revenue, income from operations and income from operations margin. We were able to achieve these results despite high inflationary cost pressures. We remain diligent in offering a competitively profitable service that meets the needs of our customers, and we are 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 our team members. We also continue to make investments in automation and optimization to enhance our operational efficiency and improve labor productivity for all lines of business. During the first quarter of 2023, we allocated $660 million of available cash to capital expenditures and $639 million to our shareholders through dividends and common stock repurchases.
Key elements of our financial results for the first quarter include:
● Revenues of $4,892 million, compared with $4,661 million in the prior year period, an increase of $231 million, or 5.0%. The increase is primarily attributable to (i) higher yield in our collection and disposal business; (ii) volume growth; (iii) increases from our fuel surcharge program and (iv) acquisitions, net of divestitures. These increases were partially offset by commodity price declines in our recycling and WM Renewable Energy businesses;
● Operating expenses of $3,086 million, or 63.1% of revenues, compared with $2,903 million, or 62.3% of revenues, in the prior year period. The $183 million increase is primarily attributable to (i) inflationary cost pressures, particularly for maintenance and repairs and subcontractor costs and (ii) labor cost pressure from frontline employee market wage adjustments and annual merit increases. These increases were offset, in part, by commodity-driven business impacts from lower recycling rebates reflected in costs of goods sold;
● Selling, general and administrative expenses were $476 million, or 9.7% of revenues, compared with $491 million, or 10.5% of revenues, in the prior year period. The $15 million decrease is primarily attributable to reduced professional fees in connection with investments in our digital platform, as certain strategic digital projects have now been implemented. This decrease was offset, in part, by an increase in labor-related costs due to annual merit increases for our employees;
● Income from operations was $825 million, or 16.9% of revenues, compared with $768 million, or 16.5% of revenues, in the prior year period. The improved earnings in the current quarter are driven by deliberate steps to grow revenue and to reduce selling, general and administrative expense, which offset increases in operating expenses and depreciation, depletion and amortization expenses;
● Net income attributable to Waste Management, Inc. was $533 million, or $1.30 per diluted share, compared with $513 million, or $1.23 per diluted share, in the prior year period. The increase in income from operations discussed above, was partially offset by increases in interest expense and income tax expense;
● Net cash provided by operating activities was $1,044 million compared with $1,258 million in the prior year period, with the decrease driven by (i) unfavorable changes in working capital, net of effects of acquisitions and divestitures; (ii) higher incentive compensation payments and (iii) higher interest payments. This decrease was partially offset by (i) increased earnings attributable to our collection and disposal business and (ii) lower income taxes in the current period due to timing of payments ; and
● Free cash flow was $395 million compared with $845 million in the prior year period. The decrease in free cash flow is primarily attributable to (i) an increase in capital spending, primarily driven by our intentional investment in sustainability growth projects as well as timing differences in our fixed asset purchases to support our ongoing
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operations and (ii) a decrease in net cash provided by operating activities as discussed above. 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
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. 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, which include landfill gas-to-energy services, environmental solutions services and recycling brokerage services. We also offer certain other expanded service offerings and solutions. The mix of operating revenues from our major lines of business for the three months ended March 31 are as follows (in millions):
2023
2022
Commercial
$
1,412
$
1,287
Industrial
933
836
Residential
854
805
Other collection
172
153
Total collection
3,371
3,081
Landfill
1,152
1,051
Transfer
540
486
Recycling
358
453
Other (a)
613
575
Intercompany (b)
(1,142)
(985)
Total
$
4,892
$
4,661
(a) The “Other” line of business includes (i) certain services provided by our WMSBS business; (ii) certain services within our sustainability business including our landfill gas-to-energy operations managed by our WM Renewable Energy business and (iii) certain other expanded service offerings and solutions and 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.
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The following table provides details associated with the period-to-period change in revenues and average yield (dollars in millions):
Period-to-Period Change for the
Three Months Ended
March 31, 2023 vs. 2022
As a % of
As a % of
Related
Total
Amount
Business(a)
Amount
Company(b)
Collection and disposal
$
244
6.2
%
Recycling and WM Renewable Energy (c)(d)
(141)
(28.0)
Fuel surcharges and mandated fees (d)
44
21.1
Total average yield (e)
$
147
3.1
%
Volume
55
1.2
Internal revenue growth
202
4.3
Acquisitions
43
0.9
Divestitures
(2)
—
Foreign currency translation
(12)
(0.2)
Total
$
231
5.0
%
(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.
(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 in both our recycling and WM Renewable Energy businesses, as well as changes in fees in our recycling business.
(d) Beginning in 2023, Recycling and WM Renewable Energy includes changes in our revenue attributable to our WM Renewable Energy business. Previously these changes in revenue were included in fuel surcharges and mandated fees. 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.
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The details of our revenue growth from collection and disposal average yield are as follows (dollars in millions):
Period-to-Period Change for the
Three Months Ended
March 31, 2023 vs. 2022
As a % of
Related
Amount
Business
Commercial
$
85
7.2
%
Industrial
77
10.0
Residential
43
5.6
Total collection
205
7.2
Landfill
17
2.7
Transfer
22
8.9
Total collection and disposal
$
244
6.2
%
Our overall pricing efforts are focused on recovering the cost to service our customers that we experience in our business by increasing our average unit rate. We experienced strong average yield growth in our collection line of business of 7.2% for the first quarter of 2023. We are driving improved profitability in our residential line of business to better align the price charged for services we provide to our customers with the costs to provide the services, resulting in increased average yield of 5.6% for the first quarter of 2023. We are also continuing to see growth in our disposal business with our municipal solid waste business experiencing average yield of 5.4% for the first quarter of 2023.
Recycling and WM Renewable Energy — The downturn in the market prices for recycling commodities in the second half of 2022 continued into the first quarter of 2023. Decreases in the market prices for recycling commodities resulted in a revenue decline of $122 million for the first quarter of 2023, as compared with the prior year period. During the first quarter of 2023, average market prices for single-stream recycled commodities were about 60% lower compared to the prior year period, resulting from the slowdown in the global economy which reduced retail demand and the corresponding need for cardboard packaging to ship retail goods. Additionally, revenue declined $19 million in our WM Renewable Energy business, as compared to the prior year period, primarily driven by decreases in the value of renewable fuel standard credits and lower energy prices.
Fuel Surcharges and Mandated Fees — These fees, which include our fuel surcharge program and other mandated fees, increased $44 million for the first quarter of 2023, as compared with the prior year period. 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. 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 first quarter of 2023, as compared with the prior year period.
Volume
Our revenues from volume (excluding volumes from acquisitions and divestitures) increased $55 million, or 1.2%, for the first quarter of 2023, as compared with the prior year period. Our collection and disposal business volumes grew 1.1% in the first quarter of 2023, as compared with the prior year period, driven by an increase in disposal volumes which was partially offset by a modest decrease in collection volumes.
Volume growth during the first quarter of 2023 was primarily driven by volumes at our landfills as our construction and demolition landfill volumes were favorably impacted by the continued clean-up efforts in our East Tier from Hurricane Ian which occurred in late 2022. Special waste volumes at our landfills continue to be strong primarily due to higher contributions from event-driven projects. In addition, our WMSBS business volumes grew as a result of our continued focus on a differentiated service model for national accounts customers. However, these increases have been partially offset by our intentional efforts to reduce unprofitable residential collection volumes.
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Operating Expenses
The following table summarizes the major components of our operating expenses for the three months ended March 31 (in millions of dollars and as a percentage of revenues):
2023
2022
Labor and related benefits
$
914
18.7
%
$
814
17.5
%
Transfer and disposal costs
307
6.3
282
6.0
Maintenance and repairs
491
10.0
422
9.1
Subcontractor costs
509
10.4
457
9.8
Cost of goods sold
185
3.8
263
5.6
Fuel
139
2.8
134
2.9
Disposal and franchise fees and taxes
170
3.5
167
3.6
Landfill operating costs
117
2.4
96
2.1
Risk management
73
1.5
95
2.0
Other
181
3.7
173
3.7
$
3,086
63.1
%
$
2,903
62.3
%
Our operating expenses for the first quarter of 2023 increased, as compared with the first quarter of 2022, primarily due to (i) inflationary cost pressures, particularly for maintenance and repairs and subcontractor costs and (ii) labor cost pressure from frontline employee market wage adjustments as well as merit increases. These increases were offset, in part, by commodity-driven business impacts from lower recycling rebates reflected in costs of goods sold. We also continue to focus on operating efficiency and efforts to control costs.
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) proactive market wage adjustments to hire and retain talent; (ii) merit increases; (iii) increased headcount attributable primarily to acquisitions and (iv) 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 primarily due to inflationary cost increases, which includes increased disposal fees at third-party sites and higher rates from our third-party haulers offset, in part, by decreases in residential and commercial 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 delayed deliveries of new trucks due to supply chain constraints and (iii) labor cost increases for our technicians, including additional headcount, market wage adjustments, merit increases and higher overtime.
Subcontractor Costs — The increase in subcontractor costs was primarily due to (i) inflationary cost increases, particularly labor and fuel costs from third-party haulers and (ii) an increase in volumes in our WMSBS business and SES offerings, which rely more extensively on subcontracted hauling and services than our collection and disposal business.
Cost of Goods Sold — The decrease in cost of goods sold was primarily driven by an approximately 60% decrease in recycling commodity prices compared to the prior year period.
Fuel — The slight increase in fuel costs was primarily due to an increase of approximately 3% in market prices for diesel fuel offset, in part, by lower diesel consumption as we expand our compressed natural gas fleet and federal natural gas fuel tax credits. The federal natural gas fuel tax credits were not retroactively extended until the third quarter of 2022 and thus no benefit was recognized during the first quarter of 2022.
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Disposal and Franchise Fees and Taxes — The increase in disposal and franchise fees and taxes was primarily driven by higher franchise fees, due to an increase in landfill volumes, paid to certain municipalities where we operate and overall rate increases in our fees and taxes paid on our disposal volumes.
Landfill Operating Costs — The increase in landfill operating costs was primarily due to higher costs across our landfills for leachate collection and treatment, site maintenance and landfill accretion. Additionally, there was a change in the measurement of our environmental remediation obligations and recovery assets during the first quarter of 2022. Our measurement of these balances includes application of a risk-free discount rate, which is based on the rate for U.S. Treasury bonds. In the first quarter of 2022, there was an increase in the discount rate, which resulted in a reduction in the net liability balance and a credit to expense.
Risk Management — Risk management costs decreased during the first quarter of 2023 primarily due to an increase in claims costs during the first quarter of 2022 driven by unfavorable cost development on a limited population of severe cases.
Other — Other operating cost increases were primarily due to (i) inflationary cost pressures; (ii) higher equipment rental costs attributable, in part, to supply chain constraints slowing normal course fleet and equipment orders; (iii) an increase in business travel and (iv) higher utility costs at our facilities. These increases were offset, in part, by a favorable litigation settlement and net gains on sales of certain assets in the current quarter.
Selling, General and Administrative Expenses
The following table summarizes the major components of our selling, general and administrative expenses for the three months ended March 31 (in millions of dollars and as a percentage of revenues):
2023
2022
Labor and related benefits
$
312
6.4
%
$
305
6.5
%
Professional fees
50
1.0
66
1.4
Provision for bad debts
9
0.2
10
0.2
Other
105
2.1
110
2.4
$
476
9.7
%
$
491
10.5
%
Selling, general and administrative expenses have decreased primarily due to reduced professional fees in connection with investments in our digital platform, as certain strategic digital projects have now been implemented. Partially offsetting these reductions are increased labor costs primarily due to merit increases and increased payroll taxes and benefits expense. The decrease in our costs, along with the increase in revenue resulted in a significant reduction in our selling, general and administrative expenses as a percentage of revenues when compared with the prior year period.
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) annual merit increases for our employees and (ii) market adjustments for deferred compensation plans related to investment performance. These increases were partially offset by lower contract labor expenses.
Professional Fees — The decrease in professional fees was primarily attributable to reduced expenses in connection with investments in our digital platform, as certain strategic projects have now been implemented.
Other — The decrease in other expenses was primarily related to lower telecommunications costs and lower technology spend.
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Depreciation, Depletion and Amortization Expenses
The following table summarizes the components of our depreciation, depletion and amortization expenses for the three months ended March 31 (in millions of dollars and as a percentage of revenues):
2023
2022
Depreciation of tangible property and equipment
$
293
6.0
%
$
283
6.1
%
Depletion of landfill airspace
178
3.6
167
3.5
Amortization of intangible assets
34
0.7
32
0.7
$
505
10.3
%
$
482
10.3
%
The increase in depreciation of tangible property and equipment during the first quarter of 2023, as compared with the first quarter of 2022, was primarily driven by additional depreciation due to investments in capital assets, such as strategic investments in our digital platform and containers and trucks to service our customers. The increase in depletion of landfill airspace during the first quarter of 2023, as compared with the first quarter of 2022, was primarily driven by the reopening of a previously closed landfill in our East Tier. The increase in amortization of intangible assets during the first quarter of 2023, as compared to the first quarter of 2022, was primarily driven by amortization of acquired intangible assets.
(Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net
(Gain) loss from divestitures, asset impairments and unusual items, net for the first quarter of 2023 were nominal. During the first quarter of 2022, we recognized a $17 million charge pertaining to reserves for loss contingencies 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.
Income from Operations
The following table summarizes income from operations for our reportable segments for the three months ended March 31 (dollars in millions):
Period-to-Period
2023
2022
Change
Solid Waste:
East Tier
$
550
$
531
$
19
3.6
%
West Tier
572
549
23
4.2
Solid Waste
1,122
1,080
42
3.9
Other (a)
(4)
1
(5)
*
Corporate and Other (b)
(293)
(313)
20
(6.4)
Total
$
825
$
768
$
57
7.4
%
Percentage of revenues
16.9
%
16.5
%
* 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 sustainability business that includes landfill gas-to-energy operations managed by our WM Renewable Energy business, our SES business and recycling brokerage services and not included in the operations of our reportable segments; (iii) certain other expanded service offerings and solutions and (iv) 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,
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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.
The significant items affecting income from operations for our segments during the first quarter of 2023, as compared with the prior year period, are summarized below:
Solid Waste — Income from operations in our Solid Waste business increased primarily due to (i) revenue growth in our collection and disposal business driven by both yield and volume and (ii) fuel tax credits recognized in the current year which were nominal in the prior year period as the majority of our fuel tax credits were not recognized until August 2022 due to the timing of the Inflationary Reduction Act of 2022. These increases were partially offset by (i) inflationary cost pressures; (ii) labor cost increases from frontline employee wage adjustments and annual merit increases and (iii) reduced profitability in our recycling business from the decline in recycling commodity prices and lower volumes.
Other — The decrease in income from operations was due to (i) reduced profitability in our WM Renewable Energy business due to lower market values for renewable fuel standard credits and lower energy prices and (ii) the decline in recycling brokerage commodity prices affecting profitability in our recycling business.
Corporate and Other — The increase in income from operations was primarily driven by (i) lower annual incentive compensation and (ii) a charge during the first quarter of 2022 to adjust an indirect wholly-owned subsidiary’s estimated potential share of the liability for a proposed environmental remediation plan at a closed site. These were partially offset by an increase in health and welfare costs driven by higher inflation and utilization of employee medical benefits.
Interest Expense, Net
Our interest expense, net was $120 million and $85 million during the three months ended March 31, 2023 and 2022, respectively. The increase is primarily related to (i) borrowings in May 2022 under our $1.0 billion two-year, U.S. term credit agreement (“Term Loan”); (ii) increases in interest rates on our floating-rate debt, including commercial paper and variable-rate tax-exempt bonds and (iii) the issuance of $1.25 billion of senior notes in February 2023.
Equity in Net Losses of Unconsolidated Entities
We recognized equity in net losses of unconsolidated entities of $11 million and $15 million during the three months ended March 31, 2023 and 2022, 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 further in Note 4 to the Condensed Consolidated Financial Statements.
Income Tax Expense
Our income tax expense and effective income tax rates were $164 million, or 23.6%, and $157 million, or 23.5%, for the three months ended March 31, 2023 and 2022, respectively. See Note 4 to the Condensed Consolidated Financial Statements for more information related to income taxes.
Tax Legislation — The Inflation Reduction Act of 2022 (“IRA”) was signed into law by President Biden on August 16, 2022, and contains a number of tax-related provisions. The provisions of the IRA related to alternative fuel tax credits secure approximately $55 million of annual pre-tax benefit (to be recorded as a reduction in our operating expense) from tax credits through 2024, which is in line with the benefit we have realized from our alternative fuel tax credits. The IRA contains a number of additional provisions related to tax incentives for investments in renewable energy production, carbon capture, and other climate actions, as well as the overall measurement of corporate income taxes. Given the complexity and uncertainty around the applicability of the legislation to our specific facts and circumstances, we continue to analyze the IRA provisions to identify and quantify potential opportunities and applicable benefits included in the legislation. With respect to only the investment tax credit aspect of the IRA, we expect the cumulative benefit to be between $250 million and $350 million, a large portion of which is anticipated to be realized in 2024, 2025 and 2026. Additionally,
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the production tax credit incentives for investments in renewable energy and the carbon capture provisions of the IRA will likely result in incremental benefit, although at this time the amount of those benefits have not been quantified. Additionally, we will incur an excise tax of 1% for common stock repurchases, which will be reflected in the cost of purchasing the underlying shares as a component of treasury stock in our Condensed Consolidated Balance Sheet. See Note 10 to the Condensed Consolidated Financial Statements for additional information. The current expectation is the minimum corporate tax will not have an impact on the Company.
Liquidity and Capital Resources
The Company consistently generates cash flow from operations that meets and exceeds our working capital needs, allows for 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, diverse investor base, large value of unencumbered assets and modest leverage enable it to obtain adequate financing, and refinance upcoming maturities, as necessary to meet its ongoing capital, operating, strategic and other liquidity requirements, despite disruption and challenges that may be presented by recent instability of financial institutions and uncertainty regarding the U.S. government’s decisions about its debt ceiling, the ultimate impacts of which cannot be predicted at this time. We also have the additional ability to manage liquidity during periods of significant financial market disruption through temporary modification of our capital expenditure and share repurchase plans.
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):
March 31,
December 31,
2023
2022
Cash and cash equivalents
$
257
$
351
Restricted funds:
Insurance reserves
$
437
$
313
Final capping, closure, post-closure and environmental remediation funds
118
113
Other
5
5
Total restricted funds (a)
$
560
$
431
Debt:
Current portion
$
336
$
414
Long-term portion
15,034
14,570
Total debt
$
15,370
$
14,984
(a) As of March 31, 2023 and December 31, 2022, $84 million and $83 million, respectively, of these account balances were included in other current assets in our Condensed Consolidated Balance Sheets.
As of March 31, 2023, we had approximately $2.3 billion of debt maturing within the next 12 months, including (i) $861 million of short-term borrowings under our commercial paper program (net of related discount on issuance); (ii) $725 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) $186 million of other debt with scheduled maturities within the next 12 months, including $65 million of tax exempt bonds. As of March 31, 2023, we have classified $1.9 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 $336 million of debt maturing in the next 12 months is classified as current obligations.
In February 2023, WMI issued $750 million and $500 million of 4.625% senior notes due February 2030 and February 2033, respectively, the net proceeds of which were $1.24 billion. We used the net proceeds to repay a portion of
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outstanding borrowings under our commercial paper program and for general corporate purposes, as further discussed in Summary of Cash Flow Activity below.
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):
March 31, 2023
December 31, 2022
Balance Sheet Information:
Current assets
$
106
$
193
Noncurrent assets
13
14
Current liabilities
272
325
Noncurrent liabilities:
Advances due to affiliates
19,939
19,740
Other noncurrent liabilities
13,067
12,618
Three Months Ended
March 31, 2023
Income Statement Information:
Revenue
$
—
Operating income
—
Net loss
89
Summary of Cash Flow Activity
The following is a summary of our cash flows for the three months ended March 31 (in millions):
2023
2022
Net cash provided by operating activities
$
1,044
$
1,258
Net cash used in investing activities
$
(778)
$
(572)
Net cash used in financing activities
$
(319)
$
(635)
Net Cash Provided by Operating Activities — Our operating cash flows decreased by $214 million for the three months ended March 31, 2023, as compared with the prior year period, driven by (i) unfavorable changes in working capital, net of effects of acquisitions and divestitures; (ii) higher incentive compensation payments and (iii) higher interest payments. This decrease was partially offset by (i) increased earnings attributable to our collection and disposal business and (ii) lower income taxes in the current period due to timing of payments.
Net Cash Used in Investing Activities — The most significant items included in our investing cash flows for the three months ended March 31, 2023 and 2022 are summarized below:
● Capital Expenditures — We used $660 million and $418 million for capital expenditures during the three months ended March 31, 2023 and 2022, respectively. The increase in capital spending is primarily driven by our intentional investment in sustainability growth capital spending on recycling and renewable energy projects, as well as timing differences in our fixed asset purchases to support ongoing operations. The Company continues to maintain a disciplined focus on capital management to prioritize investments for expansion, the replacement of aging assets and assets that support our strategy of differentiation and continuous improvement through efficiency and innovation.
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● Other, Net — The year-over-year changes in other investing activities were primarily driven by changes in our investment portfolio associated with a wholly-owned insurance captive. During the three months ended March 31, 2023 and 2022, we used $85 million and $97 million, respectively, of cash from restricted cash and cash equivalents to invest in available-for-sale securities. Additionally, we used $28 million in 2022 to make an initial cash payment associated with a low-income housing investment.
Net Cash Used in Financing Activities — The most significant items affecting the comparison of our financing cash flows for the three months ended March 31, 2023 and 2022 are summarized below:
● Debt Borrowings and Repayments — The following summarizes our cash borrowings and repayments of debt for the three months ended March 31 (in millions):
2023
2022
Borrowings :
Commercial paper
$
5,643
$
2,362
Senior notes (a)
1,242
—
$
6,885
$
2,362
Repayments :
Commercial paper
$
(6,520)
$
(2,452)
Other debt
(28)
(19)
$
(6,548)
$
(2,471)
Net cash borrowings (repayments)
$
337
$
(109)
(a)
We used the net proceeds of our senior notes issued in February 2023 of $1.24 billion to repay $867 million of outstanding borrowings under our commercial paper program and utilized the remaining $373 million, combined with our net cash provided by operating activities of $1.04 billion, for general corporate purposes including for example, payment of dividends, common stock repurchases and investments in the business through capital expenditures and acquisitions.
Refer to Note 3 to the Condensed Consolidated Financial Statements for additional information related to our debt borrowings and repayments.
● Common Stock Repurchase Program — During the three months ended March 31, 2023 and 2022, we used $350 million and $250 million, respectively, to repurchase shares of our common stock under accelerated share repurchase agreements . See Note 10 to the Condensed Consolidated Financial Statements for additional information.
● Cash Dividends — For the periods presented, all dividends have been declared by our Board of Directors. We paid cash dividends of $289 million and $275 million during the three months ended March 31, 2023 and 2022, respectively. The increase in dividend payments is primarily due to our quarterly per share dividend increasing from $0.65 in 2022 to $0.70 in 2023.
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.
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Our calculation of free cash flow and reconciliation to net cash provided by operating activities for the three months ended March 31 is shown in the table below (in millions), and may not be calculated the same as similarly-titled measures presented by other companies:
2023
2022
Net cash provided by operating activities
$
1,044
$
1,258
Capital expenditures to support the business
(504)
(371)
Capital expenditures - sustainability growth investments (a)
(156)
(47)
Total capital expenditures
(660)
(418)
Proceeds from divestitures of businesses and other assets, net of cash divested
11
5
Free cash flow
$
395
$
845
(a)
These growth investments are intended to further our sustainability leadership position by increasing recycling volumes and growing renewable natural gas generation and 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, 2022. 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 or operational disruptions caused by severe storms, extended periods of inclement weather or climate events can significantly affect the operating results of the geographic areas affected. Extreme weather events may also lead to supply chain disruption and delayed project development, or disruption of our customers’ businesses, reducing the amount of waste generated by their operations.
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
Macroeconomic pressures, including inflation and rising interest rates and market disruption resulting in labor, supply chain and transportation constraints, are continuing. Significant global supply chain disruption and the heightened pace of inflation have reduced availability and increased costs for the goods and services we purchase, particularly for repair and maintenance and subcontractor costs. Supply chain constraints have also caused delayed delivery of fleet, steel containers
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and other purchases. Aspects of our business rely on third-party transportation providers, and such services have become more limited and expensive. We continue to take proactive steps to recover and mitigate inflationary cost pressures through our overall pricing efforts and by managing our costs through efficiency, labor productivity, and investments in technology to automate certain aspects of our business. These efforts may not be successful for various reasons including the pace of inflation, operating cost inefficiencies, market responses, and contractual limitations, such as the timing lag in our ability to recover increased costs under certain contracts that are tied to a price escalation index with a lookback provision.