Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included under Item 1 and our Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.

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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 of Advanced 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 workforce-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; macroeconomic pressures and market disruption resulting in labor, supply chain and transportation constraints and inflationary cost pressure; 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 the SEC, including Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, as updated by Part II, Item 1A. Risk Factors, included in this quarterly report on Form 10-Q for the quarter ended September 30, 2021. The Company continues to be optimistic about volume recovery and overall economic recovery from the impacts of the COVID-19 pandemic. However, uncertainty remains with respect to various factors that influence the pace of economic recovery, including workforce regulation and the potential for future 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.

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Overview

We are North America’s leading provider of comprehensive waste management environmental services, providing services throughout the United States (“U.S.”) and Canada. 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 the U.S. and Canada. In order to make disposal more practical for larger urban markets, where the distance to landfills is typically farther, we manage transfer stations that consolidate, compact and transport waste efficiently and economically. 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 the U.S. and Canada, handling materials that include paper, cardboard, glass, plastic and metal. Our “Solid Waste” business is operated and managed locally by our subsidiaries that focus on distinct geographic areas and provide collection, transfer, disposal,

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and recycling and resource recovery services. Consistent with our Company’s long-standing commitment to corporate sustainability and environmental stewardship, we published our 2021 Sustainability Report, which details our people-first commitment 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

On October 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 dated April 14, 2019, as amended on June 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 the U.S. The acquisition was funded using a $3.0 billion, 364-day, U.S. revolving credit facility and our commercial paper program. In November 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 of December 31, 2020. Post-closing adjustments to our preliminary purchase price allocation have not been material. See Note 8 to the Condensed Consolidated Financial Statements for more information. During 2021, we have 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 in April 2020 as a result of COVID-19. The pace of recovery in our volumes accelerated in the second quarter of 2021, and continued into the third quarter of 2021 with minimal impact from the resurgence in transmission of COVID-19 as communities and businesses remained open. 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 completed the third 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. We continue to be optimistic about our volume recovery and overall economic recovery from the impacts of the COVID-19 pandemic. However, uncertainty remains with respect to various factors that influence the pace of

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economic recovery, including workforce regulation and the potential for future 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 in the future.

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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. As North America’s leading provider of comprehensive waste management environmental services, sustainability and environmental stewardship is embedded in all that we do. We have enabled a people-first, technology-led focus to drive our mission, that we are Always Working for a Sustainable Tomorrow. 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, 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 evaluate emerging diversion technologies that may generate additional value and related market dynamics, we are 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. 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 environmental services provider in North America, we have a responsibility to take big, bold steps that catalyze positive change – change that impacts our Company and beyond. Our sustainability agenda includes expanding recycling and focuses on meeting or exceeding specific 2025 and 2038 sustainability goals around people, customers, the environment, and community, which align around eight of the United Nations Sustainable Development Goals.

Despite some industry consolidation in recent years, 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, 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 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 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

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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.

Certain macroeconomic pressures and market disruption, driven in part by the COVID-19 pandemic, have intensified during the third quarter of 2021. The constrained labor market has resulted in increased cost and operational challenges servicing customers. The COVID-19 pandemic and the constrained labor market have also contributed to significant global supply chain disruption and inflationary pressure for the goods and services we purchase. Aspects of our business rely on third-party transportation providers, and such services have become more limited and expensive. We are currently experiencing margin pressures from rising commodities prices, particularly in our recycling brokerage services, and are being impacted by labor cost pressures resulting from limitations on labor availability, including increased wages, increased overtime and training hours driven by frontline employee turnover and increased volume. 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 nine months of 2021 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.

Current Quarter Financial Results

During the third quarter of 2021, we delivered strong revenue and income from operations as we continued to experience volume recovery in our landfill, commercial and industrial collection businesses and benefited from the acquisition of Advanced Disposal. Additionally, our income from operations was impacted by inflationary cost pressures and commodity-driven business impacts, particularly in our recycling brokerage services. We experienced strong cash flows during the quarter, allocating $741 million to our shareholders through dividends and share repurchases and $464 million of available cash to capital expenditures.

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

●Revenues of $4,665 million, compared with $3,861 million in the prior year period, an increase of $804 million, or 20.8%. The increase is primarily attributable to (i) the acquisition of Advanced Disposal; (ii) record-high increases in the market prices for recycling commodities we sell; (iii) strong volume growth and (iv) higher yield in our collection and disposal lines of business;
●Operating expenses of $2,906 million, or 62.3% of revenues, compared with $2,332 million, or 60.4% of revenues, in the prior year period. The $574 million increase is primarily attributable to (i) increased volumes from the acquisition of Advanced Disposal; (ii) volume recovery from the pandemic; (iii) labor inflation – we have experienced 9% wage inflation during the period and (iv) supply chain induced inflation. Additionally, we saw increases in our operating expense as a percentage of revenue from commodity-driven business impacts, particularly in our recycling brokerage services;
●Selling, general and administrative expenses of $469 million, or 10.1% of revenues, compared with $416 million, or 10.8% of revenues, in the prior year period. The $53 million increase is primarily attributable to (i) increased labor, support and integration costs from our acquisition of Advanced Disposal; (ii) higher incentive compensation costs; (iii) strategic investments in our digital platform and (iv) an increase in our provision for bad debts;
●Income from operations was $806 million, or 17.3% of revenues, compared with $680 million, or 17.6% of revenues, in the prior year period. The improved 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) a pre-tax gain from the recognition of cumulative translation adjustments on the divestiture of certain non-strategic Canadian operations. The increase in income from operations was partially offset by (i) labor cost pressure from

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frontline employee wage adjustments, increased turnover driving up training costs and accelerated overtime due to driver shortages and volume growth; (ii) inflationary cost pressures and (iii) an amortization charge due to management’s decision to close a landfill earlier than expected. Additionally, our commodity-driven business impacts pressured our percentage of revenues, particularly in our recycling brokerage services. During the current year period, the positive earnings contributions from Advanced Disposal were offset by elevated depreciation and amortization of acquired assets;
●Net income attributable to Waste Management, Inc. was $538 million, or $1.28 per diluted share, compared with $390 million, or $0.92 per diluted share, in the prior year period. The increase in income from operations discussed above, in addition to a prior year period loss on early extinguishment of debt and lower interest expense in the current year period, drove an increase in net income for the period;
●Net cash provided by operating activities was $1,184 million compared with $1,029 million in the prior year period, driven by (i) an increase in earnings; (ii) lower interest payments in the current quarter and (iii) system and process improvements that contributed to a significant improvement in our days-to-pay metrics. This increase was partially offset by unfavorable year-over-year comparisons attributable to decisions made in the third quarter of 2020 to temporarily defer the payment of payroll taxes and estimated income taxes; and
●Free cash flow was $773 million compared with $691 million in the prior year period primarily driven by the increase in net cash provided by operating activities discussed above and higher proceeds from divestitures of businesses. These increases were partially offset by higher capital spending, as the Company proactively managed costs during the pandemic in 2020. Free cash flow is a non-GAAP measure of liquidity. Refer to Free Cash Flow below for our definition of free cash flow, additional information about our use of this measure, and a reconciliation to net cash provided by operating activities, which is the most comparable GAAP measure.

Results of Operations

Operating Revenues

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 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):

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​​Three Months Ended​Nine Months Ended
​​September 30,​September 30,
​2021202020212020
Commercial​$1,214​$1,025​$3,523​$3,016
Residential​795​662​2,371​1,969
Industrial​829​709​2,383​2,027
Other collection​140​120​391​347
Total collection​2,978​2,516​8,668​7,359
Landfill​1,100​946​3,090​2,707
Transfer​550​482​1,547​1,362
Recycling​464​290​1,203​819
Other (a)​551​458​1,541​1,297
Intercompany (b)​(978)​(831)​(2,796)​(2,393)
Total​$4,665​$3,861​$13,253​$11,151
(a)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 “Other” line of business reflects the results of non-operating entities that provide financial

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assurance and self-insurance support for our Solid Waste business, net of intercompany activity. Revenue attributable to collection, landfill, transfer and recycling services provided by our “Other” businesses has been reflected as a component of the relevant line of business for purposes of presentation in this table.
(b)Intercompany revenues between lines of business are eliminated in the Condensed Consolidated Financial Statements included within this report.

The following table provides details associated with the period-to-period changes in revenues and average yield (dollars in millions):

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​​Period-to-Period Change for the Three Months Ended September 30, 2021 vs. 2020​​Period-to-Period Change for the Nine Months Ended September 30, 2021 vs. 2020
​​​​​As a % of​​​​​As a % of​​​​As a % of​​​​As a % of
​​​​​Related​​​​​Total​​​​Related​​​​Total
​AmountBusiness(a)AmountCompany(b)​AmountBusiness(a)AmountCompany(b)​
Collection and disposal​$123​3.5%​​​​​​​$334​3.3%​​​​​​
Recycling (c)​180​66.3​​​​​​​361​47.8​​​​​​
Fuel surcharges and mandated fees​51​45.5​​​​​​​88​25.1​​​​​​
Total average yield (d)​​​​​​$354​9.1%​​​​​​$783​7.0%
Volume​​​​​​144​3.8​​​​​​​384​3.5​
Internal revenue growth​​​​​​​​498​12.9​​​​​​​​​1,167​10.5​
Acquisitions​​​​​​​​311​8.0​​​​​​​​​929​8.3​
Divestitures​​​​​​​​(16)​(0.4)​​​​​​​​​(37)​(0.3)​
Foreign currency translation​​​​​​​​11​0.3​​​​​​​​​43​0.4​
Total​​​​​​​$804​20.8%​​​​​​​$2,102​18.9%
(a)Calculated by dividing the increase or decrease for the current year period by the prior year period’s related business revenue adjusted to exclude the impacts of divestitures for the current year period.
(b)Calculated by dividing the increase or decrease for the current year period by the prior year period’s total Company revenue adjusted to exclude the impacts of divestitures for the current year period.
(c)Includes 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):

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​​Period-to-Period Change for the​Period-to-Period Change for the
​​Three Months Ended​Nine Months Ended​
​​September 30, 2021 vs. 2020September 30, 2021 vs. 2020​
​​​​​As a % of​​​As a % of​
​​​​​Related​​​Related​
​AmountBusinessAmountBusiness
Commercial​$39​4.0%$107​3.8%
Industrial​32​4.8​89​4.6​
Residential​33​5.0​89​4.7​
Total collection​104​4.4​285​4.1​
Landfill​12​2.0​29​1.7​
Transfer​7​2.5​20​2.7​
Total collection and disposal​$123​3.5%$334​3.3%

Our overall strategic pricing efforts are focused on improving our average unit rate as well as recovering any inflationary cost increases. We experienced strong average yield growth in our collection line of business of 4.4% and 4.1% for the three and nine months ended September 30, 2021, respectively, as compared with the prior year periods. 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 5.0% and 4.7% for the three and nine months ended September 30, 2021, respectively, as compared with the prior year periods. We are also continuing to see growth in our landfill and transfer businesses with our municipal solid waste business experiencing 3.5% and 3.0% average yield growth for the three and nine months ended September 30, 2021, respectively, as compared with the prior year periods.

Recycling — Recycling revenue increased $180 million and $361 million for the three months and nine months ended September 30, 2021, respectively, as compared with the prior year periods primarily from higher market prices for recycling commodities. During the three and nine months ended September 30, 2021, average market prices for recycling commodities at the Company’s facilities were approximately 160% and 115% 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 $51 million and $88 million for the three and nine months ended September 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 35% and 20% for the three and nine months ended September 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 nine months ended September 30, 2021, as compared with the prior year periods.

Volume

Our revenues from volumes (excluding volumes from acquisitions and divestitures) increased $144 million, or 3.8%, and $384 million, or 3.5%, for the three and nine months ended September 30, 2021, respectively, as compared with the prior year periods.

Over the last year, our volumes have been recovering from the sharp decline experienced in April 2020 as a result of COVID-19. The pace of recovery in our volumes accelerated in the second quarter of 2021, and continued into the third

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quarter of 2021 with minimal impact from the resurgence in transmission of COVID-19 as communities and businesses remained open. 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 completed the third 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. Additionally, for the three and nine months ended September 30, 2021, volumes in our recycling business are also up partially due to the re-opening of facilities where we temporarily suspended operations in the second quarter of 2020 during the pandemic. We continue to be optimistic about volume recovery and overall economic recovery from the impacts of the COVID-19 pandemic. However, uncertainty remains with respect to various factors that influence the pace of economic recovery, including workforce regulation and the potential for future resurgence in transmission of COVID-19 and related business closures due to virus variants or otherwise. Such conditions could adversely impact our volumes in the future.

Acquisitions

Revenues increased $311 million, or 8.0%, and $929 million, or 8.3%, for the three and nine months ended September 30, 2021, respectively, as compared with the prior year periods, primarily due to our acquisition of Advanced Disposal and 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​​Nine Months Ended​
​​September 30,​​September 30,​
​2021​20202021​2020​
Labor and related benefits​$83517.9%​$68217.7%​$2,37217.9%​$2,00718.0%
Transfer and disposal costs​300​6.4​​293​7.6​​872​6.6​​838​7.5​
Maintenance and repairs​414​8.9​​325​8.4​​1,183​8.9​​963​8.6​
Subcontractor costs​466​10.0​​389​10.1​​1,303​9.8​​1,117​10.0​
Cost of goods sold​263​5.6​​141​3.6​​655​5.0​​399​3.6​
Fuel​101​2.2​​61​1.6​​282​2.1​​194​1.7​
Disposal and franchise fees and taxes​183​3.9​​157​4.1​​516​3.9​​446​4.0​
Landfill operating costs​105​2.2​​91​2.3​​308​2.3​​292​2.6​
Risk management​88​1.9​​70​1.8​​242​1.8​​201​1.8​
Other​151​3.3​​123​3.2​​423​3.2​​384​3.5​
​​$2,906​62.3%​$2,332​60.4%​$8,156​61.5%​$6,841​61.3%

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Our operating expenses for the three and nine months ended September 30, 2021 increased primarily due to (i) increased volumes from the acquisition of Advanced Disposal; (ii) volume recovery from the pandemic; (iii) labor cost pressure from frontline employee wage adjustments, increased turnover driving up training costs and accelerated overtime due to driver shortages and volume growth and (iv) inflationary cost pressures. Additionally, during the third quarter of 2021, we saw significant increases in operating costs as a percentage of revenue primarily due to commodity-driven business impacts, particularly in our recycling brokerage services. For the three and nine months ended September 30, 2021, these impacts were partially offset by our continued focus on operating efficiency, efforts to control costs as volumes grow and our disciplined integration of Advanced Disposal, which historically has generated lower operating 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 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

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when combined with driver shortages and turnover in certain markets, increased overtime and training hours; (iv) higher incentive compensations costs and (v) increases in health and welfare costs attributable to medical care activity generally returning to pre-pandemic levels from the lower levels experienced during 2020.

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) inflationary cost increases for parts, supplies and third-party services; (iii) labor cost pressure from our technicians, including accelerated overtime from labor shortages; (iv) additional fleet maintenance driven by commercial and industrial volume increases and (v) 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.

Subcontractor Costs — The increase in subcontractor costs was largely driven by (i) inflationary cost increases from third-party haulers; (ii) an increase in volumes in our WMSBS business, which relies more extensively on subcontracted hauling than our collection and disposal business and (iii) the acquisition of Advanced Disposal.

Cost of Goods Sold — The increase in cost of goods sold was primarily driven by increases in market prices for recycling commodities of approximately 160% and 115% during the three and nine months ended September 30, 2021, respectively, as compared to the prior year periods.

Fuel — The increase in fuel costs was primarily due to (i) increases of approximately 35% and 20% in market fuel prices during the three and nine months ended September 30, 2021, respectively, as compared with the prior year periods; (ii) the acquisition of Advanced Disposal and (iii) volume increases in our commercial and industrial collection businesses.

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 (i) landfill volume increases; (ii) disposal rate increases at certain landfills and (iii) additional costs attributable to our acquisition of Advanced Disposal.

Landfill Operating Costs — The increase in landfill operating costs for the three and nine months ended September 30, 2021 as compared to the prior year periods was primarily due to the Advanced Disposal acquisition and increased testing and monitoring costs due, in part, to volume increases. 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 nine months ended September 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, the overall economic recovery, increasing business activity and claim volumes.

Other — Other operating cost increases were due to our acquisition of Advanced Disposal and increased equipment rental costs attributable, in part, to increased volumes and supply chain constraints slowing normal-course fleet and equipment orders. Additionally, the three months ended September 30, 2021, additional volumes drove increases in supplies and vehicle transportation costs. Partially offsetting these increases for the nine months ended September 30, 2021 was a favorable litigation settlement in the second quarter of 2021.

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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​​Nine Months Ended​
​​September 30,​​September 30,​
​2021​2020​2021​2020​
Labor and related benefits​$3116.7%​$2747.1%​$9056.8%​$7486.7%
Professional fees​53​1.1​​53​1.4​​158​1.2​​167​1.5​
Provision for bad debts​11​0.2​​4​0.1​​28​0.2​​40​0.4​
Other​94​2.1​​85​2.2​​281​2.2​​263​2.3​
​​$469​10.1%​$416​10.8%​$1,372​10.4%​$1,218​10.9%

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Selling, general and administrative expenses have increased primarily due to (i) increased labor, support and integration costs from our acquisition of Advanced Disposal; (ii) higher incentive compensation costs and (iii) strategic investments in our digital platform. Although our costs increased, the significant revenue increase positioned us to reduce our overall selling, general and administrative expenses as a percentage of revenues when compared with the prior year periods.

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Significant items affecting the comparison of our selling, general and administrative expenses between reported periods include:

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Labor and Related Benefits — The increase in labor and related benefits costs was primarily related to (i) additional headcount, including from our acquisition of Advanced Disposal; (ii) higher incentive compensation costs; (iii) annual merit increases for our employees; (iv) costs associated with our strategic investments in our digital platform and (v) increases in health and welfare costs attributable to medical care activity generally returning to pre-pandemic levels from the lower levels experienced during 2020.

Professional Fees — Professional fees decreased for the nine months ended September 30, 2021 primarily due to lower consulting, advisory and legal fees following the completion of the acquisition of Advanced Disposal in the fourth quarter of 2020, offset by increased strategic investments in our digital platform and integration costs related to our acquisition of Advanced Disposal.

Provision for Bad Debts — For the nine months ended September 30, 2021, 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. The increase for the three months ended September 30, 2021, as compared to the prior year period, was primarily due to adjustments in the third quarter of 2020 to our reserve for bad debts as collection efforts began to improve in 2020.

Other — The increase in other expenses was primarily driven by costs associated with the acquisition of Advanced Disposal and increased digital costs.

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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,​
​2021​20202021​2020
Depreciation of tangible property and equipment​$2826.0%​$2476.4%​$8406.3%​$7296.5%
Amortization of landfill airspace​200​4.3​​148​3.8​​541​4.1​​434​3.9​
Amortization of intangible assets​35​0.8​​24​0.7​​108​0.8​​72​0.7​
​​$517​11.1%​$419​10.9%​$1,489​11.2%​$1,235​11.1%

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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) our acquisition of Advanced Disposal; (ii) changes in landfill estimates and amortization rates, including a $15 million charge due to management’s decision to close a landfill in our Tier 3 segment earlier than expected, resulting in acceleration of the timing of capping, closure and post-closure activities and (iii) landfill volume increases from the continued economic recovery. 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 nine months ended September 30, 2021, we recognized net gains of $17 million consisting of (i) a $35 million pre-tax gain in the third quarter of 2021 from the recognition of cumulative translation adjustments on the divestiture of certain non-strategic Canadian operations in our Tier 3 segment and (ii) an $8 million gain in the first quarter of 2021 from divestitures of certain ancillary operations in our Other 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.

During the nine months ended September 30, 2020, we recognized non-cash impairment charges of $68 million 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 of June 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.

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Additionally, during the third quarter of 2020, we recognized $7 million of net charges primarily related to non-cash impairments of certain assets within our WM Renewable Energy business in our Other segment. As the carrying values of the assets were not recoverable, we wrote off their entire net carrying value using an income approach based on estimated future cash flow projections (Level 3).

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​​​Nine Months Ended​​
​​September 30,​Period-to-Period​September 30,​Period-to-Period
​​20212020Change​20212020​Change
Solid Waste:​​​​​​​​​​​​​​​​​​​​​​​
Tier 1​$357​$314​$4313.7%$1,014​$872​$14216.3%
Tier 2​338​307​3110.1​960​784​17622.4​
Tier 3​392​323​6921.4​1,087​855​23227.1​
Solid Waste​1,087​944​14315.1​3,061​2,511​55021.9​
Other (a)​9​(7)​16*​31​(42)​73*​
Corporate and Other (b)​​(290)​​(257)​​(33)​12.8​​(845)​​(689)​​(156)​22.6​
Total​$806​$680​$12618.5%$2,247​$1,780​$46726.2%
Percentage of revenues​17.3%​17.6%​​​​​​17.0%​16.0%​​​​​

*Percentage change does not provide a meaningful comparison.

(a)“Other” includes (i) elements of 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 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.
(b)“Corporate and Other” operating results reflect certain costs incurred for various support services that are not allocated to our reportable segments. These support services include, among other things, treasury, legal, digital, tax, insurance, centralized service center processes, other administrative functions and the maintenance of our closed landfills. Income from operations for “Corporate and Other” also includes costs associated with our long-term incentive program.

The significant items affecting income from operations, as well as the percentage of revenues, for our segments during the three and nine months ended September 30, 2021, as compared with the prior year periods, are summarized below:

●Solid Waste — Income from operations in our Solid Waste business increased for the three and nine months ended September 30, 2021, as compared to the prior year periods, 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 and improved costs at facilities where we have made investments in enhanced technology and equipment and (iii) a pre-tax gain from the recognition of cumulative translation adjustments on the divestiture of certain non-strategic Canadian operations in our Tier 3 segment during the third quarter of 2021. The nine months ended September 30, 2021 also benefited from a reduction in the provision for bad debts because these expenses were higher during the nine months ended 2020, due to the impacts of the pandemic on our outlook for customer receipts. These increases were partially offset by (i) labor cost pressure from frontline employee wage adjustments, increased turnover driving up training costs and accelerated overtime due to driver shortages and volume growth; (ii) inflationary cost pressures; (iii) higher incentive compensation costs and (iv) a landfill amortization charge in our Tier 3 segment due to management’s

​

decision to close a landfill earlier than expected. Labor and inflationary cost increases were more pronounced during the three months ended September 30, 2021 than the first half of 2021, resulting in a slight reduction in income from operations as a percentage of revenue during the current period. Despite the current quarter margin pressure, income from operations as a percentage of revenue for the nine-month period has improved driven by the strong performance and volume growth in our commercial collection and landfill businesses as well as the improved profitability of our recycling business.

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 nine months ended September 30, 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 during the second quarter of 2020 to close a landfill once its constructed airspace is filled and abandon any remaining permitted airspace.

●Other — The increase in income from operations was primarily driven by increased market values for renewable energy credits generated by our WM Renewable Energy business. The increase in income from operations for the nine months ended September 30, 2021, as compared with the prior year period, was also due to a gain from the divestitures of certain ancillary operations during the first quarter of 2021.
●Corporate and Other — These costs have increased during the three and nine months ended September 30, 2021 due to (i) increased labor, support and integration costs from our acquisition of Advanced Disposal; (ii) strategic investments in our digital platform; (iii) higher incentive compensation costs and (iv) increased health and welfare costs attributable to medical care activity generally returning to pre-pandemic levels from the lower levels experienced during 2020. The nine months ended September 30, 2021, as compared with the prior year period, was further impacted by a charge pertaining to reserves for certain loss contingencies during 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. These increases were partially offset by lower consulting, advisory and legal fees following the completion of our acquisition of Advanced Disposal in the fourth quarter of 2020.

Interest Expense, Net

Our interest expense, net was $87 million and $282 million for the three and nine months ended September 30, 2021, respectively, compared to $97 million and $328 million for the three and nine months ended September 30, 2020, respectively. The decreases are primarily due to certain refinancing activities, including (i) the redemption of $3.0 billion of senior notes in July 2020 and the issuance of $2.5 billion of senior notes in November 2020 at lower rates and (ii) the retirement of $1.3 billion of certain high-coupon senior notes and concurrent issuance of $950 million of lower coupon senior notes in May 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

In May 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 nine months ended September 30, 2021 includes $220 million of charges related to the tender offer, including cash paid of $211 million related to premiums and other third-party costs,

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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 $14 million and $34 million for the three and nine months ended September 30, 2021, respectively, compared to $16 million and $56 million for the three months and nine months ended September 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 ended March 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 $8 million loss upon settlement of a reverse Treasury rate lock associated with the refinancing of certain senior notes as discussed above in Loss on Early Extinguishment of Debt.

Income Tax Expense

Our income tax expense was $167 million and $396 million for the three and nine months ended September 30, 2021, respectively, compared to $126 million and $288 million for the three and nine months ended September 30, 2020, respectively. Our effective income tax rate was 23.7% and 23.2% for the three and nine months ended September 30, 2021, respectively, compared to 24.5% and 21.4% for the three and nine months ended September 30, 2020, respectively.

The decrease in our effective income tax rate when comparing the three months ended September 30, 2021 with the prior year period was due to the detrimental impact of non-deductible transaction costs incurred during the prior year period related to our acquisition of Advanced Disposal which did not reoccur in the current period. The decrease was partially offset by a net nominal increase in our effective income tax rate during the current year period resulting from a pre-tax gain from the recognition of cumulative translation adjustments on the divestiture of certain non-strategic Canadian operations in 2021 which was not taxable and unfavorable adjustments to accruals and related deferred taxes primarily due to a change from our initial expectations of the tax effects of the Advanced Disposal acquisition and related divestitures.

The increase in our effective income tax rate for the nine-month period ended September 30, 2021 as compared with the prior year period was due to (i) lower federal tax credits in 2021; (ii) unfavorable adjustments to accruals and related deferred taxes discussed above and (iii) a decrease in excess tax benefits associated with equity-based compensation in the current year period, partially offset by a pre-tax gain from the recognition of cumulative translation adjustments on the divestiture of certain non-strategic Canadian operations in 2021 which was not taxable. In addition, our effective income tax rate in 2020 included the detrimental impact of non-deductible transaction costs related to closing the acquisition of Advanced Disposal 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.

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Summary of Cash and Cash Equivalents, Restricted Trust and Escrow Accounts and Debt Obligations

The following is a summary of our cash and cash equivalents, restricted trust and escrow accounts and debt balances (in millions):

​​​​​​​
​​September 30,​December 31,
​20212020
Cash and cash equivalents​$116​$553
Restricted trust and escrow accounts:​​​
Insurance reserves​$327​$306
Final capping, closure, post-closure and environmental remediation funds​​117​​114
Other​1​2
Total restricted trust and escrow accounts (a)​$445​$422
Debt:​​
Current portion​$601​$551
Long-term portion​12,446​13,259
Total debt​$13,047​$13,810
(a)As of September 30, 2021 and December 31, 2020, $75 million of these account balances was included in other current assets in our Condensed Consolidated Balance Sheets.

As of September 30, 2021, we had $2.8 billion of debt maturing within the next 12 months, including (i) $1.4 billion of short-term borrowings under our commercial paper program (net of related discount on issuance); (ii) $745 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 2.90% senior notes that mature in September 2022 and (iv) $168 million of other debt with scheduled maturities within the next 12 months, including $64 million of tax-exempt bonds. As of September 30, 2021, we have classified $2.2 billion of debt maturing in the next 12 months as long-term because we have the intent and ability to refinance these borrowings on a long-term basis as supported by the forecasted available capacity under our $3.5 billion long-term U.S. and Canadian revolving credit facility (“$3.5 billion revolving credit facility”). The remaining $601 million of debt maturing in the next 12 months is classified as current obligations.

In May 2021, WM issued $950 million of senior notes consisting of $475 million of 2.00% senior notes due June 1, 2029 and $475 million of 2.95% senior notes due June 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.

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Guarantor Financial Information

WM Holdings has fully and unconditionally guaranteed all of WM’s senior indebtedness. WM has fully and unconditionally guaranteed all of WM Holdings’ senior indebtedness. None of WM’s other subsidiaries have guaranteed any of WM’s or WM Holdings’ debt. In lieu of providing separate financial statements for the subsidiary issuer and guarantor (WM and WM Holdings), we have presented the accompanying supplemental summarized combined balance sheet and income statement information for WM and WM Holdings on a combined basis after elimination of intercompany transactions between WM and WM Holdings and amounts related to investments in any subsidiary that is a non-guarantor (in millions):

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​​​​​​​
​​September 30,​December 31,
​20212020
Balance Sheet Information:​​​​​​
Current assets$5​$481
Noncurrent assets​​13​​14
Current liabilities​504​446
Noncurrent liabilities:​​​​​​
Advances due to affiliates​​18,501​​16,505
Other noncurrent liabilities​10,434​11,202

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​​​​
​Nine Months Ended
​​September 30, 2021
Income Statement Information:​​​
Revenue$—
Operating income​​—
Net loss​​288

​

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Summary of Cash Flow Activity

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

​​​​​​​
​Nine Months Ended
​​September 30,
​​20212020
Net cash provided by operating activities​$3,347​$2,650
Net cash used in investing activities​$(1,106)​$(1,241)
Net cash used in financing activities​$(2,686)​$(4,244)

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Net Cash Provided by Operating Activities — Our operating cash flows increased by $697 million as compared with the prior year period, as a result of (i) an increase in earnings primarily attributable to our collection, disposal and recycling lines of business; (ii) lower interest payments in the current year period primarily due to certain refinancing activities and the retirement of high-coupon debt during 2020 reducing our overall interest rates; (iii) favorable changes in our working capital, net of effects of acquisitions and divestitures; (iv) the acquisition of Advanced Disposal and (v) lower annual incentive compensation payments in the current year. Our working capital was favorably impacted by system and process improvements that contributed to a significant improvement in our days-to-pay metrics. These favorable impacts were partially offset by (i) higher income tax payments in the current year period; (ii) the timing of cash tax benefits received in 2020 associated with federal alternative fuel tax credits and (iii) timing differences in the payment of payroll taxes due to a temporary deferral taken through the third quarter of 2020 as provided for by the Coronavirus Aid, Relief and Economic Security Act.

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Net Cash Used in Investing Activities — The most significant items included in our investing cash flows for the nine months ended September 30, 2021 and 2020 are summarized below:

●Capital Expenditures — We used $1,130 million and $1,238 million for capital expenditures during the nine months ended September 30, 2021 and 2020, respectively. The decrease in capital spending was primarily driven by timing differences in our fleet purchases as well as supply chain constraints in advancing current year projects. The Company continues to maintain a disciplined focus on capital management to prioritize investments in the long-term growth of our business and for the replacement of aging assets.

Net Cash Used in Financing Activities — The most significant items affecting the comparison of our financing cash flows for the nine months ended September 30, 2021 and 2020 are summarized below:

●Debt (Repayments) Borrowings — The following summarizes our cash borrowings and repayments of debt for the nine months ended September 30 (in millions):
​​​​​​​
​2021​2020
Borrowings:​​
Revolving credit facility​$—​$50
Commercial paper (a)​5,361​​2,419
Senior notes​942​​—
Tax-exempt bonds125​181
Other debt—​—
​$6,428​$2,650
Repayments:​
Revolving credit facility​$—​$(50)
Commercial paper (a)​(5,798)​​(1,822)
Senior notes​(1,289)​​(3,600)
Tax-exempt bonds(63)​(212)
Other debt(87)​(80)
​$(7,237)​$(5,764)
Net cash repayments​$(809)​$(3,114)
(a)Beginning in the second quarter of 2021 we elected to report these cash flows on a gross basis.

Refer to Note 3 to the Condensed Consolidated Financial Statements for additional information related to debt borrowings and repayments.

●Premiums and Other Paid on Early Extinguishment of Debt — During the nine months ended September 30, 2021, we paid premiums and other third-party costs of $211 million to retire certain high-coupon senior notes. See Note 3 to the Condensed Consolidated Financial Statements for further discussion of this debt transaction.
●Common Stock Repurchase Program — During the nine months ended September 30, 2021, we repurchased $1.0 billion of our common stock pursuant to three accelerated share repurchase (“ASR”) agreements, as discussed further in Note 11 to the Condensed Consolidated Financial Statements. We expect to repurchase the full amount of our remaining authorization of $350 million of common stock during the fourth quarter of 2021. During the three months ended March 31, 2020, we repurchased $402 million of our common stock, which included $313 million related to a February 2020 ASR agreement and $89 million in open market transactions. We did not repurchase any of our common stock during the second and third quarters of 2020.

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●Cash Dividends — For the periods presented, all dividends have been declared by our Board of Directors.

We paid cash dividends of $730 million and $696 million during the nine months ended September 30, 2021 and 2020, respectively. The increase in dividend payments is primarily due to our quarterly per share dividend increasing from $0.545 in 2020 to $0.575 in 2021.

Free Cash Flow

We are presenting free cash flow, which is a non-GAAP measure of liquidity, in our disclosures because we use this measure in the evaluation and management of our business. We define free cash flow as net cash provided by operating activities, less capital expenditures, plus proceeds from divestitures of businesses and other assets, net of cash divested. We believe it is indicative of our ability to pay our quarterly dividends, repurchase common stock, fund acquisitions and other investments and, in the absence of refinancings, to repay our debt obligations. Free cash flow is not intended to replace net cash provided by operating activities, which is the most comparable GAAP measure. We believe free cash flow gives investors useful insight into how we view our liquidity, but the use of free cash flow as a liquidity measure has material limitations because it excludes certain expenditures that are required or that we have committed to, such as declared dividend payments and debt service requirements.

Our calculation of free cash flow and reconciliation to net cash provided by operating activities is shown in the table below (in millions), and may not be calculated the same as similarly-titled measures presented by other companies:

​​​​​​​​​​​​​
​​Three Months Ended​Nine Months Ended
​​September 30,​September 30,
​​2021202020212020
Net cash provided by operating activities​$1,184​$1,029​$3,347​$2,650
Capital expenditures​(464)​(343)​(1,130)​(1,238)
Proceeds from divestitures of businesses and other assets, net of cash divested​53​5​70​20
Free cash flow​$773​$691​$2,287​$1,432

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Critical Accounting Estimates and Assumptions

In preparing our financial statements, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with precision from available data or simply cannot be calculated. In some cases, these estimates are difficult to determine and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that present the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, long-lived asset impairments, the fair value of assets and liabilities acquired in business combinations or as asset acquisitions and reserves associated with our insured and self-insured claims, as described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.

Off-Balance Sheet Arrangements

We have financial interests in unconsolidated variable interest entities as discussed in Note 13 to the Condensed Consolidated Financial Statements. Additionally, we are party to guarantee arrangements with unconsolidated entities as discussed in the Guarantees section of Note 6 to the Condensed Consolidated Financial Statements. These arrangements have not materially affected our financial position, results of operations or liquidity during the nine months ended September 30, 2021, nor are they expected to have a material impact on our future financial position, results of operations or liquidity.

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Seasonal Trends

Our operating revenues tend to be somewhat higher in summer months, primarily due to higher construction and demolition waste volumes. The volumes of industrial and residential waste in certain regions where we operate also tend to increase during the summer months. Our second and third quarter revenues and results of operations typically reflect these seasonal trends.

Service disruptions caused by severe storms, extended periods of inclement weather or climate events can significantly impact the operating results of the Areas affected. On the other hand, certain destructive weather and climate conditions, such as wildfires in the Western U.S. and hurricanes that most often impact our operations in the Southern and Eastern U.S. during the second half of the year, can increase our revenues in the Areas affected as a result of the waste volumes generated by these events. While weather-related and other event-driven special projects can boost revenues through additional work for a limited time, as a result of significant start-up costs and other factors, such revenue can generate earnings at comparatively lower margins.

Inflation

A portion of our collection revenues are generated under long-term agreements with price adjustments based on various indices intended to measure inflation. Additionally, management’s estimates associated with inflation have had, and will continue to have, an impact on our accounting for landfill and environmental remediation liabilities. Accelerated and pronounced economic pressures, particularly related to inflationary cost pressures on labor and the goods and services we rely upon to deliver service to our customers, have had a more significant impact on our cost structure and capital expenditures in 2021. We are taking proactive steps to increase the price of our service and to manage our costs through efficiency, productivity and automation in order to mitigate the inflationary cost pressures we have seen in our business. Refer to Item 1A. Risk Factors below for further discussion.

Previous: Item 1. Financial Statements. · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk.