1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
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 no.
0-017888
SERV-TECH, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1398757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5200 CEDAR CREST BOULEVARD
HOUSTON, TEXAS 77087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 644-9974
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
----- -----
The number of shares of Common Stock issued and outstanding, par value
$0.50 per share, as of May 8, 1995 was 6,504,778.
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SERV-TECH, INC. AND SUBSIDIARIES
INDEX
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
March 31, 1995 (Unaudited) and December 31, 1994....................... 3
Consolidated Statement of Income (Unaudited)
Three Months Ended March 31, 1995 and 1994............................. 4
Consolidated Statement of Cash Flows (Unaudited)
Three Months Ended March 31, 1995 and 1994............................. 5
Notes to Consolidated Financial Statements (Unaudited)................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 11
PART III. SIGNATURES.................................................................. 12
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SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, December 31,
1995 1994
--------------- --------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 13,481,012 $ 1,851,431
Accounts receivable, net................................................... 54,596,029 37,887,180
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................................... 1,266,887 3,172,181
Inventory.................................................................. 1,464,512 1,324,568
Prepaid expenses........................................................... 1,089,208 1,636,979
Deferred income taxes...................................................... 4,322,866 3,580,581
------------ ------------
Total current assets................................................. 76,220,514 49,452,920
PROPERTY, PLANT AND EQUIPMENT, NET............................................ 29,920,739 30,594,051
INVESTMENTS IN AND ADVANCES TO AFFILIATES..................................... 1,492,247 966,277
INTANGIBLE ASSETS, NET........................................................ 15,659,432 15,943,203
OTHER ASSETS.................................................................. 1,581,752 1,358,807
------------ ------------
Total assets......................................................... $124,874,684 $ 98,315,258
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 15,758,931 $ 11,578,853
Accrued liabilities........................................................ 15,362,525 13,500,090
Billings in excess of costs and estimated earnings on
uncompleted contracts................................................... 14,648,243 1,407,013
Revolving line of credit................................................... 5,000,000 -
Other...................................................................... 1,157,412 728,865
------------ ------------
Total current liabilities............................................ 51,927,111 27,214,821
LONG-TERM DEBT, LESS CURRENT MATURITIES....................................... 15,034,944 15,025,140
DEFERRED INCOME TAXES......................................................... 4,692,398 4,649,227
MINORITY INTEREST............................................................. 1,175,817 862,429
CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; 2,000,000 shares
authorized; no shares issued and outstanding............................. - -
Common stock, par value $.50, authorized 20,000,000
shares; issued and outstanding shares of 6,504,778....................... 3,252,390 3,252,390
Additional paid-in capital................................................. 41,828,709 41,828,709
Retained earnings.......................................................... 7,131,789 5,614,467
Cumulative translation adjustment.......................................... (168,474) (131,925)
------------ ------------
Total stockholders' equity........................................... 52,044,414 50,563,641
------------ ------------
Total liabilities and stockholders' equity........................... $124,874,684 $ 98,315,258
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
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SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
for the three months ended March 31, 1995 and 1994
(unaudited)
1995 1994
----------- -----------
REVENUES.............................................................. $71,550,375 $57,052,572
COSTS OF SERVICES..................................................... 59,001,813 48,524,201
----------- -----------
Gross profit....................................................... 12,548,562 8,528,371
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......................... 9,174,720 5,617,213
----------- -----------
Operating income................................................... 3,373,842 2,911,158
OTHER INCOME (EXPENSE):
Interest expense................................................... (412,563) (361,690)
Interest income.................................................... 27,684 235,022
Other, net......................................................... 59,078 (3,979)
----------- -----------
(325,801) (130,647)
----------- -----------
MINORITY INTEREST.................................................... (313,388) (141,842)
EQUITY IN EARNINGS OF AFFILIATES..................................... (24,331) 8,539
----------- -----------
INCOME BEFORE INCOME TAXES........................................... 2,710,322 2,647,208
PROVISION FOR INCOME TAXES........................................... 1,193,000 1,138,000
----------- -----------
NET INCOME........................................................... $ 1,517,322 $ 1,509,208
=========== ===========
Earnings per share................................................... $ .23 $ .25
=========== ===========
Weighted average common shares outstanding........................... 6,718,224 6,018,392
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
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SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the three months ended March 31, 1995 and 1994
(unaudited)
1995 1994
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 1,517,322 $ 1,509,208
Adjustments:
Depreciation and amortization......................................... 1,567,420 1,223,420
Provision for losses on accounts and notes receivable................. 432,460 132,012
Deferred income taxes................................................. (699,114) (486,000)
Equity in earnings of affiliates...................................... 24,331 (8,539)
Minority interest..................................................... 313,388 141,842
Other................................................................. - 32,500
------------ ------------
3,155,807 2,544,443
Change in assets and liabilities, net of effect from acquisition
of a business:
Accounts receivable................................................... (17,109,482) (16,736,936)
Net change in billings, costs and estimated earnings on
uncompleted contracts.............................................. 15,147,882 1,082,550
Inventory............................................................. (130,768) -
Prepaid expenses...................................................... 548,230 79,880
Other assets.......................................................... (225,721) 75,764
Accounts payable...................................................... 4,154,643 5,062,491
Accrued liabilities................................................... 1,844,257 3,329,052
Other................................................................. 885,295 1,211,024
------------ ------------
Net cash provided by (used in) operating activities................. 8,270,143 (3,351,732)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................... (599,564) (620,385)
Investments in and advances to affiliates............................... (550,301) (1,561,212)
Acquisition of business, net of cash acquired........................... - (2,415,529)
Intangible assets....................................................... (7,333) (34,021)
------------ ------------
Net cash used in investing activities............................. (1,157,198) (4,631,147)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt.......................................... 10,000,000 -
Principal payments of debt.............................................. (5,481,673) (6,556)
Payments of dividends on preferred stock of a subsidiary................ - (20,002)
------------ ------------
Net cash provided by (used in) financing activities............... 4,518,327 (26,558)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................................. (1,691) -
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 11,629,581 (8,009,437)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... 1,851,431 15,144,922
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 13,481,012 $ 7,135,485
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
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SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of
Serv-Tech, Inc., and its majority-owned subsidiaries ("Company"). The unaudited
consolidated financial statements have been prepared consistent with the
accounting policies reflected in the consolidated financial statements included
in the Company's Form 10-K filed with the Securities and Exchange Commission
for the year ended December 31, 1994, and should be read in conjunction
therewith.
In management's opinion, the unaudited consolidated financial
statements include all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the Company's consolidated
financial position at March 31, 1995, and the consolidated results of its
operations and cash flows for the three months ended March 31, 1995 and 1994.
Interim results are not necessarily indicative of results for a full year.
2. FINCHAA SUGAR MILL PROJECT
During the first quarter of 1995, F. C. Schaffer & Associates
("Schaffer"), a subsidiary of the Company, secured an $83 million contract to
engineer, design, procure and construct a 4,000 metric ton cane-per-day sugar
refinery and 45,000 liter-per-day ethanol plant in Finchaa, Ethiopia. The
project, which is financed by the African Development Bank, is expected to be
completed in the latter part of 1997 followed by a twelve month training and
warranty period. In conjunction with the effectiveness of the contract, the
Company received an advance payment equal to 20% of the contract value. Cash
and cash equivalents at March 31, 1995, consisted primarily of unused proceeds
from the advanced payment. Such cash balances are available to fund the
Finchaa project only and cannot be used for working capital requirements
outside of the project. The Company has issued letters of credit to support
performance and the 20% advance payment. Such letters of credit total
approximately $24.7 million. Contractual payment amounts to Schaffer will be
supported by a revolving letter of credit to be issued by the Ethiopian
government via the African Development Bank.
In accordance with the terms of the Schaffer acquisition agreement,
former shareholders of that company will participate in the earnings of the
Finchaa project. This deferred purchase price is estimated to be in the range
of 30-35% of the project profits and will be recognized as an expense, as
earned, over the life of the project.
3. DEBT
At March 31, 1995, the Company maintained a revolving line of credit
agreement with a bank (the "Revolving Note"). The Revolving Note provides for
borrowings up to $20 million. Interest is payable monthly, at rates not
exceeding the bank's prime rate. The Revolving Note contains certain covenants
which require, among other things, that the Company maintain (1) minimum
tangible net worth, (2) minimum ratio of total liabilities
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to adjusted net worth, (3) minimum current ratio, and (4) a minimum fixed
charge coverage ratio. The Revolving Note is not collateralized and the
Company pays a commitment fee of .25% on the unused portion. At March 31,
1995, $5.0 million was outstanding under the Revolving Note. The Company is
currently in the process of negotiating a two year extension and an increase in
the line of credit to $35 million.
4. BUSINESS SEGMENTS
Summarized financial information by business segment for the three
month periods ended March 31, 1995 and 1994, is set forth below (dollars in
thousands):
Corporate
1995 Services EPC SECO & Other Consolidated
- - ---- -------- --- ---- -------- ------------
Revenues $ 47,159 $ 11,226 $ 10,805 $ 2,360 $ 71,550
Operating income 3,471 942 363 (1,402) 3,374
1994
- - ----
Revenues $ 43,180 $ 1,732 $ 11,551 $ 590 $ 57,053
Operating income 3,804 92 589 (1,574) 2,911
5. CONTINGENCIES
The Company is involved in various claims and disputes incidental to
its business. The Company believes that the disposition of all such claims and
disputes, individually or in the aggregate, should not have a material adverse
effect upon the Company's financial position, results of operations or cash
flows.
At March 31, 1995, the Company had irrevocable letters of credit
outstanding of approximately $29.5 million. The letters of credit were issued
primarily to guarantee certain of the Company's insurance programs and to
support job performance on the Finchaa Sugar Mill Project (see Note 2).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated revenues for the first quarter of 1995 were $71.6
million, an increase of $14.5 million, or 25.4%, over first quarter 1994
consolidated revenues of $57.1 million. The increase is attributable primarily
to higher levels of activity in the specialty turnaround business, Serv-Tech
Services ("Services"), and the engineering, procurement and construction
business, Serv-Tech EPC ("EPC").
The first quarter revenues of Services included $9.2 million generated
by the refractory group, Hartney Industrial Services ("Hartney"), acquired in
June 1994. Additionally, the first quarter revenues of EPC included $4.0
million attributable to the Finchaa Sugar Refinery and Ethanol Plant Project
which is in its early stages and no associated gross profits have been recorded
to date. Excluding the effect of the Finchaa Project revenue, the first
quarter gross profit percentage was 18.6%.
Consolidated selling, general and administrative expenses were $9.2
million in the first quarter of 1995, an increase of $3.6 million, or 63.3%,
over the comparable period of 1994. The increase is attributable primarily to
the acquisitions of Hartney and Chemisolv Holdings, Inc. ("Chemisolv") during
the last half of 1994, increase in goodwill amortization and expansion of the
Company's EPC business. The increase in overhead is consistent with the higher
level of activity and growth of the Company. Selling, general and
administrative expenses, as a percentage of revenues, decreased from 16.7% in
the fourth quarter of 1994 to 12.8% in the first quarter of 1995. Management
believes overhead expenses have been positively impacted by the strategic
reorganization and cost reduction program implemented for 1995.
Interest income for the first quarter of 1995 decreased $0.2 million,
or 88.2%, resulting from lower available cash balances during the quarter.
Minority interest expense increased $172,000, or 120.9%, due to
increased earnings of the Company's majority owned consolidated subsidiary, ST
Piping, Inc.
SERVICES
Services generated revenues of $47.2 million for the first quarter of
1995, an increase of $4.0 million, or 9.2%, over the first quarter of 1994.
Hartney, the refractory subsidiary acquired in June 1994, contributed $9.2
million in revenues for the 1995 period.
Operating income for the first quarter of 1995 was $3.5 million, a
decrease of $0.3 million, or 8.8%, over the same period of 1994. The higher
level of revenues and gross profit were offset by an increase in selling,
general and administrative expenses, attributable primarily to the acquisition
of Hartney during the second quarter of 1994. Selling, general and
administrative expenses, as a percentage of Services revenues, decreased from
11.1% in the fourth quarter of 1994 to 9.3% in the first quarter of 1995.
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EPC
EPC revenues increased $9.5 million to $11.2 million, resulting
primarily from the introduction of procurement and construction services in the
latter half of 1994. As previously discussed, EPC revenues included
approximately $4.0 million attributable to the Sugar Refinery and Ethanol Plant
Project in Finchaa, Ethiopia. Since the project is in the early stages, no
gross profits have been recognized.
Operating income for the first quarter of 1995 was $0.9 million, an
increase of $0.8 million. Excluding the effects of the Finchaa Project
discussed above, operating income as a percentage of revenues was 13.0% for the
first quarter of 1995 compared to 5.3% for the same period of 1994. The
increase is due to the higher level of activity which was partially offset by an
increase in overhead expenses. The increase in selling, general and
administrative expenses resulted primarily from the expansion of these services
in the latter half of 1994 and are consistent with the increased level of
activity during the first quarter of 1995.
SECO
SECO revenues totaled to $10.8 million for the first quarter of 1995,
a decrease of $0.7 million, or 6.5%, from the comparable period of 1994. In
January 1995 SECO was awarded the electrical and instrumentation installation
on Shell's Mars deepwater production platform. The project, which was to begin
during the first quarter of 1995, was delayed until the second quarter of 1995,
resulting in a decrease in revenues. Revenues for the remainder of 1995 are
expected to increase as the Mars project is completed (scheduled for the fourth
quarter of 1995).
Operating income which was $0.4 million in the first quarter of 1995
decreased $0.2 million, or 38.3%, over the first quarter of 1994. The decrease
is due primarily to increased selling, general and administrative expenses
resulting from the international expansion of these services.
OTHER
Serv-Tech Environmental ("Environmental") revenues were approximately
$2.4 million in the first quarter of 1995. In November 1994 the Company
acquired the remaining 50.0% interest in Chemisolv Holdings, Inc.
("Chemisolv"), a performance chemical company. Chemisolv contributed
approximately $1.5 million to first quarter 1995 revenues. The remaining $0.9
million in revenues was generated by Terminal Technologies, Inc., the tank
cleaning unit of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for the first quarter of 1995, excluding
acquisitions, were approximately $0.6 million. These expenditures were
primarily for the purchase and manufacture of equipment necessary to support
the Company's business activities. Capital expenditures for the remainder of
1995, excluding acquisitions, are expected to be approximately $3.4 million.
At March 31, 1995, the Company's working capital totaled approximately
$24.3 million. The Company has been able to finance its working capital
requirements primarily through its cash flows from operations and bank
borrowings. The Company maintains a $20 million revolving line of credit
with a bank. The Company is currently
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in the process of negotiating a two year extension and an increase in the
line of credit to $35.0 million, to support its growing operations. At March
31, 1995, $5.0 million was outstanding under the revolving line of credit.
These amounts are expected to be repaid during the second and third
quarters of 1995 as receivables are collected from the seasonably high point
of the Company's turnaround maintenance business. In addition, the Company has
$15 million in 8.41 percent Senior Notes Payable due June 2003. The continued
expected growth of the Company will require additional working capital needs.
As discussed above, the Company is currently negotiating an increase in its
working capital line of credit necessary to facilitate such anticipated growth.
As further discussed in Note 2 of Notes to Consolidated Financial
Statements, the Company secured an $83.0 million contract to engineer, design,
procure and construct a 4,000 metric ton cane per day sugar refinery and 45,000
liter per day ethanol facility in Finchaa, Ethiopia. The project, which is
financed by the African Development Bank, is expected to be completed in the
latter part of 1997. In the first quarter of 1995, the Company received an
advanced payment equal to 20 percent of the contract value. Cash and cash
equivalents at March 31, 1995, consisted primarily of unused proceeds from the
advanced payment. Such cash balances are available to fund the Finchaa project
only and cannot be used for other working capital requirements. The Company
has issued letters of credit to support performance and the 20 percent advance
payment. Such letters of credit total approximately $24.7 million.
Contractual payments to the Company will be supported by a revolving letter of
credit to be issued by the Ethiopian government via the African Development
Bank. The project is expected to be self funding and therefore should not
require working capital support other than that received from the project
owner.
For the three months ended March 31, 1995, net cash flows from
operations were $8.3 million resulting primarily from net income of $1.5
million, depreciation and amortization of $1.6 million, increase in accounts
payable and accrued liabilities of $6.0 million, and a $15.1 million increase
in net billings and costs on uncompleted contracts offset partially by a $17.1
million increase in accounts receivable. In addition, the Company received a
federal income tax refund of approximately $2.0 million in March 1995. The
increase in net billings and costs on uncompleted contracts resulted primarily
from the 20% advance payment received on the Finchaa, Ethiopia, Project (see
Note 2 of Notes to Consolidated Financial Statements). The increases in
accounts receivable, accounts payable and accrued liabilities were due to the
higher level of business activity during the first quarter of 1995. Net
expenditures used in investing activities were $1.2 million, consisting
primarily of $0.6 million in capital expenditures and $0.6 million in advances
to affiliates. Cash flows from financing activity totaled $4.5 million
resulting primarily from net proceeds from borrowings.
Backlog totaled $159.7 million at March 31, 1995, versus $88.1 million
at December 31, 1994. The increase in backlog is attributable primarily to the
$83 million Finchaa Project and the recently announced Shell "Mars" Project.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated April 18,
1995, with the Securities and Exchange Commission in
connection with a change in Certifying Accountants.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SERV-TECH, INC.
By David P. Tusa
- - ----------------------------------------------
David P. Tusa
Sr. Vice President,
Finance and Administration
Date May 12, 1995
- - ----------------------------------------------
By Dale W. Wilhelm
- - ----------------------------------------------
Dale W. Wilhelm
Corporate Controller
Date May 12, 1995
- - ----------------------------------------------
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