<PAGE> 1
UNITED STATES
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 March 31, 1999
OR
[ ] 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 1-6805
BROWNING-FERRIS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-1673682
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
757 N. Eldridge
Houston, Texas 77079
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 870-8100
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 the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- ---
Indicate the number of shares outstanding of the issuer's common stock, as of
May 12, 1999: 156,872,528.
<PAGE> 2
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In Thousands Except for Per Share Amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,027,896 $ 1,305,717 $ 2,078,623 $ 2,650,459
Cost of operations 644,554 856,862 1,314,628 1,735,275
Selling, general and
administrative expense 132,659 157,344 261,170 321,616
Depreciation and amortization
expense 102,769 129,349 204,513 258,642
Special charges (credits), net 19,183 (18,907) 19,183 (21,464)
----------- ----------- ----------- -----------
Income from operations 128,731 181,069 279,129 356,390
Interest, net 30,049 36,623 59,740 72,242
Equity in earnings of
unconsolidated affiliates (10,967) (15,005) (19,679) (25,094)
----------- ----------- ----------- -----------
Income before income taxes, minority
interest, extraordinary item and
cumulative effects of changes in
accounting principles 109,649 159,451 239,068 309,242
Income taxes 47,773 63,781 97,771 123,697
Minority interest in income of
consolidated subsidiaries 1,314 2,327 2,521 5,444
----------- ----------- ----------- -----------
Income before extraordinary
item and cumulative effects
of changes in accounting
principles 60,562 93,343 138,776 180,101
Extraordinary loss on redemption
of debt of unconsolidated
affiliate, net of income tax
benefit of $538 -- 999 -- 999
Cumulative effects of changes in
accounting principles, net of
income tax expense of $2,800
and benefit of $4,611 -- (4,200) -- 9,563
----------- ----------- ----------- -----------
Net income $ 60,562 $ 96,544 $ 138,776 $ 169,539
=========== =========== =========== ===========
</TABLE>
(Continued on following page)
2
<PAGE> 3
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In Thousands Except for Per Share Amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Earnings per share:
Basic -
Income before extraordinary
item and cumulative effects
of changes in accounting
principles $ .384 $ .504 $ .870 $ .957
Extraordinary item -- (.005) -- (.005)
Cumulative effects of changes
in accounting principles -- .022 -- (.051)
------------ ------------ ------------ ------------
Net income $ .384 $ .521 $ .870 $ .901
============ ============ ============ ============
Diluted -
Income before extraordinary
item and cumulative effects
of changes in accounting
principles $ .381 $ .501 $ .865 $ .951
Extraordinary item -- (.005) -- (.005)
Cumulative effects of changes
in accounting principles -- .022 -- (.051)
------------ ------------ ------------ ------------
Net income $ .381 $ .518 $ .865 $ .895
============ ============ ============ ============
Number of common shares used in
computing earnings per share:
Basic 157,894 185,247 159,450 188,110
============ ============ ============ ============
Diluted 159,051 186,332 160,516 189,338
============ ============ ============ ============
Cash dividends per common
share $ .19 $ .19 $ .38 $ .38
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
(Unaudited)
---------- ----------
(In Thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 55,506 $ 89,893
Short-term investments 5,013 5,812
Receivables -
Trade, net of allowances for doubtful
accounts of $23,168 and $22,072 584,407 603,331
Other 19,430 16,205
Inventories 22,535 21,035
Deferred income taxes 90,582 99,695
Prepayments and other 54,341 101,696
---------- ----------
Total current assets 831,814 937,667
---------- ----------
PROPERTY AND EQUIPMENT, at cost, less
accumulated depreciation and amortization
of $2,260,775 and $2,223,913 2,847,495 2,812,221
---------- ----------
OTHER ASSETS:
Cost over fair value of net tangible
assets of acquired businesses,
net of accumulated amortization of
$91,643 and $83,050 602,507 592,946
Other intangible assets, net of
accumulated amortization of $88,160
and $81,959 75,477 70,594
Deferred income taxes 23,108 24,588
Investments in unconsolidated affiliates 484,953 512,964
Other 68,811 48,501
---------- ----------
Total other assets 1,254,856 1,249,593
---------- ----------
Total assets $4,934,165 $4,999,481
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
(Unaudited)
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES: (In Thousands Except for Share Amounts)
Notes payable and current portion of
long-term debt $ 7,308 $ 9,241
Accounts payable 289,282 354,916
Accrued liabilities -
Salaries and wages 66,011 83,199
Taxes, other than income 31,793 31,238
Other 310,396 332,221
Income taxes 5,665 9,076
Deferred revenues 180,623 175,615
----------- -----------
Total current liabilities 891,078 995,506
----------- -----------
LONG-TERM DEBT, net of current portion 1,971,009 1,792,863
----------- -----------
OTHER LIABILITIES:
Accrued environmental and landfill costs 382,440 392,853
Deferred income taxes 207,702 210,511
Other 180,001 194,290
----------- -----------
Total other liabilities 770,143 797,654
----------- -----------
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.16 2/3 par; 400,000,000
shares authorized; 208,799,756 and
208,310,631 shares issued 34,807 34,725
Additional paid-in capital 1,645,864 1,631,236
Retained earnings 1,469,381 1,390,797
Accumulated other comprehensive income (loss) (47,978) (22,312)
Treasury stock, 51,978,911 and 46,008,054
shares, at cost (1,800,139) (1,620,988)
----------- -----------
Total common stockholders' equity 1,301,935 1,413,458
----------- -----------
Total liabilities and common
stockholders' equity $ 4,934,165 $ 4,999,481
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
March 31,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 138,776 $ 169,539
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization -
Property and equipment 189,195 229,385
Goodwill 8,599 18,495
Other intangible assets 6,719 10,762
Special charges (credits), net 19,183 (21,464)
Cumulative effects of changes in accounting
principles -- 9,563
Deferred income tax expense 9,774 15,639
Amortization of deferred investment tax credit (354) (354)
Provision for losses on accounts receivable 10,388 15,040
Gains on sales of fixed assets (3,266) (1,148)
Equity in earnings of unconsolidated affiliates,
net of dividends received and extraordinary item 11,188 2,030
Minority interest in income of consolidated
subsidiaries, net of dividends paid (761) 3,810
Increase (decrease) in cash from changes in
assets and liabilities excluding effects
of acquisitions and divestitures -
Trade receivables 8,481 (5,942)
Inventories (1,478) (6,623)
Other assets 40,892 82,214
Other liabilities (121,551) (145,005)
--------- ---------
Total adjustments 177,009 206,402
--------- ---------
Net cash provided by operating activities 315,785 375,941
--------- ---------
</TABLE>
(Continued on following page)
6
<PAGE> 7
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
March 31,
--------------------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (259,979) (227,400)
Payments for businesses acquired (16,485) (21,509)
Proceeds from businesses divested 4,075 990,960
Investments in unconsolidated affiliates (28,764) (35,900)
Proceeds from disposition of assets 15,859 29,536
Purchases of short-term investments -- (103,330)
Sales of short-term investments 799 --
Return of investment in unconsolidated
affiliates 13,971 28,304
--------- ---------
Net cash provided by (used in) investing
activities (270,524) 660,661
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 6,286 28,776
Proceeds from issuances of indebtedness 266,519 27,122
Repayments of indebtedness (110,393) (67,391)
Repurchases of common stock (180,740) (954,675)
Dividends paid (61,338) (74,800)
--------- ---------
Net cash used in financing activities (79,666) (1,040,968)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES 18 (830)
--------- ---------
NET DECREASE IN CASH (34,387) (5,196)
CASH AT BEGINNING OF PERIOD 89,893 78,746
--------- ---------
CASH AT END OF PERIOD $ 55,506 $ 73,550
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest, net of capitalized amounts $ 55,004 $ 77,678
Income taxes $ 93,287 $ 81,513
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation -
The accompanying unaudited financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note 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. In the opinion of management, all adjustments
and disclosures necessary to a fair presentation of these financial
statements have been included. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1998
as filed with the Securities and Exchange Commission.
Certain reclassifications have been made in prior year financial
statements to conform to the fiscal year 1999 presentation.
(2) Earnings Per Share -
The following table reconciles the number of common shares outstanding
with the number of common shares used in computing basic and diluted
earnings per share (in thousands):
8
<PAGE> 9
<TABLE>
<CAPTION>
Six Months Ended
March 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Common shares outstanding, end of period 156,821 186,105
Less - Shares held in the Stock and
Employee Benefit Trust -- (6,082)
-------- --------
Common shares outstanding for purposes of
computing earnings per share, end of period 156,821 180,023
Effect of using weighted average common
shares outstanding 2,629 8,087
-------- --------
Shares used in computing earnings per
share - basic 159,450 188,110
Effect of shares issuable under stock option
plans based on the treasury stock method 1,066 1,228
-------- --------
Shares used in computing earnings
per share - diluted 160,516 189,338
======== ========
</TABLE>
Shares of common stock held in the Stock and Employee Benefit Trust
(the "Trust") were not considered to be outstanding in the computation of
common shares outstanding until shares were utilized at the Company's option
for the purposes for which the Trust was established. All remaining shares
in the Trust were fully utilized during the third quarter of fiscal 1998
and, as a result, the Trust was terminated.
Basic earnings per share amounts were computed by dividing earnings by
the weighted average number of shares of common stock outstanding during
each period. Diluted earnings per share amounts were computed considering
the dilutive effect of stock options in the calculation. Options to purchase
2.8 million shares of common stock at prices ranging from $32.25 to $43.38
per share were outstanding during the first six months of fiscal 1999 but
were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of
the common shares. The 7.25% Automatic Common Exchange Securities had no
effect on the computation for the periods presented prior to their
settlement in June 1998.
9
<PAGE> 10
(3) Comprehensive Income -
In June 1997, Statement of Financial Accounting Standards ("SFAS") No.
130 - "Reporting of Comprehensive Income" was issued establishing standards
for reporting and presentation of comprehensive income and its components.
Comprehensive income is defined as all changes in a company's net assets
except changes resulting from transactions with stockholders. The Company
has adopted SFAS No. 130 effective October 1, 1998. For the three and six
month periods ended March 31, 1999 and 1998, comprehensive income (loss) is
as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
-------------------------- ---------------------------
1999 1998 1999 1998
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 60,562 $ 96,544 $ 138,776 $ 169,539
Foreign currency
translation adjustment:
Current period translation (26,266) (20,750) (25,666) (46,332)
Reversal of portion of
cumulative translation
adjustment in connection
with sale of international
operations -- 107,642 -- 107,642
-------- --------- --------- ---------
Total foreign currency
translation adjustment (26,266) 86,892 (25,666) 61,310
-------- --------- --------- ---------
Comprehensive income $ 34,296 $ 183,436 $ 113,110 $ 230,849
======== ========= ========= =========
</TABLE>
(4) Special Charges (Credits), Net -
Fiscal 1999 Special Charges ($19.2 million).
Special charges of $19.2 million ($15.7 million after income taxes)
were reported for the second quarter of fiscal 1999. Included in these
special charges were approximately $10.0 million of losses associated with
the divestiture of certain operations in connection with the purchase and
sale transaction with Allied Waste Industries, Inc. (Allied) which closed in
early April 1999. In addition, the Company incurred approximately $9.2
million of investment banking, legal and other expenses related to the
proposed merger with Allied,
10
<PAGE> 11
which are not deductible for federal income tax purposes. See Note (9) for
further discussion of the proposed merger with Allied.
Fiscal 1998 Special Credits ($21.5 million).
Special credits of $21.5 million ($12.9 million after income taxes)
were reported for the six-month period ended March 31, 1998. These special
credits are related principally to the gain of $17.9 million recognized from
the sale in March 1998 of substantially all of the Company's operations
outside North America to SITA, a Paris-based subsidiary of Suez Lyonnaise
des Eaux. In exchange for these operations, the Company received $950
million in cash and an ownership interest of approximately 19.2% in ordinary
shares of SITA. Costs associated with the sale of these operations included
estimated transaction and other expenses and losses accumulated in the
foreign currency translation component of common stockholders' equity
(approximately $133 million). A portion of the total gain, net of expenses,
was deferred in connection with the Company's continuing investment in SITA.
The Company's consolidated results of operations on an unaudited pro
forma basis for the six-month period ended March 31, 1998, as though the
sale of the operations outside North America had occurred on October 1, 1997
are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1998
-------------
<S> <C>
Pro forma revenues $ 2,020,862
Pro forma income before extraordinary item
and cumulative effects of changes in
accounting principles $ 159,411
Pro forma earnings per share -
Basic $ .85
Diluted $ .84
</TABLE>
These pro forma results are presented for informational purposes only
and do not purport to show the actual results which would have occurred had
the sale of the international operations been consummated on October 1,
1997, nor should they be viewed as indicative of future results of
operations. In addition, these pro forma amounts give no effect to earnings
from the Company's equity investment in SITA on a pro forma basis for the
period prior to consummation of the sale of the international operations.
Had any such estimated earnings from the Company's investment in SITA been
considered in the Company pro forma
11
<PAGE> 12
results of operations presented above, management believes that pro forma
earnings per share amounts would reflect significantly less dilution when
compared with the related historical earnings per share amounts.
The remaining amounts included in special credits were attributable
principally to net gains associated with the divestiture of certain North
American operations in the first six months of fiscal 1998.
(5) Cumulative Effects of Changes in Accounting Principles -
On November 20, 1997, the Financial Accounting Standards Board's
Emerging Issues Task Force issued EITF No. 97-13, a consensus ruling
requiring that certain business process reengineering costs typically
capitalized by companies be expensed as incurred. The ruling further
required that previously capitalized costs of this nature be written off as
a cumulative effect of a change in accounting principle in the quarter
containing November 20, 1997. The Company had previously capitalized these
types of costs in connection with its SAP software implementation project.
As a result, the Company recorded an after-tax charge of $13.8 million or
$.073 diluted earnings per share in the first quarter of fiscal 1998 as the
cumulative effect of a change in accounting principle.
During the second quarter of fiscal 1998, the Company changed its
method of accounting for recognition of value changes in its employee
retirement plan for purposes of determining annual expense under SFAS No. 87
- "Employers' Accounting for Pensions", effective October 1, 1997. The
Company has changed its method of calculating the value of assets of its
plan from a calculation which recognized changes in fair value of assets
over five years to recognition of changes in fair value immediately. The
Company has also changed the method of recognizing gains and losses from
deferral within a 10% corridor and amortization of gains outside this
corridor over the future working careers of the participants to a deferral
below a 5% corridor, immediate recognition within a 5-10% corridor and
amortization of gains outside this corridor over the future working careers
of the participants. The new method is preferable because, in the Company's
situation, it produces results which more closely match current economic
realities of the Company's retirement plan through the use of the current
fair value of assets while still mitigating the impact of extreme gains and
losses. As a result, the Company recorded an after-tax credit of $4.2
million, or $.022 diluted earnings per share, as the cumulative effect of a
change in accounting principle.
12
<PAGE> 13
(6) Business Combinations -
During the current fiscal year, the Company paid approximately $27.7
million (including additional amounts payable, principally to former owners,
of $2.8 million and the issuance of 257,468 shares of the Company's common
stock valued at $8.4 million) to acquire 34 solid waste businesses, which
were accounted for as purchases. In connection with these acquisitions, the
Company recorded other liabilities of $0.9 million. The results of these
business combinations are not material to the Company's consolidated results
of operations or financial position.
During the fiscal year ended September 30, 1998, the Company paid
approximately $25.5 million (including additional amounts payable,
principally to former owners, of $0.7 million and the issuance of 7,089
shares of the Company's common stock valued at $0.2 million) to acquire 30
solid waste businesses, which were accounted for as purchases. In connection
with these acquisitions, the Company recorded additional interest-bearing
indebtedness of $0.2 million and other liabilities of $1.5 million. The
results of these business combinations were not material to the Company's
consolidated results of operations or financial position.
The results of all businesses acquired in fiscal years 1999 and 1998
have been included in the consolidated financial statements from the dates
of acquisition. In allocating purchase price, the assets acquired and
liabilities assumed in connection with the Company's acquisitions have been
initially assigned and recorded based on preliminary estimates of fair value
and may be revised as additional information concerning the valuation of
such assets and liabilities becomes available. As a result, the financial
information included in the Company's consolidated financial statements is
subject to adjustment prospectively as subsequent revisions in estimates of
fair value, if any, are necessary.
13
<PAGE> 14
(7) Long-Term Debt -
Long-term debt at March 31, 1999 and September 30, 1998, was as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
---------- ----------
<S> <C> <C>
Senior indebtedness:
6.10% Senior Notes, net of
unamortized discount of $870
and $986 $ 155,819 $ 155,703
6.375% Senior Notes, net of
unamortized discount of $1,286
and $1,360 159,914 159,840
7 7/8% Senior Notes, net of
unamortized discount of $156
and $169 69,345 69,332
7.40% Debentures, net of
unamortized discount of
$1,697 and $1,720 358,303 358,280
9 1/4% Debentures 99,500 99,500
Solid waste revenue bond
obligations 254,479 220,044
Other notes payable 40,113 46,790
---------- ----------
1,137,473 1,109,489
Commercial paper and short-term
facilities to be refinanced 840,844 692,615
---------- ----------
Total long-term debt 1,978,317 1,802,104
Less current portion 7,308 9,241
---------- ----------
Long-term debt, net of current
portion $1,971,009 $1,792,863
========== ==========
</TABLE>
It is the Company's intention to refinance certain outstanding
borrowings classified as long-term debt through the use of existing committed
long-term bank credit agreements in the event that alternative long-term
refinancing is not arranged. A summary of such outstanding borrowings
classified as long-term debt as of March 31, 1999 and September 30, 1998 is
as follows (amounts in thousands):
14
<PAGE> 15
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
--------- -------------
<S> <C> <C>
United States -
Commercial paper $489,125 $590,676
Market Value Put Securities 251,329 --
Other 100,390 101,939
-------- --------
$840,844 $692,615
======== ========
</TABLE>
On January 15, 1999, the Company issued $250 million of Market Value Put
Securities ("MVPs"). The MVPs bear interest at 6.08% and are subject to a
mandatory put on January 18, 2000. First Chicago Capital Markets, Inc. holds
an option to remarket the MVPs on that date for an additional two-year term.
Proceeds from the MVPs were used to repay a portion of the Company's
commercial paper balances.
As of March 31, 1999, distributions from retained earnings could not
exceed $82 million under the most restrictive of the Company's net worth
maintenance requirements.
(8) Commitments and Contingencies -
Legal Proceedings.
The Company and certain subsidiaries are involved in various
administrative matters or litigation, including personal injury and other
civil actions, as well as other claims and disputes that could result in
additional litigation or other adversary proceedings.
While the final resolution of any matter may have an impact on the
Company's consolidated financial results for a particular quarterly or annual
reporting period, management believes that the ultimate disposition of these
matters will not have a materially adverse effect upon the consolidated
financial position of the Company.
Environmental Proceedings.
The Company and certain subsidiaries are involved in various
environmental matters or proceedings, including original or renewal permit
application proceedings in connection with the establishment, operation,
expansion, closure and post-closure activities of certain landfill disposal
facilities, and proceedings relating to governmental actions resulting from
the involvement of various subsidiaries of the Company with certain waste
sites (including Superfund sites), as well
15
<PAGE> 16
as other matters or claims that could result in additional environmental
proceedings.
While the final resolution of any matter may have an impact on the
Company's consolidated financial results for a particular quarterly or annual
reporting period, management believes that the ultimate disposition of these
matters will not have a materially adverse effect upon the consolidated
financial position of the Company.
(9) Proposed Merger with Allied
On March 8, 1999, the Company and Allied announced that they had entered
into a definitive merger agreement under which Allied will acquire the
Company for $45 in cash for each outstanding share of the Company's common
stock. The transaction is structured as a merger of the Company with a
subsidiary of Allied and is subject to the approval of the Company's
stockholders and other customary conditions. The Company and Allied are
pursuing the necessary approvals. The merger agreement may be terminated and
the merger may be abandoned under a number of conditions. If this were to
occur, dependent upon the reasons for termination of the merger agreement, a
termination fee of $225 million could be payable by the Company to Allied,
receivable by the Company from Allied, or no fee may be payable.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion and analysis of the Company's operations,
financial performance and results includes statements that are not historical
facts. Such statements are "forward-looking statements" (as defined in the
Private Securities Litigation Reform Act of 1995) based on the Company's
expectations and as such, these statements are subject to uncertainty and
risk. These statements should be read in conjunction with the "Regulation",
"Competition" and "Waste Disposal Risk Factors" sections of the Company's
Annual Report on Form 10-K for the year ended September 30, 1998 ("the Form
10-K"), which describe many of the external factors that could cause the
Company's actual results to differ materially from the Company's
expectations. The Company's Form 10-K is on file with the U.S. Securities and
Exchange Commission, a copy of which is available without charge upon written
request to: Browning-Ferris Industries, Inc., P.O. Box 3151, Houston, Texas
77253, Attention: Assistant Corporate Secretary.
RESULTS OF OPERATIONS
Net income for the six months ended March 31, 1999, was $138.8 million
($.86 diluted earnings per share), on consolidated revenues of $2.079
billion. These results compare with net income for the first six months of
fiscal 1998 of $169.5 million ($.90 diluted earnings per share) on
consolidated revenues of $2.650 billion. Current year earnings per share
amounts were affected favorably by the reduction in outstanding common shares
under the Company's common stock repurchase initiative, offset to some extent
by higher interest expense experienced as a result of these stock
repurchases.
The results for the first six months of fiscal 1999 were affected
significantly by the sale of substantially all of the Company's operations
outside of North America to SITA, a Paris-based subsidiary of Suez Lyonnaise
des Eaux. The transaction was completed in March 1998. In exchange for these
operations, the Company received $950 million in cash and an ownership
interest of approximately 19.2% in ordinary shares of SITA.
The results for the first six months of the year included special
charges of $19.2 million, comprised of $10.0 million ($6.5 million, net of
income tax) attributable to the completion of the previously
17
<PAGE> 18
announced sale of certain business operations to Allied Waste Industries,
Inc. ("Allied") in early April 1999 and $9.2 million of non-tax deductible
investment banking, legal and other expenses recorded in the second quarter
of fiscal 1999 related to the proposed merger of the Company with Allied. On
March 8, 1999, the Company and Allied announced that they had entered into a
definitive merger agreement under which Allied will acquire the Company for
$45 in cash for each outstanding share of the Company's common stock. The
transaction is structured as a merger of the Company with a subsidiary of
Allied and is subject to the approval of the Company's stockholders and
other customary conditions. The Company currently believes that the merger
with Allied will occur during the third quarter of calendar 1999.
In addition to the special charges, approximately $4.2 million of
consulting fees were incurred in the second quarter of fiscal 1999 primarily
related to the A.T. Kearney engagement discussed below. Further, equity in
earnings of SITA (a loss of $700,000 for the second quarter) were $3.5
million lower than anticipated by the Company due to a number of charges
recorded by SITA in connection with its yearend reporting.
The results for the first six months of fiscal 1999 reflected increased
revenue growth, excluding the impact of divestitures, from the first six
months of last year despite a significant decline in recycling commodity
prices between the periods. The year-to-date results were also favorably
affected by reductions in certain cost components of cost of operations and,
to a lesser extent, selling, general and administrative ("SG&A") expense
under the Company's cost reduction program, announced in May 1998. The
Company benefited from approximately $42 million of cost savings under this
program in the first six months of fiscal 1999 as compared with the same
period last year. Savings from changes made to employee health care benefits
commenced in January 1999. These savings affect both costs of operations and
SG&A expense. The Company continues to believe that the $80 million in
annualized cost reductions for fiscal 1999, targeted when the program was
initiated in May 1998, is achievable.
The results for the first six months of fiscal 1999 were unfavorably
affected by increased SG&A expense, including staffing, and depreciation
expense associated with the implementation of the Company's SAP software
system in January 1998 and the continued support of certain existing software
systems not yet replaced. When the SAP system was implemented, the Company
expected to realize benefits in purchasing costs and in its accounting and
administrative support areas as certain modules were installed in the field
operations in fiscal 1998. The Company is incurring the higher costs
18
<PAGE> 19
of the new system, approximately $11 million in the first six months of
fiscal 1999 over the same period of last year, but is not yet realizing the
expected benefits. The implementation of the second phase of the SAP system
continues to be delayed as the Company focuses on the resolution of issues
related to the phase already implemented, including the modification of a
number of business processes, and due to the pending merger with Allied.
Modest benefits are expected to be realized in the last half of fiscal 1999.
The Strategic Industry Development Committee of the Company's Board of
Directors, together with management, engaged a consulting firm, A.T. Kearney,
Inc., to conduct a comprehensive review of the Company's cost structure at
both corporate headquarters and throughout field operations. The review,
which began in early January 1999, was completed early in the third quarter
of fiscal 1999, and focused upon the following six areas:
1. SAP - determining how the Company can best achieve the benefits from the
SAP software system that justify the substantial investment of
approximately $130 million.
2. Fleet management - optimizing purchasing and maintenance practices
related to the Company's trucks and other transportation equipment.
3. Sourcing - determining how best to use the Company's size to leverage
its purchasing practices in other areas in addition to fleet management.
4. Business model - reviewing the Company's organizational model to
determine whether it is optimal for accomplishing the Company's
objectives.
5. Field operations - assisting in benchmarking more effectively, both
internally and against competitors.
6. Change management - determining how the Company can execute change more
effectively.
The preliminary recommendations communicated to the Company as a result of
the A.T. Kearney engagement were provided to Allied in connection with their
offer to acquire the Company. The final report from the consultants, which
was received subsequent to the announcement of the proposed merger, has also
been provided to Allied. As a result of the pending merger with Allied, the
Company is pursuing only those recommendations of the consulting firm that
would not require significant changes or modifications to its existing
business.
19
<PAGE> 20
The following profitability ratios (shown as a percent of revenues)
reflect certain profitability trends for the Company's operations. Also
presented below are ratios of earnings to fixed charges and supplemental
information.
<TABLE>
<CAPTION>
Six Months Ended
--------------------- Year Ended
3/31/99 3/31/98 9/30/98
------- ------- ----------
<S> <C> <C> <C>
Profitability margins:
Income from operations 13.4% 13.4% 13.6%
Income before income taxes,
minority interest, extraordinary
items and cumulative effects of
changes in accounting principles 11.5% 11.7% 12.4%
Net income 6.7% 6.4% 7.1%
Ratio of earnings to fixed charges 3.46 3.59 3.81
Supplemental Information (1):
Income from operations before
special charges (credits), net 14.4% 12.6% 13.2%
Net income before special charges
(credits), extraordinary items and
cumulative effects of changes
in accounting principles 7.4% 6.3% 7.1%
Ratio of earnings to fixed
charges before special charges
(credits), net 3.66 3.40 3.71
</TABLE>
- -------------
(1) Amounts provided supplementally are measures of financial
performance that are not in conformity with generally accepted
accounting principles because certain items of income (expense)
have been excluded. This supplemental information has been
provided because we understand that such information is used by
certain investors when analyzing the Company's financial condition
and performance.
Profitability margins were affected negatively in the first six months
of fiscal 1999 by special charges of $19.2 million associated with the loss
from the divestiture of certain business operations to Allied and by
investment banking, legal and other expenses related to the proposed merger
with Allied. For the first six months of fiscal 1998, profitability margins
were affected favorably by special credits of $21.5 million, principally
related to the sale of substantially all of the Company's international
operations to SITA. Excluding special charges and credits, profitability
margins for the first six months of
20
<PAGE> 21
fiscal 1999 were affected favorably by the divestiture of the Company's
international operations in March 1998. Increased landfill volumes and cost
reduction efforts were also key drivers of improved margin performance.
Expenses included in cost of operations and SG&A expense were reduced
approximately $42 million in the first six months of fiscal 1999 compared
with the same period last year due to actions taken under the Company's cost
reduction program that was announced in May 1998. These cost reduction
benefits were offset partially by increased expenses of approximately $11
million associated with the implementation of the Company's SAP software
system in January 1998 and the continued support of certain existing
software systems not yet replaced, as well as approximately $4.2 million of
consulting fees incurred in the second quarter of fiscal 1999, primarily
related to the A.T. Kearney engagement. Profitability in the recycling
business was affected negatively in the first six months of the current year
compared with the same period last year by lower weighted average commodity
prices. The weighted average market prices for recycling commodities in
North America, principally corrugated, office paper and newspaper, declined
to approximately $56 per ton for the first six months of the current year
from approximately $70 per ton for the comparable period last year.
The Company's goals and actions in fiscal 1999 continue to align the
Company's performance with its stockholders' interests. The fiscal 1999
milestones compared with actual performance for the first six months of
fiscal year 1999 are as follows:
<TABLE>
<CAPTION>
Fiscal First Six Fiscal
1999 Months of 1998
Milestone Fiscal 1999 Actual
--------- ----------- ------
<S> <C> <C> <C>
SG&A as a percent of
revenues 12.2% 12.6% 12.3%(1)
Operating profit margin 14.7% 14.4%(2) 13.3%(1)(2)
Revenue growth (3) 3.5% 4.7% 2.1%
Return on Gross Assets -
Year-to-date basis 6.68%
Annualized basis 13.8% 13.36%(2) 13.5%(1)(2)
</TABLE>
- -----------
(1) Excluding severance costs of $5.2 million ($3.1 million, after
tax) incurred in the third quarter of fiscal 1998.
(2) Excluding special charges (credits), net.
(3) Revenue growth from price, volume and acquisitions, excluding the
effects of divestitures and foreign
21
<PAGE> 22
currency exchange; in fiscal 1999, also excludes the effects of
buy/sell agreements.
The Company expects to exceed its fiscal 1999 revenue growth and operating
profit margin milestones and to meet its SG&A as a percent of revenues and
ROGA milestones barring any significant changes in reporting of progress
against these goals due to the pending merger with Allied.
The Company's goals and objectives continue to emphasize growth with
success measured by cash flow and return on gross assets. Return on gross
assets ("ROGA"), although not a measure of financial performance under
generally accepted accounting principles, is a measurement utilized by the
Company which represents the quotient of operating cash flow divided by
average gross assets, where operating cash flow and gross assets are defined
generally as follows:
Operating cash flow - the sum of (i) net income before extraordinary
items and cumulative effects of changes in accounting principles, (ii)
minority interest, (iii) interest expense, net of related income tax
benefit, (iv) depreciation and amortization expense and (v) asset
impairment writedowns (e.g. special charges in fiscal years 1996, 1997
and 1999). Special credits have also been excluded for purposes of this
computation.
Gross assets - the sum of total assets, accumulated depreciation and
amortization, and asset impairment writedowns (until such assets are
sold or otherwise disposed of -- approximately $47 million and $42
million at March 31, 1999 and December 31, 1998, respectively) less the
sum of (i) current liabilities, net of interest-bearing indebtedness
included therein, (ii) noncurrent accrued environmental and landfill
costs associated with the continuing operations of the Company
(approximately $308 million and $307 million at March 31, 1999, and
December 31, 1998, respectively) and (iii) deferred income tax
liabilities.
Gross assets in the ROGA computations for the first six months of a
fiscal year is the average of the applicable beginning of year and end of
first and second quarter amounts; gross assets for a fiscal year is the
average of the applicable five quarter-end amounts in the period.
Total assets decreased slightly from $5.00 billion at September 30,
1998 to $4.93 billion at March 31, 1999. Average gross assets were
22
<PAGE> 23
approximately $5.95 billion in the computation of ROGA. Gross assets at
March 31, 1999 were $6.02 billion compared with $5.90 billion at September
30, 1998.
EBITDA (defined herein as income from operations plus depreciation and
amortization expense before considering special charges or credits) was $503
million for the first six months of fiscal 1999 as compared with $594 million
for the first six months of last year. The current year decline in EBITDA is
principally attributable to the Company's divestiture of its international
operations in March 1998. North American EBITDA was $483 million for the
first six months of fiscal 1998. EBITDA, which is not a measure of financial
performance under generally accepted accounting principles, is included in
this discussion because the Company understands that such information is used
by certain investors when analyzing the Company's financial condition and
performance.
Due to the sale of substantially all of the Company's international
operations to SITA in March 1998, supplemental information comparing
operating results for the first six months of the prior year for North
America and the total Company with the operating results for the first six
months of fiscal 1999 is presented below.
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------------------------------
1998
-------------------------------
North Total
1999 America Company
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Revenues $ 2,078,623 $ 2,017,493 $ 2,650,459
Cost of operations 1,314,628 1,284,705 1,735,275
Selling, general and
administrative expense 261,170 249,999 321,616
Depreciation and amortization
expense 204,513 197,830 258,642
Special charges (credits), net 19,183 (3,545) (21,464)
----------- ----------- -----------
Income from operations $ 279,129 $ 288,504 $ 356,390
=========== =========== ===========
</TABLE>
23
<PAGE> 24
Revenues -
Revenues for the six months ended March 31, 1999, were $2.079 billion, a
21.6% decrease from the same period last year. The following table reflects
total revenues of the Company by each of the principal lines of business
(dollar amounts in thousands):
<TABLE>
<CAPTION>
Six Months Ended
------------------------------- %
3/31/99 3/31/98 Change
----------- ----------- ------
<S> <C> <C> <C>
North American Operations
(including Canada) -
Collection Services -
Solid Waste $ 1,425,909 $ 1,354,369 5.3%
Transfer and Disposal -
Solid Waste
Unaffiliated customers 282,750 264,961 6.7%
Affiliated companies 291,578 256,796 13.5%
----------- -----------
574,328 521,757 10.1%
Recycling Services 215,036 241,799 (11.1)%
Medical Waste Services 100,600 98,694 1.9%
Services Group and Other 54,328 57,670 (5.8)%
Elimination of affiliated
companies' revenues (291,578) (256,796) 13.5%
----------- -----------
Total North American Operations 2,078,623 2,017,493 3.0%
International Operations -- 632,966 (100.0)%
----------- -----------
Total Company $ 2,078,623 $ 2,650,459 (21.6)%
=========== ===========
</TABLE>
As the table below reflects, lower revenues for the six months ended
March 31, 1999, were due principally to the decline related to the
divestiture of business operations. The reduction due to the sale of the
Company's international operations accounted for 95% of the decline due to
divestitures.
24
<PAGE> 25
<TABLE>
<CAPTION>
Changes in Revenue for
Six Months Ended
March 31,
----------------------
1999 1998
------ ------
<S> <C> <C>
Price (0.9)% 1.4%
Volume 4.6 (1.4)
Acquisitions 1.1 1.9
Divestitures (26.2) (8.2)
Foreign currency translation (0.2) (2.6)
------ ------
Total Percentage Change (21.6)% (8.9)%
====== ======
</TABLE>
In addition to divestitures, revenues declined due to price, driven by
the decline in the weighted average market price of recycling commodities
from $70 per ton for the first six months of fiscal 1998 to $56 per ton for
the first half of fiscal 1999. This decline in revenues due to price in the
recycling business was offset partially by improved pricing in the Company's
transfer and disposal and medical waste business operations. The improved
pricing in the transfer and disposal business in the first quarter of fiscal
1999 was partially offset by decreased revenues due to price in the second
quarter of the current year. The increase in revenues due to volume resulted
from increased volumes in the Company's collection business and, to a lesser
extent, landfill and recycling businesses. Increased volumes are the result
of strong new business activity in a continuing strong economy and increased
sales by the Company's national accounts organization, driven by increased
demand by national and regional customers for a single waste services company
capable of handling their needs from a centralized location. Additional
growth in revenues was attributable to acquisitions consummated since the
second quarter of last year.
In order to achieve greater internal revenue growth, the Company named
marketplace revenue managers during the second and third quarters of fiscal
1998 and redeployed 175 additional outside sales personnel in various
markets, as deemed appropriate, in order to generate additional new business.
The Company also has implemented more aggressive price increases in certain
customer segments and marketplaces and is competitively pricing business in
general business and small container government contract work to maintain
route density. The Company has also continued to exercise pricing discipline
on municipal contracts. Although the Company lost more of this work during
fiscal 1998 than contemplated, in fiscal 1999 the Company has fewer municipal
contracts to be rebid and has seen an improvement in
25
<PAGE> 26
the municipal contract pricing environment overall. Lastly, the Company
continues to pursue additional third party volumes via reciprocal waste
disposal agreements with other companies.
Cost of Operations -
Cost of operations, which excludes depreciation and amortization
expense, decreased $421 million or 24.2% for the first six months of fiscal
1999, compared with the same period of the prior year. This decrease in cost
of operations is largely attributable to the sale of the Company's
international operations in March 1998 and the Company's cost reduction
program implemented in May 1998. As a result of the cost reduction program,
the Company has reduced its costs through facility and functional
consolidations, closures of operating facilities, reduced employee benefits
and, where appropriate, after careful review, a reduction in supervisory and
administrative support personnel. These decreases in cost of operations were
offset partially by increased costs associated with acquisitions and volume
growth, principally in the core collection and transfer and disposal
businesses.
Selling, General and Administrative Expense -
SG&A expense, which excludes depreciation and amortization expense,
decreased $60 million for the first six months of fiscal 1999, a decrease of
18.8% from the same period last year. The decrease in SG&A expense was driven
largely by the impact of the sale of international operations in March 1998
and the Company's cost reduction program implemented in May 1998, including
savings from changes made to employee health care benefits effective January
1, 1999. This decrease was offset partially by an increase in SG&A expense
due to (i) approximately $4.2 million of consulting fees incurred in the
second quarter of fiscal 1999 primarily related to the A.T. Kearney
engagement, (ii) acquisitions and volume growth and (iii) an increase of
approximately $8 million related to implementation of the Company's SAP
software system and the continued support of certain existing systems not yet
replaced.
Depreciation and Amortization Expense -
Depreciation and amortization expense decreased $54 million for the
first six months of fiscal 1999, a decrease of 20.9% from the same period
last year. The decrease in depreciation and amortization expense was driven
principally by the impact of the sale of international operations in March
1998. Depreciation and amortization expense in North America was favorably
affected in the current year as a result of the Company's concerted efforts
to improve compaction at
26
<PAGE> 27
its landfills throughout North America. The Company has utilized larger
compactors and employed best operating practices during the past two years,
and confirmed actual improved compaction experience at its landfills during
the first quarter of fiscal 1999 through review of data obtained from
routine annual flyovers. The increased compaction supports lower unit of
production amortization rates in the first quarter and into the future. The
reduction in landfill depreciation and amortization expense was more than
offset by increased depreciation and amortization expense related to
implementation of the Company's SAP software system in January 1998 and
depreciation of leased equipment purchased in the fourth quarter of fiscal
1998.
Net Interest Expense -
Net interest expense decreased $12.5 million or 17.3% for the first six
months of fiscal 1999 compared with the same period of the prior year as a
result of the decrease in average debt outstanding between the periods. The
decrease was driven principally by the reduction in debt, primarily in
Germany, as a result of the sale of the Company's international operations in
March 1998. The increase in debt as a result of the Company's common stock
repurchase program which commenced in the first quarter of fiscal 1998 was
offset by the utilization of cash proceeds of $950 million from the sale of
the Company's international operations in March 1998 and cash proceeds of
$409.7 million received in exchange for approximately 11.5 million shares of
the Company's common stock in June 1998.
Equity in Earnings of Unconsolidated Affiliates -
Equity in earnings of unconsolidated affiliates decreased $5.4 million
for the first six months of fiscal 1999 compared with the same period of the
prior year primarily due to a reduction in earnings of unconsolidated foreign
affiliates as a result of the sale of the Company's international operations
in March 1998. This decrease has been largely offset by the equity in
earnings of SITA since the international operations were sold. However, the
Company's portion of SITA's results of operations for the second quarter of
fiscal 1999, which was a loss of $.7 million, was $3.5 million lower than
anticipated by the Company due to a number of charges recorded by SITA in
connection with its yearend reporting. The year-to-date equity in earnings of
SITA was reduced, accordingly, to approximately $2.5 million. The increase
in earnings from the Company's waste-to-energy equity affiliates for the
first half of fiscal 1999 was largely offset by decreased equity in earnings
resulting from significantly reduced volumes at an Illinois landfill,
operated by a 50%-owned affiliate of the Company, which is approaching full
capacity.
27
<PAGE> 28
Minority Interest in Income of Consolidated Subsidiaries -
The decrease in minority interest in income of consolidated subsidiaries
for the first six months of fiscal 1999 compared with the same period of last
year was due to the sale of the Company's international operations in March
1998.
Cumulative Effects of Changes in Accounting Principles -
On November 20, 1997, the FASB's Emerging Issues Task Force issued EITF
No. 97-13, a consensus ruling requiring that certain business process
reengineering costs typically capitalized by companies be expensed as
incurred. The ruling further required that previously capitalized costs of
this nature be written off as a cumulative effect of a change in accounting
principle in the quarter containing November 20, 1997. The Company had
previously capitalized these types of costs in connection with its SAP
software implementation project. As a result, the Company recorded an
after-tax charge of $13.8 million or $.073 diluted earnings per share in the
first quarter of fiscal 1998 as the cumulative effect of a change in
accounting principle.
During the second quarter of fiscal 1998, the Company changed its method
of accounting for recognition of value changes in its employee retirement
plan for purposes of determining annual expense under SFAS No. 87 -
"Employers' Accounting for Pensions", effective October 1, 1997. The Company
changed its method of calculating the value of assets of its plan from a
calculation which recognized changes in fair value of assets over five years
to recognition of changes in fair value immediately. The Company also changed
the method of recognizing gains and losses from deferral within a 10%
corridor and amortization of gains outside this corridor over the future
working careers of the participants to a deferral below a 5% corridor,
immediate recognition within a 5-10% corridor and amortization of gains
outside this corridor over the future working careers of the participants.
The new method is preferable because, in the Company's situation, it produces
results which more closely match current economic realities of the Company's
retirement plan through the use of the current fair value of assets while
still mitigating the impact of extreme gains and losses. As a result, the
Company recorded an after-tax credit of $4.2 million, or $.022 diluted
earnings per share, during the second quarter of fiscal 1998 as the
cumulative effect of a change in accounting principle.
28
<PAGE> 29
YEAR 2000 READINESS DISCLOSURE
Many computer software systems, as well as certain hardware and
equipment utilizing date-sensitive information, were configured to use a
two-digit date field, which may preclude them from properly recognizing dates
in the year 2000. The inability to properly recognize date-sensitive
information in the year 2000 could render systems inoperable or cause them to
incorrectly process operational or financial information.
In addition, machinery and equipment often use, or are controlled or
monitored by, electronic devices that contain embedded microchips. Such
machinery and equipment could be rendered partially or totally inoperable if
embedded microchips are date-sensitive and do not properly recognize the year
2000.
State of Readiness -
In fiscal 1995, the Company initiated a project, in the ordinary course
of business, to implement the SAP suite of business systems software (which
is year 2000 compliant) to replace essentially all of its existing business
systems. The first phase of this project, which was completed in 1998,
replaced approximately 45% of the existing business systems of the Company.
Since the remainder of the SAP implementation was not scheduled to be
completed before January 2000, the Company commenced a Year 2000 Project to
ensure the compliance of remaining legacy computer systems.
The Year 2000 Project was divided into three phases and includes both
Information Technology ("I.T.") and non-I.T. systems. I.T. systems include
the Company's central business systems that support all operations, all
networks used to connect business locations, desktop systems and specific
systems for the Company's business segments. Non-I.T. systems include
process control systems, time clocks and building, telephone and other
systems.
In late 1998, the Company also initiated a process to (i) identify
critical supplier and customer-related issues, (ii) assess the year 2000
readiness of equipment located at all of its operating facilities and (iii)
determine what contingency plans may be required.
The following is the completion status of the three phases:
29
<PAGE> 30
Phase 1 -
Overall Planning and Strategy - Includes establishing a Year 2000
Steering Committee and Project Management Office, as well as documenting
the scope of work, involving appropriate Company personnel, and the
inventorying of systems. (Timeframe -- I.T.: January - June 1997,
Non-I.T.: June 1998 - December 1999)
Phase 2 -
Implementation of Plan - Includes software code modifications, software
package upgrades and testing of the Company's central business systems,
inventorying and querying suppliers concerning their year 2000 readiness,
and evaluating and, where necessary, initiating correction of field
systems and equipment containing embedded processors for year 2000
compliance. (Timeframe -- I.T.: June 1997 - June 1999, Non-I.T.: June
1998 - December 1999)
Phase 3 -
Final Testing, Contingency Planning and Replacement of Field Systems -
Includes final remediation, replacement and testing of critical I.T. and
non-I.T. systems, as well as contingency planning. (Timeframe -- I.T.:
January - July 1999, Non-I.T.: April - December 1999)
<TABLE>
<CAPTION>
Completion Status
------------------------------------------------------
I.T. Systems Non-I.T. Systems
----------------------- -----------------------
<S> <C> <C>
Phase 1 Complete. Complete.
Phase 2(A) Substantially complete. More than 50% complete.
Full completion Full completion
expected by 6/1/99. expected by 12/1/99.
Phase 3(A) Substantially complete. Partially complete.
Expected completion Expected completion
by 7/1/99. by 12/1/99.
</TABLE>
---------------------
(A) The ability of the Company to complete these phases is
dependent in part on the outcome of the merger with Allied and
subsequent decisions made by Allied management concerning the
future use of the Company's existing systems.
30
<PAGE> 31
The estimated time of completion of the Company's year 2000 program and
compliance efforts, and the expenses related to the Company's year 2000
compliance efforts are based upon management's best estimates, which were
based on assumptions of future events, including the availability of certain
resources, third party modification plans and other factors. There can be no
assurances that these results and estimates will be achieved, and the actual
results could materially differ from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability of personnel trained in this area and the ability to locate and
correct all relevant computer codes or other date-sensitive devices.
Risk of Year 2000 Issues -
The Company has requested from its principal suppliers and services
providers written assurance that they will be year 2000 compliant. The
majority of these suppliers have responded favorably and follow-up continues
with the remaining suppliers. No significant supplier problems have been
discovered to date.
There can be no assurances that the systems or products of third
parties, which the Company relies upon, will be timely converted or that a
failure by a third party, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The Company does not expect any material disruption in operation or
losses in revenue due to year 2000 problems with I.T. or non-I.T. systems.
For the Company's critical I.T. systems, a battery power back up and diesel
power generator are in place to provide continuous electrical power in our
central computer center, if the need arises. In addition, fuel inventories
for all equipment and critical equipment spare parts will be closely managed
and stocked to maximize target levels at yearend.
Cost to Address Year 2000 Issues -
The total cost of year 2000 work since inception in 1997 is expected to
be in the range of $5 to $10 million. Of this, approximately $4 million has
been spent to date, including approximately $3.5 million related to
remediation expense with the remaining $.5 million related to replacement
capital.
31
<PAGE> 32
Cash from the operating activities of the Company will fund the costs
for year 2000 replacement and remediation work. These costs are not expected
to exceed 5% of the fiscal year 1999 I.T. budget.
No I.T. projects have been deferred due to year 2000 efforts.
Contingency Plans -
Contingency plans include the stockpiling of critical part supplies and
fuel, as well as sharing of parts and fuel inventories between districts in
close proximity to each other, if necessary. Potential power outages are
being mitigated through the implementation of standby power generator
equipment for critical functions such as the central computer center and
landfill gate operations.
The Company has not developed contingency plans related to all
uncertainties relative to its Year 2000 Plan.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $57.8 million at September
30, 1998, compared with a deficit of $59.3 million at March 31, 1999. Over
the long term, it continues to be the Company's desire to maintain
substantial available commitments under bank credit agreements or other
financial agreements to finance short-term capital requirements in excess of
internally generated cash while minimizing working capital.
During the first six months of fiscal 1999, the Company had repurchased
an additional 6.0 million shares of its common stock at a cost of
approximately $181 million. As of March 31, 1999, approximately $2.19 billion
of the authorized $2.25 billion common stock repurchase program had been
completed. The share repurchase program has been discontinued due to the
pending merger with Allied.
On January 15, 1999, the Company issued $250 million of Market Value Put
Securities ("MVPs"). The MVPs bear interest at 6.08% and are subject to a
mandatory put on January 18, 2000. First Chicago Capital Markets, Inc. holds
an option to remarket the MVPs on that date for an additional two-year term.
Proceeds from the MVPs were used to repay a portion of the Company's
commercial paper balances.
Long-term indebtedness including the current portion of long-term debt
as a percentage of total capitalization was 60% as of March 31, 1999 and 56%
at September 30, 1998.
32
<PAGE> 33
The capital appropriations budget for fiscal 1999 was established at
$600 million to provide for normal replacement requirements, new assets to
support planned revenue growth within all consolidated businesses and
corporate market development activities. This is a slight increase from the
$560 million level of capital expenditures in fiscal 1998 and is reflective
of the continued emphasis on internal rather than external growth. Capital
expenditures through March 31, 1999 were approximately $291 million,
including acquisitions.
As previously discussed, the Company and Allied have entered into a
definitive merger agreement under which Allied will acquire the Company. (See
Note 9 of Notes to Consolidated Financial Statements.) Assuming this
transaction closes as anticipated, the ratings on the Company's outstanding
debt would likely drop to below investment grade, in accordance with the
ratings of Allied, on the transaction closing date. Although the Company is
not in a position to predict the impact that the transaction will have on the
liquidity or capital resources available to the Company subsequent to the
transaction date, the Company expects that Allied will make the necessary
arrangements to deal with the ongoing liquidity and capital resource needs of
the Company assuming that the proposed merger transaction is consummated.
As of March 31, 1999, there have been no significant changes in balance
sheet caption amounts compared with September 30, 1998, and there have been
no material changes in the Company's financial condition from that reported
at September 30, 1998, except as disclosed herein.
33
<PAGE> 34
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain subsidiaries are involved in various administrative
matters or litigation, including original or renewal permit application
proceedings in connection with the establishment, operation, expansion, closure
and post-closure activities of certain landfill disposal facilities,
environmental proceedings relating to governmental actions resulting from the
involvement of various subsidiaries of the Company with certain waste sites
(including Superfund sites), personal injury and other civil actions, as well as
other claims and disputes that could result in additional litigation or other
adversary proceedings.
While the final resolution of any such litigation or such other matters may have
an impact on the Company's consolidated financial results for a particular
quarterly or annual reporting period, management believes that the ultimate
disposition of such litigation or such other matters will not have a materially
adverse effect upon the consolidated financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On March 3, 1999, the Company held its Annual Meeting of Stockholders to vote on
the election of three directors to serve for three-year terms. William D.
Ruckelshaus received 127,920,517 votes and 19,200,976 votes were withheld; Bruce
E. Ranck received 127,961,677 votes and 19,159,816 votes were withheld; and
Gerald Grinstein received 128,130,110 votes and 18,991,383 votes were withheld.
There were no broker nonvotes presented at the 1999 Annual Meeting of
Stockholders.
34
<PAGE> 35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12. Computation of Ratio of Earnings to Fixed Charges of
Browning-Ferris Industries, Inc. and Subsidiaries.
27. Financial Data Schedule.
(b) Reports on Form 8-K:
A Report on Form 8-K dated March 15, 1999 was filed pursuant to "Item
5. Other Events," whereby the Company filed (1) the Agreement and Plan
of Merger, dated as of March 7, 1999 (the "Merger Agreement") among the
Company, Allied Waste Industries, Inc. ("Allied Waste") and AWIN I
Acquisition Corporation, pursuant to which AWIN I Acquisition
Corporation, a newly formed wholly owned subsidiary of Allied Waste,
will be merged with and into the Company, and (2) the joint press
release dated March 8, 1999, announcing the entering into the Merger
Agreement.
35
<PAGE> 36
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 hereunto duly authorized.
BROWNING-FERRIS INDUSTRIES, INC.
(Company)
/s/ Bruce E. Ranck
-----------------------------------------
Bruce E. Ranck
President and
Chief Executive Officer
/s/ Jeffrey E. Curtiss
-----------------------------------------
Jeffrey E. Curtiss
Senior Vice President and
Chief Financial Officer
Date: May 13, 1999
36
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
12. Computation of Ratio of Earnings to Fixed Charges of
Browning-Ferris Industries, Inc. and Subsidiaries.
27. Financial Data Schedule.
</TABLE>
<PAGE> 1
Exhibit 12
BROWNING-FERRIS INDUSTRIES, INC.
AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Unaudited)
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Six Months
Ended March 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Earnings Available for Fixed Charges:
Income before minority interest, extraordinary
item and cumulative effects of changes in
accounting principles $141,297 $185,545
Income taxes 97,771 123,697
-------- --------
Income before income taxes, minority
interest, extraordinary item and
cumulative effects of changes in
accounting principles 239,068 309,242
Consolidated interest expense 60,644 75,549
Interest expense related to proportionate
share of 50% owned unconsolidated
affiliates 16,646 15,935
Portion of rents representing the interest
factor 14,047 21,057
Less-Undistributed earnings of affiliates
less than 50% owned 2,690 443
-------- --------
Total $327,715 $421,340
======== ========
Fixed Charges:
Consolidated interest expense and
interest costs capitalized $ 64,090 $ 80,489
Interest expense and interest costs
capitalized related to proportionate
share of 50% owned unconsolidated
affiliates 16,646 15,935
Portion of rents representing the interest
factor 14,047 21,057
-------- --------
Total $ 94,783 $117,481
======== ========
Ratio of Earnings to Fixed Charges 3.46(1) 3.59(2)
======== ========
</TABLE>
(1) Excluding the effects of the special charges of $19.2 million, the ratio
of earnings to fixed charges is 3.66.
(2) Excluding the effects of the special credits of $21.5 million, the ratio
of earnings to fixed charges is 3.40.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 55,506
<SECURITIES> 5,013
<RECEIVABLES> 627,005
<ALLOWANCES> 23,168
<INVENTORY> 22,535
<CURRENT-ASSETS> 831,814
<PP&E> 5,108,270
<DEPRECIATION> 2,260,775
<TOTAL-ASSETS> 4,934,165
<CURRENT-LIABILITIES> 891,078
<BONDS> 1,971,009
0
0
<COMMON> 34,807
<OTHER-SE> 1,267,128
<TOTAL-LIABILITY-AND-EQUITY> 4,934,165
<SALES> 0
<TOTAL-REVENUES> 2,078,623
<CGS> 0
<TOTAL-COSTS> 1,314,628
<OTHER-EXPENSES> 204,513
<LOSS-PROVISION> 10,388
<INTEREST-EXPENSE> 59,740
<INCOME-PRETAX> 239,068
<INCOME-TAX> 97,771
<INCOME-CONTINUING> 138,776
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 138,776
<EPS-PRIMARY> .87
<EPS-DILUTED> .86
</TABLE>
