<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1996
[_] 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: 0-14246
WHEELABRATOR TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2678047
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4 LIBERTY LANE WEST
HAMPTON, NEW HAMPSHIRE 03842
(Address of principal executive (Zip Code)
offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 929-3000
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
--------- ---------
SHARES OF REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE, ISSUED AND OUTSTANDING AT
OCTOBER 31, 1996: 161,129,131
================================================================================
<PAGE>
WHEELABRATOR TECHNOLOGIES INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
----------------------------------------
INDEX
-----
Page No.
--------
PART I. FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
Item 1 - Financial Statements
<S> <C>
Consolidated Balance Sheets as of December 31, 1995, and
September 30, 1996............................................ 1
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1995 and 1996...................... 2
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1995 and 1996................................... 3
Consolidated Statements of Changes in Stockholders' Equity for
the Nine Months Ended September 30, 1995 and 1996............. 4
Notes to Consolidated Financial Statements....................... 5
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition............................... 9
PART II. OTHER INFORMATION:
Item 1 - Legal Proceedings.......................................... 20
Item 6 - Exhibits and Reports on Form 8-K........................... 20
SIGNATURE........................................................... 22
Exhibit Index....................................................... 23
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s omitted, except share amounts)
(unaudited)
December 31, September 30,
1995 1996
- --------------------------------------------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
Current assets:
<S> <C> <C>
Cash and cash equivalents................................ $ 78,732 $ 20,392
Receivables, net of allowance of $12,187 in 1995
and $9,136 in 1996...................................... 215,080 227,414
Inventories.............................................. 62,638 45,074
Costs and earnings in excess of billings................. 50,497 43,156
Other current assets..................................... 51,312 56,428
---------- ----------
Total current assets.................................. 458,259 392,464
Property, plant and equipment, net......................... 1,624,159 1,613,692
Cost in excess of net assets of acquired businesses, net... 233,533 230,681
Investments in affiliates.................................. 604,656 644,046
Other assets............................................... 299,586 312,575
---------- ----------
Total assets.......................................... $3,220,193 $3,193,458
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt................ $ 35,808 $ 40,908
Due to WMX Technologies, Inc........................ - 75,192
Accounts payable.................................... 93,327 85,584
Accrued liabilities................................. 185,273 181,602
Advance payments on contracts....................... 45,686 36,690
---------- ---------
Total current liabilities........................ 360,094 419,976
Long-term debt........................................ 704,414 751,441
Deferred income taxes................................. 395,645 426,108
Deferred income....................................... 77,513 69,332
Other long-term liabilities........................... 232,262 250,545
Commitments and contingencies.........................
Stockholders' equity:
Preferred stock, par value $1.00 per share,
50,000,000 shares authorized, none
issued or outstanding.............................. - -
Common stock, par value $0.01 per share,
500,000,000 shares authorized, 189,545,407 shares
issued in 1995 and 1996............................ 1,895 1,895
Capital in excess of par value...................... 876,595 875,488
Cumulative translation adjustments.................. (9,986) (9,328)
Treasury stock at cost; 10,112,610 shares in 1995
and 28,237,189 shares in 1996...................... (146,494) (438,011)
Retained earnings................................... 728,255 846,012
---------- ----------
Total stockholders' equity....................... 1,450,265 1,276,056
---------- ----------
Total liabilities and stockholders' equity..... $3,220,193 $3,193,458
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
1
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(000s omitted, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1996 1995 1996
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue..................................... $355,951 $359,053 $1,099,244 $1,064,602
Operating expenses.......................... 247,403 247,856 775,886 738,855
Selling and administrative expenses......... 30,992 30,487 95,619 92,534
Interest expense............................ 14,917 15,807 45,950 43,134
Interest income............................. (2,697) (1,433) (8,111) (5,198)
Equity in earnings of affiliates............ (9,252) (7,859) (25,233) (20,861)
Other income, net........................... (264) (575) (3,547) (254)
-------- -------- ---------- ----------
Income before income taxes................ 74,852 74,770 218,680 216,392
Income tax provision........................ 24,952 26,695 75,386 77,946
-------- -------- ---------- ----------
Income from continuing operations......... 49,900 48,075 143,294 138,446
Equity income from discontinued operations.. 1,476 - 4,726 -
-------- -------- ---------- ----------
Net income.............................. $ 51,376 $ 48,075 $ 148,020 $ 138,446
======== ======== ========== ==========
Weighted average common and common
equivalent shares outstanding.............. 185,500 162,000 185,800 171,500
======== ======== ========== ==========
Earnings per common and common
equivalent share:
Continuing operations...................... $ 0.27 $ 0.30 $ 0.77 $ 0.81
Discontinued operations.................... 0.01 - 0.03 -
-------- -------- ---------- ----------
Net Income.............................. $ 0.28 $ 0.30 $ 0.80 $ 0.81
======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(000s omitted)
(unaudited)
<TABLE>
<CAPTION>
1995 1996
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income........................................... $ 148,020 $ 138,446
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization...................... 80,379 80,749
Deferred income taxes.............................. 43,958 30,629
Undistributed earnings of affiliates............... (25,233) (20,861)
Equity in discontinued operations.................. (4,726) -
Changes in assets and liabilities, net of
effects of acquired businesses:
Receivables, net................................. (20,017) (12,334)
Inventories...................................... 4,452 6,310
Costs and earnings in excess of billings......... (12,755) 9,213
Other current assets............................. 15,066 (2,467)
Accounts payable and accrued liabilities......... (21,356) 1,726
Advance payments on contracts.................... (19,862) (216)
Other long-term liabilities...................... (26,544) (16,885)
Other, net......................................... (13,163) (7,117)
--------- ---------
Net cash provided by operating activities.......... 148,219 207,193
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures................................. (19,668) (56,789)
Proceeds from sale of investments.................... 12,821 -
Investments held by trustees......................... (1,004) 907
Cash paid for acquisitions, net of acquired cash..... (6,835) (4,483)
Cash paid for equity investment...................... - (15,415)
Other, net........................................... (262) (1,497)
--------- ---------
Net cash used for investing activities............. (14,948) (77,277)
--------- ---------
FINANCING ACTIVITIES:
Additions to long-term debt.......................... 1,563 58,550
Repayments of long-term debt......................... (13,120) (8,876)
Net borrowings from WMX Technologies, Inc............ (53,163) 75,192
Proceeds from exercise of stock options.............. 3,033 8,977
Stock repurchase program............................. (24,420) (302,861)
Dividends paid....................................... (20,301) (20,689)
Other, net........................................... 2,491 1,451
--------- ---------
Net cash used for financing activities............. (103,917) (188,256)
--------- ---------
Net increase(decrease) in cash and cash equivalents.. 29,354 (58,340)
Cash and cash equivalents at beginning of period..... 36,133 78,732
--------- ---------
Cash and cash equivalents at end of period........... $ 65,487 $ 20,392
========= =========
Supplemental disclosure:
Interest paid, net of amounts capitalized.......... $ 40,059 $ 37,590
========= =========
Income taxes paid.................................. $ 33,937 $ 31,957
========= =========
Significant noncash investing activities:
Liabilities assumed in acquisitions................ $ - $ 2,675
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(000s omitted, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
Capital in Cumulative
Common Excess of Translation Treasury Retained
Stock Par Value Adjustment Stock Earnings Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1994 $1,895 $877,428 $(17,650) $ (47,489) $610,698 $1,424,882
Net income - - - - 148,020 148,020
Dividends declared
($0.11 per share) - - - - (20,301) (20,301)
Foreign currency
translation - - 8,325 - - 8,325
Exercise of
stock options - (999) - 4,032 - 3,033
Tax benefit from
stock options - 459 - - - 459
Stock repurchases
(1,797,200 shares) - - - (24,420) - (24,420)
Treasury stock
received as settlement
for claims - - - (4) - (4)
------ -------- -------- --------- -------- ----------
Balance,
September 30, 1995 $1,895 $876,888 $ (9,325) $ (67,881) $738,417 $1,539,994
====== ======== ======== ========= ======== ==========
Balance,
December 31,1995 $1,895 $876,595 $ (9,986) $(146,494) $728,255 $1,450,265
Net income - - - - 138,446 138,446
Dividends declared
($0.12 per share) - - - - (20,689) (20,689)
Foreign currency
translation - - 658 - - 658
Exercise of
stock options - (2,534) - 11,511 - 8,977
Tax benefit from
stock options - 1,427 - - - 1,427
Stock repurchases
(18,917,200 shares) - - - (303,028) - (303,028)
------ -------- -------- --------- -------- ----------
Balance,
September 30, 1996 $1,895 $875,488 $ (9,328) $(438,011) $846,012 $1,276,056
====== ======== ======== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying financial statements have been prepared by Wheelabrator
Technologies Inc. ("Wheelabrator" or the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
The financial information presented herein reflects all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. Certain prior period amounts have been reclassified to conform with
the current presentation. The results for interim periods are not necessarily
indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, income and expenses and
disclosures of contingencies. Future events could alter such estimates.
Wheelabrator is a majority-owned subsidiary of WMX Technologies, Inc. ("WMX").
Wheelabrator and WMX are parties to a Master Intercorporate Agreement which
provides, among other things, for Wheelabrator to lend excess cash to WMX at
interest rates at least as favorable as those Wheelabrator could otherwise
obtain. Under the terms of this agreement, in the event the Company requires
short-term cash for the conduct of its business and operations, WMX will make
available to Wheelabrator such amounts as Wheelabrator requires, up to a total
of $100.0 million in excess of amounts loaned by Wheelabrator to WMX. As of
September 30, 1996, the Company had $65.2 million of net borrowings from WMX
under the terms of this agreement. In addition, at September 30, 1996, the
Company also had $10.0 million outstanding pursuant to a short-term note from
WMX that matures on March 31, 1997, with essentially the same terms as
borrowings under the Master Intercorporate Agreement. The proceeds of this note,
which had an original balance of $75 million, were used to finance second
quarter share repurchases.
5
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Earnings per common and common equivalent share are calculated using the
weighted average number of shares outstanding for each period, including the
effect of common stock equivalents using the treasury stock method. Common stock
equivalents consist of unexercised stock options.
NOTE 2 - ACQUISITIONS, EQUITY INVESTMENT, AND DIVESTURES
During the first nine months of 1996, the Company acquired wastewater treatment
operating contracts and an industrial cogeneration facility in Martell,
California, for $7.0 million in cash and assumed debt. Also during the first
nine months of 1996, the Company acquired a 20 percent interest in an ultrapure
water company for $15.4 million. During the first nine months of 1995,
Wheelabrator completed the privatization of the Miami Conservancy District
wastewater treatment plant located in Franklin, Ohio, at a cost of approximately
$6.8 million. The proforma effect of the 1996 and 1995 acquisitions and equity
investment is not material.
In the fourth quarter of 1995, Rust International Inc. ("Rust") announced that
it would sell or discontinue its process engineering, construction, specialty
contracting, and similar lines of business and focus on its environmental and
infrastructure consulting businesses. These businesses have been accounted for
as discontinued operations, and accordingly, Wheelabrator has reported its 40
percent equity interest in the historical operating results separately from
continuing operations in the accompanying consolidated statements of income.
During the second quarter of 1996, the sale of the industrial process
engineering and construction business, based in Birmingham, Alabama, was
completed. The transaction did not have a material impact on Rust's income.
In the third quarter of 1996, Rust sold its industrial scaffolding business.
Wheelabrator's equity in the gain on the sale is not material and is included in
equity in earnings of affiliates.
Also during the third quarter, Wheelabrator announced an agreement to sell its
industrial water process and manufacturing businesses to United States Filter
Corporation ("U.S. Filter") for approximately $370 million in cash. Revenue and
operating income for the units to be sold were approximately $330 million and
$20 million, respectively, for the nine months ended September 30, 1996,
6
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and approximately $338 million and $15 million in the comparable 1995 period.
Separately, the Company and U.S. Filter announced their intention to form a new,
equally-owned joint venture to develop, finance, own and operate water and
wastewater infrastructure in North America. Both transactions are expected to be
completed during the fourth quarter.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
In May 1994, the U.S. Supreme Court ruled that state and local governments may
not constitutionally restrict the free movement of trash in interstate commerce
through the use of flow control laws. Such laws typically involve a municipality
specifying the disposal site for all solid waste generated within its borders.
Since the ruling, several decisions of state or federal courts have invalidated
regulatory flow control schemes in a number of jurisdictions. Other judicial
decisions have upheld nonregulatory means by which municipalities may
effectively control the flow of municipal solid waste. The Company's Gloucester
County, New Jersey, facility relies on a disposal franchise for substantially
all of its supply of municipal solid waste. In July 1996, a Federal District
Court permanently enjoined the State of New Jersey from enforcing its solid
waste regulatory flow control system, which was held to be unconstitutional, but
stayed the injunction for as long as its ruling is on appeal plus an additional
period of two years to enable the State to devise an alternative
nondiscriminatory approach. The State has indicated that it will continue to
enforce flow control during the two-year transition period, and has filed an
appeal of the Federal District Court's ruling.
The Supreme Court's 1994 ruling and subsequent court decisions have not to date
had a material adverse affect on any of the Company's trash-to-energy
operations. Federal legislation has been proposed, but not yet enacted, to
effectively grandfather existing flow control mandates. In the event that such
legislation is not adopted, the Company believes that affected municipalities
will endeavor to implement alternative lawful means to continue controlling the
flow of waste. In view of the uncertain state of the law at this time, however,
the Company is unable to predict whether such efforts would be successful or
what impact, if any, this matter might have on its trash-to-energy facilities.
7
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Wheelabrator has been notified by certain private parties that it may be
responsible for a portion of the remediation costs related to a certain state-
listed remediation site currently subject to an enforcement order that includes
a site assessment study. Although the Company is considering joining the private
parties to share in these costs, no litigation has been filed and the Company
has not been named a potentially responsible party. At the present time, there
is insufficient information available to estimate the remediation costs or the
extent of Wheelabrator's responsibility beyond its possible voluntary sharing of
enforcement order costs, which have been previously accrued.
There are various lawsuits and claims pending against Wheelabrator that have
arisen in the normal course of Wheelabrator's business and relate mainly to
matters of product liability, personal injury and property damage. The outcome
of these matters is not presently determinable, but in the opinion of
management, based on the advice of counsel, their ultimate resolution will not
have a material adverse effect on the financial condition or results of
operations of the Company.
NOTE 4 - ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("FAS 121"). The adoption of FAS 121 did
not have a material impact on its financial statements since Wheelabrator's
accounting was substantially in compliance with the new standard.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), which the Company also must adopt in 1996. FAS 123
provides an optional new method of accounting for employee stock options and
expands required disclosure about stock options. If the new method of accounting
is not adopted, the Company will be required to disclose pro forma net income
and earnings per share as if it were. The Company is studying FAS 123 and is
gathering data necessary to calculate compensation in accordance with its
provisions, but has not decided whether to adopt the new method or quantified
its impact on the financial statements.
8
<PAGE>
ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(000S OMITTED IN ALL TABLES)
Wheelabrator Technologies Inc. ("Wheelabrator" or the "Company") is a
diversified environmental products and services company. The Company has been a
pioneer in the privatization of municipal infrastructure while providing water,
wastewater, biosolids, air quality control, trash-to-energy, and independent
power solutions to environmental problems of communities and industries
worldwide. Wheelabrator is majority-owned by WMX Technologies, Inc. ("WMX") and
holds minority interests in two other WMX-controlled subsidiaries, Waste
Management International plc ("WM International") and Rust International Inc.
("Rust").
RESULTS OF OPERATIONS
- ---------------------
Consolidated revenue for the quarter ended September 30 was $359.1 million in
1996 compared with $356.0 million in 1995. Income from continuing operations for
the quarter was $48.1 million, which was $1.8 million below the prior year level
primarily because of lower equity income from Rust (see "Equity in Earnings of
Affiliates" below). Net income decreased $3.3 million to $48.1 million due to
decreased income from continuing operations and to the absence of equity income
from discontinued operations. Earnings per share from continuing operations and
net income per share increased $0.03 and $0.02, respectively, each to $0.30,
reflecting fewer outstanding shares.
For the nine months ended September 30, 1996, revenue totaled $1,064.6 million,
while income from continuing operations and net income were each $138.4 million,
or $0.81 per share. In the comparable nine-month period of 1995, revenue totaled
$1,099.2 million, with income from continuing operations of $143.3 million, or
$0.77 per share, and net income of $148.0 million, or $0.80 per share. Prior
year results included $37.5 million of construction revenue related to the
Lisbon, Connecticut trash-to-energy facility, which was completed in the second
quarter of 1995. The prior year results also included a second quarter gain
associated with the Company's liquidation of its investment in Abex, Inc.
9
<PAGE>
ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Wheelabrator's operations are managed along the two principal industry segments
that the Company serves--Clean Water and Clean Energy. Clean Water's principal
products and services include equipment and process systems designed for a broad
range of water and wastewater management applications, biosolids management, and
outsourcing the operation, or ownership and operation, of water and wastewater
treatment facilities. Its customer base is global in nature and includes both
municipalities and industry. The Company's materials cleaning business is
included in the Clean Water segment since its manufacturing and aftermarket
capabilities are utilized by certain Company water businesses. The Clean Energy
segment develops, owns, and operates trash-to-energy and independent power
facilities that generate electricity and other forms of energy while providing
trash disposal for municipal and industrial customers. Wheelabrator's air
quality control business is included in Clean Energy segment results. The
analysis of operating results that follows reflects these two segments. Results
from the prior year, during which the Company was managed and reported as one
industry segment, have been restated to conform with the current presentation.
Sale of Businesses: During the quarter, Wheelabrator announced an agreement to
sell its industrial water process and manufacturing businesses to United States
Filter Corporation ("U.S. Filter") for approximately $370 million in cash.
Revenue and operating income for the units to be sold were approximately $330
million and $20 million, respectively, for the nine months ended September 30,
1996, and approximately $338 million and $15 million in the comparable 1995
period. Separately, the Company and U.S. Filter announced their intention to
form a new, equally-owned joint venture to develop, finance, own and operate
water and wastewater infrastructure in North America. Both transactions are
expected to be completed during the fourth quarter.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
Clean Water:
- -----------
Operating results for the three and nine months ended September 30 were as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $158,645 $158,762 $471,865 $460,010
Operating expenses 124,926 124,089 372,804 363,229
Selling and admin.
expenses 22,282 21,359 67,475 65,752
-------- -------- -------- --------
Operating income $ 11,437 $ 13,314 $ 31,586 $ 31,029
======== ======== ======== ========
</TABLE>
Revenue for the third quarter of $158.6 million was essentially flat compared
with the prior year as lower revenue in the segment's existing North American
and European water process businesses offset $5.1 million of growth from
acquisitions made during the past twelve months. These acquisitions include Sun
Chi Environmental Industries in Taiwan and the purchase of certain water
operating contracts from Rust. North American water process revenue declined
due to a large project being completed in 1995. In addition, European revenue
was negatively impacted by the weak German economy, contract timing and the
stronger dollar. Nine-month segment revenue grew $11.9 million, or three
percent, to $471.9 million. Businesses acquired during the past twelve months
accounted for $14.1 million of this growth, with growth in existing biosolids
and contract operations and the Asian market providing an additional $20.0
million. Partially offsetting this revenue growth was lower water process
revenue in Europe and North America.
Operating income decreased $1.9 million from the third quarter of 1995 to $11.4
million in 1996 as a result of lower gross margins and higher selling and
administrative expenses. Gross margin of 21 percent for the quarter was
slightly down from 1995 due to the addition of Sun Chi, a lower margin, larger-
project business, and due to higher costs associated with the wet weather
affecting land application of biosolids in certain regions of the United States.
Selling and administrative costs increased slightly to 14 percent of revenue.
Volume-related increases in Asia, higher business development expenses and North
American restructuring costs in the quarter were responsible for a $0.9 million
increase in absolute dollars. For the
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
first nine months of 1996, operating income increased slightly to $31.6 million
due to improved revenue. Gross margin as a percent of revenue was 21 percent for
the first nine months of both years. Selling and administrative costs for the
first nine months increased $1.7 million over the same period a year ago due
largely to the growth in Asian operations, but remained flat as a percent of
revenue at 14 percent.
Clean Energy:
- ------------
Operating results for the three and nine months ended September 30 were as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
------------ -----------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $202,389 $198,313 $599,101 $644,206
Operating expenses 124,911 125,043 372,415 419,336
Selling and admin.
expenses 8,205 9,631 25,059 29,882
-------- -------- -------- --------
Operating income $ 69,273 $ 63,639 $201,627 $194,988
======== ======== ======== ========
</TABLE>
Revenue for this segment totaled $202.4 million during the third quarter of
1996, which represents a $4.1 million increase from the comparable 1995 period.
The benefits of operating revenue from the Lisbon facility, which began
commercial operation in January 1996, the acquisition of an industrial
cogeneration facility in Martell, California, higher trash deliveries and
processing at certain plants, and less curtailment of electrical purchases by
the utility customer of the Company's California independent power facilities
offset a continuing decline in air business revenue. Air business revenue fell
from fifteen percent of segment revenue in the third quarter and first nine
months of 1995 to twelve and thirteen percent, respectively, in the comparable
periods of 1996. This reflects continuing air industry weakness in the face of
regulatory uncertainty. The segment's nine-month revenue declined $45.1 million
to $599.1 million due to the benefits of the Martell facility and Lisbon
operating revenue being more than offset by the air business decline and the
absence of Lisbon construction revenue, which was $37.5 million in the prior
year.
12
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
Clean Energy operating income was $69.3 million during the third quarter of 1996
versus $63.6 million in the comparable year earlier period. As a percent of
revenue, segment operating income increased approximately two percentage points
to 34 percent. Gross margin improved over one percentage point to 38 percent of
revenue, while selling and administrative costs declined almost a point to four
percent of revenue. The gross margin percentage increase resulted from lower
maintenance expenses at the energy facilities and actions taken in 1995 to
rightsize the air organization for lower activity levels. Air downsizing costs
recognized in the prior year and lower ongoing costs as a result of the air
downsizing were also responsible for the selling and administrative percentage
and absolute dollar improvements. The air business operated near break-even,
but had an operating income increase of approximately $2 million over the same
quarter of 1995.
Nine-month operating income for the segment increased $6.6 million to $201.6
million and as a percent of revenue increased over three percentage points to 34
percent. Gross margin for the nine-month period increased in absolute dollars
from $224.9 million in 1995 to $226.7 million in 1996, and increased as a
percent of revenue almost three percentage points. Lower maintenance expenses
were responsible for the absolute dollar gross margin increase, while the
absence of no-margin Lisbon construction revenue improved the nine-month gross
margin percentage. During the first nine months, selling and administrative
costs declined $4.8 million versus the comparable 1995 period and decreased
slightly as a percent of revenue to four percent largely because of the air
downsizing efforts and reduced project development spending.
OTHER ITEMS
- -----------
Interest: Interest expense for the third quarter of 1996 increased $0.9 million
versus 1995 due mainly to higher short-term borrowings incurred in connection
with second quarter share repurchases (see "Financial Condition" below).
Interest expense for the first nine months of 1996 decreased $2.8 million
compared with 1995 principally as a result of lower average outstanding debt.
Interest income decreased $1.3 million and $2.9 million, respectively, from the
third quarter and first nine months of 1995 because of higher interest rates on
long-term investments with WMX that matured during 1995 and lower average
invested balances during 1996, especially in the third quarter.
13
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
Equity in Earnings of Affiliates: Equity income from the continuing operations
of Wheelabrator's affiliates for the third quarter and nine months ended
September 30 totaled $9.3 million and $25.2 million, respectively, in 1995 and
$7.9 million and $20.9 million, respectively, in 1996. The decreases reflect
weakness in Rust's environmental consulting business offset in part by an
immaterial gain from Rust's September 1996 sale of its scaffolding business.
The Company's equity earnings in WM International were flat year-over-year for
both the quarter and nine-month period as the effect of a stronger U.S. dollar
offset increased pound sterling net income of WM International.
Income Taxes: The Company's effective tax rate, excluding equity income which is
reported net of tax, for both the three and nine months ended September 30,
1996, was 39.9 percent. For the three and nine months ended September 30, 1995,
the rates were 38.0 percent and 39.0 percent, respectively. The lower rates in
1995 were attributable to certain tax benefits associated with the Company's
liquidation of its investment in Abex, Inc.
Discontinued Operations: In the fourth quarter of 1995, Rust announced that it
would sell or discontinue its process engineering, construction, specialty
contracting, and similar lines of business and focus on its environmental and
infrastructure consulting businesses. These businesses have been accounted for
as discontinued operations, and accordingly, Wheelabrator has reported its 40
percent equity interest in the historical operating results separately from
continuing operations in the accompanying consolidated statements of income.
During the second quarter of 1996, the sale of the industrial process
engineering and construction business, based in Birmingham, Alabama, was
completed. The transaction did not have a material impact on Rust's income.
Environmental Matters: The majority of Wheelabrator's businesses are involved
with the protection of the environment. As such, a significant portion of the
Company's operating costs and capital expenditures could be characterized as
costs of environmental protection. While the Company is faced, in the normal
course of its business, with the need to expend funds for environmental
protection, it does not expect such expenditures to have a material adverse
effect on its financial condition or results of operations because its
14
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
business is based upon compliance with environmental laws and regulations and
its products and services are priced accordingly. Although unlikely in the
near-term, such ongoing compliance costs may increase in the future as a result
of legislation or regulation. However, the Company believes that in general it
benefits from increased governmental regulation, which increases the demand for
its products and services, and that it has the resources and experience to
manage environmental risk.
Wheelabrator has instituted procedures to periodically evaluate potential
environmental exposures. When the Company concludes it is probable that a
liability has been incurred, provision is made in the financial statements,
based upon management's judgment and prior experience, for the Company's best
estimate of the liability. Such estimates are subsequently revised as deemed
necessary when additional information becomes available. While the Company does
not anticipate that any such adjustment would be material to its financial
statements, it is reasonably possible that future technological, regulatory or
enforcement developments, results of environmental studies, or other factors
could alter this expectation and necessitate the recording of additional
liabilities, which could be material.
Wheelabrator has been notified by certain private parties that it may be
responsible for a portion of the remediation costs related to a certain state-
listed remediation site currently subject to an enforcement order that includes
a site assessment study. Although the Company is considering joining the
private parties to share in these costs, no litigation has been filed and the
Company has not been named a potentially responsible party. At the present
time, there is insufficient information available to estimate the remediation
costs or the extent of Wheelabrator's responsibility beyond its possible
voluntary sharing of enforcement order costs, which have been previously
accrued.
Wheelabrator also becomes involved, in the normal course of business, in
judicial and administrative proceedings related to alleged violations of
licenses, permits, laws or regulations, or differing interpretations of
applicable requirements. From time to time, the Company pays fines and
penalties as a result of such proceedings. To date, such fines and penalties
have not been material and, in the opinion of management, the ultimate
liability, if any, with respect to these matters will not have a material
15
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
adverse effect on the business and properties of the Company, taken as a whole,
or its financial position or results of operation.
Accounting Pronouncements: Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121"). The adoption of FAS 121 did not have a material impact on its
financial statements since Wheelabrator's accounting was substantially in
compliance with the new standard.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), which the Company also must adopt in 1996. FAS 123
provides an optional new method of accounting for employee stock options and
expands required disclosure about stock options. If the new method of
accounting is not adopted, the Company will be required to disclose pro forma
net income and earnings per share as if it were. The Company is studying FAS
123 and is gathering data necessary to calculate compensation in accordance with
its provisions, but has not decided whether to adopt the new method or
quantified its impact on the financial statements.
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources: Operating activities continue to be
Wheelabrator's principal source of liquidity and provided $207.2 million of cash
for the first nine months of 1996 compared to $148.2 million during the same
period of 1995. The majority of the increase was attributable to lower working
capital needs in 1996 offset, in part, by lower deferred taxes. The working
capital improvement relates primarily to timing of long-term contract payments,
while the change in deferred taxes is attributable to the reversal of
depreciation timing differences at certain energy facilities.
Investing activities utilized $77.3 million and $14.9 million of cash during the
first nine months of 1996 and 1995, respectively. Wheelabrator spent $34.4
million on project construction during the first nine months of 1996 compared
with $2.8 million in 1995 primarily because of the construction activity on a
second Company-owned pelletizer facility in Baltimore, Maryland. Other project
spending during the first nine months of 1996 included expansion
16
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
of the Parker, Arizona, carbon regeneration facility and construction of an
industrial process water recycling facility in North Carolina. Nonproject
capital expenditures were $22.4 million and $16.9 million in the first nine
months of 1996 and 1995, respectively. During the first nine months of 1996,
Wheelabrator acquired wastewater treatment operating contracts and an industrial
cogeneration facility in Martell, California, for approximately $4.5 million in
cash and the assumption of $2.5 million in debt. Also during the first nine
months of 1996, the Company acquired a 20 percent interest in Glegg Industries,
Inc., a leading ultrapure water company, for $15.4 million. During the first
nine months of 1995, Wheelabrator completed the privatization of the Miami
Conservancy District wastewater treatment plant located in Franklin, Ohio, at a
cost of approximately $6.8 million. The proforma effect of these acquisitions
and the equity investment on the Company's results of operations is not
material.
Financing activities required $188.3 million and $103.9 million of cash during
the first nine months of 1996 and 1995, respectively. Wheelabrator repurchased
approximately 18.9 million shares of its common stock at an aggregate cost of
approximately $303.0 million ($0.2 million of which was in accounts payable at
September 30, 1996) during the first nine months of 1996 compared with
repurchases of 1.8 million shares at an aggregate cost of $24.4 million during
the first nine months of 1995. The Company is authorized to repurchase
approximately an additional 9.9 million shares of its common stock through mid-
August 1998 on the open market or in privately negotiated transactions. Short-
term borrowings from WMX provided a portion of the cash needed for these share
repurchases and totaled $75.2 million as of September 30, 1996. In the
comparable prior year period, the Company repaid $53.2 million of short-term
borrowings from WMX. In addition, during the second quarter of 1996, the
Company externally financed the two Company-owned pelletizer facilities in
Baltimore, Maryland, with $58.6 million of long-term project debt.
Within the next five years, the air pollution control systems at certain trash-
to-energy facilities owned or leased by Wheelabrator will be required to be
modified to comply with more stringent air pollution control standards adopted
by the EPA in October 1995. The compliance dates will vary by facility, but all
affected facilities will be required to be in compliance with the new rules by
the end of the year 2000. Currently available technologies will be adequate to
meet the new standards. Although the total expenditures required for such
modifications are estimated to be in the $220 -
17
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
$270 million range, they are not expected to have a material adverse effect on
the Company's liquidity or results of operations because provisions in the
impacted facilities' long-term waste supply agreements allow the Company to
recover from customers the majority of incremental capital and operating costs.
Wheelabrator had a working capital deficit of $27.5 million as of September 30,
1996, compared to net working capital of $98.2 million at December 31, 1995.
The decline was driven primarily by share repurchase activity that caused cash
and cash equivalents to decline from $78.7 million at year-end 1995 to $20.4
million at September 30, 1996, and also led to an increase in short-term
borrowings from WMX of $75.2 million during that same time period. Pursuant to
the Master Intercorporate Agreement, which governs borrowing and lending between
the Company and WMX, Wheelabrator may borrow up to $100.0 million in excess of
any amounts loaned to WMX. As of September 30, 1996, the Company had $65.2
million of net borrowings from WMX under the terms of this agreement. The
balance of the borrowings from WMX were made pursuant to a short-term note
maturing on March 31, 1997, with essentially the same terms as borrowings under
the Master Intercorporate Agreement. Proceeds from this note were used to
finance second quarter share repurchases. Cash and cash equivalents at September
30, 1996, plus net cash generated by operating activities and short-term
borrowings from WMX are expected to be sufficient to meet the Company's
anticipated short-term capital expenditure, dividend payment, debt retirement,
and operating liquidity needs. Wheelabrator's ratio of total debt to total
capital was approximately 38% at September 30, 1996, which the Company believes
to be indicative of substantial unused borrowing capacity given its historically
strong ability to generate cash from operations.
Derivatives: From time to time, the Company uses foreign currency derivatives
to mitigate the impact of currency fluctuations on its equity income from WM
International and on certain specifically identified transactions. Derivatives
used are confined to simple instruments that do not involve multipliers or
leverage. The Company's use of derivatives has not been and is not expected to
be material to the Company's financial statements.
Contingencies: In May 1994, the U.S. Supreme Court ruled that state and local
governments may not constitutionally restrict the free movement of trash in
interstate commerce through the use of flow control laws. Such laws typically
18
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
involve a municipality specifying the disposal site for all solid waste
generated within its borders. Since the ruling, several decisions of state or
federal courts have invalidated regulatory flow control schemes in a number of
jurisdictions. Other judicial decisions have upheld nonregulatory means by
which municipalities may effectively control the flow of municipal solid waste.
The Company's Gloucester County, New Jersey, facility relies on a disposal
franchise for substantially all of its supply of municipal solid waste. In July
1996, a Federal District Court permanently enjoined the State of New Jersey from
enforcing its solid waste regulatory flow control system, which was held to be
unconstitutional, but stayed the injunction for as long as its ruling is on
appeal plus an additional period of two years to enable the State to devise an
alternative nondiscriminatory approach. The State has indicated that it will
continue to enforce flow control during the two-year transition period and has
filed an appeal of the Federal District Court's ruling.
The Supreme Court's 1994 ruling and subsequent court decisions have not to date
had a material adverse affect on any of the Company's trash-to-energy
operations. Federal legislation has been proposed, but not yet enacted, to
effectively grandfather existing flow control mandates. In the event that such
legislation is not adopted, the Company believes that affected municipalities
will endeavor to implement alternative lawful means to continue controlling the
flow of waste. In view of the uncertain state of the law at this time, however,
the Company is unable to predict whether such efforts would be successful or
what impact, if any, this matter might have on its trash-to-energy facilities.
19
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Regulatory - The business in which the Company is engaged is intrinsically
connected with the protection of the environment, and the potential exists for
the discharge of materials into the environment. In the ordinary course of
conducting its business activities, the Company becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local level including, in certain instances, proceedings instituted by
citizens or local governmental authorities seeking to overturn governmental
action in which governmental officials or agencies are named as defendants
together with the Company or one or more of its subsidiaries, or both. In the
majority of the situations where proceedings are commenced by governmental
authorities, the matters involved relate to alleged technical violations of
licenses or permits pursuant to which the Company operates or is seeking to
operate or laws or regulations to which its operations are subject or are the
result of different interpretations of the applicable requirements. At September
30, 1996, the Company was not involved in any such proceeding where the Company
believes sanctions involved may exceed $100,000.
Other - In addition, there are other routine lawsuits and claims, including
certain environmental matters, pending against Wheelabrator and its subsidiaries
which are incidental to its businesses. In the opinion of the Company's
management, the ultimate liability, if any, with respect to the above
proceedings, lawsuits and claims will not have a material adverse effect on the
business and properties of the Company, taken as a whole, or its financial
position and results of operations.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits to this report are listed on the Exhibit Index elsewhere
herein.
(b) Reports on Form 8-K:
20
<PAGE>
During the quarter ended September 30, 1996 the Company filed a report dated
September 16, 1996 on Form 8-K reporting under Item 5 that the Company issued a
news release in conjunction with United States Filter Corporation ("U.S.
Filter"). The news release announced two transactions pursuant to which U.S.
Filter will acquire the Company's water process and manufacturing units and the
Company and U.S. Filter will form a joint venture establishing a water and
wastewater treatment services organization.
21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 8, 1996
WHEELABRATOR TECHNOLOGIES INC.
/s/ John D. Sanford
-----------------------------------
John D. Sanford
Executive Vice President and
Chief Financial Officer
22
<PAGE>
WHEELABRATOR TECHNOLOGIES INC.
EXHIBIT INDEX
Number and Description of Exhibit/*/
- ---------------------------------
2 None
3 None
4 None
10 None
11 None
15 None
18 None
19 None
22 None
23 None
24 None
27 Financial Data Schedule
99 None
- --------------------------
* Exhibits not listed are inapplicable
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the September 30, 1996, Consolidated Balance Sheet and the Consolidated
Statement of Income for the nine-month period ended September 30, 1996, and is
qualified in its entirety by reference to such financial statements and the
footnotes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 20,392
<SECURITIES> 0
<RECEIVABLES> 236,550
<ALLOWANCES> 9,136
<INVENTORY> 45,074
<CURRENT-ASSETS> 392,464
<PP&E> 2,070,518
<DEPRECIATION> 456,826
<TOTAL-ASSETS> 3,193,458
<CURRENT-LIABILITIES> 419,976
<BONDS> 751,441
<COMMON> 1,895
0
0
<OTHER-SE> 1,274,161
<TOTAL-LIABILITY-AND-EQUITY> 3,193,458
<SALES> 0
<TOTAL-REVENUES> 1,064,602
<CGS> 0
<TOTAL-COSTS> 738,855
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,965
<INTEREST-EXPENSE> 43,134
<INCOME-PRETAX> 216,392
<INCOME-TAX> 77,946
<INCOME-CONTINUING> 138,446
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 138,446
<EPS-PRIMARY> .81
<EPS-DILUTED> 0
</TABLE>
