UNITED STATES
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
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
For the transition period from __________ to __________
Commission File Number 0-27508
SUPERIOR SERVICES, INC.
(exact name of Registrant as specified in its charter)
Wisconsin 39-1733405
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10150 West National Avenue, Suite 350, West Allis, Wisconsin 53227
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (414) 328-2800
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes_____ No_____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The number of shares of Common Stock of the registrant, par value
$.01 per share, outstanding on November 5, 1997 was 23,809,421.
<PAGE>
SUPERIOR SERVICES, INC.
FORM 10-Q INDEX
For the Quarter Ended September 30, 1997
Page Number
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations . . . . . . . 4
Condensed Consolidated Statements of Shareholders'
Investment . . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . 7-11
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . .11-17
PART II. OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 18
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
Superior Services, Inc.
Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)
December 31, September 30,
1996 1997
(Restated)
ASSETS
Current assets:
Cash and cash equivalents $16,579 $55,124
Trade accounts receivable 19,226 35,247
Prepaid expenses and other current assets 2,817 4,166
-------- --------
Total current assets 38,622 94,537
Property and equipment, net 115,691 172,575
Restricted funds held in trust 8,035 7,007
Other assets 4,044 3,780
Intangible assets, net 23,634 57,999
-------- --------
Total assets $190,026 $335,898
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt $2,529 $1,913
Trade accounts payable 6,966 9,415
Accrued payroll and related expenses 3,178 4,240
Other accrued expenses 9,825 14,107
Accrued income taxes 299 2,823
-------- --------
Total current liabilities 22,797 32,498
Long-term debt, net of current maturities 4,907 3,853
Disposal site closure and long-term
care obligations 30,470 39,151
Deferred income taxes 13,679 13,399
Other liabilities 11,128 14,111
Commitments and contingencies
Shareholders' investment:
Common stock 187 233
Additional paid-in capital 81,754 195,743
Retained earnings 25,104 36,910
-------- --------
Total shareholders' investment 107,045 232,886
-------- --------
Total liabilities and shareholders' investment $190,026 $335,898
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Superior Services, Inc.
Condensed Consolidated Statements of Operations
(In Thousands, Except Share and Per Share amounts)
(Unaudited)
Three months Nine months
ended Sept. 30, ended Sept. 30,
1996 1997 1996 1997
(Restated) (Restated)
Revenues $31,478 $51,578 $83,563 $127,552
Expenses:
Cost of operations 15,617 28,761 42,963 69,991
Selling, general and
administrative costs 4,608 6,260 13,110 18,090
Merger costs - - - 1,035
Depreciation and
amortization expenses 4,135 6,935 12,030 17,236
------- ------- ------- -------
24,360 41,956 68,103 106,352
------- ------- ------- -------
Operating income 7,118 9,622 15,460 21,200
Other income (expense):
Interest expense (99) (471) (643) (1,030)
Other income (expense) (187) 163 300 165
------- ------- ------- -------
Income before income taxes 6,832 9,314 15,117 20,335
Provision for income taxes 2,818 3,842 6,236 8,529
------- ------- ------- -------
Net income $4,014 $5,472 $8,881 $11,806
====== ====== ====== =======
Earnings per share $0.21 $0.27 $0.50 $0.60
====== ====== ====== =======
Weighted average number
of common and common
equivalent shares
outstanding 18,791,386 20,470,838 17,815,431 19,755,520
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Superior Services, Inc.
Condensed Consolidated Statements of Shareholders' Investment
(In Thousands, Except Share Amounts)
(Unaudited)
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
Balance at
December 31, 1996,
as previously reported 17,021,449 $170 $80,015 $23,683 $103,868
Shares issued for
pooling of interests 1,705,000 17 1,739 1,421 3,177
---------- ---- ------- ------- --------
Balance at
December 31, 1996,
as restated 18,726,449 187 81,754 25,104 107,045
Net income - - - 11,806 11,806
Issuance of
common stock:
Shares sold to public,
net of costs 4,000,000 40 106,010 - 106,050
Stock options 409,579 4 5,192 - 5,196
Acquisitions 136,138 2 2,787 - 2,789
---------- ---- ------- ------- --------
Balance at
September 30, 1997 23,272,166 $233 $195,743 $36,910 $232,886
========== ==== ======== ======= ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Superior Services, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
For the nine months ended September 30,
1996 1997
(Restated)
OPERATING ACTIVITIES
Net income $8,881 $11,806
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,030 17,236
Deferred income taxes (454) (280)
Gain on sale of assets (57) (4)
Changes in operating assets and liabilities,
net of effects of acquired businesses:
Accounts receivable (2,640) (12,229)
Prepaid expenses and other current assets 142 (1,063)
Accounts payable and accrued expenses 5,089 3,926
Disposal site closure and long-term care
obligation 1,859 1,298
Other 914 2,583
------- -------
Net cash provided by operating activities 25,764 23,273
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (14,629) (77,819)
Capital expenditures (12,884) (19,983)
Proceeds from sale of discontinued operations 562 -
Proceeds from sale of property and equipment 425 753
Increase (decrease) in restricted funds
held in trust (846) 1,557
------- -------
Net cash used in investing activities (27,372) (95,492)
FINANCING ACTIVITIES
Net decrease in short-term borrowings (1,697) (616)
Proceeds from long-term debt - 4,364
Payments of long-term debt (19,329) (4,230)
Issuance of common stock 37,282 111,246
------- -------
Net cash provided by financing activities 16,256 110,764
------- -------
Net increase in cash and cash equivalents 14,648 38,545
Cash and cash equivalents at beginning of period 3,101 16,579
------- -------
Cash and cash equivalents at end of period $17,749 $55,124
======= =======
The accompanying notes are an integral part of these financial statements.
<PAGE>
Superior Services, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
Superior Services, Inc. ("Superior" or the "Company") is an
integrated solid waste services company providing solid waste collection,
transfer, transportation, disposal and recycling services to generators of
solid waste and special waste in nine states. The condensed consolidated
financial statements included herein have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). As applicable under such rules and
regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The
Company believes that the presentations and disclosures in the financial
statements included herein are adequate to make the information not
misleading. The financial statements reflect all elimination entries and
normal adjustments which are necessary for a fair statement of the results
for the interim periods presented. The Company has also restated the
previously issued financial statements for the three and nine months ended
September 30, 1996 and the consolidated balance sheet presented as of
December 31, 1996 to reflect the acquisition of Resource Recovery Transfer
& Transportation, Inc. ("R2T2") consummated on June 27, 1997 and accounted
for using the pooling of interests method. Operating results for interim
periods are not necessarily indicative of the results for full years or
other interim periods. It is suggested that the condensed consolidated
financial statements included herein be read in conjunction with the
consolidated financial statements of Superior and the related notes
thereto (the "Financial Statements") included in the Company's Form 10-K
for the year ended December 31, 1996.
The accompanying condensed consolidated financial statements include
the accounts of Superior and its subsidiaries. All significant
intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to the 1996 financial statements to
conform to the 1997 presentation.
2. Significant Accounting Policies and Use of Estimates
There have been no significant additions to or changes in accounting
policies of the Company since December 31, 1996. For a description of
these policies, see Note 2 of Notes to Consolidated Financial Statements
in the Company's Form 10-K for the year ended December 31, 1996.
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, basic earnings per share will
exclude the dilutive effect of stock options. Basic earnings per share
for the nine months ended September 30, 1997 and September 30, 1996 would
both have been one cent higher than previously reported primary earnings
per share. The impact of Statement 128 on the calculation of fully
diluted earnings per share for these quarters is not expected to be
material.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
3. Acquisitions
In the first nine months of 1997, the Company acquired 21 businesses
which were accounted for as purchases. Aggregate consideration for these
acquisitions was approximately $76.6 million in cash. These acquisitions
have been accounted for as purchases and, accordingly, the results of
their operations have been included in the Company's financial statements
from their respective dates of acquisition.
During the first nine months of 1997, in addition to the shares
issued to effect the R2T2 acquisition discussed below, 136,138 shares of
Common Stock were issued under the Company's Form S-4 Registration
Statement. 77,024 shares were issued and $1.2 million of cash was paid in
settlement of final valuation computations on certain acquisitions which
occurred in 1996. In addition, 59,114 shares were issued in payment of
debt of entities acquired in 1997.
On June 27, 1997, the Company consummated its acquisition of R2T2,
accounted for as a pooling of interests, pursuant to which the Company
issued 1,705,000 shares of Common Stock in the transaction under the
Company's Form S-4 Registration Statement. The Company incurred
nonrecurring merger costs of approximately $1.0 million during the second
quarter of 1997 as a result of the merger consummated with R2T2. The
merger costs include severance and bonuses, professional fees, and other
merger related costs. As of September 30, 1997, $270,000 had been accrued
for merger costs expected to be paid by the end of 1997. Periods prior to
1995 have not been restated to include the accounts and operations of the
acquired company as combined results are not materially different from the
results as previously presented. Combined and separate results of
operations of the Company prior to consummation of the merger, and R2T2
for the restated nine months ended September 30, 1996, are as follows (in
thousands):
Superior R2T2 Combined
Nine months ended Sept. 30, 1996
(unaudited):
Revenue $78,587 $4,976 $83,563
Income before income taxes $14,342 $ 775 $15,117
Net income $ 8,426 $ 455 $ 8,881
The unaudited pro forma results of operations below assume that 1996
and 1997 acquisitions accounted for as purchases occurred at the beginning
of 1996. In addition to combining the historical results of all such
acquired entities, the pro forma calculations include adjustments for
amortization of various intangibles acquired in conjunction with the
acquisitions. However, no adjustments have been reflected for
nonrecurring expenses as a result of the acquisition of the entities.
Nine Months Ended September 30,
1996 1997
(Unaudited and in thousands, except per share amounts)
Total net revenue $135,477 $146,205
Net income $ 11,215 $ 12,560
Earnings per share $ 0.62 $ 0.64
The above pro forma financial information is based on certain
assumptions and preliminary estimates which are subject to change. The
above pro forma financial information reflects the consideration paid at
closing for all 1996 and 1997 acquisitions accounted for as purchases. It
does not reflect the payments of any contingent consideration. The above
pro forma financial information also does not reflect anticipated volume
or price increases, synergies or other potential operational improvements.
The pro forma financial information does not purport to be indicative of
the results which would actually have been recognized had the purchase
transactions been completed on January 1, 1996 or which may be obtained in
the future.
4. Shareholders' Investment
On February 11, 1997, the Company granted employee incentive stock
options exercisable for 302,935 shares of Common Stock at an exercise
price of either $21.50 or $23.65 per share (fair market value on grant
date was $21.50). During the nine months ended September 30, 1997, an
additional 165,000 employee incentive stock options were granted at
exercise prices between $21.50 and $24.375 per share. The options become
exercisable 25% after one year and an additional 6.25% for each quarter
thereafter. On October 20, 1997, an additional 325,000 employee incentive
stock options were granted at an exercise price of $25.0625 per share.
These options become exercisable in increments of 6.25% per quarter.
On May 13, 1997, the Company granted non-qualified common stock
options for 17,500 shares at an exercise price of $21.25 per share to
independent directors serving on the Company's Board of Directors. These
options vest ratably over an approximate three-year period.
In September 1997, the Company completed a follow-on public stock
offering in which it issued 4,000,000 shares of common stock at a price of
$28.00 per share, resulting in net proceeds after deduction of
underwriting discounts and commissions and other offering expenses to the
Company of approximately $106.1 million. Subsequent to the end of the
third quarter, the underwriters of the Company's follow-on stock offering
partially exercised their over-allotment option and, as a result, an
additional 403,500 shares were sold by the Company in October 1997 at the
price of $28.00 per share, resulting in net proceeds of $10.7 million.
5. Commitments and Contingencies
In connection with at an acquisition in March 1993, the Company was
required to accept the transfer of at an adjacent closed landfill that is
listed on the National Priorities List ("NPL"). A remedial investigation
performed by the PRPs (including the Company) has determined the scope and
nature of the contamination at the site and the PRPs have submitted a
feasibility study to the EPA and WDNR which describes the alternatives for
remediating the associated groundwater contamination. The WDNR has
formally approved the remedial alternative recommended by the PRPs which
calls for the installation of two to four additional gas extraction wells
(which would be connected to the existing gas extraction system at the
site) and continued groundwater monitoring. As of September 30, 1997, the
estimated one-time capital cost for the additional extraction wells was
$107,000. Annual operating, maintenance and monitoring costs for the new
extraction wells, the landfill cap, the existing gas extraction system and
groundwater monitoring system are estimated as $90,000. The operating
duration of the proposed remediation is uncertain, but could be 30 years
or longer. The Company has entered into a settlement agreement with
certain generator PRPs which allocates the costs of the remediation.
Under the settlement agreement, certain of the generator PRPs agreed to
contribute a total of approximately 42% of future costs for remedial
action and the annual operating, maintenance, and monitoring costs related
to the site. The seller and former owner of the closed landfill agreed
to indemnify the Company up to $2.8 million for any site liabilities,
including the annual costs of operating, maintaining and monitoring the
closed landfill and any costs the Company may incur as a PRP. The Company
has been paid $482,755 by the seller. The seller's remaining potential
indemnification obligation was collateralized as of September 30, 1997 by
$2,317,245 in cash held in escrow. The $2,317,245 recoverable from the
seller is included on the Company's balance sheet as part of "other
assets." On August 15, 1997, an engineer selected by the seller
determined that the reasonable present value of the cost of a likely
remediation plan for the closed landfill approximates $688,000. The
reasonable present value of the likely remediation plan is presently the
subject of an arbitration proceeding demanded by the seller. If the
arbitrator agrees with the engineer's estimate, the Company may be
required to return to the seller substantially all or a substantial
portion of the current amount held in escrow, which would result in a
reduction of its "other asset" and the related liability account on its
balance sheet. Although the engineer's estimate of such potential costs
was substantially less than the Company's current estimate, the Company
believes its existing financial reserves, together with the amounts paid
and remaining payable by the seller and the contribution obligations of
the generator PRPs, are adequate to cover the currently anticipated
remediation costs of such landfill. As is the case with all sites on the
NPL, the performance of the selected remedies at the closed landfill will
be subject to periodic review by the WDNR and the EPA. In the event the
selected remedies do not perform adequately to meet applicable state and
federal standards, additional remedial measures beyond those currently
anticipated could be required by the WDNR or EPA. Implementation of any
such additional remedial measures may involve substantial additional costs
beyond those currently anticipated.
In connection with the formation of the Company in 1993 through the
consolidation of three groups of independent waste services companies,
certain potential environmental liabilities associated with the previously
filled portion of the Superior Valley Meadows landfill were identified.
At the time of the consolidation of these companies into the Company, a
contingent liability escrow was established to cover the then estimated
costs of remediation and monitoring with respect to these contingent
liabilities. To indemnify the Company against up to $1,308,000 of these
contingent liabilities, 130,800 shares of the Company's Common Stock
otherwise issuable as part of the consolidation to the individual who was
the principal shareholder of the prior owner of the site and who is now a
director, executive officer and significant shareholder of the Company,
were withheld from issuance. In order to preserve the Company's rights
under this indemnification arrangement prior to the February 24, 1997
expiration date for advancing such types of indemnification claims, the
Company formally notified the individual of the Company's claim against
the withheld shares for the entire amount of the originally established
liability escrow. The Company believes that the entire amount of such
environmental liabilities will either be covered by the foregoing
indemnification arrangement or otherwise is not expected to have a
material adverse effect on the Company's results of operations or
financial condition.
The Missouri Department of Natural Resources ("MDNR") has alleged
that the prior owner of the Company's Oak Ridge Landfill in Ballwin,
Missouri exceeded the permitted vertical elevation of the landfill by
allowing disposal of solid waste outside the permitted contours of the
landfill. The MDNR has also alleged that the landfill has not complied
with the terms of a settlement agreement with the MDNR addressing these
allegations. A Company subsidiary purchased the landfill in September
1996. The Company is unable to assess the cost, if any, of correcting
this alleged violation, or the extent of any fine which may be imposed by
MDNR. The Company believes that any expense associated with correcting
the alleged violation as well as any such fine imposed would be covered by
the indemnification obligations of the landfill's prior owner.
The Company carries a range of insurance, including a commercial
general liability policy and a property damage policy. The Company
maintains a limited environmental impairment liability policy on its
landfills and transfer stations that provides coverage, on a "claims made"
basis, against certain third party off-site environmental damage. There
can be no assurance that the limited environmental impairment policy will
remain in place or provide sufficient coverage for existing, but not yet
known, third party, off-site environmental liabilities. The Company is
also a party to various legal proceedings arising in the normal course of
business. The Company believes that the ultimate resolution of these
other matters will not have a material adverse effect on the Company's
financial condition or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Management's Discussion and
Analysis are "forward-looking statements" intended to qualify for the safe
harbors from liability established by the Private Securities Litigation
Reform Act of 1995. These forward-looking statements can generally be
identified as such because the context of the statement will include words
such as the Company "believes," "anticipates," "expects" or words of
similar import. Similarly, statements that describe the Company's future
plans, objectives, strategies or goals are also forward-looking
statements. Such forward-looking statements are subject to certain risks
and uncertainties which are described in close proximity to such
statements and which could cause actual results to differ materially from
those currently anticipated. Shareholders, potential investors and other
readers are urged to consider these factors carefully in evaluating the
forward-looking statements and are cautioned not to place undue reliance
on such forward-looking statements. The forward-looking statements made
herein are only made as of the date of this report and the Company
undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
General
As of September 30, 1997, the Company provided solid waste
collection, transfer, recycling and disposal services to over 435,000
residential, commercial and industrial customers in Wisconsin and in
Alabama, Illinois, Iowa, Michigan, Minnesota, Missouri, Ohio and
Pennsylvania. As of September 30, 1997, solid waste operations
consisted of 12 Company-owned and operated landfills, 31 collection
operations, 14 recycling facilities and 10 solid waste transfer
stations. The Company also manages five other landfills for
third parties. The Company also provides other integrated waste
services, most of which are project-based and provide additional waste
volumes to the Company's landfills.
As described more fully below, revenues for the periods presented
were comprised of fees received for the following services:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
Collection 43% 51% 45% 52%
Third party disposal 25% 21% 24% 21%
Recycling 12% 11% 12% 11%
Other integrated waste services 20% 17% 19% 16%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
The Company believes that future operations acquired will continue
the trend in its revenue mix away from recycling and other integrated
waste services and more towards solid waste collection and disposal. The
percentage of revenue obtained from collection services increased to 52%
in the first nine months of 1997 compared to 45% in the first nine months
of 1996 due to a greater portion of revenue being generated from
collection operations acquired since September 30, 1996.
All financial data for the three- and nine-month periods ended
September 30, 1996 and 1997 have been restated and give retroactive effect
to reflect the Company's June 27, 1997 acquisition of R2T2 in a
transaction accounted for as a pooling of interests.
Results of Operations
Overview
Revenues in the 1997 third quarter of $51.6 million increased 63.9%
over the comparable period in the prior year, as restated, primarily due
to businesses acquired and successfully integrated into the Company during
the latter half of 1996 and in the second quarter of 1997. Earnings per
share increased 28.6% to $0.27 per share in the 1997 third quarter from
$0.21 per share for the third quarter of 1996 as restated. Net income
increased 36.3% to $5.5 million in the 1997 third quarter, from $4.0
million in the same period of 1996, as restated.
For the first nine months of 1997, revenues increased 52.6% to $127.6
million compared to $83.6 million for the same period in the prior year,
as restated, largely reflecting the impact of operations acquired since
September 30, 1996. Operating income as a percentage of revenue decreased
reflecting the increase in cost of operations due to the higher relative
percentage of non-integrated collection business resulting in a lower
overall percentage of waste collected by the Company which is disposed of
at its own facilities and the $1.0 million of merger costs incurred in
June 1997 related to the R2T2 acquisition accounted for as a pooling of
interests. Net income increased 32.9% to $11.8 million in the first nine
months of 1997 from $8.9 million in the first nine months of 1996, as
restated. Earnings per share increased to $0.60 for the first nine months
of 1997 from $0.50 per share for the same period in 1996, as restated.
The following table sets forth for the periods indicated the
percentage of revenues represented by the individual line items reflected
in the Company's condensed consolidated statements of operations:
Three months Nine months
ended Sept.30, ended Sept 30,
1996 1997 1996 1997
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of operations 49.6 55.8 51.4 54.9
Selling, general and
administrative expenses 14.6 12.1 15.7 14.2
Merger costs - - - 0.8
Depreciation and amortization 13.1 13.4 14.4 13.5
---- ---- ---- ----
Operating income 22.7 18.7 18.5 16.6
Interest expense (0.3) (0.9) (0.8) (0.8)
Other income (expense) (0.6) 0.3 0.4 0.1
---- ---- ---- ----
Income before income taxes 21.8 18.1 18.1 15.9
Income taxes 9.0 7.5 7.5 6.6
---- ---- ---- ----
Net income 12.8% 10.6% 10.6% 9.3%
==== ==== ==== ====
Revenues
Revenues increased $20.1 million, or 63.9%, and $44.0 million, or
52.6%, for the three- and nine-month periods, respectively, ended
September 30, 1997 compared with the same periods in 1996, as restated.
These increases for each 1997 period were primarily due to the impact of
operations acquired since September 30, 1996 which were accounted for
under the purchase method of accounting. Revenues for each 1997 period
compared to the same periods in 1996, as restated, increased $18.3 million
and $38.7 million, respectively, from the impact of these acquired
operations. The increase in revenue was also due, to a much lesser
extent, to increases in volumes of wastes collected and disposed at the
Company's landfills. Daily disposal volume at the Company's landfills
rose to an average of almost 11,300 tons per day in the 1997 third quarter
compared to an average of about 7,900 tons per day in the corresponding
period last year, including the average daily tonnage of the two landfills
owned by R2T2. The higher landfill volume was predominantly the result of
waste received at disposal sites acquired, as well as increased volumes of
special waste streams from the Company's project-driven other integrated
waste services.
Revenue from other integrated waste services as a percentage of total
revenue decreased from 20% in the first nine months of 1996 to 17% in the
first nine months of 1997, primarily due to acquisition activity by the
Company since September 30, 1996.
1997 third quarter revenues compared to 1996 third quarter revenues
increased approximately 2% from the impact of prices for recyclable
wastepaper. The resale prices of, and demand for, recyclable waste
products, particularly wastepaper, can be volatile and subject to changing
market conditions. The Company's recycling operations continued to be
profitable in the 1997 third quarter due to the Company's floor-pricing
arrangement with a national paper company coupled with the cost
effectiveness of the Company's processing facilities and fees received for
providing recyclable waste collection services to its customers.
Cost of Operations
Cost of operations increased $13.1 million, or 84.2%, and $27.1
million, or 62.9%, for the three- and nine-month periods ended September
30, 1997, respectively, compared to the same periods in 1996, as restated.
As a percentage of revenues, cost of operations increased from 49.6% in
the third quarter of 1996, as restated, to 55.8%, in the third quarter of
1997 and from 51.4% in the first nine months of 1996, as restated, to
54.9% in the first nine months of 1997. In each case the increase was due
to the higher relative percentage of non-integrated collection business
resulting in a lower overall percentage of waste collected by the Company
which is disposed of at its own facilities and due to the higher relative
percentage of business recognized from collection operations (which
typically have higher costs of operations as a percentage of revenues than
disposal operations). Changes in this trend are dependent on the timing
and mix of potential future business acquisitions, the timing of the
opening of its landfill projects under development in Ohio and Wisconsin
and the seasonality of the Company's operations. See "Seasonality." The
increase in the dollar amount of cost of operations was primarily
attributable to the costs of collecting and disposing of the increased
volumes of wastes received from services provided to new customers,
including the operation of new businesses acquired after September 30,
1996.
Selling, General and Administrative Expense ("SG&A")
SG&A increased $1.7 million, or 35.9%, and $5.0 million, or 38.0%,
for the three- and nine-month periods ended September 30, 1997,
respectively, compared to the same periods in 1996, as restated. As a
percentage of revenues, SG&A decreased to 12.1% in the third quarter of
1997 compared to 14.6% the third quarter of 1996, as restated, and to
14.2% in the first nine months of 1997 compared to 15.7% in the first nine
months of 1996. This trend is expected to continue in the near term due
primarily to the impact of leveraging corporate SG&A costs over a larger
revenue base as the Company integrates its recent acquisitions and
continues to pursue its acquisition growth strategy. While SG&A decreased
as a percentage of revenues, the actual dollar amount of SG&A increased
primarily due to increased costs for personnel necessary to support the
Company's acquisition program and to service new customers, including
those associated with the operations acquired after September 30, 1996.
Merger Costs
The Company incurred nonrecurring merger costs of approximately $1.0
million during the second quarter of 1997 as a result of the merger
consummated June 27, 1997 with R2T2. The merger costs included severance
and bonuses, professional fees and other related merger costs. As of
September 30, 1997, $270,000 had been accrued for merger related costs
expected to be paid by the end of 1997.
Depreciation and Amortization
Depreciation and amortization increased $2.8 million, or 67.7%, and
$5.2 million, or 43.3%, for the three- and nine-month periods ended
September 30, 1997, respectively, compared to the same periods in 1996, as
restated, primarily as a result of increased landfill depletion costs and
increased depreciation costs of the additional assets and operations
acquired after September 30, 1996. As a percentage of revenues,
depreciation and amortization increased slightly to 13.4% in the third
quarter of 1997 compared to 13.1% in the third quarter of 1996, as
restated, due to lower depletion at one of the Company's landfills in the
third quarter of 1996. The depletion costs were lower in the third
quarter of 1996 as additional disposal capacity was gained at one of the
company's landfills as a result of additional settlement and recompaction
of the waste in a portion of the site. Depreciation and amortization
decreased to 13.5% in the first nine months of 1997 compared to 14.4% in
the first nine months of 1996, as restated, due to the lower relative
percentage of revenues received from disposal operations (which typically
have higher depreciation and amortization costs as a percentage of revenue
compared to collection operations) and due to lower depletion rates at
several landfills. These lower depletion rates reflect at an increase in
special waste volumes which typically utilize fewer cubic yards of air
space due to the density of this type of waste.
Interest Expense
Interest expense increased $372,000, or 375.8%, and $387,000, or
60.2%, for the three- and nine-month periods ended September 30, 1997,
respectively, compared to the same periods in 1996, as restated. Interest
of $1 million was capitalized during the first nine months of 1997 related
to land being developed.
Other Income (Expense)
The line item other income increased $350,000 from other expense of
$187,000 in the three-month period ended September 30, 1996, as restated,
to income of $163,000 in the three-month period ended September 30, 1997.
Other income decreased $135,000 from other income of $300,000 in the nine-
month period ended September 30, 1996, as restated, to $165,000 in the
nine-month period ended September 30, 1997. Approximately $500,000 of
direct costs associated with acquisition activity primarily related to one
unsuccessful acquisition bid for a significant company being liquidated in
a bankruptcy auction process were charged against earnings in the second
quarter of 1997.
Liquidity and Capital Resources
The Company's balance sheet at September 30, 1997 reflected
approximately $55.1 million in cash and cash equivalents compared to $16.6
million at December 31, 1996, as restated.
At September 30, 1997, the Company had no long-term borrowings and
$2.3 million in letters of credit outstanding under its revolving credit
facility, with $107.7 million remaining available under its credit
facility for future borrowings. Total long-term debt at September 30,
1997 was $3.9 million. At September 30, 1997, the ratio of the Company's
long-term debt to total capitalization was 1.6% compared to 4.4% at
December 31, 1996, as restated.
On August 7, 1997, the Company filed a Form S-3 "shelf" registration
statement with the Securities and Exchange Commission to register
5,000,000 shares of common stock. 4,000,000 of these registered shares
were sold in September 1997 at a price of $28.00 per share. The $106.1
million of net proceeds to the Company from this offering after deduction
of underwriting discounts and commissions and other offering expenses were
used to reduce outstanding debt by $51.7 million. The remainder of the
net proceeds have been and will continue to be used for potential future
acquisitions, capital expenditures, and working capital. Pending
specific application, the Company has invested the unused net proceeds in
short-term interest bearing securities. Subsequent to the end of the
third quarter, the underwriters of the Company's follow-on stock offering
partially exercised their over-allotment option and, as a result, an
additional 403,500 shares were sold by the Company in October 1997 at the
price of $28.00 per share, resulting in net proceeds of $10.7 million.
The Company's principal strategy for future growth is through the
acquisition of additional solid waste disposal, transfer and collection
operations. The cash required to fund any future acquisitions in 1997 will
likely be provided from one or more of the following sources: the net
proceeds from the Company's recent follow-on stock offering, existing cash
balances, cash flow from operations and/or borrowings under the Company's
revolving credit facility. During the first nine months of 1997, the
Company paid $76.6 million to complete 20 acquisitions of solid waste
operations and one marine services company.
Capital expenditures for the nine months ended September 30, 1997
were $20.0 million compared to $12.9 million for the nine months ended
September 30, 1996, as restated, primarily due to increased spending for
trucks and other revenue producing assets. Capital expenditures for 1997
are currently expected to be approximately $24.0 million compared to $17.5
million in 1996, as restated. The Company intends to fund future capital
expenditures principally through internally generated funds and equipment
lease financing. In addition, the Company also anticipates that it may
require substantial additional capital expenditures to facilitate its
growth strategy of acquiring additional solid waste collection and
disposal businesses. If the Company is successful in acquiring additional
landfill disposal facilities, the Company may also be required to make
significant expenditures to bring any such newly acquired disposal
facilities into compliance with applicable regulatory requirements, obtain
permits for any such newly acquired disposal facilities or expand the
available disposal capacity at any such newly acquired disposal
facilities. The amount of these expenditures cannot be currently
determined, since they will depend on the nature and extent of any
acquired landfill disposal facilities, the condition of any facilities
acquired and the permitting status of any acquired sites. In the past,
the Company has been able to obtain other types of financing arrangements,
such as equipment lease financing, to fund its various capital
requirements. The Company believes it can readily access such additional
sources of financing as necessary to facilitate the Company's growth.
Net cash provided by operations for the nine months ended
September 30, 1997 decreased to $23.3 million from $25.8 million in the
nine months ended September 30, 1996, as restated. The decrease was
primarily due to at an increase in accounts receivable of $9.6 million
attributable to the increased sales volume from acquisitions completed
since September, 1997. The increase in accounts receivable was virtually
offset by the increase in net income of $2.9 million, and the increase in
depreciation and amortization, a noncash expense, of $5.2 million between
the first nine months of 1996, as restated, and the first nine months of
1997.
Net cash used in investing activities for the nine months ended
September 30, 1997 increased to $95.5 million from $27.4 million in the
nine months ended September 30, 1996, as restated. The increase was
primarily due to the Company's $77.8 million of net cash payments for
operations acquired and the $7.1 million increase in capital expenditures
in the nine months ended September 30, 1997 compared to the nine months
ended September 30, 1996, as restated.
Net cash provided by financing activities in the nine months ended
September 30, 1997 totaled $110.8 million, compared to $16.3 million in
the nine months ended September 30, 1996, as restated, reflecting the
receipt of $106.1 million in net proceeds from the follow-on offering of
the Company's stock in September 1997. The cash provided by financing
activities in 1996, as restated, reflected the receipt of $37.2 million in
net proceeds from the initial public offering of the Company's stock in
March 1996 and the subsequent reduction of the Company's outstanding debt.
Seasonality
The Company's historical results of operations have tended to vary
seasonally, with the first quarter of the year typically generating the
least amount of revenues, and with revenues higher in the second and third
quarters, followed by a decline in the fourth quarter. This seasonality
reflects the lower volume of waste, as well as decreased revenues from
project-based and other integrated waste services during the fall and
winter months, as well as the operating difficulties experienced during
the protracted periods of cold and inclement weather typically experienced
during the winter in the Upper Midwest. Also, certain operating and other
fixed costs remain relatively constant throughout the calendar year,
resulting in a similar seasonality of operating income.
PART II
Item 1. Legal Proceedings
See Note 5 of Notes to Condensed Consolidated
Financial Statements included in this Form 10-Q for
information regarding certain ongoing legal
proceedings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibits filed with this Form 10-Q report are incorporated
herein by reference to the Exhibit Index accompanying this
report.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
<PAGE>
SIGNATURE
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.
Superior Services, Inc.
(Registrant)
Date November 14, 1997 /s/ George K. Farr
George K. Farr
Chief Financial Officer
<PAGE>
SUPERIOR SERVICES, INC.
EXHIBIT INDEX
Exhibit Number Exhibit Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF SUPERIOR SERVICES, INC.
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 55,124
<SECURITIES> 0
<RECEIVABLES> 36,532
<ALLOWANCES> (1,285)
<INVENTORY> 1,191
<CURRENT-ASSETS> 94,537
<PP&E> 240,713
<DEPRECIATION> (63,138)
<TOTAL-ASSETS> 335,898
<CURRENT-LIABILITIES> 32,498
<BONDS> 3,853
0
0
<COMMON> 233
<OTHER-SE> 232,653
<TOTAL-LIABILITY-AND-EQUITY> 335,898
<SALES> 0
<TOTAL-REVENUES> 127,552
<CGS> 0
<TOTAL-COSTS> 87,227
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 1,030
<INCOME-PRETAX> 20,335
<INCOME-TAX> 8,529
<INCOME-CONTINUING> 11,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,806
<EPS-PRIMARY> .60
<EPS-DILUTED> .60
</TABLE>
