WASTE MANAGEMENT, INC. 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 endedDecember 31, 2021 . This Quarterly Report on Form 10-Q contains certain forward-looking statements that are made subject to the safe harbor protections provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the words, "will," "may," "should," "continue," "anticipate," "believe," "expect," "plan," "forecast," "project," "estimate," "intend," and words of a similar nature and include estimates or projections of financial and other data; comments on expectations relating to future periods; plans or objectives for the future; and statements of opinion, view or belief about current and future events, circumstances or performance. You should view these statements with caution. They are based on the facts and circumstances known to us as of the date the statements are made. These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those set forth in such forward-looking statements, including but not limited to failure to implement our optimization, growth, and cost savings initiatives and overall business strategy; failure to identify acquisition targets, consummate and integrate acquisitions; failure to obtain the results anticipated from acquisitions; environmental and other regulations, including developments related to emerging contaminants, gas emissions and renewable fuel; significant environmental, safety or other incidents resulting in liabilities or brand damage; failure to obtain and maintain necessary permits; failure to attract, hire and retain key team members and a high quality workforce; changes in wage and labor related regulations; significant storms and destructive climate events; public health risk and other impacts of COVID-19 or similar pandemic conditions, including related regulations, resulting in increased costs and social, labor and commercial disruption; macroeconomic pressures and market disruption resulting in labor, supply chain and transportation constraints and inflationary cost pressure; increased competition; pricing actions; commodity price fluctuations; impacts fromRussia's invasion ofUkraine and the resulting geopolitical conflict and international response, including increased risk of cyber incidents and exacerbation of market disruption, inflationary cost pressure and changes in commodity prices, fuel and other energy costs; international trade restrictions; disposal alternatives and waste diversion; declining waste volumes; weakness in general economic conditions and capital markets; adoption of new tax legislation; fuel shortages; failure to develop and protect new technology; failure of technology to perform as expected, including implementation of a new enterprise resource planning and human capital management system; failure to prevent, detect and address cybersecurity incidents or comply with privacy regulations; negative outcomes of litigation or governmental proceedings; decisions or developments that result in impairment charges and other risks discussed in our filings with theSEC , including Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . We assume no obligation to update any forward-looking statement, including financial estimates and forecasts, whether as a result of future events, circumstances or developments or otherwise. Overview We areNorth America's leading provider of comprehensive environmental solutions, providing services throughoutthe United States ("U.S.") andCanada . We partner with our residential, commercial, industrial, and municipal customers and the communities we serve to manage and reduce waste at each stage from collection to disposal, while recovering valuable resources and creating clean, renewable energy. We own or operate the largest network of landfills throughout theU.S. andCanada . In order to make disposal more practical for larger urban markets, where the distance to landfills is typically farther, we manage transfer stations that consolidate, compact and transport waste efficiently and economically. We are also a leading developer, operator and owner of landfill gas-to-energy facilities in theU.S. andCanada 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 theU.S. andCanada , handling materials that include paper, cardboard, glass, plastic and metal. Our "Solid Waste" business is operated and managed locally by our subsidiaries that focus on distinct geographic areas and provide collection, transfer, disposal, and recycling and resource recovery services.
In 2021, our senior management began evaluating, overseeing, and managing the financial performance of our Solid Waste operations through two operating segments. Our East Tier primarily consists of geographic areas located in the
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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. AsNorth America's leading provider of comprehensive environmental solutions, sustainability and environmental stewardship is embedded in all that we do. We have enabled a people-first, technology-led focus to drive our mission to maximize resource value, while minimizing environmental impact, so that both our economy and our environment can thrive. Our strategy leverages and sustains the strongest asset network in the industry to drive best-in-class customer experience and growth. Our strategic planning processes appropriately consider that the future of our business and the industry can be influenced by changes in economic conditions, the competitive landscape, the regulatory environment, asset and resource availability and technology. We believe that focused differentiation, which is driven by capitalizing on our unique and extensive network of assets, will deliver profitable growth and position us to leverage competitive advantages. Simultaneously, we believe the combination of cost control and investing in automation to improve processes and drive operational efficiency will yield an attractive total cost structure and enhanced service quality. While we continue to improve existing diversion technologies, such as through investments in our recycling operations, we are also evaluating and pursuing emerging diversion technologies that may generate additional value.
Business Environment
The waste industry is a comparatively mature and stable industry. However, customers increasingly expect more of their waste materials to be recovered and those waste streams are becoming more complex. In addition, many state and local governments mandate diversion, recycling and waste reduction at the source and prohibit the disposal of certain types of waste at landfills. We monitor these developments to adapt our service offerings. As companies, individuals and communities look for ways to be more sustainable, we promote our comprehensive services that go beyond our core business of collecting and disposing of waste in order to meet their needs. This includes expanding traditional recycling services, increasing organics collection and processing, and expanding our renewable energy projects to meet the evolving needs of our diverse customer base. As the leading waste management environmental services provider inNorth America , 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 Environmental, Social and Governance ("ESG") performance and outlining new 2030 priorities. 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 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. 26 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 dramatically by line of business and volume changes in higher margin businesses, such as what we saw with COVID-19, can impact key financial metrics. We must dynamically manage our cost structure in response to volume changes and cost inflation. We believe the Company's industry-leading asset network and strategic focus on investing in our people and our digital platform will give the Company the necessary tools to address the evolving challenges impacting the Company and our industry. In line with our commitment to continuous improvement and a differentiated customer experience, we remain focused on our automation and optimization investments to enhance our operational efficiency and change the way we interact with our customers. Enhancements made through this initiative are intended to seamlessly and digitally connect all the Company's functions required to service our customers in order to provide the best experience and service. In late 2021, we began to execute on the next phase of this technology enablement strategy to automate and optimize certain elements of our service delivery model. This next phase will prioritize reduced labor dependency on certain high-turnover jobs, particularly in customer experience, recycling and residential collection. We continue to make these investments to further digitalize our customer self-service and implement technologies to further enhance the safety, reliability and efficiency of our collection operations. Additionally, in 2022, we implemented our new enterprise resource planning systems that will contribute to operational and service excellence by empowering our people through modern, simplified and connected finance, accounting and human capital management platforms. Certain macroeconomic pressures and market disruption, driven in part by the COVID-19 pandemic and other external events and conditions, including rising inflation and a constrained labor market, intensified during the second half of 2021 and have continued throughout 2022. The constrained labor market has resulted in increased costs for wage adjustments, overtime hours and training new hires to address frontline employee turnover, increased volume, and operational challenges. The COVID-19 pandemic and other external events and conditions have also contributed to significant global supply chain disruption and inflationary pressure for the goods and services we purchase, with a particular impact on our repair and maintenance costs. Supply chain constraints have also caused delayed delivery of fleet, steel containers and other purchases. Aspects of our business rely on third-party transportation providers, and such services have become more limited and expensive. Additionally, demand for recycled material strengthened through 2021 and into early 2022, moderating during the second quarter and began to decline in the third quarter of 2022. Continued significant headwinds are expected for the remainder of the year and into 2023 amid significant price declines resulting from the slowdown in the global economy, which is reducing retail demand and the need for package shipping. We are also currently experiencing margin pressures from commodity-driven business impacts, particularly from higher fuel prices. The extent and duration of the impact of these labor market, supply chain, transportation and recycling challenges are subject to numerous external factors beyond our control, including broader macroeconomic conditions; size, location, and qualifications of the labor pool; wage and price structures; adoption of new or revised regulations; future resurgence in pandemic conditions and restrictions; geopolitical conflicts and responses and supply and demand for recycled materials. As we experience inflationary cost pressures, we focus on our strategic pricing efforts, as well as operating efficiencies and cost controls, to maintain and grow our earnings and cash flow. With these macroeconomic pressures, we remain focused on putting our people first to ensure that they are well positioned to execute our daily operations diligently and safely. We are encouraged by our results in 2022 and remain focused on delivering outstanding customer service, managing our variable costs with changing volumes and investing in technology that will enhance our customers' experience and reduce our cost to serve. 27
Current Quarter Financial Results
During the third quarter of 2022, we delivered strong revenue and income from operations as we continued to experience yield and volume improvement in our collection and disposal business. We remain diligent in offering a competitively profitable service that meets the needs of our customers and are focused on driving operating efficiencies and reducing discretionary spend. We continue to invest in our people through market wage adjustments, investments in our digital platform and training for new team members. Despite the significant downturn in commodity prices for recyclable material, which were caused by overall lower demand and growing supply led by global economic conditions, we remain committed to our investment in recycling automation, which reduces costs and increases throughput, positioning us to overcome commodity price headwinds and deliver a differentiated service. We also continue to make investments in automation and optimization to enhance our operational efficiency and improve labor productivity for all lines of business. During the third quarter of 2022, we allocated$757 million of available cash to capital expenditures, both as a continuing investment in our traditional solid waste business and to support growth in our sustainability asset network. We also allocated$808 million to our shareholders through dividends and common stock repurchases.
Key elements of our financial results for the third quarter include:
Revenues of
period, an increase of
? attributable to (i) higher yield in our collection and disposal lines of
business; (ii) increases from our fuel surcharge program and (iii) volume
growth. These increases were partially offset by lower average market prices
for recycling commodities;
Operating expenses of
pressures, particularly for maintenance and repairs and subcontractor costs;
(ii) commodity-driven business impacts from higher fuel prices and (iii) labor
cost pressure from frontline employee wage adjustments. These increases were
? partially offset by (i) a
alternative fuel tax credits during the quarter that was retroactive to January
1, 2022 and (ii) the commodity-driven business impacts of lower recycling
rebates. Operating expense as a percentage of revenue improved in the
collection and disposal business as pricing and operating efficiencies worked
to overcome inflationary cost pressures. This improvement was largely offset by
the impacts of a sharp decline in market prices for recycled commodities;
Selling, general and administrative expenses were
revenues, compared with
? period. The
investments in our digital platform, including those that support our ongoing
sustainability initiatives;
Income from operations was
? the current quarter was primarily driven by deliberate steps to grow revenue
and effectively manage costs through operational efficiencies, which allowed us
to overcome inflationary pressures;
Net income attributable to
per diluted share, compared with
? the prior year period. With the increase in income from operations, as
discussed above, there was also an increase in our income tax expense impacting
our net income;
Net cash provided by operating activities was
? activities was relatively flat when compared to the prior year period,
primarily due to higher earnings offset by the effect of increased tax payments
and an increase in the number of payroll cycles in the current year period; and
Free cash flow was
period. The decrease in free cash flow is primarily attributable to (i) an
increase in capital spending, primarily driven by our intentional investment in
? sustainability growth projects as well as timing differences in our fixed asset
purchases to support our ongoing operations and (ii) lower proceeds from
divestitures of businesses. 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
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use of this measure, and a reconciliation to net cash provided by operating
activities, which is the most comparable GAAP measure.
Results of Operations
Operating Revenues
We evaluate, oversee and manage the financial performance of our Solid Waste
business subsidiaries through our East and West Tiers. We also provide
additional services that are not managed through our Solid Waste business,
including both our Strategic Business Solutions ("WMSBS") and sustainability
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 is reflected in the table below (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Commercial $ 1,392 $ 1,214 $ 4,034 $ 3,523
Industrial 966 829 2,744 2,383
Residential 846 795 2,483 2,371
Other collection 187 140 521 391
Total collection 3,391 2,978 9,782 8,668
Landfill 1,197 1,100 3,442 3,090
Transfer 562 550 1,602 1,547
Recycling 420 464 1,341 1,203
Other (a) 614 551 1,785 1,541
Intercompany (b) (1,109) (978) (3,189) (2,796)
Total $ 5,075 $ 4,665 $ 14,763 $ 13,253 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, our construction and remediation services and our services
associated with the disposal of fly ash and (iii) certain other expanded (a) service offerings and solutions. In addition, our "Other" line of business
reflects the results of non-operating entities that provide financial
assurance and self-insurance support for our Solid Waste business, net of
intercompany activity. Revenue attributable to collection, landfill, transfer
and recycling services provided by our "Other" businesses has been reflected
as a component of the relevant line of business for purposes of presentation
in this table.
(b) Intercompany revenues between lines of business are eliminated in the
Condensed Consolidated Financial Statements included within this report.
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The following table provides details associated with the period-to-period changes in revenues and average yield (dollars in millions):
Period-to-Period Change for the Period-to-Period Change for the
Three Months Ended Nine Months Ended
September 30, 2022 vs. 2021 September 30, 2022 vs. 2021
As a % of As a % of As a % of As a % of
Related Total Related Total
Amount Business(a) Amount Company(b) Amount Business(a) Amount Company(b)
Collection and disposal $ 280 7.1 % $ 722 6.3 %
Recycling (c) (54) (11.6) 158 13.7
Fuel surcharges and
other (d) 132 54.0 375 57.1
Total average yield (e) $ 358 7.7 % $ 1,255 9.5 %
Volume (d) 47 1.0 264 2.0
Internal revenue growth 405 8.7 1,519 11.5
Acquisitions 15 0.3 20 0.1
Divestitures (2) - (13) (0.1)
Foreign currency
translation (8) (0.2) (16) (0.1)
Total $ 410 8.8 % $ 1,510 11.4 %
Calculated by dividing the increase or decrease for the current year period (a) by the prior year period's related business revenue adjusted to exclude the
impacts of divestitures for the current year period.
Calculated by dividing the increase or decrease for the current year period (b) by the prior year period's total Company revenue adjusted to exclude the
impacts of divestitures for the current year period.
(c) Includes combined impact of commodity price variability and changes in fees.
Beginning in the fourth quarter of 2021, includes changes in our revenue (d) attributable to our WM Renewable Energy business from yield and volume. We
have revised our prior year results to conform with the current year
presentation.
(e) The amounts reported herein represent the changes in our revenue attributable
to average yield for the total Company.
The following provides further details about our period-to-period change in revenues:
Average Yield
Collection and Disposal Average Yield - This measure reflects the effect on our
revenue from the pricing activities of our collection, transfer and landfill
operations, exclusive of volume changes. Revenue growth from collection and
disposal average yield includes not only base rate changes and environmental and
service fee fluctuations, but also (i) certain average price changes related to
the overall mix of services, which are due to the types of services provided;
(ii) changes in average price from new and lost business and (iii) price
decreases to retain customers.
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The details of our revenue growth from collection and disposal average yield are as follows (dollars in millions):
Period-to-Period Change for the Period-to-Period Change for the
Three Months Ended Nine Months Ended
September 30, 2022 vs. 2021 September 30, 2022 vs. 2021
As a % of As a % of
Related Related
Amount Business Amount Business
Commercial $ 109 9.8 % $ 284 8.7 %
Industrial 86 11.0 221 9.9
Residential 48 6.3 126 5.5
Total collection 243 8.7 631 7.8
Landfill 21 3.2 57 3.0
Transfer 16 5.5 34 4.2Total collection and disposal$ 280 7.1 %$ 722 6.3 % Our overall strategic pricing efforts are focused on recovering inflationary cost increases we experience in our business by increasing our average unit rate. We continue to experience strong average yield growth in our collection line of business of 8.7% and 7.8% for the three and nine months endedSeptember 30, 2022 , respectively, illustrating our focus on our pricing efforts in this inflationary environment. We are also continuing to see growth in our disposal business, with our municipal solid waste experiencing 6.5% and 6.1% average yield growth for the three and nine months endedSeptember 30, 2022 , respectively. Recycling - Recycling revenue decreased$54 million and increased$158 million for the three and nine months endedSeptember 30, 2022 , respectively, as compared with the prior year periods. Demand for recycled material strengthened through 2021 and into early 2022, moderating during the second quarter and began to decline in the third quarter of 2022. Continued significant headwinds are expected for the remainder of the year and into 2023 amid significant price declines resulting from the slowdown in the global economy, which is reducing retail demand and the need for package shipping. During the third quarter of 2022, average market prices for recycling commodities at the Company's facilities were approximately 30% lower as compared to the prior year period. Fuel Surcharges and Other - These fees, which include (i) our fuel surcharge program; (ii) yield from our WM Renewable Energy business and (iii) other mandated fees, increased$132 million and$375 million for the three and nine months endedSeptember 30, 2022 , respectively, as compared with the prior year periods. Fuel surcharge revenues are based on and fluctuate in response to changes in the national average prices for diesel fuel, and also vary with changes in our volume-based revenue activity. Revenue from our fuel surcharge program increased$123 million and$324 million for the three and nine months endedSeptember 30, 2022 , respectively, as compared with the prior year periods. Market prices for diesel fuel increased approximately 55% and 60% for the three and nine months endedSeptember 30, 2022 , respectively, as compared with the prior year periods. Revenue from yield growth in our WM Renewable Energy business increased$8 million and$46 million for the three and nine months endedSeptember 30, 2022 , respectively, as compared with the prior year periods. This increase was primarily driven by increases in the value for electricity and renewable natural gas. The mandated fees are primarily related to fees and taxes assessed by various state, county and municipal government agencies at our landfills and transfer stations. These amounts have not significantly impacted the change in revenue for the three and nine months endedSeptember 30, 2022 , as compared with the prior year periods.
Volume
Our revenues from volumes (excluding volumes from acquisitions and divestitures) increased$47 million , or 1.0%, and$264 million , or 2.0%, for the three and nine months endedSeptember 30, 2022 , respectively, as compared with the prior year periods. Our collection and disposal business volumes grew 1.4% and 2.5% for the three and nine months endedSeptember 30, 2022 , respectively, as compared with the prior year periods.
Our third quarter of 2022 volume growth has moderated when compared to the accelerated volume recovery from COVID-related impacts experienced in the prior year period. Special waste volumes at our landfills have been the most
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significant driver of volume growth, primarily due to an increase in
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.
Operating Expenses
The following table summarizes the major components of our operating expenses (in millions of dollars and as a percentage of revenues):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Labor and related benefits $ 880 17.3 % $ 835 17.9 % $ 2,563 17.4 % $ 2,372 17.9 %
Transfer and disposal costs 313 6.2 300 6.4 909 6.2 872 6.6
Maintenance and repairs 475 9.4 414 8.9 1,351 9.1 1,183 8.9
Subcontractor costs 536 10.5 466 10.0 1,496 10.1 1,303 9.8
Cost of goods sold 247 4.9 263 5.6 778 5.3 655 5.0
Fuel 132 2.6 101 2.2 438 3.0 282 2.1
Disposal and franchise fees
and taxes 188 3.7 183 3.9 545 3.7 516 3.9
Landfill operating costs 100 2.0 105 2.2 303 2.0 308 2.3
Risk management 89 1.7 88 1.9 269 1.8 242 1.8
Other 196 3.9 151 3.3 549 3.7 423 3.2
$ 3,156 62.2 % $ 2,906 62.3 % $ 9,201 62.3 % $ 8,156 61.5 %
Our operating expenses increased primarily due to (i) inflationary cost
pressures, particularly for maintenance and repairs and subcontractor costs;
(ii) commodity-driven business impacts from higher fuel prices and (iii) labor
cost pressure from frontline employee wage adjustments. These increases were
partially offset in the third quarter of 2022 by (i) a $26 million catch-up
benefit from the extension of alternative fuel tax credits that was retroactive
to January 1, 2022 and (ii) commodity-driven business impacts from lower
recycling rebates. For the nine months ended September 30, 2022 , as compared
with the prior year period, commodity-driven business impacts from higher
recycling rebates in the first half of 2022 more than offset the decrease in the
third quarter of 2022. 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 and annual incentive compensation costs and (iii) increases in health and welfare costs attributable to our intentional investment in delivering a leading benefits program for our employees and increases in medical care activity. Transfer and Disposal Costs - The increase in transfer and disposal costs was largely driven by inflationary cost increases, which includes increased disposal fees at third-party sites and higher fuel from our third-party haulers. Maintenance and Repairs - The increase in maintenance and repairs costs was largely driven by (i) inflationary cost increases for parts, supplies and third-party services; (ii) additional fleet maintenance driven by supply chain constraints, which have delayed deliveries of new trucks; (iii) labor cost increases for our technicians, including higher overtime and (iv) an increase in container repairs driven by delays in delivery of steel containers due to supply chain constraints. Subcontractor Costs - The increase in subcontractor costs was largely driven by (i) inflationary cost increases, particularly for fuel and labor costs from third-party haulers and (ii) an increase in volumes in our WMSBS business, which relies more extensively on subcontracted hauling than our collection and disposal business.
Cost of Goods Sold - The increase in cost of goods sold for the nine months
ended
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compared to the prior year period, partially offset by an approximate 30%
decrease in recycling commodity prices for the three months ended
Fuel - The increase in fuel costs was primarily due to increases in market diesel and natural gas fuel prices during the three and nine months endedSeptember 30, 2022 , respectively, as compared to the prior year periods. This increase was partially offset in the third quarter of 2022 by a$26 million catch-up benefit from the extension of alternative fuel tax credits that was retroactive toJanuary 1, 2022 . Disposal and Franchise Fees and Taxes - The increase in disposal and franchise fees and taxes was primarily driven by higher franchise fees paid to certain municipalities where we operate and overall rate increases in our fees and taxes paid on our disposal volumes. Landfill Operating Costs - Our landfill operating costs were essentially flat for the reported periods. The variability in the reported periods is largely due to changes in the measurement of our environmental remediation obligations and recovery assets in 2022 and 2021. Our measurement of these balances includes application of a risk-free discount rate, which is based on the rate forU.S. Treasury bonds. In 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 increased primarily due to inflation in
premiums. The nine months ended
Other - Other operating cost increases were primarily due to (i) inflationary cost pressures; (ii) a write-down of assets and inventory related to Hurricane Ian; (iii) higher equipment rental costs attributable, in part, to supply chain constraints slowing normal course fleet and equipment orders and (iv) an increase in business travel in 2022. Additionally, a favorable litigation settlement in the second quarter of 2021 impacted the comparison for the nine months endedSeptember 30, 2022 .
Selling, General and Administrative Expenses
The following table summarizes the major components of our selling, general and
administrative expenses (in millions of dollars and as a percentage of
revenues):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Labor and related benefits $ 293 5.8 % $ 311 6.7 % $ 910 6.2 % $ 905 6.8 %
Professional fees 65 1.3 53 1.1 193 1.3 158 1.2
Provision for bad debts 12 0.2 11 0.2 36 0.2 28 0.2
Other 103 2.0 94 2.1 312 2.1 281 2.2
$ 473 9.3 % $ 469 10.1 % $ 1,451 9.8 % $ 1,372 10.4 %
Selling, general and administrative expenses have increased primarily due to
strategic investments in our digital platform, including those that support our
ongoing sustainability initiatives. Although our costs increased, the
significant revenue increases positioned us to reduce our overall selling,
general and administrative expenses as a percentage of revenues when compared
with the prior year periods.
Significant items affecting the comparison of our selling, general and administrative expenses for the reported periods include:
Labor and Related Benefits -The decrease in labor and related benefits for the three months endedSeptember 30, 2022 , as compared with the prior year period, is primarily related to lower long-term incentive compensation costs. Higher annual incentive compensation costs, annual merit increases and increases in health and welfare costs attributable to our intentional investment in delivering a leading benefits program for our employees and 33 increases in medical care activity partially offset such decrease for the three months endedSeptember 30, 2022 , and more than offset such decrease for the nine months endedSeptember 30, 2022 , as compared with the prior year periods. Professional Fees - The increase in professional fees was primarily driven by strategic investments in our digital platform and sustainability initiatives. Partially offsetting these increases were lower integration costs related to our acquisition ofAdvanced Disposal Services, Inc. ("Advanced Disposal").
Provision for Bad Debts - The increase in provision for bad debts is primarily related to our increased revenue.
Other - The increase in other expenses was primarily driven by costs associated with an increase in technology infrastructure to support our strategic investments in our digital platform and an increase in business travel expense in 2022.
Depreciation and Amortization Expenses
The following table summarizes the components of our depreciation and
amortization expenses (in millions of dollars and as a percentage of revenues):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Depreciation of tangible
property and equipment $ 287 5.7 % $ 282 6.0 % $ 859 5.8 % $ 840 6.3 %
Amortization of landfill
airspace 184 3.6 200 4.3 539 3.7 541 4.1
Amortization of intangible
assets 32 0.6 35 0.8 95 0.6 108 0.8
$ 503 9.9 % $ 517 11.1 % $ 1,493 10.1 % $ 1,489 11.2 %
The increase in depreciation of tangible property and equipment was primarily
driven by investments in capital assets to service our customers, such as heavy
equipment and containers. The decrease in amortization of landfill airspace for
the three and nine months ended September 30, 2022 was primarily driven by a
prior year charge of $15 million due to management's decision to close a
landfill in our West Tier segment earlier than expected, resulting in
acceleration of the timing of capping, closure and post-closure activities
during the third quarter of 2021. The decrease for the nine months ended
September 30, 2022 , when compared with the prior year period, was partially
offset by landfill volume increases and changes in amortization rates from
revisions in landfill estimates. The decrease in amortization of intangible
assets was primarily driven by the reduction in amortization of acquired
intangible assets from the acquisition of Advanced Disposal.
(Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net
For the nine months endedSeptember 30, 2022 , we recognized a$17 million charge in the first quarter in our Corporate and Other segment to adjust an indirect wholly-owned subsidiary's estimated potential share of the liability for a proposed environmental remediation plan at a closed site, as discussed in Note 6 to the Condensed Consolidated Financial Statements. For the nine months endedSeptember 30, 2021 , we recognized net gains of$17 million consisting of (i) an$8 million gain in the first quarter from divestitures of certain ancillary operations in our Other segment and (ii) a$35 million pre-tax gain in the third quarter from the recognition of cumulative translation adjustments on the divestiture of certain non-strategic Canadian operations in our East Tier segment. These gains were partially offset by (i) a$20 million charge pertaining to reserves for loss contingencies in our Corporate and Other segment and (ii)$6 million of asset impairment charges primarily related to our WM Renewable Energy business within our Other segment. 34 Income from Operations
The following table summarizes income from operations for our reportable segments (dollars in millions):
Three Months Ended Nine Months Ended
September 30, Period-to-Period September 30, Period-to-Period
2022 2021(c) Change 2022 2021(c) Change
Solid Waste:
East Tier $ 616 $ 550 $ 66 12.0 % $ 1,728 $ 1,514 $ 214 14.1 %
West Tier 622 548 74 13.5 1,779 1,577 202 12.8
Solid Waste 1,238 1,098 140 12.8 3,507 3,091 416 13.5
Other (a) - 10 (10) * 19 36 (17) *
Corporate and Other (b) (296) (302) 6 (2.0) (926) (880) (46) 5.2
Total $ 942 $ 806 $ 136 16.9 % $ 2,600 $ 2,247 $ 353 15.7 %
Percentage of revenues 18.6 % 17.3 % 17.6 % 17.0 %
*Percentage change does not provide a meaningful comparison.
"Other" includes (i) elements of our WMSBS business that are not included in
the operations of our reportable segments; (ii) elements of our
sustainability business that includes landfill gas-to-energy operations
managed by our WM Renewable Energy business, our environmental solutions (a) services 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.
"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, (b) 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.
In the fourth quarter of 2021, we discontinued certain allocations from our (c) Corporate and Other segment to our Solid Waste operating segments and Other
segment. Reclassifications have been made to our prior period information for
comparability purposes.
The significant items affecting income from operations for our segments during the three and nine months endedSeptember 30, 2022 , as compared with the prior year periods, are summarized below:
Solid Waste - Income from operations in our Solid Waste business increased
primarily due to (i) revenue growth in our collection and disposal businesses
driven by both yield and volume and (ii) a
the extension of alternative fuel tax credits that was retroactive to January
1, 2022. Our income from operations for the nine months ended
2022 was favorably impacted by an increase in our recycling line of business as
a result of an overall increase in average market prices for recycling
commodities during the first half of 2022. These increases were partially
? offset by (i) inflationary cost pressures; (ii) labor cost increases from
frontline employee wage adjustments and (iii) commodity-driven business impacts
from higher fuel prices. Additionally, the prior year included a pre-tax net
gain from the recognition of cumulative translation adjustments on the
divestiture of certain non-strategic Canadian operations in our East Tier
segment and a charge due to management's decision to close a landfill in our
West Tier segment earlier than expected, resulting in acceleration of the
timing of capping, closure and post-closure activities in the third quarter of
2021.
Corporate and Other - The increase in income from operations from our Corporate
and Other segment for the three months ended
with the prior year period, was primarily driven by (i) lower long-term
? incentive compensation costs and (ii) lower integration costs from our
acquisition of Advanced Disposal. Increased costs to support strategic
investments in our digital platform, including those that support our ongoing
sustainability initiatives, and increased labor costs from higher annual
incentive costs and merit
35
increases, partially offset the three months ended
than offset the nine months ended
year periods. Interest Expense, Net Our interest expense, net was$91 million and$269 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to$87 million and$282 million for the three and nine months endedSeptember 30, 2021 , respectively. The increase for the third quarter primarily related to borrowings incurred under our$1.0 billion two-year,U.S. term credit agreement ("Term Loan") in the second quarter of 2022. The decrease for the nine months endedSeptember 30, 2022 , as compared with the prior year period, is primarily due to the retirement of$1.3 billion of certain high coupon senior notes and concurrent issuance of$950 million of lower coupon senior notes inMay 2021 and, to a lesser extent, the impacts that lower interest rates had on the cost of certain of our tax-exempt debt during the first quarter of 2022. Also impacting the three and nine months endedSeptember 30, 2022 , were benefits from higher capitalized interest and increases in interest income as a result of higher cash and cash equivalents balances. During 2022, we have started to see an increase in interest rates on our floating-rate debt, including commercial paper and variable-rate tax-exempt bonds. The impact of the increase is immaterial to the reported periods; however, we expect interest expense to meaningfully increase in 2023. See Note 3 to the Condensed Consolidated Financial Statements for more information related to our debt balances.
Loss on Early Extinguishment of Debt
InMay 2021 , WMI issued$950 million of senior notes. We used the net proceeds from the newly issued senior notes of$942 million and available cash on hand to retire$1.3 billion of certain high-coupon senior notes through a tender offer. The loss on early extinguishment of debt for the nine months endedSeptember 30, 2021 includes$220 million of charges related to the tender offer, including$211 million of premiums and other third-party costs and$9 million primarily related to unamortized discounts and debt issuance costs.
Equity in Net Losses of Unconsolidated Entities
We recognized equity in net losses of unconsolidated entities of$17 million and$49 million during the three and nine months endedSeptember 30, 2022 , respectively, compared to$14 million and$34 million for the three months and nine months endedSeptember 30, 2021 , respectively. The losses for each period were primarily related to our noncontrolling interests in entities established to invest in and manage low-income housing properties. We generate tax benefits, including tax credits, from the losses incurred from these investments which are discussed in Note 4 to the Condensed Consolidated Financial Statements.
Income Tax Expense
Our income tax expense was$189 million and$535 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to$167 million and$396 million for the three and nine months endedSeptember 30, 2021 , respectively. Our effective income tax rate was 22.8% and 23.5% for the three and nine months endedSeptember 30, 2022 , respectively, compared to 23.7% and 23.2% for the three and nine months endedSeptember 30, 2021 , respectively. The increase in our income tax expense when comparing the three and nine months endedSeptember 30, 2022 and 2021 was primarily driven by an increase in pre-tax income in 2022. The decrease in our effective income tax rate when comparing the three months endedSeptember 30, 2022 and 2021 was primarily driven by an unfavorable adjustment to accruals and related deferred taxes in 2021 due to a change from our initial expectations of the tax effects of our acquisition of Advanced Disposal and related divestitures. The decrease was offset in part by the divestiture of certain non-strategic Canadian operations in 2021, which was not taxable and did not reoccur in the current period, and an increase in pre-tax income in 2022 resulting in a reduced rate benefit from federal tax credits. The increase in our effective income tax rate when comparing the nine months endedSeptember 30, 2022 and 2021 was primarily driven by an increase in pre-tax income in 2022 resulting in a reduced rate benefit from federal tax credits. 36 Tax Legislation - The Inflation Reduction Act of 2022 ("IRA") was signed into law byPresident Biden onAugust 16, 2022 and contains a number of tax-related provisions. We are in the process of evaluating the IRA and identifying all potential impacts that may be applicable. The provisions of the IRA related to alternative fuel tax credits secure approximately$55 million of annual benefit from tax credits through 2024, which is in line with the benefit we have realized from our alternative fuel tax credits in prior years. Additionally, we expect to incur an excise tax of 1% for future common stock repurchases, which will be reflected in the cost of purchasing the underlying shares as a component of treasury stock. The IRA contains a number of additional provisions related to tax incentives for investments in renewable energy production, carbon capture, and other climate actions, as well as the overall measurement of corporate taxes. Given the complexity and uncertainty around the applicability of the legislation to our specific facts and circumstances, we have not yet quantified any incremental benefits included in the legislation.
See Note 4 to the Condensed Consolidated Financial Statements for more information related to income taxes.
Liquidity and Capital Resources
The Company consistently generates cash flow from operations that meets and exceeds our working capital needs, payment of our dividends, investment in the business through capital expenditures and tuck-in acquisitions, and funding of strategic sustainability growth investments. We continually monitor our actual and forecasted cash flows, our liquidity and our capital resources, enabling us to plan for our present needs and fund unbudgeted business requirements that may arise during the year. The Company believes that its investment grade credit ratings, large value of unencumbered assets and modest leverage enable it to obtain adequate financing to meet its ongoing capital, operating, strategic and other liquidity requirements. Summary of Cash and Cash Equivalents, Restricted Funds and Debt Obligations
The following is a summary of our cash and cash equivalents, restricted funds and debt balances (in millions):
September 30, December 31,
2022 2021
Cash and cash equivalents $ 137 $ 118
Restricted funds:
Insurance reserves $ 339 $ 305
Final capping, closure, post-closure and environmental
remediation funds 112 118
Other 6 5
Total restricted funds (a) $ 457 $ 428
Debt:
Current portion $ 258 $ 708
Long-term portion 13,805 12,697
Total debt $ 14,063 $ 13,405 As of
in our Condensed Consolidated Balance Sheets.
Debt - As ofSeptember 30, 2022 , we had approximately$2.2 billion of debt maturing within the next 12 months, including (i)$839 million of short-term borrowings under our commercial paper program (net of related discount on issuance); (ii)$625 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities; (iii)$500 million of 2.4% senior notes that mature inMay 2023 and (iv)$258 million of other debt with scheduled maturities within the next 12 months, including$136 million of tax-exempt bonds. As ofSeptember 30, 2022 , we have classified$2.0 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-termU.S. and Canadian revolving credit facility ("$3.5 billion revolving credit facility"). The remaining$258 million of debt maturing in the next 12 months is classified as current obligations. 37 Additionally, as ofSeptember 30, 2022 , we also had$54 million of variable-rate tax-exempt bonds with long-term scheduled maturities that are supported by letters of credit under our$3.5 billion revolving credit facility. The interest rates on our variable-rate tax-exempt bonds reset on a weekly basis through a remarketing process. All recent variable-rate tax-exempt bond remarketings have been successful at market-driven rates. However, if the remarketing agent is unable to remarket our bonds, the remarketing agent can put the bonds to us. In the event of a failed remarketing, we have the availability under our$3.5 billion revolving credit facility to fund these bonds until they are remarketed successfully. Accordingly, we have classified the$54 million of variable-rate tax-exempt bonds with maturities of more than one year as long-term in our Condensed Consolidated Balance Sheet. InMay 2022 , WMI issued$1.0 billion of 4.15% senior notes dueApril 15, 2032 , the net proceeds of which were$992 million . We used the net proceeds to redeem our$500 million of 2.9% senior notes dueSeptember 2022 in advance of their scheduled maturity, to repay a portion of outstanding borrowings under our commercial paper program and for general corporate purposes.
In
Amendment and Extension of Revolving Credit Facility
InMay 2022 , we amended and restated our$3.5 billion U.S. and Canadian revolving credit facility extending the term throughMay 2027 . The agreement includes a$1.0 billion accordion feature that may be used to increase total capacity in future periods, and we have the option to request up to two one-year extensions.Waste Management of Canada Corporation andWM Quebec Inc. , each an indirect wholly-owned subsidiary of WMI, are borrowers under the$3.5 billion revolving credit facility, and the agreement permits borrowing in Canadian dollars up to theU.S. dollar equivalent of$375 million , with such borrowings to be repaid in Canadian dollars.WM Holdings , a wholly-owned subsidiary of WMI, guarantees all the obligations under the$3.5 billion revolving credit facility. Refer to Note 3 to the Condensed Consolidated Financial Statements for additional information.
Guarantor Financial Information
WM Holdings has fully and unconditionally guaranteed all of WMI's senior indebtedness. WMI has fully and unconditionally guaranteed all ofWM Holdings' senior indebtedness. None of WMI's other subsidiaries have guaranteed any of WMI's orWM Holdings' debt. In lieu of providing separate financial statements for the subsidiary issuer and guarantor (WMI andWM Holdings ), we have presented the accompanying supplemental summarized combined balance sheet and income statement information forWMI andWM Holdings on a combined basis after elimination of intercompany transactions betweenWMI andWM Holdings and amounts related to investments in any subsidiary that is a non-guarantor (in millions):
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