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, 2020 . 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 and negotiate attractive terms; failure to consummate or integrate acquisitions; failure to obtain the results anticipated from acquisitions; failure to successfully integrate the acquisition ofAdvanced Disposal Services, Inc. ("Advanced Disposal"), realize anticipated synergies or obtain other results anticipated from such acquisition; 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; labor disruptions and wage-related regulations; significant storms and destructive climate events; public health risk and other impacts of COVID-19 or similar pandemic conditions, including increased costs, social and commercial disruption and service reductions; increased competition; pricing actions; commodity price fluctuations; 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 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, 2020 . The Company is optimistic about volume recovery and overall economic recovery as states and local jurisdictions continue lifting previous restrictions related to the COVID-19 pandemic. However, uncertainty remains with respect to the pace of economic recovery, as well as the potential for resurgence in transmission of COVID-19 and related business closures due to virus variants or otherwise. Such conditions could have an unanticipated adverse impact on our business. 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 waste management environmental services, 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 in 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 also use waste to create energy, recovering the gas produced naturally as waste decomposes in landfills and using the gas in generators to make electricity or natural gas. 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 provides collection, transfer, disposal, and recycling and resource recovery services. Consistent with our Company's long-standing commitment to corporate sustainability and environmental stewardship, we published our 2020 Sustainability Report, which details our commitment 26
to help make the communities in which we live and work safe, resilient and sustainable. The information in this report can be found at https://sustainability.wm.com but does not constitute a part of, and is not incorporated by reference into this Quarterly Report on Form 10-Q.
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, taking into account 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 fee, fuel surcharge and regulatory recovery fee 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.
Acquisition of Advanced Disposal
OnOctober 30, 2020 , we completed our acquisition of all outstanding shares of Advanced Disposal for$30.30 per share in cash, pursuant to an Agreement and Plan of Merger datedApril 14, 2019 , as amended onJune 24, 2020 . Total enterprise value of the acquisition was$4.6 billion when including approximately$1.8 billion of Advanced Disposal's net debt. This acquisition grows our footprint and allows us to provide differentiated, sustainable waste management and recycling services to approximately three million new commercial, industrial and residential customers primarily located in the Eastern half of theU.S. The acquisition was funded using a$3.0 billion , 364-day,U.S. revolving credit facility and our commercial paper program. InNovember 2020 , we issued$2.5 billion of senior notes and used a portion of the proceeds to repay all outstanding borrowings under the$3.0 billion , 364-day,U.S. revolver and terminated the facility. As a result of the acquisition we recorded$4.1 billion of net assets including$2.5 billion of goodwill as ofDecember 31, 2020 . During the first half of 2021, we made significant progress on our integration of Advanced Disposal. The focus of these efforts has been to ensure that we continue to provide uninterrupted service to our customers through the integration of certain customer facing and back office digital platforms.
COVID-19 Update
Throughout the COVID-19 pandemic, the Company has proactively taken steps to put our employees' and customers' needs first and we continue to work with the appropriate regulatory agencies to ensure we can provide our essential services safely and efficiently. We continue to operate with a focus on protecting the health and safety of our employees and maintaining business continuity for our customers. These efforts, combined with our disciplined execution in our daily operations, have positioned the Company to prudently manage the challenges presented by COVID-19. The impacts of COVID-19 on the global economy increased rapidly during the second quarter of 2020, affecting our business in most geographies and across a variety of our customer types. Over the last year, our volumes have been recovering from the sharp decline experienced inApril 2020 as a result of COVID-19. The pace of recovery in our volumes accelerated in the second quarter of 2021 as more communities and businesses re-opened. The portions of our business that had the most pronounced decreases in volume due to the pandemic were our industrial and commercial collection businesses and construction and demolition and special waste volumes at our landfills. As we exited the second quarter of 2021, volumes in each of these lines of business were either on par with pre-pandemic levels or have now surpassed 2019 volumes. Volumes in our recycling business are also up primarily due to the re-opening of facilities where we temporarily suspended operations during the pandemic. We continue to be optimistic about our volume recovery in 2021 as the economy continues to rebound and states and local jurisdictions continue re-opening. However, uncertainty remains with respect to the pace of economic recovery, as well as the potential for resurgence in transmission of COVID-19 and related business closures due to virus variants or otherwise. Such conditions could adversely impact our volumes and costs over the remainder of the year. 27 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, that 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, enhancements to our digital platform, process improvement and operational efficiency will deliver on the Company's strategy of continuous improvement and yield an attractive total cost structure and enhanced service quality. While we will continue to monitor emerging diversion technologies that may generate additional value and related market dynamics, our current attention will be on improving existing diversion technologies, such as our recycling operations.
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.
Despite some industry consolidation in recent years, we encounter intense
competition from governmental, quasi-governmental and private service providers
based on pricing, service quality, customer experience and breadth of service
offerings. 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,
including the impact of COVID-19, can and have caused customers to reduce their
service needs. Such negative economic conditions, in addition to competitor
actions, can and have made it more challenging to implement our pricing strategy
and negotiate, renew or expand service contracts with acceptable margins. 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. 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.
In this type of environment, we must dynamically manage our cost structure.
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 customer service
digitalization initiative to change the way we interact with our customers.
Enhancements made through this initiative are designed to seamlessly and
digitally connect all the Company's functions required to service our customers
in order to provide the best experience and service. Additionally, we continue
to make meaningful progress on the implementation of our new enterprise resource
planning system.
During the second quarter of 2021, we began to see inflationary cost pressures,
particularly in our operating costs and capital expenditures. As costs increase,
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 increased
pressure from the strong economic recovery, particularly on labor, we remain
focused on putting our people first to ensure that they are well positioned to
diligently and safely execute our daily operations. We are encouraged by our
results for the first half of 2021 and remain focused on
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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.
Current Quarter Financial Results
During the second quarter of 2021, we delivered strong operating income and cash flows as we continued to experience volume recovery in our landfill, commercial and industrial collection businesses and benefited from the acquisition of Advanced Disposal. Additionally, we maintained focus on reducing our operating costs and discretionary selling, general and administrative expenses. We allocated$396 million of available cash to capital expenditures and$492 million to our shareholders through dividends and share repurchases.
Key elements of our financial results for the second quarter include:
Revenues of
period, an increase of
? attributable to (i) strong volume growth; (ii) the acquisition of Advanced
Disposal; (iii) higher yield in our collection and disposal lines of business
and (iv) increases in the market prices for recycling commodities we sell;
Operating expenses of
?
(ii) increased labor and support costs from our acquisition of Advanced
Disposal; (iii) higher market prices for recycling commodities and (iv)
inflationary cost increases;
Selling, general and administrative expenses of
revenues, compared with
period. The
? incentive compensation costs; (ii) increased labor and support costs from our
acquisition of Advanced Disposal and (iii) strategic investments in our digital
platform. These cost increases were partially offset by a decrease in the
provision for bad debts due to an overall improvement in customer account
collections;
Income from operations was
earnings in the current year are driven by (i) strong operating results in our
? collection and disposal business; (ii) improved profitability in our recycling
business and (iii) our proactive cost management efforts. The increase in
income from operations was partially offset by higher depreciation and
amortization expense, primarily due to the acquisition of Advanced Disposal;
Net income attributable to
per diluted share, compared with
the prior year period. The strong operating results discussed above, in
? addition to lower interest expense, drove an increase in earnings which was
substantially offset in the current period by a
extinguishment of debt related to the retirement of
high-coupon senior notes through a cash tender offer;
Net cash provided by operating activities was
million in the prior year period, driven by an increase in earnings, partially
offset by net unfavorable changes in our operating assets and liabilities, net
? of effects of acquisitions and divestitures, primarily due to (i) higher income
tax payments in the current quarter; (ii) a temporary deferral in the payment
of payroll taxes in 2020 and (iii) the timing of cash tax benefits received in
2020 associated with federal alternative fuel tax credits; and
Free cash flow was
period primarily driven by the increase in net cash provided by operating
activities discussed above. The increase is also due to a reduction in capital
expenditures due to timing differences as well as supply chain constraints in
? advancing current year projects. Free cash flow is a non-GAAP measure of
liquidity. Refer to Free Cash Flow below for our definition of free cash flow,
additional information about our use of this measure, and a reconciliation to
net cash provided by operating activities, which is the most comparable GAAP
measure.
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Results of Operations
Operating Revenues
We evaluate, oversee and manage the financial performance of our Solid Waste
business subsidiaries through our Areas. In the second quarter of 2021, we
combined our Eastern and Western Canada Areas reducing the number of Areas we
manage from 17 to 16. We also provide additional services that are not managed
through our Solid Waste business, including operations managed by both our
Strategic Business Solutions ("WMSBS") and Energy and Environmental Services
("EES") businesses, recycling brokerage services, landfill gas-to-energy
services and 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 Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Commercial $ 1,178 $ 928 $ 2,309 $ 1,991
Residential 794 657 1,576 1,307
Industrial 811 625 1,554 1,318
Other collection 135 115 251 227
Total collection 2,918 2,325 5,690 4,843
Landfill 1,075 874 1,990 1,761
Transfer 532 439 997 880
Recycling 397 275 739 529
Other (a) 513 409 990 839
Intercompany (b) (959) (761) (1,818) (1,562)
Total $ 4,476 $ 3,561 $ 8,588 $ 7,290 The "Other" line of business includes (i) certain services provided by our
WMSBS business; (ii) our landfill gas-to-energy operations; (iii) certain
services within our EES business, including our construction and remediation
services and our services associated with the disposal of fly ash and (iv)
certain other expanded service offerings and solutions. In addition, our (a) "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 Six Months Ended
June 30, 2021 vs. 2020 June 30, 2021 vs. 2020
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 $ 118 3.7 % $ 211 3.2 %
Recycling (c) 84 32.9 181 37.4
Fuel surcharges and
mandated fees 46 44.3 37 15.4
Total average yield (d) $ 248 7.0 % $ 429 5.9 %
Volume 341 9.6 240 3.3
Internal revenue growth 589 16.6 669 9.2
Acquisitions 316 8.9 618 8.5
Divestitures (11) (0.3) (21) (0.3)
Foreign currency
translation 21 0.5 32 0.4
Total $ 915 25.7 % $ 1,298 17.8 %
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 the impact of commodity price variability and changes in fees.
(d) The amounts reported herein represent the changes in our revenue attributable
to average yield for the total Company.
The following provides further details associated with 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 Six Months Ended
June 30, 2021 vs. 2020 June 30, 2021 vs. 2020
As a % of As a % of
Related Related
Amount Business Amount Business
Commercial $ 37 4.2 % $ 68 3.6 %
Industrial 35 5.8 57 4.5
Residential 29 4.7 56 4.5
Total collection 101 4.6 181 4.0
Landfill 10 1.7 17 1.5
Transfer 7 2.9 13 2.8Total collection and disposal$ 118 3.7 %$ 211 3.2 % Our overall strategic pricing efforts are focused on improving our average unit rate as well as recovering any inflationary cost increases. This strategy has been most successful in our collection line of business where we experienced average yield growth of 4.6% and 4.0% for the three and six months endedJune 30, 2021 , respectively. We are driving improvements in our residential line of business, aligning the price charged for services we provide to our customers with the costs to provide the services, which has increased our average yield 4.7% and 4.5% for the three and six months endedJune 30, 2021 , respectively, as compared with the prior year periods. We are also continuing to see solid growth in our landfill and transfer businesses with our municipal solid waste business experiencing 2.8% and 2.7% average yield growth for the three and six months endedJune 30, 2021 , respectively, as compared with the prior year periods. Recycling - Improved profitability in our recycling business primarily from higher market prices for recycling commodities and volume recovery from facilities where we temporarily suspended operations during the pandemic resulted in revenue growth of$84 million and$181 million for the three months and six months endedJune 30, 2021 , respectively, as compared with the prior year periods. During the three and six months endedJune 30, 2021 , average market prices for recycling commodities at the Company's facilities were approximately 75% and 90% higher, respectively, as compared to the prior year periods. We currently expect the year-over-year increase to continue for the remainder of 2021 as we see strong demand for recycled materials outpacing supply, driven by the growth in e-commerce, businesses re-opening, and manufacturers committing to use more recycled content in their packaging. We have also maintained our focus on converting to a fee-based pricing model that ensures fees paid by customers address the cost of processing materials and the impact on our cost structure of managing contamination in the recycling stream. Fuel Surcharges and Mandated Fees - These fees, which are predominantly generated by our fuel surcharge program, increased$46 million and$37 million for the three and six months endedJune 30, 2021 , respectively, as compared with the prior year periods. These 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. Market prices for diesel fuel increased approximately 30% and 15% for the three and six months endedJune 30, 2021 , respectively, as compared with the prior year periods. The mandated fees are primarily related to fees and taxes assessed by various state, county and municipal government agencies at our landfills and transfer stations. These amounts have not significantly impacted the change in revenue for the three and six months endedJune 30, 2021 , as compared with the prior year periods.
Volume
Our revenues from volumes (excluding volumes from acquisitions and divestitures) increased$341 million , or 9.6%, and$240 million , or 3.3%, for the three and six months endedJune 30, 2021 , respectively, as compared with the prior year periods. Over the last year, our volumes have been recovering from the sharp decline experienced inApril 2020 as a result of COVID-19. The pace of recovery in our volumes accelerated in the second quarter of 2021 as more communities and businesses re-opened. The portions of our business that had the most pronounced decreases in volume due to the pandemic 32 were our industrial and commercial collection businesses and construction and demolition and special waste volumes at our landfills. As we exited the second quarter of 2021, volumes in each of these lines of business were either on par with pre-pandemic levels or have now surpassed 2019 volumes. Volumes in our recycling business are also up primarily due to the re-opening of facilities where we temporarily suspended operations during the pandemic. We continue to be optimistic about our volume recovery in 2021 as the economy continues to rebound and states and local jurisdictions continue re-opening. However, uncertainty remains with respect to the pace of economic recovery, as well as the potential for resurgence in transmission of COVID-19 and related business closures due to virus variants or otherwise. Such conditions could adversely impact our volume results over the remainder of the year.
Acquisitions
Revenues increased$316 million , or 8.9%, and$618 million , or 8.5%, for the three and six months endedJune 30, 2021 , respectively, as compared with the prior year periods, primarily due to our acquisition of Advanced Disposal. The revenue increase due to the Advanced Disposal acquisition was principally in our collection and disposal lines of business.
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 Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Labor and related benefits $ 791 17.7 % $ 636 17.9 % $ 1,537 17.9 % $ 1,325 18.2 %
Transfer and disposal costs 298 6.7 267 7.5 572 6.7 545 7.5
Maintenance and repairs 395 8.8 303 8.5 769 8.9 638 8.8
Subcontractor costs 446 10.0 357 10.0 837 9.7 728 10.0
Cost of goods sold 211 4.7 140 3.9 392 4.6 258 3.5
Fuel 95 2.1 57 1.6 181 2.1 133 1.8
Disposal and franchise fees
and taxes 177 3.9 144 4.0 333 3.9 289 4.0
Landfill operating costs 107 2.4 92 2.6 203 2.3 201 2.8
Risk management 81 1.8 62 1.7 154 1.8 131 1.8
Other 135 3.0 122 3.5 272 3.2 261 3.5
$ 2,736 61.1 % $ 2,180 61.2 % $ 5,250 61.1 % $ 4,509 61.9 %
Our operating expenses for the three and six months ended June 30, 2021
increased primarily due to volume increases and the acquisition of Advanced
Disposal. During the second quarter of 2021, we began to see inflationary cost
pressures as well as increased overtime from driver shortages that increased our
operating costs. Although our costs increased, efforts to recover higher costs
through price and the significant revenue increases in our high-margin
businesses, which include our landfill and commercial and industrial collection
businesses, resulted in a reduction of our overall operating expenses as a
percentage of revenues when compared with the prior year periods. Additionally,
our operating expenses as a percentage of revenues benefited from our focus on
operating efficiency, continued efforts to control costs as volumes grow and our
disciplined integration of Advanced Disposal which historically has generated
lower margins.
Significant items affecting the comparability 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) increased labor and support costs related to of our
acquisition of Advanced Disposal; (ii) merit and proactive market wage
adjustments to hire and retain talent; (iii) volume increases, particularly in
our commercial and industrial collection businesses, which when combined with
driver shortages in certain markets, increased overtime; (iv) increases in
health and welfare costs attributable to medical care activity generally
returning to pre-pandemic levels from the lower levels experienced during 2020
and (v) higher incentive compensations costs.
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Transfer and Disposal Costs - The increase in transfer and disposal costs was
largely driven by additional disposal costs as a result of our acquisition of
Advanced Disposal, increased volume and inflationary cost increases from our
third-party haulers.
Maintenance and Repairs - The increase in maintenance and repairs costs was
largely driven by (i) our acquisition of Advanced Disposal, including
intentional investments in the fleet acquired to bring the trucks to WM
standards; (ii) additional fleet maintenance driven by commercial and industrial
volume increases; (iii) an increase in container repairs driven by volume
increases and delays in normal-course capital expenditures for steel containers
due to both steel costs and supply chain constraints and (iv) inflationary cost
increases for parts, supplies and third-party services.
Subcontractor Costs - The increase in subcontractor costs was largely driven by
(i) the acquisition of Advanced Disposal; (ii) an increase in volumes in our
WMSBS business, which relies more extensively on subcontracted hauling than our
collection and disposal business and (iii) inflationary cost increases from
third-party haulers.
Cost of Goods Sold - The increase in cost of goods sold was primarily driven by
increases in market prices for recycling commodities of approximately 75% and
90% during the three and six months ended June 30, 2021 , respectively. Tons
processed also increased from prior year primarily due to the re-opening of
facilities where operations were temporarily suspended during the pandemic.
Fuel - The increase in fuel costs was primarily due to (i) increases of
approximately 30% and 15% in market fuel prices during the three and six months
ended June 30, 2021 , respectively, as compared with the prior year periods;
(ii) volume increases in our commercial and industrial collection businesses and
(iii) the acquisition of Advanced Disposal.
Disposal and Franchise Fees and Taxes - The increase in disposal and franchise
fees and taxes as compared with the prior year periods was primarily driven by
landfill volume increases and additional costs attributable to our acquisition
of Advanced Disposal.
Landfill Operating Costs - The increase in landfill operating costs for the
three and six months ended June 30, 2021 was primarily due to volume increases
and the Advanced Disposal acquisition. These increases were partially offset by
lower leachate management costs primarily due to the cessation of certain
transportation costs in our Tier 3 segment.
Additionally, the increase in landfill operating costs for the six months ended
June 30, 2021 was partially offset by the impacts of changes in the measurement
of our environmental remediation obligations and recovery assets in both the
first quarter of 2020 and 2021. 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 2021, there was an increase in the
discount rate, which resulted in a reduction in the net liability balance and a
credit to expense. Conversely, in the first quarter of 2020, there was a
decrease in the discount rate, which resulted in an increase in the net
liability balance and a charge to expense.
Risk Management - The increase in risk management costs was primarily due to our
acquisition of Advanced Disposal, and to a lesser extent, unusually low claims
during the second quarter of 2020 that we attribute to the COVID-19 driven
decline in business activity.
Other - Other operating cost increases were due to our acquisition of Advanced Disposal, partially offset by a favorable litigation settlement in the second quarter of 2021 and asset sales.
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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 Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Labor and related benefits $ 297 6.6 % $ 228 6.4 % $ 594 6.9 % $ 474 6.5 %
Professional fees 56 1.2 54 1.5 105 1.2 114 1.6
Provision for bad debts 7 0.2 22 0.6 17 0.2 36 0.5
Other 85 1.9 73 2.1 187 2.2 178 2.4
$ 445 9.9 % $ 377 10.6 % $ 903 10.5 % $ 802 11.0 %
Selling, general and administrative expenses have increased primarily due to
(i) higher incentive compensation costs; (ii) increased labor and support costs
related to our acquisition of Advanced Disposal and (iii) strategic investments
in our digital platform. Although our costs increased, the significant revenue
increases in our high-margin businesses, which include our landfill and
commercial and industrial collection businesses, 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 between reported periods include:
Labor and Related Benefits - The increase in labor and related benefits costs was primarily related to (i) higher incentive compensation costs; (ii) additional headcount in connection with our acquisition of Advanced Disposal; (iii) increases in health and welfare costs attributable to medical care activity generally returning to pre-pandemic levels from the lower levels experienced during 2020; (iv) costs associated with our strategic investments in our digital platform and (v) annual merit increases for our employees. Professional Fees - Professional fees increased primarily due to our strategic investments in our digital platform. For the six months endedJune 30, 2021 , these increases were partially offset by lower consulting, advisory and legal fees following the completion of the acquisition of Advanced Disposal in the fourth quarter of 2020.
Provision for Bad Debts - The decrease in provision for bad debts was primarily due to an overall improvement in customer account collections and decreased collection risk with certain customers.
Other - The increase in other expenses was primarily driven by costs associated with the acquisition of Advanced Disposal and increased digital costs. For the six months endedJune 30, 2021 , these increases were partially offset by reductions in telecommunications and travel and entertainment costs.
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 Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Depreciation of tangible
property and equipment $ 279 6.3 % $ 242 6.8 % $ 558 6.5 % $ 482 6.6 %
Amortization of landfill
airspace 184 4.1 148 4.1 341 4.0 286 3.9
Amortization of intangible
assets 37 0.8 24 0.7 73 0.8 48 0.7
$ 500 11.2 % $ 414 11.6 % $ 972 11.3 % $ 816 11.2 %
35
The increase in depreciation of tangible property and equipment was primarily
related to our acquisition of Advanced Disposal and investments in capital
assets, including our fleet and facilities. The increase in amortization of
landfill airspace was driven by (i) landfill volume increases from the continued
economic recovery; (ii) our acquisition of Advanced Disposal and (iii) changes
in landfill estimates. The increase in amortization of intangible assets is
primarily driven by the amortization of acquired intangible assets related to
the acquisition of Advanced Disposal.
(Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net
During the six months endedJune 30, 2021 , we recognized net charges of$17 million in the first quarter of 2021 consisting of (i) a$19 million charge pertaining to reserves for certain 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. These charges were partially offset by an$8 million gain from divestitures of certain ancillary operations in our Other segment. During the six months endedJune 30, 2020 , we recognized non-cash impairment charges of$61 million in the second quarter of 2020 primarily related to the following: Energy Services Asset Impairments - During the second quarter of 2020, the Company tested the recoverability of certain energy services assets in our Tier 2 segment. Indicators of impairment included (i) the sharp downturn in oil demand that has led to a significant decline in oil prices and production activities, which we project will have long-term impacts on the utilization of our assets and (ii) significant shifts in our business, including increases in competition and customers choosing to bury waste on site versus in a landfill, reducing our revenue outlook. The Company determined that the carrying amount of the asset group was not fully recoverable. As a result, we recognized$41 million of non-cash impairment charges primarily related to two landfills and an oil field waste injection facility in our Tier 2 segment. We wrote down the net book value of these assets to their estimated fair value using an income approach based on estimated future cash flow projections (Level 3). The aggregate fair value of the impaired asset group was$8 million as ofJune 30, 2020 . Other Impairments - In addition to the energy services impairments noted above, during the second quarter of 2020, we recognized a$20 million non-cash impairment charge in our Tier 3 segment due to management's decision to close a landfill once its constructed airspace is filled and abandon any remaining permitted airspace, which was considered an impairment indicator. As the carrying value was not recoverable, we wrote off the entire net book value of the asset using an income approach based on estimated future cash flow projections (Level 3). The impairment charge was comprised of$12 million related to the carrying value of the asset and$8 million related to the acceleration of the expected timing of capping, closure and post-closure activities. 36 Income from Operations In the second quarter of 2021, we combined our Eastern and Western Canada Areas reducing the number of Areas we manage from 17 to 16, and realigned our Solid Waste tiers. Reclassifications have been made to our prior period condensed consolidated financial information to conform to the current year presentation.
The following table summarizes income from operations for our reportable segments (dollars in millions):
Three Months Ended Six Months Ended
June 30, Period-to-Period June 30, Period-to-Period
2021 2020 Change 2021 2020 Change
Solid Waste:
Tier 1 $ 350 $ 270 $ 80 29.6 % $ 657 $ 558 $ 99 17.7 %
Tier 2 331 208 123 59.1 622 477 145 30.4
Tier 3 375 244 131 53.7 695 532 163 30.6
Solid Waste 1,056 722 334 46.3 1,974 1,567 407 26.0
Other (a) 4 (10) 14 * 22 (35) 57 *
Corporate and Other (b) (269) (185) (84) 45.4 (555) (432) (123) 28.5
Total $ 791 $ 527 $ 264 50.1 %
17.7 % 14.8 % 16.8 % 15.1 %
*Percentage change does not provide a meaningful comparison.
"Other" includes (i) our WMSBS business; (ii) elements of our landfill
gas-to-energy operations managed by our WM Renewable Energy business and not
included in the operations of our reportable segments; (iii) elements of our
third-party subcontract and administration revenues managed by our EES (a) business and not included in the operations of our reportable segments; (iv)
our recycling brokerage services and (v) certain other expanded service
offerings and solutions. In addition, our "Other" segment reflects 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.
The significant items affecting income from operations for our segments during the three and six months endedJune 30, 2021 , as compared with the prior year periods, are summarized below:
Solid Waste - Income from operations in our Solid Waste business increased
significantly primarily due to (i) revenue growth in our collection and
disposal businesses driven by both volume and yield; (ii) improved
profitability in our recycling business from higher market prices for recycling
commodities, volume recovery from facilities where we temporarily suspended
operations during the pandemic and improved costs at facilities where we have
made investments in enhanced technology and equipment; (iii) a decrease in the
? provision for bad debts and (iv) the continuation of our proactive cost
management efforts as volumes increased. These increases were partially offset
by (i) higher incentive compensation costs; (ii) inflationary cost pressures
and (iii) increased overtime driven by increased volumes and driver shortages.
Additionally, the prior year periods were impacted by non-cash impairment
charges, as further discussed below. The positive earnings contributions of
Advanced Disposal were offset by elevated depreciation and amortization of
acquired assets.
During the second quarter of 2020, income from operations was impacted by$61 million of non-cash impairments consisting of (i)$41 million of non-cash asset impairment charges in our Tier 2 segment primarily related to two landfills and an oil field waste injection facility and (ii) a$20 million non-cash impairment charge in our Tier 3 segment related to management's decision to close a landfill once its constructed airspace is filled and abandon any remaining permitted airspace. 37 Other - The increase in income from operations was primarily driven by
(i) increased market values for renewable energy credits generated by our WM
Renewable Energy business; (ii) increased revenues for our WMSBS business as a
result of new contracts, improved pricing and increased customer activity and
? (iii) higher market prices for commodities benefiting our recycling brokerage
services. The increase in income from operations for the six months ended
from the divestitures of certain ancillary operations during the first quarter
of 2021.
Corporate and Other - The increase in these costs was driven by (i) higher
incentive compensation costs; (ii) strategic investments in our digital
platform; (iii) increased health and welfare costs attributable to medical care
activity generally returning to pre-pandemic levels from the lower levels
? experienced during 2020 and (iv) increased labor and support costs from our
acquisition of Advanced Disposal. The six months ended
compared with the prior year period, was further impacted by a charge
pertaining to reserves for certain loss contingencies during the first quarter
of 2021, as well as changes in the measurement of our environmental remediation
obligations and recovery assets in both the first quarter of 2020 and 2021.
Interest Expense, Net Our interest expense, net was$98 million and$195 million for the three and six months endedJune 30, 2021 , respectively, compared to$119 million and$231 million for the three and six months endedJune 30, 2020 , respectively. The decreases are primarily due to certain refinancing activities, including (i) the redemption of$3.0 billion of senior notes inJuly 2020 and the issuance of$2.5 billion of senior notes inNovember 2020 at lower rates and (ii) the retirement of$1.3 billion of certain high-coupon senior notes and issuance of$950 million of lower coupon senior notes inMay 2021 , as discussed further below. The decreases were partially offset by decreases in interest income as a result of lower cash and cash equivalents balances in 2021.
Loss on Early Extinguishment of Debt
InMay 2021 , WM issued$950 million of senior notes, which are discussed further below in Summary of Cash and Cash Equivalents,Restricted Trust and Escrow Accounts and Debt Obligations. Concurrently, 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. The loss on early extinguishment of debt for the three and six months endedJune 30, 2021 includes$220 million of charges related to these tender offer, including cash paid of$211 million related to premiums and other third-party costs, and$9 million primarily related to unamortized discounts and debt issuance costs. Refer to Note 3 to the Condensed Consolidated Financial Statements for additional information related to these transactions.
Equity in Net Losses of Unconsolidated Entities
We recognized equity in net losses of unconsolidated entities of$11 million and$20 million for the three and six months endedJune 30, 2021 , respectively, compared to$14 million and$40 million for the three months and six months endedJune 30, 2020 , 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. During the three months endedMarch 31, 2020 , the entity that held and managed our ownership interest in a refined coal facility sold a majority of its assets resulting in a$7 million non-cash impairment charge at that time. Refer to Note 4 to the Condensed Consolidated Financial Statements.
Other, Net
During the second quarter of 2021, we recognized an
38
Income Tax Expense
Our income tax expense was $105 million and $229 million for the three and six
months ended June 30, 2021 , respectively, compared to $88 million and
$162 million for the three and six months ended June 30, 2020 , respectively. Our
effective income tax rate was 22.9% and 22.8% for the three and six months ended
June 30, 2021 , respectively, compared to 22.2% and 19.5% for the three and six
months ended June 30, 2020 , respectively.
The increase in our income tax expense and effective income tax rate when
comparing the three and six months ended June 30, 2021 with the prior year
period was due to (i) an increase in pre-tax income in 2021; (ii) a decrease in
the benefits realized on tax audit settlements and (iii) lower federal tax
credits. The increase in our income tax expense and effective tax rate for the
six months ended June 30, 2021 as compared with the prior year period was also
impacted by (i) a decrease in excess tax benefits associated with equity-based
compensation and (ii) favorable adjustments to accruals and related deferred
taxes recorded in 2020.
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 and investment in the business through capital expenditures and tuck-in acquisitions. 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,
The following is a summary of our cash and cash equivalents, restricted trust and escrow accounts and debt balances (in millions):
June 30, December 31,
2021 2020
Cash and cash equivalents $ 148 $ 553
Restricted trust and escrow accounts:
Insurance reserves $ 384 $ 306
Final capping, closure, post-closure and environmental
remediation funds 117 114
Tax-exempt bond funds 20 -
Other - 2Total restricted trust and escrow accounts (a)$ 521
$ 422 Debt: Current portion$ 361 $ 551 Long-term portion 12,883 13,259 Total debt$ 13,244 $ 13,810
As of
Balance Sheets.
As ofJune 30, 2021 we had$2.9 billion of debt maturing within the next 12 months, including (i)$1.5 billion of short-term borrowings under our commercial paper program; (ii)$1.2 billion of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities and (iii)$212 million of other debt with scheduled maturities within the next 12 months, including$103 million of tax-exempt bonds. As ofJune 30, 2021 , we have classified$2.6 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 39 under our$3.5 billion long-termU.S. and Canadian revolving credit facility ("$3.5 billion revolving credit facility"). The remaining$361 million of debt maturing in the next 12 months is classified as current obligations. InMay 2021 , WM issued$950 million of senior notes consisting of$475 million of 2.00% senior notes dueJune 1, 2029 and$475 million of 2.95% senior notes dueJune 15, 2041 . The net proceeds from these debt issuances were$942 million , all of which were used along with available cash on hand, to retire$1.3 billion of certain high-coupon senior notes. The cash paid includes the principal amount of the debt retired,$211 million of related premiums and other third-party costs, which are classified as loss on early extinguishment of debt in our Condensed Consolidated Statement of Operations, and$15 million of accrued interest.
Guarantor Financial Information
WM Holdings has fully and unconditionally guaranteed all of WM's senior indebtedness. WM has fully and unconditionally guaranteed all ofWM Holdings' senior indebtedness. None of WM's other subsidiaries have guaranteed any of WM's orWM Holdings' debt. In lieu of providing separate financial statements for the subsidiary issuer and guarantor (WM andWM Holdings ), we have presented the accompanying supplemental summarized combined balance sheet and income statement information forWM andWM Holdings on a combined basis after elimination of intercompany transactions betweenWM andWM Holdings and amounts related to investments in any subsidiary that is a non-guarantor (in millions):
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