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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------------
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9654
OHM CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 34-1503050
(State of Incorporation) (I.R.S. Employer Identification Number)
16406 U.S. ROUTE 224 EAST, FINDLAY, OH. 45840
(Address of principal executive offices) (Zip Code)
(419) 423-3529
(Registrant's telephone number, including area code)
Indicate by check 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
requirement for the past 90 days. Yes X No
--- ---
The number of shares of Common Stock, par value $0.10 per share,
outstanding on October 31, 1996 was 26,936,905.
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OHM CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
PART I
FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 (Unaudited)
and December 31, 1995.......................................................................... 1
Consolidated Statements of Income (Unaudited) for the Three and Nine Months
Ended September 30, 1996 and 1995.............................................................. 2
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 1996 and 1995.............................................................. 3
Notes to Consolidated Financial Statements (Unaudited)........................................... 4
Independent Accountants' Review Report........................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 8
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................. 12
Signatures................................................................................................ 12
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PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
OHM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
September 30, December 31,
1996 1995
------------- -----------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents........................................................... $ 6,826 $ 11,205
Accounts receivable................................................................. 90,654 100,291
Costs and estimated earnings on contracts in process in excess of billings.......... 77,095 77,156
Materials and supply inventory, at cost............................................. 12,282 11,831
Receivable from affiliated company.................................................. - 15,000
Prepaid expenses and other assets................................................... 8,293 7,621
Deferred income taxes............................................................... 14,045 16,600
Refundable income taxes............................................................. 335 401
-------- --------
209,530 240,105
-------- --------
Property and Equipment, net............................................................ 75,069 81,107
-------- --------
Other Noncurrent Assets:
Investment in affiliated company.................................................... 23,670 23,038
Intangible assets relating to acquired businesses, net.............................. 33,574 21,613
Deferred debt issuance and financing costs.......................................... 1,539 1,779
Deferred income taxes............................................................... 818 1,440
Other assets........................................................................ 6,604 7,424
-------- --------
66,205 55,294
-------- --------
Total Assets.................................................................... $350,804 $376,506
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................... $ 60,530 $ 65,233
Billings on contracts in process in excess of costs and estimated earnings.......... 365 1,387
Accrued compensation and related taxes.............................................. 6,285 6,174
Federal, state and local taxes...................................................... 40 200
Other accrued liabilities........................................................... 30,132 33,538
Current portion of noncurrent liabilities........................................... 4,255 4,417
-------- --------
101,607 110,949
-------- --------
Noncurrent Liabilities:
Long-term debt...................................................................... 78,215 104,111
Capital leases...................................................................... 42 53
Pension agreement................................................................... 879 901
-------- --------
79,136 105,065
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $10.00 par value, 2,000,000 shares
authorized; none issued and outstanding........................................... - -
Common stock, $.10 par value, 50,000,000 shares authorized;
Shares issued: 1996 - 26,900,084; 1995 - 26,647,077.............................. 2,690 2,664
Additional paid-in capital.......................................................... 138,303 136,428
Retained earnings................................................................... 29,068 21,400
-------- --------
170,061 160,492
-------- --------
Total Liabilities and Shareholders' Equity........................................ $350,804 $376,506
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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OHM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
------- ------ -------- -------
(Unaudited) (Unaudited)
Revenue....................................................... $158,272 $135,886 $406,412 $ 315,604
Cost of services .......................................... 137,634 116,815 353,184 267,479
-------- --------- -------- ---------
Gross Profit.................................................. 20,638 19,071 53,228 48,125
Selling, general and administrative expenses............. 13,124 12,348 36,243 33,314
-------- --------- -------- ---------
Operating Income.............................................. 7,514 6,723 16,985 14,811
--------- --------- -------- ---------
Other (Income) Expenses:
Investment income.......................................... (97) (577) (112) (600)
Interest expense........................................... 1,780 2,456 5,658 8,527
Equity in net earnings of affiliate........................ (183) (6) (632) (287)
Miscellaneous, net......................................... (54) (95) 489 (56)
-------- --------- -------- ---------
1,446 1,778 5,403 7,584
-------- --------- -------- ---------
Income Before Income Taxes.................................... 6,068 4,945 11,582 7,227
Income taxes............................................... 2,072 1,758 3,877 2,519
-------- --------- -------- ---------
Net Income.................................................... $ 3,996 $ 3,187 $ 7,705 $ 4,708
======== ========= ======== =========
Net Income Per Share.......................................... $ 0.15 $ 0.12 $ 0.29 $ 0.22
======== ========== ======== =========
Weighted average number of common and
common equivalent shares outstanding....................... 26,862 27,064 26,787 21,126
======== ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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OHM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
(Unaudited)
Cash flows from operating activities:
Net income .................................................................... $ 7,705 $ 4,708
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization ............................................ 13,025 7,208
Amortization of other noncurrent assets .................................. 2,855 2,071
Deferred income taxes .................................................... 3,177 1,375
Loss/(gain) on sale of property and equipment ............................ 381 (223)
Equity in net earnings of affiliate ...................................... (632) (287)
Deferred translation adjustments and other ............................... 37 741
Changes in current assets and liabilities:
Accounts receivable ...................................................... 9,088 (3,450)
Costs and estimated earnings on contracts in process in excess of billings (4,792) 10,692
Materials and supply inventory, at cost .................................. (451) (1,810)
Prepaid expenses and other assets ........................................ 1,813 (4,279)
Refundable income taxes and other adjustments ............................ 66 (232)
Accounts payable ......................................................... (4,432) (3,276)
Billings on contracts in process in excess of costs and estimated earnings (1,022) 200
Accrued compensation and related taxes ................................... (755) (145)
Federal, state and local income taxes .................................... (160) 31
Other accrued liabilities ................................................ (6,911) (3,557)
--------- ---------
Net cash flows provided by operating activities ........................ 18,992 9,767
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment ...................................... (15,263) (8,971)
Proceeds from sale of property and equipment ............................. 2,222 2,504
Increase in other noncurrent assets ...................................... (1,057) 331
Decrease in receivable from related party ................................ 15,000 --
Cash acquired from purchase of business, net of acquisition cost ......... -- 16,670
--------- ---------
Net cash provided by investing activities .............................. 902 10,534
--------- ---------
Cash flows from financing activities:
Increase in long term debt ............................................... -- 1,945
Payments on long-term debt and capital leases ............................ (5,379) (2,701)
Proceeds from borrowing under revolving credit agreement ................. 154,000 113,700
Payments on revolving credit agreement ................................... (174,700) (120,500)
Payments on pension agreement ............................................ (95) (74)
Common stock issued for 401k funding and stock options ................... 1,901 --
Proceeds from private placement of common stock .......................... -- 10,000
Reissuance of treasury stock ............................................. -- 1,740
--------- ---------
Net cash (used in)/provided by financing activities .................... (24,273) 4,110
--------- ---------
Net (decrease)/increase in cash and cash equivalents ................... (4,379) 24,411
Cash and cash equivalents at beginning of period .............................. 11,205 4,930
--------- ---------
Cash and cash equivalents at end of period .................................... $ 6,826 $ 29,341
========= =========
Supplementary cash flow information:
Cash paid for interest ..................................................... $ 5,253 $ 7,207
========= =========
Cash paid for income taxes ................................................. $ 389 $ 194
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by OHM Corporation (the "Company") and reflect all adjustments of a normal
recurring nature which are, in the opinion of management, necessary for a fair
presentation of financial results for the three and nine months ended September
30, 1996 and 1995, in accordance with generally accepted accounting principles
for interim financial reporting and pursuant to Article 10 of Regulation S-X.
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. These
interim consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 1995. The
results of operations for the three and nine months ended September 30, 1996 and
1995 are not necessarily indicative of the results for the full year.
The unaudited consolidated financial statements include the accounts of the
Company and its subsidiaries. The Company's 40% owned asbestos abatement
affiliate, NSC Corporation ("NSC"), has been accounted for using the equity
method. All material intercompany transactions and balances have been eliminated
in consolidation.
The consolidated financial statements at September 30, 1996, and for the three
and nine months then ended, have been reviewed, prior to filing, by Ernst &
Young LLP, the Company's independent accountants, and their report is included
herein.
NOTE 2 - ACQUISITION
On May 30, 1995, the Company completed the acquisition of substantially all of
the assets and certain liabilities of the hazardous and nuclear waste
remediation service business (the "Division") of Rust International Inc.
("Rust") in exchange for 9,668,000 shares of the common stock of the Company, or
approximately 37% of the outstanding shares of the Company's common stock. Such
shares issued to Rust are subject to a number of restrictions set forth in a
Standstill and Non-competition Agreement that was entered into pursuant to the
Agreement and Plan of Reorganization dated December 5, 1994, as amended (the
"Reorganization Agreement"), among the Company, Rust and certain of their
subsidiaries. In addition to the net assets of the Division, the Company
received $16,636,000 in cash pursuant to provisions of the Reorganization
Agreement that provided for an adjustment based on the average share price of
the Company's common stock for a 20 trading day period prior to closing. Also,
under terms of the Reorganization Agreement, as amended on March 22, 1996, the
Company received an additional $15,000,000 on March 25, 1996. For purposes of
calculating the consideration given by the Company for the Division, such 20
trading day average per share price of $11.25 was used, adjusted to reflect a
40% discount for the restricted nature of the common stock issued. Consideration
for the Division aggregated $65,259,000.
The acquisition of the Division has been accounted for using the purchase method
and, accordingly, the acquired assets and assumed liabilities, including
goodwill of $34,183,000, have been recorded at their estimated fair values as of
May 30, 1995. The acquired operations of the Division included contracts in
process for which the Company recognizes revenue using the percentage of
completion method of accounting. The valuation of the contracts in process
require estimates relating to the costs to complete certain large contracts in
process which require provisions for losses. The Company has estimated the fair
value of contracts acquired at amounts which will allow the Company to achieve
reasonable operating margins on the effort it expends to complete these
contracts. The Company's consolidated financial statements for the year ended
December 31, 1995, include the results of operations for the Division since May
30, 1995.
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The estimated fair value of the assets acquired and liabilities assumed at the
date of acquisition are as follows (in thousands):
Current assets.......................................$59,805
Property and equipment................................21,523
Goodwill..............................................34,183
Current liabilities...................................50,252
NOTE 3 - INCOME TAXES
The reasons for differences between the provisions for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before income taxes are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
Federal statutory rate........................... 34.0 % 34.0 % 34.0 % 34.0 %
Add (deduct):
State income taxes, net of federal benefit.. 4.9 % 5.0 % 4.8 % 4.8 %
Goodwill.................................... 2.5 % - % 2.1 % - %
R & D credits............................... (5.9)% (3.3)% (5.9)% (3.3)%
Equity in net earnings of affiliate......... (0.8)% - % (1.5)% (1.1)%
Other, net.................................. (0.6)% (0.1)% - % 0.5 %
-------- ------- ------- -------
34.1 % 35.6 % 33.5 % 34.9 %
======== ======= ======= =======
NOTE 4 - SEASONALITY
The timing of revenue recognition is dependent on the Company's backlog,
contract awards and the performance requirements of each contract. The Company's
revenue are also affected by the timing of its clients' planned remediation work
which generally increases during the third and fourth quarters. Because of this
variability in demand, the Company's quarterly revenue can fluctuate, and
revenue for the first and second quarters of each year can normally be expected
to be lower than the third and fourth quarters. Although the Company believes
that the historical trend in quarterly revenue for the third and fourth quarters
of each year are generally higher than the first and second quarters, there can
be no assurance that this will occur in future periods. Accordingly, quarterly
or other interim results should not be considered indicative of results to be
expected for any quarter or for the full year.
NOTE 5 - LITIGATION AND CONTINGENCIES
The Company's accounts receivable at September 30, 1996 include a claim
receivable aggregating approximately $26,880,000 in direct and other costs
relating to a major remediation project which was performed by the Company for
Citgo Petroleum Corporation ("Citgo") at its Lake Charles, Louisiana refinery
during 1993 and 1994. This claim receivable represents direct and other costs to
date for activities which the Company's management believed exceeded the scope
of the existing contract due to deficient project specifications provided by
Citgo and Oxy USA, Inc. ("Oxy") as well as differing site conditions. In
addition, at September 30, 1996, the Company has recorded in its financial
statements approximately $5,381,000 of accounts receivable that are in dispute
for work performed under the terms of the Company's base contract with Citgo. In
April 1994, Citgo filed an action in the U.S. District Court for the Western
District of Louisiana seeking a declaratory judgment that the Company is not
entitled to additional compensation under the contract and certain other relief.
The Company's answer to the declaratory judgment action was filed in July 1994,
together with counterclaims against Citgo for negligent misrepresentation,
breach of contract and quantum meruit seeking damages in excess of $35,000,000.
In August 1994, Citgo amended its complaint seeking damages under the contract
for production shortfalls, which Citgo has asserted in answer to the Company's
interrogatories to be approximately $27,600,000. The Company believes that such
assertion of damages is totally without merit since the contract expressly
provides that Citgo's sole remedy for production shortfalls by the Company is
liquidated damages not to exceed $500,000. In August 1996, the Magistrate Judge,
in response to the Company's motion for partial summary judgement, issued a
Report and Recommendation supporting the Company's position that Citgo's claim
be limited to the amounts set forth in the liquidated damages provisions of the
contract between Citgo and the Company. Citgo is currently challenging this
determination. In January 1995, Citgo filed a third party complaint against
Occidental Oil and Gas Corporation and Oxy in such litigation because of their
prior involvement with the Citgo site and preparation of the contract
specifications. Additionally, in July 1995, the Company also filed a third party
complaint against Oxy for negligent misrepresentation as a result of its
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involvement with the development of sampling and analytical data relied upon by
the Company in preparation of its bid and cost estimates for work at the site.
The Company has also become involved in litigation with Occidental Chemical
Corporation ("Occidental") relating to a separate project performed in 1993 and
1994 for Occidental. The Company's accounts receivable at September 30, 1996
include a claim receivable of $8,607,000 in direct and other costs relating to
this project. The litigation arises from an October 1993 contract between the
Company and Occidental for work at a contaminated site in North Tonawanda, New
York. The Company's work was substantially delayed and its costs of performance
were substantially increased as a result of conditions at the site which the
Company's management believes were materially different than as represented by
Occidental. The Company believes that Occidental has implicitly acknowledged the
existence of differing conditions at the site through its previous execution and
partial payment of a change order relating to the Company's position. In October
1994, Occidental issued a deductive change order deleting substantially all
remaining work from the contract. On December 30, 1994, while the Company was in
the process of developing a comprehensive request for equitable adjustment,
Occidental filed suit against the Company in U.S. District Court for the Western
District of New York alleging damages in excess of $50,000, the jurisdictional
minimum. On March 3, 1995, Occidental filed an amended complaint seeking
$8,806,000 in damages primarily for alleged costs incurred as a result of
project delays and added volumes of incinerated wastes. On April 6, 1995, the
Company filed its answer and counterclaim denying any liability to Occidental
and seeking an amount in excess of $9,200,000 for damages arising from
Occidental's breach of contract, misrepresentation and failure to pay
outstanding contract amounts.
Management believes that it has established adequate reserves should the
resolution of the above accounts receivable be lower than the amounts recorded
and such resolution should not have a material adverse impact upon the Company's
consolidated results of future operations or financial condition.
The Company was named in April 1994 as one of 33 third party defendants in a
case titled UNITED STATES OF AMERICA V. AMERICAN CYANAMID COMPANY, INC., ET AL.,
pending in the United States District Court for the Southern District of West
Virginia (the "U.S. District Court"). This litigation (the "Cost Recovery
Litigation") arises out of claims made against several potentially responsible
parties ("PRPs") by the Environmental Protection Agency ("EPA") for amounts in
excess of $24,000,000 for response costs arising out of releases and threatened
releases of hazardous waste at the Fike Chemical, Inc. Superfund site ("Fike")
in Nitro, West Virginia. The Company was retained as a response action
contractor for the site under contracts with the United States Army Corps of
Engineers and the EPA. Those PRP's also filed a suit in the U.S. District Court
against the Company on behalf of the United States under the QUI TAM provisions
of the False Claims Act (the "QUI TAM suit") and caused the United States to
conduct an investigation of the accuracy of the Company's billings to the EPA.
The Company cooperated fully with the investigation and has been informed that
the government will not be proceeding criminally against the Company. The
Company signed a Settlement Agreement, pursuant to which the Company has paid
$589,000, disposing of any civil liability relating to the QUI TAM suit and the
government investigation with respect to Fike. The Settlement Agreement has been
approved by the U.S. District Court which entered a Stipulation and Order of
Dismissal on May 6, 1996. The Company also executed an agreement settling the
Cost Recovery Litigation without any cost to the Company. This agreement, which
was subject to U.S. District Court approval, was approved and the U.S. District
Court issued a Stipulation and Order of Dismissal on April 8, 1996. Other
matters related to the Fike Superfund Site are subject to a Consent Decree which
has to be approved by the U.S. District Court.
In addition to the above, the Company is subject to a number of claims and
lawsuits in the ordinary course of its business. In the opinion of management,
the outcome of these actions, which are not clearly determinable at the present
time, are either adequately covered by insurance, or if not insured, will not,
in the aggregate, have a material adverse impact upon the Company's consolidated
financial position or the results of future operations.
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
OHM Corporation
We have reviewed the accompanying consolidated balance sheet of OHM Corporation
and subsidiaries as of September 30, 1996, and the related consolidated
statements of income for the three and nine month periods ended September 30,
1996 and 1995 and the consolidated statements of cash flows for the nine month
periods ended September 30, 1996 and 1995. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of OHM Corporation and subsidiaries as
of December 31, 1995, and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for the year then ended, not
present herein, and in our report dated February 13, 1996, except for Notes 2
and 10, as to which the date is March 25, 1996, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1995, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
Ernst & Young LLP
Columbus, Ohio
October 25, 1996
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company provides a broad range of environmental and hazardous waste
remediation services to its clients located primarily in the United States. The
timing of the Company's revenue is dependent on its backlog, contract awards and
the performance requirements of each contract. The Company's revenue is also
affected by the timing of its clients' planned remediation activities which
generally increase during the third and fourth quarters. Because of this change
in demand, the Company's quarterly revenue can fluctuate, and revenue for the
first and second quarters of each year have historically been lower than for the
third and fourth quarters, although there can be no assurance that this will
occur in future years. Accordingly, quarterly or other interim results should
not be considered indicative of results to be expected for any quarter or full
fiscal year.
On May 30, 1995, the Company completed the acquisition of substantially
all of the assets and certain liabilities of the hazardous and nuclear waste
remediation service business (the "Division") of Rust International Inc.
("Rust") in exchange for 9,668,000 shares of common stock of the Company, or
approximately 37% of the outstanding shares of the Company's common stock. In
exchange for a warrant to purchase up to 700,000 shares of the Company's common
stock at an exercise price of $15.00 per share during the five years following
the closing date, Rust's parent Company, WMX Technologies, Inc. ("WMX"),
provides the Company with a credit enhancement in the form of guarantees, issued
from time to time upon request of the Company, of up to $62,000,000 of the
Company's indebtedness, which will increase proportionately up to $75,000,000
upon issuance of shares under the warrant. The acquisition of the Division has
been accounted for using the purchase method and, accordingly, the acquired
assets and assumed liabilities, including goodwill, have been recorded at their
estimated fair values as of May 30, 1995. The Company's consolidated statements
of income include the results of the division since May 30, 1995.
The Company's consolidated statements of income for the nine months
ended September 30, 1995, include expenses of $3,854,000 or $2,312,000
after-tax, for integration costs related to the acquisition of the Division. The
costs were recorded in selling, general and administrative expenses and were
primarily for severance and relocation costs for certain of the Company's
personnel and the closing of certain of the Company's offices as a result of
combining the operations of the Division and the Company.
RESULTS OF OPERATIONS
REVENUE. The following table sets forth the Company's revenue by client
type for the three and nine months ended September 30, 1996 and 1995 (in
thousands, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------- -------------------------
1996 1995 1996 1995
--------------- --------------- ----------------- --------------
Federal, State, and Local Government $ 117,754 74% $ 96,192 71% $305,128 75% $233,907 74%
Industrial 40,518 26% 39,694 29% 101,284 25% 81,697 26%
-------------- --------- ---- ----------- ---- ---------- ---
Total Revenue $158,272 100% $135,886 100% $406,412 100% $315,604 100%
======== === ======== === ======== === ======== ===
Revenue increased during the three and nine months ended September 30,
1996 by $22,386,000 or 17% and $90,808,000 or 29%, respectively, when compared
to the same periods in 1995. Such improvement resulted primarily from increased
revenue from federal government agencies. In addition, revenue from the
industrial sector for the nine months ended September 30, 1996 was favorably
impacted by the acquisition of the Division, which was included in the Company's
results of operations after May 30, 1995.
Revenue from government agencies for the three and nine months ended
September 30, 1996 increased $21,562,000 or 22% and $71,221,000 or 30%,
respectively, when compared to the same periods in 1995. This improvement
resulted primarily from an increase in revenue from the Company's term contracts
with the United States Navy, the United States Army Corps of Engineers ("USACE")
and the United States Air Force. Such increases were partially offset by a
decrease in revenue from state and local governments and the Environmental
Protection Agency ("EPA") during the 1996 when compared to the same periods in
1995. The federal government shutdown during the first quarter of 1996
negatively impacted the Company's revenue from the EPA and delayed delivery
orders issued under the Company's existing federal term contracts. The Company
expects to receive funding under its federal contracts into the foreseeable
future and is experiencing a significant amount of proposal activity for new
contracts with the various Department of Defense ("DOD") agencies, as well as
the Department of Energy ("DOE"). However, no assurance can
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be given that the Company will be awarded any new contracts with the DOD or DOE.
In addition, reductions by Congress in future environmental remediation budgets
of government agencies may have a material adverse impact upon future revenue
from such agencies and the funding of the Company's government term contracts
included in contract backlog.
Revenue from industrial clients increased $824,000 or 2% and
$19,587,000 or 24% for the three months and nine months ended September 30,
1996, respectively, when compared to the same periods in 1995. Such increases
are primarily a result of the acquisition of the Division during May 1995. The
Company believes that revenue growth from the industrial sector has been
negatively impacted due to anticipated changes in the Superfund law pending its
reauthorization as well as current economic conditions in certain industry and
geographic sectors. Although the Company cannot predict the impact upon the
environmental industry of the failure of Congress to reauthorize the Superfund
law, further delays in Superfund reauthorization may have a material impact upon
the demand for the Company's services in the form of project delays as
industrial clients and potential industrial clients wait for and anticipate
changes in these regulations. In addition, demand for the Company's services
from the industrial sector will also remain dependant on general economic and
market conditions.
COST OF SERVICES AND GROSS PROFIT. Cost of services and gross profit
for the three and nine months ended September 30, 1996 increased when compared
to the same periods in 1995 primarily as a result of increased revenue. Gross
profit as a percent of revenue for the three and nine months ended September 30,
1996 decreased to 13% in each period, from 14% and 15% respectively, in 1995.
The Company's gross profit on its fixed-price contracts has been negatively
impacted by competitive market conditions and, during the first quarter of 1996,
by the severe winter weather in the midwest and northeast regions of the
country. In addition, the Company has experienced a decrease in the overall
gross margin it has received on its government projects than it has historically
experienced. Such decrease is due to the nature of the projects that have been
awarded to the Company under its term contracts which has required an increase
in the use of subcontracted services and materials over levels historically
experienced. Under the terms of such contracts, the Company receives minimal
markups on such subcontracted services and materials.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SGA") expenses for the nine months ended September 30, 1995
include a charge for integration expenses of $3,854,000 related to the
acquisition of the Division. Without such charge, SGA expenses would have
increased 23% during the nine months ended September 30, 1996 when compared to
the same period in 1995. SGA expenses for the three months ended September 30,
1996 increased $776,000 or 6% when compared to the same period in 1995. Such
increase in SGA expenses was primarily as a result of the acquisition of the
Division and increased revenue. In addition, the Company has made a substantial
investment in personnel and systems in support of its government contracts and
related compliance issues. SGA expense as a percent of revenue was 8% and 9% for
the three months ended September 30, 1996 and 1995, respectively. For the nine
months ended September 30, 1996 and 1995, SGA expense as a percent of revenue
was 9%, exclusive of the integration expense charge.
INTEREST EXPENSE. Interest expense, net of investment income, decreased
10% and 30% during the three and nine months ended September 30, 1996 when
compared to the same periods in 1995. The decrease in interest expense was a
result of a decrease in the average borrowings outstanding, as well as interest
rates charged, under the Company's revolving credit agreement during 1996 when
compared to the same periods in 1995. The decrease in interest rates charged
under the revolving credit agreement is a result of the WMX guarantee of the
Company's debt in exchange for the warrant described above. Investment income
for the three and nine months ended September 30, 1995 included income earned on
certain outstanding receivables guaranteed by Rust pursuant to the agreement for
the acquisition of the Division. Such receivables were paid to the Company on
September 30, 1995.
EQUITY IN NET EARNINGS OF AFFILIATE. The Company's equity interest in
NSC's net earnings increased $177,000 and $345,000 for the three and nine months
ended September 30, 1996, respectively, when compared to the same periods in
1995.
NET INCOME. Net income for the three months ended September 30, 1996
was $3,996,000 or $0.15 per share compared to $3,187,000 or $0.12 per share for
the same period in 1995. For the nine months ended September 30, 1996, net
income was $7,705,000 or $0.29 per share compared to $4,708,000 or $0.22 per
share for the same period in 1995. Net income increased primarily as a result of
the charge for integration expenses recorded in the second quarter of 1995, as
well as other factors described above.
The effective income tax rate was 34% and 36% for the three months
ended September 30, 1996 and 1995, respectively. For the nine month period
ending September 30, 1996 and 1995, the effective income tax rate was 34% and
35%, respectively. See "Note 3 to the Consolidated Financial Statements" for a
reconciliation of the statutory federal income tax rate to the effective income
tax rate.
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LIQUIDITY AND CAPITAL RESOURCES
On May 31, 1995, the Company entered into a $150,000,000 revolving
credit agreement with a group of banks (the "Bank Group") to provide letters of
credit and cash borrowings. The agreement has a five year term and is scheduled
to expire on May 30, 2000. WMX has issued a guarantee of up to $62,000,000
outstanding under the credit agreement in favor of the Bank Group. Under the
terms of the agreement the entire credit facility can be used for either cash
borrowings or letters of credit. Cash borrowings bear interest at either the
prime rate plus a percentage up to 0.625% or, at the Company's option, the
Eurodollar market rate plus a percentage ranging from 0.325% to 1.625%. The
percentage over the prime rate or the Eurodollar market rate is based on the
aggregate amount borrowed under the facility, the presence of the guarantee, and
the Company's financial performance as measured by an interest coverage ratio
and a total funded debt ratio. The agreement provides the participating banks
with a security interest in the Company's equipment, inventories, accounts
receivable, general intangibles and in the Company's investment in the common
stock of NSC as well as the Company's other subsidiaries. The agreement also
imposes, among other covenants, a minimum tangible net worth covenant, a
restriction on all of the Company's retained earnings including the declaration
and payment of cash dividends and a restriction on the ratio of total funded
debt to earnings before income taxes, depreciation and amortization. The amounts
outstanding for cash borrowing under the revolving credit facility at September
30, 1996 and December 31, 1995 were $21,400,000 and $42,100,000, respectively,
and aggregate letters of credit outstanding at September 30, 1996 and December
31, 1995 were $14,823,000 and $14,655,000, respectively.
Capital expenditures for the nine months ended September 30, 1996 and
1995, were $15,263,000 and $8,971,000, respectively. The Company's capital
expenditures are primarily related to the installation of computer systems and
related equipment and the fabrication of custom equipment by the Company for the
execution of remediation projects. Capital expenditures for fiscal year 1996 are
expected to range between $17,000,000 and $20,000,000. The Company's long-term
capital expenditure requirements are dependent upon the type and size of future
remediation projects awarded to the Company.
The Company believes that the government sector will continue to be its
primary source of revenue for the foreseeable future in light of its contract
backlog with federal government agencies. Revenue from government agencies
historically has required greater working capital, the major component of which
is accounts receivable, than revenue from industrial sector clients. In
addition, the Company is bidding on a number of large, long-term contract
opportunities which, if awarded to the Company, would also increase working
capital needs and capital expenditures. The Company believes it will be able to
finance its increased working capital needs and capital expenditures in the
short term through a combination of cash flows from operations, borrowing under
its revolving credit facility, proceeds from permitted asset sales, utilization
of operating leases and other external sources. In addition, in connection with
the acquisition of the Division, Rust's parent company, WMX, has provided the
Company with a credit guarantee of up to $62,000,000 of the Company's
indebtedness outstanding until May 30, 2000. Such credit guarantee has allowed
the Company to expand its borrowing capacity and lower its cost of capital under
its new credit facility entered into on May 31, 1995.
The Company's identified long-term capital needs consist of payments
due upon the maturity of the Company's revolving credit facility in 2000 and
sinking fund payments commencing in 1996 of 7.5% of the principal amount as well
as payments due upon maturity of its 8% Subordinated Convertible Debentures
("Debentures") in 2006. Since October 1995, the Company has purchased and
retired $9,200,000 of the outstanding Debentures, sufficient to meet its first
and second sinking fund obligations due on October 1, 1996 and 1997,
respectively. The Company believes that it will be able to refinance the
remaining indebtedness as necessary.
ENVIRONMENTAL MATTERS AND GOVERNMENT CONTRACTING
Although the Company believes that it generally benefits from increased
environmental regulations and from enforcement of those regulations, increased
regulation and enforcement also create significant risks for the Company. The
assessment, remediation, analysis, handling and management of hazardous
substances necessarily involve significant risks, including the possibility of
damages or injuries caused by the escape of hazardous materials into the
environment, and the possibility of fines, penalties or other regulatory action.
These risks include potentially large civil and criminal liabilities for
violations of environmental laws and regulations, and liabilities to customers
and to third parties for damages arising from performing services for clients,
which could have a material adverse effect on the Company.
The Company does not believe there are currently any material
environmental liabilities which should be recorded or disclosed in its financial
statements. The Company anticipates that its compliance with various laws and
regulations relating to the protection of the environment will not have a
material effect on its capital expenditures, future earnings or
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competitive position.
Because of its dependence on government contracts, the Company also
faces the risks associated with such contracting, which could include civil and
criminal fines and penalties. As a result of its government contracting
business, the Company has been, is, and may in the future be subject to audits
and investigations by government agencies. The fines and penalties which could
result from noncompliance with the Company's government contracts or appropriate
standards and regulations, or the Company's suspension or debarment from future
government contracting, could have a material adverse effect on the Company's
business.
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PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
10 Employment Agreement, dated August 21, 1996, between
Joseph R. Kirk and OHM Corporation
11 Statement Re Computation of Per Share Earnings
15 Letter Re Unaudited Financial Information
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
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.
OHM CORPORATION
Date: November 14, 1996 By /s/ James L. Kirk
------------------
James L. Kirk
Chairman of the Board
President and Chief Executive Officer
(Duly Authorized Officer)
Date: November 14, 1996 By /s/ Philip O. Strawbridge
--------------------------
Philip O. Strawbridge
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 1996 By /s/ Kris E. Hansel
-------------------
Kris E. Hansel
Vice President and Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Exhibit
Number Description
- ------ -----------
10 Employment Agreement, dated August 21, 1996, between Joseph R. Kirk
and OHM Corporation
11 Statement Re Computation of Per Share Earnings
15 Letter Re Unaudited Interim Financial Information
27 Financial Data Schedule