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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 thirty-six weeks ended September 9, 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.
- ------------------------------------------------------------------------------
(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
------------
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 September 9, 1995 were 57,868,541.
1
SAFETY-KLEEN CORP. AND SUBSIDIARIES
-----------------------------------
PART I. FINANCIAL STATEMENTS
-----------------------------
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 September
9, 1995 and December 31, 1994, cash flows for the thirty-six week periods ended
September 9, 1995 and September 10, 1994, and the results of operations for the
twelve and thirty-six week periods ended September 9, 1995 and September 10,
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
Sept. 9, 1995 Dec. 31, 1994
------------- -------------
Current assets:
Cash and cash equivalents $ 37,611 $ 21,015
Trade accounts receivable, less allowances of $9,353 and $8,868, respectively 101,665 102,908
Inventories 35,475 32,137
Prepaid expenses and other 43,127 35,334
---------- ----------
Total current assets 217,878 191,394
---------- ----------
Equipment at customers and components, at cost, less accumulated depreciation of
$44,211 and $38,917, respectively 115,371 96,605
Property, plant and equipment, at cost, less accumulated depreciation of
$303,582 and $273,075, respectively 528,301 538,042
Intangible assets, at cost, less accumulated amortization of $62,845 and
$52,015, respectively 124,485 113,925
Other assets 72,659 76,020
---------- ----------
$1,058,694 $1,015,986
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Dividends payable $ 5,210 $ -
Current portion of long-term debt 10 10
Trade accounts payable 56,853 61,629
Accrued expenses 73,754 64,960
Restructure liability 16,652 24,637
Income taxes payable 14,252 3,339
Accrued environmental liabilities 8,741 11,730
---------- ----------
Total current liabilities 175,472 166,305
---------- ----------
Long-term debt, less current portion 298,492 284,125
---------- ----------
Deferred income taxes 74,655 69,545
---------- ----------
Restructure liability 27,344 34,357
---------- ----------
Accrued environmental liabilities 34,212 37,954
---------- ----------
Other liabilities 27,213 27,364
---------- ----------
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 57,868,541 and 57,754,963 shares, respectively) 5,787 5,775
Additional paid-in capital 186,366 184,789
Retained earnings 243,287 223,569
Cumulative translation adjustments (14,134) (17,797)
---------- ----------
421,306 396,336
---------- ----------
$1,058,694 $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 Thirty-Six Weeks Ended
---------------------- --------------------------
Sept. 9, Sept. 10, Sept. 9, Sept. 10,
1995 1994 1995 1994
--------- ---------- ----------- ----------
Revenue $197,529 $182,149 $595,280 $542,295
--------- --------- ----------- ----------
Costs and expenses:
Operating costs and 145,239 133,505 436,642 399,271
expenses
Selling and
administrative
expenses 29,087 24,634 85,980 76,606
Interest income (171) (133) (656) (390)
Interest expense 4,671 3,657 14,058 9,879
--------- --------- ----------- ----------
178,826 161,663 536,024 485,366
--------- --------- ----------- ----------
Earnings before income 18,703 20,486 59,256 56,929
taxes
Income taxes 7,577 8,274 23,928 23,544
--------- --------- ----------- ----------
Net earnings $ 11,126 $ 12,212 $ 35,328 $ 33,385
========= ========= =========== ==========
Earnings per common and
common equivalent share $0.19 $0.21 $0.61 $0.58
========= ========= =========== ==========
Average number of common
and common equivalent
shares outstanding 57,849 57,847 57,854 57,738
========= ========= =========== ==========
Cash dividends per common
share $0.09 $0.09 $0.27 $0.27
========= ========= =========== ==========
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)
Thirty-Six Weeks Ended
--------------------------------------
Sept. 9, 1995 Sept. 10, 1994
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Net cash provided by operating $ 84,998 $ 92,199
activities -------- --------
Cash flows used in investing
activities:
Equipment at customers and (26,832) (33,534)
component additions
Property, plant and equipment (26,378) (27,430)
additions
Business acquisitions and other (20,077) (2,428)
-------- --------
Net cash used in investing (73,287) (63,392)
activities -------- --------
Cash flows provided from (used in)
financing activities:
Net borrowings (payments) 13,212 (13,050)
Dividends (10,400) (10,387)
Other 1,931 1,186
-------- --------
Net cash provided from (used 4,743 (22,251)
in) financing activities -------- --------
Effect of exchange rate changes on 142 279
cash -------- --------
Net increase (decrease) in cash and 16,596 6,835
cash equivalents
Cash and cash equivalents at 21,015 17,375
beginning of year -------- --------
Cash and cash equivalents at end of $ 37,611 $ 24,210
the reporting period ======== ========
Supplemental disclosures of cash paid
during the reporting period:
Interest (net of amount capitalized) $ 11,122 $ 7,600
======== ========
Income taxes paid (net of $ 5,149 $ (4)
refunds received) ======== ========
The accompanying notes are an integral part of these financial statements.
5
SAFETY-KLEEN CORP. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. INVENTORIES
The Company's inventories consist primarily of solvent, oil and supplies.
LIFO inventories at September 9, 1995 and December 31, 1994 were $5.4 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 September 9, 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 September 9, 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
--------
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 September 9, 1995, the Company had placed approximately 155,000 cyclonic
machines at customer locations in North America, and there were approximately
118,000 Model 16 and 30 parts cleaners remaining in service with customers in
North America. These 155,000 cyclonic machines represent approximately 39% of
the total installed base of Company-owned parts cleaners in North America.
7
FINANCIAL CONDITION
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The Company's working capital increased from $25.1 million at December 31,
1994 to $42.4 million at September 9, 1995. Year-to-date capital spending for
equipment at customers and property, plant and equipment additions totaled $53.2
million, excluding business acquisitions. These expenditures were financed by
internally generated cash and additional borrowings. The Company's long-term
debt increased by $14.4 million during the first thirty-six 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 September 9,
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.
The Company's restructure liabilities declined $15.0 million during the
first thirty-six weeks of 1995 from $59.0 million to $44.0 million. The Company
incurred year-to-date after tax cash expenditures of $6.7 million on
restructuring items.
8
RESULTS OF OPERATION
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COMPARISON OF THE TWELVE WEEK PERIODS ENDED
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SEPTEMBER 9, 1995 AND SEPTEMBER 10, 1994
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REVENUE
- -------
Revenue for the twelve weeks ended September 9, 1995 was $198 million, up
$15 million, or 8%, from the comparable period last year.
Revenue derived from the Company's North American and European operations
during the twelve weeks ended September 9, 1995 and September 10, 1994 was as
follows:
Thousands of Dollars
-----------------------------
Percentage
Increase
Sept. 9, 1995 Sept. 10, 1994 (Decrease)
------------- -------------- ----------
North America
Automotive/Retail Repair Services $ 54,415 $ 53,796 1%
Industrial Services 55,855 51,525 8%
Oil Recovery Services 30,263 27,535 10%
Other Services 34,450 29,726 16%
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Total North America 174,983 162,582 8%
Europe 22,546 19,567 15%
-------- --------
Consolidated $197,529 $182,149 8%
======== ========
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 6% 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 September 9, 1995 increased by
nearly 17,000 machines, or 4%, from the machines in service at September 10,
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 $28.2 million from
the Fluid Recovery Service, which represents a 10% increase over the comparable
period of 1994. Most 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 $27.6 million of revenue, which represents an increase of $1.8
million, or 7%, from the comparable period of 1994. Most of the increase in
revenue resulted from higher average service charges. Machines in service at
September 9, 1995 increased by more than 10,000 machines, or 8%, from the
machines in service at September 10, 1994.
NORTH AMERICAN OIL RECOVERY SERVICES: Revenue from North American Oil
Recovery Services was up $2.7 million, or 10%, from the comparable period of
1994. Although the volume of lube oil sold decreased by approximately 1%,
revenue from lube oil sold increased $1.0 million, or 6%, due to increases in
the average selling price of lube oil and product mix. The remaining revenue
increase was primarily due to price increases in the antifreeze and oil
collection businesses and increased volumes of byproducts sold.
NORTH AMERICAN OTHER SERVICES: Revenue from Other Services during the
current reporting period was up $4.7 million, or 16%, from the comparable period
of 1994. Revenues from the new Imaging Services business increased $4.6 million.
EUROPE: European current period revenues of $22.5 million were up $3.0
million, or 15%, from the comparable period of 1994. Changes in foreign currency
exchange rates accounted for $1.3 million of this increase while expansion of
the Fluid Recovery Service business in the United Kingdom accounted for $0.5
million of the increase.
OPERATING COSTS AND EXPENSES
- ----------------------------
Operating costs and expenses as a percentage of revenue were 73.5% in the
current reporting period, compared to 73.3% for the third interim period of
1994. This increase in operating costs was caused by higher waste processing and
disposal costs and start-up losses in the Imaging business.
In the second interim period of 1995, the Company completed negotiations
and extended its long-term exclusive supply arrangements with two cement plants
and entered into arrangements to manage the waste-derived fuels program at two
additional plants. The Company's cost per gallon for disposal of waste-derived
fuel under the new agreements is higher than its historical cost per gallon. In
addition, three of these plants were unable to burn normal volumes of waste-
derived fuel during the third interim period due to unscheduled fuel burning
outages. The total impact of the new agreements and the unscheduled fuel burning
outages increased current period operating costs by an estimated $1.6 million.
The Company also incurred approximately $0.6 million in additional start-up
losses at the gross profit level from its Imaging Services business in the
current quarter. These unfavorable items were partially offset by better margins
due to improved pricing in certain of the Company's businesses, primarily the
Oil Recovery business.
SELLING AND ADMINISTRATIVE EXPENSES
- -----------------------------------
Selling and administrative expenses increased from 13.5% of revenue in 1994
to 14.7% of revenue in 1995. Selling and administrative expenses in the third
interim period of 1994 were low compared to expenses totaling 14.2% of revenue
for the full year 1994. The remaining increase is largely due to higher employee
related costs.
10
INTEREST EXPENSE
- ----------------
Interest expense increased $1.0 million to $4.7 million during the current
reporting period versus the comparable period of 1994, due primarily to
increased interest rates.
INCOME TAXES
- ------------
The Company's effective income tax rate was 40.5% for the twelve weeks
ended September 9, 1995 and 40.4% for the comparable period of 1994.
11
RESULTS OF OPERATION
--------------------
COMPARISON OF THE THIRTY-SIX WEEK PERIODS ENDED
-----------------------------------------------
SEPTEMBER 9, 1995 AND SEPTEMBER 10, 1994
----------------------------------------
REVENUE
- -------
Revenue for the thirty-six weeks ended September 9, 1995 was $595.3
million, up $53.0 million, or 10%, from the comparable period last year.
Revenue derived from the Company's North American and European operations
during the thirty-six weeks ended September 9, 1995 and September 10, 1994 was
as follows:
Thousands of Dollars
----------------------------
Percentage
Increase
Sept. 9, 1995 Sept. 10, 1994 (Decrease)
------------- ------------- ----------
North America
Automotive/Retail Repair Services $166,354 $164,331 1%
Industrial Services 166,385 151,821 10%
Oil Recovery Services 88,234 79,585 11%
Other Services 105,999 88,536 20%
-------- --------
Total North America 526,972 484,273 9%
Europe 68,308 58,022 18%
-------- --------
Consolidated $595,280 $542,295 10%
======== ========
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 4% 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 $84.6 million from the Fluid Recovery
Service and $81.8 million from the Industrial Parts Cleaner Service.
Fluid Recovery Service revenue increased 15% 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.
12
Revenue from the North American Industrial Parts Cleaner Service increased
$3.7 million, or 5%, from 1994. The increase in revenue resulted from higher
average service charges. Volume remained flat with last year as an increase in
the number of machines in service was offset by a lengthening of the average
service interval.
NORTH AMERICAN OIL RECOVERY SERVICES: Revenue from North American Oil
Recovery Services was up $8.6 million, or 11%, from the comparable period of
1994. Although the volume of lube oil sold decreased by approximately 2%,
revenue from lube oil sold increased $4.0 million, or 8%, due to a 9% 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 byproducts sold.
NORTH AMERICAN OTHER SERVICES: Revenue from Other Services during the
thirty-six weeks ended September 9, 1995 was up $17.5 million, or 20%, from the
comparable period of 1994. Revenues from the new Imaging Services business
accounted for $15.7 million of the increase.
EUROPE: European year-to-date revenues of $68.3 million were up $10.3
million, or 18%, from the comparable period of 1994. Changes in foreign currency
exchange rates accounted for $5.8 million of the increase while expansion of the
Fluid Recovery Service in the United Kingdom accounted for $1.4 million of the
increase.
OPERATING COSTS AND EXPENSES
- ----------------------------
Year-to-date operating costs and expenses as a percentage of revenue
declined from 73.6% during 1994 to 73.4% 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 cement kiln costs incurred in the third interim period of 1995, 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 increased from 14.1% of revenue in 1994
to 14.4% of revenue in 1995 due mainly to higher employee related costs.
INTEREST EXPENSE
- ----------------
Interest expense increased $4.2 million to $14.1 million during the first
thirty-six 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 40.4% for the current year-to-
date period 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.
13
PART II.
- --------
Item 1. LEGAL PROCEEDINGS
-----------------
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 September 9, 1995.
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 for 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 with respect to 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.
14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
EX-3 Amended By-laws.
EX-27 Financial Data Schedule (EDGAR filing only).
EX-99.1 Press release issued September 28, 1995 regarding the
Company's results of operations during the twelve weeks ended
September 9, 1995.
(b) Reports on Form 8-K
The Company filed an optional report on Form 8-K on August 30, 1995
pursuant to Item 5 to report that earnings in the third interim period
would be adversely affected by higher waste processing and disposal
costs.
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 23rd day of October, 1995.
SAFETY-KLEEN CORP.
/s/ ROBERT W. WILLMSCHEN, JR.
-----------------------------
Robert W. Willmschen, Jr.
Senior Vice President Finance,
and Secretary - Chief Financial Officer
15