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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 and twenty-four weeks ended June 17, 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
--- ---
Shares of common stock outstanding at June 17, 1995 were 57,756,562.
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 June 17,
1995 and December 31, 1994, cash flows for the twelve and twenty-four week
periods ended June 17, 1995 and June 18, 1994, and the results of operations for
the twelve and twenty-four week periods ended June 17, 1995 and June 18, 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
June 17, 1995 Dec. 31, 1994
------------- -------------
Current assets:
Cash and cash equivalents $ 19,331 $ 21,015
Trade accounts receivable, less allowances
of $9,591 and $8,868, respectively 116,275 102,908
Inventories 34,277 32,137
Prepaid expenses and other 42,416 35,334
----------- ----------
Total current assets 212,299 191,394
----------- ----------
Equipment at customers and components, at
cost, less accumulated depreciation of
$42,766 and $38,917, respectively 112,882 96,605
Property, plant and equipment, at cost
less accumulated depreciation of
$295,027 and $273,075, respectively 531,309 538,042
Intangible assets, at cost, less accumulated
amortization of $59,732 and $52,015, respectively 127,647 113,925
Other assets 73,624 76,020
----------- ----------
$1,057,761 $1,015,986
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Dividends payable $ 5,200 $ -
Current portion of long-term debt 10 10
Trade accounts payable 62,649 61,629
Accrued expenses 68,945 64,960
Restructure liability 16,312 24,637
Income taxes payable 9,747 3,339
Accrued environmental liabilities 9,798 11,730
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Total current liabilities 172,661 166,305
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Long-term debt, less current portion 302,173 284,125
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Deferred income taxes 73,006 69,545
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Restructure liability 32,342 34,357
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Accrued environmental liabilities 34,824 37,954
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Other liabilities 27,572 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
57,756,562 and 57,754,963 shares, respectively) 5,776 5,775
Additional paid-in capital 184,813 184,789
Retained earnings 237,371 223,569
Cumulative translation adjustments (12,777) (17,797)
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415,183 396,336
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$1,057,761 $1,015,986
========== ==========
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 Twenty-four Weeks Ended
---------------------------------------------------
June 17, June 18, June 17, June 18,
1995 1994 1995 1994
-------- -------- -------- --------
Revenue $203,192 $183,334 $397,751 $360,146
-------- -------- -------- --------
Costs and expenses:
Operating costs and expenses 148,986 134,454 291,403 265,766
Selling and administrative expenses 29,323 25,866 56,893 51,972
Interest income (225) (129) (485) (257)
Interest expense 4,843 3,260 9,387 6,222
-------- -------- -------- --------
182,927 163,451 357,198 323,703
-------- -------- -------- --------
Earnings before income taxes 20,265 19,883 40,553 36,443
Income taxes 8,134 8,415 16,351 15,270
-------- -------- -------- --------
Net earnings $ 12,131 $ 11,468 $ 24,202 $ 21,173
======== ======== ======== ========
Earnings per common and common
equivalent share $ 0.21 $ 0.20 $ 0.42 $ 0.37
======== ======== ======== ========
Average number of common and common
equivalent shares outstanding 57,906 57,710 57,847 57,705
======== ======== ======== ========
Cash dividends per common share $ 0.09 $ 0.09 $ 0.18 $ 0.18
======== ======== ======== ========
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)
Twenty-Four Weeks Ended
---------------------------------
June 17, 1995 June 18, 1994
--------------- ---------------
Net cash provided by operating activities $ 41,250 $ 62,666
-------- --------
Cash flows used in investing activities:
Equipment at customers and component additions (20,557) (22,107)
Property, plant and equipment additions (17,306) (22,113)
Business acquisitions and other (16,967) (4,753)
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Net cash used in investing activities (54,830) (48,973)
-------- --------
Cash flows provided from financing
activities:
Net borrowings (payments) 16,892 (4,408)
Dividends (5,200) (5,193)
Other 25 (1,059)
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Net cash provided from (used in) financing activities 11,717 (10,660)
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Effect of exchange rate changes on cash 179 86
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Net increase (decrease) in cash and cash equivalents (1,684) 3,119
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 $ 19,331 $ 20,494
======== ========
Supplemental disclosures of cash paid during
the reporting period:
Interest (net of amount capitalized) $ 8,713 $ 6,331
======== ========
Income taxes paid (net of refunds received) $ 4,990 $ (279)
======== ========
The accompanying notes are an integral part of these financial statements.
5
SAFETY-KLEEN CORP. AND SUBSIDIARIES
-----------------------------------
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 June 17, 1995 and December 31, 1994 were $5.2 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 June 17, 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 June 17, 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
approximately $16 million.
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.
6
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 June 17, 1995, the Company had placed approximately 142,000 cyclonic
machines at customer locations, and there were approximately 122,000 Model 16
and 30 parts cleaners remaining in service with customers in the United States.
These 142,000 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 cyclonic services in May of 1995.
7
FINANCIAL CONDITION
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The Company's working capital increased from $25.1 million at December 31,
1994 to $39.6 million at June 17, 1995. The Company incurred year-to-date cash
expenditures of $37.9 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 borrowings. The Company's long-term debt increased by $18 million
during the first twenty-four 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 42% at June 17,
1995 and December 31, 1994. The Company does not expect its long-term debt to
total capital ratio to change significantly during the balance of 1995.
8
RESULTS OF OPERATION
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COMPARISON OF THE TWELVE WEEK PERIODS ENDED
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JUNE 17, 1995 AND JUNE 18, 1994
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REVENUE
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Revenue for the twelve weeks ended June 17, 1995 was $203 million, up $20
million, or 11%, from the comparable period last year.
Revenue derived from the Company's North American and European operations
during the twelve weeks ended June 17, 1995 and June 18, 1994 was as follows:
Thousands of Dollars
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Percentage
Increase
June 17, 1995 June 18, 1994 (Decrease)
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North America
Automotive/Retail Repair Services $ 55,911 $ 54,958 1.7%
Industrial Services 56,101 50,921 10.2%
Oil Recovery Services 30,993 27,507 12.7%
Other Services 37,019 30,396 21.8%
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Total North America 180,024 163,782 9.9%
Europe 23,168 19,552 18.5%
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Consolidated $203,192 $183,334 10.8%
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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 cleaner machines in service at customers on June 17, 1995 increased by
nearly 19,000 machines, or 5%, from the machines in service at June 18, 1994.
Approximately 9,000 of these machines resulted from acquisitions.
North American Industrial Services. The Company's North American
Industrial Services revenue for the current reporting period includes
approximately $28.8 million from the Fluid Recovery Service, which represents a
15% 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.
9
The North American Industrial Parts Cleaner Service accounts for the
remaining $27.3 million of revenue, which represents an increase of $1.3
million, or 5%, from the comparable period of 1994. The increase in revenue
resulted from higher average service charges, as volume declined by
approximately 1% due to a lengthening of the average service interval. Machines
in service at June 17, 1995 increased by approximately 10,000 machines, or 8%,
from the machines in service at June 18, 1994.
North American Oil Recovery Services. Revenue from North American Oil
Recovery Services was up $3.5 million, or 13%, from the comparable period of
1994. Although the volume of lube oil sold decreased by approximately 2%,
revenue from lube oil sold increased $1.6 million, or 9%, due to an 11% 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 and increased volumes of fuel oil sold.
North American Other Services. Revenue from Other Services during the
current reporting period was up $6.6 million, or 22%, from the comparable period
of 1994. Revenues from the new Imaging Services business increased $7.1
million.
Europe. European current period revenues of $23.2 million were up
$3.6 million or 18% from the comparable period of 1994. Changes in foreign
currency exchange rates accounted for $2.4 million of this increase.
OPERATING COSTS AND EXPENSES
----------------------------
Operating costs and expenses as a percentage of revenue were 73.3% in
the current reporting period, unchanged from the second interim period of 1994.
Improved profitability in the Oil Recovery business due to the improved pricing
was offset largely by start-up losses incurred in the Imaging Services business
and higher drum processing costs in the Fluid Recovery Service business.
SELLING AND ADMINISTRATIVE EXPENSES
-----------------------------------
Selling and administrative expenses increased from 14.1% of revenue in
1994 to 14.4% of revenue in 1995.
INTEREST EXPENSE
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Interest expense increased $1.6 million to $4.8 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 40.1% for the twelve weeks
ended June 17, 1995 and 42.3% 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.
10
RESULTS OF OPERATION
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COMPARISON OF THE TWENTY-FOUR WEEK PERIODS ENDED
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JUNE 17, 1995 AND JUNE 18, 1994
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REVENUE
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Revenue for the twenty-four weeks ended June 17, 1995 was $397.7
million, up $37.6 million, or 10.4%, from the comparable period last year.
Revenue derived from the Company's North American and European
operations during the twenty-four weeks ended June 17, 1995 and June 18, 1994
was as follows:
Thousands of Dollars
--------------------
Percentage
Increase
June 17, 1995 June 18, 1994 (Decrease)
------------- ------------- ----------
North America
Automotive/Retail Repair Services $111,939 $110,535 1.3%
Industrial Services 110,530 100,296 10.2%
Oil Recovery Services 57,971 52,050 11.4%
Other Services 71,549 58,810 21.6%
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Total North America 351,989 321,691 9.4%
Europe 45,762 38,455 19.0%
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Consolidated $397,751 $360,146 10.4%
======== ========
North American Automotive/Retail Repair Services. An increase in the
average service charge accounted for most of the revenue increase in the
Company's North American Automotive/Retail Repair Services. The favorable
impact of the higher average service charge was partially offset by a 3% decline
in parts cleaner service volume caused primarily by a lengthening of the average
service interval.
North American Industrial Services. Revenue from the Company's North
American Industrial Services includes approximately $56.4 million from the Fluid
Recovery Service and $54.2 million from the Industrial Parts Cleaner Service.
Fluid Recovery Service revenue increased 17% 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.
11
Revenue from the North American Industrial Parts Cleaner Service
increased $1.9 million, or 4%, from 1994. The increase in revenue resulted from
higher average service charges, as volume declined by approximately 1% due to a
lengthening of the average service interval.
North American Oil Recovery Services. Revenue from North American Oil
Recovery Services was up $5.9 million, or 11%, from the comparable period of
1994. Although the volume of lube oil sold decreased by approximately 3%,
revenue from lube oil sold increased $2.9 million, or 8%, due to an 11% 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 and increased volumes of fuel oil sold.
North American Other Services. Revenue from Other Services during the
twenty-four weeks ended June 17, 1995 was up $12.7 million, or 22%, from the
comparable period of 1994. Revenues from the new Imaging Services business
accounted for $11.1 million of the increase.
Europe. European year-to-date revenues of $45.8 million were up $7.3
million or 19% from the comparable period of 1994. Changes in foreign currency
exchange accounted for $4.6 million of the increase.
OPERATING COSTS AND EXPENSES
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Year-to-date operating costs and expenses as a percentage of revenue
declined from 73.8% during 1994 to 73.3% during 1995. This gross profit margin
improvement is attributable to higher volumes of Envirosystems materials being
processed through the Company's existing infrastructure and increased pricing in
selected markets. The favorable impact of these items was partially offset by
higher drum processing costs in the Fluid Recovery Service business and start-up
losses in the Imaging Services business.
SELLING AND ADMINISTRATIVE EXPENSES
-----------------------------------
Selling and administrative expenses decreased from 14.4% of revenue in
1994 to 14.3% of revenue in 1995.
INTEREST EXPENSE
----------------
Interest expense increased $3.2 million to $9.4 million during the
first twenty-four weeks of 1995 versus the comparable period of 1994, due
primarily to higher interest rates.
INCOME TAXES
------------
The Company's effective income tax rate was 40.3% for the current
year-to-date period and 41.9% 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.
12
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. Two such proceedings
against the Company were pending or known to be contemplated by governmental
authorities at June 17, 1995.
The Company settled one such case during the twelve-week period ended
June 17, 1995. In this case, the State of Georgia alleged the Company had
violated certain manifesting requirements and provided inaccurate information in
certain reports, which the Company denied. The case was resolved for a penalty
of $100,000.
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.
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.
13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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The Company's Annual Meeting of Shareholders was held on May 12, 1995.
The Company's shareholders elected the four individuals who had been nominated
by management to the Board of Directors and approved the 1995 Employee Stock
Purchase Plan at the meeting. The following table sets forth the voting
results:
Absentions and
For Against Withheld Broker Non-Votes
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Election of Directors
R.A. Gwillum 51,318,563 0 244,619 0
E.D. Jannotta 51,329,498 0 233,684 0
K.G. Otzen 51,339,181 0 224,001 0
M.E. Williams 51,302,878 0 260,304 0
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1995 Employee Stock
Purchase Plan 49,427,129 1,777,010 0 359,043
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
EX-27 Financial Data Schedule (EDGAR filing only).
EX-99 Press release issued July 7, 1995 regarding the Company's results of
operations during the twelve weeks ended June 17, 1995.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on this 1st day of August, 1995.
SAFETY-KLEEN CORP.
/s/ ROBERT W. WILLMSCHEN, JR.
-----------------------------
Robert W. Willmschen, Jr.
Senior Vice President Finance,
and Secretary - Chief Financial Officer
14