-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Is0qypW6RUNPbg8LQV4OgV0fuh3Z2koK10VIusMLytMlhAFG3nPyIDuHJfcOH0Pj QwKzQgyKl/iwmhQxfm6kTg== 0000950129-99-000521.txt : 19990215 0000950129-99-000521.hdr.sgml : 19990215 ACCESSION NUMBER: 0000950129-99-000521 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROWNING FERRIS INDUSTRIES INC CENTRAL INDEX KEY: 0000014827 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 741673682 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06805 FILM NUMBER: 99537641 BUSINESS ADDRESS: STREET 1: 757 N ELDRIDGE CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 7138708100 10-Q 1 BROWNING-FERRIS INDUSTRIES, INC. - DATED 12/31/98 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ____________ to ___________ Commission file number 1-6805 BROWNING-FERRIS INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 74-1673682 ------------------------------------------------- ------------------------------------------------- (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization) 757 N. Eldridge 77079 Houston, Texas ------------------------------------------------- ------------------------------------------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 870-8100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate the number of shares outstanding of the issuer's common stock, as of February 10, 1999: 158,136,495. 2 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Unaudited) (In Thousands Except for Per Share Amounts)
- --------------------------------------------------------------------------------------- Three Months Ended December 31, ---------------------------- 1998 1997 - --------------------------------------------------------------------------------------- Revenues $ 1,050,727 $ 1,344,742 Cost of operations 670,074 878,413 Selling, general and administrative expense 128,511 164,272 Depreciation and amortization expense 101,744 129,293 Special credits, net -- (2,557) ----------- ----------- Income from operations 150,398 175,321 Interest, net 29,691 35,619 Equity in earnings of unconsolidated affiliates (8,712) (10,089) ----------- ----------- Income before income taxes, minority interest and cumulative effect of change in accounting principle 129,419 149,791 Income taxes 49,998 59,916 Minority interest in income of consolidated subsidiaries 1,207 3,117 ----------- ----------- Income before cumulative effect of change in accounting principle 78,214 86,758 Cumulative effect of change in accounting principle, net of income tax benefit of $7,411 -- 13,763 ----------- ----------- Net income $ 78,214 $ 72,995 =========== ===========
(Continued on following page) 2 3 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Unaudited) (In Thousands Except for Per Share Amounts)
- -------------------------------------------------------------------------------- Three Months Ended December 31, ------------------------- 1998 1997 - -------------------------------------------------------------------------------- Earnings per share: Basic - Income before cumulative effect of change in accounting principle $ .486 $ .454 Cumulative effect of change in accounting principle -- (.072) --------- --------- Net income $ .486 $ .382 ========= ========= Diluted - Income before cumulative effect of change in accounting principle $ .483 $ .452 Cumulative effect of change in accounting principle -- (.072) --------- --------- Net income $ .483 $ .380 ========= ========= Number of common shares used in computing earnings per share: Basic 160,973 190,911 ========= ========= Diluted 161,947 192,282 ========= ========= Cash dividends per common share $ .19 $ .19 ========= =========
The accompanying notes are an integral part of these financial statements. 3 4 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS
- --------------------------------------------------------------------------- December 31, September 30, 1998 1998 (Unaudited) - --------------------------------------------------------------------------- (In Thousands) CURRENT ASSETS: Cash $ 59,888 $ 89,893 Short-term investments 2,269 5,812 Receivables - Trade, net of allowances for doubtful accounts of $25,629 and $22,072 613,469 603,331 Other 17,443 16,205 Inventories 21,339 21,035 Deferred income taxes 88,846 99,695 Prepayments and other 48,080 101,696 ----------- ----------- Total current assets 851,334 937,667 ----------- ----------- PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $2,203,115 and $2,223,913 2,817,466 2,812,221 ----------- ----------- OTHER ASSETS: Cost over fair value of net tangible assets of acquired businesses, net of accumulated amortization of $87,369 and $83,050 602,375 592,946 Other intangible assets, net of accumulated amortization of $84,867 and $81,959 74,224 70,594 Deferred income taxes 23,589 24,588 Investments in unconsolidated affiliates 514,718 512,964 Other 48,118 48,501 ----------- ----------- Total other assets 1,263,024 1,249,593 ----------- ----------- Total assets $ 4,931,824 $ 4,999,481 =========== ===========
The accompanying notes are an integral part of these financial statements. 4 5 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------- December 31, September 30, 1998 1998 (Unaudited) - ------------------------------------------------------------------------------------------------- (In Thousands Except for Share Amounts) CURRENT LIABILITIES: Notes payable and current portion of long-term debt $ 9,070 $ 9,241 Accounts payable 313,189 354,916 Accrued liabilities - Salaries and wages 53,609 83,199 Taxes, other than income 28,102 31,238 Other 313,326 332,221 Income taxes 31,854 9,076 Deferred revenues 174,217 175,615 ----------- ----------- Total current liabilities 923,367 995,506 ----------- ----------- LONG-TERM DEBT, net of current portion 1,838,544 1,792,863 ----------- ----------- OTHER LIABILITIES: Accrued environmental and landfill costs 375,201 392,853 Deferred income taxes 216,188 210,511 Other 195,456 194,290 ----------- ----------- Total other liabilities 786,845 797,654 ----------- ----------- COMMITMENTS AND CONTINGENCIES COMMON STOCKHOLDERS' EQUITY: Common stock, $.16 2/3 par; 400,000,000 shares authorized; 208,691,950 and 208,310,631 shares issued 34,789 34,725 Additional paid-in capital 1,642,603 1,631,236 Retained earnings 1,438,657 1,390,797 Accumulated other comprehensive income (loss) (21,712) (22,312) Treasury stock, 48,931,328 and 46,008,054 shares, at cost (1,711,269) (1,620,988) ----------- ----------- Total common stockholders' equity 1,383,068 1,413,458 ----------- ----------- Total liabilities and common stockholders' equity $ 4,931,824 $ 4,999,481 =========== ===========
The accompanying notes are an integral part of these financial statements. 5 6 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (In Thousands)
- ------------------------------------------------------------------------------------ Three Months Ended December 31, ------------------------- 1998 1997 - ------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 78,214 $ 72,995 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization - Property and equipment 94,019 114,022 Goodwill 4,311 10,062 Other intangible assets 3,414 5,209 Special credits, net -- (2,557) Cumulative effect of change in accounting principle -- 13,763 Deferred income tax expense 16,819 11,983 Amortization of deferred investment tax credit (177) (177) Provision for losses on accounts receivable 5,995 7,511 Gains on sales of fixed assets (2,176) (504) Equity in earnings of unconsolidated affiliates, net of dividends received 19,185 11,256 Minority interest in income of consolidated subsidiaries, net of dividends paid 962 2,297 Increase (decrease) in cash from changes in assets and liabilities excluding effects of acquisitions and divestitures - Trade receivables (16,555) (9,203) Inventories (293) (4,180) Other assets 48,466 81,433 Other liabilities (68,106) (120,479) --------- --------- Total adjustments 105,864 120,436 --------- --------- Net cash provided by operating activities 184,078 193,431 --------- ---------
(Continued on following page) 6 7 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (In Thousands)
- ----------------------------------------------------------------------------------------- Three Months Ended December 31, ------------------------- 1998 1997 - ----------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (131,579) (108,707) Payments for businesses acquired (11,100) (1,022) Proceeds from businesses divested 4,075 15,240 Investments in unconsolidated affiliates (29,009) (29,740) Proceeds from disposition of assets 14,973 9,086 Purchases of short-term investments -- (9,519) Sales of short-term investments 3,543 -- Return of investment in unconsolidated affiliates 7,338 17,672 --------- --------- Net cash used in investing activities (141,759) (106,990) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuances of common stock 3,353 16,668 Proceeds from issuances of indebtedness 49,273 664,397 Repayments of indebtedness (3,342) (61,987) Repurchases of common stock (90,668) (659,391) Dividends paid (30,941) (38,919) --------- --------- Net cash used in financing activities (72,325) (79,232) --------- --------- EFFECT OF EXCHANGE RATE CHANGES 1 (356) --------- --------- NET INCREASE (DECREASE) IN CASH (30,005) 6,853 CASH AT BEGINNING OF PERIOD 89,893 78,746 --------- --------- CASH AT END OF PERIOD $ 59,888 $ 85,599 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR: Interest, net of capitalized amounts $ 19,960 $ 26,926 Income taxes $ 13,065 $ 12,731
The accompanying notes are an integral part of these financial statements. 7 8 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Basis of Presentation - The accompanying unaudited financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary to a fair presentation of these financial statements have been included. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1998 as filed with the Securities and Exchange Commission. Certain reclassifications have been made in prior year financial statements to conform to the fiscal year 1999 presentation. (2) Earnings Per Share - The following table reconciles the number of common shares outstanding with the number of common shares used in computing basic and diluted earnings per share (in thousands): 8 9
Three Months Ended December 31, -------------------- 1998 1997 -------- -------- Common shares outstanding, end of period 159,761 195,143 Less - Shares held in the Stock and Employee Benefit Trust -- (6,545) -------- -------- Common shares outstanding for purposes of computing earnings per share, end of period 159,761 188,598 Effect of using weighted average common shares outstanding 1,212 2,313 -------- -------- Shares used in computing earnings per share - basic 160,973 190,911 Effect of shares issuable under stock option plans based on the treasury stock method 974 1,371 -------- -------- Shares used in computing earnings per share - diluted 161,947 192,282 ======== ========
Shares of common stock held in the Stock and Employee Benefit Trust (the "Trust") were not considered to be outstanding in the computation of common shares outstanding until shares were utilized at the Company's option for the purposes for which the Trust was established. All remaining shares in the Trust were fully utilized during the third quarter of fiscal 1998 and, as a result, the Trust has been terminated. Basic earnings per share amounts were computed by dividing earnings by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share amounts were computed considering the dilutive effect of stock options in the calculation. Options to purchase 3.0 million shares of common stock at prices ranging from $31.56 to $43.38 per share were outstanding during the first three months of fiscal 1999 but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. The 7.25% Automatic Common Exchange Securities had no effect on the computation for the period presented prior to their settlement in June 1998. 9 10 (3) Comprehensive Income - In June 1997, Statement of Financial Accounting Standards ("SFAS") No. 130 - "Reporting of Comprehensive Income" was issued establishing standards for reporting and presentation of comprehensive income and its components. Comprehensive income is defined as all changes in a company's net assets except changes resulting from transactions with stockholders. The Company has adopted SFAS No. 130 effective October 1, 1998. For the three months ended December 31, 1998 and 1997, the only component of other comprehensive income (loss) was foreign currency translation. (4) Sale of Operations Outside North America - On March 31, 1998, the Company sold substantially all of its operations outside North America to SITA, a Paris-based subsidiary of Suez Lyonnaise des Eaux. In exchange for these operations, the Company received $950 million in cash and an ownership interest of approximately 19.2% in ordinary shares of SITA. The Company reported an estimated gain of $17.9 million as a special credit in the second quarter of fiscal 1998. The Company's consolidated results of operations on an unaudited pro forma basis for the three-month period ended December 31, 1997, as though the sale of the operations outside North America had occurred on October 1, 1997 are as follows (in thousands, except per share amounts):
Three Months Ended December 31, 1997 ------------------ Pro forma revenues $ 1,019,471 Pro forma income before cumulative effect of change in accounting principle 81,416 Pro forma earnings per share - Basic $ .43 Diluted $ .42
These pro forma results are presented for informational purposes only and do not purport to show the actual results which would have occurred had the sale of the international operations been consummated on October 1, 1997, nor should they be viewed as indicative of future results of operations. In addition, these pro forma amounts give no effect to earnings from the Company's equity investment in SITA on a pro forma basis for the period prior to consummation of the sale of the international operations. Had any such estimated earnings from the 10 11 Company's investment in SITA been considered in the Company pro forma results of operations presented above, management believes that pro forma earnings per share amounts would reflect significantly less dilution when compared with the related historical earnings per share amounts. (5) Cumulative Effect of Change in Accounting Principle - On November 20, 1997, the Financial Accounting Standards Board's Emerging Issues Task Force issued EITF No. 97-13, a consensus ruling requiring that certain business process reengineering costs typically capitalized by companies be expensed as incurred. The ruling further required that previously capitalized costs of this nature be written off as a cumulative effect of a change in accounting principle in the quarter containing November 20, 1997. The Company had previously capitalized these types of costs in connection with its current SAP software implementation project. As a result, the Company recorded an after-tax charge of $13.8 million or $.072 per share in the first quarter of fiscal 1998 as the cumulative effect of a change in accounting principle. (6) Business Combinations - During the current fiscal year, the Company paid approximately $20.1 million (including additional amounts payable, principally to former owners, of $1.5 million and the issuance of 224,120 shares of the Company's common stock valued at $7.5 million) to acquire 20 solid waste businesses, which were accounted for as purchases. In connection with these acquisitions, the Company recorded other liabilities of $0.9 million. The results of these business combinations are not material to the Company's consolidated results of operations or financial position. During the prior fiscal year, the Company paid approximately $25.5 million (including additional amounts payable, principally to former owners, of $0.7 million and the issuance of 7,089 shares of the Company's common stock valued at $0.2 million) to acquire 30 solid waste businesses, which were accounted for as purchases. In connection with these acquisitions, the Company recorded additional interest-bearing indebtedness of $0.2 million and other liabilities of $1.5 million. The results of these business combinations were not material to the Company's consolidated results of operations or financial position. The results of all businesses acquired in fiscal years 1999 and 1998 have been included in the consolidated financial statements from the dates of acquisition. In allocating purchase price, the assets 11 12 acquired and liabilities assumed in connection with the Company's acquisitions have been initially assigned and recorded based on preliminary estimates of fair value and may be revised as additional information concerning the valuation of such assets and liabilities becomes available. As a result, the financial information included in the Company's consolidated financial statements is subject to adjustment prospectively as subsequent revisions in estimates of fair value, if any, are necessary. (7) Long-Term Debt - Long-term debt at December 31, 1998 and September 30, 1998, was as follows (in thousands):
December 31, September 30, 1998 1998 ------------ ------------- Senior indebtedness: 6.10% Senior Notes, net of unamortized discount of $928 and $986 $ 155,761 $ 155,703 6.375% Senior Notes, net of unamortized discount of $1,323 and $1,360 159,877 159,840 7 7/8% Senior Notes, net of unamortized discount of $162 and $169 69,339 69,332 7.40% Debentures, net of unamortized discount of $1,708 and $1,720 358,292 358,280 9 1/4% Debentures 99,500 99,500 Solid waste revenue bond obligations 220,062 220,044 Other notes payable 44,328 46,790 ---------- ---------- 1,107,159 1,109,489 Commercial paper and short-term facilities to be refinanced 740,455 692,615 ---------- ---------- Total long-term debt 1,847,614 1,802,104 Less current portion 9,070 9,241 ---------- ---------- Long-term debt, net of current portion $1,838,544 $1,792,863 ========== ==========
12 13 It is the Company's intention to refinance certain outstanding borrowings classified as long-term debt through the use of existing committed long-term bank credit agreements in the event that alternative long-term refinancing is not arranged. A summary of such outstanding borrowings classified as long-term debt as of December 31, 1998 and September 30, 1998 is as follows (amounts in thousands):
December 31, September 30, 1998 1998 ------------ ------------- United States - Commercial paper $ 639,284 $ 590,676 Other 101,171 101,939 --------- --------- $ 740,455 $ 692,615 ========= =========
As of December 31, 1998, distributions from retained earnings could not exceed $137 million under the most restrictive of the Company's net worth maintenance requirements. (8) Commitments and Contingencies - Legal Proceedings. The Company and certain subsidiaries are involved in various administrative matters or litigation, including personal injury and other civil actions, as well as other claims and disputes that could result in additional litigation or other adversary proceedings. While the final resolution of any matter may have an impact on the Company's consolidated financial results for a particular quarterly or annual reporting period, management believes that the ultimate disposition of these matters will not have a materially adverse effect upon the consolidated financial position of the Company. Environmental Proceedings. The Company and certain subsidiaries are involved in various environmental matters or proceedings, including original or renewal permit application proceedings in connection with the establishment, operation, expansion, closure and post-closure activities of certain landfill disposal facilities, and proceedings relating to governmental actions resulting from the involvement of various subsidiaries of the Company with certain waste sites (including Superfund sites), as well as other matters or claims that could result in additional environmental proceedings. While the final resolution of any matter may have an impact on the Company's consolidated financial results for a particular quarterly or annual reporting period, management believes that the ultimate disposition of these matters will not have a materially adverse effect upon the consolidated financial position of the Company. 13 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The following discussion and analysis of the Company's operations, financial performance and results includes statements that are not historical facts. Such statements are "forward-looking statements" (as defined in the Private Securities Litigation Reform Act of 1995) based on the Company's expectations and as such, these statements are subject to uncertainty and risk. These statements should be read in conjunction with the "Regulation", "Competition" and "Waste Disposal Risk Factors" sections of the Company's Annual Report on Form 10-K for the year ended September 30, 1998 ("the Form 10-K"), which describe many of the external factors that could cause the Company's actual results to differ materially from the Company's expectations. The Company's Form 10-K is on file with the U.S. Securities and Exchange Commission, a copy of which is available without charge upon written request to: Browning-Ferris Industries, Inc., P.O. Box 3151, Houston, Texas 77253, Attention: Assistant Corporate Secretary. RESULTS OF OPERATIONS Net income for the three months ended December 31, 1998, was $78.2 million ($.48 diluted earnings per share), on consolidated revenues of $1.051 billion. These results compare with net income before special credits and the cumulative effect of a change in accounting principle for the first three months of fiscal 1998 of $85.2 million ($.44 diluted earnings per share) on consolidated revenues of $1.345 billion. The per share increase from the comparable prior year period of $.04 represents a 9% increase in per share results. After special credits and the effect of the accounting change, net income for the first three months of fiscal 1998 was $73.0 million ($.380 per diluted share). Current year earnings per share amounts were affected favorably by the reduction in outstanding common shares under the Company's common stock repurchase initiative, offset to some extent by higher interest expense experienced as a result of these stock repurchases. The results for the first three months of fiscal 1999 were affected significantly by the sale of substantially all of the Company's operations outside of North America to SITA, a Paris-based subsidiary of Suez Lyonnaise des Eaux. The transaction was completed in March 1998. In exchange for these operations, the Company received $950 million in cash and an ownership interest of approximately 19.2% in ordinary shares of SITA. 14 15 The fiscal 1999 first quarter results reflected increased revenue growth, excluding the impact of divestitures, from the first quarter of last year despite a significant decline in recycling commodity prices between the periods. The current quarter results were also favorably affected by reduced cost of operations and selling, general and administrative ("SG&A") expense under the Company's cost reduction program, announced in May 1998. Under this program, the Company is continuing to pursue field facility and functional consolidation and other actions, which are intended to further reduce operating and SG&A expenses. The Company benefited from almost $22 million of cost savings under this program in the first quarter of fiscal 1999 as compared with the same period last year. Additional savings from changes made to employee health care benefits commenced in January 1999. These savings will affect both costs of operations and SG&A expense. The Company continues to believe that the $80 million in annualized cost reductions for fiscal 1999, targeted when the program was initiated in May 1998, is achievable. The results for the first quarter of fiscal 1999 were unfavorably affected by increased SG&A expense, including staffing, and depreciation expense associated with the implementation of the Company's new SAP software system in January 1998 and the continued support of certain existing software systems not yet replaced. When the SAP system was implemented, the Company expected to realize benefits in purchasing costs and in its accounting and administrative support areas as certain modules were installed in the field operations in fiscal 1998. The Company is incurring the higher costs of the new system, approximately $8 million in the first quarter of fiscal 1999 over the same period of last year, but is not yet realizing the expected benefits. The implementation of the second phase of the SAP system continues to be delayed as the Company focuses on the resolution of issues related to the phase already implemented, including the modification of a number of business processes. Modest benefits are expected to be realized in the last half of fiscal 1999. The Strategic Industry Development Committee of the Company's Board of Directors, together with management, have engaged a consulting firm to conduct a comprehensive review of the Company's cost structure at both corporate headquarters and throughout field operations. The review, which began in early January and is expected to be completed in the third quarter of fiscal 1999, is focused upon the following six areas: 15 16 1. SAP - determining how the Company can best achieve the benefits from the new SAP software system that justify the substantial investment of approximately $130 million. 2. Fleet management - optimizing the purchasing and maintenance practices related to the Company's trucks and other transportation equipment. 3. Sourcing - determining how best to use the Company's size to leverage its purchasing practices in other areas in addition to fleet management. 4. Business model - reviewing the Company's organizational model to determine whether it is optimal for accomplishing the Company's objectives. 5. Field operations - assisting in benchmarking more effectively, both internally and against competitors. 6. Change management - determining how the Company can execute change more effectively. Although no conclusions have been drawn and no recommendations have been made by the consulting firm, their recommendations, along with any modifications made by management and the Board of Directors, will be the foundation of the next phase of cost reduction activities at the Company. The following profitability ratios (shown as a percent of revenues) reflect certain profitability trends for the Company's operations. Also presented below are return on asset information and ratios of earnings to fixed charges. 16 17
Three Months Ended ------------------- Year Ended 12/31/98 12/31/97 9/30/98 -------- -------- ---------- Profitability margins: Income from operations before special credits 14.3% 12.8% 13.2% Income from operations 14.3% 13.0% 13.6% Income before income taxes, minority interest, extraordinary items and cumulative effects of changes in accounting principles 12.3% 11.1% 12.4% Net income before special credits, extraordinary items and cumulative effects of changes in accounting principles 7.4% 6.3% 7.1% Net income 7.4% 5.4% 7.1% Other Financial Information: Return on Gross Assets - Year-to-date basis 3.37% 3.11% 13.5% (1) Annualized basis 13.47% 12.43% 13.5% (1) Ratio of earnings to fixed charges before special credits 3.64 3.52 3.71 Ratio of earnings to fixed charges 3.64 3.58 3.81
------------ (1) Excludes severance costs of $3.1 million, after tax, incurred in the third quarter of fiscal 1998. All of the profitability margins presented above show improvement for the three months ended December 31, 1998 compared with the same period of the prior year. Profitability margins in the first three months of fiscal 1999 were affected favorably by the divestiture of the Company's international operations in March 1998. Increased landfill volumes and cost reduction efforts were also key drivers of improved margin performance. Expenses included in cost of operations and SG&A expense were reduced almost $22 million in the first quarter of fiscal 1999 compared with the same period last year due to actions taken under the Company's cost reduction program that was announced in May 1998. These cost reduction benefits were offset partially by increased expenses of approximately $8 million associated with the implementation of the Company's new SAP software system in January 1998 and the continued support of certain existing software systems not yet replaced. Profitability in the recycling business was affected negatively in the current year first quarter compared with the same period last year by lower weighted average commodity prices. The weighted average market prices for recycling commodities in North 17 18 America, principally corrugated, office paper and newspaper, declined to approximately $56 per ton in the first quarter of the current year from approximately $74 per ton in the comparable period last year. The Company's goals and actions in fiscal 1999 continue to align the Company's performance with its stockholders' interests. The fiscal 1999 milestones compared with actual performance for the first quarter of fiscal year 1999 are as follows:
Fiscal First Three Fiscal 1999 Months of 1998 Milestone Fiscal 1999 Actual --------- ----------- ------ SG&A as a percent of revenues 12.2% 12.2% 12.4% (1) Operating profit margin 14.7% 14.3% 13.3% (1)(2) Revenue growth (3) 3.5% 5.2% 2.1% Return on Gross Assets - Year-to-date basis 3.37% Annualized basis (1) 13.8% 13.47% 13.5% (1)
------------ (1) Excluding severance costs of $5.2 million ($3.1 million, after tax) incurred in the third quarter of fiscal 1998. (2) Excluding special credits, net. (3) Revenue growth from price, volume and acquisitions, excluding the effects of divestitures and foreign currency exchange; in fiscal 1999, also excludes the effects of buy/sell agreements. The results for the first quarter reflect solid progress towards achievement of the milestone goals which the Company is committed to exceeding in fiscal 1999. The Company's goals and objectives continue to emphasize growth with success measured by cash flow and return on gross assets. Return on gross assets ("ROGA"), although not a measure of financial performance under generally accepted accounting principles, is a measurement utilized by the Company which represents the quotient of operating cash flow divided by average gross assets, where operating cash flow and gross assets are defined generally as follows: 18 19 Operating cash flow - the sum of (i) net income before extraordinary items and cumulative effects of changes in accounting principles, (ii) minority interest, (iii) interest expense, net of related income tax benefit, (iv) depreciation and amortization expense and (v) asset impairment writedowns (e.g. special charges in fiscal years 1996 and 1997). Special credits have also been excluded for purposes of this computation. Gross assets - the sum of total assets, accumulated depreciation and amortization, and asset impairment writedowns (until such assets are sold or otherwise disposed of -- approximately $42 million and $33 million at December 31, 1998, and September 30, 1998, respectively) less the sum of (i) current liabilities, net of interest-bearing indebtedness included therein, (ii) noncurrent accrued environmental and landfill costs associated with the continuing operations of the Company (approximately $307 million at December 31, 1998) and (iii) deferred income tax liabilities. Gross assets in the ROGA computations for the first three months of a fiscal year is the average of the applicable beginning of year and end of first quarter amounts; gross assets for a fiscal year is the average of the applicable five quarter-end amounts in the period. Total assets decreased slightly from $5.00 billion at September 30, 1998 to $4.93 billion at December 31, 1998. Average gross assets were approximately $5.91 billion in the computation of ROGA. Gross assets at December 31, 1998 were $5.91 billion compared with $5.90 billion at September 30, 1998. EBITDA (defined herein as income from operations plus depreciation and amortization expense before considering special charges or credits) was $252 million for the first three months of fiscal 1999 as compared with $302 million for the first three months of last year. The current year decline in EBITDA is principally attributable to the Company's divestiture of its international operations in March 1998. North American EBITDA was $243 million for the first quarter of fiscal 1998. EBITDA, which is not a measure of financial performance under generally accepted accounting principles, is included in this discussion because the Company understands that such information is used by certain investors when analyzing the Company's financial condition and performance. 19 20 Due to the sale of substantially all of the Company's international operations to SITA in March 1998, supplemental information comparing operating results of the prior year first quarter for North America and the total Company with the operating results for the first quarter of fiscal 1999 is presented below.
Three Months Ended December 31, ---------------------------------------- 1997 ------------------------- North Total 1998 America Company ---------- ---------- ---------- (in thousands) Revenues $ 1,050,727 $ 1,017,680 $ 1,344,742 Cost of operations 670,074 646,599 878,413 Selling, general and administrative expense 128,511 128,232 164,272 Depreciation and amortization expense 101,744 98,975 129,293 Special credits, net -- (2,557) (2,557) ----------- ----------- ----------- Income from operations $ 150,398 $ 146,431 $ 175,321 =========== =========== ===========
Revenues - Revenues for the three months ended December 31, 1998, were $1.05 billion, a 21.9% decrease from the same period last year. The following table reflects total revenues of the Company by each of the principal lines of business (dollar amounts in thousands): 20 21
Three Months Ended ---------------------- % 12/31/98 12/31/97 Change ---------- ---------- -------- North American Operations (including Canada) - Collection Services - Solid Waste $ 714,930 $ 683,249 4.6 % Transfer and Disposal - Solid Waste Unaffiliated customers 147,779 130,383 13.3 % Affiliated companies 147,410 130,252 13.2 % ----------- ----------- 295,189 260,635 13.3 % Recycling Services 108,374 124,213 (12.8)% Medical Waste Services 50,671 49,148 3.1 % Services Group and Other 28,973 30,687 (5.6)% Elimination of affiliated companies' revenues (147,410) (130,252) 13.2 % ----------- ----------- Total North American Operations 1,050,727 1,017,680 3.2 % International Operations -- 327,062 (100.0)% ----------- ----------- Total Company $ 1,050,727 $ 1,344,742 (21.9)% =========== ===========
As the table below reflects, lower revenues for the three months ended December 31, 1998, were due principally to the decline related to the divestiture of business operations. The reduction due to the sale of the Company's international operations accounted for 94% of the decline due to divestitures.
Changes in Revenue for Three Months Ended December 31, ----------------------- 1998 1997 ---------- ---------- Price (0.4)% 0.8 % Volume 4.4 (1.2) Acquisitions 1.3 1.5 Divestitures (27.1) (8.0) Foreign currency translation (0.1) (3.2) ----- ----- Total Percentage Change (21.9)% (10.1)% ===== =====
21 22 In addition to divestitures, revenues declined due to price, driven by the decline in the weighted average market price of recycling commodities from $74 per ton in the first quarter of fiscal 1998 to $56 per ton in fiscal 1999. This decline in revenues due to price in the recycling business was offset largely by improved pricing in all other business operations of the Company. The increase in revenues due to volume resulted from increased volumes in the Company's collection and landfill business and in recycling. Increased volumes are the result of strong new business activity in a continuing strong economy and increased sales by the Company's national accounts organization, driven by increased demand by national and regional customers for a single waste services company capable of handling their needs from a centralized location. Additional growth in revenues was attributable to acquisitions consummated since the first quarter of last year. In order to achieve greater internal revenue growth, the Company named marketplace revenue managers during the second and third quarters of fiscal 1998 and redeployed 175 additional outside sales personnel in various markets, as deemed appropriate, in order to generate additional new business. The Company also has implemented more aggressive price increases in certain customer segments and marketplaces and is competitively pricing business in general business and small container government contract work to maintain route density. The Company has also continued to exercise pricing discipline on municipal contracts. Although the Company lost more of this work during fiscal 1998 than contemplated, in fiscal 1999 the Company has fewer municipal contracts to be rebid and has seen an improvement in the municipal contract pricing environment overall. Lastly, the Company continues to pursue additional third party volumes via reciprocal waste disposal agreements with other companies. Cost of Operations - Cost of operations, which excludes depreciation and amortization expense, decreased $208 million or 23.7% for the first three months of fiscal 1999, compared with the same period of the prior year. This decrease in cost of operations is attributable to the sale of the Company's international operations in March 1998 and the Company's cost reduction program implemented in May 1998. As a result of the cost reduction program, the Company has reduced its costs through facility and functional consolidations, closures of operating facilities, reduced employee benefits and, where appropriate, after careful review, a reduction in supervisory and administrative support personnel. These decreases in cost of operations were offset partially by increased costs associated with acquisitions and volume growth, principally in the core collection and transfer and disposal businesses. 22 23 Selling, General and Administrative Expense - SG&A expense, which excludes depreciation and amortization expense, decreased $36 million for the first three months of fiscal 1999, a decrease of 21.8% from the same period last year. The decrease in SG&A expense was driven largely by the impact of the sale of international operations in March 1998 and the Company's cost reduction program implemented in May 1998. This decrease was offset partially by an increase in SG&A expense due to acquisitions and volume growth and an increase of approximately $5 million related to implementation of the Company's new SAP software system and the continued support of certain existing systems not yet replaced. Depreciation and Amortization Expense - Depreciation and amortization expense decreased $28 million for the first three months of fiscal 1999, a decrease of 21.3% from the same period last year. The decrease in depreciation and amortization expense was driven principally by the impact of the sale of international operations in March 1998. Depreciation and amortization expense in North America was favorably affected in the current year as a result of the Company's concerted efforts to improve compaction at its landfills throughout North America. The Company has utilized larger compactors and employed best operating practices during the past two years, and confirmed actual improved compaction experience at its landfills during the first quarter of fiscal 1999 through review of data obtained from routine annual flyovers. The increased compaction supports lower unit of production amortization rates in the first quarter and into the future. The reduction in landfill depreciation and amortization expense was more than offset by increased depreciation and amortization expense related to implementation of the Company's new SAP software system in January 1998 and depreciation of leased equipment purchased in the fourth quarter of fiscal 1998. Net Interest Expense - Net interest expense decreased $5.9 million or 16.6% for the first three months of fiscal 1999 compared with the same period of the prior year as a result of the decrease in average debt outstanding between the periods. The decrease was driven principally by the reduction in debt as a result of the sale of the Company's international operations in March 1998. The increase in debt as a result of the Company's common stock repurchase program which commenced in the first quarter of fiscal 1998 was largely offset by 23 24 the utilization of cash proceeds of $950 million from the sale of the Company's international operations in March 1998 and cash proceeds of $409.7 million received in exchange for approximately 11.5 million shares of the Company's common stock in June 1998. Equity in Earnings of Unconsolidated Affiliates - Equity in earnings of unconsolidated affiliates decreased $1.4 million between the periods primarily due to the significantly reduced volumes at an Illinois landfill, operated by a 50%-owned affiliate of the Company, which is scheduled to close during 1999. The reduction in equity in earnings of unconsolidated foreign affiliates as a result of the sale of the Company's international operations in March 1998 was largely offset by equity in earnings of SITA of approximately $3.2 million. Minority Interest in Income of Consolidated Subsidiaries - The decrease in minority interest in income of consolidated subsidiaries for the first three months of fiscal 1999 compared with the same period of last year was due to the sale of the Company's international operations in March 1998. Cumulative Effect of Change in Accounting Principle - On November 20, 1997, the FASB's Emerging Issues Task Force issued EITF No. 97-13, a consensus ruling requiring that certain business process reengineering costs typically capitalized by companies be expensed as incurred. The ruling further required that previously capitalized costs of this nature be written off as a cumulative effect of a change in accounting principle in the quarter containing November 20, 1997. The Company had previously capitalized these types of costs in connection with its current SAP software implementation project. As a result, the Company recorded an after-tax charge of $13.8 million or $.072 per share in the first quarter of fiscal 1998 as the cumulative effect of a change in accounting principle. YEAR 2000 ISSUES Many computer software systems, as well as certain hardware and equipment utilizing date-sensitive information, were configured to use a two-digit date field, which will preclude them from properly recognizing dates in the year 2000. The inability to properly recognize date-sensitive information in the year 2000 could render systems inoperable or cause them to incorrectly process operational or 24 25 financial information. In fiscal 1995, the Company initiated a project to implement the SAP suite of business systems software (which is year 2000 compliant) to replace essentially all of the Company's existing business systems. The first phase of this project, implemented in January 1998, replaced approximately 45% of the existing business systems of the Company. Due to timing related to implementation of the second phase of this project, the Company commenced a Year 2000 Project to ensure compliance of remaining legacy systems by early 1999. To date, the Company has incurred expense of approximately $3 million in connection with the Year 2000 modifications of legacy computer systems and does not expect additional costs related to these systems to be material to its consolidated results of operations or financial position. In addition, machinery and equipment often use or are controlled or monitored by electronic devices that contain embedded microchips. Such machinery and equipment could be rendered partially or totally inoperable if embedded microchips are date-sensitive and do not properly recognize the year 2000. The Company has initiated a process to (1) identify critical supplier and customer related issues, (2) assess the year 2000 readiness of equipment located at all of its operating facilities and (3) determine what contingency plans may be required. At this time, the potential effects in the event that the Company and/or third parties are unable to resolve year 2000 problems timely are not determinable, however, the Company believes it will be able to resolve its own year 2000 issues. LIQUIDITY AND CAPITAL RESOURCES The Company had a working capital deficit of $57.8 million at September 30, 1998, compared with a deficit of $72.0 million at December 31, 1998. Over the long term, it continues to be the Company's desire to maintain substantial available commitments under bank credit agreements or other financial agreements to finance short-term capital requirements in excess of internally generated cash while minimizing working capital. During the first quarter of fiscal 1999, the Company had repurchased an additional 2.9 million shares of its common stock at a cost of approximately $91 million. As of December 31, 1998, approximately $155 million remains to be repurchased under the authorized $2.25 billion common stock repurchase program. 25 26 Long-term indebtedness including the current portion of long-term debt as a percentage of total capitalization was 57% as of December 31, 1998 and 56% at September 30, 1998. On January 15, 1999, the Company issued $250 million of Market Value Put Securities ("MVPs"). The MVPs bear interest at 6.08% and are subject to a mandatory put on January 18, 2000. First Chicago Capital Markets, Inc. holds an option to remarket the MVPs on that date for an additional two year term. Proceeds from the MVPs were used to repay a portion of the Company's commercial paper balances. The capital appropriations budget for fiscal 1999 was established at $600 million to provide for normal replacement requirements, new assets to support planned revenue growth within all consolidated businesses and corporate market development activities. This is a slight increase from the $560 million level of capital expenditures in fiscal 1998 and is reflective of the continued emphasis on internal rather than external growth. Capital expenditures through December 31, 1998 were approximately $158 million, including acquisitions. As of December 31, 1998, there have been no significant changes in balance sheet caption amounts compared with September 30, 1998, and there have been no material changes in the Company's financial condition from that reported at September 30, 1998, except as disclosed herein. 26 27 PART II. - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and certain subsidiaries are involved in various administrative matters or litigation, including original or renewal permit application proceedings in connection with the establishment, operation, expansion, closure and post-closure activities of certain landfill disposal facilities, environmental proceedings relating to governmental actions resulting from the involvement of various subsidiaries of the Company with certain waste sites (including Superfund sites), personal injury and other civil actions, as well as other claims and disputes that could result in additional litigation or other adversary proceedings. While the final resolution of any such litigation or such other matters may have an impact on the Company's consolidated financial results for a particular quarterly or annual reporting period, management believes that the ultimate disposition of such litigation or such other matters will not have a materially adverse effect upon the consolidated financial position of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 12. Computation of Ratio of Earnings to Fixed Charges of Browning-Ferris Industries, Inc. and Subsidiaries. 27. Financial Data Schedule. (b) Reports on Form 8-K: A Report on Form 8-K/A was filed on December 23, 1998 whereby the Company amended Item 7(b) "Pro Forma Financial Information" of its Form 8-K dated March 31, 1998, relating to the divestiture of the Company's operations outside North America to SITA, a Paris-based waste services company, and certain common stock repurchases pursuant to the Company's common stock buyback program. A Report on Form 8-K dated January 12, 1999 was filed pursuant to "Item 7. Financial Statements and Exhibits", whereby the Company filed certain exhibits required in connection with the Company's offering of 6.08% Market Value Put securities, which closed on January 15, 1999. 27 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BROWNING-FERRIS INDUSTRIES, INC. (Company) /s/ Bruce E. Ranck --------------------------------------------- Bruce E. Ranck President and Chief Executive Officer /s/ Jeffrey E. Curtiss --------------------------------------------- Jeffrey E. Curtiss Senior Vice President and Chief Financial Officer Date: February 12, 1999 28 29 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 12. Computation of Ratio of Earnings to Fixed Charges of Browning-Ferris Industries, Inc. and Subsidiaries. 27. Financial Data Schedule.
EX-12 2 COMPUTATION OF RATIO OF EARNINGS OF FIXED CHARGES 1 EXHIBIT 12 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges (Unaudited) (Dollar Amounts in Thousands)
Three Months Ended December 31, ------------------------ 1998 1997 --------- --------- Earnings Available for Fixed Charges: Income before minority interest and cumulative effect of change in accounting principle $ 79,421 $ 89,875 Income taxes 49,998 59,916 --------- --------- Income before income taxes, minority interest and cumulative effect of change in accounting principle 129,419 149,791 Consolidated interest expense 30,162 37,084 Interest expense related to proportionate share of 50% owned unconsolidated affiliates 8,380 8,005 Portion of rents representing the interest factor 6,986 9,198 Less-Undistributed earnings of affiliates less than 50% owned 3,278 255 --------- --------- Total $ 171,669 $ 203,823 ========= ========= Fixed Charges: Consolidated interest expense and interest costs capitalized $ 31,858 $ 39,727 Interest expense and interest costs capitalized related to proportionate share of 50% owned unconsolidated affiliates 8,380 8,005 Portion of rents representing the interest factor 6,986 9,198 --------- --------- Total $ 47,224 $ 56,930 ========= ========= Ratio of Earnings to Fixed Charges 3.64 3.58(1) ========= =========
(1) Excluding the effects of the special credits of $2.6 million, the ratio of earnings to fixed charges is 3.52. EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (IN THOUSANDS EXCEPT PER SHARE DATA) 1,000 3-MOS SEP-30-1999 DEC-31-1998 59,888 2,269 656,541 25,629 21,339 851,334 5,020,581 2,203,115 4,931,824 923,367 1,838,544 0 0 34,789 1,348,279 4,931,824 0 1,050,727 0 670,074 101,744 5,995 29,691 129,419 49,998 78,214 0 0 0 78,214 .49 .48
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