What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-07-26 compared with 2023-04-27 · 161 added, 144 removed, 268 unchanged (53% of the section changed)

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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.

Risk Factors , included in our 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.

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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.

and Canada that produce renewable electricity and renewable natural gas, which is a significant source of fuel that we allocate to 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.

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.

Our senior management evaluates, oversees and manages the financial performance of our Solid Waste operations through two operating segments.

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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.

Significant components of our operating expenses vary directly as we experience changes in revenue due to volume and inflation.

Volume changes can fluctuate significantly by line of business and volume changes in higher margin businesses can impact key financial metrics.

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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.

Macroeconomic pressures, including inflation and rising interest rates, and market disruption resulting in labor, supply chain and transportation constraints have impacted our results.

Significant global supply chain disruption has reduced availability of certain assets used in our business and inflation has increased costs for the goods and services we purchase, particularly for labor, repair and maintenance, and subcontractor costs.

Supply chain constraints have 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.

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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

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.

With these macroeconomic pressures, we remain committed to putting our people first to ensure that they are well positioned to execute our daily 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.

During the second quarter of 2023, we continued to focus on our priorities to advance our strategy—growing price to offset cost inflation, enhancing employee engagement, permanently reducing our cost to serve 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 during the second quarter of 2023.

We were able to achieve these results despite inflationary cost pressures.

We remain diligent in offering a competitive and differentiated service that meets the needs of our customers, and 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:

During the second quarter of 2023, we allocated $520 million of available cash to capital expenditures and $553 million to our shareholders through dividends and common stock repurchases.

Key elements of our financial results for the second quarter include:

● Revenues of $5,119 million, compared with $5,027 million in the prior year period, an increase of $92 million, or 1.8%.

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;

The increase is primarily attributable to (i) higher yield in our collection and disposal business and (ii) acquisitions, net of divestitures.

These increases were partially offset by commodity price declines in our recycling and WM Renewable Energy businesses and decreased revenue from our energy surcharge program as a result of a decline in the price of fuel, particularly diesel;

● Operating expenses of $3,186 million, or 62.2% of revenues, compared with $3,142 million, or 62.5% 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;

The $44 million increase is primarily attributable to (i) inflationary cost pressures, particularly for maintenance and repairs and subcontractor costs and (ii) labor cost increases from merit increases and frontline employee market wage adjustments.

These increases were offset, in part, by commodity-driven business impacts from lower recycling rebates reflected in costs of goods sold and lower fuel prices;

● Selling, general and administrative expenses were $467 million, or 9.1% of revenues, compared with $487 million, or 9.7% 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;

The $20 million decrease is primarily attributable to (i) lower annual incentive compensation costs and (ii) reduced professional fees in connection with investments in our digital platform, as certain strategic digital projects have now been implemented.

These decreases were offset, in part, by increased litigation costs and annual merit increases;

● Income from operations was $944 million, or 18.4% of revenues, compared with $890 million, or 17.7% 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;

The improved earnings in the current quarter are driven by growth in our collection and disposal businesses and reduced selling, general and administrative expenses;

● Net income attributable to Waste Management, Inc.

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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 ;

● Net cash provided by operating activities was $1,030 million compared with $1,047 million in the prior year period, with the decrease driven by higher income tax and interest payments.

This decrease was partially offset by (i) increased earnings attributable to our collection and disposal business and (ii) favorable changes in working capital, net of effects of acquisitions and divestitures;

● Free cash flow was $545 million compared with $503 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

operations and (ii) a decrease in net cash provided by operating activities as discussed above.

The increase in free cash flow is primarily attributable to (i) lower capital spending and (ii) higher proceeds from divestitures of businesses and other assets, which were partially offset by lower net cash provided by operating activities described 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.

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

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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):

The mix of operating revenues from our major lines of business are as follows (in millions):

Three Months Ended

Six Months Ended

Other collection

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(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.

(ii) certain services within our sustainability business including our landfill gas-to-energy operations managed by our WM Renewable Energy business;

(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.

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 change in revenues and average yield (dollars in millions):

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

March 31, 2023 vs.

June 30, 2023 vs.

Period-to-Period Change for the

Six Months Ended

June 30, 2023 vs.

Collection and disposal

Recycling and WM Renewable Energy (c)(d)

Fuel surcharges and mandated fees (d)

Total average yield (e)

Energy surcharge and mandated fees (d)(e)

Total average yield (f)

Internal revenue growth

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(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.

Previously these changes in revenue were included in energy 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.

(e) Our energy surcharge was revised in the second quarter of 2023 to incorporate market prices for both diesel and compressed natural gas (“CNG”).

(f) 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:

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Period-to-Period Change for the

Three Months Ended

March 31, 2023 vs.

Six Months Ended

June 30, 2023 vs.

Total collection

Total collection and disposal

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.

This is a capital and labor intensive business.

Our capital investments and operating costs needed to serve our customers are increasing.

Our overall pricing efforts are focused on keeping pace with these higher costs.

We experienced average yield growth in our collection line of business of 6.6% and 6.9% for the three and six months ended June 30, 2023, respectively.

We are also continuing to see growth in our disposal business with our municipal solid waste business experiencing average yield of 6.0% and 5.8% for the three and six months ended June 30, 2023, respectively.

Recycling and WM Renewable Energy — The downturn in market prices for recycling commodities that started in the second half of 2022 persisted in the first half of 2023.

Decreases in the market prices for recycling commodities resulted in a revenue decline of $126 million and $248 million for the three and six months ended June 30, 2023, respectively, as compared with the prior year periods.

Average market prices for single-stream recycled commodities were down about 55% in the first half of 2023 when compared to the first half of 2022.

The decrease is due to the slowdown in the global economy which reduced retail demand and the corresponding need for cardboard packaging to ship retail goods.

Additionally, revenue in our WM Renewable Energy business declined $24 million and $43 million for the three and six months ended June 30, 2023, respectively, as compared to the prior year periods, primarily driven by decreases in the value of renewable fuel standard credits and lower electricity and natural gas prices.

Energy Surcharge and Mandated Fees — These fees decreased $60 million and $16 million for the three and six months ended June 30, 2023, respectively, as compared with the prior year periods.

Beginning in the second quarter of 2023, our energy surcharge was revised to incorporate market prices for both diesel and CNG.

The decrease in energy surcharge revenues is primarily due to a decline of approximately 30% and 15% in market prices for diesel fuel for the three and six months ended June 30, 2023, respectively, as compared with the prior year periods.

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.

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.

These amounts have not significantly impacted the change in revenue for the three and six months ended June 30, 2023, as compared with the prior year periods.

Our revenues from volume (excluding volumes from acquisitions and divestitures) increased $9 million, or 0.2%, and $64 million, or 0.7%, for the three and six months ended June 30, 2023, respectively.

These results reflect increases in municipal solid waste volumes at our landfills and an increase in WMSBS volumes, which were partially offset by lower event-driven volumes and the intentional shedding of low-margin residential collection business.

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):

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

Labor and related benefits

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Risk management

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.

Our operating expenses increased primarily due to (i) inflationary cost pressures, particularly for maintenance and repairs and subcontractor costs and (ii) labor cost pressure from merit increases and frontline employee market wage adjustments.

These increases were offset, in part, by commodity-driven business impacts, particularly from lower recycling rebates reflected in costs of goods sold and lower fuel prices.

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.

Labor and Related Benefits — The increase in labor and related benefits costs was largely driven by (i) merit increases and proactive market wage adjustments to hire and retain talent;

(ii) increased headcount primarily from acquisitions and (iii) increases in health and welfare costs and 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.

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.

Maintenance and Repairs — The increase in maintenance and repairs costs was primarily driven by (i) inflationary cost increases for parts, supplies and third-party services, although the impact of such inflationary cost increases moderated in the current quarter;

(ii) labor cost increases for our technicians, including additional headcount, market wage adjustments and merit increases and (iii) supply chain constraints which delayed fleet deliveries.

Subcontractor Costs — The increase in subcontractor costs was primarily due to (i) inflationary cost increases, particularly labor and fuel costs from third-party haulers, although the impact of such inflationary cost increases moderated in the current quarter due to lower diesel prices that reduced fuel surcharges from our third-party transportation providers, 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 approximate 55% decrease in single-stream recycling commodity prices for the three and six months ended June 30, 2023, as compared with the prior year periods.

Fuel — The decrease in fuel costs was primarily due to a decrease of approximately 30% and 15% in market prices for diesel fuel during three and six months ended June 30, 2023, respectively, as compared to the prior year periods.

decrease is also due to the timing of benefits from federal natural gas fuel tax credits.

These credits have been recognized ratably in 2023.

However, the federal natural gas fuel tax credits were not provided for by regulation until the third quarter of 2022 and thus no benefit was recognized during the first half of 2022.

Disposal and Franchise Fees and Taxes — The increase in disposal and franchise fees and taxes was primarily driven by an increase in landfill volumes and an overall rate increase in fees and taxes paid to municipalities on our disposal volumes.

Landfill Operating Costs — The increase in landfill operating costs was primarily due to higher costs for leachate collection and treatment, site maintenance and landfill accretion.

Within landfill operating costs, accretion expense was $32 million and $65 million for the three and six months ended June 30, 2023, respectively, compared with $27 million and $55 million, for the comparable prior year periods.

Additionally, there was a change in the measurement of our environmental remediation obligations and recovery assets during the first quarter of 2022.

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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;

Risk Management — During the first half of 2022 our claims costs for our risk management program were elevated due to unfavorable cost development on a limited population of severe cases.

The absence of these costs is the driver to the favorable variance for the first half of 2023 compared to the prior year.

An overall increase in insurance premiums partially offset this cost improvement.

Other — Other operating costs increased primarily due to (i) inflationary cost pressures, although the impact of such inflationary cost increases moderated in the current quarter;

(ii) higher equipment rental costs, due to supply chain constraints which delayed fleet deliveries;

(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.

These increases were partially offset by net gains on the sale of certain assets.

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):

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

Labor and related benefits

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Provision for bad debts

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.

Selling, general and administrative expenses have decreased primarily due to lower annual incentive compensation costs and 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 litigation costs and annual merit increases.

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.

Labor and Related Benefits —The decrease in labor and related benefits costs was primarily related to lower annual incentive compensation costs and lower contract labor expenses.

These decreases were partially offset by annual merit increases for our employees and market adjustments for deferred compensation plans related to investment performance.

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.

Other —The increase in other expenses was primarily related to litigation costs during the second quarter of 2023 and higher advertising costs, which were partially offset by lower technology spend and telecommunications costs.

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):

The following table summarizes the components of our depreciation, depletion and amortization expenses (in millions of dollars and as a percentage of revenues):

Three Months Ended

Six Months Ended

Depreciation of tangible property and equipment

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Amortization of intangible assets

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.

The increase in depreciation of tangible property and equipment, was primarily driven by additional depreciation due to investments in capital assets, including strategic investments in our digital platform and machinery and containers to service our customers.

The increase in depletion of landfill airspace during the first half of 2023, as compared with the prior year period, was primarily driven by increased volumes from the reopening of a previously closed landfill in our East Tier.

(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.

(Gain) loss from divestitures, asset impairments and unusual items, net for the first half 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):

The following table summarizes income from operations for our reportable segments (dollars in millions):

Three Months Ended

Six Months Ended

Period-to-Period

Corporate and Other (b)

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(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;

operations of our reportable segments;

(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.

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.

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.

The significant items affecting income from operations for our segments during the three and six months ended June 30, 2023, as compared with the prior year periods, 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 yield 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 Inflation Reduction Act of 2022 (“IRA”).

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.

● 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 electricity and natural gas prices and (ii) the decline in recycling brokerage commodity prices affecting profitability in our recycling business.

● Corporate and Other — The improvement in income from operations was primarily driven by (i) lower annual incentive compensation costs;

(ii) lower professional fees in connection with investments in our digital program, as certain strategic projects have now been implemented and (iii) 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 lower costs were partially offset by annual merit increases and market adjustments for deferred compensation plans related to investment performance.

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.

Our interest expense, net was $125 million and $245 million for the three and six months ended June 30, 2023, respectively, compared to $93 million and $178 million for the three and six months ended June 30, 2022, respectively.

The increase is primarily related to an increase in average debt balances to fund growth as well as an increase in our weighted average borrowing rates for the three and six months ended June 30, 2023, as compared to the prior year periods, of approximately 90 and 100 basis points, respectively, due to increased rates on floating-rate debt.

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.

We recognized equity in net losses of unconsolidated entities of $12 million and $23 million during the three and six months ended June 30, 2023, respectively, compared to $17 million and $32 million for the three months and six months ended June 30, 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.

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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.

Our income tax expense was $196 million and $360 million for the three and six months ended June 30, 2023, respectively, compared to $189 million and $346 million for the three and six months ended June 30, 2022, respectively.

Our effective income tax rate was 24.2% and 23.9% for the three and six months ended June 30, 2023, respectively, compared to 24.3% and 23.9% for the three and six months ended June 30, 2022, respectively.

Tax Legislation — The 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 (recorded as a reduction in our operating expense) for tax credits in each of 2022, 2023 and 2024.

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.

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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,

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.

Additionally, 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 has not been quantified.

Additionally, we incur an excise tax of 1% for common stock repurchases, which is reflected in the cost of purchasing the underlying shares as a component of treasury stock in our Condensed Consolidated Balance Sheet.

See Note 11 to the Condensed Consolidated Financial Statements for additional information.

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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.

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Long-term portion

(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.

(a) As of June 30, 2023 and December 31, 2022, $80 million and $83 million, respectively, of these account balances were included in other current assets in our Condensed Consolidated Balance Sheets.

Debt — As of June 30, 2023, we had approximately $3.6 billion of debt maturing within the next 12 months, including (i) $1.3 billion of short-term borrowings under our commercial paper program (net of related discount on issuance);

$1.0 billion Term Loan maturing May 2024;

(iii) $983 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities;

(iv) $156 million of 3.5% senior notes that mature in May 2024 and (v) $172 million of other debt with scheduled maturities within the next 12 months, including $55 million of tax-exempt bonds.

As of June 30, 2023, we have classified $3.1 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”).

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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

outstanding borrowings under our commercial paper program and for general corporate purposes, as further discussed in Summary of Cash Flow Activity below.

We used the net proceeds to reduce outstanding borrowings under our commercial paper program, repay $500 million of WMI’s 2.4% senior notes upon maturity in May 2023, and for general corporate purposes, including our sustainability capital investment program.

Guarantor Financial Information

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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:

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Other noncurrent liabilities

Three Months Ended

March 31, 2023

Six Months Ended

June 30, 2023

Income Statement Information:

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Summary of Cash Flow Activity

The following is a summary of our cash flows for the three months ended March 31 (in millions):

The following is a summary of our cash flows for the six months ended June 30 (in millions):

Net cash provided by operating activities

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Net cash used in financing activities

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.

Net Cash Provided by Operating Activities — Our operating cash flows decreased by $231 million as compared with the prior year period, driven by (i) unfavorable changes in working capital, net of effects of acquisitions and divestitures;

(ii) higher interest payments;

(iii) higher incentive compensation payments and (iv) higher income tax payments.

This decrease was partially offset by increased earnings attributable to our collection and disposal business.

Net Cash Used in Investing Activities — The most significant items included in our investing cash flows for the six months ended June 30, 2023 and 2022 are summarized below:

● Capital Expenditures — We used $1,180 million and $968 million for capital expenditures during the six months ended June 30, 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 inflationary increases in many fixed asset purchases made to support ongoing operations and intentional investments in the Company’s landfills to reduce greenhouse gas emissions.

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.

● 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.

During the six months ended June 30, 2023 and 2022, we used $76 million and $60 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 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):

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, 2023 and 2022 are summarized below:

● Debt Borrowings and Repayments — The following summarizes our cash borrowings (net of related discount) and repayments of debt for the six months ended June 30 (in millions):

Commercial paper

Senior notes (a)

Tax-exempt bonds

Commercial paper

Net cash borrowings (repayments)

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.

Tax-exempt bonds

Net cash borrowings

(a) We used the net proceeds of our senior notes issued in February 2023 of $1.24 billion to reduce outstanding borrowings under our commercial paper program, repay $500 million of WMI’s 2.4% senior notes upon maturity in May 2023, and for general corporate purposes, including our sustainability capital investment program.

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 .

● Common Stock Repurchase Program — During the six months ended June 30, 2023, we repurchased $600 million of our common stock pursuant to two accelerated share repurchase (“ASR”) agreements and repurchased $22 million of our common stock in open market transactions, of which $2 million was paid in July 2023.

See Note 11 to the Condensed Consolidated Financial Statements for additional information.

During the six months ended June 30, 2022, we repurchased $500 million of our common stock pursuant to two ASR agreements and repurchased $24 million of our common stock in open market transactions, of which $4 million was paid in July 2022.

● 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.

We paid cash dividends of $572 million and $544 million during the six months ended June 30, 2023 and 2022, respectively.

The increase in dividend payments is due to our quarterly per share dividend increasing from $0.65 in 2022 to $0.70 in 2023.

Free Cash Flow

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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.

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:

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

Net cash provided by operating activities

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Free cash flow

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.

(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

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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.

Conversely, 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.

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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.

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

and other purchases.

Macroeconomic pressures, including inflation and rising interest rates, and market disruption resulting in labor, supply chain and transportation constraints have impacted our results.

Supply chain constraints have 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis