10-Q 1 a10q.txt QUARTERLY REPORT United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period ended June 30, 2002 Commission File Number 333-34323 HYDROCHEM INDUSTRIAL SERVICES, INC. (*) (Exact name of registrant as specified in its charter) Delaware 75-2503906 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 900 Georgia Avenue Deer Park, Texas 77536 (Address of principal executive offices) (Zip Code) (713) 393-5600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares of Common Stock of the Registrant outstanding on August 1, 2002 was 100 shares. The Registrant's Common Stock is not registered under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. --------------------------------------------------------------------------- * HydroChem International, Inc., a wholly-owned subsidiary of HydroChem Industrial Services, Inc., is a Co-Registrant. It is incorporated under the laws of the State of Delaware. Its I.R.S. Employer Identification Number is 75-2512100. TABLE OF CONTENTS
Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 2001 and June 30, 2002 (unaudited)..................................................... 3 Consolidated Statements of Operations for the three and six months ended June 30, 2001 and 2002 (unaudited)............................... 4 Consolidated Statement of Stockholder's Equity for the six months ended June 30, 2002 (unaudited)........................................ 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2002 (unaudited)............................... 6 Notes to Consolidated Financial Statements (unaudited)............................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................... 13 Part II. Other Information Item 1. Legal Proceedings.................................................................. 18 Item 6. Exhibits and Reports on Form 8-K................................................... 18 Signatures........................................................................................... 21 Exhibit Index........................................................................................ 22
2 HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, June 31, 2001 2002 ---- ---- ASSETS Current assets: Cash and cash equivalents ................................ $ 7,943 $ 3,894 Receivables, less allowance of $280 and $408, respectively 30,589 35,484 Inventories .............................................. 4,119 3,516 Prepaid expenses ......................................... 675 2,637 Other current assets ..................................... 1,891 2,881 Income taxes receivable .................................. 652 691 Deferred income taxes .................................... 3,042 1,176 --------- --------- Total current assets ................................ 48,911 50,279 Property and equipment, at cost .............................. 103,438 101,991 Accumulated depreciation ................................. (62,411) (65,280) --------- --------- 41,027 36,711 Intangible assets, net ....................................... 91,697 91,129 --------- --------- Total assets ........................................ $ 181,635 $ 178,119 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable ......................................... $ 7,065 $ 6,246 Accrued liabilities ...................................... 15,404 15,506 Current portion of long-term debt (Note 3) ............... 4,286 4,286 --------- --------- Total current liabilities ........................... 26,755 26,038 Long-term debt (Note 3) ...................................... 135,714 133,419 Deferred income taxes ........................................ 7,440 5,893 Commitments and contingencies (Note 7) Stockholder's equity: Common stock, $.01 par value: 1,000 shares authorized, 100 shares outstanding ..... 1 1 Additional paid-in capital ............................... 16,558 16,558 Retained deficit ......................................... (4,833) (3,790) --------- --------- Total stockholder's equity ............................... 11,726 12,769 --------- --------- Total liabilities and stockholder's equity .......... $ 181,635 $ 178,119 ========= =========
See accompanying notes. 3 HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
Three months ended Six months ended June 30, June 30, -------- -------- 2001 2002 2001 2002 ---- ---- ---- ---- Revenue ...................................... $ 57,159 $ 51,840 $116,549 $108,640 Cost of revenue .............................. 35,937 33,345 73,268 69,186 -------- -------- -------- -------- Gross profit ........................... 21,222 18,495 43,281 39,454 Selling, general and administrative expense .. 13,164 12,655 26,621 25,112 Depreciation ................................. 2,719 2,622 5,420 5,298 Amortization of intangibles (Note 2).......... 996 148 1,991 306 -------- -------- -------- -------- Operating income ....................... 4,343 3,070 9,249 8,738 Other expense: Interest expense, net .................. 3,893 3,452 7,823 6,872 Other, net ............................. 15 (26) 20 53 -------- -------- -------- -------- Income (loss) before taxes ................... 435 (356) 1,406 1,813 Income tax provision (benefit) (Note 5). 490 (73) 985 770 -------- -------- -------- -------- Net income (loss) ............................ $ (55) $ (283) $ 421 $ 1,043 ======== ======== ======== ========
See accompanying notes. 4 HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (in thousands)
Additional Common Paid-in Retained Stock Capital Deficit Total ----- ------- -------- ----- Balance at December 31, 2001 ....... $ 1 $ 16,558 $(4,833) $ 11,726 Net income ..................... - - 1,043 1,043 -------- -------- ------- ------- Balance at June 30, 2002 ........... $ 1 $ 16,558 $(3,790) $ 12,769 ======= ======= ====== =======
See accompanying notes. 5 HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Six months ended March 31, 2001 2002 --------- -------- Operating activities: Net income........................................................ $ 421 $ 1,043 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation.................................................. 5,420 5,298 Amortization.................................................. 1,991 306 Amortization of deferred financing costs...................... 391 262 Deferred income tax provision................................. 937 319 Loss on sale of property and equipment........................ (7) 75 Changes in operating assets and liabilities: Receivables, net.............................................. (7,355) (4,895) Inventories................................................... 348 603 Prepaid expenses.............................................. (844) (1,962) Other current assets.......................................... 324 (990) Income taxes receivable....................................... 249 (39) Accounts payable.............................................. 483 (819) Accrued liabilities........................................... (2,031) 102 ------- ------- Net cash provided by (used in) operating activities...... 327 (697) ------- ------- Investing activities: Expenditures for property and equipment........................... (4,239) (1,426) Proceeds from sale of property and equipment...................... 333 369 ------- ------- Net cash used in investing activities.................... (3,906) (1,057) ------- ------- Financing activities: Repayments of long-term debt...................................... (2,510) (2,295) ------- ------- Net cash provided by financing activities................ (2,510) (2,295) ------- ------- Net decrease in cash................................................... (6,089) (4,049) Cash at beginning of period............................................ 6,380 7,943 ------- ------- Cash at end of period.................................................. $ 291 $ 3,894 ======= =======
See accompanying notes. 6 HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 1. Organization, Formation and Basis of Presentation The consolidated financial statements include the accounts of HydroChem Industrial Services, Inc. ("HydroChem") and its wholly-owned subsidiaries. (HydroChem and its subsidiaries are hereinafter sometimes referred to either separately or collectively as the "Company.") HydroChem is a wholly-owned subsidiary of HydroChem Holding, Inc. ("Holding"). The Company is engaged in the business of providing industrial cleaning services to a wide range of processing industries, including petrochemical plants, oil refineries, power plants, pulp and paper mills, steel mills, and aluminum plants. Services provided include high-pressure and ultra-high pressure water cleaning (hydroblasting), chemical cleaning, industrial vacuuming, tank cleaning, waste minimization, commissioning and other specialized services. The majority of these services involve recurring maintenance to improve or sustain the operating efficiencies and extend the useful lives of process equipment and facilities. The accompanying unaudited consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the accompanying unaudited interim financial statements include all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the results of the interim periods. Operating results for the six month interim period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. These unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 2. Adoption of New Accounting Principle On January 1, 2002, the Company adopted Statement of Financial Accounting Standards SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). Under these new rules, goodwill and intangible assets with indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with SFAS 142. Other intangible assets will continue to be amortized over their useful lives. Application of the non-amortization provisions of SFAS 142 resulted in a decrease in net loss for the three months ended June 30, 2002 of $649,000 and an increase in net income for the six months ended June 30, 2002 of $1,298,000. During the second quarter of 2002, the Company completed the first of the required impairment tests of goodwill and assets with indefinite lives as of January 1, 2002 and determined that there is no impairment as of January 1, 2002. The Company will continue to perform the required impairment testing on an annual basis during the fourth quarter. Pro forma results for the three and six months ended June 30, 2001, assuming the discontinuation of amortization for goodwill and intangible assets with indefinite lives, are shown below (in thousands):
Three Months Ended Six Months Ended June 30, 2001 June 30, 2001 ------------- ------------- Reported net income (loss)................ $ (55) $ 421 Amortization, net of taxes................ 649 1,298 --- ----- Adjusted net income....................... $ 594 $ 1,719 ======== ========
7 Intangible assets consist of the following (in thousands):
December 31, June 30, 2001 2002 ------------------------------- ------------------------------ Gross Book Net Book Gross Book Net Book Value Value Value Value ----- ----- ----- ----- Deferred financing costs .......... $ 5,127 $ 2,777 $ 5,127 $ 2,514 Other intangibles.................. 14,759 9,418 14,759 9,113 Goodwill .......................... 92,116 79,502 92,116 79,502 ------ ------ ------ ------ Total ........................ $ 112,002 $ 91,697 $ 112,002 $ 91,129 ======== ========= ======== =========
3. Long-term Debt Long-term debt consisted of the following (in thousands):
December 31, June 30, 2001 2002 ---- ---- Subordinated Notes................................................. $ 110,000 $ 110,000 Machinery and Equipment Loan....................................... 24,250 22,518 Real Estate Loan................................................... 5,750 5,187 ----- ----- Total long-term debt.......................................... 140,000 137,705 Less current portion of long-term debt........................ (4,286) (4,286) ------ ------ $ 135,714 $ 133,419 ========= =========
4. Restructuring Charge As of June 30, 2002, accruals of $318,000 remain relating to the restructuring charge recorded in 2001. These accruals relate primarily to severance, which will be paid during the second half of 2002, and rent for closed facilities, which will be paid over the respective remaining lease terms. During the second quarter of 2002, $170,000 of these accruals, principally for future lease payments, were credited to selling, general & administrative expense due to management's decision to continue an office previously identified for closure. 5. Income Taxes The Company files a consolidated tax return with Holding. The Company's effective income tax rate for the interim periods presented is based on management's estimate of the Company's effective tax rate for the applicable year and differs from the federal statutory income tax rate primarily due to nondeductible permanent differences. 6. Guarantor Information Condensed consolidating financial information for HydroChem is as follows (in thousands): 8 CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2001 ----------------------- Guarantor Total HydroChem Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ Int'l Other ----- ----- Assets: Receivables........................... $ 30,127 $ 462 $ -- $ -- $ 30,589 Other current assets ................. 13,929 3,748 645 -- 18,322 ------ ----- --- ------ Total current assets................. 44,056 4,210 645 -- 48,911 Property and equipment, net........... 40,793 101 133 -- 41,027 Intangible assets, net................ 91,630 67 -- -- 91,697 Investments........................... 1,102 -- -- (1,102) -- ----- ------ --- ------ ------- Total assets......................... $177,581 $4,378 $ 778 $(1,102) $181,635 ======= ===== ==== ====== ======= Liabilities and Stockholder's Equity: Current liabilities................... $ 26,454 $ 282 $ 19 $ -- $ 26,755 Long-term debt........................ 135,714 -- -- -- 135,714 Deferred income taxes................. 7,440 -- -- -- 7,440 Stockholder's equity.................. 7,973 4,096 759 (1,102) 11,726 ------ ----- --- ------ ------ Total liabilities and stockholder's equity.............................. $177,581 $4,378 $ 778 $(1,102) $181,635 ======= ===== ==== ====== =======
As of June 30, 2002 ----------------------- Guarantor Total HydroChem Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ Int'l Other ----- ----- Assets: Receivables........................... $ 34,941 $ 543 $ -- $ -- $ 35,484 Other current assets ................. 10,338 3,717 740 -- 14,795 ------ ----- --- ------ Total current assets................. 45,279 4,260 740 -- 50,279 Property and equipment, net........... 36,625 86 -- -- 36,711 Intangible assets, net................ 91,062 67 -- -- 91,129 Investments........................... 1,102 -- -- (1,102) -- ----- ----- --- ----- ------ Total assets......................... $174,068 $4,413 $ 740 $(1,102) $178,119 ======= ===== ==== ====== ======= Liabilities and Stockholder's Equity: Current liabilities................... $ 25,889 $ 149 $ -- $ -- $ 26,038 Long-term debt........................ 133,419 -- -- -- 133,419 Deferred income taxes................. 5,893 -- -- -- 5,893 Stockholder's equity.................. 8,867 4,264 740 (1,102) 12,769 ------ ----- --- ------ ------ Total liabilities and stockholder's equity.............................. $174,068 $4,413 $ 740 $(1,102) $178,119 ======== ====== ===== ======= ========
9 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three months ended June 30, 2001 ------------------------------------- Guarantor Total HydroChem Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ Int'l Other ----- ----- Revenue................................. $55,075 $1,808 $ 276 $ - $57,159 Cost of revenue......................... 34,630 1,165 142 - 35,937 ------ ----- --- ------ Gross profit......................... 20,445 643 134 - 21,222 Selling, general and administrative expense 12,511 572 81 - 13,164 Depreciation............................ 2,697 17 5 - 2,719 Amortization of intangibles............. 996 - - - 996 --- --- --- --- --- Operating income..................... 4,241 54 48 - 4,343 Interest and other expense, net......... 3,885 23 - - 3,908 ----- --- --- --- ----- Income before taxes.................. 356 31 48 - 435 Income tax expense...................... 490 - - - 490 --- --- --- --- --- Net income (loss).................... $ (134) $ 31 $ 48 $ - $ (55) ====== ===== ===== ==== ======
Three months ended June 30, 2002 ------------------------------------- Guarantor Total HydroChem Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ Int'l Other ----- ----- Revenue................................. $51,436 $ 404 $ - $ - $51,840 Cost of revenue......................... 33,017 325 3 - 33,345 ------ --- --- ------ Gross profit (loss).................. 18,419 79 (3) - 18,495 Selling, general and administrative expense 12,548 105 2 - 12,655 Depreciation............................ 2,610 12 - - 2,622 Amortization of intangibles............. 154 (6) - - 148 --- --- --- --- --- Operating income (loss).............. 3,107 (32) (5) - 3,070 Interest and other (income) expense, net 3,453 (27) - - 3,426 ----- --- --- --- ----- Loss before taxes.................... (346) (5) (5) - (356) Income tax expense...................... (73) - - - (73) --- --- --- --- --- Net loss............................. $ (273) $ (5) $ (5) $ - $ (283) ====== ===== ===== ==== ======
Six months ended June 30, 2001 ------------------------------------- Guarantor Total HydroChem Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ Int'l Other ----- ----- Revenue................................. $113,107 $3,037 $ 405 $ - $116,549 Cost of revenue......................... 70,950 2,074 244 - 73,268 ------ ----- --- ------- Gross profit (loss).................. 42,157 963 161 - 43,281 Selling, general and administrative expense 25,297 1,183 141 - 26,621 Depreciation............................ 5,375 35 10 - 5,420 Amortization of intangibles............. 1,991 - - - 1,991 --- ----- --- --- ----- Operating income (loss).............. 9,494 (255) 10 - 9,249 Interest and other expense, net......... 7,812 31 - - 7,843 ----- ---- --- --- ----- Income (loss) before taxes........... 1,682 (286) 10 - 1,406 Income tax expense...................... 985 - - - 985 --- --- --- --- ----- Net income (loss).................... $ 697 $ (286) $ 10 $ - $ 421 ====== ===== === === ======
10
Six months ended June 30, 2002 ------------------------------------- Guarantor Total HydroChem Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ Int'l Other ----- ----- Revenue................................. $107,310 $1,331 $ (1) $ - $108,640 Cost of revenue......................... 68,200 972 14 - 69,186 ------ ----- --- ------- Gross profit (loss).................. 39,110 359 (15) - 39,454 Selling, general and administrative expense 24,917 191 4 - 25,112 Depreciation............................ 5,275 23 - - 5,298 Amortization of intangibles............. 306 - - - 306 --- ----- --- --- ----- Operating income (loss).............. 8,612 145 (19) - 8,738 Interest and other (income) expense, net 6,949 (24) - - 6,925 ----- ---- --- --- ----- Income (loss) before taxes........... 1,663 169 (19) - 1,813 Income tax expense...................... 770 - - - 770 --- --- --- --- ----- Net income (loss).................... $ 893 $ 169 $ (19) - $ 1,043 ====== ===== === === ======
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Six months ended June 30, 2001 ------------------------------------- Guarantor Total HydroChem Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ Int'l Other ----- ----- Net cash provided by (used in) operating activities................... $ 445 $(114) $ (4) $ - $ 327 Capital expenditures.................... (4,204) (35) - - (4,239) Other investing activities.............. 333 - - - 333 ---- ---- ---- ---- ------ Net cash used in investing activities............................ (3,871) (35) - - (3,906) Net cash used in financing activities............................ (2,510) - - - (2,510) ---- ---- ---- ---- ------ Net decrease in cash.................... $(5,936) $(149) $ (4) $ - $(6,089) ====== ==== ====== ===== ======
Six months ended June 30, 2002 ------------------------------------- Guarantor Total HydroChem Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ Int'l Other ----- ----- Net cash provided by (used in) operating activities.................. $ (600) $ 30 $(127) $ - $ (697) Capital expenditures.................... (1,553) (6) 133 - (1,426) Other investing activities.............. 369 - - - 369 --- --- --- --- ------ Net cash provided by (used in) investing activities.................. (1,184) (6) 133 - (1,057) Net cash used in financing activities............................ (2,295) - - - (2,295) ------ --- --- --- ------ Net increase (decrease) in cash......... $(4,079) $ 24 $ 6 $ - $(4,049) ====== === ==== == ======
11 7. Commitments and Contingencies The Company is a defendant in various lawsuits arising in the normal course of business. Substantially all of these suits are being defended by the Company's insurance carriers. Management believes that any material contingent liability associated with this litigation will not exceed the limits of applicable insurance policies. While the results of litigation cannot be predicted with certainty, management believes adequate provision has been made for all of the foregoing claims and the final outcome of any pending litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. 8. Subsequent Event Pursuant to the Company's employee medical insurance program, the Company funds payment of approved claims and submits reimbursement requests to its stop loss insurance carrier to the extent any such claims exceed the Company's self insured claim level of $100,000 per person per year. In anticipation of obtaining a reimbursement from the stop loss insurance carrier for amounts over the self insured limit, the Company routinely records receivables from its stop loss insurance carrier for such amounts. On July 29, 2002, the Company's stop loss insurance carrier advised that it was denying a $740,000 claim made for amounts paid by the Company on behalf of an employee dependent. Although the Company has just begun to evaluate the denial of this claim and has not yet made any determination on a probable outcome, the Company is disputing the denial of the claim. At June 30, 2002, other current assets includes this $740,000 claim receivable from the stop loss insurance carrier. Subsequent to June 30, 2002, an additional $417,000 has been paid on behalf of this employee dependent. Depending upon the result of this evaluation and the resolution of this dispute, the Company may be required in the future to adjust the value of all or a part of the receivable at June 30, 2002 and any future receivable for amounts paid after that date. 12 HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statement Regarding Forward-Looking Information Management's Discussion and Analysis and other items in this Quarterly Report on Form 10-Q contain forward-looking statements and information that are based on management's beliefs, as well as assumptions made by, and information currently available to, management. When used in this document, the words "believe", "anticipate", "estimate", "expect", "intend", and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. The Company undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. For supplemental information, it is suggested that "Management's Discussion and Analysis of Financial Condition and Results of Operations" be read in conjunction with the corresponding sections included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The Form 10-K also includes the Company's Consolidated Financial Statements and the Notes thereto for certain prior periods, as well as other relevant financial and operating information. Critical Accounting Policies The discussion and analysis of the Company's financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates these estimates, including those related to self-insurance reserves and the allowance for doubtful accounts receivable. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following are the Company's most critical accounting policies. These policies require significant judgments and estimates used in the preparation of the Company's consolidated financial statements. Allowance for doubtful accounts receivable. The Company establishes reserves for doubtful accounts receivable using various percentages according to the age of the receivable and also evaluates customers on a case-by-case basis when management believes the required payment of specific amounts owed to the Company is unlikely to occur. Property and casualty insurance reserve. The Company's property and casualty insurance reserves are based upon management's assumptions and estimates regarding the probable outcome of the claims. Should the outcome differ from management's assumptions and estimates or should the insurance carriers become insolvent and unable to cover claims in excess of the Company's deductible, revisions to the estimated reserves for property and casualty insurance would be required. 13 Results of Operations The following table sets forth, for the periods indicated, information derived from the Company's consolidated statements of operations, expressed as a percentage of revenue. There can be no assurance that the trends in operating results will continue in the future.
Three months ended Six months ended June 30, June 30, -------- -------- 2001 2002 2001 2002 ---- ---- ---- ---- Revenue.................................. 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue.......................... 62.9 64.3 62.9 63.7 ---- ---- ---- ---- Gross profit....................... 37.1 35.7 37.1 36.3 SG&A expense............................. 23.0 24.4 22.8 23.1 Depreciation............................. 4.8 5.1 4.7 4.9 Amortization............................. 1.7 0.3 1.7 0.3 --- --- --- --- Operating income................... 7.6 5.9 7.9 8.0 Other expense: Interest expense, net.............. 6.8 6.7 6.7 6.3 Other, net......................... - (0.1) - - --- ---- Income (loss) before taxes............... 0.8 (0.7) 1.2 1.7 Income tax provision (benefit)..... 0.9 (0.1) 0.8 0.7 --- ---- --- --- Net income (loss)........................ (0.1)% (0.6)% 0.4 % 1.0 % ==== ==== === === EBITDA (1)............................... 14.1 % 11.3 % 14.3 % 13.2 % ==== ==== ==== ====
---------- (1) EBITDA for any relevant period presented above represents gross profit less selling, general and administrative expense. EBITDA should not be construed as a substitute for operating income, as an indicator of liquidity or as a substitute for net cash provided by operating activities, which are determined in accordance with accounting principles generally accepted in the United States. EBITDA is included because management believes it to be a useful tool for analyzing operating performance, leverage, liquidity and a company's ability to service debt. The Company's calculation of EBITDA may not be comparable to similar entitled items reported by other companies, as such companies may not define EBITDA as the Company defines it. Three months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 ----------------------------------------------------------------------------- Revenue. The Company's revenue by service line for the three months ended June 30, 2001 and 2002 is set forth in the following table (in thousands):
Three Months ended June 30, --------------------------- 2001 % 2002 % ---- - ---- - Hydroblasting $ 21,989 38.5 $ 20,805 40.1 Chemical cleaning 14,879 26.0 14,222 27.4 Industrial vacuuming 12,659 22.1 12,673 24.5 Tank cleaning 4,149 7.3 2,929 5.7 Other 3,483 6.1 1,211 2.3 ----- --- ----- --- Total $ 57,159 100.0 $ 51,840 100.0 ====== ===== ====== =====
Revenue decreased $5.3 million, or 9.3%, for the three months ended June 30, 2002, compared to the prior year period. This decrease resulted from lower revenue in all service lines except industrial vacuuming, which was essentially flat over the prior year period Hydroblasting revenue declined by $1.2 million primarily due to decreased maintenance activities with chemical and refining industry customers who are continuing to experience depressed margins. Tank cleaning revenue declined by $1.2 million, primarily due to a decrease in demand for refined products, resulting in idle tank capacity. Chemical cleaning revenue decreased by $657,000 due to a decline in project work, particularly boiler cleanings. Other revenue for the second quarter of 2002 was lower by $2.3 million compared to the second quarter of 2001 because the Company began using sub-contractors to provide mechanical services to its customers instead of performing these services directly. 14 Gross profit. Gross profit decreased $2.7 million, or 12.8%, to $18.5 million in 2002 from $21.2 million in the prior year period. Cost of revenue decreased $2.6 million, or 7.2%, to $33.3 million for 2002 from $35.9 million in the prior year period. Gross profit margin declined 1.4% to 35.7% as compared to 37.1% in the prior year period, primarily due to a decrease in revenue that was not offset by a reduction in certain compensation and equipment costs not directly affected by the decrease in revenue. SG&A expense. SG&A expense decreased $509,000, or 3.9%, to $12.7 million in 2002 from $13.2 million in the prior year period. The decrease reflected lower compensation and facility expenses resulting from the cost reduction program implemented in the last quarter of 2001. EBITDA. EBITDA decreased $2.2 million, or 27.5%, to $5.8 million in 2002 as compared to $8.1 million in the prior year period. The cost reduction program partially offset the impact on EBITDA of the revenue decrease from the prior year period. Depreciation. Depreciation expense remained relatively unchanged at $2.6 million in 2002 as compared to $2.7 million in the prior year period. Amortization. Amortization expense decreased $848,000, or 85.1%, to $148,000 in 2002 from $996,000 in the prior year period. This decrease is due to the Company's adoption of SFAS No. 142, "Goodwill and Other Intangible Assets". Under this new accounting policy, goodwill is no longer amortized but instead is periodically reviewed for impairment. During the second quarter of 2002, the Company completed the first of the required impairment tests of goodwill and assets with indefinite lives as of January 1, 2002 and determined that there is no impairment. Operating income. A decrease in gross margin, partially offset by a reduction in SG&A and amortization expense, resulted in a decrease in operating income of $1.3 million, or 29.3%, to $3.1 million in 2002 from $4.3 million in the prior year period. Interest expense, net. Interest expense, net decreased $441,000, or 11.3%, to $3.5 million in 2002 from $3.9 million in the prior year period. This decrease resulted from an $8.0 million reduction of outstanding debt from the prior year and lower interest rates on floating rate debt. Income (loss) before taxes. The Company had a loss before taxes of $356,000 in 2002 compared to income before taxes of $435,000 in the prior year period. This decrease of $791,000 was due to reduced operating income, partially offset by a decrease in interest expense. Income tax provision (benefit). The effective income tax rate decreased in 2002 primarily as a result of discontinuing certain goodwill amortization for book purposes. This amortization of goodwill was previously nondeductible for tax purposes. Net loss. Due to a decrease in operating income, partially offset by a decrease in interest expense, net, and a lower effective income tax rate, the Company's net loss increased by $228,000 to $283,000 in 2002, as compared to $55,000 in the prior year period. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 ------------------------------------------------------------------------- Revenue. The Company's revenue by service line for the six months ended June 30, 2001 and 2002 is set forth in the following table (in thousands): 15
Three Months ended June 30, --------------------------- 2001 % 2002 % ---- - ---- - Hydroblasting $ 47,531 40.8 $ 42,630 39.2 Chemical cleaning 28,606 24.5 29,062 26.8 Industrial vacuuming 25,747 22.1 28,169 25.9 Tank cleaning 7,322 6.3 6,434 5.9 Other 7,343 6.3 2,345 2.2 ----- --- ----- --- Total $116,549 100.0 $108,640 100.0 ======= ===== ======= =====
Revenue decreased $7.9 million, or 6.8%, for the six months ended June 30, 2002, compared to the prior year period. This decrease resulted primarily from lower hydroblasting, tank cleaning and other revenue, which was partially offset by higher industrial vacuuming and chemical cleaning revenue. Hydroblasting revenue declined by $4.9 million primarily due to decreased maintenance activities with chemical and refining industry customers, who are continuing to experience depressed margins. Tank cleaning revenue declined by $888,000, primarily due to a decrease in demand for refined products, resulting in idle tank capacity. Other revenue for the first six months of 2002 decreased by $5.0 million compared to the first six months of 2001 because the Company began using sub-contractors to provide mechanical services to its customers instead of performing these services directly. Industrial vacuuming revenue increased by $2.4 million resulting from new customer contracts and an increase in services to existing customers. Chemical cleaning revenue increased by $456,000 due to more project work, especially in the areas of plant pre-commissioning and boiler cleanings. Gross profit. Gross profit decreased $3.8 million, or 8.8%, to $39.5 million in 2002 from $43.3 million in the prior year period. Cost of revenue decreased $4.1 million, or 5.6%, to $69.2 million for 2002 from $73.3 million in the prior year period. Gross profit margin declined slightly to 36.3% as compared to 37.1% in the prior year period, primarily due to a decrease in revenue that was not offset by a reduction in certain compensation and equipment costs not directly affected by the decrease in revenue. SG&A expense. SG&A expense decreased $1.5 million, or 5.7%, to $25.1 million in 2002 from $26.6 million in the prior year period. The decrease reflected lower compensation and facility expenses resulting from the cost reduction program implemented in the last quarter of 2001. EBITDA. EBITDA decreased $2.3 million, or 13.9%, to $14.3 million in 2002 as compared to $16.7 million in the prior year period. The cost reduction program partially offset the impact on EBITDA of the revenue decrease from the prior year period. Depreciation. Depreciation expense remained relatively unchanged at $5.3 million in 2002 as compared to $5.4 million in the prior year period. Amortization. Amortization expense decreased $1.7 million, or 84.6%, to $306,000 in 2002 from $2.0 million in the prior year period. This decrease is due to the Company's adoption of SFAS No. 142, "Goodwill and Other Intangible Assets". Under this new accounting policy, goodwill is no longer amortized but instead is periodically reviewed for impairment. During the second quarter of 2002, the Company completed the first of the required impairment tests of goodwill and assets with indefinite lives as of January 1, 2002 and determined that there is no impairment. Operating income. A decrease in gross margin, partially offset by a reduction in SG&A and amortization expense, resulted in a decrease in operating income of $511,000, or 5.5%, to $8.7 million in 2002 from $9.2 million in the prior year period. Interest expense, net. Interest expense, net decreased $951,000, or 12.2%, to $6.9 million in 2002 from $7.8 million in the prior year period. This decrease resulted from an $8.0 million reduction of outstanding debt from the prior year and lower interest rates on floating rate debt. Income before taxes. The Company's income before taxes increased $407,000 to $1.8 million in 2002 compared to $1.4 million in the prior year period as a result of the decrease in interest expense. 16 Income tax provision. The effective income tax rate decreased in 2002 primarily as a result of discontinuing certain goodwill amortization for book purposes. This amortization of goodwill was previously nondeductible for tax purposes. Net income. Due to a decrease in interest expense, net, and a lower effective income tax rate, the Company's net income increased $622,000 to $1.0 million in 2002, as compared to $421,000 in the prior year period. Liquidity and Capital Resources The Company has financed its operations through net cash provided by operating activities, existing cash balances, and available credit facilities. On October 25, 2001, the Company entered into a financing agreement with The CIT Group/Business Credit, Inc., the proceeds of which were used for the refinancing of previously existing bank debt. The new credit facility in the amount of $62.5 million consists of (i) a revolving line of credit (the "Revolver") of up to $32.5 million, subject to a borrowing base determined by accounts receivable balances and (ii) two separate term loans in the respective amounts of $24.3 million (the "Machinery and Equipment Loan") and $5.8 million (the "Real Estate Loan"). As of June 30, 2002, $22.5 million was outstanding under the Machinery and Equipment Loan and $5.2 million was outstanding under the Real Estate Loan. The Company's borrowing base under the Revolver was $28.1 million, of which $3.5 million was reserved for standby letters of credit, principally issued in connection with the Company's property and casualty insurance program. On the same date, there was no outstanding balance under the Revolver and there were available borrowings of $24.3 million. For the six months ended June 30, 2002, net cash used in operations was $697,000, reflecting an increase in prepaid expenses due to annual insurance premium payments and an increase in other assets, primarily due to a health reinsurance receivable and deferred charges on project work. Net cash used in investing activities was $1.1 million. Expenditures for property and equipment for the six months ended June 30, 2002 were $1.4 million. The value of new vacuum trucks and light vehicles leased during the six months ended June 30, 2002 was $1.5 million. The capital expenditure budget and the value of equipment to be placed in service from operating leases for 2002 are $3.8 million and $4.6 million respectively. Management believes that cash and cash equivalents at June 30, 2002, net cash expected to be provided by operating activities, and borrowings, if necessary, under the Revolver will be sufficient to meet the Company's cash requirements for operations and expenditures for property and equipment for the next twelve months and the foreseeable future thereafter. From time to time, the Company reviews acquisition opportunities as they arise, and may require additional financing if it decides to make additional acquisitions. However, there can be no assurance if such acquisition opportunities arise, that such acquisitions will be consummated, or there will be financing available and on terms satisfactory to the Company. 17 Part II. Other Information Item 1.Legal Proceedings There have been no material changes to the proceedings previously reported in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description ------ ----------- 3.1 Certificate of Incorporation of HydroChem Industrial Services, Inc. as amended. (Exhibit 3.1 to the Company's Registration Statementon Form S-4, filed August 25, 1997, is hereby incorporated by reference.) 3.2 Certificate of Incorporation of HydroChem International, Inc., as amended. (Exhibit 3.2 to the Company's Registration Statement on Form S-4, filed August 25, 1997, is hereby incorporated by reference.) 3.3 By-Laws of HydroChem Industrial Services, Inc. (Exhibit 3.3 to the Company's Registration Statement on Form S-4, filed August 25, 1997, is hereby incorporated by reference.) 3.4 By-Laws of HydroChem International, Inc. (Exhibit 3.4 to the Company's Registration Statement on Form S-4, filed August 25, 1997, is hereby incorporated by reference.) 4.1 Purchase Agreement, dated as of July 30, 1997, by and among HydroChem Industrial Services, Inc., HydroChem International, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, as Initial Purchaser, relating to the 10 3/8% Series A Senior Subordinated Notes due 2007. (Exhibit 4.1 to the Company's Registration Statement on Form S-4, filed August 25, 1997, is hereby incorporated by reference.) 4.2 Indenture, dated as of August 1, 1997, among HydroChem Industrial Services, Inc., HydroChem International, Inc., as Guarantor, and Norwest Bank, Minnesota, N.A., as Trustee. (Exhibit 4.2 to the Company's Registration Statement on Form S-4, filed August 25, 1997, is hereby incorporated by reference.) 4.3 Registration Rights Agreement dated August 4, 1997, by and among HydroChem Industrial Services, Inc., HydroChem International, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, as Initial Purchaser. (Exhibit 4.3 to the Company's Registration Statement on Form S-4, filed August 25, 1997, is hereby incorporated by reference.) 10.1 HydroChem Holding, Inc. 1994 Stock Option Plan. (Exhibit 10.1 to the Company's Registration Statement on Form S-4, filed August 25, 1997, is hereby incorporated by reference.) 10.2 Deferred Bonus Plan of HydroChem Industrial Services, Inc. effective May 1, 1999. (Exhibit 10.14 to the Company's Form 10-Q filed August 10, 1999, is hereby incorporated by reference.) 10.3 First Amendment to Deferred Bonus Pla n of HydroChem Industrial Services, Inc. dated as of May 1, 2000. (Exhibit 10.3 to the Company's Form 10-Q filed August 11, 2000, is hereby incorporated by reference.) 18 10.4 Second Amendment to Deferred Bonus Plan of HydroChem Industrial Services, Inc. dated as of May 1, 2001. (Exhibit 10.4 to the Company's Form 10-Q filed May 11, 2001, is hereby incorporated by reference.) 10.5 Employment Agreement dated December 15, 1993 by and among HydroChem Holding, Inc., HydroChem Industrial Services, Inc. and B. Tom Carter, Jr., as amended through December 9, 1996. (Exhibit 10.5 to the Company's Registration Statement on Form S-4, filed August 25, 1997, is hereby incorporated by reference.) 10.6 Fourth Amendment to Employment Agreement dated April 9, 1998 by and among HydroChem Holding, Inc., HydroChem Industrial Services, Inc. and B. Tom Carter, Jr. (Exhibit 10.8 to the Company's Form 10-Q, filed May 14, 1998, is hereby incorporated by reference.) 10.7 Fifth Amendment to Employment Agreement dated April 18, 2002 by and among HydroChem Holding, Inc., HydroChem Industrial Services, Inc., and B. Tom Carter, Jr. (Filed herewith.) 10.8 Secured Promissory Note dated March 15, 2002 from B. Tom Carter, Jr. to HydroChem Holding, Inc. (Exhibit 10.7 to the Company's Form 10-K, filed March 29, 2002, is hereby incorporated by reference.) 10.9 Pledge Agreement dated March 15, 2002 between B. Tom Carter, Jr. and HydroChem Holding, Inc. (Exhibit 10.8 to the Company's Form 10-K, filed March 29, 2002, is hereby incorporated by reference.) 10.10 Executive Bonus Plan dated April 18, 2002 for B. Tom Carter, Jr. (Filed herewith.) 10.11 Employment Agreement dated November 1, 1992 between HydroChem Industrial Services, Inc. and Gary D. Noto. (Exhibit 10.3 to the Company's Registration Statement on Form S-4, filed August 25, 1997, is hereby incorporated by reference.) 10.12 Amendment dated January 27, 1999 to Employment Agreement dated November 1, 1992 between HydroChem Industrial Services, Inc. and Gary D. Noto. (Exhibit 10.8 to the Company's Form 10-K, filed March 29, 1999, is hereby incorporated by reference.) 10.13 Employment Agreement dated November 1, 1992 between HydroChem Industrial Services, Inc. and J. Pat DeBusk. (Exhibit 10.2 to the Company's Registration Statement on Form S-4, filed August 25, 1997, is hereby incorporated by reference.) 10.14 Employment Agreement dated September 26, 1997 between HydroChem Industrial Services, Inc. and Donovan W. Boyd. (Exhibit 10.10 to the Company's Form 10-K filed March 29, 1999, is hereby incorporated by reference.) 10.15 First Amendment to Employment Agreement dated as of June 28, 1999 to Employment Agreement dated as of September 26, 1997 between HydroChem Industrial Services Inc. and Donovan W. Boyd. (Exhibit 10.10 to the Company's Form 10-Q filed August 10, 1999, is hereby incorporated by reference.) 10.16 Second Amendment to Employment Agreement dated as of January 17, 2001 to Employment Agreement dated as of September 26, 1997 between HydroChem Industrial Services and Donovan W. Boyd. (Exhibit 10.13 to the Company's Form 10-K, filed March 21, 2001, is hereby incorporated by reference.) 19 10.17 Supplemental Confidentiality and Proprietary Information Agreement with Provision for Severance Benefit dated as of April 1, 2000 between HydroChem Industrial Services, Inc. and Dwane Ruiz. (Exhibit 10.15 to the Company's Form 10-K, filed March 29, 2002, is hereby incorporated by reference.) 10.18 Supplemental Confidentiality and Proprietary Information Agreement with provision for Severance Benefit dated as of November 1, 2001 between HydroChem Industrial Services, Inc. and Greg Rice. (Filed herewith.) 10.19 Letter Agreement regarding termination of employment dated March 27, 2002 between HydroChem Industrial Services, Inc. and Pelham H. A. Smith. (Exhibit 10.16 to the Company's Form 10-K, filed March 29, 2002, is hereby incorporated by reference.) 10.20 Amendment dated June 26, 2002 to Letter Agreement regarding termination of employment dated March 27, 2002 between HydroChem Industrial Services, Inc. and Pelham H. A. Smith. (Filed herewith.) 10.21 Letter Agreement regarding employment dated January 28, 2002 between HydroChem Industrial Services, Inc. and Kelvin Collard. (Exhibit 10.17 to the Company's Form 10-K, filed March 29,2002, is hereby incorporated by reference.) 10.22 Finance Agreement dated October 25, 2001 among HydroChem Industrial Services, Inc., HydroChem Holding, Inc. HydroChem International, Inc., HydroChem Industrial Cleaning, Inc. and The CIT Group/Business Credit, Inc., as Agent and Lender. (Exhibit 10.25 to the Company's Form 10-Q, filed November 8, 2001, is hereby incorporated by reference.) 10.23 First Amendment dated as of November 30, 2001 to Finance Agreement dated October 25, 2001 among HydroChem Industrial Services, Inc., HydroChem Holding, Inc., HydroChem International, Inc, HydroChem Industrial Cleaning, Inc., and The CIT Group/Business Credit, Inc. as Agent and Lender. (Exhibit 10.19 to the Company's Form 10-K, filed March 29, 2002, is hereby incorporated by reference.) 10.24 Second Amendment dated as of January 31, 2002 to Finance Agreement dated October 25, 2001 among HydroChem Industrial Services, Inc., HydroChem Holding, Inc., HydroChem International, Inc., HydroChem Industrial Cleaning, Inc., The CIT Group/Business Credit, Inc., as Agent and Lender, and the other Lender parties thereto. (Exhibit 10.20 to the Company's Form 10-K, filed March 29, 2002, is hereby incorporated by reference.) (b) Reports on Form 8-K. None. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HYDROCHEM INDUSTRIAL SERVICES, INC. Date: August 8, 2002 By: /s/ Kelvin R. Collard ------------------------------------ Kelvin R. Collard, Vice President and Chief Financial Officer HYDROCHEM INTERNATIONAL, INC. Date: August 8, 2002 By: /s/ Kelvin R. Collard ------------------------------------ Kelvin R. Collard, Vice President and Chief Financial Officer 21 EXHIBIT INDEX 10.18 Supplemental Confidentiality and Proprietary Information Agreement with provision for Severance Benefit dated as of November 1, 2001 between HydroChem Industrial Services, Inc. and Greg Rice. 10.20 Amendment dated June 26, 2002 to Letter Agreement regarding termination of employment dated March 27, 2002 between HydroChem Industrial Services, Inc. and Pelham H. A. Smith. 22