<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 JUNE 30, 1997
___ 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
WASTE MANAGEMENT, 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 60523
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (630)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 July 31, 1997--454,593,714
(excluding 10,886,361 shares held in the Waste Management, Inc. Employee Stock
Benefit Trust)
================================================================================
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
INDEX
-----
PAGE
----
PART I. Financial Information:
Consolidated balance sheets as of December 31, 1996, and
June 30, 1997....................................................... 3
Consolidated statements of income for the three months and six months
ended June 30, 1996 and 1997........................................ 5
Consolidated statements of stockholders' equity for the six months
ended June 30, 1996 and 1997........................................ 6
Consolidated statements of cash flows for the six months
ended June 30, 1996 and 1997........................................ 8
Notes to consolidated financial statements............................... 9
Management's discussion and analysis of results of operations
and financial condition............................................. 16
PART II. Other Information.............................................. 22
******
2
<PAGE>
PART I. FINANCIAL INFORMATION
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($000's omitted)
ASSETS
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1997
------------------ --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 323,288 $ 435,136
Short-term investments 341,338 167,009
Accounts receivable, less reserve of $47,523 in 1996
and $38,583 in 1997 1,681,817 1,594,656
Employee receivables 10,084 8,847
Parts and supplies 142,417 144,905
Costs and estimated earnings in excess of billings
on uncompleted contracts 240,531 258,200
Prepaid expenses 353,749 374,914
----------- -----------
Total Current Assets $ 3,093,224 $ 2,983,667
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Land, primarily disposal sites $ 5,019,065 $ 5,055,448
Buildings 1,495,252 1,467,607
Vehicles and equipment 7,520,902 7,304,161
Leasehold improvements 85,998 86,785
----------- -----------
$14,121,217 $13,914,001
Less - Accumulated depreciation and amortization (4,399,508) (4,516,788)
----------- -----------
Total Property and Equipment, Net $ 9,721,709 $ 9,397,213
----------- -----------
OTHER ASSETS:
Intangible assets relating to acquired businesses, net $ 3,885,293 $ 3,722,256
Sundry, including other investments 1,452,057 1,004,296
Net assets of discontinued operations 214,309 205,309
----------- -----------
Total Other Assets $ 5,551,659 $ 4,931,861
----------- -----------
Total Assets $18,366,592 $17,312,741
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($000's omitted except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1997
------------------ --------------
<S> <C> <C>
CURRENT LIABILITIES:
Portion of long-term debt payable within one year $ 553,493 $ 802,243
Accounts payable 948,350 773,225
Accrued expenses 1,324,324 1,631,634
Unearned revenue 212,541 213,071
----------- -----------
Total Current Liabilities $ 3,038,708 $ 3,420,173
----------- -----------
DEFERRED ITEMS:
Income taxes $ 1,011,593 $ 979,781
Environmental liabilities 543,723 495,338
Other 641,918 564,939
----------- -----------
Total Deferred Items $ 2,197,234 $ 2,040,058
----------- -----------
LONG-TERM DEBT, less portion payable within one year $ 6,971,607 $ 6,520,035
----------- -----------
MINORITY INTEREST IN SUBSIDIARIES $ 1,186,955 $ 1,156,821
----------- -----------
COMMITMENTS AND CONTINGENCIES $ $
----------- -----------
PUT OPTIONS $ 95,789 $ -
----------- -----------
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; 507,101,774 shares issued in 1996
and 1997 507,102 507,102
Additional paid-in capital 864,730 953,772
Cumulative translation adjustment (79,213) (209,897)
Retained earnings 4,363,754 4,563,814
----------- -----------
$ 5,656,373 $ 5,814,791
Less: Treasury stock; 12,782,864 shares in 1996 and
41,668,633 in 1997, at cost 419,871 1,286,350
1988 Employee Stock Ownership Plan 6,396 3,063
Employee Stock Benefit Trust; 10,886,361
shares in 1996 and 1997, at market 353,807 349,724
----------- -----------
Total Stockholders' Equity $ 4,876,299 $ 4,175,654
----------- -----------
Total Liabilities and Stockholders'
Equity $18,366,592 $17,312,741
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
----------------------- --------------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE $2,330,994 $2,327,309 $4,475,473 $4,525,617
---------- ---------- ---------- ----------
Operating expenses $1,619,255 $1,634,114 $3,114,104 $3,185,832
Selling and administrative
expenses 246,688 242,800 492,551 484,329
Interest expense 94,291 99,936 188,097 198,285
Interest income (6,421) (9,786) (12,661) (21,878)
Minority interest 31,397 28,314 58,601 56,076
Sundry (income) expense, net (21,379) 11,936 (38,714) (648)
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes $ 367,163 $ 319,995 $ 673,495 $ 623,621
Provision for income taxes 149,429 139,971 275,582 265,185
---------- ---------- ---------- ----------
Income from continuing operations $ 217,734 $ 180,024 $ 397,913 $ 358,436
Income from operations of
discontinued businesses, less
applicable income taxes and
minority interest of $5,572 and
$10,741 for the three months and
six months ended June 30, 1996,
respectively 5,308 - 10,307 -
---------- ---------- ---------- ----------
NET INCOME $ 223,042 $ 180,024 $ 408,220 $ 358,436
========== ========== ========== ==========
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 496,031 466,276 492,593 475,498
========== ========== ========== ==========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE
Continuing operations $ 0.44 $ 0.39 $ 0.81 $ 0.75
Discontinued operations 0.01 - 0.02 -
---------- ---------- ---------- ----------
NET INCOME $ 0.45 $ 0.39 $ 0.83 $ 0.75
========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE $ 0.16 $ 0.17 $ 0.31 $ 0.33
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
($000's omitted except per share amounts)
<TABLE>
<CAPTION>
1988
Employee Employee
Additional Cumulative Stock Stock
Common Paid-In Translation Retained Treasury Ownership Benefit
Stock Capital Adjustment Earnings Stock Plan Trust
--------- ---------- ----------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $498,817 $ 422,801 $(102,943) $ 4,486,877 $ - $13,062 $350,151
Net income for the period - - - 408,220 - - -
Cash dividends ($.31 per share) - - - (153,222) - - -
Dividends paid to Employee
Stock Benefit Trust - 3,460 - (3,460) - - -
Stock repurchase
(5,000,000 shares) - - - - 168,305 - -
Stock issued upon exercise
of stock options 217 (7,332) - - (25,617) - (28,622)
Treasury stock received in
connection with exercise of
stock options - - - - 791 - -
Tax benefit of non-qualified
stock options exercised - 4,999 - - - - -
Contribution to 1988 Employee
Stock Ownership Plan - - - - - (3,333) -
Treasury stock received as
settlement for claims - - - - 2,400 - -
Common stock issued upon
conversion of Liquid Yield
Option Notes 107 1,893 - - - - -
Common stock issued for
acquisitions 7,957 226,222 - - - - -
Temporary equity related to
put options - (135,957) - - - - -
Proceeds from sale of
put options - 14,774 - - - - -
Adjustment of Employee Stock
Benefit Trust to market value - 34,999 - - - - 34,999
Cumulative translation adjust-
ment of foreign currency
statements - - (5,587) - - - -
--------- --------- ----------- ---------- -------- -------- ---------
Balance, June 30, 1996 $507,098 $ 565,859 $(108,530) $4,738,415 $145,879 $ 9,729 $356,528
========= ========= =========== ========== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
($000's omitted except per share amounts)
<TABLE>
<CAPTION>
1988
Employee Employee
Additional Cumulative Stock Stock
Common Paid-In Translation Retained Treasury Ownership Benefit
Stock Capital Adjustment Earnings Stock Plan Trust
-------- ---------- ----------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $507,102 $864,730 $ (79,213) $4,363,754 $ 419,871 $ 6,396 $353,807
Net income for the period - - - 358,436 - - -
Cash dividends ($.33 per share) - - - (154,784) - - -
Dividends paid to Employee Stock Benefit
Trust - 3,592 - (3,592) - - -
Stock repurchase (30,000,000 shares) - - - - 902,629 - -
Stock issued upon exercise of stock
options and grant of restricted stock - (5,976) - - (35,951) - -
Tax benefit of non-qualified stock
options exercised - 1,950 - - - - -
Contribution to 1988 Employee Stock
Ownership Plan - - - - - (3,333) -
Treasury stock received as settlement
for claims - - - - 141 - -
Common stock issued upon conversion of
Liquid Yield Option Notes - (124) - - (340) - -
Temporary equity related to put options - 95,789 - - - - -
Settlement of put options - (1,605) - - - - -
Adjustment of Employee Stock Benefit
Trust to market value - (4,083) - - - - (4,083)
Unrealized loss on securities to be sold - (501) - - - - -
Cumulative translation adjustment of
foreign currency statements - - (130,684) - - - -
-------- -------- --------- ---------- ---------- ------- --------
Balance, June 30, 1997 $507,102 $953,772 $(209,897) $4,563,814 $1,286,350 $ 3,063 $349,724
======== ======== ========= ========== ========== ======= ========
</TABLE>
The accompanying notes are an integral part of this statement.
7
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
Increase (Decrease) in Cash
(Unaudited)
($000's omitted)
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income for the period $ 408,220 $ 358,436
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 462,170 425,709
Provision for deferred income taxes 116,725 (90,333)
Minority interest in subsidiaries 60,254 56,076
Interest on Liquid Yield Option Notes (LYONs) and WMI Subordinated Notes 5,737 10,976
Contribution to 1988 Employee Stock Ownership Plan 3,333 3,333
Changes in assets and liabilities, excluding effects of acquired companies:
Receivables, net (30,391) 18,552
Other current assets (43,864) (54,017)
Sundry other assets (16,939) (65,544)
Accounts payable (114,635) (152,753)
Accrued expenses and unearned revenue (68,449) 238,992
Deferred items (55,029) (120,910)
Other, net 738 (40,652)
---------- -----------
Net cash provided by operating activities $ 727,870 $ 587,865
---------- -----------
Cash flows from investing activities:
Short-term investments $ 10,371 $ (139,990)
Capital expenditures (577,791) (368,217)
Proceeds from asset monetization program 146,901 1,287,090
Cost of acquisitions, net of cash acquired (57,911) (34,800)
Other investments (45,232) 24,810
Acquisition of minority interests (329,653) (67,625)
---------- -----------
Net cash provided by (used for) investing activities $ (853,315) $ 701,268
---------- -----------
Cash flows from financing activities:
Cash dividends $ (153,222) $ (154,784)
Proceeds from issuance of indebtedness 1,366,124 529,450
Repayments of indebtedness (906,535) (677,692)
Proceeds from exercise of stock options, net 46,333 29,975
Contributions from minority interests 3,680 -
Stock repurchases (168,305) (902,629)
Proceeds from sale of put options 14,774 -
Settlement of put options - (1,605)
---------- -----------
Net cash provided by (used for) financing activities $ 202,849 $(1,177,285)
---------- -----------
Net increase in cash and cash equivalents $ 77,404 $ 111,848
Cash and cash equivalents at beginning of period 169,541 323,288
---------- -----------
Cash and cash equivalents at end of period $ 246,945 $ 435,136
========== ===========
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.
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 193,181 $ 187,309
Income taxes, net of refunds received $ 147,372 $ 210,984
Supplemental schedule of noncash investing and financing activities:
LYONs converted into common stock of the Company $ 2,000 $ 216
Liabilities assumed in acquisitions of businesses $ 97,952 $ 17,572
Fair market value of Company stock issued for acquired businesses $ 234,179 $ -
Marketable securities received from sale of discontinued operations $ - $ 63,967
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
($000's omitted in all tables)
The financial statements included herein have been prepared by Waste Management,
Inc. ("WMI" or the "Company") (formerly WMX Technologies, Inc.) 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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, income and expenses and
disclosures of contingencies. Future events could alter such estimates in the
near term.
Certain amounts in previously issued financial statements have been restated to
conform to 1997 classifications.
Income Taxes -
The following table sets forth the provision for income taxes for continuing
operations for the three months and six months ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------------------- --------------------
1996 1997 1996 1997
------------------------- --------------------
<S> <C> <C> <C> <C>
Currently payable $91,571 $ 265,456 $150,024 $355,906
Deferred 58,052 (125,290) 125,946 (90,333)
Amortization of deferred
investment credit (194) (195) (388) (388)
------- --------- -------- --------
$149,429 $ 139,971 $275,582 $265,185
======== ========= ======== ========
</TABLE>
The negative deferred tax provision for the three months and six months ended
June 30, 1997, is primarily due to previously deferred taxes becoming payable as
a result of the Company's asset monetization program.
Business Combinations -
During 1996, the Company and its principal subsidiaries acquired 83 businesses
for $104,778,000 in cash (net of cash acquired) and notes, $39,446,000 of debt
assumed, and 8,210,568 shares of the Company's common stock. These acquisitions
were accounted for as purchases.
During the six months ended June 30, 1997, the Company and its principal
subsidiaries acquired 20 businesses for $34,800,000 in cash and notes. These
acquisitions were accounted for as purchases. The pro forma effect of the
acquisitions made during 1996 and 1997 is not material.
9
<PAGE>
On June 20, 1997, the Company announced an offer to acquire, for $15 per share
in cash, all of the outstanding shares of Wheelabrator Technologies Inc. ("WTI")
it does not already own. The Company currently owns approximately 67% of the
156.6 million outstanding WTI shares. The offer is subject to approval by a
committee of independent WTI directors and the holders of a majority of the
outstanding WTI shares, other than those held by the Company, voting on it at a
special meeting of WTI stockholders to be called for that purpose. Several
lawsuits have also been filed which seek, among other things, to enjoin the
proposed transaction.
Divestitures -
The Company divested nine North American solid waste businesses in the quarter
for a price of $234,000,000. The largest of these transactions was the sale of
most of its Canadian operations. In the first six months of this year, the
Company has divested 17 solid waste operations in North America for a total
price of $265,000,000. In Europe, the Company's Waste Management International
plc subsidiary completed in June the sale of substantially all of its remaining
operations in France for 67.5 million pounds, or approximately $112,000,000, and
subsequent to June 30 sold its business in Spain.
Discontinued Operations -
In line with the Company's strategy to focus on waste management services, other
industry segments, including the engineering, construction and consulting
businesses and industrial scaffolding business of Rust International Inc.
("Rust") and the water businesses of WTI have been classified as discontinued
operations.
The discontinued businesses have been segregated from continuing operations in
the accompanying balance sheets and statements of income. Revenue from these
businesses prior to sale was $107.0 million for the three months and $241.4
million for the six months ended June 30, 1997, and $354.1 million and $769.6
million for the comparable periods in 1996, the decline relating primarily to
businesses sold in the interim. Results of operations for the three months and
six months ended June 30, 1997, were not material and were included in the
reserve for loss on disposition provided previously.
Restructuring -
In the fourth quarter of 1996, the Company recorded a charge for reengineering
and streamlining its finance and administrative functions. Approximately $20.0
million of the charge related to cash payments for employee severance. As of
June 30, 1997, approximately half of this amount had been spent. The balance is
expected to be paid by the end of 1997. In addition, reengineering costs of
approximately $0.01 to $0.02 per share were charged to income in the second
quarter and first six months of 1997.
Accounting Principles -
In February 1997, the Financial Accounting Standards Board ("FASB") issued FAS
No. 128, "Earnings Per Share". This statement supersedes Accounting Principles
Board Opinion No. 15. Primary EPS is replaced by Basic EPS, which is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. In addition, Fully Diluted EPS is
replaced with Diluted EPS, which gives effect to all common shares that would
have been outstanding if all dilutive potential common shares (relating to such
things as the exercise of stock options and convertible debt) had been issued.
10
<PAGE>
FAS No. 128 is effective for interim and annual periods ending after December
15, 1997. Earlier application is not permitted, but when the opinion becomes
effective, all prior periods presented must be restated. EPS computed in
accordance with FAS No. 128 for the three months and six months ended June 30,
1996 and 1997, would have been as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
---------------------- ---------------------
1996 1997 1996 1997
---------------------- ---------------------
<S> <C> <C> <C> <C>
Continuing Operations -
Basic $0.44 $0.39 $0.81 $0.75
Diluted 0.43 0.38 0.79 0.74
Discontinued Operations -
Basic $0.01 $ - $0.02 $ -
Diluted 0.01 - 0.02 -
</TABLE>
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income" and
FAS No. 131, "Disclosure about Segments of an Enterprise and Related
information." Both statements are effective for fiscal years beginning after
December 15, 1997. FAS 130 requires only a different format for presentation of
information already included in the Company's financial statements. FAS 131
modifies and expands required segment disclosure but does not affect accounting
principles, and accordingly will not require any change to reported financial
position, results of operations and cash flows.
Derivative Financial Instruments -
From time to time, the Company and certain of its subsidiaries use derivatives
to manage interest rate, currency and commodity risk. The Company's policy is to
use derivatives for risk management purposes only, and it does not enter into
such contracts for trading purposes. The Company enters into derivatives only
with counterparties which are financial institutions having credit ratings of at
least A- or A3, to minimize credit risk. The amount of derivatives outstanding
at any one point in time and gains or losses from their use have not been and
are not expected to be material to the Company's financial statements.
Instruments used as hedges must be effective at managing risk associated with
the exposure being hedged and must be designated as a hedge at the inception of
the contract. Accordingly, changes in market values of hedge instruments must
have a high degree of inverse correlation with changes in market values or cash
flows of underlying hedged items. Derivatives that meet the hedge criteria are
accounted for under the deferral or accrual method, except for currency
agreements as discussed below. If a derivative does not meet or ceases to meet
the aforementioned criteria, or if the designated hedged item ceases to exist,
then the Company subsequently uses fair value accounting for the derivative,
with gains or losses included in sundry income. If a derivative is terminated
early, any gain or loss, including amounts previously deferred, is deferred and
amortized over the remaining life of the terminated contract or until the
anticipated transaction occurs.
Interest Rate Agreements. Certain of the Company's subsidiaries have entered
into interest rate swap agreements to balance fixed and floating rate debt in
accordance with management's criteria. The agreements are contracts to exchange
fixed and floating interest rate payments periodically over a specified term
without the exchange of the underlying notional amounts. The agreements provide
only for the exchange of interest on the notional amounts at the stated rates,
with no multipliers or leverage. Differences paid or received are accrued in the
financial statements as a part of interest expense on the underlying debt over
the life of the agreements and the swap is not marked to market.
11
<PAGE>
Currency Agreements. From time to time, the Company and certain of its
subsidiaries use foreign currency derivatives to seek 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. 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 with gains or losses included in income.
The Company sometimes also uses foreign currency forward contracts to hedge
committed transactions when the terms of such a transaction are known and there
is a high probability that the transaction will occur. Gains or losses on
forward contracts pertaining to such transactions are deferred until the
designated transaction is completed. The impact of the forward contract is then
included with the results of the underlying transaction in the financial
statements.
Commodity Agreements. The Company utilizes derivatives to seek to mitigate the
impact of fluctuations in the price of fuel used by its vehicles. Quantities
hedged do not exceed committed fuel purchases or anticipated usage and
accordingly, gains and losses in the hedge positions are deferred and recognized
in operating expenses as fuel is purchased.
Environmental Liabilities -
The continuing business in which the Company is engaged is 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 tends to benefit when government regulation increases, which may
increase the demand for its 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 life of disposal sites as airspace is
consumed. The Company has also established procedures to evaluate its potential
remedial liabilities at closed sites which it owns or operated, or to which it
transported waste, including 94 sites listed on the Superfund National Priority
List ("NPL"). The majority of 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 necessitate the
recording of additional liabilities which could be material.
12
<PAGE>
Stockholders' Equity -
The Boards of Directors of WMI and WTI have authorized their respective
companies to repurchase shares of their own common stock (up to 50 million
shares in the case of WMI and 30 million shares in the case of WTI) in the open
market, in privately negotiated transactions, or through issuer tender offers.
These programs extend into 1998. During the 1997 second quarter, WMI purchased
30 million of its shares with its "Dutch Auction" tender offer; it has not
repurchased any other shares during 1997. WTI repurchased 5.1 million of its
shares in open market transactions during the first six months of 1997; however,
in light of the WMI offer to acquire its remaining public shares, WTI has
suspended its repurchase activity.
WMI periodically sells put options on its common stock. The put options give the
holders the right at maturity to require the Company to repurchase its shares at
specified prices. Proceeds from the sale of the options are credited to
additional paid-in capital. In the event the options are exercised, the Company
may elect to pay the holder in cash the difference between the strike price and
the market price of the Company's shares in lieu of repurchasing the stock. In
February 1997, options on 1.9 million shares were exercised, and the Company
elected to settle them for $1.6 million in cash. One million options expired
unexercised as the price of the Company's stock was in excess of the strike
price at maturity. At June 30, 1997, no put options were outstanding, although
the Company may sell such options in the future.
Commitments and Contingencies -
During the first quarter of 1995, Waste Management International plc ("WM
International") received an assessment from the Swedish Tax Authority of
approximately 417 million Krona (approximately $60 million) plus interest from
the date of the assessment, 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.
A Company subsidiary 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,
during 1995 the Connecticut Supreme Court reversed this ruling and remanded the
case for further proceedings in the Superior Court. In November 1995, the
Superior Court ordered the subsidiary to apply to the DEP for permission to
remove all waste above the height allowed by the zoning ordinance, and the
Connecticut Supreme Court has upheld that ruling. The Company believes that the
removal of such waste is an inappropriate remedy and is seeking an alternative
resolution to the issue, but is unable to predict the outcome. Depending upon
the nature of any plan eventually approved by applicable regulatory authorities
for removing the waste, the actual volume of waste to be moved, and other
currently unforseeable factors, the subsidiary could incur costs which would
have a material adverse impact on the Company's financial condition and results
of operations in one or more future periods.
In May 1994, the U.S. Supreme Court ruled that state and local governments may
not constitutionally restrict the free movement of trash in interstate commerce
through the use of flow control laws. Such laws typically involve a municipality
specifying the disposal site for all solid waste generated within its borders.
Since the ruling, several decisions of state or federal courts have invalidated
regulatory flow control schemes in a number of jurisdictions. Other judicial
decisions have upheld nonregulatory means by which municipalities may
effectively control the flow of municipal solid waste.
13
<PAGE>
WTI's Gloucester County, New Jersey, facility relies on a disposal franchise for
substantially all of its supply of municipal solid waste. In July 1996, a
Federal District Court permanently enjoined the State of New Jersey from
enforcing its solid waste regulatory flow control system, which was held to be
unconstitutional, but stayed the injunction for as long as its ruling is on
appeal plus an additional period of two years to enable the State to devise an
alternative nondiscriminatory approach. On May 1, 1997, the Third Circuit Court
of Appeals affirmed the District Court's ruling that the New Jersey flow control
system was unconstitutional, but vacated the two year "post appeal" stay.
However, the Appeals Court granted a continued stay for so long as any appeals
are pending. The State has indicated that it will continue to enforce flow
control during the appeal process. The New Jersey legislature is now considering
a bill to authorize counties and authorities, including the Gloucester County
Improvement Authority, which administers WTI's franchise there, to implement a
constitutionally permissible system of "economic flow control" designed to
recover waste disposal costs incurred in reliance on the State's franchise
system.
The Supreme Court's 1994 ruling and subsequent court decisions have not to date
had a material adverse effect on any of the Company's operations. Federal
legislation has been proposed, but not yet enacted, to effectively grandfather
existing flow control mandates. In the event that such legislation is not
adopted, the Company believes that affected municipalities will endeavor to
implement alternative lawful means to continue controlling the flow of waste. In
view of the uncertain state of the law at this time, however, the Company is
unable to predict whether such efforts would be successful or what impact, if
any, this matter might have on the Company's disposal facilities, particularly
WTI's trash-to-energy facilities.
As the states and U.S. Congress have accelerated their consideration of ways in
which economic efficiencies can be gained by deregulating the electric
generation industry, some have argued that over-market power sales agreements
entered into pursuant to the Public Utilities Regulatory Policies Act of 1978
("PURPA") should be voidable as "stranded assets." WTI's 25 power production
facilities are qualifying facilities under PURPA and depend on the sanctity of
their power sales agreements for their economic viability. Recent state and
federal agency and court decisions have unanimously upheld the inviolate nature
of these contracts. WTI believes that federal law offers strong protections to
its PURPA contracts. However, there is a risk that future utility
restructurings, court decisions or legislative or administrative action in this
area will have a material adverse effect on its business.
WM International operates facilities in Hong Kong which are owned by the Hong
Kong government. On July 1, 1997, control of the Hong Kong government
transferred to the People's Republic of China. WM International is unable to
predict what impact, if any, this change will have on its operations in Hong
Kong. At June 30, 1997, WM International had identifiable assets of $269.3
million related to its Hong Kong operations which generated pretax income of
approximately $15.3 million in calendar 1996 and $13.4 million in the first six
months of 1997.
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, or, in certain cases, conducted environmental remediation
activities at such sites. Some of these lawsuits may seek to have the Company or
its subsidiaries pay the cost 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 that 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 things. Accordingly, it is reasonably possible that such
matters could have a material adverse impact on the Company's earnings for one
or more fiscal quarters or years.
14
<PAGE>
In the ordinary course of conducting its business, the Company becomes involved
in lawsuits, administrative proceedings and governmental investigations,
including antitrust and environmental matters and commercial disputes. Some of
these proceedings may result in fines, penalties or judgments being assessed
against the Company which, from time to time, may have an impact on earnings for
a particular quarter or year. The Company believes it has adequately provided
for such matters in its financial statements and does not believe that their
outcome, individually or in the aggregate, will have a material adverse impact
on its business or financial condition.
Legal Matters -
See Part II of this Form 10-Q for a discussion of legal matters.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Tables in millions)
RESULTS OF OPERATIONS:
Summary -
- ----------
For the three months ended June 30, 1997, Waste Management, Inc. (formerly WMX
Technologies, Inc.) and its subsidiaries ("WMI" or the "Company") had net income
from continuing operations of $180.0 million, or $0.39 per share, versus $217.7
million, or $0.44 per share in the comparable quarter in 1996. Revenue from
continuing operations was $2.33 billion in both the current-year and the year-
earlier quarters. Net income was $0.39 per share for the three months ended June
30, 1997, compared with $0.45 for the same three months in 1996.
Six-month 1997 net income from continuing operations was $358.4 million, or
$0.75 per share, on revenue of $4.53 billion. For the first six months of 1996,
income from continuing operations was $397.9 million, or $0.81 per share, on
revenue of $4.48 billion. Net income was $0.75 for the first six months of 1997,
compared with $0.83 for the first six months of 1996.
Results for the three-month and six-month periods ended June 30, 1997, include
the Company's share ($10.4 million after tax and minority interest, or $0.02 per
share) of a special charge recorded by OHM Corporation, in which the Company's
Rust International Inc. ("Rust") subsidiary has an approximately 37% equity
interest.
In February 1997, the Company articulated a comprehensive set of strategic
initiatives, including returning its focus to waste management services in
domestic and selected international markets where the Company holds or can
develop a strong competitive position, and a financial strategy focused on
generating cash and using that cash for the benefit of shareholders. The
increased cash flow is to come from the divestiture of non-core or non-
integrated assets, reduction of capital expenditures, control of costs, and
improved return on the asset base. During the first six months of 1997, the
Company and its subsidiaries monetized $1.3 billion of non-core and non-
integrated assets, including the investments in Wessex Water Plc ("Wessex") and
ServiceMaster Limited Partnership ("ServiceMaster"). Its Wheelabrator
Technologies Inc. ("WTI") subsidiary sold its water and wastewater facility
operations and privatization business to United States Filter Corporation ("U.S.
Filter") for 2.3 million shares of U.S. Filter stock. Waste Management of North
America, Inc. ("WMNA") divested 17 solid waste operations in North America,
including the sale of most of its Canadian operations, for a total price of $265
million. In Europe, the Company's Waste Management International plc ("WM
International") subsidiary completed in June the sale of substantially all of
its operations in France, for approximately $112 million, and subsequent to June
30 sold its business in Spain.
During the first quarter of 1997, the Company announced a Dutch Auction tender
offer which culminated in May with its repurchasing 30 million of its
outstanding shares for $30 a share. On May 9, the Board of Directors approved an
increase in the quarterly dividend from $0.16 to $0.17 per share.
The Company has five primary operating subsidiaries. WMNA provides integrated
solid waste management services in North America and manages the industrial
cleaning services business owned by Rust. Chemical Waste Management, Inc.
("CWM") provides chemical waste treatment, storage, disposal and related
services and furnishes low-level radioactive waste management and disposal
services in North America. WTI is engaged in the ownership and operation of
trash-to-energy, waste-fuel powered independent power, and biosolids pelletizer
facilities as well as providing biosolids land application services. WM
International provides comprehensive waste management and related services
outside North America, with operations in eight countries in Europe, five
countries in Asia, and Argentina, Australia, Brazil, Israel and New Zealand. The
Company considers its operations to
16
<PAGE>
be part of a single industry segment - waste management services - and reports
accordingly. The other services formerly provided by the Company have been
classified as discontinued operations in the accompanying financial statements
and have been or are in process of being sold. The discussion which follows
relates to the Company's continuing operations.
Revenue -
- ----------
Consolidated revenue for the three months and six months ended June 30, 1997,
compared with the same periods in 1996, is shown in the table which follows:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
------------------------------ --------------------------------
Percentage Percentage
Incr./ Incr./
1997 1996 (Decr.) 1997 1996 (Decr.)
-------- -------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
North America -
WMNA -
Residential $ 327.3 $ 319.4 2.5% $ 640.3 $ 631.8 1.3%
Commercial 400.1 419.2 (4.5) 805.7 824.2 (2.2)
Rolloff and
industrial 327.0 360.0 (9.2) 637.0 675.8 (5.7)
Disposal,
transfer &
other 403.5 400.3 0.8 750.1 731.8 2.5
-------- -------- -------- --------
Total WMNA $1,457.9 $1,498.9 (2.7) $2,833.1 $2,863.6 (1.1)
CWM 115.3 127.8 (9.7) 224.6 252.9 (11.2)
Rust 80.4 71.3 12.8 152.3 136.6 11.5
WTI 256.1 244.4 4.8 504.2 463.9 8.7
WM International 463.6 477.0 (2.8) 920.8 930.8 (1.1)
Eliminations (46.0) (88.4) (109.4) (172.3)
-------- -------- -------- --------
Total $2,327.3 $2,331.0 (0.2)% $4,525.6 $4,475.5 1.1%
======== ======== ==== ======== ======== =====
</TABLE>
Total revenue for the quarter ended June 30, 1997, was essentially flat compared
with the second quarter a year ago. The overall revenue impact of dispositions,
net of acquisitions, was a reduction of approximately $45 million in the
quarter. WMNA revenue was down approximately $41 million in the second quarter
of 1997 compared with 1996. The decline is about equal to the revenue which it
lost on dispositions, as it had little internal growth between years. While WMNA
is making improvement in its lost customer rate, it continued to suffer from the
consequences of aggressive price increases in 1996.
WM International, a U.K. corporation which maintains its accounts in pounds
sterling, has been adversely impacted by the strength of the pound against other
world currencies. Year over year revenue growth, in U.S. dollars excluding
currency translation, of 3.1% in the second quarter and 3.7% for the six months
ended June 30, 1997, was more than offset by foreign currency translation losses
of 5.9% in the quarter and 4.8% for the six months.
WTI 1997 revenue included $18.3 million in the second quarter and $34.2 million
for the six months of construction revenue related to the retrofit of its
Pinellas County, Florida, trash-to-energy facility and construction of a
biosolids compost facility for Burlington County, New Jersey. No similar
construction revenue was earned during the first half of 1996. Revenue growth of
$3.8 million for the second quarter and $10.2 million for the first six months
of 1997, compared with 1996, related to new industrial cogeneration plants (so-
called "inside-the-fence" facilities) acquired in 1996. WTI is attempting to
leverage its energy plant operating capabilities and project financing expertise
by owning and/or operating inside-the-fence power plants for industrial
customers. WTI's other revenue decreased during the quarter and six-month
periods of 1997 compared with 1996, due
17
<PAGE>
to divestitures of biosolids land spreading operations and a slight decline in
revenue from trash deliveries offsetting contractual price escalation. The
decline in revenue from trash deliveries resulted from dry weather in the Mid-
Atlantic and New England states which decreased the weight of trash delivered to
WTI's plants.
Operating Expenses -
- ---------------------
Operating expenses as a percentage of revenue were 70.2% in the second quarter
of 1997 compared with 69.5% in the comparable quarter of 1996, and for the six
months ended June 30, were 70.4% in 1997 compared with 69.6% in 1996. The
higher operating expenses reflect lower margins at WTI due to the impact of the
construction revenue, and sharply lower margins in hazardous waste, as well as
the lack of revenue growth in WMNA.
Selling and Administrative Expenses -
- -------------------------------------
Selling and administrative expenses declined in actual dollars in the quarter
ended June 30, 1997 compared with the same quarter in 1996, and were 10.4% of
revenue in the current year versus 10.6% in the year-ago quarter. For the six
months ended June 30, selling and administrative expenses were 10.7% of revenue
in 1997 compared with 11.0% in 1996, and declined approximately $8.2 million in
absolute terms. The improvements reflect the ongoing focus on streamlining
administrative activities and controlling costs throughout the Company.
Interest, net -
- ---------------
The following table sets forth the components of consolidated interest, net, for
the three months and six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Six Months
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest expense $114.9 $111.8 $228.2 $222.8
Interest income (9.8) (6.4) (21.9) (12.7)
Capitalized interest (15.0) (17.5) (29.9) (34.7)
------ ------ ------ ------
Interest expense, net $ 90.1 $ 87.9 $176.4 $175.4
====== ====== ====== ======
</TABLE>
Net interest expense was relatively unchanged between years for both the three-
month and six-month periods ended June 30. Although net debt declined slightly
from December 31, 1996 to June 30, 1997, it increased in the interim due to cash
required to complete the Dutch Auction. Interest rates have also increased
slightly in 1997, and net interest expense is adversely impacted by the mix of
debt between the domestic entities and WM International.
Sundry (Income) Expense, net -
- ------------------------------
Second quarter 1997 sundry expense reflects the Company's 37% share of the
special charge recorded by OHM. Both the three-month and six-month periods in
1997 reflect the loss of income from the Company's previous investments in
Wessex and ServiceMaster, which have been sold, partially offset in the six-
month period by a gain recognized on the disposition of the ServiceMaster
shares. The Company does not expect sundry income, net, to be significant during
the remainder of 1997.
18
<PAGE>
Discontinued Operations -
- --------------------------
In line with the Company's strategy to focus on waste management services, other
industry segments, including the engineering, construction and consulting
businesses and industrial scaffolding business of Rust and the water businesses
of WTI, have been classified as discontinued operations. Results of operations
for the three months and six months ended June 30, 1997, for those businesses
not yet sold were not material and were included in the reserve for loss on
disposition provided previously. Revenues of discontinued operations were
$107.0 million for the three months and $241.4 million for the six months ended
June 30, 1997, versus $354.1 million and $769.6 million for the comparable
periods in 1996, the decline relating primarily to businesses sold in the
interim.
Restructuring -
- ----------------
In the fourth quarter of 1996, the Company recorded a charge for reengineering
and streamlining its finance and administrative functions. Approximately $20.0
million of the charge related to cash payments for employee severance. As of
June 30, 1997, approximately half of this amount had been spent. The balance is
expected to be paid by the end of 1997. In addition, the Company expects that
the reengineering will result in costs of $0.05 to $0.06 per share which will be
charged to income in 1997, including approximately $0.01 to $0.02 in the second
quarter and for the six months.
Accounting Principles -
- -----------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings Per
Share." This statement supersedes Accounting Principles Board Opinion No. 15.
Primary EPS is replaced by Basic EPS, which is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. In addition, Fully Diluted EPS is replaced with
Diluted EPS, which gives effect to all common shares that would have been
outstanding if all dilutive potential common shares (relating to such things as
the exercise of stock options and convertible debt) had been issued.
FAS No. 128 is effective for interim and annual periods ending after December
15, 1997. Earlier application is not permitted, but when the opinion becomes
effective all prior periods presented must be restated. EPS computed in
accordance with FAS No. 128 for the quarter and six months ended June 30, 1997
and 1996 would have been as follows:
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
--------------------- ------------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Continuing Operations-
Basic $ 0.39 $ 0.44 $ 0.75 $ 0.81
Diluted 0.38 0.43 0.74 0.79
Discontinued Operations-
Basic $ - $ 0.01 $ - $ 0.02
Diluted - 0.01 - 0.02
</TABLE>
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income" and
FAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." Both statements are effective for fiscal years beginning after
December 15, 1997. FAS 130 requires only a different format for presentation of
information already included in the Company's financial statements. FAS 131
modifies and expands required segment disclosure but does not affect accounting
principles, and accordingly will not require any change to reported financial
position, results of operations and cash flows.
19
<PAGE>
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. The Company's use of derivatives has not been
and is not expected to be material with respect to financial condition or
results of operations. For further discussion on the Company's use of and
accounting for derivatives, see "Derivative Financial Instruments" in the Notes
to Consolidated Financial Statements.
Environmental Liabilities -
- ---------------------------
The continuing business in which the Company is engaged is 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. As part of its ongoing operations, the
Company provides for estimated closure and post-closure monitoring costs over
the life of disposal sites as airspace is consumed. The Company has also
established procedures to evaluate its potential remedial liabilities at closed
sites which it owns or operated, or to which it transported waste. While the
Company believes that 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. For further discussion, see "Environmental Liabilities" in the Notes
to Consolidated Financial Statements.
FINANCIAL CONDITION:
Liquidity and Capital Resources -
- ----------------------------------
The Company had a working capital deficit of $436.5 million at June 30, 1997,
compared with working capital of $54.5 million at December 31, 1996. In
connection with its strategy to maximize cash flow, the Company has placed
emphasis on minimizing working capital, because it operates in a service
industry with neither significant inventory nor seasonal variation in
receivables, and thus reducing working capital typically does not adversely
affect operations.
In conjunction with its strategic focus, the Company generated $1,352.0 million
of "owners' cash flow" (which it defines as cash flow from operating activities,
less capital expenditures and dividends, plus proceeds from asset monetization)
during the six months ended June 30, 1997. Included in this total is $1,287.1
million of proceeds from asset monetization. Through the Dutch Auction, $900
million of this owners' cash flow was returned to shareholders during 1997.
Acquisitions and Capital Expenditures -
- ---------------------------------------
Capital expenditures, excluding property and equipment of purchased businesses,
were $368.2 million for the six months ended June 30, 1997, and $577.8 million
for the comparable period in 1996. In addition, the Company and its principal
subsidiaries spent $34.8 million on acquisitions in 1997 compared with $92.8
million in cash and debt (including debt assumed) and 8.0 million shares of WMI
common stock during the first six months of 1996.
Capital Structure -
- -------------------
Although the Company has placed increasing emphasis on generating owners' cash
flow during the past two years, a substantial portion of such cash has been
returned to stockholders through stock repurchases. However, during the first
six months of 1997, total debt declined $202.8 million from December 31, 1996.
Cash and marketable securities decreased $62.5 million in the first six months
of 1997 to $602.1 million as a result of the Dutch Auction.
20
<PAGE>
On June 20, 1997, the Company announced an offer to acquire, for $15 per share
in cash, all of the outstanding shares of WTI that it does not already own.
The Company currently owns approximately 67% of the 156.6 million outstanding
WTI shares. The offer is subject to the approval by a committee of independent
WTI directors and the holders of a majority of the outstanding WTI shares, other
than those held by the Company, voting on it at a special meeting of WTI
stockholders to be called for that purpose. Several lawsuits have also been
filed which seek, among other things, to enjoin the proposed transaction.
The Boards of Directors of WMI and WTI have authorized their respective
companies to repurchase shares of their own common stock (up to 50 million
shares in the case of WMI and 30 million shares in the case of WTI) in the open
market, in privately negotiated transactions, or through issuer tender offers.
These programs extend into 1998. During the 1997 second quarter, WMI purchased
30 million of its shares through the Dutch Auction; it has not repurchased any
other shares during 1997. WTI repurchased 5.1 million of its shares in open
market transactions during the first six months of 1997; however, in light of
the WMI offer to acquire its remaining public shares, WTI has suspended its
repurchase activity.
In conjunction with its authorized repurchase program, WMI periodically sells
put options on its common stock. These options give the holders the right at
maturity to require the Company to repurchase its shares at specified prices.
There were no put options outstanding at June 30, 1997, although the Company may
sell such options in the future.
Risks and Uncertainties -
- -------------------------
See "Commitments and Contingencies" in the Notes to Consolidated Financial
Statements for a description of certain contingent liabilities relating to the
Company and its subsidiaries. There has been no significant change in the
status of these matters since December 31, 1996.
Outlook -
- ---------
While the Company expected revenue and earnings to be flat in 1997 compared with
1996, second quarter results were below management's expectations. WMNA
continues to experience a very difficult pricing environment. While it is
having success obtaining and renewing residential contracts, renewals are in
many cases at lower prices. Disposal pricing is very competitive for both
special and solid wastes. Hazardous waste landfill prices continue to be flat to
weaker. WM International is being adversely affected by the strength of the
British pound against the currencies in the other countries where it operates.
In light of these and other factors and results to date, the Company expects
1997 earnings to be approximately $1.65 per share, excluding the effect of the
OHM charge but including a $0.05 to $0.06 per share cost for reengineering.
Forward-Looking Information -
- -----------------------------
Except for historical data, the information contained herein constitutes
forward-looking statements. Forward-looking statements are inherently uncertain
and subject to risks. Such statements should be viewed with caution. Actual
results or experience could differ materially from the forward-looking
statements as a result of many factors, including the ability of the Company to
meet price increase and new business sales goals, changes in the price of
recyclable commodities, weather conditions, slowing of the overall economy,
higher interest rates, failure of the Company's restructuring and reengineering
plans to produce the anticipated cost savings, the inability to complete the
divestiture of discontinued businesses or the monetization of other assets at
appropriate prices and terms, and the cost and timing of stock repurchase
programs. The Company makes no commitment to disclose any revisions to forward-
looking statements, or any facts, events or circumstances after the date hereof
that may bear upon forward-looking statements.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
-----------------
The continuing business in which the Company is engaged is intrinsically
connected with the protection of the environment, and the potential exists 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 facilities. Subject to the discussion set forth above under
"Commitments and Contingencies" in the Notes to Consolidated Financial
Statements concerning a Company subsidiary's New Milford, Connecticut landfill,
the Company believes that these matters will not have a material adverse effect
on its results of operation or financial condition. However, the outcome of any
particular proceeding cannot be predicted with certainty, 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.
Several purported class action lawsuits and one purported derivative
lawsuit seeking injunctive relief and unspecified money damages were filed in
the Chancery Court in and for New Castle County, Delaware against the Company,
WTI, and individual directors of WTI in connection with the June 20, 1997
proposal by the Company to acquire all of the shares of WTI common stock which
the Company does not own. The proposal contemplates a merger in which WTI's
stockholders would receive $15.00 in cash per share of WTI's common stock,
subject to the approval of both a special committee consisting of independent
directors of WTI and the holders of a majority of WTI's outstanding shares
(other than shares held by the Company) voting at a stockholders' meeting. The
lawsuits allege, among other things, that the defendants have breached fiduciary
duties to WTI's minority stockholders because the merger consideration
contemplated by the proposal is asserted to be inadequate and unfair. In
addition, the purported derivative lawsuit alleges that the proposal is part of
a plan to misappropriate WTI's corporate opportunity to repurchase its own
shares. The Company believes that its actions and those of WTI and its Board of
Directors in connection with the proposal have been in accordance with Delaware
law. Accordingly, the Company intends to contest these lawsuits vigorously.
ITEM 4. Submission of Matters to Vote of Security Holders.
-------------------------------------------------
At the Company's annual meeting of stockholders on May 9, 1997, a proposal
to elect the nominees listed in the following table as directors of the Company
was submitted to a vote of the Company's stockholders. The following table also
shows the results of voting as to each nominee:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
- --------------------- ----------- --------------
<S> <C> <C>
Dean L. Buntrock 365,287,789 53,134,773
Robert S. Miller 413,471,882 4,950,680
Paul M. Montrone 395,847,591 22,574,971
Peer Pedersen 391,160,263 27,262,299
</TABLE>
22
<PAGE>
At the same meeting, proposals concerning (i) ratifying the appointment of
Arthur Andersen LLP as independent auditors for 1997, (ii) an amendment to the
Company's Restated Certificate of Incorporation, as amended (the "Certificate"),
to change the Company's name to "Waste Management, Inc.," (iii) an amendment to
the Certificate to provide for annual election of directors, (iv) approval of
the Company's 1997 Equity Incentive Plan, and (v) amendment of the Company's By-
Laws to provide that the Board of Directors shall consist of a majority of
independent directors, as defined in the proposal, were considered by the
stockholders. The proposals concerning the appointment of auditors, the change
of the Company's name and the Company's 1997 Equity Incentive Plan were
approved, while the proposals concerning annual election of directors and
independence of a majority of the Board of Directors were defeated. The results
are detailed as follows:
<TABLE>
<CAPTION>
Proposal Votes For Votes Against Abstentions Broker Non-Votes
-------- --------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Ratification
of Auditors 391,047,996 26,310,575 1,063,991 -0-
Change of
Company Name 414,758,709 1,200,128 2,463,721 4
1997 Equity
Incentive
Plan 392,622,449 23,582,486 2,216,823 804
Annual
Election of
Directors* 360,098,060 13,087,350 1,758,350 43,478,802
Director
Independence 60,862,140 275,263,981 38,815,332 43,481,109
</TABLE>
* This Proposal was not approved because under the Company's Certificate
the proposal needed the affirmative vote of at least 80% of the Company's
outstanding shares, which was not obtained.
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.
During the period covered by this Quarterly Report on Form 10-Q, the
Company filed reports on Form 8-K as follows:
(i) A report dated April 1, 1997 concerning the Company's offer to
purchase from its stockholders up to 30,000,000 shares of its common stock,
$1.00 par value, at a price not in excess of $35.00 nor less than $30.00 per
share, as specified by stockholders tendering their shares (the "Dutch Auction
Tender Offer") and the commencement of a lawsuit against the Company and its
Board of Directors seeking to enjoin the Company from completing the Dutch
Auction Tender Offer.
(ii) A report dated April 15, 1997 concerning a shareholder lawsuit
related principally to an adverse court judgment in a commercial dispute
involving royalties to the former owners of the Company's Chemical Waste
Management, Inc. subsidiary's Emelle, Alabama hazardous waste facility.
(iii) A report dated April 22, 1997 concerning the refusal by the Court of
Chancery in and for New Castle County, Delaware to grant a preliminary
injunction against the completion of the Company's Dutch Auction Tender Offer.
23
<PAGE>
(iv) A report dated April 28, 1997 concerning the intention of a director
of the Company to tender a portion of his shares of the Company's common stock
in the Company's Dutch Auction Tender Offer and the preliminary results of the
Company's Dutch Auction Tender Offer.
(v) A report dated May 9, 1997 concerning the change of the Company's
name to "Waste Management, Inc." and the results of voting on various matters by
the Company's stockholders at the May 9, 1997 annual meeting of the Company's
stockholders.
(vi) A report dated June 20, 1997 concerning the approval by the Company's
Board of Directors of an offer to acquire all of the outstanding publicly held
shares of the Company's Wheelabrator Technologies Inc. subsidiary.
24
<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.
WASTE MANAGEMENT, INC.
/s/ JOHN D. SANFORD
---------------------------------------
John D. Sanford, Senior Vice President,
Chief Financial Officer and Treasurer
August 8, 1997
25
<PAGE>
WASTE MANAGEMENT, INC.
EXHIBIT INDEX
Number and Description of Exhibit*
---------------------------------
2 None
3 None
4 None
10 None
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.
26
<PAGE>
EXHIBIT 12
WASTE MANAGEMENT, INC.
Ratio of Earnings to Fixed Charges
(Unaudited)
(millions of dollars, except ratio)
<TABLE>
<CAPTION>
Six Months
Ended June 30
-------------
1996 1997
---- ----
<S> <C> <C>
Income From Continuing Operations Before Income
Taxes, Undistributed Earnings from Affiliated
Companies and Minority Interest................ $714.6 $690.1
Interest Expense................................. 222.8 228.2
Capitalized Interest............................. (34.7) (29.9)
One-Third of Rents Payable in the Next Year...... 26.9 24.4
------ ------
Income From Continuing Operations Before Income
Taxes, Undistributed Earnings from Affiliated
Companies, Minority Interest, Interest and
One-Third of Rents............................. $929.6 $912.8
====== ======
Interest Expense................................. $222.8 $228.2
One-Third of Rents Payable in the Next Year...... 26.9 24.4
------ ------
Interest Expense plus One-Third of Rents......... $249.7 $252.6
====== ======
Ratio of Earnings to Fixed Charges............... 3.72 to 1 3.61 to 1
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE JUNE 30, 1997 CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 435,136
<SECURITIES> 167,009
<RECEIVABLES> 1,633,239
<ALLOWANCES> 38,583
<INVENTORY> 0
<CURRENT-ASSETS> 2,983,667
<PP&E> 13,914,001
<DEPRECIATION> 4,516,788
<TOTAL-ASSETS> 17,312,741
<CURRENT-LIABILITIES> 3,420,173
<BONDS> 6,520,035
0
0
<COMMON> 507,102
<OTHER-SE> 3,668,552
<TOTAL-LIABILITY-AND-EQUITY> 17,312,741
<SALES> 0
<TOTAL-REVENUES> 4,525,617
<CGS> 0
<TOTAL-COSTS> 3,185,832
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,718
<INTEREST-EXPENSE> 198,285
<INCOME-PRETAX> 623,621
<INCOME-TAX> 265,185
<INCOME-CONTINUING> 358,436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 358,436
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.00
</TABLE>
