<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1994 Commission File No. 1-9253
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
CHEMICAL WASTE MANAGEMENT, INC.
-------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2989152
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3001 Butterfield Road, Oak Brook, Illinois 60521
- - ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (708) 218-1500
---------------
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 ___
---
As of May 1, 1994, the registrant had issued and outstanding an aggregate of
209,135,093 shares of its common stock.
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
PART I. Financial Information: PAGE
<S> <C>
Consolidated balance sheets as of December 31, 1993
and March 31, 1994................................. 3
Consolidated statements of income for the three-month
periods ended March 31, 1993 and 1994.............. 5
Consolidated statements of stockholders' equity for
the three-month periods ended March 31, 1993
and 1994........................................... 6
Consolidated statements of cash flows for the
three-month periods ended March 31, 1993 and 1994.. 7
Notes to consolidated financial statements.............. 8
Management's discussion and analysis of financial
condition and results of operations................ 14
PART II. Other Information............................. 20
</TABLE>
*****
2
<PAGE>
PART I. FINANCIAL INFORMATION
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(000's omitted)
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1993 1994
------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,592 $ 14,346
Short-term investments 1,906 1,688
Accounts receivable, less reserve
of $14,040 in 1993 and $18,378 in 1994 512,986 504,478
Employee receivables 1,134 1,263
Costs and estimated earnings in excess
of billings on uncompleted contracts 185,867 205,009
Refundable income taxes 54,002 45,995
Prepaid expenses 78,905 83,975
---------- ----------
Total Current Assets $ 837,392 $ 856,754
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land, primarily disposal sites $ 402,954 $ 409,115
Buildings 234,837 235,942
Vehicles and equipment 898,262 908,373
Leasehold improvements 13,032 13,484
---------- ----------
$1,549,085 $1,566,914
Less-Accumulated depreciation
and amortization (382,157) (400,765)
---------- ----------
Total Property and Equipment,net $1,166,928 $1,166,149
---------- ----------
OTHER ASSETS:
Intangible assets relating to
acquired businesses, net $ 708,473 $ 771,256
Investments 236,803 247,207
Sundry 133,069 132,878
Deferred income taxes 41,379 35,731
---------- ----------
Total Other Assets $1,119,724 $1,187,072
---------- ----------
Total Assets $3,124,044 $3,209,975
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(000's omitted except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, March 31,
1993 1994
------------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Portion of long-term debt payable
within one year $ 186,086 $ 189,643
Accounts payable 173,155 117,901
Billings in excess of costs and estimated
earnings on uncompleted contracts 43,579 70,244
Accrued expenses 201,932 192,112
---------- ----------
Total Current Liabilities $ 604,752 $ 569,900
---------- ----------
DEFERRED ITEMS:
Investment credit $ 405 $ 336
Other 238,338 238,686
---------- ----------
Total Deferred Items $ 238,743 $ 239,022
---------- ----------
LONG-TERM DEBT:
Due to WMX Technologies, Inc. $1,134,596 $1,210,024
Other long-term debt, less portion
payable within one year 58,318 74,732
---------- ----------
Total Long-Term Debt $1,192,914 $1,284,756
---------- ----------
MINORITY INTEREST IN SUBSIDIARIES $ 392,716 $ 407,231
---------- ----------
COMMITMENTS AND CONTINGENCIES $ $
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value;
500,000,000 shares authorized;
212,422,463 issued in 1993 and 1994 $ 2,124 $ 2,124
Additional paid-in capital 430,014 430,001
Cumulative translation adjustment (37,353) (33,069)
Retained earnings 336,930 346,764
---------- ----------
$ 731,715 $ 745,820
Less-Treasury stock, at cost; 3,291,170
shares in 1993 and 3,287,370 in 1994 (36,796) (36,754)
---------- ----------
Total Stockholders' Equity $ 694,919 $ 709,066
---------- ----------
Total Liabilities and
Stockholders' Equity $3,124,044 $3,209,975
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1993 1994
-------------- ------------
<S> <C> <C>
REVENUE $495,416 $523,407
-------- --------
COSTS AND EXPENSES:
Operating $390,201 $415,182
Selling and administrative 67,609 73,299
Interest expense 6,682 13,049
Equity in earnings of affiliates (3,124) (3,323)
Minority interest 9,416 7,143
Sundry income, net (13,891) (2,802)
-------- --------
Income Before Income Taxes $ 38,523 $ 20,859
Provision for Income Taxes 17,269 11,025
-------- --------
NET INCOME FOR THE PERIOD $ 21,254 $ 9,834
======== ========
AVERAGE SHARES AND EQUIVALENT SHARES
OUTSTANDING DURING THE PERIOD 212,579 209,139
======== ========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.10 $ 0.05
======== ========
DIVIDENDS DECLARED PER SHARE $ 0.05 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1993 AND 1994
(unaudited)
(000's omitted)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN TRANSLATION RETAINED TREASURY
STOCK CAPITAL ADJUSTMENT EARNINGS STOCK
------ ------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $2,123 $505,217 $(19,198) $658,439 $ --
Net income for the period -- -- -- 21,254 --
Cash dividends -- -- -- (10,631) --
Stock issued upon exercise
of stock options 1 1,477 -- -- --
Treasury stock received in
connection with exercise
of stock options -- -- -- -- 26
Tax benefit of non-qualified
stock options exercised -- 448 -- -- --
Cumulative translation
adjustment of foreign
currency statements -- -- (9,133) -- --
Investment in Rust
International, Inc. -- (77,066) -- -- --
Stock repurchases
(660,000 shares) -- -- -- -- 10,891
------ -------- -------- -------- -------
Balance at March 31, 1993 $2,124 $430,076 $(28,331) $669,062 $10,917
====== ======== ======== ======== =======
Balance at January 1, 1994 $2,124 $430,014 $(37,353) $336,930 $36,796
Net income for the period -- -- -- 9,834 --
Stock issued upon exercise
of stock options -- (13) -- -- (42)
Cumulative translation
adjustment of foreign
currency statements -- -- 4,284 -- --
------ -------- -------- -------- -------
Balance at March 31, 1994 $2,124 $430,001 $(33,069) $346,764 $36,754
====== ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1993 AND 1994
(unaudited)
(000's omitted)
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
- - --------------------
Net income $ 21,254 $ 9,834
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 24,048 32,962
Interest on LYONs 3,021 2,708
Undistributed earnings of equity investments (3,124) (3,323)
Gain on sale of property and
equipment and investments (13,183) (257)
Changes in assets and liabilities net of effects
of acquired companies:
Accounts receivable 38,899 32,445
Costs and estimated earnings in excess of
billings on uncompleted contracts 21,949 6,954
Prepaid expenses and refundable income taxes 4,482 2,818
Accounts payable (33,148) (63,185)
Accrued expenses (19,549) (42,892)
Deferred other items (9,331) (10,040)
Sundry 19,143 (166)
Minority interest in subsidiaries (2,264) 12,083
Deferred income taxes 9,569 8,599
-------- --------
Net Cash from Operating Activities $ 61,766 $(11,460)
-------- --------
INVESTING ACTIVITIES
- - --------------------
Short-term investments $ -- $ 218
Purchases of property and equipment (48,097) (24,902)
Transfer of property and equipment, net with WMX 2,836 (510)
Purchases of companies, net of cash acquired (28,587) (52,298)
Proceeds from sale of property and equipment
and investments 36,025 9,517
-------- --------
Net Cash from Investing Activities $(37,823) $(67,975)
-------- --------
FINANCING ACTIVITIES
- - --------------------
Increase in borrowings from WMX $ 6,831 $ 75,428
Proceeds from issuance of indebtedness -- 17,276
Payments on debt (1,805) (1,544)
Stock repurchases (10,891) --
Preferred stock repurchase (5,000) --
Proceeds from exercise of stock options, net 1,900 29
Dividends paid (10,631) --
-------- --------
Net Cash from Financing Activities $(19,596) $ 91,189
-------- --------
Net Increase in Cash $ 4,347 $ 11,754
Cash at beginning of period 3,552 2,592
-------- --------
Cash at End of Period $ 7,899 $ 14,346
======== ========
Additional disclosure:
Liabilities assumed in acquisitions of businesses $ 32,011 $ 62,021
======== ========
Interest paid, net of amounts capitalized $ 3,661 $ 11,074
======== ========
Income taxes paid (refunds received), net $ 1,830 $ (9,787)
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(000's omitted in all tables except per share amounts)
Summary of Accounting Policies-
The financial statements included herein have been prepared by Chemical Waste
Management, Inc. (the "Company") without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to such rules and regulations. The financial information
included herein reflects, in the opinion of the Company, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position and results of operations for the periods presented. The
results for interim periods are not necessarily indicative of results for the
entire year.
Certain amounts in previously issued financial statements have been reclassified
to conform to 1994 classifications.
Income Taxes-
The following table sets forth the provision for income taxes for the three
months ended March 31, 1993 and 1994:
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
Currently payable $ 5,499 $(4,311)
Deferred 11,883 15,404
Amortization of deferred
investment credit (113) (68)
------- -------
$17,269 $11,025
======= =======
</TABLE>
Consolidating Financial Statements-
The following consolidating statements of income show the Company's core
business and its Rust International Inc. ("Rust") subsidiary for the three
months ended March 31, 1993 and 1994.
8
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended March 31, 1993
(unaudited)
<TABLE>
<CAPTION>
Core
CWM Rust Eliminations Consolidated
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $158,766 $351,374 $(14,724) $495,416
-------- -------- -------- --------
Costs and Expenses:
Operating $115,955 $288,970 $(14,724) $390,201
Selling
and administrative 31,490 36,119 -- 67,609
Interest expense 5,978 704 -- 6,682
Equity in earnings
of affiliate -- (3,124) -- (3,124)
Minority interest (18) 2,520 6,914 9,416
Sundry income, net (13,117) (774) -- (13,891)
-------- -------- -------- --------
Income before Income Taxes $ 18,478 $ 26,959 $ (6,914) $ 38,523
Provision for Income Taxes 6,929 10,340 -- 17,269
-------- -------- -------- --------
Net Income $ 11,549 $ 16,619 $ (6,914) $ 21,254
======== ======== ======== ========
Average Shares and
Equivalent Shares
Outstanding During
the Period 212,579
========
Earnings Per Common
and Common Equivalent
Share $0.10
========
</TABLE>
9
<PAGE>
CHEMICAL WASTE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended March 31, 1994
(unaudited)
<TABLE>
<CAPTION>
Core
CWM Rust Eliminations Consolidated
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $146,336 $386,140 $(9,069) $523,407
-------- -------- ------- --------
Costs and Expenses:
Operating $105,530 $318,721 $(9,069) $415,182
Selling
and administrative 29,726 43,573 -- 73,299
Interest expense 8,209 4,840 -- 13,049
Equity in earnings
of affiliate -- (3,323) -- (3,323)
Minority interest 953 42 6,148 7,143
Sundry income, net (1,445) (1,357) -- (2,802)
-------- -------- ------- --------
Income before Income Taxes $ 3,363 $ 23,644 $(6,148) $ 20,859
Provision for Income Taxes 1,395 9,630 -- 11,025
-------- -------- ------- --------
Net Income $ 1,968 $ 14,014 $(6,148) $ 9,834
======== ======== ======= ========
Average Shares and
Equivalent Shares
Outstanding During
the Period 209,139
========
Earnings Per Common
and Common Equivalent
Share $0.05
========
</TABLE>
10
<PAGE>
Business Combinations-
Excluding the formation of Rust in January 1993, all businesses acquired by the
Company have been accounted for as purchases and are included in the financial
statements from the date of acquisition.
During 1993, the Company acquired 17 businesses (including the minority interest
in The Brand Companies, Inc. ("Brand") as a result of the Rust-Brand merger) for
$301 million in cash and notes and approximately 3.1 million shares of common
stock of Rust. During 1994, the Company acquired four businesses for $52.3
million in cash and notes.
The following summarizes the effect of businesses acquired and accounted for as
purchases in 1993 and 1994 as if they had been acquired as of January 1, 1993.
<TABLE>
<CAPTION>
Three Months Ended March 31
----------------------------
1993 1994
------------- ------------
<S> <C> <C>
Revenue as reported $495,416 $523,407
Revenue of purchased businesses
for period prior to acquisition 89,544 2,624
-------- --------
Pro forma revenue $584,960 $526,031
======== ========
Net income as reported $ 21,254 $ 9,834
Net income of purchased businesses
for period prior to acquisition 3,175 98
Adjustment for interest and amortization
of cost in excess of market value of
net assets acquired (2,589) (51)
-------- --------
Pro forma net income $ 21,840 $ 9,881
======== ========
Earnings per share as reported $ .10 $ .05
Effect of purchased businesses
for periods prior to acquisition -- --
-------- --------
Pro forma earnings per share $ .10 $ .05
======== ========
</TABLE>
Special Charge-
In the third quarter of 1993, the Company completed a study of its businesses,
announced a strategic reconfiguration of its operations to meet current demand
and recorded a special revaluation and restructuring charge of $550 million
related
11
<PAGE>
primarily to a revaluation of the Company's thermal treatment business,
including incinerators and fuels blending operations.
The special charge consisted of $381 million to write down assets, primarily
incinerators, and $169 million for the probable cash expenditures related to the
actions the Company has taken or plans to take as part of its program to reduce
costs, improve efficiency and structure the Company to meet current market
demand. Of the $169 million provided for probable cash expenditures, the
Company has spent $54 million through March 31, 1994, including $11.2 million
related to personnel actions. The Company expects the balance, except for
closure and post-closure costs, will be expended by the end of 1994. Once
completed, the Company expects the restructuring to reduce overhead, including
depreciation and amortization, by approximately $60 million annually.
Changes in Accounting Principles-
The Financial Accounting Standards Board has issued Standard No. 112,
"Employers' Accounting for Postemployment Benefits" ("FAS 112") and No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115").
Effective January 1, 1994, the Company adopted FAS 112, which did not have a
material impact on the financial statements as the Company's current accounting
was substantially in compliance with the new standard. The Company does not
have and does not contemplate acquiring significant investments of the type
covered in FAS 115.
Environmental Matters-
The majority of the businesses in which the Company is engaged are intrinsically
connected with the protection of the environment. As such, a significant
portion of the Company's operating costs and capital expenditures could be
characterized as costs of environmental protection. While the Company is faced,
in the normal course of its business, with the need to expend funds for
environmental protection and remediation, it does not expect such expenditures
to have a material adverse effect on its financial condition or results of
operations because its business is based on compliance with environmental laws
and regulations and its services are priced accordingly. Such costs may
increase in the future as a result of legislation or regulation; however, the
Company believes that it has the resources and experience to manage
environmental risk.
As a part of its ongoing operations, the Company provides for estimated closure
and post-closure monitoring costs over the operating life of disposal sites as
air space is consumed. The Company has also established procedures to evaluate
potential
12
<PAGE>
remedial liabilities at closed sites which it owns or operated, or to which it
transported waste, including 23 sites listed on the Superfund National Priority
List ("NPL"). In the majority of situations, the Company's connection with NPL
sites relates to allegations that its subsidiaries (or their predecessors)
transported waste to the facilities in question, often prior to the acquisition
of such subsidiaries by the Company. Where the Company concludes that it is
probable that a liability has been incurred, provision is made in the financial
statements.
Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate costs of
remediation require a number of assumptions and are inherently difficult, and
the ultimate outcome may differ from current estimates. However, the Company
believes that its extensive experience in the environmental services business,
as well as its involvement as a remediation services provider with a large
number of sites, provides a reasonable basis for estimating its aggregate
liability. As additional information becomes available, estimates are adjusted
as necessary. While the Company does not anticipate that any such adjustment
would be material to its financial statements, it is reasonably possible that
technological, regulatory or enforcement developments, the results of
environmental studies or other factors could alter this expectation and
necessitate the recording of additional liabilities which could be material.
The impact of such future events cannot be estimated at the current time.
13
<PAGE>
CHEMICAL WASTE MANAGEMENT INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The Company's consolidated revenue for the three months ended March 31, 1994,
was $523,407,000 compared to $495,416,000 for the three months ended March 31,
1993. Net income amounted to $9,834,000 for the three months ended March 31,
1994, compared to $21,254,000 for the first quarter of 1993 (which included an
approximate $8,000,000 net gain from the sale of stock held for investment).
Earnings per share were $.05 in the first quarter of 1994 compared to $.10,
including approximately $.04 attributable to the gain from the sale of stock
held for investment, for the same quarter a year earlier.
As a result of the slow start because of the severe weather in the first
quarter of 1994 discussed below, the Company now expects earnings per share for
the core business, excluding earnings from Rust International Inc. ("Rust"), for
1994 to be near $.20 per share (before any reimbursement of Rust's development
expenses pursuant to the agreement discussed below).
REVENUE
The Company provides hazardous waste transportation, treatment, resource
recovery and disposal services as part of its core business. Through Rust, its
56% owned subsidiary, the Company also provides engineering, construction and
environmental and infrastructure consulting services, and environmental
remediation and other on-site industrial services. Rust also operated an
asbestos abatement business through the first four months of 1993. This
business was transferred to NSC Corporation ("NSC") on May 3, 1993, in exchange
for a 41% equity interest in NSC and NSC's interest in two industrial service
businesses. Revenue for the three months ended March 31, 1993 and 1994 is as
follows (000's omitted):
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Core business $158,766 $146,336
Engineering, construction
and consulting services 174,985 205,350
Remediation and industrial
services 154,173 180,790
Asbestos abatement 22,216 --
Intercompany revenue (14,724) (9,069)
-------- --------
$495,416 $523,407
======== ========
</TABLE>
Core business revenue in the three months ended March 31, 1994 declined $12.4
million or 7.8% from the first three months of 1993. Severe weather in the
northeast quarter of the United States was the primary reason for this decline.
Event business
14
<PAGE>
revenue (generally large, non-recurring projects) declined 20.9% in the first
quarter of 1994, again primarily as a result of the severe weather. Event
business was 8.2% of core business revenue in the first quarter, 1994 compared
to 9.5% in the same quarter a year earlier. The following table analyzes 1994
core business revenue compared to the first quarter of 1993:
Percent
Change
-------
Price (3.5)%
Volume (8.3)
Purchased Business 4.0
-------
(7.8)%
=======
The increase in revenue from engineering, construction and consulting services
was the result of acquisitions completed in 1994 and during the latter part of
1993. This was offset by volume declines of $18 million, primarily related to
severe weather and customer delays on numerous projects. Backlog increased by
$85 million from December 31, 1993, to $804 million at March 31, 1994, in this
business line.
Revenue from remediation and industrial services increased due to acquisitions
completed in the second half of 1993. This was offset by volume declines of
$5.2 million due to weather related work delays. Backlog in this business line
increased by $16 million from December 31, 1993, to $669 million at March 31,
1994.
The percentage of Rust's revenue from affiliates declined to 13.3% in the
first quarter of 1994 from 13.8% in the first quarter of 1993.
OPERATING EXPENSES
Operating expenses increased as a percentage of consolidated revenue as
weather delayed projects and hampered operations in both the core business and
in the Rust lines of business. The severe weather caused many customers to
cease operations for extended periods during the quarter, forcing the Company to
absorb costs. The weather also caused additional costs to be incurred as
employees and subcontractors were forced to deal with added overtime, closed
highways due to snow emergencies, and conditions that made work outside
difficult and, at times, impossible. Partially offsetting the effect of the
weather, for the core business, were costs savings achieved in the first quarter
of 1994 from the restructuring begun in the third quarter of 1993.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased as a percentage of revenue for
both the core business and Rust in the first quarter of 1994. For the core
business, selling and administrative expenses increased to 20.3% from 19.8%, and
for Rust such expenses increased to 11.3% from 10.3% in the same quarter a year
ago. A large component of selling and administrative expenses is somewhat fixed
and, as 1994 consolidated revenue declined, the percentage of revenue increased.
Further, for Rust,
15
<PAGE>
the increased percentage of selling and administrative expenses is partly
attributable to its acquisition activity in 1993 and 1994 since the level of
selling and administrative expenses associated with acquired companies was
higher than that of existing operations. Initially higher selling and
administrative cost percentages associated with acquisitions generally reverse
themselves as the acquired businesses are integrated into existing operations.
Also contributing to the higher core business selling and administrative
expense percentage in the first quarter, 1994 was the reimbursement of $1.7
million of Rust's development expenses. Pursuant to an agreement entered into in
connection with the formation of Rust in January 1993, the Company has agreed to
reimburse Rust for certain business development expenses in an amount not to
exceed $10 million in each of 1993 and 1994. Rust has the right to defer the
Company's obligation to reimburse such expenses from year to year until December
31, 1997. Such reimbursement for 1993 was deferred. The Company is not in a
position to estimate the timing or the amount of such development expenses in
the future.
INTEREST
Consolidated interest expense increased to 2.5% of consolidated revenue for
the three months ended March 31, 1994, compared to 1.3% for the three months
ended March 31, 1993. Higher debt levels in the latter part of 1993 and early
1994 for both the core business and Rust and increased interest rates were the
cause.
EQUITY IN EARNINGS OF AFFILIATES
Waste Management International plc ("WM International") in which Rust
holds a 12% equity interest, is a leading international provider of waste
management and related services and includes essentially all of the waste
management operations of WMX Technologies, Inc. ("WMX") outside of North
America. It currently has operations in Europe, Asia/Pacific and South America.
WMX and Wheelabrator Technologies Inc. own 56% and 12%, respectively, of WM
International. Selected financial information for WM International for the
three months ended March 31, 1993 and 1994, stated in British Pounds Sterling
and in accordance with United States generally accepted accounting principles,
is as follows (000's omitted):
<TABLE>
<CAPTION>
1993 1994
--------------- ---------------
<S> <C> <C>
Revenue (Pounds)220,855 (Pounds)256,009
Operating income 29,001 36,588
Pre-tax income 29,113 33,392
Minority interest 1,839 4,725
Net income 17,508 18,592
</TABLE>
16
<PAGE>
MINORITY INTEREST
The decline in minority interest is principally due to Rust's acquisition of
the minority interest in The Brand Companies, Inc. ("Brand") during the quarter
ended June 30, 1993. However, as of January 1, 1994, as part of its core
business, the Company acquired a majority interest in a Mexican hazardous waste
management services company resulting in an increase in minority interest.
INCOME TAXES
The consolidated provision for income taxes rose to 52.9% of income before
taxes in the first quarter of 1994 from 44.8% in the first quarter of 1993 for
several reasons. The 1994 first quarter provision reflects the impact of the
Omnibus Budget Reconciliation Act of 1993. Also, increased amortization of
intangibles which for the most part is not tax deductible resulted in a higher
effective tax rate. The increase in amortization of intangibles was due
primarily to acquisitions completed by Rust during the latter part of 1993 and
early 1994, and the purchase of the minority interest in Brand.
LOW-LEVEL RADIOACTIVE WASTE DISPOSAL SERVICES
The Company's Barnwell, South Carolina facility is one of two licensed
commercial low-level radioactive waste disposal facilities in the United States.
South Carolina has adopted legislation allowing the Barnwell site to continue
operating until December 31, 1995, and to continue receiving waste generated
outside the eight states that comprise the Southeast Compact until June 30,
1994. In December 1993, the North Carolina Low Level Radioactive Waste
Management Authority voted to select a site in that state for development by the
Company as a regional disposal facility for the Southeast Compact. The Company
expects the South Carolina legislature to consider extending to December 31,
1995, the date the Barnwell site must stop accepting waste generated outside
the Southeast Compact, but there can be no assurance that such an extension will
be obtained. The Company is unable to predict the effect such an extension
might have upon its business. However, the Company's earnings for one or more
fiscal quarters or years could be adversely affected if the Company is unable to
open a new facility in North Carolina after the closure of the Barnwell site.
SPECIAL CHARGE
In the third quarter of 1993, the Company completed a study of its business,
announced a strategic reconfiguration of its operations to meet current demand
and recorded a special revaluation and restructuring charge of $550 million
($363 million after tax) related primarily to a revaluation of the Company's
thermal treatment business, including incinerators and fuels blending
operations.
The special charge consisted of $381 million to write down assets, primarily
incinerators, and $169 million for the probable cash expenditures related to the
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actions the Company has taken or plans to take as part of its program to reduce
costs, improve efficiency and structure the Company to meet current market
demand. Of the $169 million provided for probable cash expenditures, the
Company has spent $54 million through March 31, 1994, including $11.2 million
related to personnel actions. The Company expects the balance, except for
closure and post-closure costs, will be expended by the end of 1994. The
Company estimates that the full impact of the restructuring will reduce
overhead, including depreciation and amortization, by approximately $60 million
annually.
CHANGES IN ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board has issued Statements of Financial
Accounting Standards No. 112 - Employers' Accounting for Postemployment Benefits
("FAS 112") and No. 115 - Accounting for Certain Investments in Debt and Equity
Securities ("FAS 115"). Effective January 1, 1994, the Company adopted FAS 112,
which did not have a material impact on the financial statements as the
Company's current accounting was substantially in compliance with the new
standard. The Company does not have and does not contemplate acquiring
significant investments of the type covered in FAS 115.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company is in a service industry and has neither significant inventory nor
seasonal variations in receivables. Cash flow from operating activities is used
primarily for capital expenditures and acquisitions of businesses.
In 1993 and in the first quarter of 1994, the Company financed its business
primarily with cash flow from operating activities and by borrowing from WMX.
At March 31, 1994, the Company had working capital of $286.9 million compared
to working capital at December 31, 1993 of $232.6 million. The Company believes
that it has adequate liquidity and expects sufficient cash flow from future
operations to meet its capital needs. The Company filed its 1993 federal income
tax return in early April 1994, and as a result of a reported tax loss,
anticipates receiving an approximate $38 million refund of prior years' federal
income taxes before the end of the second quarter of 1994.
ACQUISITIONS AND CAPITAL EXPENDITURES
Capital expenditures, excluding acquired businesses, were $24.9 million for
the three months ended March 31, 1994, and $48.1 million for the comparable
quarter in 1993.
During the first quarter of 1994, the Company acquired four businesses for
$52.3 million in cash and notes. During the first quarter of 1993, the company
acquired two
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businesses for $28.6 million in cash and notes. See Notes to Consolidated
Financial Statements for a schedule showing the pro forma effect of businesses
acquired in 1993 and 1994, had they been acquired as of January 1, 1993.
CAPITAL STRUCTURE
The Company and Rust each has an agreement with WMX under which WMX provides a
financing commitment up to $750 million for the Company and up to $350 million
for Rust. Any indebtedness of the Company or Rust may be converted, at the
option of the borrower, to a term loan with either a fixed or floating interest
rate. The interest rates and terms of such loans will generally be WMX's costs
of funds for loans of similar maturity. Accordingly, borrowing under these
agreements are classified as long-term debt. Interest on other indebtedness is
charged at a rate equal to WMX's effective 30-day commercial paper rate plus a
number of basis points sufficient to reimburse WMX for its cost of obtaining
funds. On December 31, 1993, Rust converted $50 million of its borrowings from
WMX to a 5.75% term loan due December 31, 1998. In addition to the above
financing commitments, in August 1993, WMX increased the amount of the credit
facility for Rust by an additional $100 million which has been converted to a
five-year term loan providing for a lump-sum payment on December 31, 1998 with
interest at the rate of 6% per annum.
Holders of the Company's remaining Liquid Yield Option Notes ("LYONs")
($485.8 million aggregate principal amount at maturity) may require the Company
to repurchase LYONs on each June 30 at a price equal to the issue price plus
accrued original issue discount to the repurchase date.
The Board of Directors of the Company has authorized the repurchase of up to
10 million shares of its common stock over a 48-month period ending in November
1994. The Company did not repurchase any shares during the first quarter of
1994.
In August 1993, the Board of Directors suspended indefinitely the payment of
quarterly cash dividends on the Company's common stock.
The debt to capitalization ratio was 56.9% at March 31, 1994 compared
to 55.9% at December 31, 1993. This ratio includes minority interest in
subsidiaries as part of total capital. The increase in the first quarter is
attributable to the increased borrowing from WMX to finance acquisitions. The
Company expects to reduce this ratio during the remainder of 1994 through a
combination of income tax refunds, reduced capital expenditures and cash flow
from operations.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Some of the businesses in which the Company is engaged are
intrinsically connected with the protection of the environment and the potential
for the unintended or unpermitted discharge of materials into the environment.
In the ordinary course of conducting its business activities, the Company
becomes involved in judicial and administrative proceedings involving
governmental authorities at the federal, state and local levels (including, in
certain instances, proceedings instituted by citizens or local governmental
authorities seeking to overturn governmental action where governmental officials
or agencies are named as defendants together with the Company or one or more of
its subsidiaries, or both). In the majority of the situations where proceedings
are commenced by governmental authorities, the matters involved relate to
alleged technical violations of licenses or permits pursuant to which the
Company operates or is seeking to operate or laws or regulations to which its
operations are subject or are the result of different interpretations of the
applicable requirements. From time to time, the Company pays fines or penalties
in environmental proceedings relating primarily to waste treatment, storage or
disposal facilities. At March 31, 1994, the Company was involved in four
governmental proceedings relating to operations of the Company or one of its
subsidiaries where the Company believes sanctions involved in each instance may
exceed $100,000. The Company believes that these matters will not have
a material adverse effect on its results of operations or financial condition.
However, the outcome of any particular proceeding cannot be predicted with
certainty, and the possibility remains that technological, regulatory or
enforcement developments, the results of environmental studies, or other factors
could materially alter this expectation at any time.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Jerome D. Girsch
--------------------------------------------
Jerome D. Girsch,
Executive Vice President,
Treasurer and Controller
Dated: May 13, 1994
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