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, 2023.
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,” “target,” “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, including the pending Stericycle acquisition, or new lines of business; failure to identify acquisition targets, consummate and integrate acquisitions, including our planned integration of Stericycle; our ability to consummate and finance the Stericycle acquisition and achieve the anticipated benefits therefrom, including cost synergies; legal, regulatory and other matters that may affect the costs and timing of our ability to complete, integrate and deliver all of the expected benefits of the pending Stericycle acquisition; existing or new environmental and other regulations, including developments related to emerging contaminants, gas emissions, renewable energy, extended producer responsibility and our natural gas fleet; 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 severe weather and destructive climate events; failure to achieve our sustainability goals or execute on our sustainability-related strategy and initiatives, including within planned timelines or anticipated budgets due to disruptions, delays, cost increases or changes in environmental or tax regulations and incentives; focus on, and regulation of, environmental and sustainability-related disclosures, which could lead to increased costs, risk of non-compliance, brand damage and litigation risk related to our sustainability efforts; macroeconomic conditions, geopolitical conflict and large-scale 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 manage cybersecurity incidents or comply with privacy regulations; inability to adapt and manage the benefits and risks of artificial intelligence; negative outcomes of litigation or governmental proceedings, including those acquired through transactions, including the pending Stericycle acquisition; and operations or management 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, 2023, as updated by Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024. 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
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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. Our business is operated and managed locally by our subsidiaries that focus on distinct geographic areas and provide collection, transfer, disposal, recycling and resource recovery services. 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 (“RNG”), 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 senior management evaluates, oversees and manages the financial performance of our business through four reportable segments, referred to as (i) Collection and Disposal - East Tier (“East Tier”); (ii) Collection and Disposal - West Tier (“West Tier”); (iii) Recycling Processing and Sales and (iv) WM Renewable Energy. Our East and West Tiers, along with certain ancillary services (“Other Ancillary”) not managed through our Tier segments, but that support our collection and disposal operations, form our “Collection and Disposal” businesses.
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 Processing and Sales segments, while increasing automation and reducing labor dependency. We are also evaluating and pursuing emerging diversion technologies that may generate additional value.
The Company continually evaluates potential acquisitions that provide the opportunity for strategic growth. On June 3, 2024, we announced that we have entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire all outstanding shares of Stericycle, Inc. (“Stericycle”) for $62.00 per share in cash, representing a total enterprise value of approximately $7.2 billion when including approximately $1.4 billion of Stericycle’s net debt. Stericycle is a U.S. based leading provider of compliance-based solutions for regulated waste, including medical waste, and secure information destruction. Stericycle serves customers in North America and Europe. We believe that the pending Stericycle acquisition will expand the Company’s comprehensive environmental solutions in the growing healthcare market while advancing the Company’s sustainability commitments.
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. Consistent with our Company’s long-standing commitment to sustainability and environmental stewardship, we have published our 2024 Sustainability Report providing details on our sustainability-
26
related performance and outlining progress towards our 2030 sustainability goals. The Sustainability Report conveys the strong linkage between the Company’s sustainability goals and our growth strategy, inclusive of the planned and ongoing expansion of the Company’s Recycling Processing and Sales and WM Renewable Energy segments. 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 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. Advancements made through these initiatives are intended to seamlessly and digitally connect all enterprise functions required to service customers and provide the best experience.
We sometimes experience margin pressures and variability in earnings and margins from our commodity-driven businesses, specifically within our Recycling Processing and Sales and WM Renewable Energy segments. While recycling commodity prices have recovered nicely in 2024 from the low levels experienced in 2023, commodity values are still below prices seen at the beginning of 2022. In our WM Renewable Energy segment, while the impacts of fluctuations are not currently material, the impact of fluctuations in the prices of electricity, Renewable Identification Numbers (“RINs”) and Renewable Energy Credits (“RECs”) could be significant as the segment continues to grow. We continue to take proactive steps to adjust our business models to protect against the down-side risk of changes in commodity prices.
Variability in economic conditions, including inflation, interest rates, employment trends and supply chain reliability, can create risk and uncertainty in financial outlook. We 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. 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.
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Current Quarter Financial Results
During the third quarter of 2024, we continued to focus on our priorities to advance our strategy—enhancing employee engagement, permanently reducing our cost to serve through the use of technology and automation, and investing in growth through our Recycling Processing and Sales and WM Renewable Energy segments. This strategic focus, combined with strong operational execution, resulted in increased revenue, income from operations and income from operations margin. 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 paying a competitive market wage, 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 third quarter of 2024, we allocated $781 million of available cash to capital expenditures and $301 million to our shareholders through dividends.
Key elements of our financial results for the third quarter include:
● Revenues of $5,609 million, compared with $5,198 million in the prior year period, an increase of $411 million, or 7.9%. The increase is primarily attributable to higher yield in our Collection and Disposal businesses and an increase in market value for recycled commodities;
● Operating expenses of $3,399 million, or 60.6% of revenues, compared with $3,188 million, or 61.3% of revenues, in the prior year period. The $211 million increase in operating expenses is primarily attributable to (i) higher recycling rebates from an increase in the market value for the commodities we process; (ii) annual employee wage increases and higher incentive compensation; (iii) our recent acquisition of a solid waste and recycling company in New York; (iv) an increase in landfill operating costs largely due to wet weather driving leachate costs higher; (v) an increase in volumes in our Strategic Business Solutions (“WMSBS”) business, which increases our subcontractor costs, and (vi) an increase in risk management costs. These increases were offset in part by (i) lower diesel fuel prices and (ii) improved operating efficiency and cost control initiatives in our Collection and Disposal businesses. Although our operating expenses increased overall, efficiency gains, improved employee retention, and momentum in truck deliveries, positioned us to significantly reduce our operating expenses as a percentage of revenue when compared to the third quarter of 2023;
● Selling, general and administrative expenses were $525 million, or 9.4% of revenues, compared with $470 million, or 9.0% of revenues, in the prior year period. The $55 million increase is primarily attributable to (i) increased labor costs from higher annual and long-term incentive compensation costs and annual wage increases and (ii) increased professional fees to support strategic initiatives, including our pending acquisition of Stericycle. We focus on optimizing our costs and managing discretionary spending in order to drive continuous improvement in these costs as a percentage of revenue. The increase in this measure in the current quarter is entirely attributable to transaction and advisory costs incurred to support the pending acquisition of Stericycle;
● Income from operations was $1,119 million, or 20.0% of revenues, compared with $1,021 million, or 19.6% of revenues, in the prior year period. The increase in the current year earnings was primarily driven by revenue growth and improved business performance in our Collection and Disposal businesses;
● Net cash provided by operating activities was $1,358 million compared with $1,263 million in the prior year period, with the increase driven by higher earnings in our Collection and Disposal businesses, which were partially offset by (i) unfavorable changes in working capital and (ii) higher cash interest payments;
● Free cash flow was $618 million compared with $612 million in the prior year period. Free cash flow was relatively flat on a year-over-year basis despite the significant increase in net cash provided by operating activities discussed above due to higher capital expenditures in the current year. The increase in capital expenditures was planned and is to support the growth of our business. 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.
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Results of Operations
Operating Revenues
The mix of operating revenues from our major lines of business are as follows (in millions):
Gross
Intercompany
Net
Operating
Operating
Operating
Revenues
Revenues (a)
Revenues
Three Months Ended September 30:
2024
Commercial
$
1,564
$
(205)
$
1,359
Industrial
1,003
(206)
797
Residential
897
(22)
875
Other collection
822
(57)
765
Total collection
4,286
(490)
3,796
Landfill
1,345
(422)
923
Transfer
641
(276)
365
Total Collection and Disposal
6,272
(1,188)
5,084
Recycling Processing and Sales
503
(71)
432
WM Renewable Energy
88
(1)
87
Corporate and Other
12
(6)
6
Total
$
6,875
$
(1,266)
$
5,609
2023
Commercial
$
1,464
$
(179)
$
1,285
Industrial
982
(194)
788
Residential
875
(23)
852
Other collection
773
(55)
718
Total collection
4,094
(451)
3,643
Landfill
1,259
(412)
847
Transfer
594
(263)
331
Total Collection and Disposal
5,947
(1,126)
4,821
Recycling Processing and Sales
386
(81)
305
WM Renewable Energy
68
(1)
67
Corporate and Other
12
(7)
5
Total
$
6,413
$
(1,215)
$
5,198
29
Gross
Intercompany
Net
Operating
Operating
Operating
Revenues
Revenues (a)
Revenues
Nine Months Ended September 30:
2024
Commercial
$
4,591
$
(586)
$
4,005
Industrial
2,915
(592)
2,323
Residential
2,659
(67)
2,592
Other collection
2,354
(162)
2,192
Total collection
12,519
(1,407)
11,112
Landfill
3,813
(1,225)
2,588
Transfer
1,819
(797)
1,022
Total Collection and Disposal
18,151
(3,429)
14,722
Recycling Processing and Sales
1,414
(209)
1,205
WM Renewable Energy
228
(3)
225
Corporate and Other
36
(18)
18
Total
$
19,829
$
(3,659)
$
16,170
2023
Commercial
$
4,300
$
(508)
$
3,792
Industrial
2,889
(563)
2,326
Residential
2,595
(73)
2,522
Other collection
2,207
(161)
2,046
Total collection
11,991
(1,305)
10,686
Landfill
3,672
(1,220)
2,452
Transfer
1,719
(779)
940
Total Collection and Disposal
17,382
(3,304)
14,078
Recycling Processing and Sales
1,154
(239)
915
WM Renewable Energy
201
(3)
198
Corporate and Other
38
(20)
18
Total
$
18,775
$
(3,566)
$
15,209
(a) Intercompany operating revenues reflect each segment’s total intercompany sales, including intercompany sales within a segment and between segments. Transactions within and between segments are generally made on a basis intended to reflect the market value of the service.
30
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
September 30, 2024 vs. 2023
Period-to-Period Change for the
Nine Months Ended
September 30, 2024 vs. 2023
As a % of
As a % of
As a % of
As a % of
Related
Total
Related
Total
Amount
Business(a)
Amount
Company(b)
Amount
Business(a)
Amount
Company(b)
Collection and Disposal
$
188
4.1
%
$
609
4.6
%
Recycling Processing and Sales and WM Renewable Energy (c)
108
28.1
236
20.5
Energy surcharge and mandated fees
(19)
(7.9)
(55)
(7.6)
Total average yield (d)
$
277
5.3
%
$
790
5.2
%
Volume (e)
70
1.4
75
0.5
Internal revenue growth
347
6.7
865
5.7
Acquisitions
71
1.4
108
0.7
Divestitures
(4)
(0.1)
(5)
—
Foreign currency translation
(3)
(0.1)
(7)
(0.1)
Total
$
411
7.9
%
$
961
6.3
%
(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 Processing and Sales and WM Renewable Energy segments, as well as changes in certain recycling fees charged by our collection and disposal operations.
(d) The amounts reported herein represent the changes in our revenue attributable to average yield for the total Company.
(e) Includes activities from our Corporate and Other businesses.
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
Period-to-Period Change for the
Three Months Ended
Nine Months Ended
September 30, 2024 vs. 2023
September 30, 2024 vs. 2023
As a % of
As a % of
Related
Related
Amount
Business
Amount
Business
Commercial
$
78
5.8
%
$
245
6.3
%
Industrial
43
4.8
135
5.1
Residential
42
5.1
145
6.0
Total collection
163
5.1
525
5.6
Landfill
14
1.7
43
1.9
Transfer
11
3.6
41
4.6
Total collection and disposal
$
188
4.1
%
$
609
4.6
%
Our overall pricing efforts are focused on keeping pace with the increasing costs and capital needs of our business. Average yield growth in our collection line of business was 5.1% and 5.6% for the three and nine months ended September 30, 2024, respectively. We are also continuing to see growth in our disposal business with average yield in our municipal solid waste business of 3.1% and 3.2% for the three and nine months ended September 30, 2024, respectively.
Recycling Processing and Sales and WM Renewable Energy — Recycling Processing and Sales revenues attributable to yield increased $102 million and $219 million for the three and nine months ended September 30, 2024, as compared with prior year periods. Average market prices for single-stream recycled commodities increased approximately 75% and nearly 65% for the three and nine months ended September 30, 2024, respectively, as compared with the prior year periods. Yield from the WM Renewable Energy segment increased $6 million and $17 million for the three and nine months ended September 30, 2024, respectively, as compared with the prior year periods, primarily driven by increases in RINs values. While there may be short-term fluctuations in our commodity-driven businesses as prices change, we believe that our business models and processes appropriately protect against the downside risk of changes in commodity prices.
Energy Surcharge and Mandated Fees — These fees, which include our energy surcharge program and other mandated fees, decreased $19 million and $55 million for the three and nine months ended September 30, 2024, respectively, as compared with the prior year periods. Our energy surcharge incorporates market prices for both diesel and CNG. The decrease in energy surcharge revenues is primarily due to a decline of nearly 15% and nearly 10% in market prices for diesel fuel for the three and nine months ended September 30, 2024, respectively, as compared to 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 three and nine months ended September 30, 2024, respectively, as compared with the prior year periods.
Volume
Our revenues from volume (excluding volumes from acquisitions and divestitures) increased $70 million and $75 million for the three and nine months ended September 30, 2024, respectively, as compared with the prior year periods. Volume increases have been generated by our WMSBS business due to our continued focus on a differentiated service model for national accounts customers, special waste and municipal solid waste tons at our landfills, an increase in recycling activity, and our commercial collection business. These increases were partially offset by a decline in our industrial and residential collection volumes. Furthermore, our construction and demolition landfill volumes for the nine months ended September 30, 2024, declined as compared to prior year due to clean-up efforts in our East Tier from Hurricane Ian in the prior year.
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Operating Expenses
The following table summarizes the major components of our operating expenses (in millions of dollars and as a percentage of revenues):
Three Months Ended
Nine Months Ended
September 30,
September 30,
2024
2023
2024
2023
Labor and related benefits
$
962
17.2
%
$
913
17.6
%
$
2,780
17.2
%
$
2,750
18.1
%
Transfer and disposal costs
339
6.0
325
6.2
981
6.1
955
6.3
Maintenance and repairs
527
9.4
508
9.8
1,538
9.5
1,503
9.9
Subcontractor costs
576
10.3
566
10.9
1,673
10.3
1,627
10.7
Cost of goods sold
282
5.0
187
3.6
766
4.7
561
3.7
Fuel
106
1.9
122
2.3
329
2.0
381
2.5
Disposal and franchise fees and taxes
197
3.5
190
3.7
559
3.5
553
3.6
Landfill operating costs
130
2.3
105
2.0
393
2.4
339
2.2
Risk management
96
1.7
84
1.6
269
1.7
233
1.5
Other
184
3.3
188
3.6
542
3.4
558
3.7
$
3,399
60.6
%
$
3,188
61.3
%
$
9,830
60.8
%
$
9,460
62.2
%
Significant items affecting the comparison of operating expenses for the reported periods include:
Labor and Related Benefits — We have been driving optimization in these costs through technology that drives route optimization, improved driver retention, and efficiency. The increase in labor and related benefits costs for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 was primarily driven by (i) annual employee wage increases and higher incentive compensation; (ii) our recent acquisition of a solid waste and recycling company in New York, and (iii) higher employee benefits costs. For the first six months of 2024, labor and related benefit costs decreased as compared to the prior year periods because of efficiency gains and improved driver retention. While these productivity and operational efficiency gains continued to provide benefits in the third quarter, they were more than offset by the increases described above.
Transfer and Disposal Costs — The increase in transfer and disposal costs was primarily due to (i) inflationary cost increases, which includes increased disposal fees at third-party sites and higher rates from our third-party haulers and (ii) our recent acquisition of a solid waste and recycling company in New York. These cost increases were offset, in part, by decreases in industrial and residential collection volumes.
Maintenance and Repairs — The increase in maintenance and repairs costs was primarily driven by (i) inflationary and acquisition related cost increases for parts, supplies and third-party services, although the impact of inflationary cost increases has moderated from the high levels observed during the first half of 2023 and (ii) annual wage increases and higher technician headcount. These cost increases were offset, in part, by an improvement in new truck deliveries, which lowered average fleet age and reduced demand for third-party services, parts and supplies and has resulted in improvements in operational efficiencies.
Subcontractor Costs — The increase in subcontractor costs was primarily due to (i) an increase in volumes in our WMSBS business, which relies more extensively on subcontracted hauling and services than our Collection and Disposal businesses and (ii) continued inflationary cost increases, particularly labor costs from third-party haulers although this impact has moderated from the high levels observed during the first half of 2023. These increases were offset, in part, by the impact of lower fuel prices on third-party subcontracted hauling and services.
Cost of Goods Sold — The increase in cost of goods sold was primarily driven by an approximate 75% and 65% increase in single-stream recycling commodity prices for the three and nine months ended September 30, 2024, respectively, as compared to the prior year periods.
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Fuel — The decrease in fuel costs was primarily due to a decrease of nearly 15% and nearly 10% in market prices for diesel fuel during the three and nine months ended September 30, 2024, respectively, as compared to the prior year periods.
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 (i) leachate collection and treatment which can largely be attributed to particularly wet weather in certain markets throughout 2024; (ii) methane collection and treatment and (iii) site maintenance.
Risk Management — Risk management costs increased primarily due to higher auto and workers compensation claims costs and increases in premiums for property coverage. Additionally, for the nine months ended September 30, 2024, costs increased due to adjustments to our reserves for certain large loss claims offset, in part, by current year insurance recoveries for property claims associated with a hurricane in 2023.
Selling, General and Administrative Expenses
The following table summarizes the major components of our selling, general and administrative expenses (in millions of dollars and as a percentage of revenues):
Three Months Ended
Nine Months Ended
September 30,
September 30,
2024
2023
2024
2023
Labor and related benefits
$
324
5.8
%
$
280
5.4
%
$
961
6.0
%
$
885
5.8
%
Professional fees
89
1.6
61
1.1
200
1.2
166
1.1
Provision for bad debts
11
0.2
16
0.3
37
0.2
36
0.2
Other
101
1.8
113
2.2
319
2.0
326
2.2
$
525
9.4
%
$
470
9.0
%
$
1,517
9.4
%
$
1,413
9.3
%
Selling, general and administrative expenses increased for the three and nine months ended September 30, 2024 primarily due to (i) increased labor costs from higher annual and long-term incentive compensation costs, and annual wage increases and (ii) increased professional fees to support strategic initiatives, including our pending acquisition of Stericycle. Partially offsetting these increases was a decline in litigation costs.
Depreciation, Depletion and Amortization Expenses
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
Nine Months Ended
September 30,
September 30,
2024
2023
2024
2023
Depreciation of tangible property and equipment
$
323
5.8
%
$
298
5.7
%
$
943
5.8
%
$
894
5.9
%
Depletion of landfill airspace
203
3.6
188
3.6
580
3.6
554
3.6
Amortization of intangible assets
32
0.5
33
0.7
92
0.6
97
0.7
$
558
9.9
%
$
519
10.0
%
$
1,615
10.0
%
$
1,545
10.2
%
The increase in depreciation of tangible property and equipment for the three and nine months ended September 30, 2024 as compared to prior year periods was primarily driven by accelerated investments in capital assets such as trucks, digital assets, and upgraded facilities and equipment. The increase in depletion of landfill airspace for the three and nine months ended September 30, 2024 as compared to the prior year period, was driven by changes in amortization rates from revisions in landfill estimates and volume increases, partially offset by the closure of a landfill in our East Tier.
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(Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net
(Gain) loss from divestitures, asset impairments and unusual items, net for the three months ended September 30, 2024 primarily relates to a $14 million loss associated with the divestiture of a minority investment in a medical waste company within Corporate and Other, in connection with our pending acquisition of Stericycle. The nine months ended September 30, 2024 include a $54 million charge required to increase the estimated fair value of a liability associated with the expected disposition of an investment the Company holds in a waste diversion technology business recorded during the second quarter of 2024. This charge is reflected in our Corporate and Other measures within our segment reporting. (Gain) loss from divestitures, asset impairments and unusual items, net for the three and nine months ended September 30, 2023 were not material.
Income from Operations
The following table summarizes income from operations for our reportable segments (dollars in millions):
Three Months Ended
Nine Months Ended
September 30,
Period-to-Period
September 30,
Period-to-Period
2024
2023
Change
2024
2023
Change
Collection and Disposal:
East Tier
$
718
$
648
$
70
10.8
%
$
2,064
$
1,778
$
286
16.1
%
West Tier
708
613
95
15.5
2,009
1,720
289
16.8
Other Ancillary
—
(2)
2
*
(9)
(2)
(7)
*
Collection and Disposal
1,426
1,259
167
13.3
4,064
3,496
568
16.2
Recycling Processing and Sales
21
18
3
16.7
69
55
14
25.5
WM Renewable Energy
28
17
11
64.7
67
51
16
31.4
Corporate and Other
(356)
(273)
(83)
30.4
(1,056)
(812)
(244)
30.0
Total
$
1,119
$
1,021
$
98
9.6
%
$
3,144
$
2,790
$
354
12.7
%
Percentage of revenues
20.0
%
19.6
%
19.4
%
18.3
%
*Percentage change does not provide a meaningful comparison.
The significant items affecting income from operations for our segments during the three and nine months ended September 30, 2024, as compared with the prior year periods, are summarized below:
● Collection and Disposal — Income from operations in our Collection and Disposal businesses increased primarily due to (i) our focus on price increases that keep pace with inflationary cost pressures in our business alongside intentional efforts to improve efficiency and operating costs incurred to serve our customers; (ii) gains on the sale of non-strategic assets and (iii) higher landfill volumes generated from special waste and municipal solid waste as well as an increase in volumes from our WMSBS business. These increases were partially offset by (i) a decline in revenue from industrial volumes; (ii) increased depreciation expenses with relation to our fleet, machinery and equipment as well as higher depletion costs at our landfills and (iii) an increase in landfill operating costs .
● Recycling Processing and Sales — The increase in income from operations in Recycling Processing and Sales for the nine-month period was primarily due to (i) improved commodity pricing compared to prior year; (ii) a gain on sale of a non-strategic asset in the second quarter of 2024 and (iii) benefits from our growth investments and cost management. These improvements were partially offset by the impact of higher facility shutdown costs incurred during our capital investment programs targeted at automating and upgrading our single stream recycling business across North America.
● WM Renewable Energy — The increase in income from operations in WM Renewable Energy was primarily driven by increased revenue due to (i) higher RIN quantities and market values and (ii) increased beneficial use of landfill gas due to the completion of additional projects.
● Corporate and Other — The decrease in income from operations was primarily driven by (i) a $54 million charge required to increase the estimated fair value of a liability associated with the expected disposition of an investment
35
the Company holds in a waste diversion technology business recorded during the second quarter of 2024; (ii) higher annual and long-term incentive compensation costs; (iii) increased professional fees to support strategic initiatives, including our pending acquisition of Stericycle; (iv) an increase in risk management costs due to an adjustment to our reserves for auto and workers compensation claims and increases in premiums for property coverage and (v) a loss arising from the divestiture of a minority-owned medical waste investment.
Interest Expense , Net
Our interest expense, net was $131 million and $397 million for the three and nine months ended September 30, 2024, respectively, compared to $127 million and $372 million for the three and nine months ended September 30, 2023, respectively. The increase is primarily related to an increase in our average debt balances to fund growth as well as an increase in our weighted average borrowing rate of approximately 20 basis points.
Equity in Net Income (Losses) of Unconsolidated Entities
We recognized equity method investment income of $1 million and $4 million during the three and nine months ended September 30, 2024, respectively, compared to losses of $18 million and $41 million for the three and nine months ended September 30, 2023, respectively. These financial statement impacts are largely related to our noncontrolling interests in entities established to invest in and manage low-income housing properties. In 2024, we adopted Accounting Standards Update (“ASU”) 2023-02, and, as a result, beginning in 2024, the amortization of these investments is recognized as a component of income tax expense. Refer to Note 4 to the Condensed Consolidated Financial Statements for further discussion.
Income Tax Expense
Our income tax expense was $235 million and $611 million for the three and nine months ended September 30, 2024, respectively, compared to $210 million and $570 million for the three and nine months ended September 30, 2023, respectively. Our effective income tax rate was 23.6% and 22.2% for the three and nine months ended September 30, 2024, respectively, compared to 24.1% and 24.0% for the three and nine months ended September 30, 2023, 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 several tax-related provisions, including with respect to (i) alternative fuel tax credits; (ii) tax incentives for investments in renewable energy production, carbon capture, and other climate actions and (iii) 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. The provisions of the IRA related to alternative fuel tax credits secure approximately $60 million of annual pre-tax benefit (recorded as a reduction in our operating expense) for tax credits in 2023 and 2024.
With respect to the investment tax credit, as expanded by 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 through 2026. The Company projects a full year investment tax credit benefit of approximately $145 million, which is derived from the projected completion of five new RNG facilities by the end of 2024. The amount of the projected investment tax credit benefit for 2024 is based on a number of estimates and assumptions, including the timing of project completion and interpretation of the IRA.
The IRS issued proposed regulations applicable to the investment tax credits that could call into question our ability to realize some, or all, of this tax benefit, which would negatively impact financial expectations in connection with our significant planned and ongoing investments in sustainability growth projects in our WM Renewable Energy segment. In coordination with other members of the RNG industry and external advisors we are engaging directly with the U.S. Congress, the current federal administration, and other biogas sector stakeholders to encourage the Treasury Department to further refine its analysis prior to publication of final regulations that more accurately reflect the express language and
36
legislative intent of the statute with respect to the investment tax credit. However, there is no guarantee that such efforts will be successful. We expect that the production tax credit incentives for investments in renewable energy and carbon capture, as expanded by the IRA, will likely result in an incremental benefit to the Company, although at this time, the anticipated amount of such benefit has not been quantified.
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. 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):
September 30,
December 31,
2024
2023
Cash and cash equivalents
$
614
$
458
Restricted funds and other:
Insurance reserves
$
423
$
376
Final capping, closure, post-closure and environmental remediation funds
124
119
Other
—
17
Total restricted funds and other (a)
$
547
$
512
Debt:
Current portion
$
676
$
334
Long-term portion
15,977
15,895
Total debt
$
16,653
$
16,229
(a) As of September 30, 2024 and December 31, 2023, $90 million of these account balances were included in other current assets in our Condensed Consolidated Balance Sheets.
Debt — As of September 30, 2024, we had approximately $1.9 billion of debt maturing within the next 12 months, including (i) $1.2 billion of tax exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities; (ii) $422 million of 3.125% senior notes that mature in March 2025 and (iii) $254 million of other debt with scheduled maturities within the next 12 months, including $110 million of tax-exempt bonds. As of September 30, 2024, we have classified $1.2 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 $676 million of debt maturing in the next 12 months is classified as current obligations.
During the nine months ended September 30, 2024, WMI issued $750 million of 4.950% senior notes due 2027 and $750 million of 4.950% senior notes due 2031, the net proceeds of which were $1.5 billion. The net proceeds were used primarily to reduce outstanding borrowings under our commercial paper program.
37
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):
September 30,
December 31,
2024
2023
Balance Sheet Information:
Current assets
$
409
$
276
Noncurrent assets
14
25
Current liabilities
608
336
Noncurrent liabilities:
Advances due to affiliates
22,271
21,228
Other noncurrent liabilities
13,902
13,798
Nine Months Ended
September 30, 2024
Income Statement Information:
Revenue
$
—
Operating income
(340)
Net loss
(252)
Summary of Cash Flow Activity
The following is a summary of our cash flows for the nine months ended September 30 (in millions):
2024
2023
Net cash provided by operating activities
$
3,879
$
3,337
Net cash used in investing activities
$
(2,839)
$
(2,007)
Net cash used in financing activities
$
(903)
$
(1,525)
Net Cash Provided by Operating Activities — Our operating cash flows increased by $542 million for the nine months ended September 30, 2024, as compared with the prior year period, driven by (i) higher earnings in our Collection and Disposal businesses; (ii) favorable changes in working capital and (iii) lower annual incentive compensation payments. This increase was partially offset by higher cash interest payments.
Net Cash Used in Investing Activities — The most significant items included in our investing cash flows for the nine months ended September 30, 2024 and 2023 are summarized below:
● Capital Expenditures — We used $2,116 million and $1,853 million for capital expenditures during the nine months ended September 30, 2024 and 2023, respectively. The increase in capital spending is primarily driven by (i) our planned and ongoing investments in our Recycling Processing and Sales and WM Renewable Energy segments and (ii) an increase in truck spending in the current year due to supply chain constraints on truck deliveries in the prior year.
● Acquisitions — Our spending on acquisitions was $790 million and $139 million during the nine months ended September 30, 2024 and 2023, respectively, of which $782 million and $139 million, respectively, are considered cash used in investing activities. The remaining spend is cash used in financing activity related to the timing of
38
contingent consideration paid. Substantially all of these acquisitions are related to our solid waste and recycling businesses.
● 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 nine months ended September 30, 2024 and 2023, we used $38 million and $71 million, respectively, of cash from restricted cash and cash equivalents to invest in available-for-sale securities.
Net Cash Used in Financing Activities — The most significant items affecting the comparison of our financing cash flows for the nine months ended September 30, 2024 and 2023 are summarized below:
● Debt Borrowings and Repayments — The following summarizes our cash borrowings (net of related discount) and repayments of debt for the nine months ended September 30 (in millions):
2024
2023
Borrowings :
Commercial paper
$
9,424
$
14,062
Senior notes
1,490
3,207
Tax-exempt bonds
—
50
$
10,914
$
17,319
Repayments :
Commercial paper
$
(10,306)
$
(15,335)
Senior notes
(156)
(500)
Term loan
—
(1,000)
Tax-exempt bonds
(60)
(65)
Other debt
(97)
(91)
$
(10,619)
$
(16,991)
Net cash borrowings (repayments)
$
295
$
328
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 nine months ended September 30, 2024 and 2023, we used $262 and $990 million, respectively, to repurchase shares of our common stock under accelerated share repurchase agreements and open market transactions. The decrease in share repurchase activity in 2024 relates to our temporary suspension of share repurchase activity in anticipation of the acquisition of Stericycle. We expect to resume share repurchases once the Company’s leverage returns to targeted levels, which is currently projected to be about 24 months after the acquisition closes. See Note 11 to the Condensed Consolidated Financial Statements for additional information about our share repurchase activity.
● Cash Dividends — For the periods presented, all dividends have been declared by our Board of Directors. We paid cash dividends of $909 million and $855 million during the nine months ended September 30, 2024 and 2023, respectively. The increase in dividend payments is due to our quarterly per share dividend increasing from $0.70 in 2023 to $0.75 in 2024.
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.
39
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
Nine Months Ended
September 30,
September 30,
2024
2023
2024
2023
Net cash provided by operating activities
$
1,358
$
1,263
$
3,879
$
3,337
Capital expenditures to support the business
(598)
(493)
(1,545)
(1,456)
Capital expenditures - sustainability growth investments (a)
(183)
(180)
(571)
(397)
Total capital expenditures
(781)
(673)
(2,116)
(1,853)
Proceeds from divestitures of businesses and other assets, net of cash divested
41
22
99
68
Free cash flow
$
618
$
612
$
1,862
$
1,552
(a) These growth investments are intended to further our sustainability leadership position by increasing recycling volumes and growing renewable natural gas generation. We expect they will deliver circular solutions for our customers and drive environmental value to the communities we serve.
Critical Accounting Estimates and Assumptions
In preparing our financial statements, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with precision from available data or simply cannot be calculated. In some cases, these estimates are difficult to determine and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that present the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, long-lived asset impairments, intangible asset impairments and the fair value of assets and liabilities acquired in business combinations, as described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
Seasonal Trends
O ur financial and operating results may fluctuate for many reasons, including period-to-period changes in the relative contribution of revenue by each line of business, changes in commodity prices and general economic conditions. Our operating revenues and volumes typically experience seasonal increases in the summer months that are reflected in second and third quarter revenues and results of operations.
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.
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. 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
Variability in economic conditions, including inflation, interest rates, employment trends, and supply chain reliability, can create risk and uncertainty in financial outlook. We take proactive steps to recover and mitigate inflationary cost
40
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information about market risks as of September 30, 2024 does not materially differ from that discussed under Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2023.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.