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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
___ Act of 1934 for the twelve weeks ended March 25, 1995.
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________.
Commission File #1-8513
SAFETY-KLEEN CORP.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-6090019
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1000 North Randall Road, Elgin, Illinois 60123-7857
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code 708/697-8460
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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
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Shares of common stock outstanding at March 25, 1995 were 57,754,963.
1
SAFETY-KLEEN CORP. AND SUBSIDIARIES
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PART I. FINANCIAL STATEMENTS
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The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. In the opinion of management,
these statements contain all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the financial position as of March 25,
1995 and December 31, 1994, cash flows for the twelve-week periods ended
March 25, 1995 and March 26, 1994, and the results of operations for the twelve-
week periods ended March 25, 1995 and March 26, 1994. The 1995 interim results
reported herein may not necessarily be indicative of the results of operations
for the full year 1995.
2
SAFETY-KLEEN CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS ARE IN THOUSANDS EXCEPT PER SHARE DATA)
ASSETS
Mar. 25, 1995 Dec. 31, 1994
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Current assets:
Cash and cash equivalents $ 28,136 $ 21,015
Trade accounts receivable, less allowances
of $9,516 and $8,868, respectively 103,897 102,908
Inventories 36,074 32,137
Prepaid expenses and other 38,864 35,334
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Total current assets 206,971 191,394
Equipment at customers and components, at
cost, less accumulated depreciation of
$40,458 and $38,917, respectively 106,635 96,605
Property, plant and equipment, at cost
less accumulated depreciation of $285,838
and $273,075, respectively 533,259 538,042
Intangible assets, at cost, less accumulated
amortization of $55,768 and $52,015 respectively 127,819 113,925
Other assets 73,893 76,020
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$1,048,577 $1,015,986
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Dividends payable $ 5,200 $ 0
Current portion of long-term debt 10 10
Trade accounts payable 65,269 61,629
Accrued expenses 62,665 64,960
Restructure liability 22,012 24,637
Income taxes payable 9,515 3,339
Accrued environmental liabilities 10,910 11,730
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Total current liabilities 175,581 166,305
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Long-term debt, less current portion 300,559 284,125
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Deferred income taxes 70,869 69,545
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Restructure liability 32,406 34,357
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Accrued environmental liabilities 35,868 37,954
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Other liabilities 27,310 27,364
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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) 5,775 5,775
Additional paid-in capital 184,865 184,789
Retained earnings 230,441 223,569
Cumulative translation adjustments (15,097) (17,797)
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405,984 396,336
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$1,048,577 $1,015,986
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The accompanying notes are an integral part of these balance sheets.
3
SAFETY-KLEEN CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(THOUSANDS EXCEPT PER SHARE DATA)
Twelve Weeks Ended
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Mar. 25, 1995 Mar. 26, 1994
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Revenue $194,559 $176,812
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Costs and expenses:
Operating costs and expenses 142,417 131,312
Selling and administrative expenses 27,570 26,106
Interest income (260) (128)
Interest expense 4,544 2,962
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174,271 160,252
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Earnings before income taxes 20,288 16,560
Income taxes 8,217 6,855
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Net earnings $ 12,071 $ 9,705
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Earnings per common and common
equivalent share $ 0.21 $ 0.17
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Average number of common and common
equivalent shares outstanding 57,819 57,697
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Cash dividends per common share $ 0.09 $ 0.09
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The accompanying notes are an integral part of these financial statements.
4
SAFETY-KLEEN CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS ARE IN THOUSANDS)
Twelve Weeks Ended
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Mar. 25, 1995 Mar. 26, 1994
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Net cash provided by operating activities $ 26,490 $ 16,723
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Cash flows used in investing activities:
Equipment at customers and component
additions (11,661) (8,149)
Property, plant and equipment additions (8,323) (9,745)
Business acquisitions and other (14,872) (3,232)
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Net cash used in investing activities (34,856) (21,126)
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Cash flows provided from financing activities:
Net borrowings (payments) 15,279 7,443
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Net cash provided from financing activities 15,279 7,443
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Effect of exchange rate changes on cash 208 (37)
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Net increase in cash and cash equivalents 7,121 3,003
Cash and cash equivalents at beginning of year 21,015 17,375
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Cash and cash equivalents at end of the reporting period $ 28,136 $ 20,378
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Supplemental disclosures of cash paid during
the reporting period:
Interest (net of amount capitalized) $ 5,836 $ 5,168
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Income taxes paid $ 380 $ 598
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The accompanying notes are an integral part of these financial statements.
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SAFETY-KLEEN CORP. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. INVENTORIES
The Company's inventories consist primarily of solvent, oil and supplies.
LIFO inventories at March 25, 1995 and December 31, 1994 were $5.7 and $5.0
million, respectively. Under the FIFO method of accounting (which approximates
current or replacement cost), inventories would have been $1.4 million and $1.0
million higher at March 25, 1995 and December 31, 1994, respectively.
2. PROPERTY
During the fourth interim period of 1993, the Company implemented a
restructuring plan in conjunction with its decision to convert a substantial
portion of its existing parts cleaner machine customers to new cyclonic
technology. As part of this restructuring plan, the Company wrote down assets
associated with the planned reduction of recycling capacity and shut-down of
certain facilities. As of March 25, 1995 and December 31, 1994, the net book
value of property intended for sale as a result of such planned recycling
capacity reductions, facility shut-downs and other restructuring actions was
$16.3 million and $16.4 million, respectively.
3. ACQUISITIONS
During the first interim period of 1995, the Company completed the
acquisitions of Drew Resource Corp., a photochemical processing and silver
recovery company in California, and the parts cleaner service business of
Sparkle Corp. These acquisitions were accounted for using the purchase method
and, accordingly, their operating results have been included in the Company's
Consolidated Statements of Earnings only since the respective dates of
acquisition. The acquisitions were not material either individually or in the
aggregate.
4. INTERIM REPORTING PERIODS
The Company's interim reporting periods are twelve weeks each for the first
three reporting periods of the year, and sixteen weeks for the fourth reporting
period.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
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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, 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 March 25, 1995, the Company had placed approximately 123,000 cyclonic
machines at customer locations, and there were approximately 141,000 Model 16
and 30 parts cleaners remaining in service with customers in the United States.
These 141,000 machines represent approximately 37% 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 gains in efficiencies associated
with a growing base of cyclonic service customers and a price increase that was
instituted on the red machine service in October of 1994.
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.
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FINANCIAL CONDITION
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The Company's working capital increased from $25.1 million at December 31,
1994 to $31.4 million at March 25, 1995. The Company incurred year-to-date cash
expenditures of $20.0 million in capital spending, excluding business
acquisitions, for equipment at customers and property acquisitions and
improvements. These expenditures were financed by internally generated cash and
additional bank borrowings. The Company's long term debt increased by $16.4
million during the first twelve weeks of 1995.
In the first interim period of 1995, 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 notes were used to repay existing bank
borrowings.
The Company's long term debt to total capital ratio was 43% and 42% at
March 25, 1995 and December 31, 1994, respectively. The Company does not expect
its long-term debt to total capital ratio to change significantly during the
balance of 1995.
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RESULTS OF OPERATION
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COMPARISON OF THE TWELVE WEEK PERIODS ENDED
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MARCH 25, 1995 AND MARCH 26, 1994
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REVENUE
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Revenue for the twelve weeks ended March 25, 1995 was $195 million, up
$17.7 million, or 10%, from the comparable period last year.
Revenue derived from the Company's North American and European operations
during the twelve weeks ended March 25, 1995 and March 26, 1994 was as follows:
Thousands of Dollars
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Percentage
Increase
March 25, 1995 March 26, 1994 (Decrease)
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North America
Automotive/Retail Repair Services $ 56,028 $ 55,577 0.8%
Industrial Services 54,429 49,375 10.2%
Oil Recovery Services 26,978 24,543 9.9%
Other Services 34,530 28,414 21.5%
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Total North America 171,965 157,909 8.9%
Europe 22,594 18,903 19.5%
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Consolidated $194,559 $176,812 10.0%
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NORTH AMERICAN AUTOMOTIVE/RETAIL REPAIR SERVICES. Most of the revenue
increase in the Company's North American Automotive/Retail Repair Services is
due to an increase in the average service charge. A 3% decline in parts cleaner
service volume caused primarily by a lengthening of the average service interval
partially offset the favorable impact of the higher average service charges.
Parts washer machines in service at customers on March 25, 1995 increased by
nearly 18,000 machines, or 4%, from the machines in service at March 26, 1994.
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NORTH AMERICAN INDUSTRIAL SERVICES. The Company's North American
Industrial Services revenue for the current reporting period includes
approximately $27.5 million from the Fluid Recovery Service, which represents a
20% increase over the comparable period of 1994. Virtually all of this revenue
increase is due to the higher number of drums collected by the Company during
the current interim period. This increased volume was partially offset by a 2%
decline in the average revenue per drum collected, primarily due to a decline in
the average size of the drums collected.
The North American Industrial Parts Cleaner Service accounts for the
remaining $26.9 million of revenue, which represents an increase of $0.6
million, or 2%, from the comparable period of 1994. The increase in revenue
resulted from higher average service charges, as volume declined by
approximately 5% due to a lengthening of the average service interval. Machines
in service at March 25, 1995 increased by approximately 12,000 machines, or 9%,
from the machines in service at March 26, 1994.
NORTH AMERICAN OIL RECOVERY SERVICES. Revenue from North American Oil
Recovery Services was up $2.4 million, or 10%, from the comparable period of
1994. Although the volume of lube oil sold decreased by approximately 4%,
revenue from lube oil sold increased $1.3 million, or 8%, due to a 12% increase
in the average selling price of base lube oil. The remaining revenue increase
was primarily due to price increases in the antifreeze and oil collection
businesses.
NORTH AMERICAN OTHER SERVICES. Revenue from Other Services during the
current reporting period was up $6.1 million, or 22%, from the comparable period
of 1994. Revenues from the new Imaging business accounted for $4.0 million of
the increase.
EUROPE. European current period revenues of $22.6 million were up
$3.7 million or 20% from the comparable period of 1994. Foreign exchange
increased U.S. dollar European revenues by approximately 12%.
OPERATING COSTS AND EXPENSES
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Operating costs and expenses as a percentage of revenue declined from
74.3% in the first interim period of 1994 to 73.2% in the current reporting
period. This gross profit margin improvement is primarily attributable to
higher volumes of Envirosystems materials being processed through the Company's
existing infrastructure and increased pricing in selected markets.
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SELLING AND ADMINISTRATIVE EXPENSES
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Selling and administrative expenses increased 6% from $26.1 million
during the twelve weeks ended March 26, 1994 to $27.6 million during the current
period. This increase in selling and administrative expenses is primarily due
to increases in salaries and other employee-related costs.
INTEREST EXPENSE
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Interest expense increased $1.6 million to $4.5 million during the
current reporting period versus the comparable period of 1994, due primarily to
increased interest rates.
INCOME TAXES
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The Company's effective income tax rate was 40.5% for the twelve weeks
ended March 25, 1995 and 41.4% for the comparable period of 1994. The decrease
in the effective tax rate is primarily due to lower non-deductible expenses and
a change in the mix of taxable income among taxing jurisdictions.
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PART II.
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Item 1. LEGAL PROCEEDINGS
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Although the Company's goal is to fully comply with all environmental
regulations, the nature of the Company's business will likely cause it to incur
governmental fines and penalties from time to time as a consequence of its
business operations. In the majority of situations where proceedings are
commenced by governmental authorities, the matters involved relate to alleged
technical violations of permits or orders under which the Company operates, or
laws and regulations to which its operations are subject, and are often the
result of varying interpretations of the applicable requirements. Generally,
these proceedings result from routine inspections conducted by federal and state
regulatory agencies.
From time to time, the Company becomes subject to claims which allege
more than technical violations or in which the claimant seeks remedies which
involve potentially higher costs than routine technical violation claims. These
claims can be brought by either governmental authorities or private claimants.
The relief sought can involve remediation of the alleged environmental damage,
payment of damages, and in the case of claims brought by governmental
authorities, fines and penalties.
In some cases, governmental authorities may seek fines and/or
penalties from the Company which exceed $100,000 in each case. In these cases,
the governmental authorities may allege, among other things, that the Company is
responsible for releases or threatened releases of hazardous substances, that
the Company engaged in soil excavation or clean-up activities without obtaining
requisite advance approvals and/or that the Company committed certain
manifesting, storage or waste handling violations. One such proceeding against
the Company was pending or known to be contemplated by governmental authorities
at March 25, 1995. This represents a significant improvement over recent interim
reporting periods in the number of pending proceedings of this type.
The Company settled five such cases during the twelve-week period
ended March 25, 1995. In one of these cases, the United States EPA Region II
alleged the Company had violated certain portions of a water discharge permit
during 1993-94. The case was resolved for a penalty of $25,000 and performance
of a Supplemental Environmental Project that has been completed. In another
case, the Company and the State of New Jersey entered into a settlement
agreement involving alleged hazardous waste violations at the Linden Recycle
Center during 1991-95. The case was settled for $170,000. In the final three
cases, the Company resolved a dispute with the United States EPA Region V
relating to an alleged failure by certain of the Company's Minnesota facilities
to timely respond to a RCRA information request. These three cases were resolved
for a combined penalty of $150,000.
The Company's practice is to attempt to negotiate resolution of claims
against the Company and its facilities. The Company has to date been able to
resolve cases on generally satisfactory terms. The Company is, however,
prepared to contest claims or remedies which the Company believes to be
inappropriate unless and until satisfactory settlement terms can be agreed upon.
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Based on its past experience and its knowledge of pending cases, the
Company believes it is unlikely that the Company's actual liability on the 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 and 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 earnings for that period.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
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1. Press release issued April 17, 1995 regarding the Company's results
of operations for the twelve weeks ended March 25, 1995.
2. Financial Data Schedule (EDGAR filing only).
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SIGNATURES
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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 on this 5th day of May, 1995.
SAFETY-KLEEN CORP.
/s/ ROBERT W. WILLMSCHEN, JR.
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Robert W. Willmschen, Jr.
Senior Vice President Finance,
and Secretary - Chief Financial Officer
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