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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, 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 October 31, 1997 was 27,367,417.
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OHM CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I
FINANCIAL INFORMATION
PAGE
NUMBER
------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 (Unaudited) and December
31, 1996................................................................... 1
Consolidated Statements of Operations (Unaudited) for the Three and Nine
Months Ended September 30, 1997 and 1996................................... 2
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended
September 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............................................................ 13
Item 6. Exhibits and Reports on Form 8-K............................................. 13
Signatures.............................................................................. 14
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OHM CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents........................................ $ 8,544 $ 14,002
Accounts receivable.............................................. 76,281 85,461
Costs and estimated earnings on contracts in process in excess of
billings...................................................... 49,661 56,303
Materials and supply inventory, at cost.......................... 14,037 13,899
Prepaid expenses and other assets................................ 9,734 17,274
Deferred income taxes............................................ 21,840 10,513
Refundable income taxes.......................................... 159 493
-------- --------
180,256 197,945
-------- --------
Property and Equipment, net........................................ 59,816 70,521
-------- --------
Other Noncurrent Assets:
Investments in affiliated company................................ 8,421 23,185
Intangible assets relating to acquired businesses, net........... 45,444 33,534
Deferred debt issuance and financing costs....................... 1,219 1,412
Deferred income taxes............................................ 6,086 3,563
Other assets..................................................... 7,777 6,377
-------- --------
68,947 68,071
-------- --------
Total Assets.................................................. $ 309,019 $336,537
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................. $ 66,750 $ 69,230
Billings on contracts in process in excess of costs and estimated
earnings...................................................... 1,289 897
Accrued compensation and related taxes........................... 5,550 6,528
Federal, state and local taxes................................... 142 150
Other accrued liabilities........................................ 22,427 21,477
Current portion of noncurrent liabilities........................ 7,400 5,321
-------- --------
103,558 103,603
-------- --------
Noncurrent Liabilities:
Long-term debt................................................... 49,248 52,972
Deferred gain from sale leaseback of equipment................... 3,450 4,484
Capital leases................................................... 74 32
Pension agreement................................................ 860 874
-------- --------
53,632 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 -- 27,302,115; 1996 -- 26,992,140......... 2,730 2,699
Additional paid-in capital....................................... 141,470 138,989
Retained earnings................................................ 7,629 32,884
-------- --------
151,829 174,572
-------- --------
Total Liabilities and Shareholders' Equity.................... $ 309,019 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
Revenue........................................ $143,656 $158,272 $381,467 $406,412
Cost of services............................. 122,747 137,634 328,833 353,184
-------- -------- -------- --------
Gross Profit................................... 20,909 20,638 52,634 53,228
Claims settlement costs and other............ -- -- 37,877 --
Selling, general and administrative
expenses.................................. 11,972 13,124 33,872 36,243
-------- -------- -------- --------
Operating Income (Loss)........................ 8,937 7,514 (19,115) 16,985
-------- -------- -------- --------
Other (Income) Expenses:
Investment income............................ (102) (97) (154) (112)
Interest expense............................. 1,226 1,780 3,779 5,658
Equity in net earnings of affiliate.......... -- (183) (185) (632)
Write-down of investment in NSC
Corporation............................... -- -- 14,949 --
Miscellaneous expense, net................... 9 (54) 232 489
-------- -------- -------- --------
1,133 1,446 18,621 5,403
-------- -------- -------- --------
Income (Loss) Before Income Taxes.............. 7,804 6,068 (37,736) 11,582
Income taxes (benefit)....................... 2,890 2,072 (12,479) 3,877
-------- -------- -------- --------
Net Income (Loss).............................. $ 4,914 $ 3,996 $(25,257) $ 7,705
======== ======== ======== ========
Net Income (Loss) Per Share.................... $ 0.18 $ 0.15 $ (0.93) $ 0.29
======== ======== ======== ========
Weighted average number of common and
equivalent shares outstanding................ 27,301 26,862 27,151 26,787
======== ======== ======== ========
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,
-----------------------
1997 1996
--------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net (loss) income.................................................... $ (25,257) $ 7,705
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization...................................... 10,717 13,025
Amortization of other noncurrent assets............................ 2,345 2,855
Deferred income taxes.............................................. (13,224) 3,177
Loss (gain) on sale of property and equipment...................... (285) 381
Equity in net earnings of affiliate................................ (185) (632)
Writedown of investment in affiliated company...................... 14,949 --
Deferred translation adjustments and other......................... 74 37
Changes in current assets and liabilities:
Accounts receivable................................................ 13,330 9,088
Costs and estimated earnings on contracts in process in excess of
billings........................................................ 6,642 (4,792)
Materials and supply inventory, at cost............................ (138) (451)
Prepaid expenses and other assets.................................. 7,540 1,813
Refundable income taxes and other adjustments...................... 334 66
Accounts payable................................................... (9,997) (4,432)
Billings on contracts in process in excess of costs and estimated
earnings........................................................ 392 (1,022)
Accrued compensation and related taxes............................. (1,458) (755)
Federal, state and local income taxes.............................. (8) (160)
Other accrued liabilities.......................................... (1,056) (6,911)
-------- --------
Net cash flows provided by operating activities................. 4,715 18,992
-------- --------
Cash flows from investing activities:
Purchases of property and equipment................................ (14,547) (15,263)
Proceeds from sale of property and equipment....................... 585 2,222
Proceeds from sale and leaseback of equipment...................... 17,900 --
Purchase of stock of business less cash acquired................... (7,092) --
Decrease in receivable from affiliated company..................... -- 15,000
Increase in other noncurrent assets................................ (2,755) (1,057)
-------- --------
Net cash (used in) provided by investing activities............. (5,909) 902
-------- --------
Cash flows from financing activities:
Payments on long-term debt and capital leases...................... (6,690) (5,379)
Proceeds from borrowing under revolving credit agreement and term
loan............................................................ 151,864 154,000
Payments on revolving credit agreement and term loan............... (151,864) (174,700)
Payments on pension agreement...................................... (86) (95)
Common stock issued for 401(k) funding and stock options........... 2,512 1,901
-------- --------
Net cash used in financing activities........................... (4,264) (24,273)
-------- --------
Net decrease in cash and cash equivalents....................... (5,458) (4,379)
Cash and cash equivalents at beginning of period..................... 14,002 11,205
-------- --------
Cash and cash equivalents at end of period........................... $ 8,544 $ 6,826
======== ========
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, 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 nine months ended
September 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 nine months ended
September 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 nine months ended September 30, 1997 and 1996 is not
expected to be material.
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 as an asset held for
sale. See "Note 7 -- Special Charges" regarding the Company's plans to divest
its ownership of NSC and the related reduction of its carrying value. All
material intercompany transactions and balances have been eliminated in
consolidation.
The consolidated financial statements at September 30, 1997, and for the
three and nine months then ended, have been reviewed 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 $3,520,000 and $5,253,000 and cash paid for
income taxes was $39,000 and $389,000 for the nine months ended September 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 the year 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 nine month
periods ended September 30, 1997 include the results of Beneco since June 1,
1997. The following table sets forth the unaudited
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combined pro forma results of operations of the Company for the nine months
ended September 30, 1997 and 1996, giving effect to the acquisition of Beneco as
if such acquisition had occurred on January 1, 1996.
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Gross revenue................................................ $410,047 $452,193
Net (loss) income............................................ $(25,156) $ 8,178
Net (loss) income per share.................................. $ (0.93) $ 0.31
The combined pro forma results of operations for the nine months ended
September 30, 1997 and 1996 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.
The estimated fair value of the assets acquired and liabilities assumed at
the date of acquisition are as follows (in thousands):
Current assets............................................................ $ 6,042
Property and equipment.................................................... 895
Goodwill.................................................................. 11,934
Current liabilities....................................................... 5,205
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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 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 4.9 6.0 4.8
Goodwill.......................................... 1.5 2.5 (0.7) 2.1
Research and development tax credits.............. (4.6) (5.9) 1.8 (5.9)
Write-down of investment in NSC Corporation....... -- -- (5.9) --
Equity in net earnings of affiliate............... -- (0.8) 0.1 (1.5)
Other, net........................................ 0.1 (0.6) (2.2) --
---- ---- ---- ----
37.0% 34.1% 33.1% 33.5%
==== ==== ==== ====
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 contract 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.
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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 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 September 30,
1997 include a claim receivable of $8,653,000 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.
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 denied the
Company's motion and confirmed the award.
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's consolidated future results of operations or financial
condition.
NOTE 7 -- SPECIAL CHARGES
During June 1997, the Company settled litigation that was pending involving
Citgo Petroleum Corporation ("Citgo") and Occidental 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 Occidental, 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 September 30, 1997, and the related consolidated statements of
operations for the three and nine month periods ended September 30, 1997 and
1996 and the consolidated statements of cash flows for the nine month periods
ended September 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.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
October 29, 1997
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a diversified services firm for government and private
sector clients and provides a broad range of outsourced services including
environmental remediation and project, program and construction management
services. 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 contract
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. The Company has agreed to make an additional payment in the year
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 ("DOD") 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 nine months ended September 30, 1997 and 1996 (in
thousands, except percentages):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
Federal, State, and
Local Government..... $110,879 77% $117,754 74% $308,036 81% $305,128 75%
Industrial............. 32,777 23% 40,518 26% 73,431 19% 101,284 25%
-------- --- -------- --- -------- --- -------- ---
Total Revenue..... $143,656 100% $158,272 100% $381,467 100% $406,412 100%
======== === ======== === ======== === ======== ===
Revenue decreased $14,616,000 or 9% and $24,945,000 or 6% for the three and
nine months ended September 30, 1997, respectively, when compared to the same
time period in 1996. Such decrease in revenue is primarily due to decreased
environmental remediation revenues from government and industrial sector
clients, partially offset by revenue from Beneco which was acquired effective
June 1, 1997 and has been included in the results of operations for the entire
third quarter of 1997.
Revenue from government agencies for the three months ended September 30,
1997 decreased $6,875,000 or 6% and increased $2,908,000 or 1% for the nine
months ended September 30, 1997, when compared to the same periods in 1996. The
improvement for the nine months ended September 30, 1997 is primarily due to the
inclusion of revenue from Beneco which was acquired effective June 1, 1997,
partially offset by a decrease in revenue from government contracts in the
Company's environmental remediation services business. Beneco's revenue is
primarily derived from program and construction management services provided
under term contracts with the various DOD agencies and state and local
governments. The environmental remediation business experienced a decrease in
revenue from the Company's term contracts with the various DOD agencies, which
was partially offset by an increase in revenue from the Environmental Protection
Agency as well as from state and local governments, during the three and nine
months ended September 30, 1997 when compared to the same periods in 1996. In
addition, the Company has experienced a decrease in revenue from its site
specific thermal
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incineration project in Holbrook, Massachusetts with the United States Army
Corps of Engineers as such project nears its completion. The Company expects to
continue to receive funding under its federal contracts in the foreseeable
future and is experiencing a significant amount of proposal activity for new
contracts with the various DOD 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 decrease in revenue from industrial clients of
$7,741,000 or 19% and $27,853,000 or 27% for the three months and nine months
ended September 30, 1997, respectively, when compared to the same periods 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 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 for the
three and nine months ended September 30, 1997 when compared to the same periods
in 1996. The decrease is due primarily to the decrease in revenue. Gross profit
increased slightly for the three months ended September 30 1997 and decreased
slightly for the nine months ended September 30, 1997 when compared to the same
periods in 1996. The Company's gross profit as a percentage of revenue increased
for the three and nine months ended September 30, 1997 when compared to the same
periods in 1996 due to an increase in the margin percent on the Company's
government projects and increased selectivity in bidding industrial contracts.
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 $1,152,000 or 9% and $2,371,000 or 7%,
for the three and nine months ended September 30, 1997, respectively, when
compared to the same periods in 1996. SGA expense as a percentage of revenue was
8% for the three months ended September 30, 1997 and 1996 and 9% for the nine
months ended September 30, 1997 and 1996. SGA expense has decreased primarily as
a result of decreased revenue and reductions made to overhead expenses in light
of such decreased revenue.
INTEREST EXPENSE. Interest expense decreased 31% and 33% during the three
and nine months ended September 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.
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WRITE-DOWN OF INVESTMENT IN NSC CORPORATION. The Company has written down
to expected net realizable value and 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 and to account for it
as an asset held for sale.
NET INCOME (LOSS). Net income for the three months ended September 30,
1997 was $4,914,000 or $0.18 per share compared to $3,996,000 or $0.15 per share
for the same period in 1996. For the nine months ended September 30, 1997, net
loss was $(25,257,000) or $(0.93) per share compared to net income of $7,705,000
or $0.29 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 $9,558,000 or $0.35 per share, for the nine
months ended September 30, 1997.
The effective income tax rate was 37% and 34% for the three months ended
September 30, 1997 and 1996, respectively. For the nine month period ending
September 30, 1997 and 1996, the effective income tax rate was 33% and 34%,
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. Waste Management, Inc. ("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. There were no amounts outstanding for cash
borrowing under the revolving credit facility at September 30, 1997 or December
31, 1996. Aggregate letters of credit outstanding at September 30, 1997 and
December 31, 1996 were $14,108,000 and $12,223,000, respectively.
Capital expenditures for the nine months ended September 30, 1997 and 1996,
were $14,547,000 and $15,263,000, 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
$18,000,000 and $22,000,000. 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.
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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. 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, or if available, will be
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 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,
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(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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.40 Amendment No. 2 and Waiver, dated as of August 12, 1997, to the
Revolving Credit Agreement, dated as of May 31, 1995, by and among OHM
Corporation and OHM Remediation Services Corp., and the banks named
therein, Citicorp USA, Inc., as Administrative Agent and Bank of America
National Trust and Savings Association (successor by merger to Bank of
America Illinois), as Issuing and Paying Agent and Co-Agent.
10.41 Third Amendment, dated as of August 12, 1997, to Security Agreement,
dated as of May 11, 1993, by and among OHM Corporation, OHM Remediation
Services Corp., Beneco Enterprises, Inc., Citicorp USA, Inc. as
Administrative Agent and Bank of America National Trust and Savings
Association (successor by merger to Bank of America Illinois) as Issuing
and Paying Agent and Co-Agent.
10.42 Second Amendment, dated as of August 12, 1997, to Pledge Agreement,
dated as of May 11, 1993, by and between OHM Corporation and Bank of
American National Trust and Savings Association (successor by merger to
Bank of America Illinois), as Issuing and Paying Agent.
10.43 Guaranty, dated as of August 12, 1997, by Beneco Enterprises, Inc., in
favor of the banks under the Revolving Credit Agreement, as amended as
of August 12, 1997 by and among OHM Corporation and OHM Remediation
Services Corp., and the banks named therein, Citicorp USA, Inc., as
Administrative Agent and Bank of America National Trust and Savings
association (successor by merger to bank of American Illinois), as
Issuing and Paying Agent and Co-Agent.
11 Statement Re Computation of Per Share Earnings
15 Letter Re Unaudited Financial Information
27 Financial Data Schedule
(b) Reports on Form 8-K
On July 2, 1997, the Company filed a Current Report on Form 8-K in connection
with the acquisition of all of the issued and outstanding capital stock of Beneco
Enterprises, Inc., a Utah corporation ("Beneco").
On August 22, 1997, the Company filed an amendment to the Current Report on Form
8-K, dated July 2, 1997.
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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: November 14, 1997 By: /s/ JAMES L. KIRK
------------------------------------
James L. Kirk
Chairman of the Board
President and Chief Executive
Officer
(Duly Authorized Officer)
By: /s/ PHILIP O. STRAWBRIDGE
------------------------------------
Philip O. Strawbridge
Vice President and Chief Financial
and Administrative Officer
(Principal Financial Officer)
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
- ------ -----------
10.40 Amendment No. 2 and Waiver, dated as of August 12, 1997, to
the Revolving Credit Agreement, dated as of May 31, 1995, by
and among OHM Corporation and OHM Remediation Services Corp.,
and the banks named therein, Citicorp USA, Inc., as
Administrative Agent and Bank of America National Trust and
Savings Association (successor by merger to Bank of America
Illinois), as Issuing and Paying Agent and Co-Agent.
10.41 Third Amendment, dated as of August 12, 1997, to Security
Agreement, dated as of May 11, 1993, by and among OHM
Corporation, OHM Remediation Services Corp., Beneco
Enterprises, Inc., Citicorp USA, Inc. as
Administrative Agent and Bank of America National
Trust and Savings Association (successor by merger to
Bank of America Illinois) as Issuing and Paying Agent
and Co-Agent.
10.42 Second Amendment, dated as of August 12, 1997, to Pledge
Agreement, dated as of May 11, 1993, by and between
OHM Corporation and Bank of American National Trust
and Savings Association (successor by merger to Bank
of America Illinois), as Issuing and Paying Agent.
10.43 Guaranty, dated as of August 12, 1997, by Beneco
Enterprises, Inc., in favor of the banks under the
Revolving Credit Agreement, as amended as of August
12, 1997 by and among OHM Corporation and OHM
Remediation Services Corp., and the banks named
therein, Citicorp USA, Inc., as Administrative Agent
and Bank of America National Trust and Savings
association (successor by merger to bank of American
Illinois), as Issuing and Paying Agent and Co-Agent.
11 Statement Re Computation of Per Share Earnings
15 Letter Re Unaudited Financial Information
27 Financial Data Schedule