EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following table sets forth for the periods indicated (i) percentages which
certain items reflected in the financial data bear to consolidated revenue of
the Company and (ii) the percentage increase (decrease) of such items as
compared to the indicated prior period:
Relationship to Period to Period
Consolidated Increase
Revenue (Decrease)
Fiscal Year Fiscal Years
1994 1993 1992 1993-94 1992-93
---------------------------------------------------------------------------
Revenue 100% 100% 100% (0.5%) 0.1%
---------------------------------------------------
Costs and Expenses:
Operating costs
and expenses 73.3 76.1 75.0 (4.3) 1.7
Selling and
administrative
expenses 14.2 15.0 14.3 (5.5) 4.9
Restructuring and
special charges -- 28.8 -- N/A N/A
Interest income (0.1) (0.1) (0.2) (16.0) (36.2)
Interest expense 1.9 1.4 1.6 36.9 (11.6)
---------------------------------------------------
89.3 121.2 90.7 (26.7) 33.8
---------------------------------------------------
Earnings (loss) before
income taxes
and cumulative
effect of changes
in accounting
principles 10.7 (21.2) 9.3 N/A N/A
Income taxes 4.4 (8.5) 3.6 N/A N/A
---------------------------------------------------
Net earnings (loss) before
the cumulative
effect of changes
in accounting
principles 6.3% (12.7%) 5.7% N/A N/A
---------------------------------------------------
In 1987, the Company made two long-term strategic acquisitions to enter the
North American Oil Recovery Service and expand its ability to service large and
small industrial customers' fluid waste disposal needs. Subsequent to these
acquisitions, substantial capital and other infrastructure investments were made
to accommodate future anticipated growth. In 1990, the Company made the
strategic decision to develop and expand its business in Western Europe on a
direct basis. The implementation of this strategy has required investments in
the acquisition of its joint venture partners' interests in operations in
several countries, acquisition of other related businesses and accompanying
infrastructure investments.
Summary of 1992, 1993 and 1994 Financial Results.
In 1992 and 1993, the Company's net earnings before restructuring and special
charges declined 12% and 24%, respectively. However, in 1994, the Company's net
earnings increased 45% over 1993 net earnings before restructuring and special
charges largely as a result of the restructuring plan and change in accounting
estimate for remediation costs implemented at the end of 1993, which are more
fully described below.
The cost increases underlying the 1992 and 1993 earnings declines were largely
the result of strategic and infrastructure investments mentioned above. These
investments were made primarily in anticipation of future long-term growth,
which has been realized more slowly than originally anticipated. The Company
also experienced increased environmental compliance costs.
The Company's 1992 earnings were also adversely affected by costly regulatory
problems encountered at its Puerto Rico operations. Pre-tax charges totalling
approximately $11.4 million ($7.3 million after tax) were taken in 1992 to
record the estimated costs of reducing excess storage of hazardous waste fluids
to permitted levels, providing for possible environmental remediation of waste
water discharges and paying penalties related thereto. Since this time, the
Company has incurred substantially higher costs to process waste-derived fuel
collected from its Puerto Rico customers. These higher costs are due primarily
to the local third-party cement kiln outlet's inability to burn waste-derived
fuels on a sustained basis. This has resulted in additional costs to transport
waste-derived fuels in Puerto Rico to the U.S. mainland for processing.
The Company believes that lower demand for its services has been the primary
cause of flat revenues from 1992 through 1994. A number of factors have
contributed to this lower demand, including waste and cost minimization efforts
by customers, sluggish economies in North America and Europe in 1993 and slower
than expected development of the Company's European operations. In addition,
1994 revenues were impacted by the elimination of certain product and service
lines, as the result of the restructuring plan implemented in the fourth interim
period of 1993.
Cyclonic Parts Cleaner Service.
In order to address the waste minimization concerns of its customers, the
Company began converting its existing Model 16 and 30 red sink-on-a-drum parts
cleaners in the United States to a new cyclonic parts cleaner service in 1993.
The new service employs a premium non-hazardous solvent and a patented cyclonic
separation technology that continuously removes dirt particles from the solvent
during use. As a result, the solvent stays cleaner longer,
20
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extending the life of the solvent and reducing the number of annual services
required. With the new cyclonic parts cleaner service, customers need service
less frequently and generate less waste on an annual basis, which reduces the
cost of the Parts Cleaner Service to Safety-Kleen and also provides customers
with the potential to reduce their cost.
At December 31, 1994, the Company had placed approximately 103,000 cyclonic
machines at customer locations, and there were approximately 155,000 red Model
16 and 30 parts cleaners remaining in service with customers in the United
States. These 155,000 machines represent approximately 42% of the total
installed base of Company-owned parts cleaners in the United States. The
Company expects to convert a large portion of the remaining Model 16 and 30
parts cleaner machines to the cyclonic parts cleaner in 1995 and 1996.
The Company believes the new cyclonic service will reduce the turnover rate
of its existing parts cleaner base and result in faster penetration of the
market. The Company also anticipates the gross profit margin of its parts
cleaner service will improve as a result of a price increase that was
instituted on the red machine service in October 1994, and gains in
efficiencies associated with a growing base of cyclonic service customers.
In conjunction with the conversion of parts cleaners to new technology and a
comprehensive review of its operations, the Company adopted a restructuring plan
in the fourth interim period of 1993. The restructuring plan is more fully
described below in "Results of Operations" under the subheading "Restructuring
and Special Charges".
In 1994, the Company developed and test marketed a proprietary filtration
device which can be added to larger Safety-Kleen machines and a substantial
portion of customer-owned parts cleaners. The Company believes this filtration
device should provide these customers with the opportunity to receive waste
minimization and cost reduction benefits similar to the cyclonic parts cleaner
service.
OTHER TRENDS, EVENTS AND UNCERTAINTIES
While the Company can benefit from increased governmental regulation, as a
leading environmental services company, it is also the focus of regulatory
scrutiny. The Company's goal is to fully comply with all regulations and thus
avoid any fines or penalties, and the Company has committed significant human
and capital resources to the pursuit of this goal. Nonetheless, given its
extensive operations, the technical aspects of the regulations, and the
varying interpretations of the requirements from jurisdiction to jurisdiction,
the Company may incur fines and penalties as a natural consequence of its
business operations. While the Company does not anticipate that the amount of
fines and penalties will have a material adverse impact on its financial
condition, many environmental laws are written and enforced in a way in which
the potential liability can be large, and it is always possible that the
Company's actual liability in any particular case will prove to be larger than
anticipated by the Company. It is also possible that expenses incurred in any
particular reporting period for remediation costs or for fines, penalties or
judgments, could have a material impact on the Company's results of operations
for that period. The Company paid approximately $4 million, $1 million and $3
million in 1994, 1993 and 1992, respectively, for environmental fines, penalties
and forfeitures.
State and local authorities are increasingly adopting legislation and
regulations which impose stricter operating and performance standards and
increased taxes, assessments and fees upon the generators, transporters and
handlers of hazardous and non-hazardous waste. The Company may or may not be
able to pass on the costs associated with such legislation and regulations to
its customers through price increases.
EFFECTS OF PETROLEUM PRICE CHANGES
Through its Oil Recovery operations, the Company re-refines and markets
petroleum based products at prices positively correlated to crude oil prices
over the long-term. The Company's various service operations (such as its
Parts Cleaner Service) also consume petroleum based products, the cost of which
are positively correlated to crude oil prices over the long-term. Consequently,
any meaningful increase or decrease in crude oil prices will have both a
positive and negative effect on earnings. Generally, the Company's earnings are
positively affected by higher crude oil prices and are negatively affected by
lower crude oil prices. The speed at which the Company is able to raise prices
on its services and products is restricted somewhat by committed price
contracts.
LIQUIDITY AND CAPITAL RESOURCES
Capital spending in 1994, 1993 and 1992 for additions of equipment at
customers and property, excluding business acquisitions, totaled $88 million,
$96 million and $143 million, respectively. These capital expenditures were
financed primarily by cash from operations. Long-term debt decreased $5 million
and $12 million in 1994 and 1993, respectively.
The Company expects its capital expenditures for equipment at customers and
property additions for the full year 1995 will be less than $90 million. The
Company expects to be able to finance these expenditures entirely through
internally generated funds. As more fully described in Note 5 to the
Consolidated Financial Statements,
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the Company and its subsidiaries have lines of credit aggregating approximately
$340 million. As of December 31, 1994, total borrowings under these lines were
$179 million. The Company does expect to lease equipment and property to a
greater extent than it has in the recent past.
Subsequent to year-end 1994, the Company entered into a note purchase
agreement with two insurance companies, under which the Company borrowed $50
million at a fixed interest rate of 8.05% for 3 years expiring in January,
1998. Proceeds from the note were used to repay existing bank borrowings.
A portion of the Company's capital expenditures are related to compliance with
environmental laws and regulations. The Company estimates capital spending of
approximately $7 million in 1995 and $14 million in the years 1996 through 1999
in order to comply with current environmental laws and regulations in connection
with the Company's existing business.
RESULTS OF OPERATIONS
Revenues.
Total revenue derived from the Company's North American services and
European operations for each of the three fiscal years in the period ended
December 31, 1994, are presented below:
Percentage
Increase (Decrease)
(Expressed in thousands) Fiscal Years
1994 1993 1992 1993-94 1992-93
------------------------------------------------------------------------------
North America
Automotive/Retail
Repair Services $237,780 $248,700 $251,069 (4%) (1%)
Industrial Services 222,120 212,940 197,270 4% 8%
Oil Recovery
Services 117,815 113,277 114,671 4% (1%)
Other Service
Areas 128,172 141,117 150,261 (9%) (6%)
--------------------------------------------------------
Total North America 705,887 716,034 713,271 (1%) 0%
Europe 85,380 79,474 81,271 7% (2%)
--------------------------------------------------------
Consolidated $791,267 $795,508 $794,542 (1%) 0%
--------------------------------------------------------
North American Automotive/Retail Repair Services.
Lack of sales from discontinued allied products accounted for $6.4 million
of the Company's North American Automotive/Retail Repair Services 1994 revenue
decline. Most of the remaining $4.5 million revenue decline was due to a 2%
decline in parts cleaner service volume caused primarily by a lengthening of
the average time interval between services. The average service charge was
flat with 1993. The 1993 revenue decline was caused by an 8% decline in
service volumes, partially offset by service charges which were, on average, 7%
higher in 1993 than 1992. The 1993 service volume decline is primarily a
result of lengthening in the average time interval between services and fewer
parts cleaner machines in service.
North American Industrial Services.
Revenue from the Company's North American Industrial Services includes Fluid
Recovery Service revenue of $109.1 million in 1994, $96.8 million in 1993, and
$85.0 million in 1992. The 13% increase in Fluid Recovery Service revenue in
1994 was due to higher volumes. A 26% increase in the number of drums collected
was partially offset by an 8% decline in the average revenue per drum which can
be attributed to drum quantity and regional discounts offered in 1994. The 14%
revenue increase in 1993 was due almost entirely to a 12% increase in the number
of drums collected. Average revenue per drum increased by 1% in 1993.
The North American Industrial Parts Cleaner Service accounts for the remaining
revenue of $113.0 million in 1994, $116.1 million in 1993 and $112.2 million in
1992. The lower revenue experienced in 1994 was due almost entirely to the lack
of sales from discontinued allied products. The favorable impact of a 5%
increase in the average parts cleaner service charge in 1994 was offset by a 6%
decline in parts cleaner service volume. The Parts Cleaner Service volume
decline in 1994 was primarily due to a lengthening in the average time interval
between services. Increased prices accounted for most of the revenue growth in
1993. Parts cleaner service volumes declined 5% in 1993 primarily as a result of
lengthening in the average time interval between services, partially offsetting
the favorable effect of increased prices.
North American Oil Recovery Services.
The increase in revenue experienced in 1994 from the North American Oil
Recovery Services was primarily due to a 16% increase in the volume of
lubricating oil sales, which was partially offset by 7% lower average lube oil
sales prices. The 1993 revenue decline was primarily the result of lower prices
realized in 1993 for sales of lubricating oil and collection of used oil. The
negative effect of lower prices in 1993 was partially offset by a shift in sales
mix from lower value industrial fuel to higher value re-refined lubricating oil.
This shift was made possible by 12% and 50% capacity expansions at the Company's
East Chicago, Indiana re-refinery in 1993 and 1992, respectively.
North American Other Service Areas.
Revenue from Other Service Areas decreased in 1994 due primarily to the lack
of sales from discontinued allied products and the planned lower volume of
Envirosystems revenue as a result of
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the reduction of toll recycling capacity completed during the restructuring. The
revenue decline in 1993 from 1992 was due primarily to lower revenue from the
Company's Envirosystems operations caused mainly by lower volumes and product
mix.
Europe.
A strengthening of European currencies against the U.S. dollar increased
revenue by approximately $1.4 million in 1994. Exclusive of exchange rate
effects, revenues in Europe increased approximately 6% due to higher volumes and
prices throughout most of the European operations.
The European revenue decline in 1993 was attributable to weaker European
currencies, which lowered 1993 revenues by approximately $9.0 million. Exclusive
of the change in exchange rates, European revenues increased nearly 9%.
Approximately 50% of this 1993 revenue increase is attributable to the
acquisition of the Company's joint venture partner's 50% interest in the Spanish
joint venture completed in September, 1992. The remaining 1993 increase in
European revenues resulted from increased volumes and prices.
Operating Costs and Expenses.
The following table arrays the gross profit margins of the Company's North
American services and European operations for each of the three fiscal years in
the period ended December 31, 1994.
Gross Profit Margin
-----------------------------------------------------
1994 1993 1992
-----------------------------------------------------
North America
Automotive/Retail
Repair Services 35% 31% 36%
Industrial Services 33% 33% 33%
Oil Recovery Services 11% 8% 9%
Other Service Areas 19% 12% 8%
Total North America 27% 24% 25%
Europe 24% 22% 24%
Consolidated 27% 24% 25%
North American Automotive/Retail Repair Services.
The North American Automotive/Retail Repair Services gross margin improved in
1994 from 1993 primarily due to the Company's lower cost structure which
resulted from its restructuring plan and the change in accounting estimate for
remediation costs implemented in the fourth interim period of 1993. The gross
margin decline experienced in 1993 resulted primarily from expansion costs
incurred in anticipation of growth in demand for the Company's services that was
not fully realized and higher costs for environmental compliance in its branch,
distribution and recycling networks. These higher fixed expansion and
environmental compliance costs affected all of the North American Services
except for Oil Recovery Services, in varying degrees. These costs had a
particularly adverse impact on the Automotive/Retail Repair Service gross margin
because of the decline in revenue.
North American Industrial Services.
Gross margins for the Company's North American Industrial Services remained
unchanged from 1992 through 1994. The favorable benefits realized from the lower
cost structure in 1994 as a result of the restructuring plan and change in
accounting estimate were offset by lower parts cleaner service volume and lower
average revenue per drum in the Fluid Recovery Service. In 1993, the effect of
higher average prices charged on the Industrial Parts Cleaner Service was offset
by the lower volume of services performed.
North American Oil Recovery Services.
The improvement in the Oil Recovery Services 1994 gross profit margin can be
attributed to a lower cost structure in the automotive used oil collection
business resulting from the Company's restructuring plan that was implemented in
1993, and certain plant processing improvements. The Company implemented a price
increase in the Oil Collection Service in the second quarter of 1994. The 1993
decline in gross profitability of the Company's Oil Recovery Services was
primarily due to lower prices realized in 1993 for sales of lubricating oil and
the collection of used oil.
North American Other Service Areas.
The increase in the North American Other Service Areas gross profit margin
experienced in 1994 resulted primarily from the elimination of the lower margin
allied product businesses contemplated by the Company's restructuring plan. The
1993 improvement in North American Other Service Areas gross profitability is
primarily due to a $10.5 million reduction in the gross loss of the Company's
Puerto Rico Envirosystems operations. This improvement in the Puerto Rico
operations is attributable to charges associated with the 1992 regulatory
problems discussed earlier. A $2.0 million dispute settlement with the State of
Kentucky regarding hazardous waste fees and penalties for alleged violations
also reduced gross profits in 1992. A $2.2 million increase in alternative waste
fuel processing costs in the Company's U.S. Envirosystems operations adversely
affected North American Other Service Areas gross profit margin in 1993.
Europe.
The increase in Europe's 1994 gross profit margin is mainly attributable to
work force reductions, and elimination of lower
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margin businesses in connection with the Company's restructuring plan. The 1993
decline in Europe's gross profit margin was due primarily to more rapid revenue
growth in markets which have lower gross margins.
Selling and Administrative Expenses.
Selling and administrative expenses decreased 5% in 1994, primarily due to
work force reductions implemented as part of the Company's restructuring plan.
Selling and administrative expenses increased 5% in 1993, primarily due to
additional employees and employee expenses and increases in compensation and
benefits.
Restructuring and Special Charges.
During the fourth interim period of 1993, the Company adopted a restructuring
plan based on conversion of its Parts Cleaner Service to new technology and
other strategic actions to better focus the Company on its core environmental
services, reduce its cost structure and improve the value of its services to its
customers. In conjunction with the adoption of this plan, the Company recorded a
restructuring charge of $179 million ($106 million after-tax or $1.84 per
share). The pre-tax restructuring charge of $179 million included $93 million of
asset write-downs and $86 million of other restructuring charges. The after-tax
restructuring charge of $106 million included an estimated $34 million of costs
requiring cash outflows and $72 million of non-cash items. During 1994, the
Company's restructuring activities proceeded substantially in accordance with
the original plan. The Company's restructure reserves declined $25.2 million in
1994 from $84.2 million to $59.0 million. The Company incurred $20 million of
after-tax cash flows in 1994. In 1994, the Company also received a $10.8 million
refund of estimated tax payments made in 1993. The Company still expects to
incur an estimated $13 million of after tax cash flows associated with the
restructuring in 1995 and beyond.
As part of the restructuring plan, the Company provided for the write-down
of the cost of parts cleaner machines expected to be replaced with the new
cyclonic parts cleaners, as well as the cost of converting customers to the new
service.
The Company anticipated that converting a large portion of its existing parts
cleaners to the new cyclonic technology would result in less spent solvent being
collected from the Company's parts cleaner service. Accordingly, the Company
decided to convert many of its branch permitted hazardous waste storage
facilities to transfer locations, thereby eliminating the need for permits
required under the Resource Conservation and Recovery Act (RCRA) and reducing
unnecessary operating costs driven by RCRA-imposed requirements. The non-cash
restructuring charge included the write-off of the capitalized cost of the
permits at these affected facilities. The restructuring charge also included a
write-down of recycling capacity because the collection of less spent solvent
would reduce the amount of solvent recycling capacity required.
Other elements of the restructuring plan included: (i) a work force reduction
of approximately 375 jobs and payment of severance benefits; (ii) a write-down
of inventories and other assets for discontinuing certain minor business
activities, including the sale of allied products; and (iii) accrual of costs
and asset write-downs related to the curtailment or sale of certain operations.
In addition to the restructuring charge, the Company recorded a $50 million
special charge ($30 million after-tax or $.52 per share) representing a change
in estimate for remediation costs. These additional remediation costs were
estimated prior to conducting detailed individual site investigations to
ascertain the existence and extent of contamination, and were related to all
operating and previously closed sites. The Company expects the expenditures for
these remediation costs will occur over several years. Primarily as a result of
the special charge, the Company's expenses for environmental remediation
declined $11.6 million in 1994 compared to 1993. Total accrued environmental
liabilities declined from $66.5 million at the end of 1993 to $49.7 million at
the end of 1994 due to substantial remediation activities in 1994.
The Company experienced an estimated net earnings benefit of $16 million in
1994 directly attributable to cost reductions and other actions resulting from
the restructuring plan and the special charge in 1993.
Interest Income.
The $135,000 and $480,000 declines in interest income in 1994 and 1993,
respectively, are due primarily to a lower average investment balance in 1994
and lower interest rates in 1993.
Interest Expense.
Interest expense increased $4.1 million in 1994 due mainly to increased
interest rates and lower capitalized interest. Interest expense excludes $2.4,
$4.5 and $5.2 million of interest capitalized during 1994, 1993 and 1992,
respectively. Interest expense decreased $1.5 million in 1993 due to lower
rates. The impact of the interest rate swaps executed in the United States and
Germany in 1992 and 1993 and more fully explained in Note 5 to the Consolidated
Financial Statements resulted in interest expense savings of $1.8, $3.6 and $3.2
million in 1994, 1993 and 1992, respectively.
24
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Income Taxes.
The effective income tax rate was 41% in 1994, 40% in 1993 and 39% in 1992.
The increase in the effective tax rate in 1994 is primarily due to an increase
in non-deductible expenses. The increase in the effective tax rate in 1993 is
primarily due to an increase in the U.S. statutory income tax rate.
Accounting Changes.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 112
on accounting for post-employment benefits in fiscal year 1993. The effect of
adopting this accounting change was not material. The Company adopted SFAS No.
106 on accounting for post-retirement benefits and SFAS No. 109 on accounting
for income taxes in fiscal year 1992. The cumulative prior years' effect of SFAS
No. 106 reduced net earnings by $2.9 million, or five cents per share increase
in 1992. The cumulative prior years' effect of SFAS No. 109 increased net
earnings by $3.2 million, or six cents per share in 1992. The effects of
adopting SFAS Nos. 106 and 109 are more fully discussed in Notes 7 and 8 to the
Consolidated Financial Statements.
SELECTED FINANCIAL DATA
FISCAL YEAR
-------------------------------------------------------------------------------------------
1994 1993 1992(4) 1991 1990
(Expressed in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
-------------------------------------------------------------------------------------------
Revenue $ 791,267 $795,508 $ 794,542 $695,001 $588,987
Net earnings (loss) 50,094 (101,346)(1) 45,637(2) 51,551 55,198
Earnings (loss) per share 0.87 (1.76)(1) 0.79(2) 0.90 1.05(3)
Cash dividends per share 0.360 0.360 0.340 0.320 0.267(3)
BALANCE SHEET DATA
-------------------------------------------------------------------------------------------
Current assets 191,394 193,724 188,717 182,275 169,772
Current liabilities 166,305 149,415 140,988 128,156 102,720
Working capital 25,089 44,309 47,729 54,119 67,052
Total assets 1,015,986 995,378 1,006,446 903,824 718,548
Long-term debt 284,125 288,633 300,724 243,724 122,158
Shareholders' equity 396,336 362,664 492,095 463,621 429,833
(1) Includes restructuring and special charges, net of tax benefit, of $136
million ($229 million pre-tax) or $2.36 per share.
(2) Includes $300,000 ($.01 per share) increase in net earnings from the net
cumulative prior years effect of adopting Statement of Financial Accounting
Standards (SFAS) No. 106 on accounting for post-retirement benefits and SFAS
No. 109 on accounting for income taxes.
(3) Has been restated to reflect the three-for-two stock split on March 7, 1991.
(4) Fiscal year 1992 was a fifty-three week year. All other years presented were
fifty-two weeks.
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Safety-Kleen Corp.:
We have audited the accompanying consolidated balance sheets of Safety-Kleen
Corp. (a Wisconsin corporation) and Subsidiaries as of December 31, 1994 and
January 1, 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Safety-Kleen Corp. and
Subsidiaries as of December 31, 1994 and January 1, 1994, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in notes 7 and 8 to the consolidated financial statements,
effective December 29, 1991, the Company changed its methods of accounting for
post-retirement benefits other than pensions and income taxes.
Chicago, Illinois, Arthur Andersen LLP
February 9, 1995
26
CONSOLIDATED STATEMENTS OF OPERATIONS
Safety-Kleen Corp. and Subsidiaries
For The Years Ended December 31, 1994, January 1, 1994 and January 2, 1993
Fiscal Year
------------------------------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------------------
(Expressed in thousands, except per share amounts)
------------------------------------------------------------------------------------------------------------------
REVENUE $ 791,267 $ 795,508 $ 794,542
------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Operating costs and expenses 579,509 605,815 595,572
Selling and administrative expenses 112,434 119,037 113,433
Restructuring charge -- 179,000 --
Special charge for change in estimate of environmental costs -- 50,000 --
Interest income (711) (846) (1,326)
Interest expense 15,209 11,111 12,571
------------------------------------------------------------------------------------------------------------------
706,441 964,117 720,250
------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 84,826 (168,609) 74,292
INCOME TAXES 34,732 (67,263) 28,955
------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES 50,094 (101,346) 45,337
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES -- -- 300
------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ 50,094 $(101,346) $ 45,637
------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE
Earnings (loss) before cumulative effect of changes in
accounting principles $ 0.87 $ (1.76) $ 0.78
Cumulative effect of changes in accounting principles -- -- 0.01
------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE $ 0.87 $ (1.76) $ 0.79
==================================================================================================================
The accompanying notes are an integral part of these financial statements.
27
CONSOLIDATED BALANCE SHEETS
Safety-Kleen Corp. and Subsidiaries
As of December 31, 1994 and January 1, 1994
December 31, 1994 January 1, 1994
--------------------------------------------------------------------------------------------------------------------------
ASSETS (Expressed in thousands)
--------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 21,015 $ 17,375
Trade accounts receivable, less allowances of $8,868 and $8,432, respectively 102,908 98,678
Refundable taxes 6,091 19,500
Inventories 32,137 34,362
Deferred tax assets 12,429 10,527
Prepaid expenses and other 16,814 13,282
--------------------------------------------------------------------------------------------------------------------------
191,394 193,724
--------------------------------------------------------------------------------------------------------------------------
EQUIPMENT AT CUSTOMERS AND COMPONENTS, AT COST, LESS
accumulated depreciation of $38,917 and $30,922, respectively 96,605 63,026
--------------------------------------------------------------------------------------------------------------------------
PROPERTY, AT COST
Land 47,215 46,651
Buildings and improvements 236,125 223,081
Leasehold improvements 29,817 29,274
Machinery and equipment 365,676 341,994
Autos and trucks 132,284 146,190
--------------------------------------------------------------------------------------------------------------------------
811,117 787,190
Less accumulated depreciation and amortization 273,075 233,971
--------------------------------------------------------------------------------------------------------------------------
538,042 553,219
--------------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS, AT COST
Goodwill 87,484 80,913
Other 78,456 63,055
--------------------------------------------------------------------------------------------------------------------------
165,940 143,968
Less accumulated amortization 52,015 37,254
--------------------------------------------------------------------------------------------------------------------------
113,925 106,714
--------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Deferred tax assets 71,452 72,194
Other 4,568 6,501
--------------------------------------------------------------------------------------------------------------------------
76,020 78,695
--------------------------------------------------------------------------------------------------------------------------
$1,015,986 $995,378
==========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 10 $ 888
Trade accounts payable 61,629 58,417
Accrued salaries, wages and employee benefits 23,178 20,988
Other accrued expenses 28,298 18,836
Restructure liability 24,637 21,742
Insurance reserves 13,484 16,461
Accrued environmental liabilities 11,730 10,736
Income taxes payable 3,339 1,347
--------------------------------------------------------------------------------------------------------------------------
166,305 149,415
--------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT PORTION 284,125 288,633
--------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES 69,545 61,540
--------------------------------------------------------------------------------------------------------------------------
RESTRUCTURE LIABILITY 34,357 62,431
--------------------------------------------------------------------------------------------------------------------------
ACCRUED ENVIRONMENTAL LIABILITIES 37,954 55,768
--------------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES 27,364 14,927
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 9)
SHAREHOLDERS' EQUITY
Preferred stock ($.10 par value; authorized 1,000,000 shares; none issued) -- --
Common stock ($.10 par value; authorized 300,000,000 shares;
issued and outstanding 57,754,963 shares and 57,683,756 shares, respectively) 5,775 5,768
Additional paid-in capital 184,789 183,612
Retained earnings 223,569 194,261
Cumulative translation adjustments (17,797) (20,977)
--------------------------------------------------------------------------------------------------------------------------
396,336 362,664
--------------------------------------------------------------------------------------------------------------------------
$1,015,986 $995,378
==========================================================================================================================
The accompanying notes are an integral part of these financial statements.
28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Safety-Kleen Corp. and Subsidiaries
For The Years Ended December 31, 1994, January 1, 1994 and January 2, 1993
Total Common Additional Cumulative
Shareholders' Stock $.10 Paid-In Retained Translation
Equity Par Value Capital Earnings Adjustments
------------------------------------------------------------------------------------------------------------------------------------
(Expressed in thousands)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1991 $463,621 $5,695 $165,437 $290,293 $ 2,196
Net earnings 45,637 -- -- 45,637 --
Cash dividends (19,556) -- -- (19,556) --
Stock options exercised and related tax benefits 6,118 27 6,091 -- --
Stock issued for businesses acquired 11,803 45 11,758 -- --
Change in cumulative translation adjustments (15,528) -- -- -- (15,528)
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 2, 1993 492,095 5,767 183,286 316,374 (13,332)
Net earnings (loss) (101,346) -- -- (101,346) --
Cash dividends (20,767) -- -- (20,767) --
Stock options exercised and related tax benefits 327 1 326 -- --
Change in cumulative translation adjustments (7,645) -- -- -- (7,645)
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 362,664 5,768 183,612 194,261 (20,977)
Net earnings 50,094 -- -- 50,094 --
Cash dividends (20,786) -- -- (20,786) --
Stock options exercised and related tax benefits 1,184 7 1,177 -- --
Change in cumulative translation adjustments 3,180 -- -- -- 3,180
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $396,336 $5,775 $184,789 $223,569 $(17,797)
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
Safety-Kleen Corp. and Subsidiaries
For The Years Ended December 31, 1994, January 1, 1994 and January 2, 1993
Fiscal Year
-----------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------------
(Expressed in thousands)
Cash flows from operating activities:
Net earnings (loss) $ 50,094 $(101,346) $ 45,637
-----------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation of equipment at customers and property 63,112 65,808 63,714
Amortization of intangible and other assets 14,618 15,673 12,011
Provisions for doubtful accounts receivable 5,067 6,822 7,053
Change in deferred income tax assets and liabilities, net 22,247 (85,856) (5,193)
Writedown of non-current assets due to restructuring -- 88,028 --
Other (2,440) 10,332 8,812
(Increase) Decrease in assets, net of effects from business acquisitions:
Trade accounts receivable (9,072) (4,601) (3,323)
Inventories 2,472 3,800 4,009
Prepaid expenses and other (2,412) (2,205) (121)
Increase (decrease) in liabilities, net of effects from business acquisitions:
Trade accounts payable and accrued expenses 18,644 (1,312) 15,265
Restructure liability (25,179) 84,173 --
Environmental liabilities (16,820) 47,804 800
Other liabilities 5,575 9,097 743
-----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 75,812 237,563 103,770
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 125,906 136,217 149,407
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities:
Equipment at customers additions (42,623) (20,846) (15,361)
Property additions (45,349) (74,991) (128,127)
Payment for business acquisitions, net of cash acquired (1,845) (2,414) (4,928)
Other assets additions, net (7,446) (18,557) (16,594)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (97,263) (116,808) (165,010)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (payments) under line-of-credit agreements (5,404) (11,634) 40,655
Proceeds from common stock offering and stock option exercises 1,184 326 6,089
Cash paid for dividends (20,786) (20,767) (19,556)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (25,006) (32,075) 27,188
-----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 3 (524) (1,003)
-----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in cash and cash equivalents 3,640 (13,190) 10,582
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 17,375 30,565 19,983
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 21,015 $ 17,375 $ 30,565
===================================================================================================================================
Supplemental Information:
-----------------------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest (net of amount capitalized) $ 14,241 $ 10,375 $ 13,053
Income taxes (net of refunds received) $ 10,222 $ 18,603 $ 33,556
-----------------------------------------------------------------------------------------------------------------------------------
Consideration given up and liabilities assumed in
business acquisitions $ 2,261 $ 4,823 $ 30,630
===================================================================================================================================
The accompanying notes are an integral part of these financial statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Safety-Kleen Corp. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company
and its subsidiaries after elimination of all significant intercompany balances
and transactions. The Company's fiscal year ends on the Saturday closest to
December 31. Fiscal year 1992 has fifty-three weeks while fiscal years 1994
and 1993 have fifty-two weeks.
Equipment at Customers and Related Depreciation
Equipment at customers is capitalized at manufactured or purchased cost.
Depreciation is computed using the straight-line method over a period of 3 to 13
years, commencing when the units are placed in service.
Property and Related Depreciation
Land, buildings and improvements, leasehold improvements, machinery and
equipment, and autos and trucks are capitalized at cost. Items of an ordinary
repair or maintenance nature are charged directly to operating expense.
Improvement costs are capitalized and charged to operations over the shorter of
the improvement life or the related asset life. Depreciation is computed
principally using the straight-line method over the estimated useful lives as
follows: Buildings and improvements 5 to 40 years; machinery and equipment 2 to
20 years; autos and trucks 4 to 10 years; and leasehold improvements over the
shorter of the 5 to 10 years, or remaining term of the lease.
Intangible Assets and Related Amortization
Goodwill consists primarily of the cost of acquired businesses in excess of
market value of net assets acquired. Goodwill is being amortized on a
straight-line basis over forty years. Subsequent to its acquisition, the
Company continually evaluates whether later events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related business
segment's undiscounted net income over the remaining life of the goodwill in
measuring whether the goodwill is recoverable.
Other intangible assets consist primarily of costs to obtain customers,
regulatory operating permits and computer software. Amortization of other
intangible assets is computed using the straight-line method over the expected
life of the related intangible asset, which principally ranges from 3 years to
15 years.
Environmental Remediation Costs and Liabilities
The Company reviews the adequacy of its liability for environmental
remediation on a periodic basis and records adjustments to costs and
liabilities accordingly. In 1993 the Company recorded a $50 million pre-tax
charge for a change in estimate for remediation costs relating to all operating
and previously-closed sites prior to conducting detailed individual site
investigations to ascertain the existence and extent of contamination.
Earnings (Loss) Per Share
Earnings (loss) per share amounts are based on the average shares of common
stock outstanding during each year and common stock equivalents of dilutive
stock options.
Statement of Cash Flows
Short-term investments with original maturities of 90 days or less are
considered to be cash equivalents for purposes of the Consolidated Statements of
Cash Flows and Consolidated Balance Sheets. Cash flows associated with items
intended as hedges of identifiable transactions are classified in the same
categories as the cash flows of the items being hedged.
2. ACQUISITIONS
All acquisitions made during the three fiscal years ended December 31, 1994
were accounted for using the purchase method and, accordingly, their operating
results have been included in the Company's Consolidated Statements of
Operations only since the respective dates of acquisition. The acquisitions were
not material either individually or in the aggregate.
3. SEGMENT INFORMATION
The Company and its subsidiaries operate in the United States, the
Commonwealth of Puerto Rico, Canada and the seven European countries, consisting
of the United Kingdom, the Republic of Ireland, France, Belgium, Italy, Germany,
and Spain. The Company also operated in Portugal during 1992. Spain and Portugal
were operated as fifty percent owned joint ventures until September of 1992. In
September of 1992, the Spanish joint venture became a wholly-owned subsidiary of
the Company and the Company sold its interest in the Portuguese joint venture. A
summary of certain data with respect to these operations for the fiscal years
ended December 31, 1994, January 1, 1994, and January 2, 1993 is presented
below.
[LOGO FOR SAFETY KLEEN]
1994 1993 1992
-------------------------------------------------------------------
(Expressed in thousands)
-------------------------------------------------------------------
REVENUE
United States and Puerto Rico $ 648,555 $ 665,592 $ 656,266
Canada 57,332 50,442 57,003
Europe 85,380 79,474 81,273
-------------------------------------------------------------------
Consolidated $ 791,267 $ 795,508 $ 794,542
-------------------------------------------------------------------
TOTAL ASSETS
United States and Puerto Rico $ 780,770 $ 770,389 $ 785,737
Canada 72,213 76,763 70,383
Europe 163,003 148,226 150,326
-------------------------------------------------------------------
Consolidated $1,015,986 $ 995,378 $1,006,446
-------------------------------------------------------------------
NET EARNINGS(LOSS) BEFORE
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLES
United States and Puerto Rico $ 47,766 $ (84,454) $ 43,221
Canada 1,552 (4,693) 3,214
Europe 776 (12,199) (1,098)
-------------------------------------------------------------------
Consolidated $ 50,094 $(101,346) $ 45,337
-------------------------------------------------------------------
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLES
United States and Puerto Rico $ - $ - $ (1,786)
Canada - - -
Europe - - 2,086
-------------------------------------------------------------------
Consolidated $ - $ - $ 300
-------------------------------------------------------------------
NET EARNINGS (LOSS)
United States and Puerto Rico $ 47,766 $ (84,454) $ 41,435
Canada 1,552 (4,693) 3,214
Europe 776 (12,199) 988
-------------------------------------------------------------------
Consolidated $ 50,094 $(101,346) $ 45,637
-------------------------------------------------------------------
The Company operates primarily in one business segment--providing businesses
with environmentally safe and convenient solutions for managing fluid waste and
other recoverable resources.
4. INVENTORIES
The Company's inventories consist primarily of solvent, oil and supplies. LIFO
inventories at December 31, 1994 and January 1, 1994 were $5.0 million and $4.7
million, respectively. Under the FIFO method of accounting (which approximates
current or replacement cost) inventories would have been $1.0 million and $1.8
million higher, respectively.
5. FINANCIAL ARRANGEMENTS AND LONG-TERM DEBT
Long-term debt at December 31, 1994 and January 1, 1994 consisted of the
following:
December 31, January 1,
1994 1994
------------------------------------------------------------
(Expressed in thousands)
------------------------------------------------------------
9.25% Senior Notes due in 1999 $100,000 $100,000
Unsecured notes payable to banks
under financing agreements:
Revolving lines of credit 105,085 120,576
Uncommitted lines of credit 73,533 61,557
Other 5,517 7,388
------------------------------------------------------------
284,135 289,521
Less-current portion 10 888
------------------------------------------------------------
Total long-term debt $284,125 $288,633
------------------------------------------------------------
The long-term debt as of December 31, 1994 is due as follows:
In thousands
------------------------------------------------------------
1996 $ 44,752
1997 $138,496
1998 $ 732
1999 $100,015
2000 and thereafter $ 130
The $100 million of 9.25% Senior Notes ("the Notes") due September, 1999,
specify that, upon the occurrence of a credit agency rating decline below
investment grade, either in conjunction with a change in control or as a result
of other events as defined in the Notes, each holder of the Notes has the option
to require the Company to purchase all or any part of such holder's Notes at a
price equal to 100% of the principal amount plus accrued interest.
In May, 1992, the Company executed interest rate swap agreements that
effectively converted $100 million of its fixed rate borrowings into variable
rate obligations. These swap agreements expire in September, 1999. In April,
1993, the Company executed an interest rate swap agreement that converted these
$100 million variable rate obligations to a fixed rate. This agreement expires
in September, 1996. The effect of these swaps reduces the interest rate on the
Notes from 9.25% to 7.08% through September, 1996. At that time the interest
reverts to a variable rate. The variable rate is based on the U.S. Dollar London
Interbank Offered Rate (LIBOR) determined at 6-month intervals.
32
[LOGO: SAFETY-KLEEN]
In May, 1992, at the same time the Company entered into the $100 million
interest rate swap agreement, the Company entered an interest rate cap
agreement, which protects the Company from rising interest rates. The cap has a
notional amount of $100 million, and expires on September 12, 1999. The cap
effectively limits the Company's interest rate exposure to 13.92% if LIBOR
exceeds 12%. The premium paid on the cap is being amortized to interest expense
over the term of the cap.
The Company has a U.S. revolving credit agreement totalling $160 million. The
agreement provides for interest rates to be determined at the time of the
borrowing based on a choice of formulas as specified in the agreement. A
facility fee based on the Company's credit ratings is paid on the total amount
of the line of credit. At December 31, 1994, $58 million of borrowings were
outstanding at an average interest rate of 6.2%.
At December 31, 1994, the Company had uncommitted lines of credit totalling
$124 million. Borrowings under these lines were $74 million at an average
interest rate of 6.4%.
The Company has the ability to convert other bank borrowings to its
revolving credit facilities. Since the committed facilities extend beyond 1995
and the Company intends to renew these obligations, $138 million of the loans
payable to banks have been classified as long-term debt.
The Company's German subsidiary has a revolving credit agreement totalling 76
million Deutschmarks (U.S. $49 million) that extend credit until December, 1997.
The interest rate determined at the time of each borrowing is LIBOR plus 0.5%. A
commitment fee of 0.125% per annum is paid quarterly on the unused portion of
the facility. At December 31, 1994, 70 million Deutschmarks ($45 million U.S.)
of borrowings were outstanding under this agreement at an average interest rate
of 5.8% (prior to the effect of the interest rate swap described below).
In May, 1992, the Company's German subsidiary executed an interest rate swap
agreement which expires in May, 1997. The interest rate on DM 70 million (U.S.
$45 million) was swapped from rates based on 6-month DM LIBOR to rates based on
6-month U.S. Dollar LIBOR. At December 31, 1994, the effective interest rate
was 8.9%.
At December 31, 1994, the Company's other subsidiary operations have
miscellaneous line of credit agreements totaling $7 million (U.S.). At December
31, 1994, borrowings under these lines were $2 million (U.S.) at an average
interest rate of 5.7%.
All of the Company's interest rate swap agreements have been entered into
with major financial institutions which are expected to fully perform under the
terms of the agreements. The Company monitors the credit ratings of these
counterparties and considers the risk of default to be remote.
The fair value of the three interest rate swap agreements and the interest cap
agreement noted above was approximately $2.7 million less and $3.8 million
greater than the Company's carrying value at December 31, 1994 and January 1,
1994. This fair value is determined by obtaining quotes from brokers who
regularly deal in these types of financial instruments. These interest rate
swaps have resulted in a net savings of $1.8, $3.6 and $3.2 million in 1994,
1993 and 1992, respectively.
Subsequent to year-end, the Company entered into a note purchase agreement
with two insurance companies, under which the Company borrowed $50 million at a
fixed interest rate of 8.05% for 3 years expiring in February, 1998. Proceeds
from the note were used to repay existing bank borrowings.
The Company's credit agreements include provisions, among others, relative to
maintenance of minimum shareholders' equity and interest coverage ratios. At
December 31, 1994, the Company was in compliance with all such loan provisions.
6. CAPITAL STOCK
Preferred Stock
The Board of Directors has the authority to issue up to 1,000,000 shares of
preferred stock, par value $.10 per share, at such time or times, in such
series, and with such designations and features thereof as it may determine,
including rate of dividend, redemption provisions and prices, conversion
conditions and prices and voting rights. No shares of preferred stock have
been issued.
Stock Option and Employee Stock Purchase Plans
The Company has the following stock option and employee stock purchase plans:
1. The 1985 and 1993 Stock Option Plans (The "Option Plans")
2. The 1988 Non-Qualified Stock Option Plan for Outside Directors (The
"Directors Plan")
3. The Employee Stock Purchase Plan (the "ESPP")
Under the Option Plans, options to purchase up to 5,937,500 shares of the
Company's common stock may be granted to officers
33
[LOGO: SAFETY-KLEEN]
and other key employees at a price of 100% of the quoted market price at date of
grant. Options granted under the Option Plans may be either Incentive Stock
Options or Non-Qualified Stock Options. Stock appreciation rights (SARs) may be
granted in conjunction with Non-Qualified Stock Options whereby the grantee may
surrender exercisable Non-Qualified Options and receive a cash payment equal to
the difference between the option price and the market value of the common
stock on the exercise date. Incentive Options, Non-Qualified Options and SARs
become exercisable at such time or times, and are subject to such conditions, as
determined by the Compensation Committee of the Board of Directors.
Under the Directors' Plan, options to purchase up to 300,000 shares of the
Company's common stock may be granted to outside Directors at a price of 100% of
the quoted market price at the date of grant. Under the terms of the Directors'
Plan, each outside Director was granted an option to purchase 15,000 shares at
the time the plan was adopted. Any new outside Director elected or appointed
after the date the plan was adopted would also be granted an option to purchase
15,000 shares of the Company's common stock upon taking office. The Directors'
Plan also provides that a second option to purchase 15,000 shares be granted to
each outside Director on the fifth anniversary of the initial grant of options
to such Director if such Director is still serving on the Board at that time.
Options are exercisable 25% annually, on a cumulative basis, starting one year
from date of grant and terminating ten years after the grant date.
Under the ESPP, a total of 1,500,000 shares of the Company's common stock
may be purchased by employees of the Company and designated subsidiaries,
through payroll deductions, at 90% of the quoted market price for the date
preceding the date of grant. Under terms of the ESPP, no further grants to
purchase shares may be made after December 31, 1994. Therefore, 1,064,571
available option shares not granted as of December 31, 1994 have expired.
Officers of the Company, employees with less than six months of service or
employees who hold options under the 1985 Stock Option Plan are not eligible to
participate in this Plan.
A summary of the status of the Company's stock option plans for the three
fiscal years ended December 31, 1994, is presented below.
Available
for
Price Future
Shares Range Exercisable Grants
-------------------------------------------------------------------------
Outstanding Options
@ 12/28/91 2,029,823 $17.08-$32.25 990,435 2,258,665
1992 Activity:
Granted 429,080 $26.33-$28.13
Exercised (282,698) $17.08-$29.59
Cancelled (99,445) $18.58-$32.00
---------------------------------
Outstanding Options
@ 1/2/93 2,076,760 $17.08-$32.25 1,134,476 1,929,030
1993 Activity:
Authorized 2,750,000
Granted 879,101 $13.50-$24.00
Exercised (15,258) $17.33-$19.42
Cancelled (212,188) $17.33-$32.00
---------------------------------
Outstanding Options
@ 1/1/94 2,728,415 $13.50-$32.25 1,447,846 4,012,117
1994 Activity:
Expired (1,064,571)
Granted 853,408 $13.50-$15.88
Exercised (71,207) $16.65-$16.65
Cancelled (271,341) $13.50-$32.00
---------------------------------
Outstanding Options
@ 12/31/94 3,239,275 $13.50-$32.25 1,829,500 2,365,479
---------------------------------
Shareholders' Rights Plan
Pursuant to a plan adopted by the Company in December, 1988, each share of the
Company's common stock carries the right to buy one share of the Company's
common stock at a price of $73.33 per share. The rights will expire on November
21, 1998, unless earlier redeemed by the Company. The rights will become
exercisable if a person becomes an "acquiring person" by acquiring 20% of the
Company's common stock or announces a tender offer that would result in such
person owning 20% or more of the Company's common stock. If someone becomes an
acquiring person (except pursuant to certain cash tender offers for all shares),
the holder of each right (other than rights owned by the acquiring person) will
be entitled to purchase common stock of the Company having a market value of
twice the exercise price of the right. In addition, if the Company is acquired
in a merger or other business combination transaction in which the Company's
common stock is exchanged for cash or securities, or 50% or more of its
consolidated assets or earning power are sold, each holder (other than the
acquiring person) will have the right to purchase
34
[LOGO]
common stock of the acquiring company having a market value of twice the
exercise price. The rights may be redeemed by the Company, at a price of 0.67
cents per right, at any time prior to anyone becoming an acquiring person.
7. PENSION AND EMPLOYEE BENEFIT PLANS
The Company has noncontributory pension plans covering substantially all
full time employees in the United States. Domestic pension costs are funded in
compliance with ERISA requirements as employees become eligible to participate,
generally, after completing one year of service.
The Company's consolidated pension costs for fiscal years 1994, 1993 and
1992 were $5.5 million, $7.2 million, and $4.0 million, respectively. The 1993
pension costs include $2.4 million incurred in conjunction with a restructuring
plan more fully described in Management's Discussion and Analysis of Financial
Condition and Results of Operations--Restructuring and Special Charges on page
24.
The following table sets forth the domestic plans' combined funded status
at December 31, 1994, and January 1, 1994:
December 31, 1994 January 1, 1994
-------------------------------------------------------------------------------------
(Expressed in thousands)
-------------------------------------------------------------------------------------
Actuarial present value of
benefit obligation:
Vested benefits $28,027 $27,700
Nonvested benefits 3,955 4,674
-------------------------------------------------------------------------------------
Accumulated benefit obligation 31,982 32,374
Effect of projected compensation
levels 12,744 18,851
-------------------------------------------------------------------------------------
Projected benefit obligation 44,726 51,225
Plan assets at fair value 38,984 33,645
-------------------------------------------------------------------------------------
Projected benefit obligation
greater than plan assets (5,742) (17,580)
Unrecognized net loss 3,266 13,036
Unrecognized net assets to be
amortized over 16-20 years (91) (99)
Unrecognized prior service cost 355 315
-------------------------------------------------------------------------------------
Unfunded accrued pension
cost recognized in the
Consolidated Balance Sheets $(2,212) $(4,328)
-------------------------------------------------------------------------------------
The Plans' assets consist of cash, cash equivalents, equity funds, pooled
funds of real estate and common stock of the Company.
Net periodic pension cost for the Company's domestic plans in 1994, 1993 and
1992 includes the following components:
1994 1993 1992
-----------------------------------------------------------------
(Expressed in thousands)
-----------------------------------------------------------------
Service cost-benefits earned
during the year $ 4,235 $3,374 $2,499
Interest on projected
benefit obligation 3,909 3,339 2,818
Return on plan assets (334) (2,034) (2,243)
Charges due to restructuring -- 2,376 --
Net amortization and deferral (3,318) (1,007) (33)
-----------------------------------------------------------------
Net periodic pension cost $ 4,492 $6,048 $ 3,041
-----------------------------------------------------------------
Actuarial assumptions used to determine the projected benefit obligation and
the expected net periodic pension costs were:
1994 1993 1992
----------------------------------------------------------------------
Projected Benefit
Obligation Assumptions:
Discount Rates 8.5% 7.3% 8.7%
Rates of increase in
compensation levels 5.0% 5.0% 6.0%
Net Periodic Pension Cost Assumption:
Expected long-term rate of
return on assets 10.0% 10.0% 10.0%
The Company also has pension plans covering employees of its Canadian and
British subsidiaries. Those plans are funded by purchase of insurance contracts
and units in a managed fund invested in stocks, fixed income securities and real
estate. Vested benefits are fully funded. The Company's foreign subsidiaries are
not required to report under ERISA and do not otherwise determine the actuarial
value of accumulated plan benefits as disclosed above for the Company's domestic
pension plans. These plans do not have a material effect on the Company's
financial condition or results of operations.
The Safety-Kleen Corp. Savings and Investment Plan allows eligible employees
to make contributions, up to a certain limit, to the Plan on a tax-deferred
basis under Section 401(k) of the Internal Revenue Code of 1986. The Company
may, at its discretion, make matching contributions out of its profits for the
year. The Company's expense for contributions was $1.5 million in 1994, and $1.1
million in 1992. The Company did not make a matching contribution for 1993.
35
The Company offers a post-retirement medical insurance plan to its domestic
employees retiring prior to the normal retirement age of 65. Retirees are
eligible to continue this medical coverage until age 65. The plan is currently
unfunded and retirees electing this coverage are required to pay a premium for
the insurance.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
106 on accounting for employees' post-retirement benefits during the fourth
quarter of 1992 retroactive to the beginning of the year. This statement
requires the accrual of the cost of providing post-retirement health care
coverage over the active service period of the employee. Prior to 1992, these
costs were charged to operating expenses in the year paid and were immaterial.
The Company elected to immediately recognize the accumulated liability in 1992.
The following table reconciles the funded status of the plan to the accrued
post-retirement benefit cost recognized in the Consolidated Balance Sheets at
December 31, 1994 and January 1, 1994:
DECEMBER 31, 1994 January 1, 1994
--------------------------------------------------------------------------------
(Expressed in thousands)
--------------------------------------------------------------------------------
Accumulated post-retirement benefit
obligation (APBO):
Retirees, beneficiaries and dependents $ 1,505 $ 1,626
Active employees 4,494 6,345
--------------------------------------------------------------------------------
5,999 7,971
--------------------------------------------------------------------------------
Plan assets at fair value -- --
--------------------------------------------------------------------------------
APBO greater than plan assets (5,999) (7,971)
--------------------------------------------------------------------------------
Unrecognized net loss (gain) (1,399) 1,567
--------------------------------------------------------------------------------
Accrued post-retirement benefit cost $(7,398) $(6,404)
--------------------------------------------------------------------------------
APBO discount rate assumption 8.50% 7.25%
--------------------------------------------------------------------------------
Net periodic post-retirement benefit cost recognized for 1994 and 1993 are
as follows:
1994 1993
--------------------------------------------------------------------------------
(Expressed in thousands)
--------------------------------------------------------------------------------
Service costs-benefits earned
during the year $ 786 $ 735
Interest costs on APBO 498 489
Curtailment charge due to restructuring -- 581
Other (44) --
--------------------------------------------------------------------------------
Net periodic post-retirement benefit
cost $ 1,240 $ 1,805
--------------------------------------------------------------------------------
Net periodic post-retirement benefit costs for 1992 were not material.
The health care cost trend was assumed to be 11% for 1994 decreasing by 2%
per year through 1997, then to an ultimate trend of 4.5% in 1998.
If the health care cost trend rate increases one percent for all future
years, the accumulated post-retirement benefit obligation as of December 31,
1994, would have increased 17.1%. The effect of this change on the aggregate
of the service and interest cost for 1994 would be an increase of 20.5%.
The Company also adopted SFAS No. 112 on accounting for post-employment
benefits during 1993. The effect of adopting this change was not material.
8. INCOME TAXES
The components of earnings before income taxes consisted of the following
for each of the last three fiscal years:
1994 1993 1992
--------------------------------------------------------------------------------
(Expressed in thousands)
--------------------------------------------------------------------------------
Domestic $81,275 $(137,043) $73,234
Foreign 3,551 (31,566) 1,058
--------------------------------------------------------------------------------
$84,826 $(168,609) $74,292
--------------------------------------------------------------------------------
Effective at the beginning of fiscal year 1992, the Company adopted SFAS No.
109 on accounting for income taxes. This adoption resulted in an increase in
net earnings of $3.2 million or $.06 per share for the cumulative effect of
prior years' income. The effect of the adoption on income for fiscal year
1992, was not material.
36
Under SFAS No. 109, deferred tax assets and liabilities are computed based on
the difference between the financial statement and income tax bases of assets
and liabilities using the enacted tax rates. The provisions (benefits) for
income taxes include the following:
1994 1993 1992
-----------------------------------------------------------------------------
(Expressed in thousands)
-----------------------------------------------------------------------------
CURRENT
Federal $12,352 $ 878 $24,468
State 5,692 1,361 5,877
Commonwealth of Puerto Rico (883) (1,726) --
Foreign 1,365 -- 1,646
DEFERRED
Federal 6,590 (2,871) 5,364
Foreign 928 (15,841) 2,725
PREPAID
Federal 10,090 (35,926) (1,130)
State -- (8,340) --
Commonwealth of Puerto Rico - (5,657) (5,361)
Foreign (1,402) 859 (4,634)
-----------------------------------------------------------------------------
TOTAL PROVISION $34,732 $(67,263) $28,955
-----------------------------------------------------------------------------
The following table reconciles the statutory U.S. Federal income tax rate to
the Company's consolidated effective tax rate:
1994 1993 1992
-----------------------------------------------------------------------------
Statutory U.S. federal tax rate 35.0% (35.0%) 34.0%
Increase (decrease) resulting from:
Provision for state income tax, net of federal
benefit 4.4 (2.9) 5.3
Difference in foreign statutory rates (0.3) (3.3) (1.6)
Puerto Rico Commonwealth Tax and U.S. Federal tax
exemption, net -- -- (0.6)
Other 1.8 1.3 1.9
-----------------------------------------------------------------------------
Effective tax rate 40.9% (39.9%) 39.0%
-----------------------------------------------------------------------------
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities are as follows:
December 31, January 1, January 2,
1994 1994 1993
-----------------------------------------------------------------------------
(Expressed in thousands)
-----------------------------------------------------------------------------
Deferred tax assets - current
Environmental reserves $ 1,628 $ 1,628 $ 1,580
Insurance reserves 10,004 6,551 5,275
Other 797 2,348 1,555
-----------------------------------------------------------------------------
Total deferred tax assets - current 12,429 10,527 8,410
-----------------------------------------------------------------------------
Deferred tax assets - non-current
Restructuring charges not currently
deductible $ 33,465 $ 37,084 $ --
Net operating loss (NOL)carryforwards of
subsidiaries 18,679 16,233 18,845
Environmental reserves 19,382 21,113 1,613
Other 3,143 2,324 2,869
Valuation allowance (3,217) (4,560) (6,083)
-----------------------------------------------------------------------------
Total deferred tax assets non-current 71,452 72,194 17,244
-----------------------------------------------------------------------------
Total Deferred Tax Assets $ 83,881 $ 82,721 $ 25,654
-----------------------------------------------------------------------------
Deferred Tax Liabilities
Restructuring and special charges $ 12,726 $ 14,061 $ --
Depreciation (73,187) (62,338) (51,190)
Tax lease agreements (7,539) (7,682) (7,496)
Other (1,545) (5,581) (159)
-----------------------------------------------------------------------------
Total Deferred Tax Liabilities $(69,545) $ (61,540) $(58,845)
-----------------------------------------------------------------------------
The tax assets derived from Net Operating Loss carryforwards (NOLs) that
have no expiration total approximately $13.0 million or 70% of the total NOL
tax assets available to the Company. The remaining NOL tax assets of
approximately $5.6 million consist of NOL tax assets with expiration dates as
follows:
In Thousands
-----------------------------------------------------------------------------
1995 $1,303
1996 $1,219
1997 $ 790
1998 $ 548
1999 $1,288
2000 $ 403
2001 $ --
37
LOGO FOR SAFETY-KLEEN
The Company has recorded a valuation allowance of approximately $3.2 million
for unrealized NOL tax assets that may expire before the Company is able to
utilize such NOLs.
The valuation allowance account balance of $3.2 million represents
approximately 57% of the NOL tax assets that are due to expire as compared to a
valuation allowance percentage of approximately 72% of the NOLs due to expire
at the end of 1993. The valuation account balance activity is summarized in
the table below.
1994
------------------------------------------------------------
(Expressed in thousands)
------------------------------------------------------------
Balance - beginning of year $ 4,560
Increase (Decrease):
Adjust valuation balances (1,610)
Cumulative translation adjustment 267
------------------------------------------------------------
Balance - end of year $ 3,217
------------------------------------------------------------
9. SPECIAL CHARGE FOR ENVIRONMENTAL COST, OTHER ACCRUED EXPENSES AND
LIABILITIES, COMMITMENTS AND CONTINGENT LIABILITIES
The Company operates a large number of facilities for the collection and
processing of hazardous and non-hazardous wastes and is subject to extensive and
expansive regulation by Federal, state and local authorities.
In the ordinary course of conducting its business activities, the Company
becomes involved in judicial and administrative proceedings in which
governmental authorities seek remedial actions and/or fines and penalties. The
Company also has been notified by the EPA that it may be a responsible party at
several National Priority List ("NPL") sites. Generally, these proceedings by
Federal and state regulatory agencies have been resolved by negotiation and
settlement. Based on its past experience and its knowledge of pending cases, the
Company believes it is unlikely that the Company's actual liability on cases now
pending will be materially adverse to the Company's financial condition. It
should be noted, however, that many environmental laws are written in a way in
which the Company's potential liability can be large and it is always possible
that the Company's actual liability on any particular environmental claim will
prove to be larger than anticipated or accrued for by the Company. It is also
possible that expenses incurred in any particular reporting period for
remediation costs or for fines, penalties or judgments could have a material
impact on the Company's results of operations for that period.
Under various Federal, state and local regulations, the Company can be
required to conduct an environmental investigation of any of its permitted
operating or closed facilities to determine the possible existence and extent of
environmental contamination. In the event that contamination is found, the
Company may be required to perform a remedial cleanup of the site. The Company
is currently engaged in investigation and cleanup work at many of its sites.
In 1993 the Company recorded a $50 million pre-tax special charge ($30 million
after-tax or $0.52 per share) for a change in estimate for remediation costs
relating to all operating and previously-closed sites prior to conducting
detailed individual site investigations to ascertain the existence and extent of
contamination. This change results in earlier recognition of environmental
remediation costs and liabilities as compared with the Company's previous
practice which was to accrue the estimated cost of remedial cleanup work at the
time the need for such work was specifically identified based on site
investigation.
Federal environmental regulations require that the Company demonstrate
financial responsibility for sudden and non-sudden releases, as well as closure
and post-closure liabilities. One manner by which to make this demonstration is
through Environmental Impairment Liability (EIL) insurance coverage. The Company
has EIL insurance coverage which it believes complies with the Federal
regulatory requirements. However, the Company must reimburse the insurance
carrier for all losses and expenses incurred by it under the policy. The
Company's income could be adversely affected in the future if it is unable to
obtain risk-transfer EIL insurance coverage and uninsured losses were to be
incurred.
The Company leases certain of its branches, vehicles and other equipment.
These leases are accounted for as operating leases. Related rental expenses
were $21.2 million in 1994, $20.8 million in 1993 and $20.3 million in 1992.
Aggregate minimum future rentals are payable as follows:
Expressed in
Periods Millions
----------------------------------------
1995 $ 17.8
1996 14.2
1997 10.8
1998 6.3
1999 4.6
Future Years 16.0
----------------------------------------
Total $ 69.7
----------------------------------------
38
10. 1993 RESTRUCTURING CHARGE
During the fourth interim period of 1993 the Company adopted a restructuring
plan based on conversion of its core Parts Cleaner Service to new technology
and other strategic actions. In conjunction with the adoption of this plan,
the Company recorded a special charge of $179 million ($106 million after tax
or $1.84 per share) in the fourth quarter. The pre-tax restructuring charge
included $93 million of asset write-downs and $86 million of other
restructuring charges.
11. PROPERTY PLANT & EQUIPMENT HELD FOR SALE
The net book value of property intended for sale as a result of planned
recycling capacity reductions, facility shutdowns and other restructuring
action taken during the fourth interim period of 1993 was $16.4 and $16.6
million, as of December 31, 1994 and January 1, 1994, respectively.
12. INTERIM RESULTS OF OPERATIONS (UNAUDITED)
Earnings (Loss)
Revenue Gross Profit Net Earnings (Loss) Per Share
-------------------------------------------------------------------------------------------------------------------
Interim Period 1994 1993 1994 1993 1994 1993/(1)/ 1994 1993/(1)/
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
First (12 Weeks) $176,812 $181,818 $ 45,500 $ 43,051 $ 9,705 $ 8,635 $0.17 $ 0.15
Second (12 Weeks) 183,334 189,314 48,880 47,725 11,468 10,487 0.20 0.18
Third (12 Weeks) 182,149 182,047 48,644 43,391 12,212 5,809 0.21 0.10
Fourth (16 Weeks) 248,972 242,329 68,734 55,526 16,709 (126,277) 0.29 (2.19)
-------------------------------------------------------------------------------------------------------------------
Total $791,267 $795,508 $211,758 $189,693 $50,094 $(101,346) $0.87 $(1.76)
-------------------------------------------------------------------------------------------------------------------
/(1)/ During the fourth interim period the Company recorded restructuring and special environmental charges totalling $136 million
net of tax benefits ($229 million pre-tax) or $2.36 per share which is more fully described in Notes 9 and 10 to the
Consolidated Financial Statements and the Management's Discussion and Analysis of Financial Condition and Results
of Operations section of this report.
39
BOARD OF DIRECTORS
Donald W. Brinckman, Founder and Chairman
Safety-Kleen Corp.
John G. Johnson Jr., President and Chief Executive Officer,
Safety Kleen Corp.
Richard T. Farmer, Chairman and Chief Executive Officer, Cintas
Corporation (uniform manufacturer and supplier)
Russell A. Gwillim, Chairman Emeritus, Safety-Kleen Corp.
Edgar D. Jannotta, Senior Partner, William Blair & Company
(investment banking firm)
Karl G. Otzen, President, Gerhard & Company
(product development consulting firm)
Paul D. Schrage, Senior Executive Vice President,
McDonald's Corporation (restaurant franchiser and operator)
Marcia Williams, President, Williams & Vanino, Inc.
(environmental/management consulting firm.)
W. Gordon Wood, Retired Vice President, Safety-Kleen Corp.
OFFICERS
Donald W. Brinckman, Founder, Chairman and Director
John G. Johnson Jr., President, Chief Executive
Officer and Director
Hyman K. Bielsky, Senior Vice President General Counsel
Roy D. Bullinger, Senior Vice President Business
Management and Marketing
Robert J. Burian, Senior Vice President Human Resources
Michael H. Carney, Senior Vice President
Marketing Services and Customer Care
Joseph Chalhoub, Senior Vice President
Processing, Engineering and Oil Recovery
David A. Dattilo, Senior Vice President Sales and Service
Scott E. Fore, Senior Vice President
Environment, Health and Safety
F. Henry Habicht II, Senior Vice President
Strategic/Environmental Planning
William P. Kasko, Senior Vice President
Operations and Information
Robert W. Willmschen Jr., Senior Vice President
Finance and Secretary
Glenn R. Casbourne, Vice President Engineering
Clark J. Rose, Vice President Technical Services
Laurence M. Rudnick, Treasurer
Clifford J. Schulz, Controller
40
CORPORATE DATA
CORPORATE OFFICE
Safety-Kleen Corp., 1000 North Randall Road,
Elgin, IL 60123
Telephone: (708) 697-8460
AUDITORS
Arthur Andersen LLP, 33 W. Monroe Street,
Chicago, IL 60603.
REGISTRAR AND TRANSFER AGENT
First Chicago Trust Company of New York,
Post Office Box 2500, Jersey City, NJ 07303.
ANNUAL MEETING
The Annual Meeting of Shareholders of Safety-Kleen Corp.
will be held at 10:00 a.m., Friday, May 12, 1995, at
The Westin Hotel, O'Hare, 6100 River Road,
Rosemont, IL 60018.
STOCK LISTING
Safety-Kleen stock is traded on the New York Stock Exchange.
STOCK SYMBOL SK
FORM 10-K
Safety-Kleen's Annual Report to the Securities and Exchange Commission on form
10-K is available, on request, from Safety-Kleen's Corporate Secretary.
SHAREHOLDER DIVIDEND
REINVESTMENT PLAN
Safety-Kleen offers a dividend reinvestment plan for shareholders of record.
Further information may be obtained from the Company's Registrar and Transfer
Agent as follows:
First Chicago Trust Company of New York
Post Office Box 2598
Jersey City, NJ 07303
Telephone: (800) 446-2617
MARKET AND DIVIDEND
INFORMATION
Market and Dividend Information
The Company's common stock is traded on the New York Stock Exchange. The
approximate number of record holders of the Company's common stock at December
31, 1994 was 7,258.
The following table shows the range of common stock prices and cash dividends
for the calendar quarters indicated. The quotations represent the high and low
prices on the New York Stock Exchange as reported by The Wall Street Journal.
1994 1993
-------------------------------------------------------------------
Cash Cash
Prices Dividends Prices Dividends
High Low Paid High Low Paid
March 31 $18.50 $13.63 $0.09 $24.75 $20.00 $0.09
June 30 18.25 13.63 0.09 21.13 16.13 0.09
September 30 18.00 15.38 0.09 18.00 14.38 0.09
December 31 16.38 12.75 0.09 18.13 13.13 0.09
-------------------------------------------------------------------
$0.36 $0.36
-------------------------------------------------------------------
The Company has continuously paid quarterly cash dividends since March, 1979.
The Company expects to continue its policy of paying regular cash dividends,
although there is no assurance as to future dividends, as they are dependent
upon future earnings, capital requirements, financial condition of the Company
and other factors.
41