Safety-Kleen Systems Inc.

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Safety-Kleen Systems Inc.

5400 Legacy Drive
Cluster II, Building 3
Plano, Texas 75024
U.S.A.
Telephone: (972) 265-2000
Toll Free: (800) 669-5740
Fax: (972) 265-2990
Web site: http://www.Safety-Kleen.com

Private Company
Incorporated: 1963
Employees: 5,000
Sales: $868 million (2004)
NAIC: 56292 Materials Recovery Facilities; 562211 Hazardous Waste Treatment and Disposal; 562219 Other Nonhazardous Waste Treatment and Disposal

Safety-Kleen Systems Inc., formerly known as Safety-Kleen Corporation, is a leading provider of parts washers, industrial waste management, and oil recycling and re-refining services. The company has more than 400,000 customers including auto shops, government agencies, and corporations such as General Electric, Goodyear, and Chrysler. Safety-Kleen is the largest recovery and recycling company for used oil products in the United States refining nearly 160 million gallons of used motor oil each year. The company emerged from bankruptcy protection in 2003 as a private entity.

EARLY HISTORY

Safety-Kleen traces its roots to a Wisconsin inventor named Ben Palmer who designed the Safety-Kleen parts washer, a device that helped remove grease from auto parts. While working in his family's sand and gravel business during the 1950s, Palmer was inspired to come up with a safer means of cleaning automotive parts than the standard and somewhat dangerous method of washing parts in gasoline. In 1954 Palmer developed his first parts-washing device, a sink with a nonflammable fire cover placed on top of a barrel containing a parts-washing solvent. Palmer attached a hose and spigot to the sink, which was used to pump cleaning solution into the sink. Beneath the sink Palmer placed a screening filter, allowing the part-washing solvent, once screened, to be reused in a relatively dirt-free condition.

By 1959 Palmer had received an initial patent for his parts washer and sold a few of his machines to other gravel pit businesses. He then left his native Milwaukee area to market his invention in New Orleans and Chicago. With minimal sales success, Palmer, who was still assembling his own machines, returned to Milwaukee during the early 1960s. He leased his parts washers to local businesses and periodically serviced those machines, removing used solvent and adding a clean solution. By the mid-1960s Palmer had 100 customers.

In 1967 Gene Olson, a Wisconsin businessman, discovered one of Palmer's parts washers in a local service station and thought the under-marketed device represented a gold mine. Olson offered Palmer $100,000 for his Safety-Kleen business and the inventor accepted the offer. In order to make the business more profitable, Olson expanded service areas around the Milwaukee area, franchised his business to independent operators outside of Wisconsin, and established minimum service intervals. Marketing efforts, which boosted Safety-Kleen's customer base to 400, were not enough to keep the parts washer operation afloat and within a year the company was nearly bankrupt.

In 1968 Olson sold Safety-Kleen to Chicago Rawhide Manufacturing Company, an Elgin, Illinois-based manufacturer of automotive bearing shaft seals for the original equipment market. Chicago Rawhide, seeking to diversify into the automotive replacement market, paid Olson $25,000 in cash and assumed Safety-Kleen's $160,000 worth of debt. Donald W. Brinckman, a Chicago Rawhide vice-president who helped engineer the Safety-Kleen deal, became president and chief executive of the new Chicago Rawhide subsidiary.

In order to avoid competitor duplication of the Safety-Kleen washer, which held only a loose patent, and also to avoid unwanted competition in a yet developed market for parts washer services, Brinckman devised a marketing plan designed to quickly push Safety-Kleen into the national arena. The plan divided the country into seven regions for marketing purposes. Newly recruited regional managers were trained in the Minneapolis-St. Paul, Minnesota, area just a few months after Safety-Kleen was acquired in preparation for a national rollout of services. The managers leased service centers, rented trucks, hired route drivers and sales help, and established branch routes in a matter of weeks before moving on to their own respective regions. Following a similar formula in other major market areas, Safety-Kleen established a network of 130 branch facilities within three years.

The Safety-Kleen business—which literally created its own industry—was targeted to help sell Chicago Rawhide's replacement wheel seals by placement of route drivers throughout the United States and provision of a regular customer service that could become an inroad for selling seals. Safety-Kleen's initial activities included placement of its parts washer free of charge at an auto or retail repair business; it then collected a fee to remove and replace the dirty solvent.

Safety-Kleen was the first company to provide other companies with solvent disposal services, which became a major selling point. Seeking to avoid direct disposal of waste solvents, in 1969 Allan Manteuffel, a Safety-Kleen chemical engineer, began experimenting with ways to recycle used solvents. That same year Safety-Kleen purchased and began conversion of a former oil storage plant; by 1970 the company was processing solvents at its first recycling center.

GROWTH IN THE 1970S

Safety-Kleen entered the international arena in 1970 when it began establishing service routes in Canada. By October 1971 Safety-Kleen had placed 75,000 machines on 132 routes in 42 states and two Canadian provinces. That same year the company added a computerized control center in Elgin to manage customer records and automatically generate lists of needed service calls. The company also converted a second oil storage plant into a recycling center in Reedley, California. With annual sales topping $7.4 million in 1971, the company became profitable for the first time.

In 1972 Safety-Kleen began introducing allied products that its service representatives could regularly offer to established customers. Safety-Kleen's first allied product, an oil filter produced outside the company and offered exclusively by Safety-Kleen, debuted in September 1972 and was followed by a cream hand cleaner one year later. In December 1972 Safety-Kleen utilized trade magazines to launch the company's first major advertising drive, which targeted service station and automobile garage operators.

In 1973 Safety-Kleen established its first overseas operations and began to do business in England. That same year the company constructed a new Wisconsin parts cleaner production facility to replace a much smaller factory it had been leasing. In 1974 a recycling center in Clayton, New Jersey, opened.

The expansion of Safety-Kleen's business during the early 1970s drove the company to devise a branch system, with each branch encompassing several service and sales routes. Much like a franchise system without any required initial investment on the part of the branch manager, the branch system rewarded the success of individual branch operators by giving managers a stake in the company at a cost for route trucks and sales help. The branch manager was also responsible for sale representatives' commissions.

COMPANY PERSPECTIVES

Safety-Kleen's mission is to be the leader in providing responsible cleaning and environmental solutions that meet the needs of our customers and the communities we serve; while conserving natural resources, protecting the environment and serving our constituencies.

The Safety-Kleen formula for sales growth paid off and by 1974 the company had placed 125,000 washers and grown from a local work force of ten to an international operation with more than 700 employees. In October 1974 Safety-Kleen, which never delivered the seal sales expected of it, was spun off as an independent corporation. Brinckman was named president of Safety-Kleen and Russell A. Gwillim, president of Chicago Rawhide, assumed the position of chairman of Safety-Kleen. Four days after the spinoff, Safety-Kleen moved into its new Elgin headquarters, adjacent to the Chicago Rawhide office.

In December 1974 Safety-Kleen set up shop in Germany, but the language barrier resulted in recruiting problems and growth remained slow there throughout the 1970s. In 1975 Safety-Kleen opened recycling centers in Denton, Texas, and Lexington, South Carolina. The company's five recycling centers completed Safety-Kleen's national "closed loop" recovery system, which followed waste fluids throughout their existence and recovered them for re-use. The recycling centers began paying more than environmental dividends in 1973, following the onset of the OPEC Oil Embargo and the accompanying rise in gas prices and the cost of new solvent.

In 1976 Safety-Kleen opened a new, state-of-the-artrecycling plant in Elgin and two years later began recycling immersion cleaner solvent. By the mid-1970s Safety-Kleen was processing more than 15 million gallons of used mineral spirits solvent annually, with 70 of every 100 gallons of solvent delivered to customers as recycled liquid.

During the mid-1970s Safety-Kleen introduced a number of allied products, including a powdered concrete floor cleaner that was the first company-made allied product, a wiper blade, a carburetor cold parts cleaner, an aerosol spray choke and carburetor cleaner, and a Safety-Kleen broom. In 1977 Safety-Kleen introduced a wheel seal cabinet service.

Safety-Kleen continued to target industrial customers, introducing a number of allied services during the mid-1970s. In 1976 the company introduced its immersion cleaner service, which cleaned gum-and-varnish encrusted automotive parts, and two years later Safety-Kleen debuted a customer-owned machine service (COMS). COMS—aimed at customers who originally purchased parts washers from Ben Palmer as well as customers who owned parts cleaning machines made by other firms—opened up industrial markets by providing a service for all sizes and brands of parts washers.

In 1978 Safety-Kleen entered the Australian market and two years later established a recycling center there. In April 1979 Safety-Kleen went public with an initial over-the-counter offering of 265,000 shares. Proceeds from the stock offering allowed Safety-Kleen to polish off its $4 million debt to Chicago Rawhide.

During the late 1970s Safety-Kleen began test marketing a restaurant filter cleaning business and in mid-1979, after establishing a regional restaurant filter cleaning business around the Elgin area, Safety-Kleen opened an automated filter cleaning plant in Elk Grove Village, Illinois; similar plants opened a year later in New Jersey and California. Overseas, U.K. parts washer placements nearly doubled in the late 1970s. In 1980 Safety-Kleen absorbed its chief U.K. competitor, Greaseater, Ltd., a two-year-old firm that had modeled its operations on Safety-Kleen's business.

KEY DATES

1954:: Ben Palmer develops his first parts-washing device.
1959:: Palmer has received an initial patent for his parts washer and has sold a few of his machines to other gravel pit businesses.
1967:: Gene Olson offers Palmer $100,000 for his Safety-Kleen business.
1968:: Olson sells Safety-Kleen to Chicago Rawhide Manufacturing Company.
1970:: The company processes solvents at its first recycling center; the company enters the Canadian market.
1974:: Safety-Kleen is spun off as an independent company.
1983:: The company lists on the New York Stock Exchange.
1998:: Laidlaw Environmental Services acquires Safety-Kleen.
2000:: The company files for Chapter 11 bankruptcy protection.
2003:: The company emerges from Chapter 11 as Safety-Kleen Systems Inc.

Safety-Kleen entered the 1980s with more than six domestic recycling centers and more than 200 branch facilities, including more than 160 branches in the United States. By 1980 Safety-Kleen was the world's largest solvent recycler, processing more than 25 million gallons of mineral solvents a year. In addition, the company's recycling efforts had been expanded to include restaurant exhaust grease filters and Safety-Kleen route vans and trucks, which the company regularly rebuilt.

FOCUSING ON INDUSTRIAL MARKETS IN THE EARLY 1980S

Safety-Kleen's business profile shifted during the early 1980s as the industrial market replaced the automotive repair market as the company's targeted core business. The move toward the industrial market was encouraged in part by U.S. Environmental Protection Agency (EPA) regulations that took effect in 1980 and labeled used solvents as hazardous material. Fortunately for the company, its recycling process was recognized as a safe means of disposal of solvents.

By 1980 Safety-Kleen's German business was still losing money, so in April 1981 the German operation was sold to a local businessman who continued to provide Safety-Kleen services for customers as a licensee, paying the company royalties on his revenues. Australian operations flourished, though, and in 1981 a branch office was established in New Zealand.

In 1981 Safety-Kleen enhanced its service to restaurants with the introduction of its Fire-Shield restaurant filter. That same year the company began bulk solvent sales to industrial customers and launched a national collection and recycling business.

Safety-Kleen debuted its auto body shop buffing pad service following its 1980 acquisition of American Impacts Corporation, a service company that recycled buffing pads used in high-luster lacquer finishing. Safety-Kleen's sales—pushed upward by diversification and increased industrial sales—rose to $134.8 million in 1981 and the company made the "Fortune 1000" list.

In 1983 the company made a secondary public offering and was listed on the New York Stock Exchange. The following year Safety-Kleen entered Puerto Rico, after licensing Puerto Rico Oil Company (PROICO) to market Safety-Kleen services.

In November 1984 the U.S. Resource Conservation and Recovery Act was expanded to include small-quantity waste generators, which included thousands of Safety-Kleen customers. That same year the company debuted a plan to target dry cleaner businesses, especially small firms in need of help to comply with EPA regulations, which had made dry cleaner solvent a hazardous waste. The dry cleaner service, which included the collection, recovery, and recycling of dry cleaner solvent, was the company's first major experience handling hazardous waste through its branch system and helped to firmly establish Safety-Kleen as an environmental service company.

By 1985 the company had extended its operations to include the acquisition and recycling of large volumes of hazardous waste streams, which were collected and sent directly to recycling centers. The wastes from these customers were recycled and sold, or blended into fuels for industrial use. Safety-Kleen also prepared EPA-approved legal manifests for other companies, which made Safety-Kleen entirely responsible for the life span of the solvent it provided. In order to accommodate the increasing amounts of waste solvent it was handling, in 1985 Safety-Kleen established its first regional accumulation center for small-quantity-generator hazardous waste and within two years a dozen such accumulation centers were in place.

In 1985 Safety-Kleen introduced a paint refinishing service, providing businesses with a machine designed to clean paint spray guns and trap the solvent and paint residue. Like other closed loop solvent services, the paint refinishing service used the company's branch and recycling center system to collect, store, recycle, and produce clean solvent.

As a result of its foreign start-up experiences in Germany, Safety-Kleen resolved to enter non-English-speaking countries only through joint ventures. The first such venture, SOPIA, was created in 1985 through a 50/50 partnership with Primagaz Company, France's largest independent supplier of liquified gases. Within a few years SOPIA had established branches in France, Belgium, and Italy. In 1985 Safety-Kleen also began a test joint venture in Japan and a year later Safety-Kleen and the Spanish firm Armero-Johnsen created the Spanish joint venture CODISA. Through CODISA, Safety-Kleen entered Portugal in 1987.

EXPANSION IN THE MIDDLE TO LATE 1980S

Between 1985 and 1987 Safety-Kleen made three strategic acquisitions designed to expand its technological base and broaden the types of fluids the company could recycle. In 1985 the company acquired Custom Organics, a privately owned recycler of solvents and chemical wastes for the electronics industry. In 1986 Safety-Kleen enhanced its restaurant services through the acquisition of Phillips Manufacturing Company, a vapor-degreaser operation. One year later Safety-Kleen purchased McKesson Envirosystems, a solvent-refining company with plants in Kentucky, Illinois, and Puerto Rico. McKesson's ability to process flammable wastes provided Safety-Kleen with new inroads to industrial markets; it increased the company's ability to handle large quantities of wastes and produce supplemental fuels for cement kilns.

Capitalizing on its expanding capabilities, in 1987 Safety-Kleen launched its fluid recovery service, designed to remove and treat small and medium-sized quantities of industrial waste. The service included collection of 55-gallon drums of industrial fluid wastes, which were recycled or processed as part of the company's new supplemental fuels program. In 1987 Safety-Kleen also entered the oil recovery services business after the acquisition of the Canadian firm Breslube Enterprises, North America's leading re-refiner of lubricating oils. Like other Safety-Kleen businesses, the oil recovery service was designed to take advantage of the company's branch network in the collection of used oil, destined to be re-refined into lubricating oils or processed into industrial fuels.

In 1987 Safety-Kleen's revenues leaped 31 percent for the company's biggest percentage gain in 12 years. Net income rose 24 percent and Safety-Kleen became the first American company to post 17 straight years of earnings growth of more than 20 percent.

In 1988 Safety-Kleen entered Ireland after acquiring Greaseaters of Ireland (renamed Safety-Kleen of Ireland). One year later the company established joint ventures in Korea and Taiwan that solidified Safety-Kleen's foothold in the Pacific Rim area.

In 1988 Safety-Kleen sold its restaurant services business after it concluded that the operation no longer fit the company's emerging profile as an industrial waste handler. That profile was enhanced the following year through the acquisition of Solvents Recovery Service of New Jersey, Inc. (SRS), a processor of heavy-duty industrial solvent wastes.

In 1989 Safety-Kleen began construction of both a new re-refining oil plant in East Chicago, Indiana, and the company's first European solvent recycling plant in Dinnington, England. Record expenditures were allocated to expand the company's oil and solvent recovery services, and for the first time in 20 years Safety-Kleen's earnings, which rose only 8 percent in 1989, showed less than a 20 percent increase. Gwillim retired at the end of 1989 and Brinckman assumed the additional duties of chairman.

FOCUS ON INTERNATIONAL MARKETS

Safety-Kleen entered the 1990s seeking to expand its foreign operations and take advantage of the proposed unification of the European Economic Community. In 1990 Safety-Kleen reached agreements to acquire entire control of Safety-Kleen operations in Belgium, France, and Italy, and started licensee operations in Hong Kong, Israel, Singapore, and Taiwan. That same year Safety-Kleen acquired complete control of Breslube and purchased its German licensee's operation. In 1991 Safety-Kleen acquired Orm Bergold Chemie, Germany's largest solvent recycler. One year later Safety-Kleen purchased Niemann Chemie, a leading provider of parts cleaner services to German automotive repair outlets, and acquired complete control of its Spanish licensee's business in exchange for the sale of Safety-Kleen's 50 percent ownership in Portuguese operations.

Safety-Kleen's nearly untarnished environmental record was smudged during the early 1990s after the company agreed to pay a $1.3 million settlement to the state of California, which had charged the company with 89 alleged violations of the state's hazardous waste laws. Safety-Kleen neither admitted to nor denied the charges. In 1992 a Safety-Kleen internal inspection found that the company had exceeded its authorized waste storage capacity and was illegally storing three million gallons of hazardous waste fluids at its Puerto Rico facilities. The company was later fined $1.4 million by the U.S. EPA.

In 1991 the company opened its new East Chicago oil recycling facility, billed as the world's largest re-refining plant, with a capacity to process more than 100 million gallons of oil annually. However, the oil recovery business, banking in part on an unrealized expectation that lubricating oils would join the federal government's list of hazardous wastes, met with a sluggish economy and a slow start.

Safety-Kleen was ranked among the Fortune 500 companies in 1991, despite the company's first-ever drop in annual earnings. The company's payout of two large EPA fines, as well as lower-than-anticipated oil re-refining sales, led to a second drop in earnings the following year. Between 1990 and 1992, then, Safety-Kleen's net income fell from $55 million to $45 million, despite continued record revenue totals.

In March 1993 John G. Johnson, Jr., a former Arco Chemical Company executive, was named president, while Brinckman remained chairman and chief executive. The company moved toward the close of 1993 predicting that its oil recovery services and European operations would be profitable by the end of that year. The company's plans beyond 1993 called for further expansion of European branches, which were expected to increase in number from 55 in 1993 to 75 or 80 by 1997. Looking toward the future, Safety-Kleen—with infrastructure in place to expand both at home and overseas, a near-spotless record of tremendous earnings growth, and still no nationwide competition in its home country—appeared likely to move back into record territory as it rolled into the remainder of the 1990s.

CHALLENGES IN THE FUTURE

The latter half of the 1990s and the early years of the new millennium would prove to be a challenging time for Safety-Kleen. CEO Jack Johnson abruptly left the company and former CEO Donald W. Brinckman was called in to take the helm. At this time, Safety-Kleen began to look for ways to increase shareholder value. Its steady growth and position in the industry made it an attractive suitor for companies looking to expand into the waste services business. Sure enough, the company soon found itself in the middle of a takeover battle between Philip Services Corp. and Laidlaw Environmental Services Inc., owned by Laidlaw Inc. of Canada. In November 1997, industrial services company Philip Services made a friendly $1.97 billion bid for Safety-Kleen. Laidlaw then countered with a hostile bid of its own. Safety-Kleen's chairman and CEO Donald W. Brinckman commented on Laidlaw's hostile bid in a December 1997 Oil Daily article: "The ultimate objective of Laidlaw Environmental's offer is to allow Laidlaw Inc., the parent company, to deconsolidate and remove the liabilities and environmental exposure of Laidlaw Environmental from its financial statements." He went on to claim, "If their deal were consummated, these risks would be passed on to Safety-Kleen shareholders." Despite Brinckman's protests, shareholders voted to accept Laidlaw Environmental's $1.8 billion offer in March 1998. The merged company retained the Safety-Kleen name.

The benefits of the merger failed to reach fruition. Laidlaw decided to sell its stake in Safety-Kleen in 2000 but put its plans on hold as its stock price faltered. In March of that year, Safety-Kleen discovered accounting irregularities in previous financial statements and reported its findings to the U.S. Securities and Exchange Commission. Struggling under a $1.6 billion debtload, Safety-Kleen filed for Chapter 11 bankruptcy protection in June 2000. In response, Laidlaw filed a $6.5 billion claim against Safety-Kleen, hoping to recoup its investment. It was then forced to declare bankruptcy, leading Safety-Kleen to file its own claim against Laidlaw. The two companies eventually settled all claims against each other as part of their reorganization plans.

In 2001, Safety-Kleen restated its results for 1997, 1998, and 1999. Overall, earnings had been overstated by nearly $500 million. Four former Safety-Kleen executives including CEO Kenneth Winger, chief financial officer Paul R. Humphreys, controller William D. Ridings, and vice-president Thomas W. Ritter, Jr., were charged with accounting fraud in December 2002. The SEC settled its case with Safety-Kleen later that year.

As part of the company's restructuring plan, it sold its chemical services division and divested its environmental health and safety compliance and information management firm. Headquarters also were moved from South Carolina to Plano, Texas. In 2003, the U.S. Bankruptcy Court approved its reorganization plan and the company emerged from Chapter 11 as a private entity operating under the name Safety-Kleen Systems Inc.

In 2004, Ron Haddock was named chairman and Frederick J. Florjancic, Jr., was elected president and CEO. Under the new management team, Safety-Kleen appeared to be back on track. By December 2005, the company had reported five consecutive quarters of revenue and profit growth. It had signed a national contract with the U.S. Postal Service, secured a three-year renewal of its contract with Wal-Mart, and expanded its contract with Federal Express. It also completed a significant refinancing of its senior debt. Plans for the future included paying down remaining debt, increasing revenues and profits, and an eventual public offering. Florjancic commented on the company's post-bankruptcy/accounting scandal mood in a 2005 Dallas Morning News article: "The organization is walking taller, smiling more. Confidence is building. Success begets success, and those successes are becoming more frequent."

Roger W. Rouland