Synagro Reports Third Quarter Revenue and Earnings

ARCHIVED 2002–2016: Originally distributed via the eWire press wire service. Preserved as historical record.

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Synagro Reports Third Quarter Revenue and Earnings

Key Third Quarter Results

TEXAS, HOUSTON, Nov. 7 -/E-Wire/-- Revenues increased 6.6% to $74.7 million

* Adjusted EBITDA increased 6.6% to $18 million * Completion of Earthwise acquisition for $3 million cash, adding annualized revenue of $10 million * Cash payments on debt totaling $4.5 million

Synagro Technologies Inc. (Nasdaq:SYGR - News), a national water and wastewater residuals management company, today announced its results of operations for the three and nine months ended Sept. 30, 2002.

Sept. 30, 2002 - Third Quarter Financial Results

Revenue for the quarter increased 6.6% to $74.7 million from $70.1 million in the comparable quarter last year, with approximately $.9 million of the increase related to the Earthwise acquisition, which closed in August 2002, and the balance from internal growth totaling approximately 5.2%. Earnings before interest, taxes, depreciation and amortization expense adjusted to exclude reorganization costs totaling $.6 million in 2002 and the nonrecurring gain from litigation settlement totaling $6 million in 2001 ("Adjusted EBITDA") for the quarter increased 6.6% to $18 million from $16.9 million in the comparable quarter last year. Adjusted EBITDA as a percent of revenue remained unchanged at 24% during the third quarter of 2002 compared to the third quarter of 2001. Amortization of intangibles, including goodwill, decreased $1.1 million compared to the comparable quarter last year as goodwill is no longer permitted to be amortized under current accounting standards. Operating income for the quarter decreased to $13.3 million from $18.2 million in the comparable quarter last year. Excluding the impact of the 2002 reorganization costs, 2001 goodwill amortization, and the 2001 nonrecurring gain from litigation settlement, operating income increased 4% to $13.9 million from $13.3 million last year primarily due to the increase in Adjusted EBITDA, reduced by a $.7 million increase in depreciation expense.

During the quarter, the Company decided to reorganize and reduce the number of its operating regions, which resulted in a reduction in personnel and locations. Accordingly, reorganization costs totaling $.6 million were incurred during the quarter, which primarily relate to severance and lease-exit costs.

Pre-tax income for the quarter decreased to $7.2 million from $12 million in the comparable quarter last year primarily due to the $6 million nonrecurring gain from litigation settlement realized in the third quarter of last year, partially offset by the $1.1 million reduction in goodwill amortization, the $.6 million of reorganization costs, and a $.3 million reduction in interest expense.

Net income before preferred stock dividends for the quarter decreased to $4.5 million from $12 million in the comparable quarter last year due to the changes in pre-tax income described above and a $2.7 million increase in the tax provision in 2002. The Company was not required to provide a tax provision in 2001 as changes in the deferred tax asset valuation allowance offset deferred tax requirements. The Company's 2002 tax provision is principally a deferred provision that will not significantly impact cash flow since the Company has significant tax deductions in excess of book deductions and net operating loss carryforwards available to offset taxable income.

Diluted income per share for the three months ended Sept. 30, 2002, totaled $.08 per share compared to diluted income per share of $.24 per share for the three months ended Sept. 30, 2001. This decrease is principally due to the $6 million nonrecurring gain from litigation settlement in 2001, the $2.7 million provision for income taxes this quarter compared to no provision requirements in the third quarter of last year, partially offset by the reduction in goodwill amortization.

Commenting on the results, Synagro's Chief Executive Officer, Ross M. Patten, stated, "We are pleased with our financial results for the third quarter. During the quarter, we reorganized our operating and support infrastructure, which resulted in a $.6 million charge. We believe the changes made will help us to more efficiently manage our business and reduce our annual operating costs by over $1 million. In addition to the completion of the Earthwise acquisition, which should add about $10 million of annualized revenue, we also paid down $4.5 million of debt during the quarter."

Sept. 30, 2002 - Year-to-Date Financial Results

Revenue for the nine months ended Sept. 30, 2002, increased 3.3% to $201 million from $194.7 million in the prior year. Net income before extraordinary loss on early retirement of debt, net of tax benefit, cumulative effect of change in accounting for derivatives (related to prior year) and preferred stock dividends for the nine months ended Sept. 30, 2002, decreased to $12 million from $16.9 million in the comparable period of the prior year. The decrease is principally due to the prior year $6 million nonrecurring gain from litigation settlement, the requirement for a tax provision in 2002 (see above discussion), offset by the reduction in goodwill amortization. Adjusted EBITDA for the nine months ended Sept. 30, 2002, increased 3.5% to $46.9 million from $45.3 million in the comparable period last year.

In April 2002, the Company completed the sale of $150 million 9.5% Senior Subordinated Notes due 2009 and used the proceeds to pay down approximately $92 million of senior bank debt and to pay off $53 million of 12% subordinated debt. In May 2002, the Company entered into a new $150 million senior credit facility that provides for a $70 million funded term loan and up to an $80 million revolver. The term loan proceeds were used to pay off the existing senior debt that remained unpaid after the $150 million Senior Subordinated Notes offering. Accordingly, the Company recorded a $4.5 million noncash extraordinary loss on early retirement of debt, net of tax benefit of $2.8 million, during the three months ended June 30, 2002, which represents the unamortized deferred debt costs related to the debt that was repaid with the net proceeds received from the Senior Subordinated Notes and the new senior credit facility.

Diluted income per share for the nine months ended Sept. 30, 2002, totaled $.14 per share compared to diluted income per share of $.30 per share for the nine months ended Sept. 30, 2001. Diluted income per share, adjusted to exclude the impact of the noncash extraordinary loss on early retirement of debt, net of tax, for the nine months ended Sept. 30, 2002, totaled $.23 per share compared to diluted income per share adjusted to exclude the cumulative effect of change in accounting for derivatives totaled $.34 per share for the nine months ended Sept. 30, 2001. This decrease is principally due to the $6 million nonrecurring gain from litigation settlement in 2001, the $7.3 million provision for income taxes this year compared to no provision requirements last year, partially offset by the reduction in goodwill amortization.

Fiscal Year 2002 Earnings Guidance Update

Based on results to date and current expectations for the remainder of the year, the Company expects to report fiscal year 2002 revenues of approximately $273 million, adjusted EBITDA of approximately $63.5 million, and adjusted diluted earnings per share totaling approximately $.30 per share compared to fiscal 2001 revenues of $260.2 million, adjusted EBITDA of $60.6 million, and adjusted diluted earnings per share of $.25 per share.

While revenue guidance remains unchanged, adjusted EBITDA has been revised from $64 million to $63.5 million and adjusted diluted earnings per share has been revised from $.33 per share to $.30 per share. These revisions reflect additional revenue from the Earthwise acquisition (closed in August 2002), a reduction in industrial revenue (primarily soils cleanout projects), and a $1.8 million increase in interest expense.

The $1.8 million increase in interest expense is primarily due to the refinancing of debt in the second quarter of 2002 (see above discussion regarding $150 million 9.5% Senior Subordinated Notes). TheCompany had originally anticipated entering in a fixed-to-floating interest rate swap agreement on the $150 million 9.5% Senior Subordinated Notes, which would have offset the majority of the increase in interest expense. Unfavorable conditions with the external capital markets have delayed the Company's execution of this interest rate swap. The Company's weighted average cash interest rate on total outstanding debt of $258 million as of Sept. 30, 2002, is approximately eight percent with approximately 75% of the total representing fixed-rate debt.

Consistent with historical operating trends, the Company's year-to-date results include the effects of seasonally low volumes and revenues in the first quarter due to weather conditions that prevent the Company's land application operations from hauling and processing customer materials in several geographic markets. Similar weather and operating conditions generally also occur during the fourth quarter of each year, which if significant, could impact the Company's full-year guidance for revenue and earnings.

Synagro is the largest national company focused on water and wastewater residuals management services in the United States, serving over 1,000 municipal, industrial, and agribusiness water and wastewater generators in 35 states and the District of Columbia. The Company offers a range of water and wastewater residuals management services, focusing on the beneficial reuse of organic, nonhazardous residuals resulting from the water and wastewater treatment process, including collection and transportation, land application, thermal drying and pelletization, incineration, composting, alkaline stabilization, dewatering, cleanout services, wastewater treatment plant operations and maintenance, product marketing, and related record keeping and regulatory reporting services

This press release contains certain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which involve known and unknown risks, uncertainties or other factors not under the Company's control which may cause the actual results, performance or achievement of the Company to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include, but are not limited to, (1) the ability to find, timely close, and integrate acquisitions, (2) unseasonable weather, (3) changes in government regulations, and (4) the ability to access debt and equity financing when needed. Other factors are discussed in the Company's periodic filings with the Securities and Exchange Commission.

Synagro Technologies Inc. Consolidated Statement of Operations For the Three Months Ended September 30 (dollars in thousands, except per share data) (unaudited)

2002 2001 -------------- -------------- Net sales $74,712 100.0% $70,067 100.0% Cost of operations (including depreciation) 55,287 74.0% 50,975 74.7% ------- ------ ------- ------ Gross profit 19,425 26.0% 19,092 27.3%

General and administrative expenses 5,500 7.4% 5,761 8.2% Reorganization costs 571 0.8% -- --% Nonrecurring gain from litigation settlement -- --% (6,043) (8.6)% Amortization of intangibles 27 --% 1,156 1.7% ------- ------ ------- ------ Income from operations 13,327 17.8% 18,218 26.0%

Interest expense 6,129 8.2% 6,422 9.2% Other income, net (29) --% (170) (0.3)% ------- ------ ------- ------ Other expense, net 6,100 8.2% 6,252 8.9% ------- ------ ------- ------ Income before provision for income taxes 7,227 9.7% 11,966 17.1% Provision for income taxes 2,746 3.7% -- --% ------- ------ ------- ------ Net income before preferred stock dividends 4,481 6.0% 11,966 17.1% ====== ====== Preferred stock dividends (Note A) 1,944 1,815 ------- ------- Net income applicable to common stock $ 2,537 $10,151 ======= =======

Earnings per share (Note B): Basic $ 0.13 $ 0.52 ======= ======= Diluted $ 0.08 $ 0.24 ======= ======= Depreciation and amortization $ 4,046 5.4% $ 4,517 6.5%

EBITDA (Note C) $17,402 23.3% $22,905 32.7% Adjusted EBITDA (Note C) $17,973 24.1% $16,862 24.1%

Operating cash flow (Adjusted EBITDA less cash interest expense) $12,458 16.7% $10,636 15.2%

Note A: The Company's preferred stock accrues an 8% noncash dividend per annum, which accumulates. Dividends totaled $1,944,000 and $1,815,000 during the three months ended Sept. 30, 2002 and 2001, respectively, of which $1,681,000 and $1,551,000, respectively, represent the 8% noncash dividend and the remainder represents amortization of issuance costs and accretion.

Note B: The following summarizes reported basic and diluted earnings per share for the three months ended Sept. 30, 2002 and 2001:

2002 2001 ----------- ----------- Basic earnings per share: ------------------------- Net income applicable to common stock $2,537 $10,151 =========== =========== Earnings per share- ------------------- Net income applicable to common stock $0.13 $0.52 =========== =========== Weighted average shares outstanding 19,775,821 19,472,543 =========== =========== Diluted income (loss) per share: -------------------------------- Net income before preferred stock dividends $4,481 $11,966 =========== =========== Earnings per share- ------------------- Net income before preferred stock dividends $0.08 $0.24 =========== =========== Diluted shares outstanding 52,816,779 49,950,589 =========== ===========

Basic earnings per share ("EPS") is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income before preferred stock dividends by the total of the weighted average number of common shares outstanding for the period, the weighted average number of shares of common stock that would be issued assuming conversion of the Company's preferred stock, and other common stock equivalents for options and warrants outstanding determined using the treasury stock method ("Diluted shares outstanding").

Effective Jan. 1, 2002, the Company discontinued the amortization of Goodwill in accordance with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." Reported EPS for the three months ended Sept. 30, 2001, after adding back goodwill amortization of approximately $1.1 million, would have been $.58 and $.26 for basic and diluted, respectively.

Note C: "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization. Earnings is "net income before preferred stock dividends." "Adjusted EBITDA" is EBITDA adjusted to exclude the $.6 million charge for reorganization costs during the three months ended Sept. 30, 2002, and the $6 million nonrecurring gain from litigation settlement in 2001.

Synagro Technologies Inc. Consolidated Statement of Operations For the Nine Months Ended September 30 (dollars in thousands, except per share data) (unaudited)

2002 2001 ------------------ ------------------ Net sales $201,027 100.0% $194,662 100.0% Cost of operations (including depreciation) 148,543 73.9% 143,390 73.7% --------- ------- -------- -------- Gross profit 52,484 26.1% 51,272 26.3%

General and administrative expenses 16,880 8.4% 16,341 8.4% Reorganization costs 571 0.3% -- --% Nonrecurring gain from litigation settlement -- --% (6,043) (3.1)% Amortization of intangibles 82 --% 3,439 1.8% --------- ------- -------- -------- Income from operations 34,951 17.4% 37,535 19.3%

Interest expense 17,480 8.7% 20,902 10.7% Other income, net (1,869) (0.9)% (250) (0.1)% --------- ------- -------- -------- Other expense, net 15,611 7.8% 20,652 10.6% --------- ------- -------- -------- Income before provision for income taxes 19,340 9.6% 16,883 8.7% Provision for income taxes 7,349 3.6% -- --% --------- ------- -------- -------- Net income before extraordinary loss on early retirement of debt, net of tax benefit, cumulative effect of change in accounting for derivatives and preferred stock dividends 11,991 6.0% 16,883 8.7% ======= ======== Extraordinary loss on early retirement of debt, net of tax benefit (Note A) 4,489 -- Cumulative effect of change in accounting for derivatives (Note B) -- 1,861 --------- -------- Net income before preferred stock dividends 7,502 15,022 Preferred stock dividends (Note C) 5,681 5,401 --------- -------- Net income applicable to common stock $1,821 $9,621 ========= ======== Earnings per share (Note D): Basic $0.09 $0.49 ========= ======== Diluted $0.14 $0.30 ========= ======== Adjusted earnings per share (Note D): Basic $0.32 $0.59 ========= ======== Diluted $0.23 $0.34 ========= ======== Depreciation and amortization $11,223 5.6% $13,573 7.0%

EBITDA (Note E) $48,043 23.9% $51,358 26.4% Adjusted EBITDA (Note E) $46,879 23.3% $45,315 23.3%

Operating cash flow (Adjusted EBITDA less cash Interest expense) $31,124 15.5% $25,529 13.1%

Note A: In April 2002, the Company completed the sale of $150 million 9.5% Senior Subordinated Notes due 2009 and used the proceeds to pay down approximately $92 million of senior bank debt and to pay off $53 million of 12% subordinated debt. In May 2002, the Company entered into a new $150 million senior credit facility that provides for a $70 million funded term loan and up to an $80 million revolver. The term loan proceeds were used to pay off the existing senior debt that remained unpaid after the $150 million 9.5% Senior Subordinated Notes offering. Accordingly, the Company recorded a $4.5 million noncash extraordinary loss on early retirement of debt, net of tax benefit of approximately $2.8 million during the three months ended June 30, 2002, which represents the unamortized deferred debt costs related to the debt that was repaid with the net proceeds received from the Senior Subordinated Notes and the new senior credit facility.

Note B: Effective Jan. 1, 2001, the Company adopted the accounting requirements of "Financial Accounting Standards Board Opinion No. 133, Accounting for Derivatives," as amended, which requires that the Company recognize all derivative instruments as asset or liabilities in its balance sheet and measure them at their fair value. The statement also requires that changes in the fair value of derivatives be recognized in earnings unless specific hedge accounting criteria are met. The Company's derivatives consist of interest rate hedging agreements. The noncash transition adjustment related to the adoption of this statement has been reflected as a "cumulative effect of change in accounting for derivatives" of $1.9 million charged to net income and $2.0 million charged to other comprehensive income included in stockholders' equity.

Note C: The Company's preferred stock accrues an 8% noncash dividend per annum, which accumulates. Dividends totaled $5,681,000 and $5,401,000 during the nine months ended Sept. 30, 2002 and 2001, respectively, of which $4,890,000 and $4,514,000, respectively, represent the 8% noncash dividend and the remainder represents amortization of issuance costs and accretion.

Note D: The following summarizes reported and adjusted basic and diluted earnings per share for the nine months ended Sept. 30, 2002 and 2001, respectively:

2002 2001 ----------- ----------- Basic earnings per share: ------------------------- Net income applicable to common stock $1,821 $9,621 Extraordinary loss on early retirement of debt, net 4,489 -- Cumulative effect of change in accounting for derivatives -- 1,861 ----------- ----------- Adjusted net income applicable to common stock $6,310 $11,482 =========== =========== Earnings per share- -------------------- Net income applicable to common stock $0.09 $0.49 Extraordinary loss on early retirement of debt, net 0.23 -- Cumulative effect of change in accounting for derivatives -- 0.10 ----------- ----------- Adjusted net income per share - basic $0.32 $0.59 =========== =========== Weighted average shares outstanding 19,577,569 19,450,854 =========== =========== Diluted income (loss) per share: -------------------------------- Net income before preferred stock dividends $7,502 $15,022 Extraordinary loss on early retirement of debt, net 4,489 -- Cumulative effect of change in accounting for derivatives -- 1,861 ----------- ----------- Adjusted net income before preferred stock dividends $11,991 $16,883 =========== =========== Earnings per share- ------------------- Net income before preferred stock dividends $0.14 $0.30 Extraordinary loss on early retirement of debt, net 0.09 -- Cumulative effect of change in accounting for derivatives -- 0.04 ----------- ----------- Adjusted net income per share -- diluted $0.23 $0.34 =========== =========== Diluted shares outstanding 52,197,529 49,338,398 =========== ===========

Effective Jan. 1, 2002, the Company discontinued the amortization of Goodwill in accordance with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." Reported EPS for the nine months ended Sept. 30, 2001, after adding back goodwill amortization of approximately $3.4 million, would have been $.66 and $.37 for both basic and diluted, respectively.

Note E: "EBITDA" is defined as earnings before interest, taxes, depreciation, and amortization. Earnings is "net income before extraordinary loss on early retirement of debt, net of tax benefit, cumulative effect of change in accounting for derivatives and preferred stock dividends." "Adjusted EBITDA" is EBITDA adjusted to exclude the $1.7 million gain for mark-to-market adjustments on an interest rate swap included in other income during the nine months ended Sept. 30, 2002, the $.6 million charge for reorganization costs during the nine months ended Sept. 30, 2002, and the $6 million nonrecurring gain from litigation settlement during the nine months ended Sept. 30, 2001

Synagro Technologies Inc

Synagro Technologies Inc., Houston

Ross M. Patten, 713/369-1700,

http://www.synagro.com

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