UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2023 | |
or | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission file number 1-12154 |
Waste Management, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 73-1309529 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
800 Capitol Street
Suite 3000
Houston, Texas 77002
(Address of principal executive offices)
(713) 512-6200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading Symbol |
| Name of Each Exchange on Which Registered |
Common Stock, $0.01 par value | WM | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ | Accelerated filer ☐ | |
Non-accelerated filer ☐ | Smaller reporting company ☐ | |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding as of April 24, 2023 was 406,816,705 (excluding treasury shares of 223,465,756).
PART I.
Item 1. Financial Statements.
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Par Value Amounts)
March 31, | December 31, | |||||
| 2023 |
| 2022 | |||
(Unaudited) | ||||||
ASSETS | ||||||
Current assets: |
|
|
| |||
Cash and cash equivalents | $ | 257 | $ | 351 | ||
Accounts receivable, net of allowance for doubtful accounts of $26 and $26, respectively |
| 2,418 |
| 2,461 | ||
Other receivables, net of allowance for doubtful accounts of $5 and $7, respectively |
| 190 |
| 291 | ||
Parts and supplies |
| 170 |
| 164 | ||
Other assets |
| 336 |
| 284 | ||
Total current assets |
| 3,371 |
| 3,551 | ||
Property and equipment, net of accumulated depreciation and depletion of $22,027 and $21,627, respectively |
| 15,705 |
| 15,719 | ||
Goodwill |
| 9,344 |
| 9,323 | ||
Other intangible assets, net |
| 823 |
| 827 | ||
Restricted funds |
| 476 |
| 348 | ||
Investments in unconsolidated entities |
| 569 |
| 578 | ||
Other assets |
| 1,002 |
| 1,021 | ||
Total assets | $ | 31,290 | $ | 31,367 | ||
LIABILITIES AND EQUITY | ||||||
Current liabilities: |
|
|
|
| ||
Accounts payable | $ | 1,510 | $ | 1,766 | ||
Accrued liabilities |
| 1,426 |
| 1,625 | ||
Deferred revenues |
| 584 |
| 589 | ||
Current portion of long-term debt |
| 336 |
| 414 | ||
Total current liabilities |
| 3,856 |
| 4,394 | ||
Long-term debt, less current portion |
| 15,034 |
| 14,570 | ||
Deferred income taxes |
| 1,784 |
| 1,733 | ||
Landfill and environmental remediation liabilities |
| 2,729 |
| 2,700 | ||
Other liabilities |
| 1,079 |
| 1,106 | ||
Total liabilities |
| 24,482 |
| 24,503 | ||
Commitments and contingencies (Note 6) |
|
|
|
| ||
Equity: |
|
|
|
| ||
Waste Management, Inc. stockholders’ equity: |
|
|
|
| ||
Common stock, $0.01 par value; 1,500,000,000 shares authorized; 630,282,461 shares issued |
| 6 |
| 6 | ||
Additional paid-in capital |
| 5,244 |
| 5,314 | ||
Retained earnings |
| 13,414 |
| 13,167 | ||
Accumulated other comprehensive (loss) income |
| (57) |
| (69) | ||
Treasury stock at cost 223,491,127 and 222,396,166 shares, respectively |
| (11,813) |
| (11,569) | ||
Total Waste Management, Inc. stockholders’ equity |
| 6,794 |
| 6,849 | ||
Noncontrolling interests |
| 14 |
| 15 | ||
Total equity |
| 6,808 |
| 6,864 | ||
Total liabilities and equity | $ | 31,290 | $ | 31,367 |
See Notes to Condensed Consolidated Financial Statements.
2
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except per Share Amounts)
(Unaudited)
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Operating revenues | $ | 4,892 | $ | 4,661 | ||
Costs and expenses: |
|
|
| |||
Operating |
| 3,086 |
| 2,903 | ||
Selling, general and administrative |
| 476 |
| 491 | ||
Depreciation, depletion and amortization |
| 505 |
| 482 | ||
Restructuring | 3 | — | ||||
(Gain) loss from divestitures, asset impairments and unusual items, net |
| (3) |
| 17 | ||
| 4,067 |
| 3,893 | |||
Income from operations |
| 825 |
| 768 | ||
Other income (expense): |
|
| ||||
Interest expense, net |
| (120) |
| (85) | ||
Equity in net losses of unconsolidated entities |
| (11) |
| (15) | ||
Other, net |
| 2 |
| 3 | ||
| (129) |
| (97) | |||
Income before income taxes |
| 696 |
| 671 | ||
Income tax expense |
| 164 |
| 157 | ||
Consolidated net income |
| 532 |
| 514 | ||
Less: Net income (loss) attributable to noncontrolling interests |
| (1) |
| 1 | ||
Net income attributable to Waste Management, Inc. | $ | 533 | $ | 513 | ||
Basic earnings per common share | $ | 1.31 | $ | 1.24 | ||
Diluted earnings per common share | $ | 1.30 | $ | 1.23 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
(Unaudited)
Three Months Ended | |||||
March 31, | |||||
2023 |
| 2022 | |||
Consolidated net income | $ | 532 | $ | 514 | |
Other comprehensive income (loss), net of tax: |
|
|
|
| |
Derivative instruments, net |
| 5 |
| 1 | |
Available-for-sale securities, net |
| 5 |
| (13) | |
Foreign currency translation adjustments |
| 2 |
| 10 | |
Post-retirement benefit obligations, net |
| — |
| — | |
Other comprehensive income (loss), net of tax |
| 12 |
| (2) | |
Comprehensive income |
| 544 |
| 512 | |
Less: Comprehensive income (loss) attributable to noncontrolling interests |
| (1) |
| 1 | |
Comprehensive income attributable to Waste Management, Inc. | $ | 545 | $ | 511 |
See Notes to Condensed Consolidated Financial Statements.
3
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Cash flows from operating activities: |
|
|
|
| ||
Consolidated net income |
| $ | 532 | $ | 514 | |
Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
|
|
| |||
Depreciation, depletion and amortization |
| 505 |
| 482 | ||
Deferred income tax expense (benefit) |
| 42 |
| (11) | ||
Interest accretion on landfill and environmental remediation liabilities |
| 32 |
| 28 | ||
Provision for bad debts |
| 9 |
| 10 | ||
Equity-based compensation expense |
| 26 |
| 25 | ||
Net gain on disposal of assets |
| (10) |
| (4) | ||
(Gain) loss from divestitures, asset impairments and other, net |
| (3) |
| 17 | ||
Equity in net losses of unconsolidated entities, net of dividends |
| 11 |
| 15 | ||
Change in operating assets and liabilities, net of effects of acquisitions and divestitures: |
|
| ||||
Receivables |
| 138 |
| 93 | ||
Other current assets |
| (51) |
| (20) | ||
Other assets |
| 22 |
| 19 | ||
Accounts payable and accrued liabilities |
| (145) |
| 101 | ||
Deferred revenues and other liabilities |
| (64) |
| (11) | ||
Net cash provided by operating activities |
| 1,044 |
| 1,258 | ||
Cash flows from investing activities: |
|
|
|
| ||
Acquisitions of businesses, net of cash acquired |
| (34) |
| (9) | ||
Capital expenditures |
| (660) |
| (418) | ||
Proceeds from divestitures of businesses and other assets, net of cash divested |
| 11 |
| 5 | ||
Other, net |
| (95) |
| (150) | ||
Net cash used in investing activities |
| (778) |
| (572) | ||
Cash flows from financing activities: |
|
|
|
| ||
New borrowings |
| 6,885 |
| 2,362 | ||
Debt repayments |
| (6,548) |
| (2,471) | ||
Common stock repurchase program |
| (350) |
| (250) | ||
Cash dividends |
| (289) |
| (275) | ||
Exercise of common stock options |
| 12 |
| 9 | ||
Tax payments associated with equity-based compensation transactions |
| (28) |
| (34) | ||
Other, net |
| (1) |
| 24 | ||
Net cash used in financing activities |
| (319) |
| (635) | ||
Effect of exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents |
| — |
| 1 | ||
(Decrease) increase in cash, cash equivalents and restricted cash and cash equivalents |
| (53) |
| 52 | ||
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period |
| 445 |
| 194 | ||
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
| $ | 392 | $ | 246 | |
Reconciliation of cash, cash equivalents and restricted cash and cash equivalents at end of period: | ||||||
Cash and cash equivalents | $ | 257 | $ | 155 | ||
62 | 20 | |||||
73 | 71 | |||||
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
| $ | 392 | $ | 246 |
See Notes to Condensed Consolidated Financial Statements.
4
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In Millions, Except Shares in Thousands)
(Unaudited)
Waste Management, Inc. Stockholders’ Equity | |||||||||||||||||||||||||
Accumulated | |||||||||||||||||||||||||
Additional | Other | ||||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Treasury Stock | Noncontrolling | ||||||||||||||||||||
| Total |
| Shares |
| Amounts |
| Capital |
| Earnings |
| (Loss) Income |
| Shares |
| Amounts |
| Interests | ||||||||
2023 | |||||||||||||||||||||||||
Balance, December 31, 2022 | $ | 6,864 | 630,282 | $ | 6 | $ | 5,314 | $ | 13,167 | $ | (69) |
| (222,396) | $ | (11,569) | $ | 15 | ||||||||
Consolidated net income |
| 532 | — |
| — |
| — |
| 533 |
| — |
| — |
| — |
| (1) | ||||||||
Other comprehensive income (loss), net of tax |
| 12 | — |
| — |
| — |
| — |
| 12 |
| — |
| — |
| — | ||||||||
Cash dividends declared of $0.70 per common share |
| (289) | — |
| — |
| — |
| (289) |
| — |
| — |
| — |
| — | ||||||||
Equity-based compensation transactions, net |
| 42 | — |
| — |
| — |
| 3 |
| — |
| 766 |
| 39 |
| — | ||||||||
Common stock repurchase program |
| (353) | — |
| — |
| (70) |
| — |
| — |
| (1,862) |
| (283) |
| — | ||||||||
Other, net |
| — | — |
| — |
| — |
| — |
| — |
| 1 |
| — |
| — | ||||||||
Balance, March 31, 2023 | $ | 6,808 | 630,282 | $ | 6 | $ | 5,244 | $ | 13,414 | $ | (57) |
| (223,491) | $ | (11,813) | $ | 14 | ||||||||
2022 | |||||||||||||||||||||||||
Balance, December 31, 2021 | $ | 7,126 | 630,282 | $ | 6 | $ | 5,169 | $ | 12,004 | $ | 17 |
| (214,159) | $ | (10,072) | $ | 2 | ||||||||
Consolidated net income |
| 514 | — |
| — |
| — |
| 513 |
| — |
| — |
| — |
| 1 | ||||||||
Other comprehensive income (loss), net of tax |
| (2) | — |
| — |
| — |
| — |
| (2) |
| — |
| — |
| — | ||||||||
Cash dividends declared of $0.65 per common share |
| (275) | — |
| — |
| — |
| (275) |
| — |
| — |
| — |
| — | ||||||||
Equity-based compensation transactions, net |
| 34 | — |
| — |
| (11) |
| 5 |
| — |
| 862 |
| 40 |
| — | ||||||||
Common stock repurchase program |
| (250) | — |
| — |
| 20 |
| — |
| — |
| (1,806) |
| (270) |
| — | ||||||||
Other, net |
| (1) | — |
| — |
| — |
| — |
| — |
| 1 |
| — |
| (1) | ||||||||
Balance, March 31, 2022 | $ | 7,146 | 630,282 | $ | 6 | $ | 5,178 | $ | 12,247 | $ | 15 |
| (215,102) | $ | (10,302) | $ | 2 |
See Notes to Condensed Consolidated Financial Statements.
5
1. Basis of Presentation
The financial statements presented in this report represent the consolidation of Waste Management, Inc., a Delaware corporation; its wholly-owned and majority-owned subsidiaries; and certain variable interest entities for which Waste Management, Inc. or its subsidiaries are the primary beneficiaries as described in Note 12. Waste Management, Inc. is a holding company and all operations are conducted by its subsidiaries. When the terms “the Company,” “we,” “us” or “our” are used in this document, those terms refer to Waste Management, Inc., together with its consolidated subsidiaries and consolidated variable interest entities. When we use the term “WMI,” we are referring only to Waste Management, Inc., the parent holding company.
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. 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. Through our subsidiaries and 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.
Our senior management evaluates, oversees and manages the financial performance of our Solid Waste operations through two operating segments. Our East Tier primarily consists of geographic areas located in the Eastern U.S., the Great Lakes region and substantially all of Canada. Our West Tier primarily includes geographic areas located in the Western U.S., including the upper Midwest region, and British Columbia, Canada. Each of our Solid Waste operating segments provides integrated environmental services, including collection, transfer, recycling, and disposal. The East and West Tiers are presented in this report and constitute our existing Solid Waste business. We also provide additional services that are not managed through our Solid Waste business, which are presented in this report as “Other.” Additional information related to our segments is included in Note 7.
The Condensed Consolidated Financial Statements as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 are unaudited. In the opinion of management, these financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows, and changes in equity for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The financial statements presented herein should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.
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. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
6
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue Recognition
We generally recognize revenue as services are performed or products are delivered. For example, revenue typically is recognized as waste is collected, tons are received at our landfills or transfer stations, or recycling commodities are collected or delivered as product. We bill for certain services prior to performance. Such services include, among others, certain commercial and residential contracts, and equipment rentals. These advanced billings are included in deferred revenues and recognized as revenue in the period service is provided. Substantially all our deferred revenues during the reported periods are realized as revenues within
to three months, when the related services are performed.Contract Acquisition Costs
Our incremental direct costs of obtaining a contract, which consist primarily of sales incentives, are generally deferred and amortized to selling, general and administrative expense over the estimated life of the relevant customer relationship, ranging from
to 13 years. Contract acquisition costs that are paid to the customer are deferred and amortized as a reduction in revenue over the contract life. Our contract acquisition costs are classified as current or noncurrent based on the timing of when we expect to recognize amortization and are included in other assets in our Condensed Consolidated Balance Sheets. As of both March 31, 2023 and December 31, 2022, we had $192 million of deferred contract costs, of which $139 million and $137 million, respectively, were related to deferred sales incentives.Leases
Amounts for our operating lease right-of-use assets are recorded in long-term other assets and the current and long-term portion of our operating lease liabilities are reflected in accrued liabilities and other long-term liabilities, respectively, in our Condensed Consolidated Balance Sheets. Amounts for our financing leases are recorded in property and equipment, net of accumulated depreciation and depletion, and current or long-term debt in our Condensed Consolidated Balance Sheets, as appropriate.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments held within restricted funds, and accounts receivable. We make efforts to control our exposure to credit risk associated with these instruments by (i) placing our assets and other financial interests with a diverse group of credit-worthy financial institutions; (ii) holding high-quality financial instruments while limiting investments in any one instrument and (iii) maintaining strict policies over credit extension that include credit evaluations, credit limits and monitoring procedures, although generally we do not have collateral requirements for credit extensions. We also control our exposure associated with trade receivables by discontinuing service, to the extent allowable, to non-paying customers. However, our overall credit risk associated with trade receivables is limited due to the large number and diversity of customers we serve.
Reclassifications
When necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation and are not material to our consolidated financial statements.
7
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Landfill and Environmental Remediation Liabilities
Liabilities for landfill and environmental remediation costs are presented in the table below (in millions):
March 31, 2023 | December 31, 2022 | |||||||||||||||||
Environmental | Environmental | |||||||||||||||||
| Landfill |
| Remediation |
| Total |
| Landfill |
| Remediation |
| Total | |||||||
| $ | 136 | $ | 32 | $ | 168 | $ | 137 | $ | 31 | $ | 168 | ||||||
| 2,561 |
| 168 |
| 2,729 |
|
| 2,527 |
| 173 |
| 2,700 | ||||||
| $ | 2,697 | $ | 200 | $ | 2,897 | $ | 2,664 | $ | 204 | $ | 2,868 |
The changes to landfill and environmental remediation liabilities for the three months ended March 31, 2023 are reflected in the table below (in millions):
At several of our landfills, we provide financial assurance by depositing cash into restricted trust funds for purposes of settling final capping, closure, post-closure and environmental remediation obligations. Generally, these trust funds are established to comply with statutory requirements and operating agreements. See Note 12 for additional information related to these trusts.
8
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. Debt
The following table summarizes the major components of debt at principal amounts as of each balance sheet date (in millions) and provides the maturities and interest rate ranges of each major category as of March 31, 2023:
March 31, | December 31, | |||||
| 2023 |
| 2022 | |||
Commercial paper program (weighted average interest rate of 5.2% as of March 31, 2023 and 4.9% as of December 31, 2022) | $ | 863 | $ | 1,730 | ||
Senior notes, maturing through 2050, interest rates ranging from 0.75% to 7.75% (weighted average interest rate of 3.4% as of March 31, 2023 and 3.2% as of December 31, 2022) | 9,876 | 8,626 | ||||
Term Loan maturing May 2024, (interest rate of 5.6% as of March 31, 2023 and 5.1% as of December 31, 2022) | 1,000 | 1,000 | ||||
Canadian senior notes, C$500 million maturing September 2026, interest rate of 2.6% |
| 370 |
| 369 | ||
Tax-exempt bonds, maturing through 2048, fixed and variable interest rates ranging from 0.4% to 4.4% (weighted average interest rate of 2.8% as of March 31, 2023 and 2.7% as of December 31, 2022) |
| 2,648 |
| 2,648 | ||
Financing leases and other, maturing through 2071 (weighted average interest rate of 4.7% as of March 31, 2023 and December 31, 2022) (a) |
| 704 |
| 699 | ||
Debt issuance costs, discounts and other |
| (91) |
| (88) | ||
| 15,370 |
| 14,984 | |||
Current portion of long-term debt |
| 336 |
| 414 | ||
Long-term debt, less current portion | $ | 15,034 | $ | 14,570 |
(a) | Excluding our landfill financing leases, the maturities of our financing leases and other debt obligations extend through 2059. |
Debt Classification
As of March 31, 2023, we had approximately $2.3 billion of debt maturing within the next 12 months, including (i) $861 million of short-term borrowings under our commercial paper program (net of related discount on issuance); (ii) $725 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities; (iii) $500 million of 2.4% senior notes that mature in May 2023 and (iv) $186 million of other debt with scheduled maturities within the next 12 months, including $65 million of tax-exempt bonds. As of March 31, 2023, we have classified $1.9 billion of debt maturing in the next 12 months as long-term because we have the intent and ability to refinance these borrowings on a long-term basis as supported by the forecasted available capacity under our $3.5 billion long-term U.S. and Canadian revolving credit facility (“$3.5 billion revolving credit facility”), as discussed below. The remaining $336 million of debt maturing in the next 12 months is classified as current obligations.
Access to and Utilization of Credit Facilities, Commercial Paper Program and Term Loan
$3.5 Billion Revolving Credit Facility — Our $3.5 billion revolving credit facility, maturing May 2027, provides us with credit capacity to be used for cash borrowings, to support letters of credit and to support our commercial paper program. The interest rates we pay on outstanding U.S. or Canadian loans are based on the Secured Overnight Financing Rate (“SOFR”) administered by the Federal Reserve Bank of New York or the Canadian Dollar Offered Rate (“CDOR”), respectively, plus a spread depending on WMI’s senior public debt rating assigned by Moody’s Investors Service, Inc. and Standard and Poor’s Global Ratings. As of March 31, 2023, we had no outstanding borrowings under this facility. We had $165 million of letters of credit issued and $861 million of outstanding borrowings (net of related discount on issuance) under our commercial paper program, both supported by the facility, leaving unused and available credit capacity of
9
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$2.5 billion as of March 31, 2023. WM Holdings, a wholly-owned subsidiary of WMI, guarantees all of the obligations under the $3.5 billion revolving credit facility.
Commercial Paper Program — We have a commercial paper program that enables us to borrow funds for up to 397 days at competitive interest rates. The rates we pay for outstanding borrowings are based on the term of the notes. The commercial paper program is fully supported by our $3.5 billion revolving credit facility. As of March 31, 2023, we had $861 million of outstanding borrowings (net of related discount on issuance) under our commercial paper program.
$1.0 Billion, Two-Year, Term Credit Agreement — In May 2022, we entered into a $1.0 billion, two-year, U.S. term credit agreement (“Term Loan”) maturing May 2024 to be used for general corporate purposes. The interest rate we pay on our outstanding balance is generally based on SOFR, plus a spread depending on WMI’s senior public debt rating assigned by Moody’s Investors Service, Inc. and Standard and Poor’s Global Ratings. As of March 31, 2023, we had $1.0 billion of outstanding borrowings under our Term Loan. WM Holdings also guarantees all of the obligations under the Term Loan.
Other Letter of Credit Lines — As of March 31, 2023, we had utilized $796 million of other uncommitted letter of credit lines, with terms maturing through December 2026.
Debt Borrowings and Repayments
Commercial Paper Program — During the three months ended March 31, 2023, we made cash repayments of $6.5 billion, which were partially offset by $5.6 billion of cash borrowings (net of related discount on issuance).
Senior Notes — 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 $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.
Financing Leases and Other — The increase in our financing leases and other debt obligations during the three months ended March 31, 2023 is due to an increase of $33 million primarily related to non-cash financing leases, partially offset by $28 million of cash repayments of debt at maturity.
4. Income Taxes
Our effective income tax rate was 23.6% and 23.5% for the three months ended March 31, 2023 and 2022, respectively. We evaluate our effective income tax rate at each interim period and adjust it as facts and circumstances warrant.
Equity-Based Compensation — During the three months ended March 31, 2023, and 2022, we recognized a reduction in our income tax expense of $7 million and $10 million, respectively, for excess tax benefits related to the vesting or exercise of equity-based compensation awards.
Adjustments to Accruals and Related Deferred Taxes — There were no adjustments to accruals and related deferred taxes during the three months ended March 31, 2023. During the three months ended March 31, 2022, we recognized an increase in our income tax expense of $3 million for adjustments to accruals and related deferred taxes.
Investments Qualifying for Federal Tax Credits — We have significant financial interests in entities established to invest in and manage low-income housing properties. We support the operations of these entities in exchange for a pro-rata
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
share of the tax credits they generate. The low-income housing investments qualify for federal tax credits that we expect to realize through 2033 under Section 42 or Section 45D of the Internal Revenue Code.
We account for our investments in these entities using the equity method of accounting, recognizing our share of each entity’s results of operations and other reductions in the value of our investments in equity in net losses of unconsolidated entities, within our Condensed Consolidated Statements of Operations. During the three months ended March 31, 2023 and 2022, we recognized $13 million and $14 million of net losses, respectively, and a reduction in our income tax expense of $22 million and $23 million, respectively, primarily due to federal tax credits realized from these investments as well as the tax benefits from the pre-tax losses realized. In addition, during the three months ended March 31, 2023 and 2022, we recognized interest expense of $4 million and $3 million, respectively, associated with our investments in low-income housing properties. See Note 12 for additional information related to these unconsolidated variable interest entities.
5. Earnings Per Share
Basic and diluted earnings per share for the three months ended March 31 were computed using the following common share data (shares in millions):
Refer to the Condensed Consolidated Statements of Operations for net income attributable to Waste Management, Inc.
6. Commitments and Contingencies
Financial Instruments — We have obtained letters of credit, surety bonds and insurance policies and have established trust funds and issued financial guarantees to support tax-exempt bonds, contracts, performance of landfill final capping, closure and post-closure requirements, environmental remediation and other obligations. Letters of credit generally are supported by our $3.5 billion revolving credit facility and other credit lines established for that purpose. These facilities are discussed further in Note 3. Surety bonds and insurance policies are supported by (i) a diverse group of third-party surety and insurance companies; (ii) an entity in which we have a noncontrolling financial interest or (iii) a wholly-owned insurance captive, the sole business of which is to issue surety bonds and/or insurance policies on our behalf.
Management does not expect that any claims against or draws on these instruments would have a material adverse effect on our financial condition, results of operations or cash flows. We have not experienced any unmanageable difficulty in obtaining the required financial assurance instruments for our current operations. In an ongoing effort to mitigate risks of future cost increases and reductions in available capacity, we continue to evaluate various options to access cost-effective sources of financial assurance.
Insurance — We carry insurance coverage for protection of our assets and operations from certain risks including general liability, automobile liability, workers’ compensation, real and personal property, directors’ and officers’ liability, pollution legal liability, cyber incident liability and other coverages we believe are customary to the industry. Our exposure to loss for insurance claims is generally limited to the per incident deductible under the related insurance policy and any
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amounts that exceed our insured limits. Our exposure could increase if our insurers are unable to meet their commitments on a timely basis.
We have retained a significant portion of the risks related to our health and welfare, general liability, automobile liability and workers’ compensation claims programs. “General liability” refers to the self-insured portion of specific third-party claims made against us that may be covered under our commercial general liability insurance policy. For our self-insured portions, the exposure for unpaid claims and associated expenses, including incurred but not reported losses, is based on an actuarial valuation or internal estimates. The accruals for these liabilities could be revised if future occurrences or loss development significantly differ from such valuations and estimates. We use a wholly-owned insurance captive to insure the deductibles for our general liability, automobile liability and workers’ compensation claims programs.
We do not expect the impact of any known casualty, property, environmental or other contingency to have a material impact on our financial condition, results of operations or cash flows.
Guarantees — In the ordinary course of our business, WMI and WM Holdings enter into guarantee agreements associated with their subsidiaries’ operations. Additionally, WMI and WM Holdings have each guaranteed all of the senior debt of the other entity. No additional liabilities have been recorded for these intercompany guarantees because all of the underlying obligations are reflected in our Condensed Consolidated Balance Sheets.
As of March 31, 2023, we have guaranteed the obligations and certain performance requirements of third parties in connection with both consolidated and unconsolidated entities, including guarantees to cover the difference, if any, between the sale value and the guaranteed market or contractually-determined value of certain homeowner’s properties that are adjacent to or near 17 of our landfills. We have also agreed to indemnify certain third-party purchasers against liabilities associated with divested operations prior to such sale. We do not believe that the remaining contingent obligations will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
Environmental Matters — A significant portion of our operating costs and capital expenditures could be characterized as costs of environmental protection. The nature of our operations, particularly with respect to the construction, operation and maintenance of our landfills, subjects us to an array of laws and regulations relating to the protection of the environment. Under current laws and regulations, we may have liabilities for environmental damage caused by our operations, or for damage caused by conditions that existed before we acquired a site. In addition to remediation activity required by state or local authorities, such liabilities include potentially responsible party (“PRP”) investigations. The costs associated with these liabilities can include settlements, certain legal and consultant fees, as well as incremental internal and external costs directly associated with site investigation and clean-up.
Estimating our degree of responsibility for remediation is inherently difficult. We recognize and accrue for an estimated remediation liability when we determine that such liability is both probable and reasonably estimable. Determining the method and ultimate cost of remediation requires that a number of assumptions be made. There can sometimes be a range of reasonable estimates of the costs associated with the likely site remediation alternatives identified in the environmental impact investigation. In these cases, we use the amount within the range that is our best estimate. If no amount within a range appears to be a better estimate than any other, we use the amount that is the low end of such range. If we used the high ends of such ranges, our aggregate potential liability would be approximately $130 million higher than the $200 million recorded in the Condensed Consolidated Balance Sheet as of March 31, 2023. Our ultimate responsibility may differ materially from current estimates. It is possible that technological, regulatory or enforcement developments, the results of environmental studies, the inability to identify other PRPs, the inability of other PRPs to contribute to the settlements of such liabilities, or other factors could require us to record additional liabilities. Our ongoing review of our remediation liabilities, in light of relevant internal and external facts and circumstances, could result in revisions to our accruals that could cause upward or downward adjustments to our balance sheet and income from operations. These adjustments could be material in any given period.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of March 31, 2023, we have been notified by the government that we are a PRP in connection with 73 locations listed on the Environmental Protection Agency’s (“EPA’s”) Superfund National Priorities List (“NPL”). Of the 73 sites at which claims have been made against us, 14 are sites we own. Each of the NPL sites we own was initially developed by others as a landfill disposal facility. At each of these facilities, we are working in conjunction with the government to characterize or remediate identified site problems, and we have either agreed with other legally liable parties on an arrangement for sharing the costs of remediation or are working toward a cost-sharing agreement. We generally expect to receive any amounts due from other participating parties at or near the time that we make the remedial expenditures. The other 59 NPL sites, which we do not own, are at various procedural stages under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, known as CERCLA or Superfund.
The majority of proceedings involving NPL sites that we do not own are based on allegations that certain of our subsidiaries (or their predecessors) transported hazardous substances to the sites, often prior to our acquisition of these subsidiaries. CERCLA generally provides for liability for those parties owning, operating, transporting to or disposing at the sites. Proceedings arising under Superfund typically involve numerous waste generators and other waste transportation and disposal companies and seek to allocate or recover costs associated with site investigation and remediation, which costs could be substantial and could have a material adverse effect on our consolidated financial statements. At some of the sites at which we have been identified as a PRP, our liability is well defined as a consequence of a governmental decision and an agreement among liable parties as to the share each will pay for implementing that remedy. At other sites, where no remedy has been selected or the liable parties have been unable to agree on an appropriate allocation, our future costs are uncertain.
On October 11, 2017, the EPA issued its Record of Decision (“ROD”) with respect to the previously proposed remediation plan for the San Jacinto River Waste Pits Site in Harris County, Texas. McGinnes Industrial Maintenance Corporation (“MIMC”), a subsidiary of Waste Management of Texas, Inc., operated some of the waste pits from 1965 to 1966 and has been named as a site PRP. In 1998, WMI acquired the stock of the parent entity of MIMC. MIMC has been working with the EPA and other named PRPs as the process of addressing the site proceeds. On April 9, 2018, MIMC and International Paper Company entered into an Administrative Order on Consent agreement with the EPA to develop a remedial design for the EPA’s proposed remedy for the site, and we recorded a liability for MIMC’s estimated potential share of the EPA’s proposed remedy and related costs, although allocation of responsibility among the PRPs for the proposed remedy has not been established. MIMC and International Paper Company have continued to work on a remedial design to support the EPA’s proposed remedy; however, design investigations indicate that fundamental changes are required to the proposed remedy and MIMC maintains its prior position that the remedy set forth in the ROD is not the best solution to protect the environment and public health. Due to further increases in the estimated cost of the remedy set forth in the ROD, we recorded an additional liability of $17 million as of March 31, 2022 for MIMC’s estimated potential share of such costs. As of March 31, 2023 and December 31, 2022, the recorded liability for MIMC’s estimated potential share of the EPA’s proposed remedy was $69 million and $68 million, respectively. MIMC’s ultimate liability could be materially different from current estimates and MIMC will continue to engage the EPA regarding its proposed remedy.
Item 103 of the SEC’s Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings, or such proceedings are known to be contemplated, unless we reasonably believe that the matter will result in no monetary sanctions, or in monetary sanctions, exclusive of interest and costs, below a stated threshold. In accordance with this SEC regulation, the Company uses a threshold of $1 million for purposes of determining whether disclosure of any such environmental proceedings is required. As of the date of this filing, we are not aware of any matters that are required to be disclosed pursuant to this standard.
From time to time, we are also named as defendants in personal injury and property damage lawsuits, including purported class actions, on the basis of having owned, operated or transported waste to a disposal facility that is alleged to have contaminated the environment or, in certain cases, on the basis of having conducted environmental remediation activities at sites. Some of the lawsuits may seek to have us pay the costs of monitoring of allegedly affected sites and health care examinations of allegedly affected persons for a substantial period of time even where no actual damage is
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
proven. While we believe we have meritorious defenses to these lawsuits, the ultimate resolution is often substantially uncertain due to the difficulty of determining the cause, extent and impact of alleged contamination (which may have occurred over a long period of time), the potential for successive groups of complainants to emerge, the diversity of the individual plaintiffs’ circumstances, and the potential contribution or indemnification obligations of co-defendants or other third parties, among other factors. Additionally, we often enter into agreements with landowners imposing obligations on us to meet certain regulatory or contractual conditions upon site closure or upon termination of the agreements. Compliance with these agreements inherently involves subjective determinations and may result in disputes, including litigation.
Litigation — We are subject to various proceedings, lawsuits, disputes and claims arising in the ordinary course of our business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions that have been filed against us, and that may be filed against us in the future, include personal injury, property damage, commercial, customer, and employment-related claims, including purported state and national class action lawsuits related to: alleged environmental contamination, including releases of hazardous material and odors; sales and marketing practices, customer service agreements and prices and fees; and federal and state wage and hour and other laws. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. These actions are in various procedural stages, and some are covered, in part, by insurance. We currently do not believe that the eventual outcome of any such actions will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
In June 2022, we and certain of our officers were named as defendants in a complaint alleging violation of the federal securities laws and seeking certification as a class action in the U.S. District Court for the Southern District of New York. A lead plaintiff has been appointed and an amended complaint was filed in January 2023. The amended complaint seeks damages on behalf of a putative class of secondary market purchasers of our senior notes with a special mandatory redemption feature issued in May 2019, asserting claims under the Securities Exchange Act based on alleged misrepresentations and omissions concerning the time for completion of our acquisition of Advanced Disposal. We will vigorously defend against this pending suit. We believe any potential recovery by the plaintiffs, in excess of applicable deductibles, will be covered by insurance, and we do not believe that the eventual outcome of this suit will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
WMI’s charter and bylaws provide that WMI shall indemnify against all liabilities and expenses, and upon request shall advance expenses to any person, who is subject to a pending or threatened proceeding because such person is or was a director or officer of the Company. Such indemnification is required to the maximum extent permitted under Delaware law. Accordingly, the director or officer must execute an undertaking to reimburse the Company for any fees advanced if it is later determined that the director or officer was not permitted to have such fees advanced under Delaware law. Additionally, the Company has direct contractual obligations to provide indemnification to each of the members of WMI’s Board of Directors and each of WMI’s executive officers. The Company may incur substantial expenses in connection with the fulfillment of its advancement of costs and indemnification obligations in connection with actions or proceedings that may be brought against its former or current officers, directors and employees.
Multiemployer Defined Benefit Pension Plans — About 20% of our workforce is covered by collective bargaining agreements with various local unions across the U.S. and Canada. As a result of some of these agreements, certain of our subsidiaries are participating employers in a number of trustee-managed multiemployer defined benefit pension plans (“Multiemployer Pension Plans”) for the covered employees. In connection with our ongoing renegotiation of various collective bargaining agreements, we may discuss and negotiate for the complete or partial withdrawal from one or more of these Multiemployer Pension Plans. A complete or partial withdrawal from a Multiemployer Pension Plan may also occur if employees covered by a collective bargaining agreement vote to decertify a union from continuing to represent them. Any other circumstance resulting in a decline in Company contributions to a Multiemployer Pension Plan through a reduction in the labor force, whether through attrition over time or through a business event (such as the discontinuation or nonrenewal of a customer contract, the decertification of a union, or relocation, reduction or discontinuance of certain operations) may also trigger a complete or partial withdrawal from one or more of these pension plans.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We do not believe that any future liability relating to our past or current participation in, or withdrawals from, the Multiemployer Pension Plans to which we contribute will have a material adverse effect on our business, financial condition or liquidity. However, liability for future withdrawals could have a material adverse effect on our results of operations or cash flows for a particular reporting period, depending on the number of employees withdrawn and the financial condition of the Multiemployer Pension Plan(s) at the time of such withdrawal(s).
Tax Matters — We participate in the IRS’s Compliance Assurance Process, which means we work with the IRS throughout the year towards resolving any material issues prior to the filing of our annual tax return. Any unresolved issues as of the tax return filing date are subject to routine examination procedures. In the fourth quarter of 2022, the Company received a notice of tax due for the 2017 tax year related to a remaining disagreement with the IRS. In response to the notice, the Company made a deposit of approximately $103 million with the IRS. The Company expects to seek a refund of the entire amount deposited with the IRS and litigate any denial of the claim for refund. As of March 31, 2023 and December 31, 2022, the IRS deposit, net of reserve for uncertain tax positions, is classified as a component of other long-term assets in the Company’s Condensed Consolidated Balance Sheets.
In addition, we are in the examination phase of IRS audits for the 2022 and 2023 tax years and expect the audits to be completed within the next 24 months. We are also currently undergoing audits by various state and local jurisdictions for tax years that date back to 2014. We maintain a liability for uncertain tax positions, the balance of which management believes is adequate. Results of audit assessments by taxing authorities are not currently expected to have a material adverse effect on our financial condition, results of operations or cash flows.
7. Segment and Related Information
Our senior management evaluates, oversees and manages the financial performance of our Solid Waste operations through two operating segments. Our East Tier primarily consists of geographic areas located in the Eastern U.S., the Great Lakes region and substantially all of Canada. Our West Tier primarily includes geographic areas located in the Western U.S., including the upper Midwest region, and British Columbia, Canada. Each of our Solid Waste operating segments provides integrated environmental services, including collection, transfer, recycling, and disposal. The East and West Tiers are presented in this report and constitute our existing Solid Waste business.
The operating segments not evaluated and overseen through our East and West Tiers are presented herein as “Other” as these operating segments do not meet the criteria to be aggregated with other operating segments and do not meet the quantitative criteria to be separately reported.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Summarized financial information concerning our reportable segments for the three months ended March 31 is shown in the following table (in millions):
Gross | Intercompany | Net | Income | |||||||||
Operating | Operating | Operating | from | |||||||||
| Revenues |
| Revenues(d) |
| Revenues |
| Operations | |||||
2023 |
|
|
|
|
|
|
|
| ||||
Solid Waste: |
|
|
|
|
|
|
|
| ||||
East Tier | $ | 2,642 | $ | (534) | $ | 2,108 | $ | 550 | ||||
West Tier |
| 2,537 |
| (554) |
| 1,983 |
| 572 | ||||
Solid Waste (a) |
| 5,179 |
| (1,088) |
| 4,091 |
| 1,122 | ||||
Other (b) |
| 855 |
| (54) |
| 801 |
| (4) | ||||
6,034 | (1,142) | 4,892 | 1,118 | |||||||||
Corporate and Other (c) |
| — |
| — |
| — |
| (293) | ||||
Total | $ | 6,034 | $ | (1,142) | $ | 4,892 | $ | 825 | ||||
2022 |
|
|
|
|
|
|
|
| ||||
Solid Waste: |
|
|
|
|
|
|
|
| ||||
East Tier | $ | 2,383 | $ | (445) | $ | 1,938 | $ | 531 | ||||
West Tier |
| 2,406 |
| (490) |
| 1,916 |
| 549 | ||||
Solid Waste (a) |
| 4,789 |
| (935) |
| 3,854 |
| 1,080 | ||||
Other (b) |
| 857 |
| (50) |
| 807 |
| 1 | ||||
| 5,646 | (985) | 4,661 | 1,081 | ||||||||
Corporate and Other (c) |
| — |
| — |
| — |
| (313) | ||||
Total | $ | 5,646 | $ | (985) | $ | 4,661 | $ | 768 |
(a) | Income from operations provided by our Solid Waste business is generally indicative of the margins provided by our collection, landfill, transfer and recycling lines of business. From time to time, the operating results of our reportable segments are significantly affected by certain transactions or events that management believes are not indicative or representative of our results. |
Income from operations in our Solid Waste business increased primarily due to (i) revenue growth in our collection and disposal business driven by both yield and volume and (ii) fuel tax credits recognized in the current year which were nominal in the prior year period as the majority of our fuel tax credits were not recognized until August 2022 due to the timing of the Inflationary Reduction Act of 2022. These increases were partially offset by (i) inflationary cost pressures; (ii) labor cost increases from frontline employee wage adjustments and annual merit increases and (iii) reduced profitability in our recycling business from the decline in recycling commodity prices and lower volumes.
(b) | “Other” includes (i) elements of our Strategic Business Solutions (“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 Sustainability and Environmental Solutions business and recycling brokerage services and not included in the operations of our reportable segments; (iii) certain other expanded service offerings and solutions and (iv) the results of non-operating entities that provide financial assurance and self-insurance support for our Solid Waste business, net of intercompany activity. |
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.
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WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(c) | “Corporate and Other” operating results reflect certain costs incurred for various support services that are not allocated to our reportable segments. These support services include, among other things, treasury, legal, digital, tax, insurance, centralized service center processes, other administrative functions and the maintenance of our closed landfills. Income from operations for “Corporate and Other” also includes costs associated with our long-term incentive program. |
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.
(d) | 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. |
The mix of operating revenues from our major lines of business for the three months ended March 31 are as follows (in millions):
(a) | The “Other” line of business includes (i) certain services provided by our WMSBS business; (ii) certain services within our sustainability business including our landfill gas to energy operations managed by our WM Renewable Energy business and (iii) certain other expanded service offerings and solutions and reflects the results of non-operating entities that provide financial assurance and self-insurance support for our Solid Waste business, net of intercompany activity. Revenue attributable to collection, landfill, transfer and recycling services provided by our “Other” businesses has been reflected as a component of the relevant line of business for purposes of presentation in this table. |
(b) | Intercompany revenues between lines of business are eliminated in the Condensed Consolidated Financial Statements included within this report. |
Fluctuations in our operating results may be caused by many factors, 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 revenues and income from operations typically reflect seasonal patterns. Our operating revenues tend to be somewhat higher in summer months, primarily due to the higher construction and demolition waste volumes. The volumes of industrial and residential waste in certain regions where we operate also tend to increase during the summer months. Our second and third quarter revenues and results of operations typically reflect these seasonal trends.
Service or operational disruptions caused by severe storms, extended periods of inclement weather or climate events can significantly affect the operating results of the geographic areas affected. Extreme weather events may also lead to
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
supply chain disruption and delayed project development, or disruption of our customers’ businesses, reducing the amount of waste generated by their operations.
On the other hand, certain destructive weather and climate conditions, such as wildfires in the Western U.S. and hurricanes that most often impact our operations in the Southern and Eastern U.S. during the second half of the year, can increase our revenues in the geographic areas affected as a result of the waste volumes generated by these events. While weather-related and other event-driven special projects can boost revenues through additional work for a limited time, due to significant start-up costs and other factors, such revenue can generate earnings at comparatively lower margins.
8. (Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net
(Gain) loss from divestitures, asset impairments and unusual items, net for the first quarter of 2023 were nominal. During the first quarter of 2022, we recognized a $17 million charge pertaining to reserves for loss contingencies in our Corporate and Other segment to adjust an indirect wholly-owned subsidiary’s estimated potential share of the liability for a proposed environmental remediation plan at a closed site, as discussed in Note 6.
9. Accumulated Other Comprehensive (Loss) Income
The changes in the balances of each component of accumulated other comprehensive (loss) income, net of tax, which is included as a component of Waste Management, Inc. stockholders’ equity, are as follows (in millions, with amounts in parentheses representing decreases to accumulated other comprehensive income):
10. Common Stock Repurchase Program
The Company repurchases shares of its common stock as part of capital allocation programs authorized by our Board of Directors.
In February 2023, we entered into an accelerated share repurchase (“ASR”) agreement to repurchase $350 million of our common stock. At the beginning of the repurchase period, we delivered $350 million cash and received 1.9 million shares based on a stock price of $150.34, exclusive of the 1% excise tax discussed below. The final number of shares to be repurchased and the final average price per share under the ASR agreement, exclusive of the 1% excise tax, will depend on the volume-weighted average price of our stock, less a discount, during the term of the agreement. Purchases under the ASR agreement are expected to be completed in April 2023.
The Inflation Reduction Act of 2022, which was enacted into law on August 16, 2022, imposed a nondeductible 1% excise tax on the net value of certain stock repurchases made after December 31, 2022. During the three months ended March 31, 2023, we reflected the applicable excise tax in treasury stock as part of the cost basis of the stock repurchased
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and recorded a corresponding liability for the excise taxes payable in accrued liabilities in our Condensed Consolidated Balance Sheet.
As of March 31, 2023, the Company has authorization for $1.15 billion of future share repurchases. Any future share repurchases pursuant to this authorization of our Board of Directors will be made at the discretion of management and will depend on factors similar to those considered by the Board of Directors in making dividend declarations, including our net earnings, financial condition and cash required for future business plans, growth and acquisitions.
11. Fair Value Measurements
Assets and Liabilities Accounted for at Fair Value
Our assets and liabilities that are measured at fair value on a recurring basis include the following (in millions):
March 31, | December 31, | |||||
| 2023 |
| 2022 | |||
Quoted prices in active markets (Level 1): | ||||||
Cash equivalents and money market funds |
| $ | 186 |
| $ | 240 |
Equity securities | 39 | 37 | ||||
Significant other observable inputs (Level 2): | ||||||
Available-for-sale securities (a) |
| 451 |
| 360 | ||
Significant unobservable inputs (Level 3): | ||||||
Redeemable preferred stock (b) |
| 56 |
| 56 | ||
Total Assets |
| $ | 732 | $ | 693 |
(a) | Our available-for-sale securities primarily relate to debt securities with maturities over the next ten years. |
(b) | Our investment, which is classified as an available-for-sale debt security, has been measured based on third-party investors’ recent or pending transactions in these securities, which are considered the best evidence of fair value. When this evidence is not available, we use other valuation techniques as appropriate and available. These valuation methodologies may include transactions in similar instruments, discounted cash flow techniques, third-party appraisals or industry multiples and public company comparable transactions. |
Fair Value of Debt
As of March 31, 2023 and December 31, 2022, the carrying value of our debt was $15.4 billion and $15.0 billion. The estimated fair value of our debt was approximately $14.4 billion and $13.8 billion as of March 31, 2023 and December 31, 2022, respectively. The increase in the fair value of debt is primarily due to net borrowings of $337 million in 2023 and, to a lesser extent, changes in the current market rates of our senior notes.
Although we have determined the estimated fair value amounts using available market information and commonly accepted valuation methodologies, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, our estimates are not necessarily indicative of the amounts that we, or holders of the instruments, could realize in a current market exchange. The use of different assumptions or estimation methodologies could have a material effect on the estimated fair values. The fair value estimates are based on Level 2 inputs of the fair value hierarchy available as of March 31, 2023 and December 31, 2022. These amounts have not been revalued since those dates, and current estimates of fair value could differ significantly from the amounts presented.
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WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. Variable Interest Entities
The following is a description of our financial interests in unconsolidated and consolidated variable interest entities that we consider significant:
Low-Income Housing Properties
We do not consolidate our investments in entities established to manage low-income housing properties because we are not the primary beneficiary of these entities as we do not have the power to individually direct the activities of these entities. Accordingly, we account for these investments under the equity method of accounting. Our aggregate investment balance in these entities was $309 million and $321 million as of March 31, 2023 and December 31, 2022, respectively. The debt balance related to our investments in low-income housing properties was $278 million and $295 million as of March 31, 2023 and December 31, 2022, respectively. Additional information related to these investments is discussed in Note 4.
Trust Funds for Final Capping, Closure, Post-Closure or Environmental Remediation Obligations
Unconsolidated Variable Interest Entities — Trust funds that are established for both the benefit of the Company and the host community in which we operate are not consolidated because we are not the primary beneficiary of these entities as (i) we do not have the power to direct the significant activities of the trusts or (ii) power over the trusts’ significant activities is shared. Our interests in these trusts are accounted for as investments in unconsolidated entities and receivables. These amounts are recorded in other receivables, investments in unconsolidated entities and long-term other assets in our Condensed Consolidated Balance Sheets, as appropriate. We also reflect our share of the unrealized gains and losses on available-for-sale securities held by these trusts as a component of our accumulated other comprehensive income (loss). Our investments and receivables related to these trusts had an aggregate carrying value of $95 million and $93 million as of March 31, 2023 and December 31, 2022, respectively.
Consolidated Variable Interest Entities — Trust funds for which we are the sole beneficiary are consolidated because we are the primary beneficiary. These trust funds are recorded in restricted funds in our Condensed Consolidated Balance Sheets. Unrealized gains and losses on available-for-sale securities held by these trusts are recorded as a component of accumulated other comprehensive income (loss). These trusts had a fair value of $118 million and $113 million as of March 31, 2023 and December 31, 2022, respectively.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included under Item 1 and our Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2022.
This Quarterly Report on Form 10-Q contains certain forward-looking statements that are made subject to the safe harbor protections provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “forecast,” “project,” “estimate,” “intend,” and words of a similar nature and include estimates or projections of financial and other data; comments on expectations relating to future periods; plans or objectives for the future; and statements of opinion, view or belief about current and future events, circumstances or performance. You should view these statements with caution. They are based on the facts and circumstances known to us as of the date the statements are made. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those set forth in such forward-looking statements, including but not limited to failure to implement our optimization, automation, growth, and cost savings initiatives and overall business strategy; failure to obtain the results anticipated from strategic initiatives, investments, acquisitions or new lines of business; failure to identify acquisition targets, consummate and integrate acquisitions; environmental and other regulations, including developments related to emerging contaminants, gas emissions, renewable energy and environmental, social and governance (“ESG”) performance and disclosure; significant environmental, safety or other incidents resulting in liabilities or brand damage; failure to obtain and maintain necessary permits due to land scarcity, public opposition or otherwise; diminishing landfill capacity, resulting in increased costs and the need for disposal alternatives; failure to attract, hire and retain key team members and a high quality workforce; increases in labor costs due to union organizing activities or changes in wage and labor related regulations; disruption and costs resulting from extreme weather and destructive climate events; failure to achieve our sustainability goals or execute on our sustainability-related strategy and initiatives; public health risk, increased costs and disruption due to a future resurgence of pandemic conditions and restrictions; macroeconomic conditions, geopolitical conflict and market disruption resulting in labor, supply chain and transportation constraints, inflationary cost pressures and fluctuations in commodity prices, fuel and other energy costs; increased competition; pricing actions; impacts from international trade restrictions; competitive disposal alternatives, diversion of waste from landfills and declining waste volumes; weakness in general economic conditions and capital markets, including potential for an economic recession; instability of financial institutions; adoption of new tax legislation; fuel shortages; failure to develop and protect new technology; failure of technology to perform as expected; failure to prevent, detect and address cybersecurity incidents or comply with privacy regulations; negative outcomes of litigation or governmental proceedings; and decisions or developments that result in impairment charges and other risks discussed in our filings with the SEC, including Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 as updated by Part II, Item 1A. Risk Factors, included in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023. We assume no obligation to update any forward-looking statement, including financial estimates and forecasts, whether as a result of future events, circumstances or developments or otherwise.
Overview
We are North America’s leading provider of comprehensive environmental solutions, providing services throughout the United States (“U.S.”) and Canada. We partner with our customers and the communities we serve to manage and reduce waste at each stage from collection to disposal, while recovering valuable resources and creating clean, renewable energy. We own or operate the largest network of landfills throughout the U.S. and Canada. In order to make disposal more practical for larger urban markets, where the distance to landfills is typically farther, we manage transfer stations that consolidate, compact and transport waste efficiently and economically. Through our subsidiaries, including our Waste Management Renewable Energy (“WM Renewable Energy”) business, we are also a leading developer, operator and owner of landfill gas-to-energy facilities in the U.S. and Canada that produce renewable electricity and renewable natural gas, which is a significant source of fuel for our natural gas fleet. Additionally, we are a leading recycler in the U.S. and Canada, handling materials that include paper, cardboard, glass, plastic and metal. Our “Solid Waste” business is operated
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and managed locally by our subsidiaries that focus on distinct geographic areas and provide collection, transfer, disposal, and recycling and resource recovery services.
Our senior management evaluates, oversees and manages the financial performance of our Solid Waste operations through two operating segments. Our East Tier primarily consists of geographic areas located in the Eastern U.S., the Great Lakes region and substantially all of Canada. Our West Tier primarily includes geographic areas located in the Western U.S., including the upper Midwest region, and British Columbia, Canada. Each of our Solid Waste operating segments provides integrated environmental services, including collection, transfer, recycling, and disposal.
Our Solid Waste operating revenues are primarily generated from fees charged for our collection, transfer, disposal, and recycling and resource recovery services, and from sales of commodities by our recycling and landfill gas-to-energy operations. Revenues from our collection operations are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the disposal facility or material recovery facility and our disposal costs. Revenues from our landfill operations consist of tipping fees, which are generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, considering our cost of loading, transporting, and disposing of the solid waste at a disposal site. Recycling revenues generally consist of tipping fees and the sale of recycling commodities to third parties. The fees we charge for our services generally include our environmental, fuel surcharge and regulatory recovery fees which are intended to pass through to customers direct and indirect costs incurred. We also provide additional services that are not managed through our Solid Waste business, described under Results of Operations below.
Strategy
Our fundamental strategy has not changed; we remain dedicated to providing long-term value to our stockholders by successfully executing our core strategy of focused differentiation and continuous improvement. We have enabled a people-first, technology-led focus to drive our mission to maximize resource value, while minimizing environmental impact, and sustainability and environmental stewardship is embedded in all that we do. Our strategy leverages and sustains the strongest asset network in the industry to drive best-in-class customer experience and growth. Our strategic planning processes appropriately consider that the future of our business and the industry can be influenced by changes in economic conditions, the competitive landscape, the regulatory environment, asset and resource availability and technology. We believe that focused differentiation, which is driven by capitalizing on our unique and extensive network of assets, will deliver profitable growth and position us to leverage competitive advantages. Simultaneously, we believe that investing in automation to improve processes and drive operational efficiency combined with a focus on the cost to serve our customer will yield an attractive profit margin and enhanced service quality. We are furthering our strategy of focused differentiation and continuous improvement beyond our traditional waste operations through our sustainability growth strategy that includes significant planned investments in our WM Renewable Energy and recycling businesses, while increasing automation and reducing labor dependency. We are also evaluating and pursuing emerging diversion technologies that may generate additional value.
Business Environment
The waste industry is a comparatively mature and stable industry. However, customers increasingly expect more of their waste materials to be recovered and those waste streams are becoming more complex. In addition, many state and local governments mandate diversion, recycling and waste reduction at the source and prohibit the disposal of certain types of waste at landfills. We monitor these developments to adapt our service offerings. As companies, individuals and communities look for ways to be more sustainable, we promote our comprehensive services that go beyond our core business of collecting and disposing of waste in order to meet their needs. This includes expanding traditional recycling services, increasing organics collection, and processing, and expanding our renewable energy projects to meet the evolving needs of our diverse customer base. As North America’s leading provider of comprehensive environmental solutions, we are taking big, bold steps to catalyze positive change – change that will impact our Company as well as the communities we serve. Consistent with our Company’s long-standing commitment to sustainability and environmental stewardship, we published our 2022 Sustainability Report providing details on our ESG performance and outlining new 2030 ESG goals.
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The Sustainability Report conveys the strong linkage between the Company’s ESG goals and our growth strategy, inclusive of the planned expansion of the Company’s recycling and WM Renewable Energy businesses. The information in this report can be found at https://sustainability.wm.com but it does not constitute a part of, and is not incorporated by reference into, this Quarterly Report on Form 10-Q.
We encounter intense competition from governmental, quasi-governmental and private service providers based on pricing, and to a much lesser extent, the nature of service offerings, particularly in the residential line of business. Our industry is directly affected by changes in general economic factors, including increases and decreases in consumer spending, business expansions and construction activity. These factors generally correlate to volumes of waste generated and impact our revenue. Negative economic conditions and other macroeconomic trends can and have caused customers to reduce their service needs. Such negative economic conditions, in addition to competitor actions, can impact our strategy to negotiate, renew, or expand service contracts and grow our business. We also encounter competition for acquisitions and growth opportunities. General economic factors and the market for consumer goods, in addition to regulatory developments, can also significantly impact commodity prices for the recyclable materials we sell. Significant components of our operating expenses vary directly as we experience changes in revenue due to volume and a heightened pace of inflation. Volume changes can fluctuate significantly by line of business and volume changes in higher margin businesses can impact key financial metrics. We must dynamically manage our cost structure in response to volume changes and cost inflation.
We believe the Company’s industry-leading asset network and strategic focus on investing in our people and our digital platform will give the Company the necessary tools to address the evolving challenges impacting the Company and our industry. In line with our commitment to continuous improvement and a differentiated customer experience, we remain focused on our automation and optimization investments to enhance our operational efficiency and change the way we interact with our customers. Enhancements made through these initiatives are intended to seamlessly and digitally connect all the Company’s functions required to service our customers in order to provide the best experience and service. In late 2021, we began to execute on the next phase of this technology enablement strategy to automate and optimize certain elements of our service delivery model. Our next and ongoing phase is to prioritize reduced labor dependency on certain high-turnover jobs, particularly in customer experience, recycling and residential collection, while further elevating our customer self-service through digitalization and implementing technologies to enhance the safety, reliability and efficiency of our collection operations. Additionally, in 2022, we implemented a new general ledger accounting system, complementary finance enterprise resource planning system and a human capital management system, which will drive operational and service excellence by empowering our people through a modern, simplified and connected employee experience.
Macroeconomic pressures, including inflation and rising interest rates, and market disruption, resulting in labor, supply chain and transportation constraints, are continuing. Significant global supply chain disruption and the heightened pace of inflation have reduced availability and increased costs for the goods and services we purchase, with a particular impact on our repair and maintenance costs, as well as subcontractor costs. Supply chain constraints have also caused delayed delivery of fleet, steel containers and other purchases. Aspects of our business rely on third-party transportation providers, and such services have become more limited and expensive.
With the significant decline in commodity prices that started in the second half of 2022 and have continued into 2023, we are currently experiencing margin pressures from our commodity-driven businesses, specifically within our recycling and WM Renewable Energy businesses. While there may be short-term fluctuations in our commodity-driven businesses as prices change, we continue to focus on adjusting our business models to protect against the down-side risk by spreading the inherent risk of changes in commodity prices across the vertically integrated value chain. The extent and duration of the impact of labor, supply chain, transportation and commodity price challenges are subject to numerous external factors beyond our control, including broader macroeconomic conditions; recessionary fears and/or an economic recession; size, location, and qualifications of the labor pool; wage and price structures; adoption of new or revised regulations; future resurgence of pandemic conditions and restrictions; geopolitical conflicts and responses and supply and demand for commodities. As we experience inflationary cost pressures, we focus on our pricing efforts, as well as operating efficiencies and cost controls to maintain our earnings and cash flow and facilitate growth. With these macroeconomic pressures, we remain committed to putting our people first to ensure that they are well positioned to execute our daily
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operations diligently and safely. We remain focused on delivering outstanding customer service, managing our variable costs with changing volumes and investing in technology that will enhance our customers’ experience and provide operating efficiencies intended to reduce our cost to serve.
Current Quarter Financial Results
During the first quarter of 2023, we continued to focus on our priorities to advance our strategy—enhancing employee engagement, improving our operations through the use of technology and automation, and investing in growth through our recycling and WM Renewable Energy businesses. This strategic focus, combined with strong operational execution resulted in increased revenue, income from operations and income from operations margin. We were able to achieve these results despite high inflationary cost pressures. We remain diligent in offering a competitively profitable service that meets the needs of our customers, and we are focused on driving operating efficiencies and reducing discretionary spend. We continue to invest in our people through market wage adjustments, investments in our digital platform and training for our team members. We also continue to make investments in automation and optimization to enhance our operational efficiency and improve labor productivity for all lines of business. During the first quarter of 2023, we allocated $660 million of available cash to capital expenditures and $639 million to our shareholders through dividends and common stock repurchases.
Key elements of our financial results for the first quarter include:
● | Revenues of $4,892 million, compared with $4,661 million in the prior year period, an increase of $231 million, or 5.0%. The increase is primarily attributable to (i) higher yield in our collection and disposal business; (ii) volume growth; (iii) increases from our fuel surcharge program and (iv) acquisitions, net of divestitures. These increases were partially offset by commodity price declines in our recycling and WM Renewable Energy businesses; |
● | Operating expenses of $3,086 million, or 63.1% of revenues, compared with $2,903 million, or 62.3% of revenues, in the prior year period. The $183 million increase is primarily attributable to (i) inflationary cost pressures, particularly for maintenance and repairs and subcontractor costs and (ii) labor cost pressure from frontline employee market wage adjustments and annual merit increases. These increases were offset, in part, by commodity-driven business impacts from lower recycling rebates reflected in costs of goods sold; |
● | Selling, general and administrative expenses were $476 million, or 9.7% of revenues, compared with $491 million, or 10.5% of revenues, in the prior year period. The $15 million decrease is primarily attributable to reduced professional fees in connection with investments in our digital platform, as certain strategic digital projects have now been implemented. This decrease was offset, in part, by an increase in labor-related costs due to annual merit increases for our employees; |
● | Income from operations was $825 million, or 16.9% of revenues, compared with $768 million, or 16.5% of revenues, in the prior year period. The improved earnings in the current quarter are driven by deliberate steps to grow revenue and to reduce selling, general and administrative expense, which offset increases in operating expenses and depreciation, depletion and amortization expenses; |
● | Net income attributable to Waste Management, Inc. was $533 million, or $1.30 per diluted share, compared with $513 million, or $1.23 per diluted share, in the prior year period. The increase in income from operations discussed above, was partially offset by increases in interest expense and income tax expense; |
● | Net cash provided by operating activities was $1,044 million compared with $1,258 million in the prior year period, with the decrease driven by (i) unfavorable changes in working capital, net of effects of acquisitions and divestitures; (ii) higher incentive compensation payments and (iii) higher interest payments. This decrease was partially offset by (i) increased earnings attributable to our collection and disposal business and (ii) lower income taxes in the current period due to timing of payments; and |
● | Free cash flow was $395 million compared with $845 million in the prior year period. The decrease in free cash flow is primarily attributable to (i) an increase in capital spending, primarily driven by our intentional investment in sustainability growth projects as well as timing differences in our fixed asset purchases to support our ongoing |
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operations and (ii) a decrease in net cash provided by operating activities as discussed above. Free cash flow is a non-GAAP measure of liquidity. Refer to Free Cash Flow below for our definition of free cash flow, additional information about our use of this measure, and a reconciliation to net cash provided by operating activities, which is the most comparable GAAP measure. |
Results of Operations
Operating Revenues
Our Solid Waste operating revenues are primarily generated from fees charged for our collection, transfer, disposal, and recycling and resource recovery services, and from sales of commodities by our recycling and landfill gas-to-energy operations. We also provide additional services that are not managed through our Solid Waste business, including both our Strategic Business Solutions (“WMSBS”) and Sustainability and Environmental Solutions (“SES”) businesses, which include landfill gas-to-energy services, environmental solutions services and recycling brokerage services. We also offer certain other expanded service offerings and solutions. The mix of operating revenues from our major lines of business for the three months ended March 31 are as follows (in millions):
(a) | The “Other” line of business includes (i) certain services provided by our WMSBS business; (ii) certain services within our sustainability business including our landfill gas-to-energy operations managed by our WM Renewable Energy business and (iii) certain other expanded service offerings and solutions and reflects the results of non-operating entities that provide financial assurance and self-insurance support for our Solid Waste business, net of intercompany activity. Revenue attributable to collection, landfill, transfer and recycling services provided by our “Other” businesses has been reflected as a component of the relevant line of business for purposes of presentation in this table. |
(b) | Intercompany revenues between lines of business are eliminated in the Condensed Consolidated Financial Statements included within this report. |
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The following table provides details associated with the period-to-period change in revenues and average yield (dollars in millions):
(a) | Calculated by dividing the increase or decrease for the current year period by the prior year period’s related business revenue adjusted to exclude the impacts of divestitures for the current year period. |
(b) | Calculated by dividing the increase or decrease for the current year period by the prior year period’s total Company revenue adjusted to exclude the impacts of divestitures for the current year period. |
(c) | Includes combined impact of commodity price variability in both our recycling and WM Renewable Energy businesses, as well as changes in fees in our recycling business. |
(d) | Beginning in 2023, Recycling and WM Renewable Energy includes changes in our revenue attributable to our WM Renewable Energy business. Previously these changes in revenue were included in fuel surcharges and mandated fees. We have revised our prior year results to conform with the current year presentation. |
(e) | The amounts reported herein represent the changes in our revenue attributable to average yield for the total Company. |
The following provides further details about our period-to-period change in revenues:
Average Yield
Collection and Disposal Average Yield — This measure reflects the effect on our revenue from the pricing activities of our collection, transfer and landfill operations, exclusive of volume changes. Revenue growth from collection and disposal average yield includes not only base rate changes and environmental and service fee fluctuations, but also (i) certain average price changes related to the overall mix of services, which are due to the types of services provided; (ii) changes in average price from new and lost business and (iii) price decreases to retain customers.
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The details of our revenue growth from collection and disposal average yield are as follows (dollars in millions):
Our overall pricing efforts are focused on recovering the cost to service our customers that we experience in our business by increasing our average unit rate. We experienced strong average yield growth in our collection line of business of 7.2% for the first quarter of 2023. We are driving improved profitability in our residential line of business to better align the price charged for services we provide to our customers with the costs to provide the services, resulting in increased average yield of 5.6% for the first quarter of 2023. We are also continuing to see growth in our disposal business with our municipal solid waste business experiencing average yield of 5.4% for the first quarter of 2023.
Recycling and WM Renewable Energy — The downturn in the market prices for recycling commodities in the second half of 2022 continued into the first quarter of 2023. Decreases in the market prices for recycling commodities resulted in a revenue decline of $122 million for the first quarter of 2023, as compared with the prior year period. During the first quarter of 2023, average market prices for single-stream recycled commodities were about 60% lower compared to the prior year period, resulting from the slowdown in the global economy which reduced retail demand and the corresponding need for cardboard packaging to ship retail goods. Additionally, revenue declined $19 million in our WM Renewable Energy business, as compared to the prior year period, primarily driven by decreases in the value of renewable fuel standard credits and lower energy prices.
Fuel Surcharges and Mandated Fees — These fees, which include our fuel surcharge program and other mandated fees, increased $44 million for the first quarter of 2023, as compared with the prior year period. Fuel surcharge revenues are based on and fluctuate in response to changes in the national average prices for diesel fuel, and also vary with changes in our volume-based revenue activity. The mandated fees are primarily related to fees and taxes assessed by various state, county and municipal government agencies at our landfills and transfer stations. These amounts have not significantly impacted the change in revenue for the first quarter of 2023, as compared with the prior year period.
Volume
Our revenues from volume (excluding volumes from acquisitions and divestitures) increased $55 million, or 1.2%, for the first quarter of 2023, as compared with the prior year period. Our collection and disposal business volumes grew 1.1% in the first quarter of 2023, as compared with the prior year period, driven by an increase in disposal volumes which was partially offset by a modest decrease in collection volumes.
Volume growth during the first quarter of 2023 was primarily driven by volumes at our landfills as our construction and demolition landfill volumes were favorably impacted by the continued clean-up efforts in our East Tier from Hurricane Ian which occurred in late 2022. Special waste volumes at our landfills continue to be strong primarily due to higher contributions from event-driven projects. In addition, our WMSBS business volumes grew as a result of our continued focus on a differentiated service model for national accounts customers. However, these increases have been partially offset by our intentional efforts to reduce unprofitable residential collection volumes.
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Operating Expenses
The following table summarizes the major components of our operating expenses for the three months ended March 31 (in millions of dollars and as a percentage of revenues):
| 2023 |
| 2022 | |||||||||
Labor and related benefits | $ | 914 |
| 18.7 | % | $ | 814 |
| 17.5 | % | ||
Transfer and disposal costs |
| 307 | 6.3 |
| 282 | 6.0 | ||||||
Maintenance and repairs |
| 491 | 10.0 |
| 422 | 9.1 | ||||||
Subcontractor costs |
| 509 | 10.4 |
| 457 | 9.8 | ||||||
Cost of goods sold |
| 185 | 3.8 |
| 263 | 5.6 | ||||||
Fuel |
| 139 | 2.8 |
| 134 | 2.9 | ||||||
Disposal and franchise fees and taxes |
| 170 | 3.5 |
| 167 | 3.6 | ||||||
Landfill operating costs |
| 117 | 2.4 |
| 96 | 2.1 | ||||||
Risk management |
| 73 | 1.5 |
| 95 | 2.0 | ||||||
Other |
| 181 | 3.7 |
| 173 | 3.7 | ||||||
$ | 3,086 | 63.1 | % | $ | 2,903 | 62.3 | % |
Our operating expenses for the first quarter of 2023 increased, as compared with the first quarter of 2022, primarily due to (i) inflationary cost pressures, particularly for maintenance and repairs and subcontractor costs and (ii) labor cost pressure from frontline employee market wage adjustments as well as merit increases. These increases were offset, in part, by commodity-driven business impacts from lower recycling rebates reflected in costs of goods sold. We also continue to focus on operating efficiency and efforts to control costs.
Significant items affecting the comparison of operating expenses for the reported periods include:
Labor and Related Benefits — The increase in labor and related benefits costs was largely driven by (i) proactive market wage adjustments to hire and retain talent; (ii) merit increases; (iii) increased headcount attributable primarily to acquisitions and (iv) increases in health and welfare costs attributable to our intentional investment in delivering a leading benefits program for our employees and increases in medical care activity.
Transfer and Disposal Costs — The increase in transfer and disposal costs was primarily due to inflationary cost increases, which includes increased disposal fees at third-party sites and higher rates from our third-party haulers offset, in part, by decreases in residential and commercial collection volumes.
Maintenance and Repairs — The increase in maintenance and repairs costs was largely driven by (i) inflationary cost increases for parts, supplies and third-party services; (ii) additional fleet maintenance driven by delayed deliveries of new trucks due to supply chain constraints and (iii) labor cost increases for our technicians, including additional headcount, market wage adjustments, merit increases and higher overtime.
Subcontractor Costs — The increase in subcontractor costs was primarily due to (i) inflationary cost increases, particularly labor and fuel costs from third-party haulers and (ii) an increase in volumes in our WMSBS business and SES offerings, which rely more extensively on subcontracted hauling and services than our collection and disposal business.
Cost of Goods Sold — The decrease in cost of goods sold was primarily driven by an approximately 60% decrease in recycling commodity prices compared to the prior year period.
Fuel — The slight increase in fuel costs was primarily due to an increase of approximately 3% in market prices for diesel fuel offset, in part, by lower diesel consumption as we expand our compressed natural gas fleet and federal natural gas fuel tax credits. The federal natural gas fuel tax credits were not retroactively extended until the third quarter of 2022 and thus no benefit was recognized during the first quarter of 2022.
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Disposal and Franchise Fees and Taxes — The increase in disposal and franchise fees and taxes was primarily driven by higher franchise fees, due to an increase in landfill volumes, paid to certain municipalities where we operate and overall rate increases in our fees and taxes paid on our disposal volumes.
Landfill Operating Costs — The increase in landfill operating costs was primarily due to higher costs across our landfills for leachate collection and treatment, site maintenance and landfill accretion. Additionally, there was a change in the measurement of our environmental remediation obligations and recovery assets during the first quarter of 2022. Our measurement of these balances includes application of a risk-free discount rate, which is based on the rate for U.S. Treasury bonds. In the first quarter of 2022, there was an increase in the discount rate, which resulted in a reduction in the net liability balance and a credit to expense.
Risk Management — Risk management costs decreased during the first quarter of 2023 primarily due to an increase in claims costs during the first quarter of 2022 driven by unfavorable cost development on a limited population of severe cases.
Other — Other operating cost increases were primarily due to (i) inflationary cost pressures; (ii) higher equipment rental costs attributable, in part, to supply chain constraints slowing normal course fleet and equipment orders; (iii) an increase in business travel and (iv) higher utility costs at our facilities. These increases were offset, in part, by a favorable litigation settlement and net gains on sales of certain assets in the current quarter.
Selling, General and Administrative Expenses
The following table summarizes the major components of our selling, general and administrative expenses for the three months ended March 31 (in millions of dollars and as a percentage of revenues):
| 2023 |
| 2022 | |||||||||
Labor and related benefits | $ | 312 |
| 6.4 | % | $ | 305 |
| 6.5 | % | ||
Professional fees |
| 50 | 1.0 |
| 66 | 1.4 | ||||||
Provision for bad debts |
| 9 | 0.2 |
| 10 | 0.2 | ||||||
Other |
| 105 | 2.1 |
| 110 | 2.4 | ||||||
$ | 476 | 9.7 | % | $ | 491 | 10.5 | % |
Selling, general and administrative expenses have decreased primarily due to reduced professional fees in connection with investments in our digital platform, as certain strategic digital projects have now been implemented. Partially offsetting these reductions are increased labor costs primarily due to merit increases and increased payroll taxes and benefits expense. The decrease in our costs, along with the increase in revenue resulted in a significant reduction in our selling, general and administrative expenses as a percentage of revenues when compared with the prior year period.
Significant items affecting the comparison of our selling, general and administrative expenses for the reported periods include:
Labor and Related Benefits — The increase in labor and related benefits costs was primarily related to (i) annual merit increases for our employees and (ii) market adjustments for deferred compensation plans related to investment performance. These increases were partially offset by lower contract labor expenses.
Professional Fees — The decrease in professional fees was primarily attributable to reduced expenses in connection with investments in our digital platform, as certain strategic projects have now been implemented.
Other — The decrease in other expenses was primarily related to lower telecommunications costs and lower technology spend.
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Depreciation, Depletion and Amortization Expenses
The following table summarizes the components of our depreciation, depletion and amortization expenses for the three months ended March 31 (in millions of dollars and as a percentage of revenues):
2023 |
| 2022 | |||||||||
Depreciation of tangible property and equipment | $ | 293 |
| 6.0 | % | $ | 283 |
| 6.1 | % | |
Depletion of landfill airspace |
| 178 | 3.6 |
| 167 | 3.5 | |||||
Amortization of intangible assets |
| 34 | 0.7 |
| 32 | 0.7 | |||||
$ | 505 | 10.3 | % | $ | 482 | 10.3 | % |
The increase in depreciation of tangible property and equipment during the first quarter of 2023, as compared with the first quarter of 2022, was primarily driven by additional depreciation due to investments in capital assets, such as strategic investments in our digital platform and containers and trucks to service our customers. The increase in depletion of landfill airspace during the first quarter of 2023, as compared with the first quarter of 2022, was primarily driven by the reopening of a previously closed landfill in our East Tier. The increase in amortization of intangible assets during the first quarter of 2023, as compared to the first quarter of 2022, was primarily driven by amortization of acquired intangible assets.
(Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net
(Gain) loss from divestitures, asset impairments and unusual items, net for the first quarter of 2023 were nominal. During the first quarter of 2022, we recognized a $17 million charge pertaining to reserves for loss contingencies in our Corporate and Other segment to adjust an indirect wholly-owned subsidiary’s estimated potential share of the liability for a proposed environmental remediation plan at a closed site, as discussed in Note 6 to the Condensed Consolidated Financial Statements.
Income from Operations
The following table summarizes income from operations for our reportable segments for the three months ended March 31 (dollars in millions):
Period-to-Period | ||||||||||||
| 2023 |
| 2022 | Change |
| |||||||
Solid Waste: |
|
|
|
|
|
|
| |||||
East Tier | $ | 550 | $ | 531 | $ | 19 |
| 3.6 | % | |||
West Tier |
| 572 |
| 549 |
| 23 |
| 4.2 | ||||
Solid Waste |
| 1,122 |
| 1,080 |
| 42 |
| 3.9 | ||||
Other (a) |
| (4) |
| 1 |
| (5) |
| * | ||||
Corporate and Other (b) | (293) | (313) | 20 | (6.4) | ||||||||
Total | $ | 825 | $ | 768 | $ | 57 |
| 7.4 | % | |||