<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 December 31, 1998
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)
<TABLE>
<S> <C>
Delaware 74-1673682
------------------------------------------------- -------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
757 N. Eldridge 77079
Houston, Texas
------------------------------------------------- -------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
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
February 10, 1999: 158,136,495.
<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
December 31,
----------------------------
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 1,050,727 $ 1,344,742
Cost of operations 670,074 878,413
Selling, general and administrative
expense 128,511 164,272
Depreciation and amortization expense 101,744 129,293
Special credits, net -- (2,557)
----------- -----------
Income from operations 150,398 175,321
Interest, net 29,691 35,619
Equity in earnings of unconsolidated
affiliates (8,712) (10,089)
----------- -----------
Income before income taxes, minority
interest and cumulative effect
of change in accounting principle 129,419 149,791
Income taxes 49,998 59,916
Minority interest in
income of consolidated
subsidiaries 1,207 3,117
----------- -----------
Income before cumulative effect of
change in accounting principle 78,214 86,758
Cumulative effect of change in
accounting principle, net of income
tax benefit of $7,411 -- 13,763
----------- -----------
Net income $ 78,214 $ 72,995
=========== ===========
</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
December 31,
-------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Earnings per share:
Basic -
Income before cumulative effect of
change in accounting principle $ .486 $ .454
Cumulative effect of change in
accounting principle -- (.072)
--------- ---------
Net income $ .486 $ .382
========= =========
Diluted -
Income before cumulative effect of
change in accounting principle $ .483 $ .452
Cumulative effect of change in
accounting principle -- (.072)
--------- ---------
Net income $ .483 $ .380
========= =========
Number of common shares used in computing
earnings per share:
Basic 160,973 190,911
========= =========
Diluted 161,947 192,282
========= =========
Cash dividends per common share $ .19 $ .19
========= =========
</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>
- ---------------------------------------------------------------------------
December 31, September 30,
1998 1998
(Unaudited)
- ---------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 59,888 $ 89,893
Short-term investments 2,269 5,812
Receivables -
Trade, net of allowances for doubtful
accounts of $25,629 and $22,072 613,469 603,331
Other 17,443 16,205
Inventories 21,339 21,035
Deferred income taxes 88,846 99,695
Prepayments and other 48,080 101,696
----------- -----------
Total current assets 851,334 937,667
----------- -----------
PROPERTY AND EQUIPMENT, at cost, less
accumulated depreciation and amortization
of $2,203,115 and $2,223,913 2,817,466 2,812,221
----------- -----------
OTHER ASSETS:
Cost over fair value of net tangible
assets of acquired businesses,
net of accumulated amortization of
$87,369 and $83,050 602,375 592,946
Other intangible assets, net of
accumulated amortization of $84,867
and $81,959 74,224 70,594
Deferred income taxes 23,589 24,588
Investments in unconsolidated affiliates 514,718 512,964
Other 48,118 48,501
----------- -----------
Total other assets 1,263,024 1,249,593
----------- -----------
Total assets $ 4,931,824 $ 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>
- -------------------------------------------------------------------------------------------------
December 31, September 30,
1998 1998
(Unaudited)
- -------------------------------------------------------------------------------------------------
(In Thousands Except for Share Amounts)
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable and current portion of
long-term debt $ 9,070 $ 9,241
Accounts payable 313,189 354,916
Accrued liabilities -
Salaries and wages 53,609 83,199
Taxes, other than income 28,102 31,238
Other 313,326 332,221
Income taxes 31,854 9,076
Deferred revenues 174,217 175,615
----------- -----------
Total current liabilities 923,367 995,506
----------- -----------
LONG-TERM DEBT, net of current portion 1,838,544 1,792,863
----------- -----------
OTHER LIABILITIES:
Accrued environmental and landfill costs 375,201 392,853
Deferred income taxes 216,188 210,511
Other 195,456 194,290
----------- -----------
Total other liabilities 786,845 797,654
----------- -----------
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.16 2/3 par; 400,000,000
shares authorized; 208,691,950 and
208,310,631 shares issued 34,789 34,725
Additional paid-in capital 1,642,603 1,631,236
Retained earnings 1,438,657 1,390,797
Accumulated other comprehensive income (loss) (21,712) (22,312)
Treasury stock, 48,931,328 and 46,008,054
shares, at cost (1,711,269) (1,620,988)
----------- -----------
Total common stockholders' equity 1,383,068 1,413,458
----------- -----------
Total liabilities and common
stockholders' equity $ 4,931,824 $ 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>
- ------------------------------------------------------------------------------------
Three Months Ended
December 31,
-------------------------
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 78,214 $ 72,995
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization -
Property and equipment 94,019 114,022
Goodwill 4,311 10,062
Other intangible assets 3,414 5,209
Special credits, net -- (2,557)
Cumulative effect of change in accounting
principle -- 13,763
Deferred income tax expense 16,819 11,983
Amortization of deferred investment tax credit (177) (177)
Provision for losses on accounts receivable 5,995 7,511
Gains on sales of fixed assets (2,176) (504)
Equity in earnings of unconsolidated affiliates,
net of dividends received 19,185 11,256
Minority interest in income of consolidated
subsidiaries, net of dividends paid 962 2,297
Increase (decrease) in cash from changes in
assets and liabilities excluding effects
of acquisitions and divestitures -
Trade receivables (16,555) (9,203)
Inventories (293) (4,180)
Other assets 48,466 81,433
Other liabilities (68,106) (120,479)
--------- ---------
Total adjustments 105,864 120,436
--------- ---------
Net cash provided by operating activities 184,078 193,431
--------- ---------
</TABLE>
(Continued on following page)
6
<PAGE> 7
BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Three Months Ended
December 31,
-------------------------
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (131,579) (108,707)
Payments for businesses acquired (11,100) (1,022)
Proceeds from businesses divested 4,075 15,240
Investments in unconsolidated affiliates (29,009) (29,740)
Proceeds from disposition of assets 14,973 9,086
Purchases of short-term investments -- (9,519)
Sales of short-term investments 3,543 --
Return of investment in unconsolidated affiliates 7,338 17,672
--------- ---------
Net cash used in investing activities (141,759) (106,990)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 3,353 16,668
Proceeds from issuances of indebtedness 49,273 664,397
Repayments of indebtedness (3,342) (61,987)
Repurchases of common stock (90,668) (659,391)
Dividends paid (30,941) (38,919)
--------- ---------
Net cash used in financing activities (72,325) (79,232)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES 1 (356)
--------- ---------
NET INCREASE (DECREASE) IN CASH (30,005) 6,853
CASH AT BEGINNING OF PERIOD 89,893 78,746
--------- ---------
CASH AT END OF PERIOD $ 59,888 $ 85,599
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest, net of capitalized amounts $ 19,960 $ 26,926
Income taxes $ 13,065 $ 12,731
</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>
Three Months Ended
December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Common shares outstanding, end of period 159,761 195,143
Less - Shares held in the Stock and
Employee Benefit Trust -- (6,545)
-------- --------
Common shares outstanding for purposes of
computing earnings per share, end of period 159,761 188,598
Effect of using weighted average common
shares outstanding 1,212 2,313
-------- --------
Shares used in computing earnings per
share - basic 160,973 190,911
Effect of shares issuable under stock option
plans based on the treasury stock method 974 1,371
-------- --------
Shares used in computing earnings
per share - diluted 161,947 192,282
======== ========
</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 has been 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
3.0 million shares of common stock at prices ranging from $31.56 to $43.38
per share were outstanding during the first three 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 period 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 months
ended December 31, 1998 and 1997, the only component of other comprehensive
income (loss) was foreign currency translation.
(4) Sale of Operations Outside North America -
On March 31, 1998, the Company sold substantially all of its 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. The Company reported an estimated gain of $17.9 million as a
special credit in the second quarter of fiscal 1998.
The Company's consolidated results of operations on an unaudited pro
forma basis for the three-month period ended December 31, 1997, 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>
Three Months Ended
December 31, 1997
------------------
<S> <C>
Pro forma revenues $ 1,019,471
Pro forma income before cumulative effect
of change in accounting principle 81,416
Pro forma earnings per share -
Basic $ .43
Diluted $ .42
</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
10
<PAGE> 11
Company's investment in SITA been considered in the Company pro forma
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.
(5) Cumulative Effect of Change in Accounting Principle -
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 current SAP software implementation
project. As a result, the Company recorded an after-tax charge of $13.8
million or $.072 per share in the first quarter of fiscal 1998 as the
cumulative effect of a change in accounting principle.
(6) Business Combinations -
During the current fiscal year, the Company paid approximately $20.1
million (including additional amounts payable, principally to former owners,
of $1.5 million and the issuance of 224,120 shares of the Company's common
stock valued at $7.5 million) to acquire 20 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 prior fiscal year, 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
11
<PAGE> 12
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.
(7) Long-Term Debt -
Long-term debt at December 31, 1998 and September 30, 1998, was as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
<S> <C> <C>
Senior indebtedness:
6.10% Senior Notes, net of
unamortized discount of $928
and $986 $ 155,761 $ 155,703
6.375% Senior Notes, net of
unamortized discount of $1,323
and $1,360 159,877 159,840
7 7/8% Senior Notes, net of
unamortized discount of $162
and $169 69,339 69,332
7.40% Debentures, net of
unamortized discount of
$1,708 and $1,720 358,292 358,280
9 1/4% Debentures 99,500 99,500
Solid waste revenue bond
obligations 220,062 220,044
Other notes payable 44,328 46,790
---------- ----------
1,107,159 1,109,489
Commercial paper and short-term
facilities to be refinanced 740,455 692,615
---------- ----------
Total long-term debt 1,847,614 1,802,104
Less current portion 9,070 9,241
---------- ----------
Long-term debt, net of current
portion $1,838,544 $1,792,863
========== ==========
</TABLE>
12
<PAGE> 13
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 December 31, 1998 and September 30, 1998
is as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
<S> <C> <C>
United States -
Commercial paper $ 639,284 $ 590,676
Other 101,171 101,939
--------- ---------
$ 740,455 $ 692,615
========= =========
</TABLE>
As of December 31, 1998, distributions from retained earnings could not
exceed $137 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 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.
13
<PAGE> 14
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 three months ended December 31, 1998, was $78.2
million ($.48 diluted earnings per share), on consolidated revenues of $1.051
billion. These results compare with net income before special credits and the
cumulative effect of a change in accounting principle for the first three
months of fiscal 1998 of $85.2 million ($.44 diluted earnings per share) on
consolidated revenues of $1.345 billion. The per share increase from the
comparable prior year period of $.04 represents a 9% increase in per share
results. After special credits and the effect of the accounting change, net
income for the first three months of fiscal 1998 was $73.0 million ($.380 per
diluted share). 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 three 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.
14
<PAGE> 15
The fiscal 1999 first quarter results reflected increased revenue
growth, excluding the impact of divestitures, from the first quarter of last
year despite a significant decline in recycling commodity prices between the
periods. The current quarter results were also favorably affected by reduced
cost of operations and selling, general and administrative ("SG&A") expense
under the Company's cost reduction program, announced in May 1998. Under this
program, the Company is continuing to pursue field facility and functional
consolidation and other actions, which are intended to further reduce
operating and SG&A expenses. The Company benefited from almost $22 million of
cost savings under this program in the first quarter of fiscal 1999 as
compared with the same period last year. Additional savings from changes made
to employee health care benefits commenced in January 1999. These savings
will 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 quarter of fiscal 1999 were unfavorably
affected by increased SG&A expense, including staffing, and depreciation
expense associated with the implementation of the Company's new 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 of the
new system, approximately $8 million in the first quarter 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. 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, have engaged a consulting firm 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 and is expected to be completed in the third quarter
of fiscal 1999, is focused upon the following six areas:
15
<PAGE> 16
1. SAP - determining how the Company can best achieve the benefits from
the new SAP software system that justify the substantial investment of
approximately $130 million.
2. Fleet management - optimizing the 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.
Although no conclusions have been drawn and no recommendations have been made
by the consulting firm, their recommendations, along with any modifications
made by management and the Board of Directors, will be the foundation of the
next phase of cost reduction activities at the Company.
The following profitability ratios (shown as a percent of revenues)
reflect certain profitability trends for the Company's operations. Also
presented below are return on asset information and ratios of earnings to
fixed charges.
16
<PAGE> 17
<TABLE>
<CAPTION>
Three Months Ended
------------------- Year Ended
12/31/98 12/31/97 9/30/98
-------- -------- ----------
<S> <C> <C> <C>
Profitability margins:
Income from operations before
special credits 14.3% 12.8% 13.2%
Income from operations 14.3% 13.0% 13.6%
Income before income taxes,
minority interest, extraordinary
items and cumulative effects of
changes in accounting principles 12.3% 11.1% 12.4%
Net income before special credits,
extraordinary items and cumulative
effects of changes in accounting
principles 7.4% 6.3% 7.1%
Net income 7.4% 5.4% 7.1%
Other Financial Information:
Return on Gross Assets -
Year-to-date basis 3.37% 3.11% 13.5% (1)
Annualized basis 13.47% 12.43% 13.5% (1)
Ratio of earnings to fixed
charges before special credits 3.64 3.52 3.71
Ratio of earnings to fixed charges 3.64 3.58 3.81
</TABLE>
------------
(1) Excludes severance costs of $3.1 million, after tax, incurred in the
third quarter of fiscal 1998.
All of the profitability margins presented above show improvement for
the three months ended December 31, 1998 compared with the same period of the
prior year. Profitability margins in the first three months of 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 almost $22
million in the first quarter 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 $8 million associated with
the implementation of the Company's new SAP software system in January 1998
and the continued support of certain existing software systems not yet
replaced. Profitability in the recycling business was affected negatively in
the current year first quarter compared with the same period last year by
lower weighted average commodity prices. The weighted average market prices
for recycling commodities in North
17
<PAGE> 18
America, principally corrugated, office paper and newspaper, declined to
approximately $56 per ton in the first quarter of the current year from
approximately $74 per ton in 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 quarter of fiscal
year 1999 are as follows:
<TABLE>
<CAPTION>
Fiscal First Three Fiscal
1999 Months of 1998
Milestone Fiscal 1999 Actual
--------- ----------- ------
<S> <C> <C> <C>
SG&A as a percent of
revenues 12.2% 12.2% 12.4% (1)
Operating profit margin 14.7% 14.3% 13.3% (1)(2)
Revenue growth (3) 3.5% 5.2% 2.1%
Return on Gross Assets -
Year-to-date basis 3.37%
Annualized basis (1) 13.8% 13.47% 13.5% (1)
</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 credits, net.
(3) Revenue growth from price, volume and acquisitions, excluding the
effects of divestitures and foreign currency exchange; in fiscal
1999, also excludes the effects of buy/sell agreements.
The results for the first quarter reflect solid progress towards
achievement of the milestone goals which the Company is committed to
exceeding in fiscal 1999.
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:
18
<PAGE> 19
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 and
1997). 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 $42 million and $33
million at December 31, 1998, and September 30, 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 $307 million at December 31, 1998) and (iii)
deferred income tax liabilities.
Gross assets in the ROGA computations for the first three months of a
fiscal year is the average of the applicable beginning of year and end of
first 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 December 31, 1998. Average gross assets were
approximately $5.91 billion in the computation of ROGA. Gross assets at
December 31, 1998 were $5.91 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 $252
million for the first three months of fiscal 1999 as compared with $302
million for the first three 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 $243
million for the first quarter 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.
19
<PAGE> 20
Due to the sale of substantially all of the Company's international
operations to SITA in March 1998, supplemental information comparing
operating results of the prior year first quarter for North America and the
total Company with the operating results for the first quarter of fiscal 1999
is presented below.
<TABLE>
<CAPTION>
Three Months Ended December 31,
----------------------------------------
1997
-------------------------
North Total
1998 America Company
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Revenues $ 1,050,727 $ 1,017,680 $ 1,344,742
Cost of operations 670,074 646,599 878,413
Selling, general and
administrative expense 128,511 128,232 164,272
Depreciation and amortization
expense 101,744 98,975 129,293
Special credits, net -- (2,557) (2,557)
----------- ----------- -----------
Income from operations $ 150,398 $ 146,431 $ 175,321
=========== =========== ===========
</TABLE>
Revenues -
Revenues for the three months ended December 31, 1998, were $1.05
billion, a 21.9% 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):
20
<PAGE> 21
<TABLE>
<CAPTION>
Three Months Ended
---------------------- %
12/31/98 12/31/97 Change
---------- ---------- --------
<S> <C> <C> <C>
North American Operations
(including Canada) -
Collection Services -
Solid Waste $ 714,930 $ 683,249 4.6 %
Transfer and Disposal -
Solid Waste
Unaffiliated customers 147,779 130,383 13.3 %
Affiliated companies 147,410 130,252 13.2 %
----------- -----------
295,189 260,635 13.3 %
Recycling Services 108,374 124,213 (12.8)%
Medical Waste Services 50,671 49,148 3.1 %
Services Group and Other 28,973 30,687 (5.6)%
Elimination of affiliated
companies' revenues (147,410) (130,252) 13.2 %
----------- -----------
Total North American Operations 1,050,727 1,017,680 3.2 %
International Operations -- 327,062 (100.0)%
----------- -----------
Total Company $ 1,050,727 $ 1,344,742 (21.9)%
=========== ===========
</TABLE>
As the table below reflects, lower revenues for the three months ended
December 31, 1998, 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 94% of the decline due to
divestitures.
<TABLE>
<CAPTION>
Changes in Revenue for
Three Months Ended
December 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Price (0.4)% 0.8 %
Volume 4.4 (1.2)
Acquisitions 1.3 1.5
Divestitures (27.1) (8.0)
Foreign currency translation (0.1) (3.2)
----- -----
Total Percentage Change (21.9)% (10.1)%
===== =====
</TABLE>
21
<PAGE> 22
In addition to divestitures, revenues declined due to price, driven by
the decline in the weighted average market price of recycling commodities
from $74 per ton in the first quarter of fiscal 1998 to $56 per ton in fiscal
1999. This decline in revenues due to price in the recycling business was
offset largely by improved pricing in all other business operations of the
Company. The increase in revenues due to volume resulted from increased
volumes in the Company's collection and landfill business and in recycling.
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 first 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 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 $208 million or 23.7% for the first three months of fiscal
1999, compared with the same period of the prior year. This decrease in cost
of operations is 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.
22
<PAGE> 23
Selling, General and Administrative Expense -
SG&A expense, which excludes depreciation and amortization expense,
decreased $36 million for the first three months of fiscal 1999, a decrease
of 21.8% 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. This
decrease was offset partially by an increase in SG&A expense due to
acquisitions and volume growth and an increase of approximately $5 million
related to implementation of the Company's new SAP software system and the
continued support of certain existing systems not yet replaced.
Depreciation and Amortization Expense -
Depreciation and amortization expense decreased $28 million for the
first three months of fiscal 1999, a decrease of 21.3% 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 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 new 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 $5.9 million or 16.6% for the first three
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 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 largely offset by
23
<PAGE> 24
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 $1.4 million
between the periods primarily due to the significantly reduced volumes at an
Illinois landfill, operated by a 50%-owned affiliate of the Company, which is
scheduled to close during 1999. The reduction in equity in earnings of
unconsolidated foreign affiliates as a result of the sale of the Company's
international operations in March 1998 was largely offset by equity in
earnings of SITA of approximately $3.2 million.
Minority Interest in Income of Consolidated Subsidiaries -
The decrease in minority interest in income of consolidated subsidiaries
for the first three 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 Effect of Change in Accounting Principle -
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 current
SAP software implementation project. As a result, the Company recorded an
after-tax charge of $13.8 million or $.072 per share in the first quarter of
fiscal 1998 as the cumulative effect of a change in accounting principle.
YEAR 2000 ISSUES
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 will 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
24
<PAGE> 25
financial information. In fiscal 1995, the Company initiated a project to
implement the SAP suite of business systems software (which is year 2000
compliant) to replace essentially all of the Company's existing business
systems. The first phase of this project, implemented in January 1998,
replaced approximately 45% of the existing business systems of the Company.
Due to timing related to implementation of the second phase of this project,
the Company commenced a Year 2000 Project to ensure compliance of remaining
legacy systems by early 1999. To date, the Company has incurred expense of
approximately $3 million in connection with the Year 2000 modifications of
legacy computer systems and does not expect additional costs related to these
systems to be material to its consolidated results of operations or financial
position.
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.
The Company has initiated a process to (1) identify critical supplier
and customer related issues, (2) assess the year 2000 readiness of equipment
located at all of its operating facilities and (3) determine what contingency
plans may be required. At this time, the potential effects in the event that
the Company and/or third parties are unable to resolve year 2000 problems
timely are not determinable, however, the Company believes it will be able to
resolve its own year 2000 issues.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $57.8 million at September
30, 1998, compared with a deficit of $72.0 million at December 31, 1998. 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 quarter of fiscal 1999, the Company had repurchased an
additional 2.9 million shares of its common stock at a cost of approximately
$91 million. As of December 31, 1998, approximately $155 million remains to
be repurchased under the authorized $2.25 billion common stock repurchase
program.
25
<PAGE> 26
Long-term indebtedness including the current portion of long-term debt
as a percentage of total capitalization was 57% as of December 31, 1998 and
56% at September 30, 1998.
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.
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 December 31, 1998 were approximately $158 million,
including acquisitions.
As of December 31, 1998, 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.
26
<PAGE> 27
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 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/A was filed on December 23, 1998 whereby the
Company amended Item 7(b) "Pro Forma Financial Information" of its Form
8-K dated March 31, 1998, relating to the divestiture of the Company's
operations outside North America to SITA, a Paris-based waste services
company, and certain common stock repurchases pursuant to the Company's
common stock buyback program.
A Report on Form 8-K dated January 12, 1999 was filed pursuant to "Item
7. Financial Statements and Exhibits", whereby the Company filed
certain exhibits required in connection with the Company's offering of
6.08% Market Value Put securities, which closed on January 15, 1999.
27
<PAGE> 28
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: February 12, 1999
28
<PAGE> 29
INDEX TO EXHIBITS
<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>
Three Months
Ended December 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Earnings Available for Fixed Charges:
Income before minority interest
and cumulative effect of change in
accounting principle $ 79,421 $ 89,875
Income taxes 49,998 59,916
--------- ---------
Income before income taxes, minority
interest and cumulative effect of
change in accounting principle 129,419 149,791
Consolidated interest expense 30,162 37,084
Interest expense related to proportionate
share of 50% owned unconsolidated
affiliates 8,380 8,005
Portion of rents representing the interest
factor 6,986 9,198
Less-Undistributed earnings of affiliates
less than 50% owned 3,278 255
--------- ---------
Total $ 171,669 $ 203,823
========= =========
Fixed Charges:
Consolidated interest expense and
interest costs capitalized $ 31,858 $ 39,727
Interest expense and interest costs
capitalized related to proportionate
share of 50% owned unconsolidated
affiliates 8,380 8,005
Portion of rents representing the interest
factor 6,986 9,198
--------- ---------
Total $ 47,224 $ 56,930
========= =========
Ratio of Earnings to Fixed Charges 3.64 3.58(1)
========= =========
</TABLE>
(1) Excluding the effects of the special credits of $2.6 million, the ratio
of earnings to fixed charges is 3.52.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. (IN THOUSANDS EXCEPT PER SHARE DATA)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 59,888
<SECURITIES> 2,269
<RECEIVABLES> 656,541
<ALLOWANCES> 25,629
<INVENTORY> 21,339
<CURRENT-ASSETS> 851,334
<PP&E> 5,020,581
<DEPRECIATION> 2,203,115
<TOTAL-ASSETS> 4,931,824
<CURRENT-LIABILITIES> 923,367
<BONDS> 1,838,544
0
0
<COMMON> 34,789
<OTHER-SE> 1,348,279
<TOTAL-LIABILITY-AND-EQUITY> 4,931,824
<SALES> 0
<TOTAL-REVENUES> 1,050,727
<CGS> 0
<TOTAL-COSTS> 670,074
<OTHER-EXPENSES> 101,744
<LOSS-PROVISION> 5,995
<INTEREST-EXPENSE> 29,691
<INCOME-PRETAX> 129,419
<INCOME-TAX> 49,998
<INCOME-CONTINUING> 78,214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,214
<EPS-PRIMARY> .49
<EPS-DILUTED> .48
</TABLE>
