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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 JUNE 30, 1995
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM __________ TO __________
COMMISSION FILE NUMBER 1-7327
WMX TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-2660763
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3003 BUTTERFIELD ROAD,
OAK BROOK, ILLINOIS 60521
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (708) 572-8800
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 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 JULY 31, 1995 -- 484,884,747
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WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
-----
PAGE
----
PART I. Financial Information:
Consolidated balance sheets as of December 31, 1994 and
June 30, 1995........................................................ 3
Consolidated statements of income for the three-month and six-month
periods ended June 30, 1994 and 1995................................. 5
Consolidated statements of stockholders' equity for the six months
ended June 30, 1994 and 1995......................................... 6
Consolidated statements of cash flows for the six months
ended June 30, 1994 and 1995......................................... 8
Notes to consolidated financial statements................................ 9
Management's discussion and analysis of results of operations
and financial condition.............................................. 15
PART II. Other Information............................................... 23
******
2
PART I. FINANCIAL INFORMATION
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($000's omitted)
ASSETS
December 31, 1994 June 30, 1995
------------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 121,918 $ 170,069
Short-term investments 19,704 86,445
Accounts receivable, less reserve of $65,536 in 1994
and $64,174 in 1995 1,958,052 1,984,292
Employee receivables 10,140 9,552
Parts and supplies 194,645 204,498
Costs and estimated earnings in excess of billings
on uncompleted contracts 403,949 460,836
Refundable income taxes 30,713 11,981
Prepaid expenses 349,723 355,989
----------- -----------
Total Current Assets $ 3,088,844 $ 3,283,662
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Land, primarily disposal sites $ 4,162,418 $ 4,319,318
Buildings 1,372,782 1,506,019
Vehicles and equipment 7,162,217 7,211,144
Leasehold improvements 91,554 82,147
----------- -----------
$12,788,971 $13,118,628
Less - Accumulated depreciation and amortization (3,503,219) (3,734,625)
----------- -----------
Total Property and Equipment, Net $ 9,285,752 $ 9,384,003
----------- -----------
OTHER ASSETS:
Intangible assets relating to acquired businesses, net $ 3,789,801 $ 4,202,329
Sundry, including other investments 1,374,517 1,486,078
----------- -----------
Total Other Assets $ 5,164,318 $ 5,688,407
----------- -----------
Total Assets $17,538,914 $18,356,072
=========== ===========
The accompanying notes are an integral part of these balance sheets.
3
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($000's omitted except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 1994 June 30, 1995
----------------- -------------
CURRENT LIABILITIES:
Portion of long-term debt payable within one year $ 890,686 $ 875,497
Accounts payable 1,017,451 1,011,767
Accrued expenses 966,284 953,689
Unearned revenue 305,310 319,877
----------- -----------
Total Current Liabilities $ 3,179,731 $ 3,160,830
----------- -----------
DEFERRED ITEMS:
Income taxes $ 665,677 $ 771,851
Environmental liabilities 704,015 675,634
Other 615,606 641,652
----------- -----------
Total Deferred Items $ 1,985,298 $ 2,089,137
----------- -----------
LONG-TERM DEBT, less portion payable within one year $ 6,044,411 $ 6,585,138
----------- -----------
MINORITY INTEREST IN SUBSIDIARIES $ 1,536,165 $ 1,478,772
----------- -----------
COMMITMENTS AND CONTINGENCIES $ $
----------- -----------
PUT OPTIONS $ 252,328 $ 241,195
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $l par value (issuable in series);
50,000,000 shares authorized; none outstanding
during the periods $ - $ -
Common stock, $l par value; 1,500,000,000 shares
authorized; 496,386,758 shares issued in 1994
and 496,900,951 in 1995 496,387 496,901
Additional paid-in capital 357,150 405,731
Cumulative translation adjustment (150,832) (95,007)
Retained earnings 4,181,606 4,352,959
----------- -----------
$ 4,884,311 $ 5,160,584
Less: 1988 Employee Stock Ownership Plan 19,729 16,395
Employee Stock Benefit Trust (12,386,629
shares in 1994 and 12,094,763 shares
in 1995, at market) 323,601 343,189
----------- -----------
Total Stockholders' Equity $ 4,540,981 $ 4,801,000
----------- -----------
Total Liabilities and Stockholders'
Equity $17,538,914 $18,356,072
=========== ===========
The accompanying notes are an integral part of these balance sheets.
4
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30
(Unaudited)
(000's omitted except per share amounts)
Three Months Six Months
Ended June 30 Ended June 30
------------------------ --------------------------
1994 1995 1994 1995
----------- ----------- ---------- ----------
REVENUE $2,551,722 $2,855,994 $4,835,789 $5,460,903
---------- ---------- ---------- ----------
Operating expenses $1,766,889 $2,017,919 $3,363,800 $3,854,013
Special charges -- -- -- 140,600
Goodwill amortization 27,721 30,098 54,932 60,146
Selling and administrative
expenses 297,692 306,435 584,626 600,474
Interest expense 78,271 112,927 162,501 220,087
Interest income (5,643) (14,507) (16,407) (23,401)
Minority interest 41,970 41,637 70,750 70,939
Sundry income, net (12,787) (14,490) (30,197) (31,552)
---------- ---------- ---------- ----------
Income before income taxes $ 357,609 $ 375,975 $ 645,784 $ 569,597
Provision for income taxes 154,492 156,848 280,055 249,225
---------- ---------- ---------- ----------
NET INCOME $ 203,117 $ 219,127 $ 365,729 $ 320,372
========== ========== ========== ==========
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 483,915 485,082 483,878 484,968
========== ========== ========== ==========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.42 $ 0.45 $ 0.76 $ 0.66
========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE $ 0.15 $ 0.15 $ 0.30 $ 0.30
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
5
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1994
(Unaudited)
($000's omitted)
1988
Employee
Additional Cumulative Stock Employee
Common Paid-In Translation Retained Treasury Ownership Stock
Stock Capital Adjustment Earnings Stock Plan Benefit Trust
-------- ----------- ------------ ----------- ---------- ---------- --------------
Balance, January 1, 1994 $496,217 $668,470 $(245,587) $3,693,108 $425,097 $27,659 $ -
Net income for the period - - - 365,729 - - -
Cash dividends ($.30 per share) - - - (146,983) - - -
Stock issued upon exercise
of stock options - (3,939) - - (6,852) - (1,649)
Treasury stock received in
connection with exercise of
stock options - - - - 247 - -
Contribution to 1988 Employee
Stock Ownership Plan - - - - - (3,965) -
Treasury stock received as
settlement for claims - - - - 1,356 - -
Stock issued upon conversion
of Liquid Yield Option
Notes 30 423 - - (56) - -
Common stock issued for
acquisitions 74 1,799 - - - - -
Tax benefit of non-qualified
stock options exercised - 950 - - - - -
Temporary equity related to
put options - (226,591) - - - - -
Proceeds from sale of put
options - 14,718 - - - - -
Sale of shares to Employee Stock
Benefit Trust (12,601,609
shares) - (106,327) - - (419,792) - 313,465
Adjustment of Employee Stock
Benefit Trust to market value - 22,362 - - - - 22,362
Transfer of equity interests
among controlled subsidiaries - (254) - - - - -
Cumulative translation adjust-
ment of foreign currency
statements - - 67,812 - - - -
-------- --------- ----------- ---------- --------- --------- -------------
Balance, June 30, 1994 $496,321 $371,611 $(177,775) $3,911,854 $ - $23,694 $334,178
======== ========= =========== ========== ========= ========= =============
The accompanying notes are an integral part of these statements.
6
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(Unaudited)
($000's omitted except per share amounts)
1988
Employee
Additional Cumulative Stock Employee
Common Paid-In Translation Retained Treasury Ownership Stock
Stock Capital Adjustment Earnings Stock Plan Benefit Trust
-------- ----------- ------------ ----------- --------- ---------- --------------
Balance, January 1, 1995 $496,387 $357,150 $(150,832) $4,181,606 $ - $19,729 $323,601
Net income for the period - - - 320,372 - - -
Cash dividends ($.30 per share) - - - (145,376) - - -
Dividends paid to Employee
Stock Benefit Trust - 3,643 - (3,643) - - -
Stock issued upon exercise
of stock options 16 (1,959) - - (329) - (7,801)
Treasury stock received in
connection with exercise of
stock options - - - - 329 - -
Contribution to 1988 Employee
Stock Ownership Plan - - - - - (3,334) -
Common stock issued upon
conversion of Liquid Yield
Option Notes 120 1,929 - - - - -
Common stock issued for
acquisitions 378 10,206 - - - - -
Tax benefit of non-qualified
stock options exercised - 895 - - - - -
Temporary equity related to
put options - 11,133 - - - - -
Proceeds from sale of put
options - 6,766 - - - - -
Settlement of expired put
options - (12,019) - - - - -
Adjustment of Employee Stock
Benefit Trust to market value - 27,389 - - - - 27,389
Transfer of equity interests
among controlled subsidiaries - 598 - - - - -
Cumulative translation adjust-
ment of foreign currency
statements - - 55,825 - - - -
-------- -------- --------- ---------- -------- ------- --------
Balance, June 30, 1995 $496,901 $405,731 $ (95,007) $4,352,959 $ - $16,395 $343,189
======== ======== ========= ========== ======== ======= ========
The accompanying notes are an integral part of these statements.
7
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
Increase (Decrease) in Cash
(Unaudited)
($000's omitted)
1994 1995
--------- -----------
Cash flows from operating activities:
Net income for the period $ 365,729 $ 320,372
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 438,477 433,624
Provision for deferred income taxes 119,869 113,418
Minority interest in subsidiaries 70,750 70,939
Interest on Liquid Yield Option Notes (LYONs) and
WMX Subordinated Notes 18,719 17,365
Gain on sale of property and equipment (7,375) (3,691)
Contribution to 1988 Employee Stock
Ownership Plan 3,965 3,334
Special charge, net of tax - 91,400
Changes in assets and liabilities, excluding effects
of acquired companies:
Receivables, net (165,160) (5,852)
Other current assets (25,991) (55,786)
Sundry other assets (7,444) 48,770
Accounts payable (62,413) (43,910)
Accrued expenses and unearned revenue 24,449 (39,594)
Deferred items (40,914) (33,227)
Minority interest in subsidiaries 6,713 (6,807)
--------- -----------
Net cash provided by operating activities $ 739,374 $ 910,355
--------- -----------
Cash flows from investing activities:
Short-term investments $ 31,493 $ (65,847)
Capital expenditures (651,232) (584,988)
Proceeds from sale of property and equipment 174,036 131,853
Cost of acquisitions, net of cash acquired (123,974) (119,648)
Other investments (28,828) (54,123)
Acquisition of minority interests (3,600) (2,263)
--------- -----------
Net cash used for investing activities $(602,105) $ (695,016)
--------- -----------
Cash flows from financing activities:
Cash dividends $(146,983) $ (145,376)
Proceeds from issuance of indebtedness 920,962 1,128,278
Repayments of indebtedness (934,715) (1,140,402)
Proceeds from exercise of stock options, net 5,265 6,753
Contributions from minority interests 9,552 13,348
Stock repurchases by Company and subsidiaries - (24,536)
Proceeds from sale of put options 14,718 6,766
Settlement of expired put options - (12,019)
--------- -----------
Net cash used for financing activities $(131,201) $ (167,188)
--------- -----------
Net increase in cash and cash equivalents $ 6,068 $ 48,151
Cash and cash equivalents at beginning of period 92,802 121,918
--------- -----------
Cash and cash equivalents at end of period $ 98,870 $ 170,069
========= ===========
The Company considers cash and cash equivalents to include currency on
hand, demand deposits with banks and short-term investments with
maturities of less than three months when purchased.
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 143,782 $ 202,722
Income taxes, net of refunds received $ 74,909 $ 144,377
Supplemental schedule of noncash investing and
financing activities:
LYONs converted into common stock of the Company $ 509 $ 2,049
Liabilities assumed in acquisitions of businesses $ 145,296 $ 107,740
Fair market value of Company and subsidiary stock
issued for acquired businesses $ 4,773 $ 10,584
WMX Subordinated Notes issued for acquisition of CWM
minority interest $ - $ 436,830
The accompanying notes are an integral part of these statements.
8
WMX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
($000's omitted in all tables except per share amounts)
The financial statements included herein have been prepared by WMX Technologies,
Inc. ("WMX" 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
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 restated to
conform to 1995 classifications.
Income Taxes -
The following table sets forth the provision for income taxes for the three
months and six months ended June 30, 1994 and 1995:
Three Months Six Months
Ended June 30 Ended June 30
-------------------- --------------------
1994 1995 1994 1995
-------- -------- -------- --------
Currently payable $ 84,503 $ 76,511 $161,470 $136,350
Deferred 70,628 80,609 119,869 113,418
Amortization of deferred
investment credit (639) (272) (1,284) (543)
-------- -------- -------- --------
$154,492 $156,848 $280,055 $249,225
======== ======== ======== ========
Business Combinations -
During 1994, the Company and its principal subsidiaries acquired 119 businesses
for $197,201,000 in cash (net of cash acquired) and notes, 73,809 shares of the
Company's common stock and 156,124 shares of common stock of Wheelabrator
Technologies Inc. ("WTI"). These acquisitions were accounted for as purchases.
During the six months ended June 30, 1995, the Company and its principal
subsidiaries acquired 59 businesses for $119,648,000 in cash (net of cash
acquired) and notes and 377,978 shares of the Company's common stock. These
acquisitions were accounted for as purchases. The pro forma effect of the
acquisitions made during 1994 and 1995 is not material.
On January 24, 1995, the Company acquired all of the outstanding shares of
Chemical Waste Management, Inc. ("CWM") that it did not already own. WMX
previously owned approximately 78.6% of the outstanding CWM shares. The
transaction provided for the CWM public shareholders to receive a convertible
subordinated WMX note due 2005, with a principal amount at maturity of $1,000,
for every 81.1 CWM shares held, with cash paid in lieu of issuance of fractional
9
notes. The notes are subordinated to all existing and future senior
indebtedness of WMX. Each note bears cash interest from the date the merger was
consummated at the rate of two percent per annum of the $1,000 principal amount
at maturity, payable semi-annually. The difference between the principal amount
at maturity of $1,000 and the $717.80 stated issue price of each note represents
the stated discount which, together with the cash interest payable on the notes,
will accrue at a rate of 5.75 percent per annum (determined on a semi-annual
bond equivalent basis) for purposes of determining the prices at which WMX may
purchase or redeem notes, as described below. At the option of the holder, each
note will be purchased for cash by WMX on March 15, 1998, and March 15, 2000, at
prices of $789.95 and $843.03, respectively, which represent the stated issue
price plus accrued stated discount to those dates. Accrued unpaid interest to
those dates will also be paid. The notes will be redeemable by WMX on and after
March 15, 2000 (but not before) for cash, at the stated issue price plus accrued
stated discount and accrued but unpaid interest through the date of redemption.
In addition, each note is convertible at any time prior to maturity, unless
previously purchased or redeemed by WMX, into 26.078 shares of WMX common stock,
subject to adjustment upon the occurrence of certain events. Upon any such
conversion, WMX will have the option of paying cash equal to the market value of
the WMX shares which would otherwise be issuable.
As of December 31, 1994, the Convertible Liquid Yield Option Notes issued by CWM
("CWM LYONs") and the Exchangeable Liquid Yield Option Notes issued by the
Company ("Exchangeable LYONs") (together with the CWM LYONs, the "LYONs") were
convertible into (in the case of the CWM LYONs) or exchangeable for (in the case
of the Exchangeable LYONs) CWM shares. Upon consummation of the merger, the
LYONs became convertible into the number of notes discussed in the preceding
paragraph to which the holders would have been entitled had they converted or
exchanged the LYONs immediately prior to the merger approval. Outstanding CWM
stock options were converted into options to acquire 2,867,061 Company shares
at prices of $21.97 to $63.33 per share.
Accounting Principles -
The Financial Accounting Standards Board has issued 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"), which is
effective for fiscal years beginning after December 15, 1995. The Company is
studying FAS 121 but has not yet determined what, if any, effect its adoption
will have on the Company's financial statements.
Derivative Financial Instruments -
From time to time, the Company uses derivatives to manage interest rate,
currency and commodity risk. The portfolio of such instruments (which are held
for purposes other than trading) at June 30, 1995, is set forth in the
paragraphs which follow.
INTEREST RATE AGREEMENTS Certain of the Company's subsidiaries have entered
into interest rate swap agreements to reduce the impact of changes in interest
rates on underlying borrowings. The agreements are contracts to exchange fixed
and floating interest rate payments periodically over the term without the
exchange of the underlying notional amounts. The notional amounts of such
agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The agreements provide only
for the exchange of interest on the notional amounts at the stated rates, with
no multipliers or leverage.
While the subsidiaries are exposed to market risk to the extent that receipts
and payments under interest rate agreements are affected by market interest
rates, such agreements are entered into as a hedge against interest rate
exposure on
10
existing debt. Accordingly, differences paid or received under the agreements
are recognized as part of interest expense over the life of the agreements. The
impact of swap agreements on consolidated interest expense and on the effective
interest rate on consolidated debt was immaterial. As of June 30, 1995,
interest rate agreements in notional amounts and with terms as set forth in the
following table were outstanding:
Notional
Amount
Currency (000's omitted) Duration of Agreement
- --------- --------------- ---------------------
Sterling 20,000 Feb. 1995 - Feb. 1999
Hong Kong dollars 250,000 Feb. 1995 - Feb. 1997
U.S. dollars 25,000 Jan. 1988 - Dec. 1995
CURRENCY AGREEMENTS From time to time, the Company and certain of its
subsidiaries use foreign currency derivatives to mitigate the impact of
translation on foreign earnings and income from foreign investees. Typically
these have taken the form of purchased put options or offsetting put and call
options with different strike prices. The Company receives or pays, based on
the notional amount of the option, the difference between the average exchange
rate of the hedged currency against the base currency and the average (strike
price) contained in the option. Complex instruments involving multipliers or
leverage are not used. While the Company may be required to make a payment in
connection with these agreements, it will recognize an offsetting increase in
the translation of foreign earnings or income from foreign investees. Although
the purpose for using such derivatives is to mitigate currency risk, they do not
qualify for hedge accounting under generally accepted accounting principles and
accordingly, must be adjusted to market value at the end of each accounting
period. Gains and losses on currency derivatives to date have not been
material.
As of June 30, 1995, the Company was party to the following average rate
currency options (all options settle at expiration):
Notional Amount Currency
--------------- -----------------------------
(000's omitted) Hedged Against
- --------------------------------------------------------------------------
Collars, structured as
offsetting puts and
calls with different
strike prices, covering
the period January 1 to
December 31, 1995 40,000 French Franc Sterling
120,000 Swedish Krona Sterling
Put options purchased,
expiring at various
dates through May 31,
1996 47,600 Deutschemark Sterling
42,000 French Franc Sterling
13,500 Netherlands Guilder Sterling
60,000 Swedish Krona Sterling
20,000,000 Italian Lira Sterling
46,500 Sterling Dollar
In addition, subsidiaries have sold currencies forward for delivery in 1995 to
hedge foreign exchange exposure on specific transactions. The amounts involved
are not material to the consolidated financial statements, and any gains or
losses on the hedges will be included in the measurement of the identified
transaction.
COMMODITY AGREEMENTS The Company utilizes collars, calls and swaps to mitigate
the risk of price fluctuations on the fuel used by its vehicles. Quantities
hedged equate to committed fuel purchases or anticipated usage and accordingly,
11
gains and losses are deferred and recognized as fuel is purchased. The
following table summarizes the Company's positions in commodity derivatives as
of June 30, 1995:
Quantity
Type Commodity (000's omitted) Expiration
- ----------------------------------------------------------
Swaps Heating oil 63,000 gal. 1995
Collars Gas oil 20 tons 1995
Swaps Crude oil 3,000 bbls. 1996
Collars Crude oil 300 bbls. 1996
Swaps Crude oil 3,000 bbls. 1997
Collars Crude oil 350 bbls. 1997
Swaps Crude oil 2,000 bbls. 1998
Collars Crude oil 200 bbls. 1998
Collars Crude oil 100 bbls. 1999
The Company is exposed to credit loss in the event of non-performance by
counterparties on interest rate, currency and commodity derivatives, but in all
cases such counterparties are substantial financial institutions and the Company
does not anticipate non-performance. Maximum credit exposure is represented by
the fair value of contracts with a positive fair value; at June 30, 1995, such
amounts were not material.
Environmental Liabilities -
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 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 upon 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 in general it benefits from increased government
regulation, which increases the demand for its services, and that it has the
resources and experience to manage environmental risk.
As part of its ongoing operations, the Company provides for estimated closure
and post-closure monitoring costs over the operating life of disposal sites as
airspace is consumed. The Company also has established procedures to evaluate
potential remedial liabilities at closed sites which it owns or operated or to
which it transported waste, including 104 sites listed on the Superfund National
Priority List ("NPL"). The majority of the situations involving NPL sites
relate to allegations that subsidiaries of the Company (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 cost 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 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
12
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.
The Company and certain of its subsidiaries are named as defendants in personal
injury and property damage lawsuits, including purported class actions, on the
basis of a Company subsidiary's having owned, operated or transported waste to a
disposal facility which is alleged to have contaminated the environment. See
"Legal Proceedings" for further discussion.
The Company has filed several lawsuits against numerous insurance carriers
seeking reimbursement for past and future remedial, defense and tort claim costs
at a number of sites. The carriers have denied coverage and are vigorously
defending these claims. No amounts have been recognized in the financial
statements for any future insurance recoveries.
Stockholders' Equity -
The Boards of Directors of each of WMX and WTI have authorized their respective
companies to repurchase shares of their own common stock in the open market or
in privately negotiated transactions. The programs extend into 1996. During
the first six months of 1995, WTI repurchased approximately 1.8 million of its
shares.
In connection with its authorized stock repurchase program, WMX sells put
options on its own common stock. As of June 30, 1995, put options were
outstanding on 9 million shares, at strike prices ranging from $25.5875 to
$28.8333 per share, expiring at various dates in 1995. Subsequent to June 30,
1995, options covering 4.3 million shares expired unexercised as the market
value of the Company's common stock was in excess of the strike price. Options
on the remaining 4.7 million shares have strike prices ranging from $26.1068 to
$26.5750 per share and expire in October and November of 1995. Subsequent to
June 30, WMX sold additional put options on 2.6 million shares with strike
prices from $30.6140 to $31.4464 per share, expiring in April and May 1996.
Commitments and Contingencies -
In 1994, a Connecticut Superior Court issued a decision with respect to appeals
brought by certain project opponents of the permit issued to WTI to construct
the $92 million Lisbon, Connecticut, trash-to-energy facility. In the ruling,
the Court remanded the permit back to the Department of Environmental Protection
("DEP") for further proceedings on an uncontested permit condition that requires
the Lisbon facility to dispose of only Connecticut waste. Following a series of
judicial proceedings, the permit was remanded to the DEP in July of this year.
During the proceedings, WTI continued to construct the facility, which is now
complete and ready to undergo start-up and shakedown activities, but lacks the
necessary temporary operating permit to do so. If WTI does not prevail in the
construction permit remand, the temporary operating permit cannot be obtained.
Through a guarantee agreement with the facility's owner, such a consequence may
require WTI to redeem the debt issued to finance the facility. The resulting
payments could have a material adverse impact on WTI's financial condition and
results of operations and, to a lesser extent, on the Company's financial
condition and results of operations. WTI reached a settlement in July 1995 with
a major opponent of the project pursuant to which this opponent withdrew all
legal actions against the project and agreed to support permitting the
construction and operation of the facility. In light of this settlement, WTI
believes that the probability of an adverse determination on the construction
permit remand is remote, and that it will secure the necessary construction and
temporary operating permits in time for the facility to generate electricity
prior to the July 1996 delivery deadline contained in the facility's power
contract.
During the first quarter of 1995, Waste Management International plc ("WM
International") received an assessment of approximately 417 million Krona
13
(approximately $58 million) from the Swedish Tax Authority, relating to a
transaction completed in 1990. WM International believes that all appropriate
tax returns and disclosures were properly filed at the time of the transaction,
and intends to vigorously contest the assessment.
In February 1995, WMX offered to acquire the approximately 3.1 million Rust
shares held by the public, for $14 per share in cash. In May 1995, following
negotiations with a special committee of Rust independent directors, WMX agreed
to increase the price to the public stockholders under its proposal to $16.35
per share in cash. The revised WMX proposal was approved by the special
committee of Rust independent directors and by the Boards of Directors of both
WMX and Rust, and the transaction was completed in July 1995.
Debt -
In May 1995, the Company issued $200,000,000 of 6.65% Notes due May 15, 2005, at
par. The holder of each 6.65% Note may elect to have such Note, or any portion
thereof which is a multiple of $1,000, repaid on May 15, 2000 at 100% of its
principal amount, together with accrued interest. The Company also issued in
May 1995, $100,000,000 of 7% Notes due May 15, 2005, at a price of 99.293%. In
June 1995, the Company issued $100,000,000 of 5.84% Notes due July 3, 1996, at
par. None of these issues is redeemable at the option of the Company prior to
maturity.
Legal Matters -
See Part II of this Form 10-Q for a discussion of legal matters.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
Consolidated
- ------------
For the three months ended June 30, 1995, WMX Technologies, Inc. and its
subsidiaries ("WMX" or the "Company") had net income of $219,127,000 or $.45 per
share, compared to $203,117,000 or $.42 per share in the year-earlier period.
Revenue for the quarter was $2,855,994,000 versus $2,551,722,000 in the 1994
second quarter. Second quarter 1995 net income included a charge of
approximately $.01 per share for the write-off of deferred costs related to
LYONs previously issued by the Company and its Chemical Waste Management, Inc.
("CWM") subsidiary. These securities were put to the Company by the debtholders
prior to maturity.
For the six months ended June 30, 1995, net income was $320,372,000 or $.66 per
share versus $365,729,000 or $.76 per share for the corresponding six-month
period in 1994. The 1995 first quarter included a CWM charge related to a
revaluation of investments in certain hazardous waste treatment and processing
technologies and facilities, which reduced consolidated earnings in that quarter
by $.19 per share. Excluding that charge and the LYONs charge discussed above,
earnings per share for the six months ended June 30, 1995, were $.86. Revenues
for the first six months of 1995 rose 13% to $5,460,903,000 from $4,835,789,000
in the comparable year-earlier period.
The Company provides comprehensive environmental, engineering and construction,
industrial and related services through five principal subsidiaries, each of
which presently operates in a relatively discrete industry or geographic area.
Waste Management, Inc. ("WMI") provides integrated solid waste services and CWM
provides hazardous waste collection, transportation, treatment and disposal
services in North America. Waste Management International plc ("WM
International") provides these services as well as trash-to-energy services
outside North America. Wheelabrator Technologies Inc. ("WTI") is involved in
trash-to-energy and independent power projects, water and wastewater treatment,
and air quality control, primarily in North America. Rust International Inc.
("Rust") serves the engineering, construction, environmental and infrastructure
consulting, and on-site industrial and related services markets in the United
States and a number of foreign countries.
As a result of a strategic review begun in 1994, WMX has established a long-term
goal of organizing the management of its four principal businesses - waste
services, energy, water and engineering and consulting - on a global line of
business basis. During the second quarter of 1995, the Company essentially
completed a program to integrate management of the CWM land disposal facilities
into the WMI organization. In addition, WTI and WM International announced the
formation of a joint venture to develop trash-to-energy projects on a world-wide
basis outside of Germany, Italy and North America. As further steps are taken
to implement the global line of business strategy, the current business
alignment could change.
Following is an analysis of operating results for the second quarter and first
six months of 1995 by principal subsidiary.
WMI
- ---
WMI revenue for the second quarter and first six months of 1995 compared to the
same periods in 1994 is analyzed in the following table ($000's omitted):
15
Three Months Six Months
Ended June 30 Ended June 30
--------------------------------- ---------------------------------
1995 1994 Increase 1995 1994 Increase
---------- ---------- --------- ---------- ---------- ---------
Residential $ 304,307 $ 286,245 6.3% $ 597,394 $ 562,144 6.3%
Commercial 408,089 377,952 8.0 802,400 743,534 7.9
Rolloff and
industrial 343,299 317,392 8.2 648,382 599,667 8.1
Disposal,
transfer
and other 387,739 305,567 26.9 697,021 557,315 25.1
---------- ---------- ---------- ----------
$1,443,434 $1,287,156 12.1% $2,745,197 $2,462,660 11.5%
========== ========== ==== ========== ========== ====
Volume increases accounted for revenue growth of 7 to 7.5% and price for 3.5 to
4% in both the second quarter and first six months of 1995. Acquisitions
accounted for revenue growth of 1 to 1.5% in the second quarter and .5 to 1.0%
in the six months. Increases in prices of recyclable commodities were
responsible for revenue increases of approximately 1% in the second quarter and
six months, but prices are trending down in the third quarter. Volume growth
was helped by a relatively mild winter in 1995, whereas severe weather over a
large part of the country adversely affected the first quarter and thus the
first six months of 1994. A portion of the volume growth also results from
increased recycling activities, including the second quarter acquisition of
Resource Recycling Technologies, Inc.
Operating expenses were 67.4% of revenue for the second quarter and 67.3% for
the first six months of 1995 versus 68.8% and 69.0% for the comparable periods
in 1994. Mild weather in 1995, WMI's pricing effectiveness program, improved
safety performance, higher recyclable commodity prices and internalization of
recycling processing, and continuing productivity enhancements all contributed
to the improvement. Selling and administrative expenses were 10.1% of revenue
for the second quarter and 10.3% for the six months of 1995, compared to 10.6%
and 11.0% in the year-earlier periods. Such expenses increased in absolute
dollars in both the quarter and the six months ended June 30, 1995. However,
productivity enhancements have enabled WMI to manage a higher revenue base with
relatively modest selling and administrative expense increases, the majority of
which result from acquisitions and pay-for-performance compensation plans.
CWM
- ---
CWM revenue declined $23.9 million or 12.9% in the second quarter and $39.7
million or 12.0% in the first six months of 1995, compared to the same periods
in 1994. The major cause of this decline was a 40% decrease in second quarter
revenue at CWM's Barnwell, South Carolina, low-level radioactive waste disposal
facility. Second quarter 1994 revenue at the facility had benefited from
volumes received in anticipation of a state deadline which denied access to
Barnwell to customers outside an eight-state region in the southeastern United
States (the "Southeast Compact") after June 30, 1994. Reduced event business
revenue (revenue from larger, typically non-recurring projects), the decline in
value of the Mexican peso, and overall hazardous waste volume decreases also
contributed to the revenue decline. During June 1995, the South Carolina
legislature approved a budget measure that widened access to and extended the
authorized life of the Barnwell site. The measure means that the facility,
which was previously scheduled to close December 31, 1995, may remain open until
its permitted disposal capacity is fully utilized (estimated to be in ten years)
and may again accept waste from outside the Southeast Compact.
Second quarter 1995 operating expenses were approximately flat in absolute
dollars compared to the second quarter of 1994, but increased from 67.1% of
revenue to 76.8% due to the revenue decline. For the six months ended June 30,
16
operating expenses declined $6.9 million but increased from 69.3% of revenue to
76.4% of revenue. Six-month amounts and percentages exclude a charge of $140.6
million which CWM recorded in the first quarter of 1995 to write-off its
investment in facilities and technologies that it has eliminated because they do
not meet customer service or performance objectives.
Selling and administrative expenses declined $3.3 million in the second quarter
and $8.5 million in the first half of 1995 compared to the corresponding 1994
periods due to personnel reductions, but were relatively unchanged as a
percentage of revenue.
WTI
- ---
Revenue for the quarter ended June 30, 1995, grew $48.3 million to $370.0
million, a 15% increase over the prior year. First half 1995 revenue of $743.3
million represents an increase of $140.3 million or 23% compared to the first
six months of 1994. Acquisitions, primarily of industrial water businesses,
accounted for approximately 60% and 40% of second quarter and first half 1995
growth, respectively. New plants, along with existing businesses, were
responsible for the remaining 40% of the second quarter's increased revenue as
well as for slightly over 40% of the first half pick-up. The balance of the
increase for the first six months of 1995 came from first quarter construction
revenue associated with the Lisbon, Connecticut, trash-to-energy facility being
built by WTI.
Second quarter energy business revenue grew $9.5 million, or 6%, from 1994
levels. For the six months ended June 30, 1995, energy revenue increased $63.7
million or 20%. WTI's Falls Township trash-to-energy facility and Polk County,
Florida wood waste-to-energy facility, both of which began commercial operations
in the third quarter of last year, provided 160% of the increase in second
quarter 1995 revenue. Revenue from existing plants declined during the quarter
compared to last year due mainly to greater curtailment of electrical purchases
by utility customers of WTI's California independent power facilities as a
result of lower cost hydropower being available from late spring snow melt. The
Falls Township and Polk County facilities accounted for almost 50% of first half
energy revenue growth, with construction revenue on Lisbon contributing 40% and
contractual price escalation along with a shift in trash deliveries toward
higher priced municipal contract sources representing the balance. WTI's water
business revenue grew $54.3 million or 48% in the second quarter and $92.3
million or 45% for the six months of 1995 compared to the same periods in 1994.
Acquisitions generated over 50% of the second quarter growth and 60% of the
first half growth. Existing businesses and the Baltimore I biosolids pellitizer
facility, which began commercial operations in January of this year, accounted
for the balance of the increase. Air business revenue declined 35% in the
second quarter and 19% in the first six months of 1995 compared to 1994. The
declines are consistent with general industry trends and reflect a slowdown in
air pollution control retrofit activities by utilities between Phases I and II
of the Clean Air Act Amendments of 1990, spotty enforcement of existing
regulations, and uncertainty associated with the current national political
debate on environmental regulatory reform. WTI management has downsized certain
of its air businesses during the second quarter to reflect expected market
demand.
Energy, water and air businesses represented 47%, 45% and 8%, respectively, of
second quarter revenue compared to 51%, 35% and 14% in the second quarter of
1994. For the six months, these business lines contributed 51%, 40% and 9%,
respectively, of revenue in 1995 and 52%, 34% and 14% in 1994.
Operating expenses were 70.4% of revenue in the second quarter of 1995 and 71.1%
through six months. Comparable 1994 percentages were 67.9% and 68.7%,
respectively. The increased percentages reflect a greater contribution from
lower margin water business, decreased air business profitability, and the fact
that the energy business experienced very strong margins during the 1994 second
17
quarter. An additional factor impacting year-to-date percentages is Lisbon
construction revenue which is being offset by a corresponding amount of
construction expense. Management expects overall operating costs to remain at
approximately the second quarter percentage of revenue for the balance of 1995.
Selling and administrative costs increased $3.3 million and $9.4 million over
the second quarter and first half of 1994, primarily due to the impact of 1994
acquisitions. However, as a percentage of revenue such expenses declined for
both the second quarter and the first half of 1995 compared to last year,
reflecting primarily revenue growth at a faster rate than associated selling and
overhead cost increases. The percentage decrease for the six months ended June
30, 1995, was also influenced by the Lisbon construction revenue, which has no
associated selling and administrative cost.
WM International
- ----------------
WM International is a United Kingdom corporation which prepares its financial
statements in pounds sterling under accounting principles prevailing in the U.K.
Such accounting principles differ in certain respects from those generally
accepted in the United States ("U.S. GAAP"). The following discussion and
analysis is prepared on the basis of U.S. GAAP financial statements with pounds
sterling translated to U.S. dollars at the rates used to translate WM
International financial statements for inclusion in the Company's consolidated
financial statements (one pound = $1.5918 in 1995 and one pound = $1.5042 in
1994).
Revenues were $475,519,000 for the quarter ended June 30, 1995, versus
$435,365,000 for the comparable quarter of 1994. For the six months ended June
30, 1995, revenues were $917,788,000 in 1995 compared to $816,672,000 in 1994.
Components of the change in revenue are shown in the following table:
Increase (Decrease) in 1995
Compared to 1994
-----------------------------
Three Months Six Months
--------------- ------------
Price 1.3% 1.5%
Volume (5.0) (2.7)
Acquisitions 6.1 6.1
Currency translation 6.8 7.5
---- ----
9.2% 12.4%
=== ====
WM International's ability to implement price increases continues to be
adversely affected by economic and competitive conditions and relatively low
inflation. In Italy, where a substantial portion of its business is municipal
contracts, renewals continue to be consistently at reduced prices. A portion of
the 1995 volume decline is a result of the completion of the SENT landfill in
Hong Kong, construction revenue from which was included in the 1994 second
quarter. The government introduced a new pricing mechanism in March that
requires generators to absorb a portion of the disposal cost of waste brought to
the Hong Kong incinerator, and is considering a similar charge at the SENT
landfill. This resulted in some volume decline in the second quarter and the
future impact on the facilities is uncertain. Volume increased in several
European countries, but was adversely impacted by a decline in landfill volumes
in France and Italy.
A significant portion of WM International's revenue arises in currencies other
than pounds sterling (its reporting currency) or U.S. dollars. As a result,
foreign currency movement has had and will continue to have an impact on
reported revenue, expenses and net income, stated in both pounds sterling and
U.S. dollars. Both the Company and WM International periodically engage in
hedging transactions intended to mitigate currency translation risk. See
"Derivatives."
18
Operating expenses were 75.4% of second quarter 1995 revenue compared to 72.0%
in the same period of 1994, and for the six months ended June 30 were 75.4% in
1995 versus 72.1% in 1994. The increases are a reflection of highly competitive
pricing in hazardous waste and in the solid waste markets of Italy and France.
France continues to be a significant problem and through the first half of 1995
has experienced substantially lower margins, which are anticipated to continue
at least for the balance of the year. Selling and administrative expenses were
12.3% of revenue for the second quarter of 1995 compared to 13.3% in the 1994
second quarter and for the first six months were 12.8% in 1995 and 13.5% in
1994. The improvements are a result of the increased revenue base over which to
spread the fixed portion of such costs, integration of acquired businesses, and
continued emphasis on productivity improvements.
In light of results to date, WM International expects its 1995 earnings to be
below 1994 levels.
Rust
- ----
Rust revenue increased 18.9% for the second quarter and 16.7% for the first six
months of 1995 compared to the same periods in 1994. Substantially all of the
increase related to growth in existing businesses, as the impact of acquisitions
was not significant. Revenue by business line is shown in the following table
($000's omitted):
Three Months Six Months
Ended June 30 Ended June 30
----------------------------- -----------------------------
Increase Increase
1995 1994 (Decrease) 1995 1994 (Decrease)
-------- -------- ---------- -------- -------- ----------
Engineering,
construction
and consulting
services $344,778 $241,436 42.8% $622,698 $446,786 39.4%
Remediation and
industrial
services 144,774 170,242 (15.0) 308,060 351,032 (12.2)
-------- -------- -------- --------
$489,552 $411,678 18.9% $930,758 $797,818 16.7%
======== ======== ==== ======== ======== ====
The revenue increase for engineering, construction and consulting services was
driven by volume growth, particularly engineering and construction activities on
several large pulp and paper projects. Remediation and industrial services
revenue for the second quarter and first six months of 1995 declined from the
comparable 1994 periods. The transaction with OHM Corporation ("OHM") described
below resulted in the loss of revenue contribution from the remedial services
group for the month of June. Customer reluctance to award new projects to the
group pending the outcome of the transaction, as well as management's focus on
completing the transition of the business to OHM, also resulted in a revenue
decrease.
In May 1995, OHM acquired Rust's environmental remediation business in exchange
for an approximately 37% equity interest in OHM. For the five months ended May
31, 1995, the Rust environmental remediation business had revenue of $62.2
million and operating income (after operating, selling and administrative
expenses) of $.9 million. For the six months ended June 30, 1994, the
comparable amounts were $106.3 million and $3.5 million, respectively.
Rust's backlog at June 30, 1995, was $1.249 billion, of which $186.1 million
related to several Department of Defense contracts, including two Total
Environmental Restoration Contracts. There can be no assurance that specific
projects identified and performed pursuant to such Department of Defense
contracts will result in aggregate revenues of $186.1 million over the remaining
terms of the contracts. The decrease in the backlog from March 31, 1995,
19
primarily results from remediation backlog transferred to OHM in connection with
the transaction discussed above, as well as work completed on a large pulp and
paper project. Revenue from affiliated companies was 7.4% of total revenue for
the first six months of 1995 compared to 13.6% for the first six months of 1994,
primarily the result of the completion of the Falls Township trash-to-energy
facility for WTI.
Operating expenses were 84.7% of revenue for the second quarter and 84.8% for
the first six months of 1995, compared to 82.5% for both the quarter and six
months of 1994. The increase in operating expenses is primarily attributable to
the continued shift of the revenue mix in favor of engineering, construction and
consulting work, which has higher operating expenses than the industrial
services business. Selling and administrative expenses as a percentage of
revenue were 8.8% for the second quarter and 9.1% for the first six months of
1995, compared to 10.7% and 11.0% in the corresponding periods of 1994. The
decrease is attributable to revenue growth and to ongoing programs to reduce
selling and administrative expenses across all business lines, including closing
certain offices and consolidating the engineering and construction groups in the
fourth quarter of 1994.
Interest
- --------
The following table sets forth the components of consolidated interest, net, for
the three-month and six-month periods ended June 30, 1995 and 1994 ($000's
omitted):
Three Months Six Months
-------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
Interest expense $132,226 $106,638 $259,122 $216,069
Interest income (14,507) (5,643) (23,401) (16,407)
Capitalized interest (19,299) (28,367) (39,035) (53,568)
-------- -------- -------- --------
Interest expense, net $ 98,420 $ 72,628 $196,686 $146,094
======== ======== ======== ========
Net interest expense for the three months and six months ended June 30, 1995,
increased compared to the corresponding periods in 1994 as a result of higher
interest rates, debt incurred to purchase the public shares of CWM, and lower
capitalized interest due to the completion of several large construction
projects, partially offset by positive cash flow from operations.
Accounting Principles
- ---------------------
The Financial Accounting Standards Board has issued 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"), which is
effective for fiscal years beginning after December 15, 1995. The Company is
studying FAS 121 but has not yet determined what, if any, effect its adoption
will have on the Company's financial statements.
Derivatives
- -----------
From time to time, the Company and certain of its subsidiaries use derivatives
to manage currency, interest rate, and commodity (fuel) risk. Derivatives used
are simple agreements which provide for payments based on the notional amount,
with no multipliers or leverage. While the Company is exposed to credit loss in
the event of non-performance by counterparties to derivatives, in all cases such
counterparties are substantial financial institutions and the Company does not
anticipate non-performance. In addition, maximum credit exposure is represented
by the fair value of contracts with a positive fair value; at June 30, 1995,
such amounts are not material. See Notes to Consolidated Financial Statements
for
20
further discussion. Also see "Capital Structure" below for a discussion of the
Company's sale of put options in connection with its authorized stock repurchase
program.
FINANCIAL CONDITION:
Liquidity and Capital Resources
- -------------------------------
The Company had working capital of $122.8 million at June 30, 1995, compared to
a working capital deficit of $90.9 million at December 31, 1994. Net receivables
and costs and estimated earnings in excess of billings on uncompleted contracts
increased $82.5 million as a result of revenue growth and large engineering and
construction contracts in process at Rust. Cash and short-term investments
increased $114.9 million in anticipation of retirement of debt maturing in July
1995 and the acquisition of the Rust shares discussed below. Current liabilities
remained relatively constant.
The Company is primarily in a service industry and accordingly, cash flow from
operations is used primarily for capital expenditures (including business
acquisitions), dividends, stock repurchases or debt reduction. Beginning in
1994, management placed increased emphasis on reducing capital expenditures and
obtaining higher returns from existing assets. As a result, in the first six
months of 1995 the Company generated positive cash flow of $215.3 million before
financing activities.
Long-term and short-term debt, net of cash and cash equivalents, increased
$477.4 million during the six months ended June 30, 1995. The primary reasons
for this increase include the subordinated debt issued to acquire the public
shares of CWM, debt of acquired businesses, and the impact of foreign currency
translation on the debt of WM International, partially offset by the positive
cash flow noted above.
During the first quarter of 1995, WM International received an assessment of
approximately 417 million Krona (approximately $58 million) from the Swedish Tax
Authority, relating to a transaction completed in 1990. WM International
believes that all appropriate tax returns and disclosures were filed at the
time of the transaction, and intends to vigorously contest the assessment.
In 1994, a Connecticut Superior Court issued a decision with respect to appeals
brought by certain project opponents of the permit issued to WTI to construct
the $92 million Lisbon, Connecticut trash-to-energy facility. In the ruling,
the Court remanded the permit back to the Department of Environmental Protection
("DEP") for further proceedings on an uncontested permit condition that requires
the Lisbon facility to dispose of only Connecticut waste. Following a series of
judicial proceedings, the permit was remanded to the DEP in July of this year.
During the proceedings, WTI continued to construct the facility, which is now
complete and ready to undergo start-up and shakedown activities but lacks the
necessary temporary operating permit to do so. If WTI does not prevail in the
construction permit remand, the temporary operating permit cannot be obtained.
Through a guarantee agreement with the facility's owner, such a consequence may
require WTI to redeem the debt issued to finance the facility. The resulting
payments could have a material adverse impact on WTI's financial condition and
results of operations and, to a lesser extent, on the Company's financial
condition and results of operations. WTI reached a settlement in July 1995 with
a major opponent of the project pursuant to which this opponent withdrew all
legal actions against the project and agreed to support permitting the
construction and operation of the facility. In light of this settlement, WTI
believes that the probability of an adverse determination on the construction
permit remand is remote, and that it will secure the necessary construction and
temporary operating permits in time for the facility to generate electricity
prior to the July 1996 delivery deadline contained in the facility's power
contract.
21
The majority of the businesses in which the Company is engaged are intrinsically
connected with the protection of the environment. As part of its ongoing
operations, the Company provides for estimated closure and post-closure
monitoring costs over the operating life of disposal sites as airspace is
consumed. The Company has also established procedures to evaluate potential
remedial liabilities at closed sites which it owns or operated, or to which it
transported waste. While the Company believes it has adequately provided for its
environmental liabilities, it is reasonably possible that technological,
regulatory or enforcement developments, the results of environmental studies or
other factors could necessitate the recording of additional liabilities which
could be material. See Notes to Consolidated Financial Statements.
The Company and certain of its subsidiaries are named as defendants in personal
injury and property damage lawsuits, including purported class actions, on the
basis of a Company subsidiary's having owned, operated or transported waste to a
disposal facility which is alleged to have contaminated the environment. See
"Legal Proceedings" for further discussion.
Acquisitions and Capital Expenditures
- -------------------------------------
Capital expenditures, excluding property and equipment of purchased businesses,
were $585.0 million for the six months ended June 30, 1995, and $651.2 million
for the comparable period in 1994. In addition, the Company and its principal
subsidiaries acquired 59 businesses for $119.6 million in cash and notes, and
377,978 shares of WMX common stock during the first six months of 1995. For the
six months ended June 30, 1994, the Company and its principal subsidiaries
acquired 60 businesses for $124.0 million in cash and notes, 73,809 shares of
WMX common stock and 156,124 shares of WTI common stock. The proforma effect of
acquisitions made during 1994 and 1995 is not material.
Capital Structure
- -----------------
In January 1995, the holders of a majority of the outstanding CWM shares (other
than those held by WMX) approved a merger transaction that resulted in WMX
acquiring all of the outstanding CWM shares it did not previously own, in return
for convertible subordinated debt.
In February 1995, WMX offered to acquire the approximately 3.1 million Rust
shares held by the public, for $14 per share in cash. In May 1995, following
negotiations with a special committee of Rust independent directors, WMX agreed
to increase the price to the public shareholders under its proposal to $16.35
per share in cash. The revised WMX proposal was approved by the special
committee of Rust independent directors and by the Boards of Directors of both
WMX and Rust, and the transaction was completed in July of 1995.
The Boards of Directors of WMX and WTI have authorized their respective
companies to repurchase shares of their own common stock in the open market or
in privately negotiated transactions. The programs extend into 1996. During
the first six months of 1995, WTI repurchased approximately 1.8 million of its
shares.
In connection with its authorized stock repurchase program, WMX from time to
time sells put options on its own common stock. As of June 30, 1995, put
options were outstanding on 9 million shares, at strike prices ranging from
$25.5875 to $28.8333 per share, expiring at various dates in 1995. Subsequent
to June 30, 1995, options covering 4.3 million shares expired unexercised as the
market value of the Company's common stock was in excess of the strike price.
Options on the remaining 4.7 million shares have strike prices ranging from
$26.1068 to $26.5750 per share and expire in October and November of 1995.
Subsequent to June 30, WMX sold additional put options on 2.6 million shares
with strike prices from $30.6140 to $31.4464 per share, expiring in April and
May 1996.
22
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
-----------------
The majority 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 level, 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 or trash-to-energy facilities. As of June 30, 1995, CWM was involved
in one such proceeding and a subsidiary of WTI was involved in one such
proceeding where it is believed that sanctions involved in each instance may
exceed $100,000.
In June 1995, CWM entered into a consent order with the State of
Illinois Environmental Protection Agency in a proceeding before the Circuit
Court of the State of Illinois for St. Clair County in connection with certain
alleged infractions of technical operating regulations at a CWM hazardous waste
management facility in Sauget, Illinois. The consent order provided for the
payment by CWM of a civil penalty of $250,000. In settling these matters, CWM
did not admit any violation of law.
The Company or certain of its subsidiaries have been identified as
potentially responsible parties in a number of governmental investigations and
actions relating to waste disposal facilities which may be subject to remedial
action under the Comprehensive Environmental Response, Compensation and
Liabilities Act of 1980, as amended ("Superfund"). The majority of these
proceedings are based on allegations that certain subsidiaries of the Company
(or their predecessors) transported hazardous substances to the facilities in
question, often prior to acquisition of such subsidiaries by the Company. Such
proceedings arising under Superfund typically involve numerous waste generators
and other waste transportation and disposal companies and seek to allocate or
recover costs associated with site investigation and cleanup, which costs could
be substantial.
As of June 30, 1995, the Company or its subsidiaries had been notified
that they are potentially responsible parties in connection with 104 locations
listed on the Superfund National Priority List ("NPL"). Of the 104 NPL sites at
which claims have been made against the Company, 19 are sites which the Company
has come to own over time. All of the NPL sites owned by the Company were
initially sited by others as land disposal facilities. At each of the 19 owned
facilities, the Company is working in conjunction with the government to
characterize or to remediate identified site problems. In addition, at these 19
facilities the Company has either agreed with other legally liable parties on an
arrangement for sharing the costs of remediation or is pursuing resolution of an
allocation formula. The 85 NPL sites at which claims have been made against the
Company and which are not owned by the Company are at different procedural
stages under Superfund. At some, the Company's liability is well defined as a
consequence of a governmental decision as to the appropriate remedy and an
agreement among liable parties as to the share each will pay for implementing
that remedy. At others, where no remedy has been selected or the liable parties
have been unable
23
to agree on an appropriate allocation, the Company's future costs are
substantially uncertain.
The Company periodically reviews its role, if any, with respect to
each such location, giving consideration to the nature of the Company's alleged
connection to the location (e.g., owner, operator, transporter or generator),
the extent of the Company's alleged connection to the location (e.g., amount and
nature of waste hauled to the location, number of years of site operation by the
Company or other relevant factors), the accuracy and strength of evidence
connecting the Company to the location, the number, connection and financial
ability of other named and unnamed potentially responsible parties at the
location, and the nature and estimated cost of the likely remedy. Where the
Company concludes that it is probable that a liability has been incurred, a
provision is made in the Company's financial statements for the Company's best
estimate of the liability based on management's judgment and experience,
information available from regulatory agencies, and the number, financial
resources and relative degree of responsibility of other potentially responsible
parties who are jointly and severally liable for remediation of a specific site,
as well as the typical allocation of costs among such parties. If a range of
possible outcomes is estimated and no amount within the range appears to be a
better estimate than any other, then the Company provides for the minimum amount
within the range, in accordance with generally accepted accounting principles.
Sites subject to state action under state laws similar to the federal Superfund
statute are treated by the Company in the same way as NPL sites. The Company's
estimates are subsequently revised, as deemed necessary, as additional
information becomes available. While the Company does not anticipate that the
amount of any such revisions will have a material adverse effect on the
Company's operations or financial condition, the measurement of environmental
liabilities is inherently difficult 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. Such matters could have a material adverse impact on earnings for
one or more fiscal quarters or years.
From time to time, the Company and certain of its subsidiaries are
named as defendants in personal injury and property damage lawsuits, including
purported class actions, on the basis of a Company subsidiary's having owned,
operated or transported waste to a disposal facility which is alleged to have
contaminated the environment. Some of such lawsuits may seek to have the
Company or its subsidiaries pay the costs of groundwater monitoring and health
care examinations of allegedly affected persons for a substantial period of time
even where no actual damage is proven. While the Company believes it has
meritorious defenses to these lawsuits, their ultimate resolution is often
substantially uncertain due to the difficulty of determining the cause, extent
and impact of alleged contamination (which may have occurred over a long period
of time), the potential for successive groups of complainants to emerge, the
diversity of the individual plaintiffs' circumstances, and the potential
contribution or indemnification obligations of co-defendants or other third
parties, among other factors. Accordingly, it is possible such matters could
have a material adverse impact on the Company's earnings for one or more fiscal
quarters or years.
The Company and certain of its subsidiaries are also currently
involved in other civil litigation and governmental proceedings relating to the
conduct of their business. While the outcome of any particular lawsuit or
governmental investigation cannot be predicted with certainty, the Company
believes that these matters will not have a material adverse effect on its
results of operations or financial condition.
24
ITEM 4. Submission of Matters to Vote of Security Holders.
-------------------------------------------------
At the Company's annual meeting of stockholders on May 12, 1995, a
proposal to elect the nominees listed in the following table as directors of the
Company was submitted to a vote of the Company's stockholders. The following
table also shows the results of voting as to each nominee:
Nominee Votes For Votes Withheld
------- ----------- --------------
H. Jesse Arnelle 394,489,203 5,369,595
Jerry E. Dempsey 394,076,333 5,782,465
James B. Edwards 394,425,721 5,433,077
Alexander B. Trowbridge 394,466,304 5,392,494
At the same meeting, proposals to approve the WMX Technologies, Inc.
Corporate Incentive Bonus Plan and the WMX Technologies, Inc. Long Term
Incentive Plan were submitted to a vote of the Company's stockholders. Both
proposals were adopted by the stockholders. The voting was as follows:
Votes Broker
Votes For Against Abstentions Non-Votes
----------- ---------- ----------- ---------
Corporate Incentive 362,792,057 33,018,248 4,048,493 -0-
Bonus Plan
Long Term Incentive 371,721,299 23,962,800 4,174,699 -0-
Plan
ITEM 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
The exhibits to this report are listed in the Exhibit Index elsewhere
herein.
(b) Reports on Form 8-K.
The registrant filed no reports on Form 8-K during the quarter ended June
30, 1995.
25
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.
WMX TECHNOLOGIES, INC.
/s/ JAMES E. KOENIG
---------------------------------------
James E. Koenig - Senior Vice President
and Chief Financial Officer
August 11, 1995
26
WMX TECHNOLOGIES, INC.
EXHIBIT INDEX
Number and Description of Exhibit*
---------------------------------
2 None
4 None
10 None
11 None
12 Computation of Ratios of Earnings to Fixed Charges
15 None
18 None
19 None
22 None
23 None
24 None
27 Financial Data Schedule
99 None
- ----------------------------
* Exhibits not listed are inapplicable.
27