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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 June 30, 1997
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 July 31, 1997 was 27,253,439.
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OHM CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
PART I
FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (Unaudited)
and December 31, 1996 ..................................................................... 1
Consolidated Statements of Operations (Unaudited) for the Three and Six Months
Ended June 30, 1997 and 1996............................................................... 2
Consolidated Statements of Cash Flows (Unaudited) for the Six Months
Ended June 30, 1997 and 1996 .............................................................. 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 1. Legal Proceedings................................................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 12
Item 6. Exhibits and Reports on Form 8-K................................................................. 12
Signatures ............................................................................................... 14
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PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
OHM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
June 30, December 31,
1997 1996
------- -----------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents....................................................... $ 19,680 $ 14,002
Accounts receivable............................................................. 64,582 85,461
Costs and estimated earnings on contracts in process in excess of billings...... 45,585 56,303
Materials and supply inventory, at cost......................................... 14,454 13,899
Prepaid expenses and other assets............................................... 9,876 17,274
Deferred income taxes........................................................... 23,930 10,513
Refundable income taxes......................................................... 163 493
--------- ---------
178,270 197,945
--------- ---------
Property and Equipment, net........................................................ 62,822 70,521
--------- ---------
Other Noncurrent Assets:
Investments in affiliated company............................................... 8,421 23,185
Intangible assets relating to acquired businesses, net.......................... 45,769 33,534
Deferred debt issuance and financing costs...................................... 1,282 1,412
Deferred income taxes........................................................... 6,783 3,563
Other assets.................................................................... 7,738 6,377
--------- ---------
69,993 68,071
--------- ---------
Total Assets.................................................................. $ 311,085 $ 336,537
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $ 71,139 $ 69,230
Billings on contracts in process in excess of costs and estimated earnings...... 1,124 897
Accrued compensation and related taxes.......................................... 6,715 6,528
Federal, state and local taxes.................................................. 92 150
Other accrued liabilities....................................................... 24,981 21,477
Current portion of noncurrent liabilities....................................... 7,920 5,321
--------- ---------
111,971 103,603
--------- ---------
Noncurrent Liabilities:
Long-term debt.................................................................. 49,747 52,972
Deferred gain from sale leaseback of equipment.................................. 2,514 4,484
Capital leases.................................................................. 79 32
Pension agreement............................................................... 865 874
--------- ---------
53,205 58,362
--------- ---------
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: 1997 - 27,179,892; 1996 - 26,992,140.......................... 2,718 2,699
Additional paid-in capital...................................................... 140,476 138,989
Retained earnings............................................................... 2,715 32,884
--------- ---------
145,909 174,572
--------- ---------
Total Liabilities and Shareholders= Equity.................................... $ 311,085 $ 336,537
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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OHM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
--------- --------- ---------- --------
1997 1996 1997 1996
--------- --------- --------- --------
(Unaudited) (Unaudited)
Revenue............................................... $ 129,313 $ 129,177 $ 237,811 $ 248,140
Cost of services................................... 111,439 111,617 206,086 215,550
--------- --------- --------- ---------
Gross Profit.......................................... 17,874 17,560 31,725 32,590
Claims settlement costs and other.................. 37,877 -- 37,877 --
Selling, general and administrative expenses....... 11,491 11,943 21,900 23,119
--------- --------- --------- ---------
Operating Income (Loss)............................... (31,494) 5,617 (28,052) 9,471
--------- --------- --------- ---------
Other (Income) Expenses:
Investment income.................................. (39) (4) (52) (15)
Interest expense................................... 1,220 1,970 2,553 3,878
Equity in net earnings of affiliate................ -- (224) (185) (449)
Write-down of investment in NSC Corporation........ 14,949 -- 14,949 --
Miscellaneous expense, net......................... 113 314 223 543
--------- --------- --------- ---------
16,243 2,056 17,488 3,957
--------- --------- --------- ---------
Income (Loss) Before Income Taxes (47,737) 3,561 (45,540) 5,514
Income taxes (benefit)............................. (16,128) 1,182 (15,369) 1,805
--------- --------- --------- ---------
Net Income (Loss)..................................... $ (31,609) $ 2,379 $ (30,171) $ 3,709
========= ========= ========= =========
Net Income (Loss) Per Share........................... $ (1.16) $ 0.09 $ (1.11) $ 0.14
========= ========= ========= =========
Weighted average number of common and
equivalent shares outstanding...................... 27,141 26,830 27,092 26,757
========= ========= ========= =========
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)
Six Months Ended
June 30,
---------------------------
1997 1996
---------- ----------
(Unaudited)
Cash flows from operating activities:
Net (loss) income................................................................... $ (30,171) $ 3,709
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.................................................. 8,153 8,016
Amortization of other noncurrent assets........................................ 1,555 1,699
Deferred income taxes.......................................................... (16,011) 1,177
Loss (gain) on sale of property and equipment.................................. (528) 296
Equity in net earnings of affiliate............................................ (185) (449)
Writedown of investment in affiliated company.................................. 14,949 --
Deferred translation adjustments and other..................................... 50 49
Changes in current assets and liabilities:
Accounts receivable............................................................ 25,029 10,879
Costs and estimated earnings on contracts in process in excess of billings..... 10,718 475
Materials and supply inventory, at cost........................................ (555) (473)
Prepaid expenses and other assets.............................................. 7,398 447
Refundable income taxes and other adjustments.................................. 330 49
Accounts payable............................................................... (8,563) (16,156)
Billings on contracts in process in excess of costs and estimated earnings..... 227 (825)
Accrued compensation and related taxes......................................... (293) 550
Federal, state and local income taxes.......................................... (58) (177)
Other accrued liabilities...................................................... 1,498 (5,222)
--------- ---------
Net cash flows provided by operating activities.............................. 13,543 4,044
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment............................................ (10,529) (11,221)
Proceeds from sale of property and equipment................................... 176 2,075
Proceeds from sale and leaseback of equipment.................................. 16,110 --
Purchase of stock of business less cash acquired............................... (7,092) --
Decrease in receivable from affiliated company................................. -- 15,000
Increase in other noncurrent assets............................................ (2,314) (562)
--------- ---------
Net cash (used in) provided by investing activities.......................... (3,649) 5,292
--------- ---------
Cash flows from financing activities:
Payments on long-term debt and capital leases.................................. (5,665) (2,372)
Proceeds from borrowing under revolving credit agreement and term loan......... 114,064 105,400
Payments on revolving credit agreement and term loan........................... (114,064) (120,300)
Payments on pension agreement.................................................. (57) (66)
Common stock issued for 401(k) funding and stock options....................... 1,506 1,210
--------- ---------
Net cash (used in) financing activities...................................... (4,216) (16,128)
--------- ---------
Net increase (decrease) in cash and cash equivalents......................... 5,678 (6,792)
Cash and cash equivalents at beginning of period.................................... 14,002 11,205
--------- ---------
Cash and cash equivalents at end of period.......................................... $ 19,680 $ 4,413
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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OHM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(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 six months ended June 30,
1997 and 1996, 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, 1996. The
results of operations for the three and six months ended June 30, 1997 and 1996
are not necessarily indicative of the results for the full year.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options will be excluded. The impact on the calculation of earnings per
share for the three and six months ended June 30, 1997 and 1996 is not expected
to be significant.
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. See "Note 7 -- Special Charges" regarding the Company's plans
to divest its ownership of NSC and the related reduction of its carrying value.
The consolidated financial statements at June 30, 1997, and for the three and
six 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 - SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest was $3,022,000 and $4,222,000 and cash paid for income
taxes was $73,000 and $327,000 for the six months ended June 30, 1997 and 1996,
respectively.
NOTE 3 - ACQUISITION
Effective June 1, 1997, the Company acquired all of the outstanding stock of
Beneco Enterprises, Inc., a Utah corporation ("Beneco"), for an aggregate
purchase price of $14,700,000. The purchase price was paid as follows: (i)
$9,700,000 in cash and (ii) unsecured promissory notes in the aggregate of
$5,000,000, bearing interest at 7.25%, due and payable June 17, 1998. The
Company has agreed to make an additional payment in 2000 contingent upon the
achievement of certain operating results and other contractual conditions.
Beneco is a provider of project, program and construction management services to
the Department of Defense and other government agencies throughout the United
States.
The acquisition of Beneco 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 June 1, 1997. The
Company's consolidated financial statements for the three and six month periods
ended June 30, 1997 include the results of Beneco since June 1, 1997. The
following table sets forth the unaudited combined pro forma results of
operations for the six months ended June 30, 1997 and 1996, giving effect to the
acquisition of Beneco as if such acquisition had occurred on January 1, 1996.
Pro Forma
Six Months Ended
June 30,
------------------------------------
1997 1996
---- ----
(In Thousands, Except Per Share Data)
Gross revenue .................................... $266,391 $ 277,399
Net (loss) income................................. $(30,070) $ 3,817
Net (loss) income per share....................... $ (1.11) $ 0.14
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The actual purchase accounting adjustments to reflect the fair value of assets
and liabilities acquired have not been finalized and, as a result, the
accompanying consolidated financial statements and combined pro forma results of
operations have been prepared on the basis of preliminary estimates of such
adjustments. The combined pro forma results of operations for the six months
ended June 30, 1997 are based upon certain assumptions and estimates which the
Company believes are reasonable. The combined pro forma results of operations
may not be indicative of the operating results that actually would have been
reported had the transaction been consummated on January 1, 1996, nor are they
necessarily indicative of results which will be reported in the future.
NOTE 4 - 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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
Federal statutory rate...................... 34.0% 34.0% 34.0% 34.0%
Add (deduct):
State income taxes, net of federal benefit 6.0 4.7 6.0 4.7
Goodwill................................. (0.2) 1.4 (0.4) 1.7
Research and development tax credits..... 0.5 (5.8) 0.7 (4.9)
NSC write-off............................ (4.7) -- (4.9) --
Equity in net earnings of affiliate...... -- (1.7) 0.1 (2.2)
Other, net............................... (1.8) 0.6 (1.8) (0.6)
---- ---- ---- -----
33.8% 33.2% 33.7% 32.7%
==== ==== ==== ====
NOTE 5 - 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 is 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 6 - LITIGATION AND CONTINGENCIES
The Company is subject to a number of claims and litigation. These matters
include the following items which were disclosed in the consolidated financial
statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
The Company has settled litigation that was pending in the U.S. District Court
for the Western District of Louisiana involving Citgo Petroleum Corporation
("Citgo"), Oxy USA Inc., and Occidental Oil & Gas (collectively "Oxy") relating
to cost overruns and production shortfalls on a remediation project which was
performed by the Company for Citgo at its Lake Charles Louisiana refinery during
1993 and 1994. Under the terms of the settlement Citgo and Oxy dismissed all
claims against the Company related to this matter and the Company dismissed all
claims against Citgo and Oxy related to this matter. In addition, the Company
received a cash payment of $14,346,000. The Company reduced the amount of its
account receivables by the amount such receivables exceeded the payments
received (see "Note 7 -- Special Charges").
The Company is in litigation in the U.S. District Court for the Western District
of New York with Occidental Chemical Corporation ("Occidental") relating to the
Durez Inlet Project performed in 1993 and 1994 for Occidental in North
Tonawanda, New York. The Company's account receivables at June 30, 1997 include
a claim receivable of $8,651,000 related to this matter. The Company's work was
substantially delayed and its costs of performance were substantially increased
as a result of conditions at the site that the Company believes were materially
different than as represented by Occidental. Occidental's amended complaint
seeks $8,806,000 in damages primarily for alleged costs incurred as a result of
project delays and added volumes of incinerated waste. The Company's
counterclaim seeks 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. The Company has established additional reserves
for a portion of the receivables related to this matter (see "Note 7 -- Special
Charges"). Management believes that it has established adequate reserves should
the resolution of the above matter be lower than the amounts recorded.
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As a result of an arbitration proceeding between the Company and Separation and
Recovery Systems, Inc. ("SRS") arising out of the Company's termination of SRS'
subcontract for the performance of thermal desorption services at the
Hilton-Davis Project in Cincinnati, Ohio, SRS was awarded $2,400,000 in damages
from the Company. The Company has established a $2,400,000 reserve for the
arbitration award and has reduced the receivables relating to SRS' subcontract
performance (see "Note 7 -- Special Charges"). The Company filed a motion in
federal court to overturn the award and SRS has filed a motion to confirm the
award. The U.S. District Court for the Southern District of Ohio has scheduled
a hearing in September 1997 to decide these two motions.
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 other reserves, or if not
insured or reserved, will not, in the aggregate, have a material adverse impact
upon the Company's consolidated future results of operations or financial
condition.
In the course of the Company's business there is always risk and uncertainty in
pursuing and defending claims, litigation and arbitration proceedings and,
notwithstanding the reserves currently established, adverse future results in
litigation or other proceedings could have a material adverse impact upon the
Company' consolidated future results of operations or financial condition.
NOTE 7 - SPECIAL CHARGES
During June 1997, the Company settled litigation that was pending involving
Citgo and Oxy relating to a remediation project which was performed by the
Company for Citgo at its Lake Charles, Louisiana refinery during 1993 and 1994.
Under the terms of the settlement with Citgo and Oxy, the Company received a
cash payment of $14,346,000. In addition, as a result of an unfavorable binding
arbitration decision on the dispute between the Company and SRS arising out of
the Company's termination of SRS' subcontract for services at a project in
Cincinnati, Ohio, the Company must pay SRS $2,400,000 in damages. The settlement
and write-down of the aforementioned claims and litigation, together with other
receivables and the establishment of reserves for the consolidation of certain
laboratory and operational functions resulted in the Company recording a
$37,877,000 pre-tax, $22,726,000 after-tax or $0.83 per share, charge during the
second quarter of 1997.
The Company plans to divest its 40% share of NSC Corporation. As a result, the
Company recorded, in addition to the charge described above, a $14,949,000
pre-tax, $12,089,000 after tax or $0.45 per share, charge during the second
quarter of 1997, to reduce the carrying value of its NSC investment to reflect
the likely value to be realized given the Company's current intentions.
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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
as of June 30, 1997, and the related consolidated statements of operations for
the three and six month periods ended June 30, 1997 and 1996 and the
consolidated statements of cash flows for the six month periods ended June 30,
1997 and 1996. 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 as of December 31,
1996, 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 7, 1997, 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, 1996, 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
July 29, 1997
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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.
Effective June 1, 1997, the Company acquired all of the outstanding
stock of Beneco Enterprises, Inc., a Utah corporation ("Beneco"), for an
aggregate purchase price of $14,700,000. The purchase price was paid as follows:
(i) $9,700,000 in cash and (ii) unsecured promissory notes in the aggregate of
$5,000,000. Beneco is a provider of project, program and construction management
services to the Department of Defense and other government agencies throughout
the United States. The acquisition of Beneco 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 June
1, 1997. The Company's consolidated statements of operations include the results
of Beneco since June 1, 1997. See "Note 3 to the Consolidated Financial
Statements."
RESULTS OF OPERATIONS
REVENUE. The following table sets forth the Company's revenue by client
type for the three and six months ended June 30, 1997 and 1996 (in thousands,
except percentages):
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
----------------- --------------- --------------- ----------------
Federal, State, and Local Government... $104,771 81% $ 96,802 75% $197,157 83% $187,374 76%
Industrial............................. 24,542 19% 32,375 25% 40,654 17% 60,766 24%
-------- --- -------- --- -------- --- -------- ---
Total Revenue................. $129,313 100% $129,177 100% $237,811 100% $248,140 100%
======== === ======== === ======== === ======== ===
Revenue increased slightly for the three months ended June 30, 1997 by
$136,000 when compared to the same time period in 1996. Such increase in revenue
is primarily due to the inclusion of results of Beneco which was acquired
effective June 1, 1997. For the six months ended June 30, 1997 revenue decreased
$10,329,000 when compared to the same period in 1996. Such decrease in revenue
is primarily the result of decreased revenue from industrial sector clients,
partially offset by the results of Beneco.
Revenue from government agencies for the three and six months ended
June 30, 1997 increased $7,969,000 or 8% and $9,783,000 or 5%, respectively,
when compared to the same periods in 1996. This improvement resulted primarily
due to the inclusion of results of Beneco which was acquired effective June 1,
1997. Beneco's revenue is primarily derived from program and construction
management services provided under term contracts with the various Department of
Defense agencies and state and local governments. The hazardous waste
remediation services business experienced an increase in revenue from the
Company's term contracts with the United States Army Corps of Engineers
("USACE") and the Environmental Protection Agency ("EPA") as well as from state
and local governments during the three and six months ended June 30, 1997 when
compared to the same periods in 1996. Such increases were offset by a decrease
in revenue from the Company's term contracts with the United States Navy and the
United States Air Force. The Company expects to continue 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 agencies, as well as the Department of Energy. However,
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.
The Company experienced a $7,833,000 or 24% decrease in revenue from
industrial clients for the three months ended June 30, 1997 when compared to the
same period in 1996. For the six months ended June 30, 1997, revenue from
industrial clients decreased $20,112,000 or 33% when compared to the same period
in 1996. The Company believes that demand for its services 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 will continue to
have a material adverse impact upon the demand
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for the Company's services in the form of project delays as clients and
potential clients wait for and anticipate changes in these regulations. The
result of decreased demand from the industrial sector has increased the
competitive pressures on the contracts available for bid from the industrial
market. The Company has been very selective in bidding industrial contracts and
has established specific minimum criteria on profitability and risk in
determining whether or not to compete for any given contract. The Company
expects the current market conditions to continue in the industrial sector into
the foreseeable future.
COST OF SERVICES AND GROSS PROFIT. Cost of services decreased and gross
profit increased for the three months when compared to the same periods in 1996
as the Company experienced a slight increase in gross profit as a percentage of
revenue. Both cost of services and gross profit decreased for the six months
ended June 30, 1997, primarily as a result of the decrease in revenue. The
Company's gross profit as a percentage of revenue was negatively impacted during
the three and six months ended June 30, 1997 when compared to the same periods
in 1996 due to decreased margins in the industrial sector resulting from
competitive pressures. This was partially offset by an increase in the margin
percent on the Company's government projects.
CLAIMS SETTLEMENT COSTS AND OTHER. During June 1997, the Company
settled litigation that was pending involving Citgo Petroleum Corporation
("Citgo"), Oxy USA Inc., and Occidental Oil & Gas (collectively "Oxy") relating
to a remediation project which was performed by the Company for Citgo at its
Lake Charles, Louisiana refinery during 1993 and 1994. Under the terms of the
settlement with Citgo and Oxy, the Company received a cash payment of
$14,346,000. In addition, as a result of an unfavorable binding arbitration
decision on the dispute between the Company and Separation and Recovery Systems,
Inc. ("SRS") arising out of the Company's termination of SRS' subcontract for
services at a project in Cincinnati, Ohio, SRS was awarded $2,400,000 in
damages. The settlement and write-down of the aforementioned claims and
litigation, together with other receivables and the establishment of reserves
for the consolidation of certain laboratory and operational functions, resulted
in the Company recording a $37,877,000 pre-tax, $22,726,000 after-tax or $0.83
per share, charge during the second quarter of 1997. See "Note 7 to the
Consolidated Financial Statements."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SGA") expenses decreased $452,000 or 4% and $1,219,000 or 5%,
for the three and six months ended June 30, 1997, respectively, when compared to
the same periods in 1996. SGA expense as a percentage of revenue was 9% for all
periods presented. SGA expense has decreased primarily as a result of decreased
revenues and reductions made to overhead expenses.
INTEREST EXPENSE. Interest expense decreased 38% and 34% during the
three and six months ended June 30, 1997, respectively, when compared to the
same periods in 1996. The decrease in interest expense was a result of a
decrease in the average borrowings outstanding under the Company's revolving
credit agreement during such periods in 1997 when compared to the same periods
in 1996.
EQUITY IN NET EARNINGS OF AFFILIATE. The Company's equity interest in
NSC's net earnings was $0 and $185,000 for the three and six months ended June
30, 1997, respectively. NSC's net income has decreased primarily as a result of
decreased revenues in its Olshan demolition business. In addition, NSC has
experienced a decrease in gross profit as a result of margin deterioration and
losses incurred on certain of its projects during 1997.
WRITE-DOWN OF INVESTMENT IN NSC CORPORATION. The Company plans to
divest its 40% share of NSC Corporation. As a result, the Company recorded a
$14,949,000 pre-tax, $12,089,000 after tax or $0.45 per share, charge during the
second quarter of 1997, to reduce the carrying value of its NSC investment to
reflect the likely value to be realized given the Company's current intentions.
NET INCOME (LOSS). Net income (loss) for the three months ended June
30, 1997 was $(31,609,000) or $(1.16) per share compared to $2,379,000 or $0.09
per share for the same period in 1996. For the six months ended June 30, 1997,
net income (loss) was $(30,171,000) or $(1.11) per share compared to $3,709,000
or $0.14 per share for the same period in 1996. Such losses were a result of
the aforementioned charges recorded during the second quarter of 1997. Without
such charges, net income would have been $3,206,000 or $0.12 per share and
$4,644,000 or $0.17 per share, for the three and six months ended June 30,
1997, respectively.
The effective income tax rate was 34% and 33% for the three months
ended June 30, 1997 and 1996, respectively. For the six month period ending June
30, 1997 and 1996, the effective income tax rate was 34% and 33%, respectively.
See "Note 4 to the Consolidated Financial Statements" for a reconciliation of
the statutory federal income tax rate to the effective income tax rate.
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
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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. There were no amounts outstanding
for cash borrowing under the revolving credit facility at June 30, 1997 or
December 31, 1996. Aggregate letters of credit outstanding at June 30, 1997 and
December 31, 1996 were $14,108,000 and $12,223,000, respectively.
Capital expenditures for the six months ended June 30, 1997 and 1996,
were $10,529,000 and $11,221,000, respectively. The Company's capital
expenditures are primarily related to the installation of computer systems and
related equipment, the purchase of heavy equipment and the fabrication of custom
equipment by the Company for the execution of remediation projects. Capital
expenditures for the entire fiscal year 1997 are expected to range between
$20,000,000 and $25,000,000. 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 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 and other
external sources. In addition, in connection with the acquisition of Rust
Remedial Services, its parent company, Waste Management, Inc., 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, from time to time, evaluates potential acquisitions of
companies in the environmental remediation industry and industries related to
the core skills of the Company. While the Company believes that there are
currently available a number of potential acquisition candidates that would be
complementary to its business, the Company currently has no agreements,
understandings or arrangements to acquire a specific business or other material
assets. The Company cannot predict whether it will be successful in pursuing
such acquisition opportunities or what the consequences of any such acquisition
would be. Future acquisitions may involve the expenditure of significant funds
and management time. Depending upon the nature, size and timing of future
acquisitions, the Company may be required to raise additional capital through
financings, including public or private equity or debt offerings or additional
bank financings. There is no assurance that such additional financing will be
available to the Company on acceptable terms.
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 which commenced in 1996 of 7.5% of the principal amount as
well as payments due upon maturity of its Convertible Debentures in 2006. The
Company has purchased and retired $10,736,000 of the outstanding Convertible
Debentures during 1995 and 1996, sufficient to meet its annual sinking fund
obligations through October 1, 1997, as well as a portion of the sinking fund
obligation due October 1, 1998. 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 competitive
position.
Because of its dependence on government contracts, the Company also
faces the risks associated with such
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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.
FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical facts, included in
this Form 10-Q that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, including such
matters as future capital expenditures, including the amount and nature thereof,
potential acquisitions by the Company, trends affecting the Company's financial
condition or results of operations, and the Company's business and growth
strategies are forward-looking statements. Such statements are subject to a
number of risks and uncertainties, including risks and uncertainties identified
in this Form 10-Q, and in "Business -- Environmental Contractor Risks,"
"Business -- Regulation," "--Results of Operations" "--Environmental Matters and
Government Contracting," and "Note 1 to Consolidated Financial Statements" of
the Company's Annual Report on Form 10-K for the year ended December 31, 1996,
which sections are incorporated herein by reference, and other general economic
and business conditions, the business opportunities (or lack thereof) that may
be presented to and pursued by the Company, changes in laws or regulations
affecting the Company's operations and other factors, many of which are beyond
the control of the Company. In addition, these risks and uncertainties include,
without limitation, (i) the potential for fluctuations in funding of backlog,
(ii) weather conditions affecting or delaying the Company's ability to perform
or complete the services required by its contracts, (iii) the Company's ability
to be awarded new contracts in its target markets or its ability to expand
existing contracts, (iv) other industry-wide market factors, including the
timing of client's planned remediation activities and (v) interpretation or
enforcement by federal, state or local regulators of existing environmental
regulations. Also, there is always risk and uncertainty in pursuing and
defending litigation, arbitration proceedings and claims in the course of the
Company's business. All of these risks and uncertainties could cause actual
results to differ materially from those assumed in the forward-looking
statements. These forward-looking statements reflect management's analysis,
judgment, belief or expectation only as of the date of this Form 10-Q. The
Company undertakes no obligations to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
In addition to the disclosure contained herein, readers should carefully review
risks and uncertainties contained in other documents the Company files or has
filed from time to time with the Securities and Exchange Commission pursuant to
the Securities and Exchange Act of 1934, including, without limitation, the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 to Consolidated Financial Statements for a discussion of legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
a) The Annual Meeting of the Company's shareholders was held on
May 8, 1997. At the Annual Meeting, the following persons were
elected as directors of the Company, to serve until the next
Annual Meeting of Shareholders, with the votes for and
withheld with respect to each person, respectively, set forth
after such name:
For Withheld
---------- --------
Herbert A. Getz 25,235,472 753,687
Ivan W. Gorr 25,233,230 755,929
Charles D. Hollister 24,610,734 1,378,425
William Hulligan 25,238,142 751,017
James L. Kirk 25,243,835 745,324
Joseph R. Kirk 25,247,233 741,926
James E. Koenig 25,237,254 751,905
Richard W. Pogue 25,243,793 745,366
Charles W. Schmidt 25,224,582 744,577
(b) A proposal to amend the Company's Regulations to provide the
Chief Executive greater flexibility in human resources issues,
as described in the Company Proxy to Shareholders dated April
1, 1997, was approved by 95% of the Company's Common Stock
present and voting at the meeting. The results of the vote on
the proposal were:
For 25,569,625
Abstain 307,171
Against 98,608
(c) A proposal to approve the Company's Incentive Stock Plan, as
described in the Company Proxy to Shareholders dated April 1,
1997, was approved by 86% of the Company's Common Stock
present and voting at the meeting. The results of the vote on
the proposal were:
For 22,362,513
Abstain 3,484,037
Against 128,854
(d) A proposal to amend the Company's 1986 Stock Option Plan to
limit the number of options granted to any individual in a
three year period, as described in the Company Proxy to
Shareholders dated April 1, 1997, was approved by 98% of the
Company's Common Stock present and voting at the meeting. The
results of the vote on the proposal were:
For 25,400,008
Abstain 428,909
Against 146,487
(e) The total number of shares of the Registrant's Common Stock
outstanding as of March 20, 1997, the record date for the
Annual Meeting, was 27,071,464.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.39 Stock Purchase Agreement dated June 17, 1997 by and
among OHM Corporation, Beneco Enterprises, Inc.,
Bennie Smith, Jr., Robert Newberry and Scott Doxey
[incorporated by reference to Exhibit 2.1 to the
Registrant's Report on Form 8-K filed on July 2,
1997].
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 period.
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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: August 14, 1997 By /s/ James L. Kirk
------------------
James L. Kirk
Chairman of the Board
President and Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 1997 By /s/ Philip O. Strawbridge
--------------------------
Philip O. Strawbridge
Vice President and Chief Financial and
Administrative Officer
(Principal Financial Officer)
Date: August 14, 1997 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
- ------- -----------
10.39 Stock Purchase Agreement dated June 17, 1997 by and among
OHM Corporation, Beneco Enterprises, Inc., Bennie
Smith, Jr., Robert Newberry and Scott Doxey
[incorporated by reference to Exhibit 2.1 to the
Registrant's Report on Form 8-K filed on July 2,
1997].
11 Statement Re Computation of Per Share Earnings
15 Letter Re Unaudited Financial Information
27 Financial Data Schedule