<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
-- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
-- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 1-7327
WMX TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-2660763
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3003 BUTTERFIELD ROAD,
OAK BROOK, ILLINOIS 60521
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (708) 572-8800
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT REGISTRANT WAS REQUIRED
TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES X NO
--- ---
SHARES OF REGISTRANT'S COMMON STOCK, $1 PAR VALUE, ISSUED AND OUTSTANDING
AT OCTOBER 31, 1995 -- 486,567,803
================================================================================
<PAGE>
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
-----
PAGE
----
PART I. Financial Information:
Consolidated balance sheets as of December 31, 1994, and
September 30, 1995................................................. 3
Consolidated statements of income for the three months and nine months
ended September 30, 1994 and 1995.................................. 5
Consolidated statements of stockholders' equity for the nine months
ended September 30, 1994 and 1995.................................. 6
Consolidated statements of cash flows for the nine months
ended September 30, 1994 and 1995.................................. 8
Notes to consolidated financial statements.............................. 9
Management's discussion and analysis of results of operations
and financial condition............................................ 15
PART II. Other Information............................................. 24
******
2
<PAGE>
PART I. FINANCIAL INFORMATION
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($000's omitted)
ASSETS
<TABLE>
<CAPTION>
December 31, 1994 September 30, 1995
----------------- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 121,918 $ 213,114
Short-term investments 19,704 73,528
Accounts receivable, less reserve of $65,536 in 1994
and $65,007 in 1995 1,958,052 2,007,978
Employee receivables 10,140 8,831
Parts and supplies 194,645 206,745
Costs and estimated earnings in excess of billings
on uncompleted contracts 403,949 511,456
Refundable income taxes 30,713 -
Prepaid expenses 349,723 339,596
----------- -----------
Total Current Assets $ 3,088,844 $ 3,361,248
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Land, primarily disposal sites $ 4,162,418 $ 4,473,961
Buildings 1,372,782 1,542,302
Vehicles and equipment 7,162,217 7,418,876
Leasehold improvements 91,554 84,637
----------- -----------
$12,788,971 $13,519,776
Less - Accumulated depreciation and amortization (3,503,219) (3,889,454)
----------- -----------
Total Property and Equipment, Net $ 9,285,752 $ 9,630,322
----------- -----------
OTHER ASSETS:
Intangible assets relating to acquired businesses, net $ 3,789,801 $ 4,217,188
Sundry, including other investments 1,374,517 1,481,208
----------- -----------
Total Other Assets $ 5,164,318 $ 5,698,396
----------- -----------
Total Assets $17,538,914 $18,689,966
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($000's omitted except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, 1994 September 30, 1995
----------------- ------------------
<S> <C> <C>
CURRENT LIABILITIES:
Portion of long-term debt payable within one year $ 890,686 $ 1,087,947
Accounts payable 1,017,451 973,762
Accrued expenses 966,284 993,094
Unearned revenue 305,310 319,278
----------- -----------
Total Current Liabilities $ 3,179,731 $ 3,374,081
----------- -----------
DEFERRED ITEMS:
Income taxes $ 665,677 $ 865,981
Environmental liabilities 704,015 643,844
Other 615,606 652,351
----------- -----------
Total Deferred Items $ 1,985,298 $ 2,162,176
----------- -----------
LONG-TERM DEBT, less portion payable within one year $ 6,044,411 $ 6,458,622
----------- -----------
MINORITY INTEREST IN SUBSIDIARIES $ 1,536,165 $ 1,480,000
----------- -----------
COMMITMENTS AND CONTINGENCIES $ $
----------- -----------
PUT OPTIONS $ 252,328 $ 253,998
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $l par value (issuable in series);
50,000,000 shares authorized; none outstanding
during the periods $ - $ -
Common stock, $l par value; 1,500,000,000 shares
authorized; 496,386,758 shares issued in 1994
and 498,517,379 in 1995 496,387 498,517
Additional paid-in capital 357,150 402,290
Cumulative translation adjustment (150,832) (95,860)
Retained earnings 4,181,606 4,512,037
----------- -----------
$ 4,884,311 $ 5,316,984
Less: 1988 Employee Stock Ownership Plan 19,729 14,729
Employee Stock Benefit Trust (12,386,629
shares in 1994 and 11,970,730 shares
in 1995, at market) 323,601 341,166
----------- -----------
Total Stockholders' Equity $ 4,540,981 $ 4,961,089
----------- -----------
Total Liabilities and Stockholders'
Equity $17,538,914 $18,689,966
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------------------- -------------------------------
1994 1995 1994 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE $2,603,110 $2,826,033 $7,438,899 $8,286,936
---------- ---------- ---------- ----------
Operating expenses $1,809,485 $1,985,581 $5,173,285 $5,839,594
Special charges -- -- -- 140,600
Goodwill amortization 27,776 30,558 82,708 90,704
Selling and administrative
expenses 293,175 298,394 877,801 898,868
Interest expense 83,528 107,133 246,029 327,220
Interest income (8,747) (8,402) (25,154) (31,803)
Minority interest 41,885 38,665 112,635 109,604
Sundry income, net (18,606) (24,225) (48,803) (55,777)
---------- ---------- ---------- ----------
Income before income taxes $ 374,614 $ 398,329 $1,020,398 $ 967,926
Provision for income taxes 161,729 164,481 441,784 413,706
---------- ---------- ---------- ----------
NET INCOME $ 212,885 $ 233,848 $ 578,614 $ 554,220
========== ========== ========== ==========
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 484,162 486,286 483,985 485,495
========== ========== ========== ==========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.44 $ 0.48 $ 1.20 $ 1.14
========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE $ 0.15 $ 0.15 $ 0.45 $ 0.45
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
(Unaudited)
($000's omitted)
<TABLE>
<CAPTION>
1988
Employee
Additional Cumulative Stock Employee
Common Paid-In Translation Retained Treasury Ownership Stock
Stock Capital Adjustment Earnings Stock Plan Benefit Trust
---------- ---------- ------------ ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $496,217 $668,470 $(245,587) $3,693,108 $425,097 $27,659 $ -
Net income for the period - - - 578,614 - - -
Cash dividends ($.45 per share) - - - (217,676) - - -
Dividends paid to Employee
Stock Benefit Trust - 3,756 - (3,756) - - -
Stock issued upon exercise
of stock options - (4,729) - - (7,406) - (3,164)
Treasury stock received in
connection with exercise of
stock options - - - - 250 - -
Contribution to 1988 Employee
Stock Ownership Plan - - - - - (4,948) -
Treasury stock received as
settlement for claims - - - - 1,907 - -
Stock issued upon conversion
of Liquid Yield Option
Notes 36 511 - - (56) - -
Common stock issued for
acquisitions 74 1,799 - - - - -
Tax benefit of non-qualified
stock options exercised - 1,156 - - - - -
Temporary equity related to
put options - (240,151) - - - - -
Proceeds from sale of put
options - 22,720 - - - - -
Sale of shares to Employee Stock
Benefit Trust (12,601,609
shares) - (106,327) - - (419,792) - 313,465
Adjustment of Employee Stock
Benefit Trust to market value - 50,250 - - - - 50,250
Transfer of equity interests
among controlled subsidiaries - (228) - - - - -
Cumulative translation adjust-
ment of foreign currency
statements - - 111,768 - - - -
-------- -------- --------- ---------- -------- ------- --------
Balance, September 30, 1994 $496,327 $397,227 $(133,819) $4,050,290 $ - $22,711 $360,551
======== ======== ========= ========== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(Unaudited)
($000's omitted except per share amounts)
<TABLE>
<CAPTION>
1988
Employee
Additional Cumulative Stock Employee
Common Paid-In Translation Retained Treasury Ownership Stock
Stock Capital Adjustment Earnings Stock Plan Benefit Trust
-------- ----------- ------------ ----------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $496,387 $357,150 $(150,832) $4,181,606 $ - $19,729 $323,601
Net income for the period - - - 554,220 - - -
Cash dividends ($.45 per share) - - - (218,350) - - -
Dividends paid to Employee
Stock Benefit Trust - 5,439 - (5,439) - - -
Stock issued upon exercise
of stock options 39 (2,705) - - (1,348) - (11,522)
Treasury stock received in
connection with exercise of
stock options - - - - 332 - -
Contribution to 1988 Employee
Stock Ownership Plan - - - - - (5,000) -
Treasury stock received as
settlement for claims - - - - 1,016 - -
Common stock issued upon
conversion of Liquid
Yield Option Notes 127 2,060 - - - - -
Common stock issued for
acquisitions 1,964 8,984 - - - - -
Tax benefit of non-qualified
stock options exercised - 1,422 - - - - -
Temporary equity related to
put options - (1,670) - - - - -
Proceeds from sale of put
options - 14,013 - - - - -
Settlement of expired put
options - (12,019) - - - - -
Adjustment of Employee Stock
Benefit Trust to market value - 29,087 - - - - 29,087
Transfer of equity interests
among controlled subsidiaries - 529 - - - - -
Cumulative translation adjust-
ment of foreign currency
statements - - 54,972 - - - -
-------- -------- --------- ---------- ------- ------- --------
Balance, September 30, 1995 $498,517 $402,290 $ (95,860) $4,512,037 $ - $14,729 $341,166
======== ======== ========= ========== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
Increase (Decrease) in Cash
(Unaudited)
($000's omitted)
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income for the period $ 578,614 $ 554,220
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 658,715 661,461
Provision for deferred income taxes 216,398 199,806
Minority interest in subsidiaries 112,635 109,604
Interest on Liquid Yield Option Notes (LYONs) and
WMX Subordinated Notes 26,039 20,173
Gain on sale of property and equipment (11,276) (6,114)
Contribution to 1988 Employee Stock Ownership Plan 4,948 5,000
Special charge, net of tax - 91,400
Changes in assets and liabilities, excluding effects
of acquired companies:
Receivables, net (290,874) (6,649)
Other current assets (51,838) (40,686)
Sundry other assets 2,818 25,707
Accounts payable 1,887 (92,689)
Accrued expenses and unearned revenue 33,798 10,582
Deferred items (101,835) (53,053)
Minority interest in subsidiaries 13,593 (5,011)
----------- -----------
Net cash provided by operating activities $ 1,193,622 $ 1,473,751
----------- -----------
Cash flows from investing activities:
Short-term investments $ (647) $ (41,779)
Capital expenditures (1,004,196) (964,826)
Proceeds from sale of property and equipment 244,118 132,524
Cost of acquisitions, net of cash acquired (154,477) (175,658)
Other investments (51,714) (41,324)
Acquisition of minority interests (5,800) (55,707)
----------- -----------
Net cash used for investing activities $ (972,716) $(1,146,770)
----------- -----------
Cash flows from financing activities:
Cash dividends $ (217,676) $ (218,350)
Proceeds from issuance of indebtedness 1,183,452 1,332,696
Repayments of indebtedness (1,199,365) (1,353,789)
Proceeds from exercise of stock options, net 5,591 9,872
Contributions from minority interests 17,052 16,328
Stock repurchases by subsidiaries (1,382) (24,536)
Proceeds from sale of put options 22,720 14,013
Settlement of expired put options - (12,019)
----------- -----------
Net cash used for financing activities $ (189,608) $ (235,785)
----------- -----------
Net increase in cash and cash equivalents $ 31,298 $ 91,196
Cash and cash equivalents at beginning of period 92,802 121,918
----------- -----------
Cash and cash equivalents at end of period $ 124,100 $ 213,114
=========== ===========
</TABLE>
The Company considers cash and cash equivalents to include currency on hand,
demand deposits with banks and short-term investments with maturities of less
than three months when purchased.
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 219,990 $ 307,047
Income taxes, net of refunds received $ 149,915 $ 221,457
Supplemental schedule of noncash investing and
financing activities:
LYONs converted into common stock of the Company $ 603 $ 2,187
Liabilities assumed in acquisitions of businesses $ 175,577 $ 200,026
Fair market value of Company and subsidiary stock
issued for acquired businesses $ 4,773 $ 58,267
WMX Subordinated Notes issued for acquisition of
CWM minority interest $ - $ 436,830
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(000's omitted in all tables)
The financial statements included herein have been prepared by WMX Technologies,
Inc. ("WMX" or the "Company") without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The financial information
included herein reflects, in the opinion of the Company, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position and results of operations for the periods presented. The
results for interim periods are not necessarily indicative of results for the
entire year.
Certain amounts in previously issued financial statements have been restated to
conform to 1995 classifications.
Income Taxes -
The following table sets forth the provision for income taxes for the three
months and nine months ended September 30, 1994 and 1995:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------- -------------------
1994 1995 1994 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Currently payable $ 65,845 $ 78,362 $227,315 $214,712
Deferred 96,529 86,388 216,398 199,806
Amortization of deferred
investment credit (645) (269) (1,929) (812)
-------- -------- -------- --------
$161,729 $164,481 $441,784 $413,706
======== ======== ======== ========
</TABLE>
Business Combinations -
During 1994, the Company and its principal subsidiaries acquired 119 businesses
for $197,201,000 in cash (net of cash acquired) and notes, 73,809 shares of the
Company's common stock and 156,124 shares of common stock of Wheelabrator
Technologies Inc. ("WTI"). These acquisitions were accounted for as purchases.
During the nine months ended September 30, 1995, the Company and its principal
subsidiaries acquired 103 businesses for $175,658,000 in cash (net of cash
acquired) and notes and 1,962,893 shares of the Company's common stock. Three
of the aforementioned 1995 acquisitions, which otherwise met pooling of
interests criteria, were not significant in the aggregate and, consequently,
prior period financial statements were not restated. The remaining acquisitions
were accounted for as purchases. The pro forma effect of the acquisitions made
during 1994 and 1995 is not material.
On January 24, 1995, the Company acquired all of the approximately 21.4% of the
outstanding shares of Chemical Waste Management, Inc. ("CWM") that it did not
already own. The transaction provided for the CWM public shareholders to
receive
9
<PAGE>
a convertible subordinated WMX note due 2005, with a principal amount at
maturity of $1,000, for every 81.1 CWM shares held, with cash paid in lieu of
issuance of fractional notes. The notes are subordinated to all existing and
future senior indebtedness of WMX. Each note bears cash interest from the date
the merger was consummated at the rate of two percent per annum of the $1,000
principal amount at maturity, payable semi-annually. The difference between the
principal amount at maturity of $1,000 and the $717.80 stated issue price of
each note represents the stated discount which, together with the cash interest
payable on the notes, will accrue at a rate of 5.75 percent per annum
(determined on a semi-annual bond equivalent basis) for purposes of determining
the prices at which WMX may purchase or redeem notes, as described below. At
the option of the holder, each note will be purchased for cash by WMX on March
15, 1998, and March 15, 2000, at prices of $789.95 and $843.03, respectively,
which represent the stated issue price plus accrued stated discount to those
dates. Accrued unpaid interest to those dates will also be paid. The notes
will be redeemable by WMX on and after March 15, 2000 (but not before) for cash,
at the stated issue price plus accrued stated discount and accrued but unpaid
interest through the date of redemption. In addition, each note is convertible
at any time prior to maturity, unless previously purchased or redeemed by WMX,
into 26.078 shares of WMX common stock, subject to adjustment upon the
occurrence of certain events. Upon any such conversion, WMX will have the
option of paying cash equal to the market value of the WMX shares which would
otherwise be issuable.
As of December 31, 1994, the Convertible Liquid Yield Option Notes issued by CWM
("CWM LYONs") and the Exchangeable Liquid Yield Option Notes issued by the
Company ("Exchangeable LYONs") (together with the CWM LYONs, the "LYONs") were
convertible into (in the case of the CWM LYONs) or exchangeable for (in the case
of the Exchangeable LYONs) CWM shares. Upon consummation of the merger, the
LYONs became convertible into the number of notes discussed in the preceding
paragraph to which the holders would have been entitled had they converted or
exchanged the LYONs immediately prior to the merger approval. Outstanding CWM
stock options were converted into options to acquire 2,867,061 Company shares
at prices of $21.97 to $63.33 per share.
In July 1995, the Company acquired all of the approximately 3.1 million Rust
International Inc. ("Rust") shares held by the public for $16.35 per share in
cash. Outstanding Rust stock options were converted into options to acquire
1,976,412 Company shares at prices of $21.39 to $40.10 per share.
Accounting Principles -
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), which is
effective for fiscal years beginning after December 15, 1995. The Company is
studying FAS 121 but has not yet determined what, if any, effect its adoption
will have on the Company's financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123") which the Company
also must adopt in 1996. FAS 123 provides an optional new method of accounting
for employee stock options and expands required disclosure about stock options.
If the new method of accounting is not adopted, the Company will be required to
disclose pro forma net income and earnings per share as if it were. The Company
is studying FAS 123 and is gathering data necessary to calculate compensation in
accordance with its provisions, but has not decided whether to adopt the new
method or quantified its impact on the financial statements.
10
<PAGE>
Derivative Financial Instruments -
From time to time, the Company uses derivatives to manage interest rate,
currency and commodity risk. The portfolio of such instruments (which are held
for purposes other than trading) at September 30, 1995, is set forth in the
paragraphs which follow.
INTEREST RATE AGREEMENTS Certain of the Company's subsidiaries have entered
into interest rate swap agreements to reduce the impact of changes in interest
rates on underlying borrowings. The agreements are contracts to exchange fixed
and floating interest rate payments periodically over the term without the
exchange of the underlying notional amounts. The notional amounts of such
agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The agreements provide only for
the exchange of interest on the notional amounts at the stated rates, with no
multipliers or leverage .
While the subsidiaries are exposed to market risk to the extent that receipts
and payments under interest rate agreements are affected by market interest
rates, such agreements are entered into as a hedge against interest rate
exposure on existing debt. Accordingly, differences paid or received under the
agreements are recognized as part of interest expense over the life of the
agreements. The impact of swap agreements on consolidated interest expense and
on the effective interest rate on consolidated debt was immaterial. As of
September 30, 1995, interest rate agreements in notional amounts and with terms
as set forth in the following table were outstanding:
Notional
Currency Amount Duration of Agreement
- ----------------- ------- ---------------------
Sterling 20,000 Feb. 1995 - Feb. 1999
Hong Kong dollars 250,000 Feb. 1995 - Feb. 1997
U.S. dollars 25,000 Jan. 1988 - Dec. 1995
CURRENCY AGREEMENTS From time to time, the Company and certain of its
subsidiaries use foreign currency derivatives to mitigate the impact of
translation on foreign earnings and income from foreign investees. Typically
these have taken the form of purchased put options or offsetting put and call
options with different strike prices. The Company receives or pays, based on the
notional amount of the option, the difference between the average exchange rate
of the hedged currency against the base currency and the average (strike price)
contained in the option. Complex instruments involving multipliers or leverage
are not used. While the Company may be required to make a payment in connection
with these agreements, it will recognize an offsetting increase in the
translation of foreign earnings or income from foreign investees. Although the
purpose for using such derivatives is to mitigate currency risk, they do not
qualify for hedge accounting under generally accepted accounting principles and
accordingly, must be adjusted to market value at the end of each accounting
period. Gains and losses on currency derivatives to date have not been material.
As of September 30, 1995, the Company was party to the following average rate
currency options (all options settle at expiration):
11
<PAGE>
Currency
-----------------------------
Notional Amount Hedged Against
- -------------------------------------------------------------------------
Collars, structured as
offsetting puts and
calls with different
strike prices, covering
the period January 1 to
December 31, 1995 40,000 French Franc Sterling
120,000 Swedish Krona Sterling
Put options purchased,
expiring at various
dates through May 31,
1996 47,600 Deutschemark Sterling
42,000 French Franc Sterling
13,500 Netherlands Guilder Sterling
60,000 Swedish Krona Sterling
20,000,000 Italian Lira Sterling
28,035 Sterling Dollar
COMMODITY AGREEMENTS The Company utilizes collars, calls and swaps to mitigate
the risk of price fluctuations on the fuel used by its vehicles. Quantities
hedged equate to committed fuel purchases or anticipated usage and accordingly,
gains and losses are deferred and recognized as fuel is purchased. The
following table summarizes the Company's positions in commodity derivatives as
of September 30, 1995:
Type Commodity Quantity Expiration
- -----------------------------------------------------------------
Swaps Heating oil 31,500 gals. 1995
Collars Gas oil 10 tons 1995
Swaps Crude oil 3,000 bbls. 1996
Collars Crude oil 300 bbls. 1996
Swaps Crude oil 3,000 bbls. 1997
Collars Crude oil 350 bbls. 1997
Swaps Crude oil 2,000 bbls. 1998
Collars Crude oil 200 bbls. 1998
Collars Crude oil 100 bbls. 1999
The Company is exposed to credit loss in the event of non-performance by
counterparties on interest rate, currency and commodity derivatives, but in all
cases such counterparties are substantial financial institutions and the Company
does not anticipate non-performance. Maximum credit exposure is represented by
the fair value of contracts with a positive fair value; at September 30, 1995,
such amounts were not material.
Environmental Liabilities -
The majority of the businesses in which the Company is engaged are intrinsically
connected with the protection of the environment. As such, a significant
portion of the Company's operating costs and capital expenditures could be
characterized as costs of environmental protection. While the Company is faced,
in the normal course of business, with the need to expend funds for
environmental protection and remediation, it does not expect such expenditures
to have a material adverse effect on its financial condition or results of
operations because its business is based upon compliance with environmental laws
and regulations and its services are priced accordingly. Such costs may
increase in the future as a result of legislation or regulation; however, the
Company believes that in general it benefits from increased government
regulation, which increases the demand for its
12
<PAGE>
services, and that it has the resources and experience to manage environmental
risk.
As part of its ongoing operations, the Company provides for estimated closure
and post-closure monitoring costs over the operating life of disposal sites as
airspace is consumed. The Company also has established procedures to evaluate
potential remedial liabilities at closed sites which it owns or operated or to
which it transported waste, including 105 sites listed on the Superfund National
Priority List ("NPL"). The majority of the situations involving NPL sites
relate to allegations that subsidiaries of the Company (or their predecessors)
transported waste to the facilities in question, often prior to the acquisition
of such subsidiaries by the Company. Where the Company concludes that it is
probable that a liability has been incurred, provision is made in the financial
statements.
Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult, and the ultimate
outcome may differ from current estimates. However, the Company believes that
its extensive experience in the environmental services business, as well as its
involvement with a large number of sites, provides a reasonable basis for
estimating its aggregate liability. As additional information becomes
available, estimates are adjusted as necessary. While the Company does not
anticipate that any such adjustment would be material to its financial
statements, it is reasonably possible that technological, regulatory or
enforcement developments, the results of environmental studies or other factors
could alter this expectation and necessitate the recording of additional
liabilities which could be material. The impact of such future events cannot be
estimated at the current time.
The Company and certain of its subsidiaries are named as defendants in personal
injury and property damage lawsuits, including purported class actions, on the
basis of a Company subsidiary's having owned, operated or transported waste to a
disposal facility which is alleged to have contaminated the environment. See
"Legal Proceedings" for further discussion.
The Company has filed several lawsuits against numerous insurance carriers
seeking reimbursement for past and future remedial, defense and tort claim costs
at a number of sites. The carriers have denied coverage and are vigorously
defending these claims. No amounts have been recognized in the financial
statements for any future insurance recoveries.
Stockholders' Equity -
The Boards of Directors of each of WMX and WTI have authorized their respective
companies to repurchase shares of their own common stock in the open market or
in privately negotiated transactions. The programs extend into 1996. During
the first nine months of 1995, WTI repurchased approximately 1.8 million of its
shares; WMX has not repurchased any shares in 1995.
In connection with its authorized stock repurchase program, WMX from time to
time sells put options on its own common stock. As of September 30, 1995, put
options were outstanding on 9 million shares, at strike prices ranging from
$26.1068 to $31.4464, expiring at various dates through May 1996. Subsequent to
September 30, 1995, options covering 4.7 million shares expired unexercised as
the market value of the Company's common stock was in excess of the strike
price. Options on the remaining 4.3 million shares have strike prices ranging
from $29.375 to $31.4464 and expire in April and May 1996. Subsequent to
September 30, WMX sold additional put options on 4.7 million shares with strike
prices from $27.3417 to $28.4583 per share, expiring in July and August 1996.
Commitments and Contingencies -
In 1994, a Connecticut Superior Court issued a decision with respect to appeals
brought by certain project opponents of the Connecticut Department of
13
<PAGE>
Environmental Protection's ("DEP") issuance to WTI of a permit to construct the
$92 million Lisbon, Connecticut, trash-to-energy facility. The Court remanded
the permit back to the DEP for further proceedings on an uncontested permit
condition that requires the Lisbon facility to dispose of only Connecticut
waste. Following a series of judicial proceedings, the permit was remanded to
the DEP in July of this year. Prior to the commencement of the remand
proceedings, WTI filed a motion with the Connecticut Superior Court to dismiss
the original appeals of the DEP decision to issue the construction permit based
on the grounds that such appeals were not timely filed. This motion was granted
in September 1995, prior to which time WTI reached settlements with two major
opponents of the project pursuant to which they withdrew all legal actions
against the project and agreed to support permitting of the project's
construction and operation. The effect of the decision was to reinstate the
DEP's decision to issue the permit. On October 17, following a 30-day notice
and comment period, the DEP issued temporary operating permits which enable WTI
to commence performance testing of the facility. The facility had been complete
and ready to undergo startup and shakedown activities since the second quarter
of 1995, but lacked these temporary operating permits. In light of these
settlements and the issuance of the temporary operating permits, WTI believes
that it will be successful in generating electricity at the facility prior to
the July 1996 delivery deadline contained in the facility's power contract.
Through a guarantee agreement with the Eastern Connecticut Resource Recovery
Authority, the facility's owner, failure to meet such deadline may require WTI
to redeem the debt issued to finance the facility. The resulting payments could
have a material adverse impact on WTI's financial condition and results of
operations and, to a lesser extent, on the Company's financial condition and
results of operations.
Waste Management, Inc. ("WMI") has been involved in litigation challenging a
municipal zoning ordinance which restricted the height of its New Milford,
Connecticut landfill to a level below that allowed by the permit previously
issued by the DEP. Although a lower court declared the zoning ordinance's height
limitation unconstitutional, the Connecticut Supreme Court reversed that ruling
and remanded the case for further proceedings in the Supreme Court. On November
8, 1995, the Superior Court ordered WMI to apply to the DEP for permission to
remove all waste above the height allowed by the zoning ordinance. The Company
believes that removal of such waste is an inappropriate remedy and WMI intends
to appeal the most recent ruling. The Company is unable to predict the outcome
of any appeal or the removal action that may ultimately be required following
further appeals or as a result of the permitting process. However, if the lower
court order as to removal of the waste is not modified, the subsidiary could
incur substantial costs, which could vary significantly depending upon the
nature of any plan which is eventually approved by applicable regulatory
authorities for removing the waste, the actual volume of waste to be moved and
other currently unforeseeable factors and which could have a material adverse
effect on the Company's financial condition and results of operations in one or
more future periods.
During the first quarter of 1995, Waste Management International plc ("WM
International") received an assessment of approximately 417 million Krona
(approximately $58 million) from the Swedish Tax Authority, relating to a
transaction completed in 1990. WM International believes that all appropriate
tax returns and disclosures were properly filed at the time of the transaction,
and intends to vigorously contest the assessment.
Debt -
In October 1995, the Company issued $250,000,000 of 6.25% Notes due October 15,
2000, at a price of 99.85%. The Notes are not redeemable prior to maturity.
Legal Matters -
See Part II of this Form 10-Q for a discussion of legal matters.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
Consolidated
- ------------
For the three months ended September 30, 1995, WMX Technologies, Inc. and its
subsidiaries ("WMX" or the "Company") had net income of $233,848,000 or $.48 per
share, compared to $212,885,000 or $.44 per share in the year-earlier period.
Revenue for the quarter was $2,826,033,000 versus $2,603,110,000 in the 1994
third quarter.
Net income for the nine months ended September 30, 1995, was $554,220,000 or
$1.14 per share, versus $578,614,000 or $1.20 per share for the corresponding
nine-month period in 1994. The 1995 nine-month results include first-half
charges, related to a writeoff of certain investments in hazardous waste
treatment and processing technologies and facilities by the Company's Chemical
Waste Management, Inc. ("CWM") subsidiary and costs related to the early
extinguishment of LYONs debt, which together reduced earnings by $.20 per share.
Excluding these charges, earnings per share for the nine months ended September
30, 1995, would have been $1.34. Revenues for the first nine months of 1995
rose 11.4% to $8,286,936,000 from $7,438,899,000 in the comparable year-earlier
period.
The Company provides comprehensive environmental, engineering and construction,
industrial and related services through five principal subsidiaries, each of
which presently operates in a relatively discrete industry or geographic area.
Waste Management, Inc. ("WMI") provides integrated solid waste services and CWM
provides hazardous waste collection, transportation, treatment and disposal
services in North America. Waste Management International plc ("WM
International") provides these services as well as trash-to-energy services
outside North America. Wheelabrator Technologies Inc. ("WTI") is involved in
trash-to-energy and independent power projects, water and wastewater treatment,
and air quality control, primarily in North America. Rust International Inc.
("Rust") serves the engineering, construction, environmental and infrastructure
consulting, and on-site industrial and related services markets in the United
States and a number of foreign countries.
As a result of a strategic review begun in 1994, WMX has established a long-term
goal of organizing the management of its four principal businesses - waste,
energy, water, and engineering and consulting services - on a global line of
business basis. During 1995, the Company essentially completed a program to
integrate management of the CWM land disposal facilities into the WMI
organization. In addition, WTI and WM International have formed a joint venture
to develop trash-to-energy projects on a world-wide basis outside of Germany,
Italy and North America. During the third quarter, executives were named to
head each of the global lines of business. In connection with additional
actions to implement the global line of business strategy, the existing business
alignment could change.
Following is an analysis of operating results for the third quarter and first
nine months of 1995 by principal subsidiary.
WMI
- ---
WMI revenue for the third quarter and first nine months of 1995 compared to the
same periods in 1994 is analyzed in the following table ($000's omitted):
15
<PAGE>
<TABLE>
Three Months Nine Months
Ended September 30 Ended September 30
--------------------------------- ----------------------------------
1995 1994 Increase 1995 1994 Increase
---------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Residential $ 308,722 $ 290,829 6.2% $ 906,116 $ 852,973 6.2%
Commercial 415,155 385,959 7.6 1,217,555 1,129,493 7.8
Rolloff and
industrial 348,903 324,564 7.5 997,285 924,231 7.9
Disposal,
transfer
and other 400,839 332,643 20.5 1,097,860 889,958 23.4
---------- ---------- ---------- ----------
$1,473,619 $1,333,995 10.5% $4,218,816 $3,796,655 11.1%
========== ========== ==== ========== ========== ====
</TABLE>
Price increases accounted for revenue growth of 2 to 2.5%, increased volume 6.5
to 7% and acquisitions 1.5 to 2% in the third quarter of 1995. For the nine
months ended September 30, 1995, revenue growth came from price increases (3 to
3.5%) and volume (7 to 7.5%), with acquisitions accounting for .5 to 1% revenue
growth. Prices of recyclable commodities trended down throughout the third
quarter, and that trend is expected to continue at least through the end of
1995. Nevertheless, average commodity prices for the third quarter were higher
in 1995 than in 1994, but this is not expected to be the case in the fourth
quarter. Volume growth for the nine months was helped by a relatively mild
winter in 1995, whereas severe weather over a large portion of the country
adversely affected the first quarter and thus the first nine months of 1994.
Operating expenses were 67.5% of revenue for the third quarter and 67.4% for the
first nine months of 1995 versus 68.0% and 68.6% for the comparable periods in
1994. Milder weather in 1995, WMI's pricing effectiveness program, improved
safety performance, generally higher recyclable commodity prices,
internalization of recycling processing, and continuing productivity
enhancements all contributed to the improvement. Selling and administrative
expenses were 10.1% of revenue for the third quarter and 10.2% for the first
nine months of 1995, compared to 10.5% and 10.8% in the year-earlier periods.
Although such expenses increased in absolute dollars in both the quarter and the
nine months ended September 30, 1995, productivity enhancements have enabled WMI
to manage a higher revenue base with relatively modest selling and
administrative expense increases, the majority of which result from acquisitions
and pay-for-performance compensation plans.
CWM
- ---
CWM revenue increased $4.1 million or 2.8% in the third quarter but declined
$35.6 million or 7.4% in the first nine months of 1995 compared to the same
periods in 1994. The revenue growth in the third quarter is more than accounted
for by the acquisition of Advanced Environmental Technology Corporation made
earlier in the year; both pricing and volume growth were negative. For the
nine-month period, the primary cause of the revenue decline was a 40% decrease
in second-quarter revenue at CWM's Barnwell, South Carolina, low-level
radioactive waste disposal facility. Barnwell had unusually high revenues in
the second quarter of 1994 from volumes accelerating in anticipation of a state
deadline which denied access to the facility to customers outside an eight-state
region in the southeastern United States (the "Southeast Compact") after June
30, 1994. During June 1995, the South Carolina legislature approved a measure
that extended the authorized life of the Barnwell site until its permitted
disposal capacity is fully utilized (estimated to be in ten years) and again
permitted acceptance of waste from outside the Southeast Compact.
Margins (revenue minus operating, selling and administrative expenses) declined
for both the three-month and nine-month periods ended September 30, 1995,
compared to the same 1994 periods. The declines are a function of pressure on
pricing and a shift in revenue mix toward lower margin technical services, which
16
<PAGE>
offset the benefits of personnel reductions. However, operating, selling and
administrative expenses declined, in both absolute terms and as a percentage of
revenue, from the second quarter of 1995. The nine-month percentages exclude a
charge of $140.6 million which CWM recorded in the first quarter of 1995 to
write off its investment in facilities and technologies that it has eliminated
because they do not meet customer service or performance objectives.
WTI
- ---
WTI revenue for the quarter ended September 30, 1995, grew $21.2 million to
$356.0 million, a 6.3% increase over the third quarter of 1994. For the nine
months ended September 30, WTI revenue was $1,099.2 million in 1995, an increase
of $161.5 million or 17.2% over the same period in 1994. WTI recognized $21.2
million of construction revenue associated with the Lisbon, Connecticut trash-
to-energy facility during the third quarter of 1994, and none during the third
quarter of 1995. For the nine months ended September 30, the impact of Lisbon
construction on revenue growth was immaterial.
Revenue from energy businesses declined $13.3 million in the third quarter of
1995 compared to the same period in 1994. Revenue growth from the Falls
Township, Pennsylvania trash-to-energy facility and the Polk County, Florida
urban wood waste-to-energy facility, both of which began commercial operations
in August of 1994, and increased revenue from existing plants was more than
offset by the absence of the Lisbon construction revenue. For the nine months
ended September 30, 1995, energy revenue increased $50.3 million or 10% compared
to the same period in 1994, primarily a result of the Falls Township and Polk
County facilities, with some growth from existing plants. The quarter and nine-
month growth in revenue from existing plants has been due largely to contractual
price escalation and greater waste processing and associated energy generation,
offset in part by increased curtailment of electrical purchases by the utility
customers of WTI's California independent power facilities.
WTI's third quarter water business revenue grew $43.9 million or 39% in 1995
compared to the same period in 1994. Water revenue for the nine months ended
September 30, 1995, increased $136.2 million, a growth of 43% over the prior
year. Acquisitions generated approximately 37% and 53% of third quarter and
nine-month revenue growth, respectively. The balance came from increased land
application volumes and new contracts, contractual price escalation at WTI's New
York Organic Fertilizer Company biosolids pelletizer facility, and improved
worldwide equipment and screen product sales.
Air business revenue declined 23% in the third quarter and 20% for the first
nine months of 1995 compared to the same periods in 1994. These declines are
consistent with general air industry trends and reflect a lull in air pollution
control retrofit activities by utilities between Phases I and II of the Clean
Air Act Amendments of 1990, spotty enforcement of existing regulations, and
uncertainty in connection with the current national political debate on
environmental regulatory reform. Management has downsized certain of WTI's air
businesses during 1995 to reflect expected market demand.
Energy, water and air businesses contributed 47%, 44% and 9%, respectively, of
third quarter 1995 revenue and 50%, 41% and 9% of nine-month revenue. For the
periods ended September 30, 1994, comparable amounts were 54%, 34% and 12% for
the three months and 53%, 34% and 13% for the nine months.
Operating expenses for the three-month and nine-month periods ended September
30, 1995, were 69.5% and 70.6% of revenue, respectively, compared to 68.3% and
68.5%, respectively, for the three-month and nine-month periods ended September
30, 1994. The higher 1995 operating expenses reflect the increased revenue
contribution of lower margin water businesses coupled with decreased air
business profitability.
17
<PAGE>
Selling and administrative expenses declined as a percentage of revenue for both
the three months and nine months ended September 30, 1995, compared with the
same periods in 1994, primarily reflecting consolidation of acquired businesses
and increased revenue over which to spread the fixed portion of such costs. On
an absolute basis, selling and administrative costs increased $.9 million in the
third quarter and $10.3 million for the first nine months of 1995 compared to
the same periods in 1994, primarily due to the impact of acquisitions.
WM International
- ----------------
WM International is a United Kingdom corporation which prepares its financial
statements in pounds sterling under accounting principles prevailing in the U.K.
Such accounting principles differ in certain respects from those generally
accepted in the United States ("U.S. GAAP"). The following discussion and
analysis is prepared on the basis of U.S. GAAP financial statements with pounds
sterling translated to U.S. dollars at the rates used to translate WM
International financial statements for inclusion in the Company's consolidated
financial statements (one pound = $1.5870 in 1995 and one pound = $1.5181 in
1994).
Revenues were $471,760,000 for the quarter ended September 30, 1995, versus
$446,024,000 for the comparable quarter of 1994. For the nine months ended
September 30, revenues were $1,389,548,000 in 1995 compared to $1,262,696,000 in
1994. Components of the change in revenue are shown in the following table:
Increase (Decrease) in 1995
Compared to 1994
-----------------------------
Three Months Nine Months
-------------- -------------
Price 1.8% 1.9%
Volume (5.9) (4.0)
Acquisitions 5.0 5.7
Currency translation 4.9 6.4
---- ----
5.8% 10.0%
==== ====
The major cause of the 1995 volume declines is the completion of the
construction phase of the SENT landfill in Hong Kong; the landfill opened in
1995. A new pricing mechanism introduced by the Hong Kong government in March,
which requires generators to absorb a portion of the disposal cost for waste
brought to the Hong Kong incinerator, has resulted in volume declines in certain
waste streams, but the impact has been offset with other volumes. The future
impact of these charges, on the incinerator and on the SENT landfill, should
they be extended to that facility, is uncertain. Pricing in Europe has been
negatively impacted by highly competitive conditions in the solid waste market
in France, softness in segments of the hazardous waste market, and lower prices
on rebids of municipal contracts in Italy.
A significant portion of WM International's revenue arises in currencies other
than pounds sterling (its reporting currency) or U.S. dollars. As a result,
foreign currency movement has had and will continue to have an impact on
reported revenue, expenses and net income, stated in both pounds sterling and
U.S. dollars. Both the Company and WM International periodically engage in
hedging transactions intended to mitigate currency translation risk. See
"Derivatives".
Operating expenses were 74.7% of revenue in the third quarter of 1995 compared
to 73.3% for the same quarter in 1994, and for the nine months ended September
30, were 75.1% in 1995 and 72.5% in 1994. The increases are a reflection of
highly competitive pricing in hazardous waste and in the solid waste markets of
Italy and France. However, the third quarter 1995 percentage did improve
slightly compared to the first and second quarters, a result of increased
18
<PAGE>
recycling volume and higher commodity prices. Selling and administrative
expenses were 12.7% of revenue for the three months ended September 30, 1995,
compared to 13.3% of revenue in the same period of 1994, and for the nine months
were 12.8% in 1995 and 13.5% in 1994. These improvements are a result of an
increased revenue base to absorb the fixed portion of such costs, integration of
acquired businesses, and continued emphasis on productivity improvements.
During the third quarter of 1995, the new management team at WM International
began an extensive review of operations and management structure with the
objective of simplifying the organization, getting country management closer to
the customer, and improving operating results, return on assets and cash flow.
Opportunities to dispose of or terminate investments in non-core businesses and
projects will also be evaluated. Depending on the outcome of this review, which
is expected to be completed in the fourth quarter, the possibility exists that
WM International will record a charge that could be material to its and the
Company's results of operations.
Rust
- ----
Rust revenue increased 1.9% for the third quarter and 11.4% for the first nine
months of 1995 compared to the same periods in 1994. Revenue by business line is
shown in the following table ($000's omitted):
Three Months Nine Months
Ended September 30 Ended September 30
----------------------------- ---------------------------------
Increase Increase
1995 1994 (Decrease) 1995 1994 (Decrease)
-------- -------- ---------- ---------- ---------- ----------
Engineering,
construction
and consulting
services $338,488 $260,827 29.8% $ 961,186 $ 707,612 35.8%
Remediation and
industrial
services 113,044 182,173 (37.9) 421,104 533,206 (21.0)
-------- -------- ---------- ----------
$451,532 $443,000 1.9% $1,382,290 $1,240,818 11.4%
======== ======== === ========== ========== ====
The revenue increase for engineering, construction and consulting services was
driven by volume growth, particularly activities on several large pulp and paper
projects. The impact of acquisitions on revenue growth was not significant.
The decline in remediation and industrial services revenue is primarily the
result of the divestiture of Rust's environmental remediation business. In May
1995, Rust exchanged this business for an approximately 37% equity interest in
OHM Corporation. For the three months ended September 30, 1994, the Rust
environmental remediation business had revenue of $65.5 million and operating
income (after operating, selling and administrative expenses) of $1.3 million.
For the nine months ended September 30, revenues were $62.2 million in 1995 and
$171.8 million in 1994, and operating income was $.9 million in 1995 and $4.8
million in 1994.
Rust's backlog declined $217 million during the third quarter due to significant
work performed on several large pulp and paper projects. The backlog at
September 30, 1995, of $1.032 billion includes $170 million related to several
Department of Defense contracts; there can be no assurance that specific
projects identified and performed pursuant to such contracts will result in
aggregate revenue of $170 million over their remaining term.
Operating expenses were 85.0% of revenue for the third quarter and 84.9% for the
first nine months of 1995, compared to 83.7% for the third quarter and 82.9% for
the first nine months of 1994. The increase in operating expenses is primarily
19
<PAGE>
attributable to a shift in revenue mix in favor of engineering, construction and
consulting work, which has higher operating expenses than the industrial
services business. Selling and administrative expenses as a percentage of
revenue were 7.9% for the third quarter and 8.7% for the first nine months of
1995, compared to 9.8% and 10.6% in the corresponding periods of 1994. The
decrease is a result of revenue growth, which provides a higher base over which
to spread the fixed components of such costs, and to ongoing programs to reduce
selling and administrative expenses across all business lines, including closing
certain offices and consolidating the engineering and construction groups in the
fourth quarter of 1994.
Interest
- --------
The following table sets forth the components of consolidated interest, net, for
the three-month and nine-month periods ended September 30, 1995 and 1994 ($000's
omitted):
Three Months Nine Months
-------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
Interest expense $127,798 $109,478 $386,920 $325,547
Interest income (8,402) (8,747) (31,803) (25,154)
Capitalized interest (20,665) (25,950) (59,700) (79,518)
-------- -------- -------- --------
Interest expense, net $ 98,731 $ 74,781 $295,417 $220,875
======== ======== ======== ========
Net interest expense for the three months and nine months ended September 30,
1995, increased compared to the corresponding periods in 1994 as a result of
slightly higher interest rates, debt incurred to purchase the public shares of
CWM and Rust, and lower capitalized interest due to the completion of several
large construction projects, partially offset by positive cash flow from
operations.
Minority Interest
- -----------------
The decline in minority interest for the three-month and nine-month periods
ended September 30, 1995, compared to the corresponding periods in 1994 is
primarily the result of the acquisition of the public shares of CWM and Rust.
See "Capital Structure".
Sundry Income, Net
- ------------------
Sundry income for the three months and nine months ended September 30, 1995,
increased over the comparable 1994 periods primarily as a result of higher
earnings by ServiceMaster Consumer Services L.P. and Wessex Water Plc in which
the Company and its subsidiaries have equity investments.
Income Taxes
- ------------
The Company's consolidated income tax rate has declined slightly in 1995 as a
result of shifts in the sources of taxable income and implementation of tax
planning strategies.
Accounting Principles
- ---------------------
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), which is
effective for fiscal years beginning after December 15, 1995. The Company is
studying FAS 121 but has not yet determined what, if any, effect its adoption
will have on the Company's financial statements.
20
<PAGE>
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123") which the Company
also must adopt in 1996. FAS 123 provides an optional new method of accounting
for employee stock options and expands required disclosure about stock options.
If the new method of accounting is not adopted, the Company will be required to
disclose pro forma net income and earnings per share as if it were. The Company
is studying FAS 123 and is gathering data necessary to calculate compensation in
accordance with its provisions, but has not decided whether to adopt the new
method or quantified its impact on the financial statements.
Derivatives
- -----------
From time to time, the Company and certain of its subsidiaries use derivatives
to manage currency, interest rate, and commodity (fuel) risk. Derivatives used
are simple agreements which provide for payments based on the notional amount,
with no multipliers or leverage. All derivatives are related to actual or
anticipated instruments or transactions of the Company. While the Company is
exposed to credit loss in the event of non-performance by counterparties to
derivatives, in all cases such counterparties are substantial financial
institutions and the Company does not anticipate non-performance. In addition,
maximum credit exposure is represented by the fair value of contracts with a
positive fair value; at September 30, 1995, such amounts were not material. See
Notes to Consolidated Financial Statements for further discussion. Also see
"Capital Structure" below for a discussion of the Company's sale of put options
in connection with its authorized stock repurchase program.
FINANCIAL CONDITION:
Liquidity and Capital Resources
- -------------------------------
The Company had a working capital deficit of $12.8 million at September 30,
1995, compared to a deficit of $90.9 million at December 31, 1994. The Company
is primarily in a service industry and has neither significant inventory nor
seasonal variations in receivables. Accordingly, it does not require
substantial working capital. Cash flow from operations during the nine months
ended September 30, 1995, ($1,473.8 million) was used for capital expenditures,
acquisitions of businesses, dividends, stock repurchases and debt reductions.
Long-term and short-term debt, net of cash and cash equivalents, increased
$520.3 million during the nine months ended September 30, 1995. The primary
reasons for this increase include the debt issued to acquire the public shares
of CWM and Rust, debt of acquired businesses, and the impact of foreign currency
translation on the debt of WM International, partially offset by reductions from
the positive cash flow noted above.
During the first quarter of 1995, WM International received an assessment of
approximately 417 million Krona (approximately $58 million) from the Swedish Tax
Authority, relating to a transaction completed in 1990. WM International
believes that all appropriate tax returns and disclosures were filed at the time
of the transaction, and intends to vigorously contest the assessment.
WMI has been involved in litigation challenging a municipal zoning ordinance
which restricted the height of its New Milford, Connecticut landfill to a level
below that allowed by the permit previously issued by the Connecticut Department
of Environmental Protection ("DEP"). Although a lower court had declared the
zoning ordinance's height limitation unconstitutional, the Connecticut Supreme
Court reversed that ruling and remanded the case for further proceedings in the
Superior Court. On November 8, 1995, the Superior Court ordered WMI to apply to
the DEP for permission to remove all waste above the height allowed by the
zoning ordinance. The Company believes that removal of such waste is an
inappropriate remedy and WMI intends to appeal the most recent ruling. The
Company is unable to predict the outcome of any appeal or the removal action
that may ultimately
21
<PAGE>
be required following further appeals or as a result of the permitting process.
However, if the lower court order as to removal of the waste is not modified,
the subsidiary could incur substantial costs, which could vary significantly
depending upon the nature of any plan which is eventually approved by applicable
regulatory authorities for removing the waste, the actual volume of waste to be
moved and other currently unforeseeable factors and which could have a material
adverse effect on the Company's financial condition and results of operations in
one or more future periods.
In September 1995, the Connecticut Superior Court dismissed appeals of the
decision by the DEP to issue a construction permit to WTI for the Lisbon
waste-to-energy facility. Also during the third quarter, WTI reached settlement
with two major opponents of the project pursuant to which they withdrew all
legal actions against the project and agreed to support the permitting for the
construction and operation of the project. The effect was to reinstate the
DEP's decision to issue the permit. On October 17, 1995, following a 30-day
notice and comment period, the DEP issued temporary operating permits, which
enabled WTI to commence performance testing of the facility. In light of the
settlement and the issuance of the temporary operating permits, WTI believes
that it will be successful in generating electricity at the facility prior to
the July 1996 delivery deadline contained in the facility's power contract.
Through a guarantee agreement with the Eastern Connecticut Resource Recovery
Authority, the facility's owner, failure to meet such deadline may require WTI
to redeem the debt issued to finance the facility. The resulting payments could
have a material adverse impact on WTI's financial condition and results of
operations and, to a lesser extent, on the Company's financial condition and
results of operations. See Notes to Consolidated Financial Statements.
The majority of the businesses in which the Company is engaged are intrinsically
connected with the protection of the environment. As part of its ongoing
operations, the Company provides for estimated closure and post-closure
monitoring costs over the operating life of disposal sites as airspace is
consumed. The Company has also established procedures to evaluate the potential
remedial liabilities at closed sites which it owns or operated, or to which it
transported waste. While the Company believes it has adequately provided for
its environmental liabilities, it is reasonably possible that technological,
regulatory or enforcement developments, the results of environmental studies or
other factors could necessitate the recording of additional liabilities which
could be material. See Notes to Consolidated Financial Statements.
The Company and certain of its subsidiaries are named as defendants in personal
injury and property damage lawsuits, including purported class actions, on the
basis of a Company subsidiary's having owned, operated or transported waste to a
disposal facility which is alleged to have contaminated the environment. See
"Legal Proceedings" for further discussion.
Acquisitions and Capital Expenditures
- -------------------------------------
Capital expenditures, excluding property and equipment of purchased businesses,
were $964.8 million for the nine months ended September 30, 1995, and $1,004.2
million for the comparable period in 1994. In addition, the Company and its
principal subsidiaries acquired 103 businesses for $248.7 million in cash and
notes (including debt assumed), and 1,962,893 shares of WMX common stock during
the first nine months of 1995. For the nine months ended September 30, 1994,
the Company and its principal subsidiaries acquired 89 businesses for $169.6
million in cash and notes (including debt assumed), 73,809 shares of WMX common
stock and 156,124 shares of WTI common stock. The pro forma effect of
acquisitions made during 1995 and 1994 is not material.
Capital Structure
- -----------------
In January 1995, the holders of a majority of the outstanding CWM shares (other
22
<PAGE>
than those held by WMX) approved a merger transaction that resulted in WMX
acquiring all of the outstanding CWM shares it did not previously own, in return
for convertible subordinated debt. In July 1995, WMX acquired the approximately
3.1 million Rust shares held by the public for $16.35 per share in cash.
The Boards of Directors of WMX and WTI have authorized their respective
companies to repurchase shares of their own common stock in the open market or
in privately negotiated transactions. The programs extend into 1996. During
the first nine months of 1995, WTI repurchased approximately 1.8 million of its
shares; WMX has not repurchased any shares in 1995.
In connection with its authorized stock repurchase program, WMX from time to
time sells put options on its own common stock. As of September 30, 1995, put
options were outstanding on 9 million shares, at strike prices ranging from
$26.1068 to $31.4464, expiring at various dates through May 1996. Subsequent to
September 30, 1995, options covering 4.7 million shares expired unexercised as
the market value of the Company's common stock was in excess of the strike
price. Options on the remaining 4.3 million shares have strike prices ranging
from $29.375 to $31.4464 and expire in April and May 1996. Subsequent to
September 30, WMX sold additional put options on 4.7 million shares with strike
prices from $27.3417 to $28.4583 per share, expiring in July and August 1996.
23
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
-----------------
The majority of the businesses in which the Company is engaged are
intrinsically connected with the protection of the environment and the potential
for the unintended or unpermitted discharge of materials into the environment.
In the ordinary course of conducting its business activities, the Company
becomes involved in judicial and administrative proceedings involving
governmental authorities at the federal, state and local level, including, in
certain instances, proceedings instituted by citizens or local governmental
authorities seeking to overturn governmental action where governmental officials
or agencies are named as defendants together with the Company or one or more of
its subsidiaries, or both. In the majority of the situations where proceedings
are commenced by governmental authorities, the matters involved relate to
alleged technical violations of licenses or permits pursuant to which the
Company operates or is seeking to operate or laws or regulations to which its
operations are subject, or are the result of different interpretations of the
applicable requirements. From time to time the Company pays fines or penalties
in environmental proceedings relating primarily to waste treatment, storage or
disposal or trash-to-energy facilities. As of September 30, 1995, CWM was
involved in one such proceeding and a subsidiary of WTI was involved in one such
proceeding where it is believed that sanctions involved in each instance may
exceed $100,000.
The Company or certain of its subsidiaries have been identified as
potentially responsible parties in a number of governmental investigations and
actions relating to waste disposal facilities which may be subject to remedial
action under the Comprehensive Environmental Response, Compensation and
Liabilities Act of 1980, as amended ("Superfund"). The majority of these
proceedings are based on allegations that certain subsidiaries of the Company
(or their predecessors) transported hazardous substances to the facilities in
question, often prior to acquisition of such subsidiaries by the Company. Such
proceedings arising under Superfund typically involve numerous waste generators
and other waste transportation and disposal companies and seek to allocate or
recover costs associated with site investigation and cleanup, which costs could
be substantial.
As of September 30, 1995, the Company or its subsidiaries had been notified
that they are potentially responsible parties in connection with 105 locations
listed on the Superfund National Priority List ("NPL"). Of the 105 NPL sites at
which claims have been made against the Company, 19 are sites which the Company
has come to own over time. All of the NPL sites owned by the Company were
initially sited by others as land disposal facilities. At each of the 19 owned
facilities, the Company is working in conjunction with the government to
characterize or to remediate identified site problems. In addition, at these 19
facilities the Company has either agreed with other legally liable parties on an
arrangement for sharing the costs of remediation or is pursuing resolution of an
allocation formula. The 86 NPL sites at which claims have been made against the
Company and which are not owned by the Company are at different procedural
stages under Superfund. At some, the Company's liability is well defined as a
consequence of a governmental decision as to the appropriate remedy and an
agreement among liable parties as to the share each will pay for implementing
that remedy. At others, where no remedy has been selected or the liable parties
have been unable to agree on an appropriate allocation, the Company's future
costs are substantially uncertain.
The Company periodically reviews its role, if any, with respect to each
such location, giving consideration to the nature of the Company's alleged
connection to the location (e.g., owner, operator, transporter or generator),
the extent of the Company's alleged connection to the location (e.g., amount and
nature of waste hauled to the location, number of years of site operation by the
Company or other relevant factors), the accuracy and strength of evidence
connecting the Company to the location, the number, connection and financial
ability of other named and unnamed potentially responsible parties at the
location, and the nature and estimated cost of the likely remedy. Where the
24
<PAGE>
Company concludes that it is probable that a liability has been incurred, a
provision is made in the Company's financial statements for the Company's best
estimate of the liability based on management's judgment and experience,
information available from regulatory agencies, and the number, financial
resources and relative degree of responsibility of other potentially responsible
parties who are jointly and severally liable for remediation of a specific site,
as well as the typical allocation of costs among such parties. If a range of
possible outcomes is estimated and no amount within the range appears to be a
better estimate than any other, then the Company provides for the minimum amount
within the range, in accordance with generally accepted accounting principles.
Sites subject to state action under state laws similar to the federal Superfund
statute are treated by the Company in the same way as NPL sites. The Company's
estimates are subsequently revised, as deemed necessary, as additional
information becomes available. While the Company does not anticipate that the
amount of any such revisions will have a material adverse effect on the
Company's operations or financial condition, the measurement of environmental
liabilities is inherently difficult and the possibility remains that
technological, regulatory or enforcement developments, the results of
environmental studies, or other factors could materially alter this expectation
at any time. Such matters could have a material adverse impact on earnings for
one or more fiscal quarters or years.
From time to time, the Company and certain of its subsidiaries are named as
defendants in personal injury and property damage lawsuits, including purported
class actions, on the basis of a Company subsidiary's having owned, operated or
transported waste to a disposal facility which is alleged to have contaminated
the environment. Some of such lawsuits may seek to have the Company or its
subsidiaries pay the costs of groundwater monitoring and health care
examinations of allegedly affected persons for a substantial period of time even
where no actual damage is proven. While the Company believes it has meritorious
defenses to these lawsuits, their ultimate resolution is often substantially
uncertain due to the difficulty of determining the cause, extent and impact of
alleged contamination (which may have occurred over a long period of time), the
potential for successive groups of complainants to emerge, the diversity of the
individual plaintiffs' circumstances, and the potential contribution or
indemnification obligations of co-defendants or other third parties, among other
factors. Accordingly, it is possible such matters could have a material
adverse impact on the Company's earnings for one or more fiscal quarters or
years.
A subsidiary of the Company has been involved in litigation challenging a
municipal zoning ordinance which restricted the height of its New Milford,
Connecticut landfill to a level below that allowed by the permit previously
issued by the Connecticut Department of Environmental Protection ("DEP").
Although a lower court had declared the zoning ordinance's height limitation
unconstitutional, the Connecticut Supreme Court reversed that ruling and
remanded the case for further proceedings in the Superior Court in the judicial
district of Litchfield. On November 8, 1995, the Superior Court ordered the
Company's subsidiary to apply to the DEP for permission to remove all waste
above the height allowed by the zoning ordinance. The Company believes that
removal of such waste is an inappropriate remedy and its subsidiary intends to
appeal the most recent ruling. The Company is unable to predict the outcome of
any appeal or the removal action that may ultimately be required following
further appeals or as a result of the permitting process. However, if the lower
court order as to removal of the waste is not modified, the subsidiary could
incur substantial costs, which could vary significantly depending upon the
nature of any plan which is eventually approved by applicable regulatory
authorities for removing the waste, the actual volume of waste to be moved and
other currently unforeseeable factors and which could have a material adverse
effect on the Company's financial condition and results of operations in one or
more future periods.
The Company and certain of its subsidiaries are also currently involved in
other civil litigation and governmental proceedings relating to the conduct of
their business. While the outcome of any particular lawsuit or governmental
investigation cannot be predicted with certainty, the Company believes that
these matters will not have a material adverse effect on its results of
operations or financial condition.
ITEM 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
The exhibits to this report are listed in the Exhibit Index elsewhere
herein.
(b) Reports on Form 8-K.
The registrant filed no reports on Form 8-K during the quarter ended
September 30, 1995.
25
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WMX TECHNOLOGIES, INC.
/s/ JAMES E. KOENIG
----------------------------------------
James E. Koenig - Senior Vice President
and Chief Financial Officer
November 14, 1995
26
<PAGE>
WMX TECHNOLOGIES, INC.
EXHIBIT INDEX
Number and Description of Exhibit*
- ---------------------------------
2 None
4 None
10 Amendment, dated as of July 10, 1995, to the First Amended and Restated
International Business Opportunities Agreement, by and among the
registrant, Chemical Waste Management, Inc., Wheelabrator Technologies
Inc., Waste Management, Inc., Waste Management International, Inc.,
Waste Management International plc and Rust International Inc.
(incorporated by reference to Exhibit 10 to the quarterly report on
Form 10-Q of Wheelabrator Technologies Inc. (Securities Exchange Act of
1934 file no. 0-14246) for the quarter ended September 30, 1995)
11 None
12 Computation of Ratios of Earnings to Fixed Charges
15 None
18 None
19 None
22 None
23 None
24 None
27 Financial Data Schedule
99 None
- ---------------
* Exhibits not listed are inapplicable.
<PAGE>
EXHIBIT 12
WMX TECHNOLOGIES, INC.
Ratio of Earnings to Fixed Charges
(Unaudited)
(millions of dollars, except ratio)
Nine Months
Ended September 30
---------------------
1994 1995 (1)
--------- ---------
Income Before Income Taxes, Undistributed Earnings
from Affiliated Companies and Minority Interest... $1,091.1 $1,083.4
Interest Expense.................................... 325.5 386.9
Capitalized Interest................................ (79.5) (59.7)
One-Third of Rents Payable in the Next Year......... 34.9 37.4
-------- --------
Income Before Income Taxes, Undistributed Earnings
from Affiliated Companies, Minority Interest,
Interest and One-Third of Rents................... $1,372.0 $1,448.0
======== ========
Interest Expense.................................... $ 325.5 $ 386.9
One-Third of Rents Payable in the Next Year......... 34.9 37.4
-------- --------
Interest Expense plus One-Third of Rents............ $ 360.4 $ 424.3
======== ========
Ratio of Earnings to Fixed Charges.................. 3.81 to 1 3.41 to 1
(1) The results for 1995 include a special charge ($140.6 million before income
taxes), recorded by the Company's Chemical Waste Management, Inc., subsidiary,
primarily related to a writeoff of certain investments in hazardous waste
treatment and processing technologies and facilities. Excluding the effect of
this charge, the ratio of earnings to fixed charges would be 3.74 to 1.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the September 30, 1995 consolidated balance sheet and the consolidated statement
of income for the nine-month period ended September 30, 1995 and is qualified in
its entirety by reference to such financial statements and the footnotes
thereto.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
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