<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 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)
LIBERTY LANE 03842
Hampton, New Hampshire (Zip Code)
(Address of principal executive 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, $1 PAR VALUE, ISSUED AND OUTSTANDING AT
APRIL 30, 1996: 173,013,531
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<PAGE>
WHEELABRATOR TECHNOLOGIES INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
------------------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1 - Financial Statements
<S> <C>
Consolidated Balance Sheets as of December 31, 1995, and March 31, 1996.. 1
Consolidated Statements of Income for the Three Months Ended
March 31, 1995 and 1996............................................. 2
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1995 and 1996............................................. 3
Consolidated Statements of Changes in Stockholders' Equity for
the Three Months Ended March 31, 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.................................................... 17
Item 6 - Exhibits and Reports on Form 8-K..................................... 17
SIGNATURE..................................................................... 19
Exhibit Index................................................................. 20
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s omitted, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
- -------------------------------------------------------------------------------------
ASSETS
------
Current assets:
<S> <C> <C>
Cash and cash equivalents............................... $ 78,732 $ 58,801
Receivables, net of allowance of $12,187 in 1995
and $13,347 in 1996.................................... 215,080 233,658
Inventories............................................. 62,638 45,702
Costs and earnings in excess of billings................ 50,497 50,040
Other current assets.................................... 51,312 58,613
---------- ----------
Total current assets................................. 458,259 446,814
---------- ----------
Property, plant and equipment, net........................ 1,624,159 1,615,264
Cost in excess of net assets of acquired businesses, net.. 233,533 233,305
Investments in affiliates................................. 604,656 608,382
Other assets.............................................. 299,586 301,875
---------- ----------
Total assets........................................ $3,220,193 $3,205,640
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt.................... $ 35,808 $ 35,292
Accounts payable........................................ 93,327 97,027
Accrued liabilities..................................... 185,273 188,258
Advance payments on contracts........................... 45,686 40,940
---------- ----------
Total current liabilities............................. 360,094 361,517
---------- ----------
Long-term debt............................................ 704,414 703,652
Deferred income taxes..................................... 395,645 398,830
Deferred income........................................... 77,513 75,055
Other long-term liabilities............................... 232,262 223,406
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.......................... 876,595 876,419
Cumulative translation adjustments...................... (9,986) (11,358)
Treasury stock at cost; 10,112,610 shares in 1995
and 12,946,915 shares in 1996.......................... (146,494) (192,601)
Retained earnings....................................... 728,255 768,825
---------- ----------
Total stockholders' equity............................ 1,450,265 1,443,180
---------- ----------
Total liabilities and stockholders' equity.......... $3,220,193 $3,205,640
========== ==========
</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 MONTHS ENDED MARCH 31, 1995 AND 1996
(000s omitted, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
1995 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Revenue........................................... $373,299 $339,597
Operating expenses................................ 267,893 237,153
Selling and administrative expenses............... 31,758 31,041
Interest expense.................................. 15,827 13,539
Interest income................................... (2,480) (2,052)
Equity in earnings of affiliates.................. (8,303) (5,064)
Other expense, net................................ 132 810
-------- --------
Income before income taxes...................... 68,472 64,170
Income tax provision.............................. 24,772 23,600
-------- --------
Income from continuing operations............... 43,700 40,570
Equity in loss from discontinued operations....... 24 --
-------- --------
Net income.................................... $ 43,676 $ 40,570
======== ========
Weighted average common and common
equivalent shares outstanding................... 186,400 179,600
======== ========
Earnings per common and common equivalent share:
Income from continuing operations............... $ 0.23 $ 0.23
Discontinued operations......................... -- --
-------- --------
Net Income.................................... $ 0.23 $ 0.23
======== ========
</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 THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(000s omitted)
(unaudited)
<TABLE>
<CAPTION>
1995 1996
- ------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income......................................... $ 43,676 $ 40,570
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization.................... 26,622 26,253
Deferred income taxes............................ 11,402 13,815
Undistributed earnings of affiliates............. (8,303) (5,064)
Equity in loss from discontinued operations...... 24 --
Changes in assets and liabilities, net of
effects of acquired businesses:
Receivables, net............................... (4,635) (18,578)
Inventories.................................... 2 6,534
Costs and earnings in excess of billings....... (7,009) 584
Other current assets........................... 9,175 (3,896)
Accounts payable and accrued liabilities....... (22,646) (13,253)
Advance payments on contracts.................. 843 5,906
Other long-term liabilities.................... (9,040) (8,538)
Other, net....................................... 4,210 2,985
-------- --------
Net cash provided by operating activities........ 44,321 47,318
-------- --------
INVESTING ACTIVITIES:
Capital expenditures............................... (4,752) (14,162)
Investments held by trustees....................... (523) (97)
Cash paid for acquisitions, net of acquired cash... -- (1,500)
Other, net ........................................ (3,792) (1,833)
-------- --------
Net cash used for investing activities........... (9,067) (17,592)
-------- --------
FINANCING ACTIVITIES:
Additions to long-term debt........................ 1,285 --
Repayments of long-term debt....................... (1,041) (3,912)
Net borrowings from WMX Technologies, Inc.......... (20,847) --
Proceeds from exercise of stock options............ 185 1,841
Stock repurchase program........................... (23,150) (48,408)
Other, net......................................... 1,220 822
-------- --------
Net cash used for financing activities........... (42,348) (49,657)
-------- --------
Net decrease in cash and cash equivalents.......... (7,094) (19,931)
Cash and cash equivalents at beginning of period... 36,133 78,732
-------- --------
Cash and cash equivalents at end of period......... $ 29,039 $ 58,801
======== ========
Supplemental disclosure:
Interest paid, net of amounts capitalized........ $ 9,586 $ 8,668
======== ========
Income taxes paid................................ $ 5,684 $ 2,531
======== ========
</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 THREE MONTHS ENDED MARCH 31, 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 - - - - 43,676 43,676
Foreign currency
translation - - 8,241 - - 8,241
Exercise of
stock options - (128) - 313 - 185
Tax benefit from
stock options - 13 - - - 13
Stock repurchases
(1,708,600 shares) - - - (23,150) - (23,150)
------ -------- -------- --------- -------- ----------
Balance,
March 31, 1995 $1,895 $877,313 $ (9,409) $ (70,326) $654,374 $1,453,847
====== ======== ======== ========= ======== ==========
Balance,
December 31, 1995 $1,895 $876,595 $ (9,986) $(146,494) $728,255 $1,450,265
Net income - - - - 40,570 40,570
Foreign currency
translation - - (1,372) - - (1,372)
Exercise of
stock options - (460) - 2,301 - 1,841
Tax benefit from
stock options - 284 - - - 284
Stock repurchases
(2,992,100 shares) - - - (48,408) - (48,408)
------ -------- -------- --------- -------- ----------
Balance,
March 31, 1996 $1,895 $876,419 $(11,358) $(192,601) $768,825 $1,443,180
====== ======== ======== ========= ======== ==========
</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 an 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 March 31, 1996, cash and cash
equivalents included approximately $34.1 million of net investments with WMX
under the terms of this agreement.
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 engineering and consulting business. The businesses being sold
are being accounted for as discontinued operations, and accordingly,
Wheelabrator has
5
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
reported its 40 percent equity interest in the historical operating results of
these businesses separately from continuing operations.
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
During the first quarter of 1996, the Company acquired wastewater treatment
operating contracts for $1.5 million. No acquisitions were made during the first
quarter of 1995. The proforma effect of the purchased contracts is not material.
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. There can be no assurance
that such alternatives to regulatory flow control will in every case be found to
be lawful. For example, the Company's Gloucester County, New Jersey, facility
relies on a disposal franchise for substantially all of its supply of municipal
solid waste. A recent federal court ruling in that state invalidated a franchise
applicable to construction and demolition waste and has cast doubt on the
validity of the municipal solid waste disposal franchise, which is now being
challenged in separate litigation. The Supreme Court's ruling has 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.
6
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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, the ultimate resolution of these
matters 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, Wheelabrator 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 the Company's 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 proforma 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
7
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
Wheelabrator Technologies Inc. ("Wheelabrator" or the "Company") is a
diversified environmental products and services company focused primarily on
meeting customer requirements for clean energy and clean water. 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 three-month period ended March 31 was $339.6
million in 1996 compared to $373.3 million in 1995. The absence of construction
revenue associated with the Lisbon, Connecticut, trash-to-energy facility
completed in the second quarter of 1995 was primarily responsible for the
decrease. Both income from continuing operations and net income in the first
quarter decreased $3.1 million to $40.6 million compared to $43.7 million in the
year earlier period. Earnings per share remained flat at $0.23, reflecting fewer
outstanding common shares.
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.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
Clean Water: Revenue for the first quarter grew $13.2 million to $150.3 million
in 1996, which represents a 10 percent increase compared to the prior year.
Companies acquired in the previous 12 months provided $4.8 million, or 36
percent, of this increase. The balance was attributable to growth in the
segment's existing domestic, European, and Asian operations. Biosolids and
screen activity were particularly strong. The domestic industrial water process
business experienced strong orders during the quarter, reversing the delays
experienced late in 1995.
Clean Water's operating income grew $3.3 million, or 60 percent, to $8.8 million
in the first quarter of 1996. As a percent of revenue, operating income
increased almost two percentage points to 5.8 percent due primarily to business
mix and the benefits of consolidating office and manufacturing locations.
Overall gross margin was 20.9 percent for the first three months of 1996
compared to 19.7 percent in 1995. A larger proportion of 1996 revenue came from
higher margin equipment and product offerings, which offset weather-related
declines in biosolids' margins. Selling and administrative costs increased $1.0
million over the same quarter a year ago, but decreased as a percent of revenue
almost a full percentage point to 15.0 percent. Integration activities along
with a revenue growth rate in excess of associated selling and overhead cost
increases were responsible for the percentage improvement.
Clean Energy: Revenue for this segment totaled $191.6 million during the first
quarter of 1996, which represents a $46.5 million decrease from the comparable
1995 period. The lack of construction revenue from the Lisbon facility, which
began commercial operation at the beginning of 1996, and a continuing decline in
air business revenue are largely responsible for the decrease. Air revenue fell
from 15 percent of segment revenue in the first quarter of 1995 to 12 percent in
1996, reflecting continuing, industry-wide weakness in the face of regulatory
uncertainty. Revenue from existing energy facilities decreased compared to 1995
and offset the positive impact of Lisbon facility operation. A combination of
factors accounted for this decline, including lower pricing for spot market
trash disposal in the Broward and Dade County, Florida, area, and the timing of
scheduled maintenance at certain facilities. During the quarter, the Company
began operating an industrial cogeneration facility in Martell, California, that
provides steam and electricity to an adjacent forest products plant. The Company
also has an exclusive option to purchase this industrial project.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
Clean Energy operating income was $62.6 million during the first three months of
1996 versus $67.7 million in the comparable year earlier period. Lower air
business volume and the decreased revenue from existing energy facilities
discussed above account for this decline. The air business generated
approximately $1.2 million less operating income during the quarter and operated
at a small loss. As a percent of revenue, operating income for the segment
increased approximately four percentage points to 32.7 percent. Gross margin
improved to 37.1 percent of revenue, while selling and administrative costs were
relatively flat compared to the prior year as a percent of revenue. The gross
margin percentage improvement resulted from the absence of Lisbon facility
construction revenue, which had no margin. Selling and administrative costs
declined $1.7 million in terms of actual dollars due to downsizing the air
business in the prior year.
OTHER ITEMS
- -----------
Interest: Interest expense declined from $15.8 million in the first quarter of
1995 to $13.5 million in the first quarter of 1996 principally as a result of
lower outstanding debt balances. Interest income decreased from $2.5 million in
the first quarter of 1995 to $2.1 million in the first quarter of 1996 because
of higher interest rates on long-term investments with WMX that matured during
1995.
Equity in Earnings of Affiliates: Equity income from the continuing operations
of Wheelabrator's affiliates for the first quarter totaled $5.1 million in 1996
compared with $8.3 million in 1995. Flat local currency income and a slightly
less advantageous dollar versus British pound exchange rate caused the Company's
equity in WM International's earnings to decrease by $0.2 million. Equity in
Rust's earnings decreased $3.1 million due to the weather and associated high
demand for heating fuel, which kept refineries running and thereby deferred
maintenance activities that Rust performs.
Income Taxes: The Company's first quarter effective tax rates excluding equity
income, which is reported net of tax, were 41.2 percent and 39.9 percent in 1995
and 1996, respectively. The rate decline in 1996 was the result of international
and state tax planning activities.
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
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
infrastructure engineering and consulting business. The businesses being sold
are being accounted for as discontinued operations, and accordingly,
Wheelabrator has reported its 40 percent equity interest in the historical
operating results of these businesses separately from continuing operations.
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 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 other 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
12
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
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 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 proforma 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.
13
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources: Operating activities continue to be
Wheelabrator's principal source of liquidity and provided $47.3 million of cash
for the first three months of 1996 compared to $44.3 million during the same
period of 1995. Approximately 70 percent of the increase is attributable to
higher net income when adjusted for noncash items such as depreciation and
amortization, equity income, and deferred income taxes. The balance of the
increase was due to lower cash funding of working capital needs in 1996. Cash
flows from certain working capital items varied significantly between the first
three months of 1995 and 1996 due largely to timing of long-term contract
payments.
Investing activities utilized $9.1 million and $17.6 million of cash during the
first quarter of 1995 and 1996, respectively. Wheelabrator spent $0.4 million on
project construction during the first three months of 1995 compared with $8.6
million in 1996. During the 1996 quarter, the Company continued construction on
a second Company-owned pelletizer facility in Baltimore, Maryland, which also
accounted for the majority of the 1995 quarter project spending. Other project
spending occurring during the first three months of 1996 related to expansion of
the Parker, Arizona, carbon regeneration facility, and construction of an
industrial water process reuse facility in North Carolina and a Pacific Rim
headquarters and research center located in Singapore. Nonproject capital
expenditures were $4.4 million and $5.6 million in the first quarter of 1995 and
1996, respectively. Wheelabrator acquired wastewater treatment operating
contracts for $1.5 million during the 1996 quarter. There was no acquisition
activity during the first quarter of 1995. The proforma effect of the purchased
contracts on the Company's results of operations is not material.
Financing activities required $42.3 million and $49.7 million of cash during the
first quarter of 1995 and 1996, respectively. Wheelabrator repurchased 3.0
million shares of its common stock at an aggregate cost of $48.4 million during
the first quarter of 1996 compared with repurchases of 1.7 million shares at an
aggregate cost of $23.2 million during the first quarter of 1995. The Company is
authorized to repurchase an additional 16.2 million shares of its common stock
through mid-December 1997 on the open market or in privately negotiated
transactions. Also, the Company repaid $20.8 million of short-term borrowings
from WMX during the first three months of 1995.
14
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
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 $250 - $300 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 net working capital of $85.3 million as of March 31, 1996,
compared to $98.2 million at December 31, 1995. The decline was driven by stock
repurchase activity that caused cash and cash equivalents to decline from $78.7
million at year-end 1995 to $58.8 million at March 31, 1996. This cash 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.
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. In addition to using available
internally-generated cash, expected share repurchase and acquisition activities
will likely be funded by external, long-term financing of certain projects such
as the two Baltimore pelletizers. Wheelabrator's ratio of total debt to total
capital was approximately 34 percent at March 31, 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 had and is not expected to
have a material impact on 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
15
<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. There
can be no assurance that such alternatives to regulatory flow control will in
every case be found to be lawful. For example, the Company's Gloucester County,
New Jersey, facility relies on a disposal franchise for substantially all of its
supply of municipal solid waste. A recent federal court ruling in that state
invalidated a franchise applicable to construction and demolition waste and has
cast doubt on the validity of the municipal solid waste disposal franchise,
which is now being challenged in separate litigation. The Supreme Court's ruling
has 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.
16
<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 March
31, 1996, the Company was not involved in any such proceeding where the Company
believes sanctions involved may exceed $100,000.
In March 1996, the Company entered into a consent order in an administrative
proceeding brought by the United States Environmental Protection Agency in
connection with certain alleged sulphur dioxide exceedences at a trash-to-energy
facility operated by the Company in Westchester County, New York. The consent
order provided for the payment by the Company of a civil penalty of $172,917.
In settling these matters, the Company did not admit any violation of the law.
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 and such other 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.
17
<PAGE>
(b) Reports on Form 8-K:
The Company filed a report dated February 6, 1996, on Form 8-K during the
quarter ended March 31, 1996, reporting under Item 5, that the Company
issued a news release reporting its results of operations for the three
months and year-ended December 31, 1995, and the Company's belief that 1996
earnings growth in excess of ten percent should not be expected.
18
<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.
WHEELABRATOR TECHNOLOGIES INC.
/s/ John D. Sanford
------------------------------
May 10, 1996 John D. Sanford
Executive Vice President and
Chief Financial Officer
19
<PAGE>
WHEELABRATOR TECHNOLOGIES INC.
EXHIBIT INDEX
Number and Description of Exhibit*
---------------------------------
2 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
20
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<PAGE>
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<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1996, CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 58,801
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<RECEIVABLES> 247,005
<ALLOWANCES> 13,347
<INVENTORY> 45,702
<CURRENT-ASSETS> 446,814
<PP&E> 2,030,519
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<BONDS> 703,652
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