Attached files
Table of Contents
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: June 30, 2011
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: 001-33816
HECKMANN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 26-0287117 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
300 Cherrington Parkway, Suite 200, Coraopolis, Pennsylvania 15108
(412) 329-7275
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
75080 Frank Sinatra Drive, Palm Desert, California 92211
(760) 341-3606
(Former name, former address and former fiscal year, if changed since last report)
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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrants common stock as of July 30, 2011 was 116,727,227
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HECKMANN CORPORATION
Heckmann Corporation
(In thousands, except share data)
June 30, 2011 | December 31, 2010 |
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(Unaudited) | ||||||||
Assets |
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Current assets: |
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Cash and cash equivalents |
$ | 36,887 | $ | 91,212 | ||||
Certificates of deposit |
11,830 | 11,830 | ||||||
Marketable securities |
6,113 | 75,554 | ||||||
Accounts receivable, net |
42,389 | 17,749 | ||||||
Inventories, net |
3,088 | 1,877 | ||||||
Prepaid expenses and other receivables |
4,890 | 2,893 | ||||||
Income tax receivable |
2,018 | 1,980 | ||||||
Other current assets |
1,908 | 144 | ||||||
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Total current assets |
109,123 | 203,239 | ||||||
Property, plant and equipment, net |
210,102 | 103,618 | ||||||
Marketable securities |
8,873 | 14,619 | ||||||
Equity investments |
7,182 | 7,628 | ||||||
Intangible assets, net |
32,210 | 24,526 | ||||||
Goodwill |
100,665 | 47,350 | ||||||
Other |
1,173 | 273 | ||||||
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Total assets |
$ | 469,328 | $ | 401,253 | ||||
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Liabilities and equity |
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Current liabilities: |
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Accounts payable |
$ | 31,331 | $ | 20,961 | ||||
Deferred revenue |
158 | 346 | ||||||
Accrued expenses |
26,117 | 21,680 | ||||||
Current portion of long-term debt |
33,827 | 11,221 | ||||||
Due to related parties |
423 | 414 | ||||||
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Total current liabilities |
91,856 | 54,622 | ||||||
Deferred income taxes |
12,771 | 8,773 | ||||||
Long-term debt, net of current portion |
36,494 | 20,474 | ||||||
Other long-term liabilities |
11,438 | 14,307 | ||||||
Equity: |
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Preferred stock, $0.001 par value: 1,000,000 shares authorized; no shares issued or outstanding |
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Common stock, $0.001 par value: 500,000,000 shares authorized, 131,036,430 shares issued and 116,727,227 shares outstanding at June 30, 2011 and 127,489,387 shares issued and 114,180,184 shares outstanding December 31, 2010 |
128 | 126 | ||||||
Additional paid-in capital |
764,993 | 747,187 | ||||||
Purchased warrants |
(6,844 | ) | (6,844 | ) | ||||
Treasury stock |
(19,500 | ) | (15,088 | ) | ||||
Accumulated other comprehensive income |
(108 | ) | 99 | |||||
Accumulated deficit |
(423,311 | ) | (423,859 | ) | ||||
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Total equity of Heckmann Corporation |
315,358 | 301,621 | ||||||
Noncontrolling interest |
1,411 | 1,456 | ||||||
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Total equity |
316,769 | 303,077 | ||||||
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Total liabilities and equity |
$ | 469,328 | $ | 401,253 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
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Heckmann Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
$ | 46,933 | $ | 11,626 | $ | 70,693 | $ | 20,231 | ||||||||
Cost of goods sold |
35,685 | 8,647 | 54,365 | 15,469 | ||||||||||||
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Gross profit |
11,248 | 2,979 | 16,328 | 4,762 | ||||||||||||
Operating expenses: |
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Selling and marketing |
788 | 797 | 1,272 | 1,306 | ||||||||||||
General and administrative |
9,441 | 4,717 | 15,281 | 7,523 | ||||||||||||
Pipeline start-up and commissioning (Note 2) |
| 13,005 | | 13,005 | ||||||||||||
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Total operating expenses |
10,229 | 18,519 | 16,553 | 21,834 | ||||||||||||
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Income (loss) from operations |
1,019 | (15,540 | ) | (225 | ) | (17,072 | ) | |||||||||
Interest income (expense), net |
(895 | ) | 532 | (1,147 | ) | 1,098 | ||||||||||
Loss from equity method investment |
(422 | ) | (4,098 | ) | (462 | ) | (4,048 | ) | ||||||||
Other, net |
558 | 3,926 | 2,547 | 4,257 | ||||||||||||
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Income (loss) before income taxes |
260 | (15,180 | ) | 713 | (15,765 | ) | ||||||||||
Income tax benefit (expense) |
(77 | ) | 2,580 | (210 | ) | 2,722 | ||||||||||
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Net income (loss) |
183 | (12,600 | ) | 503 | (13,043 | ) | ||||||||||
Net income (loss) attributable to the noncontrolling interest |
| (61 | ) | 45 | (24 | ) | ||||||||||
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Net income (loss) attributable to common stockholders |
$ | 183 | $ | (12,661 | ) | $ | 548 | $ | (13,067 | ) | ||||||
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Earnings (loss) per share (Note 2) |
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Basic |
$ | * | $ | (0.12 | ) | $ | * | $ | (0.12 | ) | ||||||
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Diluted |
$ | * | $ | (0.12 | ) | $ | * | $ | (0.12 | ) | ||||||
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* | amount is less than $0.01 per share |
The accompanying notes are an integral part of these consolidated financial statements.
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Heckmann Corporation
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) attributable to common stockholders |
$ | 183 | $ | (12,661 | ) | $ | 548 | $ | (13,067 | ) | ||||||
Add back: net loss (income) attributable to the noncontrolling interest |
| 61 | (45 | ) | 24 | |||||||||||
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Net income (loss) |
183 | (12,600 | ) | 503 | (13,043 | ) | ||||||||||
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation loss |
(76 | ) | (51 | ) | (87 | ) | (84 | ) | ||||||||
Reclassification of net gains from sales of available-for-sale securities included in earnings |
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Unrealized loss on available-for-sale securities |
(65 | ) | (165 | ) | (120 | ) | (81 | ) | ||||||||
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Total other comprehensive loss, net of tax |
(141 | ) | (216 | ) | (207 | ) | (476 | ) | ||||||||
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Comprehensive income (loss), net of tax |
42 | (12,816 | ) | 296 | (13,519 | ) | ||||||||||
Net income (loss) attributable to the noncontrolling interest |
| (61 | ) | 45 | (24 | ) | ||||||||||
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Comprehensive income (loss) attributable to the Company |
$ | 42 | $ | (12,877 | ) | $ | 341 | $ | (13,543 | ) | ||||||
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The accompanying notes are an integral part of these consolidated financial statements.
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Heckmann Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six months ended June 30, | ||||||||
2011 | 2010 | |||||||
Operating activities |
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Net income (loss) |
$ | 503 | $ | (13,043 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Depreciation |
9,165 | 2,032 | ||||||
Amortization |
1,281 | 812 | ||||||
Bad debt expense |
| 194 | ||||||
Settlement of litigation |
(1,849 | ) | ||||||
Stock-based compensation |
884 | 437 | ||||||
Loss from equity method investments |
462 | 4,048 | ||||||
Loss on Harbin rescission |
| 1,576 | ||||||
Change in fair value of contingent consideration |
| (3,962 | ) | |||||
Loss on disposal of property, plant and equipment |
| 708 | ||||||
Other |
852 | 486 | ||||||
Changes in operating assets and liabilities, net of business acquisitions: |
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Accounts receivable |
(19,418 | ) | (3,055 | ) | ||||
Inventories |
(638 | ) | 22 | |||||
Prepaid expenses and other receivables |
(3,327 | ) | 2,229 | |||||
Refundable income tax |
| (2,743 | ) | |||||
Accounts payable and accrued expenses |
(655 | ) | 11,341 | |||||
Deferred revenue |
| (844 | ) | |||||
Deposits |
(66 | ) | (5 | ) | ||||
Other assets |
650 | (855 | ) | |||||
Due to related party |
| (74 | ) | |||||
VAT and income taxes payable |
(136 | ) | 34 | |||||
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Net cash used in operating activities |
(12,292 | ) | (662 | ) | ||||
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Investing activities |
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Purchases of available-for-sale securities |
(34,947 | ) | (71,048 | ) | ||||
Proceeds from sale and maturity of available-for-sale securities |
109,460 | 67,429 | ||||||
Purchase of certificates of deposit |
(1,000 | ) | | |||||
Proceeds from sale of certificates of deposit |
1,001 | | ||||||
Purchases of property and equipment |
(61,046 | ) | (13,248 | ) | ||||
Prepayment for acquisitions |
(938 | ) | | |||||
Investment in joint venture |
(16 | ) | (50 | ) | ||||
Cash paid for acquisitions, net of cash acquired of $200 (Note 3) |
(88,334 | ) | | |||||
Other |
(400 | ) | | |||||
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Net cash used in investing activities |
(76,220 | ) | (16,917 | ) | ||||
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Financing activities |
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Payments on long-term debt agreements |
(3,841 | ) | (1,603 | ) | ||||
Borrowings under revolving credit facility |
450 | 2,486 | ||||||
Borrowings under term loans |
40,898 | | ||||||
Notes payable |
1,121 | 98 | ||||||
Cash proceeds from exercise of warrants |
| 66 | ||||||
Cash paid to repurchase warrants |
| (723 | ) | |||||
Cash paid to purchase treasury stock |
(4,412 | ) | | |||||
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Net cash provided by financing activities |
34,216 | 324 | ||||||
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Net decrease in cash and cash equivalents |
(54,296 | ) | (17,255 | ) | ||||
Effect of change in foreign currency exchange rate on cash and cash equivalents |
(29 | ) | 59 | |||||
Cash and cash equivalents at beginning of period |
91,212 | 136,050 | ||||||
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Cash and cash equivalents at end of period |
$ | 36,887 | $ | 118,854 | ||||
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Non-cash investing and financing activities |
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Property plant and equipment purchased in exchange for accounts payable |
$ | 5,900 | $ | 765 | ||||
Supplemental cash flow information: |
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Cash paid for interest |
$ | 996 | $ | 49 | ||||
Cash paid for income taxes |
$ | 72 | $ | 36 |
The accompanying notes are an integral part of these consolidated financial statements.
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Heckmann Corporation
Consolidated Statement of Equity
Six months ended June 30, 2011
(Unaudited)
(In thousands, except share data)
Total | Heckmann Corporation Shareholders | Noncontrolling Interest |
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Common Stock | Additional Paid-In Capital |
Treasury Stock | Purchased Warrants |
Accumulated Deficit |
Accumulated Other Comprehensive Income |
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Shares | Amount | Shares | Amount | Warrants | Amount | |||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2011 |
$ | 303,077 | 127,489,387 | $ | 126 | $ | 747,187 | 13,308,563 | $ | (15,088 | ) | 11,331,197 | $ | (6,844 | ) | $ | (423,859 | ) | $ | 99 | $ | 1,456 | ||||||||||||||||||||||
Issuance of stock to employees (Note 8) |
884 | 48,334 | 884 | |||||||||||||||||||||||||||||||||||||||||
Exercise of warrants (Note 8) |
797,865 | |||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares in connection with acquisitions (Note 3) |
16,924 | 2,700,844 | 2 | 16,922 | ||||||||||||||||||||||||||||||||||||||||
Purchase of common stock |
(4,412 | ) | 1,000,000 | (4,412 | ) | |||||||||||||||||||||||||||||||||||||||
Comprehensive income: |
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Net income |
503 | 548 | (45 | ) | ||||||||||||||||||||||||||||||||||||||||
Unrealized gain from available for sale securities |
(120 | ) | (120 | ) | ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation gain |
(87 | ) | (87 | ) | ||||||||||||||||||||||||||||||||||||||||
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Comprehensive income |
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Balance at June 30, 2011 |
$ | 316,769 | 131,036,430 | $ | 128 | $ | 764,993 | 14,308,563 | $ | (19,500 | ) | 11,331,197 | $ | (6,844 | ) | $ | (423,311 | ) | $ | (108 | ) | $ | 1,411 | |||||||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
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HECKMANN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Organization and Basis of Presentation
Heckmann Corporation, together with its subsidiaries (collectively, the Company, we, us or our), is a services-based company focused on total water solutions for shale or unconventional oil and gas exploration. We also have a subsidiary that produces and distributes bottled water products in the Peoples Republic of China (PRC or China). As such, we operate in two primary business segments: water solutions for energy development and bottled water products.
Water Solutions For Energy Development
Our water solutions for energy development segment, referred to as Heckmann Water Resources or HWR, addresses the pervasive demand for diverse water solutions required for the production of energy in an integrated and efficient manner through the delivery of various services and product offerings. This segment includes water and related services including water delivery and disposal, trucking, fluids handling, treatment and temporary and permanent pipeline facilities, and water infrastructure services for oil and gas exploration and production companies. HWR also transports fresh water for production and provides services for site preparation, water pit excavations, and remediation.
We completed five acquisitions during the three month period ending on June 30, 2011 within our water solutions for energy development segment. In April we acquired: (i) certain assets from Bear Creek Services, LLC, including fresh water and produced water transportation operations and two salt water disposal wells in the Haynesville Shale area of Texas with complementary transportation operations extending into Louisiana; (ii) substantially all of the assets and the business of Devonian Industries, a fresh water and produced water transportation and frac tank rental company operating in southwestern Pennsylvania, southeastern Ohio and northern West Virginia (Marcellus Shale area); and (iii) certain fresh water and produced water transportation assets and two salt water disposal wells in the Haynesville Shale area from Sand Hill Foundation, LLC pursuant to a Bankruptcy Code section 363 sale transaction. On May 5, 2011 we acquired all of the equity interests of Excalibur Energy Services, Inc., a fresh water and produced water transportation company, and its affiliate Blackhawk Industries, LLC, a frac tank rental company, operating in northern Pennsylvania (Marcellus Shale area), as well as the Eagle Ford and Barnett Shale areas in Texas. On June 14, 2011, we acquired substantially all of the assets and business of Consolidated Petroleum, Inc., a temporary water transportation and rental company operating in the Eagle Ford and Haynesville Shale areas.
HWR currently operates multi-modal water disposal, treatment, trucking, and pipeline transportation businesses in Texas, Louisiana, Pennsylvania, West Virginia, and Ohio. HWR serves customers seeking fresh water acquisition, temporary water transmission and storage, transportation, treatment or disposal of fresh water and complex water flows, such as flowback and produced brine water, in connection with shale gas hydraulic fracturing drilling, or fracking, operations. HWR services customers operating in select shale areas in the United States including the Haynesville, Eagle Ford, Marcellus, and Barnett Shale areas.
We have focused our strategies on acquisitive and organic capital growth initiatives in the water solutions for energy development segment. As a result of these acquisitions and our organic growth, we now own and operate a fleet of approximately 400 trucks for water transportation and approximately 900 frac tanks. In addition, we now have a total of 23 operating salt water disposal, or underground injection wells in the Haynesville and Eagle Ford Shale areas shale plays which have a combined permitted salt water disposal capacity of approximately 368,000 barrels per day. We are also in the process of acquiring and permitting, in various stages of development, additional salt water disposal wells in our operating markets.
HWR also develops underground pipelines for the efficient delivery of fresh water and removal of produced water in connection with fracking operations. On January 31, 2010, HWR completed a 50-mile water transport pipeline, which at design capacity could dispose of up to 100,000 barrels of water per day. The pipeline is supported by a network of deep injection disposal wells which we believe is not only an efficient solution for our customers, but also provides HWR with a strategic competitive position.
On February 17, 2011, we announced that HWR has started construction on a pipeline expansion that will significantly increase its produced water disposal pipeline capacity in Louisiana. The expansion will supplement HWRs 50-mile pipeline through the Haynesville Shale area with the addition of approximately 19 miles of significantly enlarged fiberglass pipe and increased pipeline capacity for salt water transportation and disposal. The existing 19-mile section of the eastern portion of the pipeline will be used to transport fresh water to current and new customers for shale well development.
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The additional capacity is required to support any future extension of the pipeline further east into the Haynesville Shale area to accommodate our growing customer base. The expansion will also enable the construction of additional truck terminals. This important combination of local trucking and pipeline facilities will provide customers with convenient access to HWRs disposal wells.
We also own approximately 180 miles of portable poly and aluminum pipe and associated pumps and other equipment that is used above ground for pumping and transporting water from streams, ponds and special holding areas, including the Companys frac tanks, to hydraulic fracturing wells. These assets will add further service capabilities to our underground pipeline network in the Haynesville and Eagle Ford Shale areas and will add to and complement our current service offerings to our customers throughout all shale plays in which we operate.
Our water solutions for energy development segment also includes HEK Water Solutions, LLC (HWS) established on February 4, 2010 through the Companys joint venture with Energy Transfer Partners, L.P. (NYSE: ETP) (ETP). Our joint venture with ETP was a 50/50 partnership that was primarily designed to develop water pipeline infrastructure and treatment solutions for oil and gas producers in the Marcellus Shale area in Pennsylvania, Haynesville Shale area in Louisiana and Texas, and potentially other areas. On July 8, 2011, the joint venture was formally terminated and dissolved by the parties. We have determined, with ETP, that a more efficient means of executing on our respective strategies would be to work on various pipeline opportunities on a project-by-project basis.
During 2009, we acquired an approximately 7% equity interest in Underground Solutions, Inc. (UGSI.PK) (UGSI). We believe UGSIs complement of patented flexible fusion pipeline products and fusion processes, technologies, and field know-how positions it as a leading and innovative pipeline products solution provider. UGSI provides infrastructure technologies for water, sewer and conduit applications.
Bottled Water Products
Our bottled water products segment consists of various businesses operating within our wholly owned subsidiary, China Water and Drinks, Inc. (China Water). China Water produces a variety of bottled water products including natural mineral water, spring water, purified water, flavored water and oxygenated water. Its water products are produced either in hand-held sized bottles (330 milliliters to 1.5 liters), referred to as Small Bottles, or carboy-sized bottles (11.4 to 18.9 liters, or 3 to 5 gallons), referred to as Carboy Bottles.
We market our bottled water products in China using the brand names Darcunk (which translates to Absolutely Pure) and Grand Canyon. We also supply bottled water products to beverage companies and servicing companies, which we refer to as OEM customers, including Coca-Cola China, Uni-President and Jian Li Bao. In addition, we provide private label bottled water products to companies in the service industry, such as hotels and casinos. During the second quarter of 2010, we launched our HOWMAX line of private-label fruit flavored beverage products. In 2010, we also established a distribution agreement with Icelandic Water Holdings, producers of an award-winning natural spring water branded as Icelandic Glacial, targeting the premium bottled water category.
The accompanying consolidated financial statements of the Company have been prepared by management in accordance with the instructions to Form 10-Q of the United States Securities and Exchange Commission (the SEC). These statements include all normal reoccurring adjustments considered necessary by management to present a fair statement of the consolidated balance sheets, results of operations, and cash flows. The results reported in these financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in the Companys 2010 Annual Report on Form 10-K, filed with the SEC on March 14, 2011.
Note 2 Summary of Selected Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts, transactions and profits are eliminated in consolidation.
Economic and Political Risks - A portion of the Companys operations are conducted in the Peoples Republic of China (the PRC). Accordingly, the Companys business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy. The Companys operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and western Europe. These include risks associated with, among other things, the political, economic and legal environment and foreign currency exchange. The Companys results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.
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Seasonality - We typically experience higher sales of bottled water in the summer time in coastal cities while sales remain constant throughout the entire year in certain inland cities. In general, our bottled water sales are higher in the second and third quarters of the year when the weather tends to be hot and dry, and lower in the first and fourth quarters when the weather tends to be cold and wet. Sales, however, may also fluctuate throughout the year for other reasons, such as the timing of our advertising and promotional campaigns.
Our water solutions for energy development business segment is impacted by seasonal factors as well. Generally, our business is negatively impacted during the winter months due to inclement weather, fewer daylight hours and holidays. During periods of heavy snow, ice or rain, we may not be able to move our trucks and equipment between locations, thereby reducing our ability to provide services and generate revenues.
Accounting Estimates - The Companys consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information, however, actual results could differ materially from those estimates.
Earnings Per Share - Basic earnings per share (EPS) excludes dilution and is computed by dividing income (loss) applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period plus the additional weighted average common equivalent shares during the period. Common equivalent shares result from the assumed exercises of outstanding warrants, the proceeds of which are then assumed to have been used to repurchase outstanding shares of common stock. Inherently, stock warrants are deemed to be anti-dilutive when the average market price of the common stock during the period is less than the exercise prices of the stock warrants.
For the purpose of the computation of earnings per share, shares issued in connection with acquisitions that are returnable are considered contingently returnable shares and although classified as issued, are not included in the basic weighted average number of shares outstanding until all necessary conditions are met that no longer cause the shares to be contingently returnable. Accordingly, excluded from the computation of basic EPS are approximately 2,704,000 and 3,500,000 contingently returnable shares held in escrow as of June 30, 2011 and 2010, respectively.
Basic and diluted earnings per share for the three and six months ended June 30, 2011 and 2010 were calculated as follows (amounts in thousands except share and per share amounts):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) attributable to the Company |
$ | 183 | $ | (12,661 | ) | $ | 548 | $ | (13,067 | ) | ||||||
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|
|
|||||||||
Weighted average number of common shares: |
||||||||||||||||
Basic |
113,530,367 | 108,873,868 | 112,393,028 | 108,944,922 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Warrants |
2,753,830 | | 407,409 | | ||||||||||||
Employee share-based compensation |
851,904 | | 815,402 | | ||||||||||||
Contingent issuances |
2,775,710 | | 2,775,710 | | ||||||||||||
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|||||||||
Diluted |
119,911,811 | 108,873,868 | 116,391,549 | 108,944,922 | ||||||||||||
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|||||||||
Earnings per share attributable to the Company |
||||||||||||||||
Basic |
$ | * | $ | (0.12 | ) | $ | * | $ | (0.12 | ) | ||||||
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|||||||||
Diluted |
$ | * | $ | (0.12 | ) | $ | * | $ | (0.12 | ) | ||||||
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* | amount is less than $0.01 per share |
Warrants to purchase approximately 14.5 million and 64.2 million shares of the Companys common stock at June 30, 2011, had exercise prices that exceeded the average market price of the Companys common stock for the three and six months ended June 30, 2011, respectively. As such, these warrants did not affect the computation of diluted earnings per share.
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Marketable Securities - All of the Companys investments in marketable securities are classified as available-for-sale. These marketable securities are stated at fair value with any unrealized gains or losses recorded in accumulated other comprehensive income (loss), a component of equity, until realized. Other-than-temporary declines in market value from original cost are included in the current years operations. In determining whether an other-than-temporary decline in the market value has occurred, the Company considers the duration that, and extent to which, fair value of the investment is below its cost. Realized gains and losses are calculated based on specific identification to the individual securities involved with the resulting gains and losses included in non-operating income and expense on the consolidated statements of operations.
Accounts Receivable, net - Accounts receivable are recognized and carried at the original invoice amount less an allowance for any uncollectible amounts. The Company provides an allowance for doubtful accounts to reflect the expected uncollectibility of trade receivables. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customers willingness or ability to pay, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. The Company writes off trade receivables when it determines that they have become uncollectible. As of June 30, 2011 and December 31, 2010, the allowance for doubtful accounts was approximately $1.8 million and $2.2 million, respectively.
Equity Investments - Equity investments in companies over which the Company has no ability to exercise significant influence are accounted for under the cost method. Equity investments in companies over which the Company has the ability to exercise significant influence but does not hold a controlling interest are accounted for under the equity method and the Companys income or loss on these investments is recorded in non-operating income or expense.
Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net assets of the businesses acquired. Authoritative guidance requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments are required to estimate the fair value of a reporting unit including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or goodwill impairment at future reporting dates. The Company performs this impairment analysis annually during the third quarter of each fiscal year.
Accounting for the Impairment of Long-Lived Assets other than Goodwill - In accordance with authoritative guidance, the Company reviews the carrying value of intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of their carrying amounts to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset, if any, exceeds its fair market value.
Fair Value of Financial Instruments - The carrying amounts of the Companys cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments. The Companys long-term debt, secured by various properties, bears interest at rates commensurate with market rates and therefore management believes carrying values approximate fair values. The fair value of amounts due from and to related parties is not practicable to estimate due to the related party nature of the underlying transactions. The fair value of the contingent consideration was determined using a probability-weighted discounted cash flow model.
Revenue Recognition - We recognize revenues in accordance with Staff Accounting Bulletin No 104, and accordingly all of the following criteria must exist for revenues to be recognized: pervasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectibility is reasonably assured. The majority of our revenue results from contracts with direct customers and revenues are generated upon shipment of the goods or upon performance of contracted services.
All finished products for bottled water sales are delivered to customers directly from plant locations throughout the PRC. Furnished services relating to the saltwater disposal and transport business consist of transportation of fresh water and saltwater by Company owned and independent truck haulers; through a water transport pipeline; or directly to our disposal wells or at saltwater storage facilities. Certain customers, limited to those under contract with us to utilize the pipeline, have an obligation to dispose of a minimum quantity (number of barrels) of saltwater over the contract period. Transportation and disposal rates are generally based on a fixed fee per barrel of disposal water or, in certain circumstances, transportation based on an hourly rate. Revenue is recognized based on the number of barrels transported or disposed or at hourly rates for transportation. Rates for other services are based on negotiated rates with our customers and revenue is recognized when the services have been performed.
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Income taxes - Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that will more likely than not be realized. The Companys policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of June 30, 2011, the Company had no interest or penalties accrued for uncertain tax positions.
Foreign Currency Translation - The functional currency of the Companys PRC subsidiaries is the Chinese renminbi, (RMB). The RMB is not freely convertible into foreign currencies. The functional currency of the Companys BVI subsidiary and its Hong Kong subsidiaries is the Hong Kong dollar (HKD). The Companys PRC, BVI and Hong Kong subsidiaries financial statements are maintained in their functional currency.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Exchange gains or losses arising from foreign currency transactions are included in the calculation of net income for the respective periods.
The Company has adopted the United States dollar as its reporting currency. The financial statements of the Companys non-United States subsidiaries are translated into United States dollars (USD), using year-end rates of exchange for assets and liabilities and rates of exchange that approximate the rates in effect at the transaction date for revenues, expenses gains and losses. Amounts classified in equity are translated at historical exchange rates. The resulting translation adjustments are not included in determining net income, but are included as a foreign exchange adjustment recorded in accumulated other comprehensive income (loss) a component of equity.
Property, Plant and Equipment and Repair and Maintenance Costs - Property plant and equipment is recorded at its original cost of construction or fair value of assets purchased. Expenditures that extend the useful life or increase the expected output of property, plant and equipment, as well as major improvements are capitalized. Repair and maintenance costs are expensed as incurred.
Depreciation is computed using the following estimated useful lives:
Buildings |
20-25 years | |||
Motor vehicles |
5-10 years | |||
Pipelines |
30 years | |||
Disposal wells |
10 years | |||
Office equipment |
5-10 years | |||
Machinery and equipment |
3-15 years |
Subsequent to the completion of the 50-mile pipeline in February 2010, HWR incurred significant costs for pipeline start up, commissioning, and pipeline integrity testing. As a result, during the three and six months ended June 30, 2010 the Company recorded start up and commissioning expenses of approximately $13 million within operations.
Recently Issued Accounting Pronouncements
Fair Value Measurements and Disclosures
Effective January 1, 2010, the Company adopted the Financial Accounting Standards Board (FASB) updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for such transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should separately disclose information related to purchases, sales, issuances and settlements to be included in the roll forward of activity. The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities, and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring Level 2 and Level 3 fair value measurements. The Company has updated its disclosures to comply with the updated guidance.
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Table of Contents
Multiple Deliverable Revenue Arrangements
In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on managements best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. In October 2009, the FASB also issued a new accounting standard which changed revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. The new guidance was effective for the Company in the first quarter of 2011. The adoption of the new guidance did not have an impact on the Companys consolidated results of operations or financial position.
Intangibles Goodwill and Other
In December 2010, the FASB issued updated guidance that modifies the goodwill impairment test. Goodwill is tested for impairment using a two-step process. The first step is to identify potential impairments by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If the carrying value of a reporting unit exceeds the estimated fair value, a second step is performed to measure the amount of impairment, if any. The second step is to determine the implied fair value of the reporting units goodwill, measured in the same manner as goodwill is recognized in a business combination, and compare the implied fair value with the carrying amount of the goodwill. If the carrying amount exceeds the implied fair value of the reporting units goodwill, an impairment loss is recognized in an amount equal to that excess.
The updated guidance requires that, if the carrying amount of a reporting unit becomes zero or a negative, the second step of the impairment test must be performed when it is more likely than not that a goodwill impairment loss exists. In considering whether it is more likely than not that an impairment loss exists, a company is required to evaluate qualitative factors, including the factors presented in existing guidance that trigger an interim impairment test of goodwill (e.g., a significant adverse change in business climate or an anticipated sale of a reporting unit). The provisions of the guidance were effective for annual and interim periods beginning after December 15, 2010. The adoption of this guidance in January 2011 did not affect the Companys results of operations, financial position or liquidity.
Note 3 Acquisitions
In 2011, the Company completed the following acquisitions, with an aggregate preliminary purchase price of approximately $110.2 million, comprised of $88.5 million cash consideration less cash acquired of $0.2 million, 2,700,844 shares of the Companys common stock with an estimated fair value of approximately $16.9 million, a non-compete arrangement of $2.5 million, and approximately $2.5 million of contingent consideration. In conjunction with these acquisitions, the Company incurred transaction costs of approximately $1.4 million, which are reported in selling, general and administrative expenses in the accompanying consolidated statements of operations. These acquisitions enhanced the service offerings of the Company and expanded the geographic coverage for our water solutions for energy development segment.
Company name |
Form of acquisition |
Date of acquisition | ||
Bear Creek Services, LLC |
Fresh water and produced water transportation assets and salt water disposal wells | April 1, 2011 | ||
Devonian Industries |
Substantially all of the assets and certain liabilities | April 4, 2011 | ||
Sand Hill Foundation, LLC |
Fresh water and produced water transportation assets and salt water disposal wells | April 12, 2011 | ||
Excalibur Energy Services, Inc. and Blackhawk, LLC |
100% of the outstanding equity interests | May 5, 2011 | ||
Consolidated Petroleum, Inc. |
Substantially all of the assets and certain liabilities | June 14, 2011 |
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The preliminary allocation of the purchase price for these acquisitions is summarized as follows (in thousands):
Preliminary purchase price allocation June 30, 2011 |
||||
Equipment |
$ | 35,463 | ||
Salt Water disposal wells |
14,000 | |||
Customer relationships |
6,590 | |||
Disposal permits |
2,150 | |||
Other assets |
6,391 | |||
Goodwill |
53,315 | |||
Deferred income tax liabilities |
(3,956 | ) | ||
Other liabilities |
(3,706 | ) | ||
|
|
|||
Total |
$ | 110,247 | ||
|
|
We expect to make further adjustments to the purchase price allocation of these acquisitions, principally resulting from working capital and tax related adjustments, in accordance with the respective purchase agreements. The purchase agreement with Excalibur Energy Services, Inc. contains a contingent consideration clause in the form of an earn-out provision based upon the achievement of an $8.9 million EBITDA target at the end of the first fiscal year. The contingent consideration was recorded as a liability and will be subject to further valuation and remeasurement at interim reporting dates with any changes recognized in earnings. At the date of acquisition, the Company recorded $2.5 million as the estimate of the fair value of this contingent consideration. Additionally, another acquisition agreement contains a non-compete clause whereby the seller is precluded from competing with the Company for a period of three years. We recorded a $2.5 million liability as the estimated fair value of the non-compete agreement. The value of the non-compete agreement will be accreted quarterly over the next three years to a full value of $3.0 million. Goodwill of $32.0 million and other intangible assets of $6.1 million are expected to be deductible for tax purposes.
The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the Company is still in the process of finalizing those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
The Company has determined that the presentation of Bear Creek Services, LLC and Sand Hill Foundation, LLCs revenues and net income is impracticable for the six months ended June 30, 2011, due to the integration of their operations into the Company upon acquisition. The amount of revenue and net income attributable to the remaining three acquisitions that is included in the Companys consolidated financial statements from the respective date of the acquisition to the period ended June 30, 2011 are approximately $10.9 million and approximately $1.5 million, respectively.
Pro forma Financial Information
The following unaudited pro forma results of operations for the six months ended June 30, 2011 and 2010 assumes that the acquisitions were completed at the beginning of the periods presented. The pro forma results include adjustments to reflect additional amortization of intangibles associated with the acquisitions, and other costs deemed to be non-recurring in nature.
Six months ended June 30, | ||||||||
2011 | 2010 | |||||||
Pro forma revenues |
$ | 93,767 | $ | 58,796 | ||||
Pro forma net income (loss) |
1,715 | (11,333 | ) | |||||
Pro forma net income (loss) per share: |
||||||||
Basic |
$ | 0.02 | $ | (0.10 | ) | |||
Diluted |
0.01 | (0.10 | ) |
The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions been effective as of January 1 of the respective years, or of future operations of the Company.
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Note 4 Investments
The amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for sale securities as of June 30, 2011 and December 31, 2010 are as follows (in thousands):
Contractual Maturity (in years) |
Amortized Cost |
Gross Unrealized Holding | Fair Value |
|||||||||||||||||
Gains | Losses | |||||||||||||||||||
June 30, 2011 |
||||||||||||||||||||
Held-to-maturity |
||||||||||||||||||||
Certificates of deposit |
1 | $ | 11,829 | $ | 1 | $ | | $ | 11,830 | |||||||||||
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|
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|
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Available-for-sale: |
||||||||||||||||||||
Current: |
||||||||||||||||||||
U.S. Government Securities |
1 | $ | 1,002 | $ | 2 | $ | | $ | 1,004 | |||||||||||
Corporate Notes |
1 | 5,096 | 13 | | 5,109 | |||||||||||||||
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6,098 | 15 | | 6,113 | |||||||||||||||||
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|
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Noncurrent: |
||||||||||||||||||||
U.S. Government Agencies |
2-3 | 474 | 14 | | 488 | |||||||||||||||
Corporate Notes |
2-3 | 8,319 | 66 | | 8,385 | |||||||||||||||
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|
|||||||||||||
8,793 | 80 | | 8,873 | |||||||||||||||||
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|
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Total |
$ | 14,891 | $ | 95 | $ | | $ | 14,986 | ||||||||||||
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|
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|
|
|||||||||||||
Contractual Maturity (in years) |
Amortized Cost |
Gross Unrealized Holding | Fair Value |
|||||||||||||||||
Gains | Losses | |||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||
Held-to-maturity: |
||||||||||||||||||||
Certificates of deposit |
1 | $ | 11,830 | $ | | $ | | $ | 11,830 | |||||||||||
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|
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Available-for-sale: |
||||||||||||||||||||
Current: |
||||||||||||||||||||
U.S. Government Agencies |
1 | $ | 13,026 | $ | 14 | $ | | $ | 13,040 | |||||||||||
U.S. Government Securities |
1 | 16,168 | 10 | 5 | 16,173 | |||||||||||||||
Corporate Notes |
1 | 46,178 | 169 | 6 | 46,341 | |||||||||||||||
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|
|
|||||||||||||
75,372 | 193 | 11 | 75,554 | |||||||||||||||||
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|
|
|||||||||||||
Noncurrent: |
||||||||||||||||||||
U.S. Government Agencies |
2-3 | 1,035 | 30 | | 1,065 | |||||||||||||||
U.S. Government Securities |
2-3 | 2,925 | | 11 | 2,914 | |||||||||||||||
Corporate Notes |
2-3 | 10,537 | 123 | 20 | 10,640 | |||||||||||||||
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14,497 | 153 | 31 | 14,619 | |||||||||||||||||
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|
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Total |
$ | 89,869 | $ | 346 | $ | 42 | $ | 90,173 | ||||||||||||
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Note 5 Fair Value Measurements
The following table presents information about the Companys assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2011, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability (in thousands):
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Table of Contents
Fair Value Measurements at June 30, 2011 Using | ||||||||||||||||
Total | Significant Observable Inputs (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Assets: |
||||||||||||||||
Certificates of deposit |
$ | 11,830 | $ | 11,830 | $ | | $ | | ||||||||
U.S. Government Agencies |
488 | 488 | | | ||||||||||||
Corporate Notes |
13,494 | 13,494 | | | ||||||||||||
U.S. Government Securities |
1,004 | 1,004 | | | ||||||||||||
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|
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|
|
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Total |
$ | 26,816 | $ | 26,816 | $ | | $ | | ||||||||
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|
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Liabilities: |
||||||||||||||||
Non-compete agreement |
$ | 2,500 | $ | | $ | | $ | 2,500 | ||||||||
Contingent consideration |
17,139 | | | 17,139 | ||||||||||||
|
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|
|
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|
|
|||||||||
Total |
$ | 19,639 | $ | | $ | | $ | 19,639 | ||||||||
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|
The fair value of the contingent consideration was determined using a probability-weighted income approach at the acquisition date and is revalued at each reporting date or more frequently if circumstances dictate based on changes in the discount periods and rates, changes in the timing and amount of the revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the obligations. The fair value of the non-compete liability was determined using a discounted cash flow model which incorporates an unobservable discount rate that considers the Companys estimate of liquidity risk and other cash flow model related assumptions. Changes in the fair value of these obligations are recorded as income or expense within the line item Other, net in the Companys consolidated statements of operations. Accretion expense related to the increase in the net present value of the contingent liabilities is included in interest expense for the period. The fair value measurement is based on significant inputs not observable in the market, which are referred to as Level 3 inputs. Changes in the fair value of the Level 3 liabilities for the three and six months ended June 30, 2011, are as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Balance at beginning of period |
$ | 14,088 | $ | 8,243 | $ | 13,701 | $ | 8,062 | ||||||||
Additions (Note 3) |
5,000 | | 5,000 | | ||||||||||||
Change in fair value of contingent consideration |
551 | (4,588 | ) | 938 | (4,407 | ) | ||||||||||
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|
|
|
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Balance at end of period |
$ | 19,639 | $ | 3,655 | $ | 19,639 | $ | 3,655 | ||||||||
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|
Note 6 Equity Investments
Investment in Underground Solutions, Inc.
On May 6, 2009, the Company purchased approximately 7% of the equity of UGSI, a water infrastructure and pipeline supplier located in Poway, California for approximately $6.8 million in cash. On December 10, 2009, the Company purchased 1.0 million preferred shares of UGSI for approximately $0.4 million in cash. Equity investments in companies over which the Company has no ability to exercise significant influence are accounted for under the cost method. Accordingly, this investment is accounted for under the cost method. The Chief Executive Officer of UGSI serves as a member of the Board of Directors of the Company.
Investment in Energy Transfer Water Solutions, JV LLC
Our water solutions for energy development segment also includes Heckmann Water Solutions LLC (HWS) established on February 4, 2010 through the Companys joint venture with Energy Transfer Partners, L.P. (NYSE: ETP) (ETP). Our joint venture with ETP is a 50/50 partnership that was primarily designed to develop water pipeline infrastructure and treatment solutions for oil and gas producers in the Marcellus Shale area in Pennsylvania, and in the Haynesville Shale areas in Louisiana and Texas, and potentially other areas. On July 8, 2011, the joint venture was formally terminated and dissolved by the parties. We have determined, with ETP, that a more efficient means of executing on our respective strategies would be to work on various pipeline opportunities on a project-by-project basis.
In 2010, each of the partners made capital contributions to ETWS of $1,135,000. Each of the partners made $15,000 contributions during the six months ended June 30, 2011. All cash contributions and payables recorded to the joint venture were to fund prospective project expenses. During the three and six months ended June 30, 2011 the Company recorded $422,000 and $462,000 of losses, respectively, on this equity investment, which represents the Companys 50 % share of operating expenses of ETWS. No income or loss was recorded in the three months ended June 30, 2010.
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Table of Contents
China Bottles
During the three months ended June 30, 2010 there was a significant decline in the observable market price of China Bottles, Inc., the Companys 48% owned equity investment. Additionally, during the three months ended June 30, 2010 the Company noted a significant decline in the China Bottles business which impacted the financial results of the equity investment. As a result of these events management believes that the Company will not be able to recover the carrying amount of the investment and that China Bottles does not have the ability to sustain an earnings capacity that would justify the carrying amount of the investment. Therefore, the Company concluded that the decline in the value of the equity investment was other than temporary. The Company conducts its equity investment impairment analyses in accordance with Accounting Standards Codification (ASC) 323, Investments-Equity Method and Joint Ventures. ASC 323 requires the Company to record an impairment charge for a decrease in value of an investment when the decline in the investment is considered to be other than temporary. Accordingly the Company recorded a $4.1 million non-cash impairment charge within Income (loss) from equity method investment in the consolidated statements of operations for the three and six months ended June 30, 2010 to fully impair the carrying amount of its equity investment in China Bottles.
Note 7 Income Taxes
The effective income tax expense rate was 29.6% and 29.5% for the three and six months ended June 30, 2011, respectively and 17.0% and 17.3% tax benefit for the three and six months ended June 30, 2010, respectively. The Companys effective tax rate differs from the statutory rate primarily due to the tax impact of state taxes, foreign operations, nondeductible compensation, transaction costs on acquisitions and earnout agreements from previous acquisitions.
The Company is subject to taxation in the various federal, state and province, county, municipal, and local taxing jurisdictions where it has operations in the United States and China. The Companys tax returns since inception are subject to examination by the Unites States federal and state and PRC tax authorities. Additionally, the Companys value added tax reports are subject to routine review by PRC tax authorities.
Note 8 Stock-Based Compensation
The Company grants stock options, stock appreciation rights, restricted common stock and restricted stock units, performance shares and units, other stock-based awards and cash-based awards to employees, directors, consultants and advisors of the Company in accordance with the Heckmann Corporation 2009 Equity Incentive Plan (the 2009 Plan). The 2009 Plan authorizes the issuance of up to 5,000,000 shares of common stock.
Stock Options
The Company estimates the fair value of stock options granted to employees using a Black-Scholes option-pricing model. There were 180,000 and 387,500 stock options granted during the three and six months ended June 30, 2011, respectively. These stock options generally vest over a three year period and had a weighted average grant date fair value of approximately $3.13 and $2.84 per share for the three and six months ended June 30, 2011, respectively. The exercise price for these options was equal to the market price of the Companys common stock at the grant dates. No stock options were granted during the three and six months ended June 30, 2010. Stock-based compensation cost is included in general and administrative expense in the statement of operations and totaled approximately $364,000 and $88,100 for the three months ended June 30, 2011 and 2010, respectively, and approximately $690,000 and $175,300 for the six months ended June 30, 2011 and 2010, respectively,
Restricted Stock Units
The Company recorded stock-based compensation expense to its employees and consultants related to shares of restricted stock units granted prior to January 1, 2010 totaling approximately $78,000 and $97,800 for the three months ended June 30, 2011 and 2010, respectively, and approximately $194,000 and $262,000 for the six months ended June 30, 2011 and 2010, respectively. No restricted stock units were issued pursuant to the 2009 Plan during the three and six months ended June 30, 2011 and 2010.
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Stock and Warrant Repurchase Program
In March 2011, the Board of Directors approved a 1-year extension of the Companys discretionary equity buy-back plan. Under the plan, the Company may purchase warrants and up to 20 million shares of the Companys common stock in open market and private transactions through March 11, 2012, at times and in amounts as management deems appropriate, subject to applicable securities laws. One million common shares were purchased by the Company in a private transaction, through a financial intermediary, in connection with the Ng Settlement (see Note 10) for approximately $4.4 million in cash during the six months ended June 30, 2011. No warrants were purchased in the three months ended June 30, 2011.
In connection with the Albert Li settlement (see Note 10), 1,164,179 warrants were exercised on a cashless basis, resulting in the issuance of 797,865 shares of the Companys common stock in the three months ended June 30, 2011.
Note 9 Debt
Total debt is comprised of the following at June 30, 2011 and December 31, 2010 (in millions):
(in millions) |
June 30, 2011 |
December 31, 2010 |
||||||
Working capital line of credit |
$ | 5.1 | $ | 6.1 | ||||
Equipment credit line |
21.7 | 1.5 | ||||||
4.3% Term loans due through 2020 |
37.5 | 20.8 | ||||||
3.8% Real estate loans due through 2015 |
3.0 | 3.0 | ||||||
3.1% Notes payable due through 2014 |
3.0 | 0.3 | ||||||
|
|
|
|
|||||
Total debt |
70.3 | 31.7 | ||||||
|
|
|
|
|||||
Less: current portion |
(33.8 | ) | (11.2 | ) | ||||
|
|
|
|
|||||
Total long-term debt |
$ | 36.5 | $ | 20.5 | ||||
|
|
|
|
Financings under the equipment credit line are subject to conversion into term loans and as such may be reclassified as long term debt in future periods.
Note 10 Commitments and Contingencies
Environmental Liabilities
The Company complies with the environmental protection laws and regulatory framework of the United States and the individual states where it operates water gathering pipelines and salt water disposal wells. The Company has installed safety, monitoring and environmental protection equipment such as pressure sensors and relief valves, and has established reporting and responsibility protocols for environmental protection and reporting to relevant local environmental protection departments. In Texas and Louisiana, the Company is subject to rules and regulations promulgated by the Texas Railroad Commission, the Texas Commission on Environmental Quality, the Louisiana Department of Natural Resources and the Louisiana Department of Environmental Quality, all of which are designed to protect the environment and monitor compliance with water quality. Management believes the Company is in material compliance with all applicable environmental protection laws and regulations in the United States, Texas and Louisiana.
In accordance with the requirements of the PRCs Environmental Protection Law, the Company has installed required environmental protection equipment, adopted advanced environmental protection technologies, established responsibility systems for environmental protection, and has reported to and registered with the relevant local environmental protection departments. The Company has complied with the relevant regulations and has never paid a fee for the excessive discharge of pollutants. Management believes that there are no unrecorded liabilities in connection with the Companys compliance with environment laws and regulations.
Litigation
We are party to various litigation matters, including regulatory and administrative proceedings arising out of the normal course of business, the more significant of which are summarized below. The ultimate outcome of each of these matters cannot presently be determined, nor can the liability that could potentially result from a negative outcome be reasonably estimated presently for every case. The liability we may ultimately incur with respect to any one of these matters in the event of a negative outcome may be in excess of amounts currently accrued with respect to such matters and, as a result of these matters, may potentially be material to our financial position or results of operations. We review our litigation activities and determine if an unfavorable outcome to us is considered remote, reasonably possible or probable as defined by U.S. GAAP. Where we have determined an unfavorable outcome is probable and is reasonably estimable, we have accrued for potential litigation losses. In addition to the matters described below, we are involved in various other claims and legal actions, including regulatory and administrative proceedings arising out of the normal course of our business. We do not expect that the outcome of such other claims and legal actions will have a material adverse effect on our financial position or results of operations.
On June 1, 2009, Xu Hong Bin, the former president and chairman of China Water and his affiliated entity, Kotex Development Corp. (collectively Xu), filed a lawsuit in the Delaware Court of Chancery titled Xu Hong Bin, et al. v. Heckmann Corporation, et al. (C.A. No. 4637-CC) making various claims against the Company and its directors and executive officers (the Delaware Action). Xu alleged that the Companys intended cancellation of approximately 5.3 million shares of Company common stock held by him was unwarranted and was a breach of the general release in the Escrow Resolution and Transition Agreement between him and the Company, which was filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2008. On June 22, 2009, the Company filed an answer denying all allegations in the complaint, and a counterclaim alleging breaches of fiduciary duties, fraud, and fraudulent inducement. On April 3, 2011, the Company and Xu entered into a Settlement Agreement and Mutual Release to resolve all claims between and among them arising from the Delaware Action (the Xu Settlement).
On April 3, 2011, in addition to the Xu Settlement, and to avoid potential future claims, the Company entered into a Settlement Agreement and Mutual Release with First Asia Finance Group Limited, Lap Woon Wong, Sze Tang Li, IBroader Developments Limited and Canary Global Investments, Inc. (collectively, the Albert Li Group), arising out of the Albert Li Groups purported right to certain shares of Company common stock in connection with the acquisition of China Water (the Li Settlement Agreement) (together with the Xu Settlement, the Delaware Settlement Agreements).
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Under the terms of the Delaware Settlement Agreements, both Xu and the Albert Li Group received and were allowed to trade previously-issued shares of Company common stock and warrants, in exchange for their relinquishment of all claims to the remainder of the Company shares previously claimed by them. In addition, the Albert Li Group was paid $600,000 in cash. The parties to the Delaware Settlement Agreements exchanged full and mutual releases between and among the Company, Xu and the Albert Li Group. On April 26, 2011, the parties to the Delaware Action filed a Stipulation of Dismissal with Prejudice of the Delaware Action.
On May 21, 2010, Richard P. Gielata, an individual purporting to act on behalf of shareholders, served a class action lawsuit filed May 6, 2010 against the Company and various directors and officers in the United States District Court for the District of Delaware (the Class Action). The Class Action alleges violations of federal securities laws in connection with the acquisition of China Water. The Company responded by filing a motion to transfer the Class Action to California and a motion to dismiss the case. On October 6, 2010, the Magistrate Judge issued a report and recommendation to the District Court Judge to deny the motion to transfer. On October 8, 2010, the court-appointed lead plaintiff, Matthew Haberkorn, filed an Amended Class Action Complaint that adds China Water as a defendant. On October 25, 2010, the Company filed objections to the Magistrate Judges report and recommendation on the motion to transfer. The court adopted the report and recommendation on the motion to transfer on March 31, 2011. The Company filed a motion to dismiss the Amended Class Action Complaint and a reply to lead plaintiffs opposition to the motion to dismiss. On June 16, 2011, the Magistrate Judge issued a report and recommendation to the District Court Judge to deny the motion to dismiss. The Company filed objections to the Magistrate Judges report and recommendation on the motion to dismiss. The Plaintiff has filed a response to the Companys objections. The court has not yet ruled on the objections to the report and recommendation on the motion to dismiss.
On November 18, 2010, Melissa Hess filed a shareholder derivative complaint, purportedly on behalf of the Company, against various officers and directors in the Superior Court of California, County of Riverside (the Derivative Action). The Derivative Action alleges claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment in connection with the acquisition of China Water. The Company responded to the Derivative Action on February 1, 2011 by filing a motion to stay the case until the Class Action is resolved and a demurrer seeking to dismiss the case. The Company filed a reply to the Plaintiffs opposition to the motion to stay and demurrer on May 25, 2011. The court held a hearing on the demurrer and motion to stay on June 21, 2011. On July 20, 2011, the court issued orders overruling the Companys demurrer and denying its motion to stay the Derivative Action.
The outcome of the above Class Action and Derivative Action could have a material adverse effect on our consolidated financial statements.
In addition, on June 10, 2011, we received a subpoena from the Denver Regional Office of the United States Securities and Exchange Commission (the SEC) seeking information and documents concerning the Companys acquisition of China Water in 2008. The Company is cooperating fully with the SEC with respect to its requests.
Earn-outs
Complete Vacuum and Rentals, Inc. Acquisition - In addition to the initial purchase price the Company may make additional payments to the former shareholders of Complete Vacuum and Rentals, Inc. (CVR), which we acquired on November 30, 2010 upon the achievement of certain EBITDA targets for each of fiscal years 2011, 2012 and 2013, in which CVR achieves targeted EBITDA of $20.0 million per year. The Company could pay CVRs former shareholders an additional $2.0 million plus one-half of the amount by which EBITDA exceeds $20.0 million for the relevant fiscal year (the Earn-Out Payments). The Earn-Out Payments are to be paid in a combination of 70% cash and 30% of the Companys common stock, up to an aggregate maximum amount equal to $12.0 million. The specific number of shares of the Companys common stock to be included in each Earn-Out Payment shall be computed as the average of the closing price of the Companys common stock on the New York Stock Exchange for the 10 trading days immediately prior to the issuance of the shares.
Excalibur Energy Services, Inc. Acquisition - The Company may also make additional earn-out payments of $3.0 million to the former equity holders of Excalibur Energy Services, Inc., which we acquired on May 6, 2011, upon the achievement of a target EBITDA of $8.8 million during the first anniversary of the acquisition. This earn-out is payable in shares of the Companys common stock computed as the average of the closing price of the Companys common stock on the New York Stock Exchange for the 5 trading days ending on the second trading day preceding the end of the earn-out period.
Charis Acquisition - The Company may also make an additional earn-out payment of $5.0 million pursuant to an asset purchase agreement dated April 22, 2009 between the Company and Charis Partners, LLC, Green Exploration Corporation and Silversword partnerships. The earn-out is payable in shares of the companys common stock and is subject to the attainmant of specified profitability targets.
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Note 11 Segments
The Companys reporting segments have been determined based on the nature of the services and/or products offered to customers. The Company evaluates performance based on the operating income contributed by each segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 14, 2011. The Companys two reportable segments are referred to as water solutions for energy development and bottled water products.
The tables below summarize information about reported segments (in thousands):
Bottled Water Products |
Water Solutions for Energy Development |
Corporate | Total | |||||||||||||
Three Months Ended June 30, 2011 |
||||||||||||||||
Sales |
$ | 7,766 | $ | 39,167 | $ | 0 | $ | 46,933 | ||||||||
Gross profit |
1,136 | 10,112 | 0 | 11,248 | ||||||||||||
Income (loss) before income taxes |
(647 | ) | 4,076 | (3,169 | ) | 260 | ||||||||||
Additions to fixed assets |
995 | 32,700 | 88 | 33,783 | ||||||||||||
Total assets |
45,440 | 364,021 | 59,867 | 469,328 | ||||||||||||
Three Months Ended June 30, 2010 |
||||||||||||||||
Sales |
9,153 | 2,473 | | 11,626 | ||||||||||||
Gross profit |
2,269 | 710 | | 2,979 | ||||||||||||
Loss before income taxes |
(5,819 | ) | (8,745 | ) | (616 | ) | (15,180 | ) | ||||||||
Additions to fixed assets |
237 | 2,697 | | 2,934 | ||||||||||||
Six Months Ended June 30, 2011 |
||||||||||||||||
Sales |
13,295 | 57,398 | 0 | 70,693 | ||||||||||||
Gross profit |
1,806 | 14,522 | 0 | 16,328 | ||||||||||||
Income (loss) before income taxes |
409 | 5,612 | (5,308 | ) | 713 | |||||||||||
Additions to fixed assets |
2,543 | 64,216 | 187 | 66,946 | ||||||||||||
Six Months Ended June 30, 2010 |
||||||||||||||||
Sales |
15,663 | 4,568 | | 20,231 | ||||||||||||
Gross profit |
3,607 | 1,155 | | 4,762 | ||||||||||||
Loss before income taxes |
(6,250 | ) | (8,874 | ) | (641 | ) | (15,765 | ) | ||||||||
Additions to fixed assets |
654 | 7,121 | | 7,775 | ||||||||||||
December 31, 2010 |
||||||||||||||||
Goodwill |
6,341 | 41,009 | | 47,350 | ||||||||||||
Total assets |
45,582 | 171,282 | 184,389 | 401,253 | ||||||||||||
The following information is by geographic area (in thousands): | ||||||||||||||||
China | United States | Total | ||||||||||||||
June 30, 2011 |
||||||||||||||||
Revenue |
$ | 13,295 | $ | 57,398 | $ | 70,693 | ||||||||||
Long-lived assets, net |
19,940 | 190,162 | 210,102 | |||||||||||||
June 30, 2010 |
||||||||||||||||
Revenue |
15,663 | 4,568 | 20,231 |
Note 12 Subsequent Events
Subsequent to June 30, 2011, management committed to a plan to sell substantially all of the assets and liabilities of our bottled water segment, specifically, China Water & Drinks, Inc., and actively began to locate a buyer. At June 30, 2011, the carrying value of the assets and liabilities included in the disposal group were: current assets of approx $15.4 million, intangible assets, including goodwill of approximately $10.0 million, fixed assets of approximately $19.9 million and current liabilities of approximately $22.1 million. We expect that a transaction could be completed within one year, subject to the terms of any definitive transaction documentation.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Certain Terms
In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, the terms the Company, we, us and our refer to the combined company, which is Heckmann Corporation and its subsidiaries, including China Water and Drinks, Inc. and its affiliated entities (China Water), Heckmann Water Resources Corporation (HWRC), Heckmann Water Resources (CVR), Inc. (CVR), Heckmann Water Resources (Excalibur), Inc. (Excalibur), and HEK Water Solutions, LLC (HWS). China Water is included in our bottled water products segment and HWRC, CVR Excalibur, and HWS are all included within our water solutions for energy development segment, which we also refer to as HWR.
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Special Note About Forward-Looking Statements
This Quarterly Report contains statements that are forward-looking and, as such, are not historical facts. Rather, these statements constitute projections, forecasts and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of performance. They involve known and unknown risks, uncertainties, assumptions and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by these statements. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements use words such as believe, expect, should, strive, plan, intend, estimate, anticipate or similar expressions. When the Company discusses its strategies or plans, it is making projections, forecasts or forward-looking statements. Actual results and stockholders value will be affected by a variety of risks and factors, including, without limitation, the recent crisis in worldwide financial markets, international, national and local economic conditions, merger, acquisition and business combination risks, financing risks, geo-political risks, and acts of terror or war. Many of the risks and factors that will determine these results and stockholder values are beyond the Companys ability to control or predict. These statements are necessarily based upon various assumptions involving judgment with respect to the future. You should carefully read the risk factor disclosure contained in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2010, files with the United States Securities and Exchange Commission (the SEC) on March 14, 2011, where many of the important factors currently known to management that could cause actual results to differ materially from those in our forward-looking statements are discussed.
All such forward-looking statements speak only as of the date of this Quarterly Report. The Company is under no obligation to, nor does it intend to, release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Companys expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Company Overview
Headquartered in Pittsburgh, Pennsylvania, Heckmann Corporation was incorporated in the State of Delaware on May 29, 2007. Our address is 300 Cherrington Parkway, Suite 200 Coraopolis, Pennsylvania 15108. The Companys website is found at http://www.heckmanncorp.com.
We are a services-based company focused on total water solutions for shale or unconventional oil and gas exploration. We also have a subsidiary that produces and distributes bottled water products in China. As such, we operate in two primary business segments: water solutions for energy development and bottled water products.
Water Solutions for Energy Development
Our water solutions for energy development segment addresses the pervasive demand for diverse water solutions required for the production of energy in an integrated and efficient manner through various service and product offerings. This segment includes our water disposal, trucking, fluids handling, treatment and pipeline transport facilities, and water infrastructure services for oil and gas exploration and production companies.
This segment includes water and related services including our water delivery and disposal, trucking, fluids handling, treatment and temporary and permanent pipeline facilities, and water infrastructure services for oil and gas exploration and production companies. HWR also transports fresh water for production and provides services for site preparation, water pit excavations, and remediation.
We completed five acquisitions during the three month period ended June 30, 2011 within our water solutions for energy development segment. In April we acquired: (i) certain assets from Bear Creek Services, LLC including fresh water and produced water transportation operations and two salt water disposal wells in the Haynesville Shale area of Texas with complementary transportation operations extending into Louisiana; (ii) substantially all of the assets and the business of Devonian Industries, a fresh water and produced water transportation and frac tank rental company operating in southwestern Pennsylvania, southeastern Ohio and northern West Virginia (Marcellus Shale area); and (iii) certain fresh water and produced water transportation assets and two salt water disposal wells in the Haynesville Shale area from Sand Hill Foundation LLC pursuant to a Bankruptcy Code section 363 sale transaction. On May 5, 2011 we acquired Excalibur Energy Services Inc., a fresh water and produced water transportation company, and its affiliate Blackhawk, LLC, a frac tank rental company, operating in northern Pennsylvania (Marcellus Shale area), as well as the Eagle Ford and Barnett Shale areas in Texas. On June 14, 2011, we acquired substantially all of the assets and business of Consolidated Petroleum, Inc., a temporary water transportation and rental company operating in the Eagle Ford Shale and Haynesville Shale areas.
HWR currently operates multi-modal water disposal, treatment, trucking, and pipeline transportation businesses in Texas, Louisiana, Pennsylvania, West Virginia, and Ohio. HWR serves customers seeking fresh water acquisition, temporary water transmission and storage, transportation, treatment or disposal of fresh water and complex water flows, such as flowback and produced brine water, in connection with shale gas hydraulic fracturing drilling, or fracking, operations. HWR services customers operating in select shale areas in the United States including the Haynesville, Eagle Ford, Marcellus, and Barnett Shale.
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We have focused our strategies on acquisitive and organic capital growth initiatives in the water solutions for energy development segment. As a result of acquisitions and our organic growth, we now own and operate a fleet of approximately 400 trucks for water transportation and approximately 900 frac tanks. In addition, we have a total of 23 operating salt water disposal, or underground injection, wells in the Haynesville and Eagle Ford Shale areas which have a combined permitted salt water disposal capacity of approximately 368,000 barrels per day. We are also in the process of acquiring and permitting, in various stages of development, additional salt water disposal wells in our operating markets.
HWR also develops underground pipelines for the efficient delivery of fresh water and removal of produced water in connection with fracking operations. On January 31, 2010, HWR completed a 50-mile water transport pipeline, which at design capacity could dispose of up to 100,000 barrels of water per day. The pipeline is supported by a network of deep injection disposal wells which we believe is not only an efficient solution for our customers, but also provides HWR with a strategic competitive position.
On February 17, 2011, we announced that HWR started construction on a pipeline expansion that will significantly increase its produced water disposal pipeline capacity in Louisiana. The expansion will supplement HWRs 50-mile pipeline through the Haynesville Shale area with the addition of approximately 19 miles of significantly enlarged fiberglass pipe and increased pipeline capacity for salt water transportation and disposal. The existing 19-mile section of the eastern portion of the pipeline will be used to transport fresh water to current and new customers for shale well development.
The additional capacity is required to support any future extension of the pipeline further east into the Haynesville Shale area to accommodate our growing customer base. The expansion will also enable the construction of additional truck terminals. This important combination of local trucking and pipeline facilities will provide customers with convenient access to HWRs disposal wells.
We also own approximately 180 miles of portable poly and aluminum pipe and associated pumps and other equipment that is used above ground for pumping and transporting water from streams, ponds and special holding areas, including the Companys frac tanks, to hydraulic fracturing wells. These assets will add further service capabilities to our underground pipeline network in the Haynesville and Eagle Ford Shale areas and will add to and compliment our current service offerings to our customers throughout all shale areas in which we operate.
Our water solutions for energy development segment also includes HEK Water Solutions LLC (HWS) established on February 4, 2010 through the Companys joint venture with Energy Transfer Partners, L.P. (NYSE: ETP) (ETP). Our joint venture with ETP was a 50/50 partnership that was primarily designed to develop water pipeline infrastructure and treatment solutions for oil and gas producers in the Marcellus Shale area in Pennsylvania, and in the Haynesville Shale area in Louisiana and Texas, and potentially other areas. On July 8, 2011, the joint venture was formally terminated and dissolved by the parties. We have determined, with ETP, that a more efficient means of executing on our respective strategies would be to work on various pipeline opportunities on a project-by-project basis.
During 2009, we acquired an approximately 7% equity interest in Underground Solutions, Inc. (UGSI.PK) (UGSI). UGSIs complement of patented flexible fusion pipeline products and fusion processes, technologies, and field know-how positions it as a leading and innovative pipeline products solution provider. UGSI provides infrastructure technologies for water, sewer and conduit applications.
Bottled Water Products
Our bottled water products segment is operated through our wholly owned subsidiary, China Water. Through China Water, we produce bottled water products at seven bottled water facilities in the Peoples Republic of China (the PRC). Coca-Cola and its subcontractors located in China, which we collectively refer to as Coca-Cola China, is China Waters largest customer.
China Water produces bottled water products at facilities throughout the PRC. China Water uses two types of production lines, one which produces hand-held sized (330 milliliters to 1.5 liters) bottled water (Small Bottles) and the other which produces carboy-sized (11.4 to 18.9 liters, or 3 to 5 gallons) bottled water (Carboy Bottles). China Water produces a variety of bottled water products including purified water, mineralized water, and oxygenated water. China Water has the capacity to produce up to 0.9 billion bottles of water annually in China. China Water supplies bottled water products to beverage companies and servicing companies, including Coca-Cola China, Uni-President and Jian Li Bao. China Water also markets its bottled water products in China using the brand names Absolutely Pure and Grand Canyon. In addition, China Water provides private label bottled products to companies in the service industry, such as hotels and casinos.
Subsequent to June 30, 2011, management committed to a plan to sell substantially all of the assets and liabilities of our bottled water products segment, specifically, China Water, and actively began to look for a buyer. We expect that a transaction could be completed within one year, subject to the terms of any definitive transaction documentation.
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As of June 30, 2011, we had approximately $36.9 million in cash and cash equivalents as well as approximately $26.8 million of certificates of deposit and marketable securities on our balance sheet. For the remainder of the 2011 year, we plan to continue building our water resources for energy development business, and we expect to continue to explore additional acquisition opportunities to complement our existing business in this segment.
Results of Operations for the Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010
Three months ended June 30, | ||||||||
2011 | 2010 | |||||||
(unaudited) | (unaudited) | |||||||
Revenue |
$ | 46,933 | $ | 11,626 | ||||
Cost of goods sold |
35,685 | 8,647 | ||||||
|
|
|
|
|||||
Gross profit |
11,248 | 2,979 | ||||||
Operating expenses: |
||||||||
Selling and marketing expenses |
788 | 797 | ||||||
General and administrative expenses |
9,441 | 4,717 | ||||||
Pipeline start-up and commissioning |
| 13,005 | ||||||
|
|
|
|
|||||
Total operating expenses |
10,229 | 18,519 | ||||||
|
|
|
|
|||||
Income (loss) from operations |
1,019 | (15,540 | ) | |||||
Interest income (expense), net |
(895 | ) | 532 | |||||
Loss from equity method investments |
(422 | ) | (4,098 | ) | ||||
Other, net |
558 | 3,926 | ||||||
|
|
|
|
|||||
Income (loss) before income taxes |
260 | (15,180 | ) | |||||
Income tax benefit (expense) |
(77 | ) | 2,580 | |||||
|
|
|
|
|||||
Net income (loss) |
$ | 183 | $ | (12,600 | ) | |||
|
|
|
|
Revenues
Revenues for the three months ended June 30, 2011 were $ 46.9 million as compared to $11.6 million for the same period one year ago. The substantial increase is due primarily to the acquisitions completed by HWR during the quarter, and the acquisition of CVR which we consummated on November 30, 2010. During the three months ended June 30, 2011, our revenues from HWR were $39.2 as compared to $2.5 million in the comparable period in 2010. Revenues from bottled water products for the three months ended June 30, 2011 were $7.7 million, as compared to $9.1 million for the comparable period in 2010, or $8.0 million, if revenues from our former Harbin facility (which we divested in the second quarter of 2010) are excluded for the three months ended June 30, 2010.
The $36.7 million increase in HWR revenues during the three months ended June 30, 2011 from $2.5 million during the three months ended June 30, 2010 was due primarily to the acquisitions referenced above and to increases in revenues from services we provide to the energy and production industry in the Haynesville Shale area. The price charged for water disposal is negotiated in agreements with HWRs customers and did not significantly change during the three months ended June 30, 2011 compared to the comparable period of 2010.
Sales of bottled water decreased to $7.7 million during the second quarter of 2011 from $9.1 million during the year ago period, primarily due to the loss of $1.1 million of revenues attributable to our former facility in Harbin which we divested in the second quarter of 2010. Otherwise, our product mix and the prices of our bottled water products did not significantly change during the three month period ended June 30, 2011 compared to the comparable period of 2010.
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Cost of Goods Sold
Cost of goods sold increased to $35.7 million for the three months ended June 30, 2011 from $8.6 million for the three months ended June 30, 2010 primarily due to the acquisition of CVR and the acquisitions completed during the second quarter of 2011 and the resulting increase in revenues.
Gross Profit
Gross profit from our HWR business was $10.1 million, or 25.8% of net sales, during the three months ended June 30, 2011, compared to $0.7 million, or 28.7% of net sales, during the three months ended June 30, 2010. The increase in gross profit was primarily attributable to higher gross profits derived from CVRs service business and the service businesses of the acquisitions completed during the quarter. Gross profit attributable to our bottled water business was $1.1 million, or 14.3% of net sales, during the three months ended June 30, 2011, compared to $2.3 million, or 25.3% of net sales, during the three months ended June 30, 2010. The decrease in gross margins for our bottled water products was attributable to the divestiture of our former Harbin facility which accounted for approximately $0.2 million of the 2010 second quarter gross margin, an approximately 7% increase in the raw material cost of PET plastic materials which negatively impacted gross margins by approximately $0.3 million, and unfavorable overhead absorption in China Waters factories due to competitive pressures leading to lower sales volume of bottled water products of approximately $0.4 million in the three months ended June 30, 2011.
Operating Expenses
Operating expenses for the three months ended June 30, 2011 decreased to $10.2 million from $18.5 million for the three months ended June 30, 2010, primarily due to increases from the acquisition of CVR and acquisitions completed during the quarter offet by $13.0 million of start-up and commissioning expenses recorded in the three months ended June 30, 2010.
Also included in operating expense for the three months ended June 30, 2011 are approximately $1.0 million of transaction related costs for the acquisitions completed during the quarter, approximately $0.4 million of legal costs related to certain litigation, and approximately $0.4 million of costs related to stock based compensation.
Income (loss) from Operations
We had operating income of $1.0 million for the three months ended June 30, 2011 compared to a loss from operations of $15.5 million for the three months ended June 30, 2010 as a result of the items mentioned above.
Interest Income (Expense), net
During the three months ended June 30, 2011, we recorded net interest expense of $0.9 million compared to $0.5 million of net interest income for the three months ended June 30, 2010. The decrease was primarily due to lower interest rates for invested funds and lower investment balances in the three months ended June 30, 2011 compared to the comparable period of 2010. Also included in interest income (expense), net for the three months ended June 30, 2011 is accretion expense for contingent compensation related to the acquisition of Charis Partners, LLC and all of the assets of Greer Exploration Corporation and Silversword Partnerships, which we acquired on July 1, 2009 (the Charis Acquisition), the CVR acquisition and certain other acquisitions completed in the quarter, which are recorded as interest expense, of approximately $0.5 million.
Income (Loss) from Equity Method Investment
During the three months ended June 30, 2011, we recorded $0.4 million of equity loss from our 50% equity interest in ETWS, which was formally terminated and dissolved by the parties on July 8, 2011 (see Note 6). The loss was primarily due to project related expenditures associated with the review of proposed projects in the Marcellus Shale oil and gas fields in Pennsylvania. Our equity loss in the three months ended June 30, 2010 was attributable to a $4.1 million impairment charge recorded to fully impair our 48% equity method investment in China Bottles, Inc. (see Note 6).
Other Income (Expense), net
We recorded other income of $0.6 million for the three months ended June 30, 2011 compared to $3.9 million of other income for the three months ended June 30, 2010. The difference from the prior period relates primarily to changes in the fair value of contingent consideration associated with the performance based earn-out related to the Charis Acquisition. As a result of pipeline start-up and commissioning expenses incurred in the three months ended June 30, 2010, management determined that the earn-out obligation related to the profitability target for 2010 would not be met. Accordingly the liability for contingent consideration was adjusted through earnings in the three months ended June 30, 2010.
Income Taxes
The effective income tax rate was 29.6% and 17% (benefit) for the three months ended June 30, 2011 and 2010, respectively (see Note 7). The effective rate increased in 2011 as more of the Companys operations are conducted in the United States.
Net Income (Loss)
Our net income for the three months ended June 30, 2011 was approximately $ 0.2 million compared to a net loss of $12.6 million for the three months ended June 30, 2010, as a result of the items mentioned above.
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Results of Operations for the Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010
Six months ended June 30, | ||||||||
2011 | 2010 | |||||||
(unaudited) | (unaudited) | |||||||
Revenue |
$ | 70,693 | $ | 20,231 | ||||
Cost of goods sold |
54,365 | 15,469 | ||||||
|
|
|
|
|||||
Gross profit |
16,328 | 4,762 | ||||||
Operating expenses: |
||||||||
Selling and marketing expenses |
1,272 | 1,306 | ||||||
General and administrative expenses |
15,281 | 7,523 | ||||||
Pipeline start-up and commissioning (Note 2) |
| 13,005 | ||||||
|
|
|
|
|||||
Total operating expenses |
16,553 | 21,834 | ||||||
|
|
|
|
|||||
Loss from operations |
(225 | ) | (17,072 | ) | ||||
Interest income (expense), net |
(1,147 | ) | 1,098 | |||||
Loss from equity method investments |
(462 | ) | (4,048 | ) | ||||
Other, net |
2,547 | 4,257 | ||||||
|
|
|
|
|||||
Income (loss) before income taxes |
713 | (15,765 | ) | |||||
Income tax benefit (expense) |
(210 | ) | 2,722 | |||||
|
|
|
|
|||||
Net income (loss) |
$ | 503 | $ | (13,043 | ) | |||
|
|
|
|
Revenues
Revenues for the six months ended June 30, 2011 of $70.7 million increased substantially from the same period one year ago due primarily to our completed acquisitions, including the acquisition of CVR which we consummated on November 30, 2010. During the six months ended June 30, 2011, our revenues included $57.4 million from HWR and $13.3 million for bottled water products, compared to $4.6 million from HWR and an adjusted $13.2 million for bottled water products, without Harbin (as more fully explained below), during the six months ended June 30, 2010.
Revenue from HWR increased by $52.8 million during the six months ended June 30, 2011 from $4.6 million during the six months ended June 30, 2010 primarily the result of our acquisitions, including CVR, as well as from other services we provide to the energy and production industry, the majority of which occurred in the Haynesville Shale area. The price charged for water disposal is negotiated in agreements with HWRs customers and, therefore, did not significantly change during the six months ended June 30, 2011 compared to the same period of 2010.
Sales of bottled water decreased to $13.3 million during the six months ended June 30, 2011 from $15.7 million during the year ago period, primarily due to the divestiture of our former Harbin facility in the second quarter of 2010. During the first six months of 2010 the Company had bottled water sales of approximately $2.5 million from the former Harbin facility. Without Harbin, total sales for bottled water products was an adjusted $13.2 million in the six months ended June 30, 2010. The prices of our bottled water products and our product mix did not significantly change during the six month period ended June 30, 2011 compared to the same period of 2010.
Cost of Goods Sold
Cost of goods sold increased to $54.4 million for the six months ended June 30, 2011 from $15.5 million for the six months ended June 30, 2010 primarily due to certain acquisitions, including our acquisition of CVR.
Gross Profit
Gross profit for HWR was $14.5 million, or 25.3% of net sales, during the six months ended June 30, 2011, compared to $1.2 million, or 26.1% of net sales, during the six months ended June 30, 2010. The increase in gross profit was primarily attributable to higher gross profits derived from our acquired service businesses. Gross profit attributable to our bottled water business was $1.8 million, or 13.5% of net sales, during the six months ended June 30, 2011, compared to $3.6 million, or 23.1% of net sales, during the six months ended June 30, 2010. The decrease in gross margins for our bottled water products was attributable to the former Harbin facility which accounted for approximately $0.4 million of the 2010 second quarter gross margin, an increase of approximately 6.5% in the raw material cost of PET plastic materials which negatively impacted gross margins by approximately $0.8 million, and unfavorable overhead absorption in China Waters factories due to lower sales volume of bottled water products of approximately $0.6 million in the six months ended June 30, 2011.
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Operating Expenses
Operating expenses for the six months ended June 30, 2011 decreased significantly to $16.6 million from $21.8 million for the six months ended June 30, 2010, primarily due to increases from the acquisition of CVR and certain acquisitions completed during the three months ended June 30, 2011 being offset by $13.0 million of start-up and commissioning expenses recorded in the six months ended June 30, 2010.
Also included in operating expense for the six months ended June 30, 2011 are approximately $1.4 million of transaction related costs for the acquisitions completed during the quarter, approximately $0.7 million of legal costs related to the China litigation, and approximately $0.8 million of costs related to stock based compensation.
Loss from Operations
We had operating losses of $0.2 million and $17.1 million for the six months ended June 30, 2011 and 2010, respectively, as a result of the items discussed above.
Interest Income (Expense), net
During the six months ended June 30, 2011, we recorded net interest expense of $1.1 million compared to $1.1 million of net interest income for the six months ended June 30, 2010. The decrease was primarily due to lower interest rates for invested funds and lower investment balances in the six months ended June 30, 2011 compared to the same period of 2010. Also included in interest expense for the six months ended June 30, 2011 is accretion expense for contingent compensation related to the CVR acquisition and certain other acquisitions completed in the quarter, of approximately $0.8 million.
Income (Loss) from Equity Method Investment
During the six months ended June 30, 2011, we recorded $0.5 million of equity loss from our 50% equity interest in ETWS, which was formally terminated and dissolved by the parties on July 8, 2011. The loss was primarily due to project related expenditures associated with the review of proposed projects in the Marcellus Shale oil and gas fields in Pennsylvania. Our $4.0 million of equity loss in the six months ended June 30, 2010 was attributable to an impairment charge recorded to fully impair our former 48% equity method investment in China Bottles, Inc.
Other Income (Expense), net
We recorded other income of $2.5 million for the six months ended June 30, 2011, primarily related to the January 2011 settlement agreement with Ng Tak Kao (Ng) where Ng agreed to relinquish all claims against the Company including the cancellation of a loan and accrued interest owed to him by a subsidiary of the Company in the aggregate amount of approximately $1.8 million. The $4.3 million of other income for the six months ended June 30, 2010 was attributable to the changes in fair value of contingent consideration associated with the performance based earn-out related to the Charis Acquisition. As a result of the pipeline start-up and commissioning expenses incurred in the six months ended June 30, 2010, management determined that the earn-out obligation related to the profitability target for 2010 would not be met. Accordingly the liability for contingent consideration was adjusted through earnings in the six months ended June 30, 2010.
Income Taxes
The effective income tax rate was 29.5% (expense) and 17.2% (benefit) for the six months ended June 30, 2011 and 2010, respectively. The effective rate increased in 2011 as more of the Companys operations are conducted in the United States.
Net Income (Loss)
Our net income for the six months ended June 30, 2011 was approximately $0.5 million compared to a net loss of $13.0 million for the six months ended June 30, 2010, as a result of the items discussed above.
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Liquidity and Capital Resources
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures, strategic acquisitions and investments, repurchases of our securities, and lease payments. Our primary sources of liquidity are cash on hand and cash generated from operations. Cash generated from operations is a function of such factors as changes in demand for our products and services, competitive pricing pressures, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, and the impact of integration on our productivity. We seek to preserve our cash balances by investing in marketable securities consisting of high grade corporate notes and United States government securities purchased in accordance with our investment policy, which allows us to invest and reinvest in United States government securities having a maturity of five years or less, and other obligations of United States government agencies and instrumentalities, including government sponsored enterprises, commercial paper, corporate notes and bonds, short term instruments that are direct obligations of issuers, long term instruments that are direct obligations of issuers, and municipal notes and bonds with a maturity of five years or less. We avoid any involvement with mortgage backed securities, collateralized mortgage obligations, auction rate securities, collateralized debt obligations, credit default swaps and similar high risk and/or exotic financial instruments. Any decisions regarding the size of individual investments or their composition must comply with our investment policy with the intent to yield higher obtainable returns with the understanding that the investment may need to be liquidated in the near term to consummate strategic business combinations. As of June 30, 2011, we had cash and cash equivalents of approximately $36.9 million, and approximately $26.8 million of certificates of deposit and marketable securities, for an aggregate of approximately $63.7 million in cash and cash equivalents and investments.
We believe that our cash, cash equivalents and investments will be sufficient to facilitate planned capital expenditures that we may undertake this year.
Cash Flows for the Six months ended June 30, 2011
Net cash used in operating activities was approximately $12.3 million for the six months ended June 30, 2011. Cash used by operating activities was primarily driven by increased accounts receivable of $19.4 million, primarily driven by our acquisitions, offset by various non-cash charges.
Net cash used in investing activities was approximately $76.2 million for the six months ended June 30, 2011. Of this amount, $109.5 million was received from the sale and maturity of securities, offset by the use of $34.9 million for investments in high grade corporate notes, the use of $88.3 million for the purchase of acquisitions (Note 3), and $61.0 million for payments on purchases of machinery and equipment.
Net cash provided by financing activities was $34.2 million for the six months ended June 30, 2011. This amount primarily represents $40.9 million of borrowings under term loans offset by $4.4 million of cash used to repurchase one million shares of the Companys common stock in a private transaction and $3.8 million of cash used in payment on long-term debt agreements.
Contractual Obligations
For information on our contractual obligations, please refer to Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual Commitments as presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. There have been no changes to the Companys contractual obligations in the six months ended June 30, 2011 from those contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Recent Accounting Pronouncements
Fair Value Measurements Disclosures
Effective January 1, 2010, the Company adopted the Financial Accounting Standards Board (FASB) updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information related to purchases, sales, issuances and settlements to be included in the roll forward of activity. The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities, and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring Level 2 and Level 3 fair value measurements. The Company has not yet adopted the guidance with respect to the roll forward activity in Level 3 fair value measurements. The Company has updated its disclosures to comply with the updated guidance.
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Multiple Deliverable Revenue Arrangements
In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on managements best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. In October 2009, the FASB also issued a new accounting standard which changed revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. The new guidance is effective for the Company in the first quarter of 2011. The adoption of the new guidance did not have an impact on the Companys consolidated results of operations or financial position.
Intangibles Goodwill and Other
In December 2010, the FASB issued updated guidance that modifies the goodwill impairment test. Under the updated guidance, goodwill is tested for impairment using a two-step process. The first step is to identify potential impairments by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If the carrying value of a reporting unit exceeds the estimated fair value, a second step is performed to measure the amount of impairment, if any. The second step is to determine the implied fair value of the reporting units goodwill, measured in the same manner as goodwill is recognized in a business combination, and compare the implied fair value with the carrying amount of the goodwill. If the carrying amount exceeds the implied fair value of the reporting units goodwill, an impairment loss is recognized in an amount equal to that excess.
The updated guidance requires that, if the carrying amount of a reporting unit becomes zero or negative, the second step of the impairment test must be performed when it is more likely than not that a goodwill impairment loss exists. In considering whether it is more likely than not that an impairment loss exists, a company is required to evaluate qualitative factors, including the factors presented in existing guidance that trigger an interim impairment test of goodwill (e.g., a significant adverse change in business climate or an anticipated sale of a reporting unit). The provisions of the guidance were effective for annual and interim periods beginning after December 15, 2010. The adoption of this guidance in January 2011 did not affect the Companys results of operations, financial position or liquidity.
Critical Accounting Policies
There have been no changes to the Companys Critical Accounting Policies in the six months ended June 30, 2011 from those contained in the Companys 2010 Annual Report on Form 10-K.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Foreign Exchange Risk
The value of the Chinese renminbi (RMB) against the United States dollar and other currencies is affected by, among other things, changes in Chinas political and economic conditions. Since July 2005, the RMB has no longer been pegged to the United States dollar at a constant exchange rate. Although the Peoples Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate within a flexible peg range against the United States dollar in the medium to long term. Moreover, it is possible that in the future, Chinas governmental authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Because substantially all of the earnings from our Chinese subsidiary are denominated in RMB, but our reporting currency is the United States dollar, fluctuations in the exchange rate between the United States dollar and the RMB will affect our balance sheet and our earnings per share in United States dollars. In addition, appreciation or depreciation in the value of the RMB relative to the United States dollar would affect our financial results reported in United States dollar terms without giving effect to any underlying change in our business or results of operations.
We do not believe that foreign currency exchange rate fluctuations have had a material impact on the Companys balance sheet and earnings per share for the three or six months ended June 30, 2011. The impact in actual U.S. dollars that foreign currency translation had on our balance sheet, statements of comprehensive loss and changes in equity are reported in the line item Foreign currency translation loss within other comprehensive income in the statement of changes in equity. The impact that foreign currency translation had on our statement of cash flows is reported in the line item Effect of change in foreign exchange rate on cash and cash equivalents in our statement of cash flows.
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Inflation
Inflationary factors, such as increases in the cost of our products and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.
Companys Operations in Foreign Countries
Our operations conducted in the PRC are subject to various political, economic, and other risks and uncertainties inherent in conducting business in the PRC . Among other risks, the operations of the Companys China Water subsidiary are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.
Interest Rates
Our exposure to market risk for changes in interest rates relates to our cash investments. Our cash investments policy emphasizes the preservation of principal over other portfolio considerations. If market interest rates increased by one percent from June 30, 2011, the fair value of our portfolio would decline approximately $0.2 million.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, our management, under the supervision and with the participation of our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer), performed an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the United States Securities Exchange Act of 1934, as amended (Exchange Act)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at that time to provide reasonable assurance that the information required to be disclosed in our reports filed with the United States Securities and Exchange Commission (SEC) under the Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and are accumulated and communicated to our management, including the Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
The term internal control over financial reporting is defined under Rule 13a-15(f) of the Exchange Act and refers to the process of a company that is designed by, or under the supervision of, the issuers principal executive and principal financial officers, or persons performing similar functions, and effected by the issuers board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the issuers assets that could have a material effect on the financial statements.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated whether any change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As a result of this review there were no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the period covered by this Quarterly Report.
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Item 1. | Legal Proceedings. |
We are party to various litigation matters, including regulatory and administrative proceedings arising out of the normal course of business, the more significant of which are summarized below. The ultimate outcome of each of these matters cannot presently be determined, nor can the liability that could potentially result from a negative outcome be reasonably estimated presently for every case. The liability we may ultimately incur with respect to any one of these matters in the event of a negative outcome may be in excess of amounts currently accrued with respect to such matters and, as a result of these matters, may potentially be material to our financial position or results of operations. We review our litigation activities and determine if an unfavorable outcome to us is considered remote, reasonably possible or probable as defined by U.S. GAAP. Where we have determined an unfavorable outcome is probable and is reasonably estimable, we have accrued for potential litigation losses. In addition to the matters described below, we are involved in various other claims and legal actions, including regulatory and administrative proceedings arising out of the normal course of our business. We do not expect that the outcome of such other claims and legal actions will have a material adverse effect on our financial position or results of operations.
On June 1, 2009, Xu Hong Bin, the former president and chairman of China Water and his affiliated entity, Kotex Development Corp. (collectively Xu), filed a lawsuit in the Delaware Court of Chancery titled Xu Hong Bin, et al. v. Heckmann Corporation, et al. (C.A. No. 4637-CC) making various claims against the Company and its directors and executive officers (the Delaware Action). Xu alleged that the Companys intended cancellation of approximately 5.3 million shares of Company common stock held by him was unwarranted and was a breach of the general release in the Escrow Resolution and Transition Agreement between him and the Company, which was filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2008. On June 22, 2009, the Company filed an answer denying all allegations in the complaint, and a counterclaim alleging breaches of fiduciary duties, fraud, and fraudulent inducement. On April 3, 2011, the Company and Xu entered into a Settlement Agreement and Mutual Release to resolve all claims between and among them arising from the Delaware Action (the Xu Settlement).
On April 3, 2011, in addition to the Xu Settlement, and to avoid potential future claims, the Company entered into a Settlement Agreement and Mutual Release with First Asia Finance Group Limited, Lap Woon Wong, Sze Tang Li, IBroader Developments Limited and Canary Global Investments, Inc. (collectively, the Albert Li Group), arising out of the Albert Li Groups purported right to certain shares of Company common stock in connection with the acquisition of China Water (the Li Settlement Agreement) (together with the Xu Settlement, the Delaware Settlement Agreements).
Under the terms of the Delaware Settlement Agreements, both Xu and the Albert Li Group received and were allowed to trade previously-issued shares of Company common stock and warrants, in exchange for their relinquishment of all claims to the remainder of the Company shares previously claimed by them. In addition, the Albert Li Group was paid $600,000 in cash. The parties to the Delaware Settlement Agreements exchanged full and mutual releases between and among the Company, Xu and the Albert Li Group. On April 26, 2011, the parties to the Delaware Action filed a Stipulation of Dismissal with Prejudice of the Delaware Action.
On May 21, 2010, Richard P. Gielata, an individual purporting to act on behalf of shareholders, served a class action lawsuit filed May 6, 2010 against the Company and various directors and officers in the United States District Court for the District of Delaware (the Class Action). The Class Action alleges violations of federal securities laws in connection with the acquisition of China Water. The Company responded by filing a motion to transfer the Class Action to California and a motion to dismiss the case. On October 6, 2010, the Magistrate Judge issued a report and recommendation to the District Court Judge to deny the motion to transfer. On October 8, 2010, the court-appointed lead plaintiff, Matthew Haberkorn, filed an Amended Class Action Complaint that adds China Water as a defendant. On October 25, 2010, the Company filed objections to the Magistrate Judges report and recommendation on the motion to transfer. The court adopted the report and recommendation on the motion to transfer on March 31, 2011. The Company filed a motion to dismiss the Amended Class Action Complaint and a reply to lead plaintiffs opposition to the motion to dismiss. On June 16, 2011, the Magistrate Judge issued a report and recommendation to the District Court Judge to deny the motion to dismiss. The Company filed objections to the Magistrate Judges report and recommendation on the motion to dismiss. Plaintiff has filed a response to the Companys objections. The court has not yet ruled on the objections to the report and recommendation on the motion to dismiss.
On November 18, 2010, Melissa Hess filed a shareholder derivative complaint, purportedly on behalf of the Company, against various officers and directors in the Superior Court of California, County of Riverside (the Derivative Action). The Derivative Action alleges claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment in connection with the acquisition of China Water. The Company responded to the Derivative Action on February 1, 2011 by filing a motion to stay the case until the Class Action is resolved and a demurrer seeking to dismiss the case. The Company filed a reply to Plaintiffs opposition to the motion to stay and demurrer on May 25, 2011. The court held a hearing on the demurrer and motion to stay on June 21, 2011. On July 20, 2011, the court issued orders overruling the Companys demurrer and denying its motion to stay the Derivative Action.
The outcome of the above Class Action and Derivative Action could have a material adverse effect on our consolidated financial statements.
In addition, on June 10, 2011, we received a subpoena from the Denver Regional Office of the SEC seeking information and documents concerning the Companys acquisition of China Water in 2008. The Company is cooperating fully with the SEC with respect to its requests.
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Item 1A. | Risk Factors. |
There have been no material changes from the risk factors as previously disclosed in our 2010 Annual Report on Form 10-K, filed with the SEC on March 14, 2011.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
On April 4, 2011, we issued 1,597,542 shares of our common stock pursuant to a private placement pursuant to the exemption from registration provided by Section 4(2) under the Securities Act in connection with the acquisition of substantially all of the assets and business of Devonian Industries Leasing Company, Inc. and its affiliates. On May 4, 2011, we issued 1,103,302 shares of our common stock pursuant to a private placement pursuant to the exemption from registration provided by Section 4(2) under the Securities Act in connection with the acquisition of all of the equity interests in Excalibur Energy Services, Inc. and Blackhawk, LLC.
Purchases of Equity Securities
In March 2011, the Board of Directors approved a 1-year extension of the Companys discretionary equity buy-back plan. Under the plan, the Company may purchase warrants and up to 20 million shares of the Companys common stock in open market and private transactions through March 11, 2012, at times and in amounts as management deems appropriate, subject to applicable securities laws. One million common shares were purchased by the Company in a private transaction, through a financial intermediary, in connection with the Ng Settlement for approximately $4.4 million in cash, during the three months ended March 31, 2011. No common shares were purchased by the Company in the three months ended June 30, 2011 and no warrants were purchased by the Company in the three and six months ended June 30, 2011.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Removed and Reserved |
None.
Item 5. | Other Information. |
None.
Item 6. | Exhibits. |
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
Exhibit Number |
Description | |
2.10 |
Stock Purchase Agreement, dated as of November 8, 2010, by and among Heckmann Corporation, Complete Vacuum and Rental, Inc., Steven W. Kent, II and Jana S. Kent (incorporated herein by reference to Exhibit 2.10 to Heckmann Corporations Current Report on Form 8-K filed November 9, 2010) | |
3.1 |
Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to Amendment No. 2 to Heckmann Corporations Registration Statement on Form S-1 filed September 4, 2007) | |
3.1A |
Certificate of Amendment to Amended and Restated Certificate of Incorporation (incorporated hereby by reference to Exhibit 3.1 to Heckmann Corporations Current Report on Form 8-K filed November 5, 2008) | |
3.1B |
Second Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibits 3.1B Heckmann Corporations Current Report on Form 10-K filed on March 14, 2011). | |
3.2 |
Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.1 to Heckmann Corporations Current Report on Form 8-K filed on April 7, 2011 | |
4.1 |
Specimen Unit Certificated (incorporated herein by reference to Exhibit 4.1 to Heckmann Corporations Registration Statement on Form S-1 filed June 26, 2007) | |
4.2 |
Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.2 to Heckmann Corporations Registration Statement on Form S-1 filed June 26, 2007) |
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Exhibit Number |
Description | |
4.3 |
Specimen Warrant Certificate (incorporated herein by reference to Exhibit 4.3 to Amendment No. 2 to Heckmann Corporations Registration Statement on Form S-1 filed September 4, 2007) | |
4.4 |
Form of Second Amended and Restated Warrant Agreement, by and between American Stock Transfer & Trust Company, as warrant agent, and Heckmann Corporation (incorporated herein by reference to Exhibit 4.4 to Amendment No. 6 to Heckmann Corporations Registration Statement on Form S-1 filed November 8, 2007) | |
4.5 |
Registration Rights Agreement, dated May 19, 2008, by and between Heckmann Corporation and the signatories party thereto (included as Annex G to Amendment No. 5 to Heckmann Corporations Registration Statement on Form S-4 filed October 1, 2008 and incorporated herein by reference) | |
4.6 |
Form of Registration Rights Agreement, by and among Heckmann Corporation and certain security holders (incorporated herein by reference to Exhibit 10.2 to Amendment No. 6 to Heckmann Corporations Registration Statement on Form S-1 filed November 8, 2007) | |
31.1 |
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
31.2 |
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
32.1 |
Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
101.INS** |
XBRL Instance Document. | |
101.SCH** |
XBRL Taxonomy Extension Schema Document. | |
101.CAL** |
XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.LAB** |
XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE** |
XBRL Taxonomy Extension Presentation Linkbase Document. | |
101.DEF** |
XBRL Taxonomy Definition Linkbase Document |
* | Filed herewith. |
** | XBRL (eXtensible Business Reporting Language) information is furnished and not filed herewith, is not part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to the liability under these sections. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 9, 2011 | ||
/s/ RICHARD J. HECKMANN | ||
Name: | Richard J. Heckmann | |
Title: | Chief Executive Officer (Principal Executive Officer) | |
/s/ BRIAN R. ANDERSON | ||
Name: | Brian R. Anderson | |
Title: |
Chief Financial Officer (Principal Financial Officer and Accounting Officer) |
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