UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURTIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED MARCH 31,
2008
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSTION PERIOD
FROM
TO
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Commission File Number 0-16379
CLEAN HARBORS, INC.
(Exact
name of registrant as specified in its charter)
Massachusetts
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04-2997780
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(State of
Incorporation)
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(IRS Employer
Identification No.)
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42
Longwater Drive, Norwell, MA
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02061-9149
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(Address of
Principal Executive Offices)
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(Zip Code)
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(781)
792-5000
(Registrants Telephone Number, Including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve 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
o
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 the definitions of
large accelerated filer, accelerated filer, and smaller reporting company
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting
company
o
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(Do not check if a
smaller reporting company)
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Indicate by check mark whether the registrant is a
shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes
o
No
x
Indicate the number of shares outstanding of each of
the issuers classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value
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23,328,008
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(Class)
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(Outstanding
at May 8, 2008)
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CLEAN
HARBORS, INC.
QUARTERLY
REPORT ON FORM 10-Q
TABLE OF
CONTENTS
PART I:
FINANCIAL INFORMATION
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
ASSETS
(in thousands)
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March 31,
2008
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December 31,
2007
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(unaudited)
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Current assets:
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Cash and cash
equivalents
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$
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86,153
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$
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119,538
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Marketable
securities
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1,500
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850
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Accounts
receivable, net of allowances aggregating $6,331 and $6,105 respectively
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180,411
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193,126
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Unbilled
accounts receivable
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15,051
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14,703
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Deferred costs
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6,136
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7,359
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Prepaid expenses
and other current assets
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12,918
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10,098
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Supplies
inventories
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23,395
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22,363
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Deferred tax
assets
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11,497
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11,491
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Properties held
for sale
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374
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910
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Total current
assets
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337,435
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380,438
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Property, plant
and equipment:
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Land
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26,217
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22,273
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Asset retirement
costs (non-landfill)
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1,784
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1,438
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Landfill assets
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33,916
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29,925
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Buildings and
improvements
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118,543
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112,469
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Vehicles
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32,497
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22,854
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Equipment
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285,983
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274,619
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Furniture and
fixtures
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1,554
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1,454
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Construction in
progress
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17,209
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18,702
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517,703
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483,734
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Lessaccumulated
depreciation and amortization
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229,449
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221,133
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288,254
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262,601
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Other assets:
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Long-term
investments
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6,116
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8,500
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Deferred
financing costs
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5,306
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5,881
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Goodwill
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24,809
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21,572
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Permits and
other intangibles, net of accumulated amortization of $37,465 and $36,443,
respectively
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82,553
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74,809
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Deferred tax
assets
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12,317
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12,176
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Other
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4,052
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3,911
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135,153
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126,849
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Total assets
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$
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760,842
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$
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769,888
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The accompanying notes are an integral part of these
consolidated financial statements.
1
LIABILITIES
AND STOCKHOLDERS EQUITY
(in thousands except per share
amounts)
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March 31,
2008
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December 31,
2007
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(unaudited)
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Current liabilities:
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Uncashed checks
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$
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6,854
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$
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5,489
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Current portion
of capital lease obligations
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478
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1,251
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Accounts payable
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74,509
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81,309
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Deferred revenue
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25,061
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29,730
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Other accrued
expenses
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60,346
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65,789
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Current portion
of closure, post-closure and remedial liabilities
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22,061
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18,858
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Income taxes
payable
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3,651
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8,427
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Total current
liabilities
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192,960
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210,853
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Other
liabilities:
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Closure and
post-closure liabilities, less current portion of $6,227 and $5,527, respectively
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25,134
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24,202
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Remedial
liabilities, less current portion of $15,834 and $13,331, respectively
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139,329
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141,428
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Long-term
obligations
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120,746
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120,712
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Capital lease
obligations, less current portion
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616
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1,520
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Unrecognized tax
benefits and other long-term liabilities
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70,550
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68,276
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Total other
liabilities
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356,375
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356,138
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Stockholders
equity:
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Common stock,
$.01 par value:
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Authorized
40,000,000 shares; issued and outstanding 20,433,117 and 20,327,533 shares,
respectively
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204
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203
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Treasury stock
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(1,451
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)
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(1,170
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)
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Additional
paid-in capital
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170,105
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166,653
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Accumulated
other comprehensive income
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14,014
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17,498
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Accumulated
earnings
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28,635
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19,713
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Total
stockholders equity
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211,507
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202,897
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Total
liabilities and stockholders equity
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$
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760,842
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$
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769,888
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The accompanying notes are an integral part of these
consolidated financial statements.
2
CLEAN HARBORS, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share
amounts)
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Three Months Ended
March 31,
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2008
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2007
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Revenues
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$
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242,509
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$
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205,024
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Cost of revenues
(exclusive of items shown separately below)
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170,194
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151,604
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Selling, general
and administrative expenses
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39,170
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31,355
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Accretion of
environmental liabilities
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2,670
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2,474
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Depreciation and
amortization
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10,475
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8,938
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Income from
operations
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20,000
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10,653
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Other (expense)
income
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(104
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)
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6
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Interest
(expense), net of interest income of $1,062 and $795, respectively
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(3,385
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)
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(3,184
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)
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Income before
provision for income taxes
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16,511
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7,475
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Provision for
income taxes
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7,589
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3,974
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Net income
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8,922
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3,501
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Dividends on
Series B preferred stock
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69
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Net income
attributable to common stockholders
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$
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8,922
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$
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3,432
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Earnings per
share:
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Basic income
attributable to common stockholders
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$
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0.44
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$
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0.17
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Diluted income
attributable to common stockholders
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$
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0.43
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$
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0.17
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Weighted average
common shares outstanding
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20,357
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19,750
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Weighted average
common shares outstanding plus potentially dilutive common shares
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20,910
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20,637
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The accompanying notes are an integral part of these
consolidated financial statements.
3
CLEAN
HARBORS, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Three Months
Ended March 31,
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2008
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2007
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Cash flows from
operating activities:
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Net income
|
|
$
|
8,922
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$
|
3,501
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|
Adjustments to
reconcile net income to net cash from operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
10,475
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8,938
|
|
Allowance for
doubtful accounts
|
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(146
|
)
|
(330
|
)
|
Amortization of
deferred financing costs and debt discount
|
|
609
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|
474
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|
Accretion of
environmental liabilities
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2,670
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2,474
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|
Changes in
environmental liability estimates
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(62
|
)
|
(1,929
|
)
|
Deferred income
taxes
|
|
(41
|
)
|
(5,056
|
)
|
Stock-based
compensation
|
|
733
|
|
894
|
|
Excess tax
benefit of stock-based compensation
|
|
(1,604
|
)
|
|
|
Income tax
benefits related to stock option exercises
|
|
1,610
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|
|
|
(Gain) loss on
sale of fixed assets and assets held for sale
|
|
104
|
|
6
|
|
Changes in
assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
15,077
|
|
10,586
|
|
Other current
assets
|
|
(2,281
|
)
|
(779
|
)
|
Accounts payable
|
|
(7,365
|
)
|
(11,506
|
)
|
Other current
liabilities
|
|
(13,814
|
)
|
(9,953
|
)
|
Environmental
expenditures
|
|
(1,871
|
)
|
(1,687
|
)
|
Net cash from
operating activities
|
|
13,016
|
|
(4,367
|
)
|
Cash flows from
investing activities:
|
|
|
|
|
|
Additions to
property, plant and equipment
|
|
(19,207
|
)
|
(5,722
|
)
|
Acquisitions,
net of cash acquired
|
|
(27,427
|
)
|
(1,131
|
)
|
Costs to obtain
or renew permits
|
|
(1,393
|
)
|
(64
|
)
|
Proceeds from
sales of fixed assets and assets held for sale
|
|
7
|
|
140
|
|
Sales of
marketable securities
|
|
850
|
|
|
|
Purchase of
available-for-sale securities
|
|
|
|
(877
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)
|
Net cash from
investing activities
|
|
(47,170
|
)
|
(7,654
|
)
|
Cash flows from
financing activities:
|
|
|
|
|
|
Change in
uncashed checks
|
|
1,402
|
|
(4,158
|
)
|
Proceeds from
exercise of stock options
|
|
731
|
|
740
|
|
Deferred
financing costs paid
|
|
|
|
(32
|
)
|
Proceeds from
employee stock purchase plan
|
|
379
|
|
260
|
|
Dividend
payments on preferred stock
|
|
|
|
(69
|
)
|
Payments on
capital leases
|
|
(1,666
|
)
|
(437
|
)
|
Other
|
|
|
|
(69
|
)
|
Excess tax
benefit of stock-based compensation
|
|
1,604
|
|
|
|
Net cash from
financing activities
|
|
2,450
|
|
(3,765
|
)
|
Effect of
exchange rate change on cash
|
|
(1,681
|
)
|
184
|
|
(Decrease) in
cash and cash equivalents
|
|
(33,385
|
)
|
(15,602
|
)
|
Cash and cash
equivalents, beginning of period
|
|
119,538
|
|
73,550
|
|
Cash and cash
equivalents, end of period
|
|
$
|
86,153
|
|
$
|
57,948
|
|
|
|
|
|
|
|
|
|
Supplemental
information:
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
for interest and income taxes:
|
|
|
|
|
|
Interest paid
|
|
$
|
6,386
|
|
$
|
5,680
|
|
Income taxes
paid
|
|
9,568
|
|
5,789
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
Property, plant
and equipment accrued
|
|
$
|
5,099
|
|
$
|
2,255
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
4
CLEAN
HARBORS, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
S 0.01
Par
Value
|
|
Treasury
Stock
|
|
Additional
Paid-in
Capital
|
|
Comprehensive
Income
|
|
Accumulated
Other
Comprehensive
Income
|
|
Accumulated
Earnings
|
|
Total
Stockholders
Equity
|
|
Balance at
January 1, 2008
|
|
20,328
|
|
$
|
203
|
|
$
|
(1,170
|
)
|
$
|
166,653
|
|
|
|
$
|
17,498
|
|
$
|
19,713
|
|
$
|
202,897
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
8,922
|
|
|
|
8,922
|
|
8,922
|
|
Unrealized loss
on long-term investments, net of taxes (see Note 5)
|
|
|
|
|
|
|
|
|
|
(548
|
)
|
(548
|
)
|
|
|
(548
|
)
|
Foreign currency
translation
|
|
|
|
|
|
|
|
|
|
(2,936
|
)
|
(2,936
|
)
|
|
|
(2,936
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
$
|
5,438
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
9
|
|
|
|
|
|
733
|
|
|
|
|
|
|
|
733
|
|
Issuance of
restricted shares, net of shares remitted
|
|
4
|
|
|
|
(281
|
)
|
|
|
|
|
|
|
|
|
(281
|
)
|
Exercise of stock
options
|
|
82
|
|
1
|
|
|
|
730
|
|
|
|
|
|
|
|
731
|
|
Tax benefit on
exercise of stock options
|
|
|
|
|
|
|
|
1,610
|
|
|
|
|
|
|
|
1,610
|
|
Employee stock
purchase plan
|
|
10
|
|
|
|
|
|
379
|
|
|
|
|
|
|
|
379
|
|
Balance at
March 31, 2008
|
|
20,433
|
|
$
|
204
|
|
$
|
(1,451
|
)
|
$
|
170,105
|
|
|
|
$
|
14,014
|
|
$
|
28,635
|
|
$
|
211,507
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
5
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying consolidated interim financial
statements include the accounts of Clean Harbors, Inc. and its
wholly-owned subsidiaries (collectively, Clean Harbors or the Company) and
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission and, in the opinion of management, include all
adjustments which, except as described elsewhere herein, are of a normal
recurring nature, necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The results
for interim periods are not necessarily indicative of results for the entire
year. The financial statements presented herein should be read in connection
with the financial statements included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2007.
Certain
reclassifications have been made to Note 14, Segment Reporting and Note 15, Guarantor
and Non-Guarantor Subsidiaries prior year information to conform to the
current year presentation.
(2)
NEW ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued Statement No. 157, Fair Value
Measurements
(SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value
in accordance with accounting principles generally accepted in the United
States, and expands disclosures about fair value measurements. The Company has
adopted the provisions of SFAS 157 as of January 1, 2008, for financial
instruments. Although the adoption of SFAS 157 did not materially impact its
financial condition, results of operations, or cash flow, the Company is now
required to provide additional disclosures as part of its financial
statements.
In February 2008,
the FASB issued FSP No. SFAS 157-2 (FSP 157-2) which delays the effective
date of SFAS 157 for non-financial assets and non-financial liabilities, except
for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis, for one year.
The Company currently expects the application of the fair value
framework established by SFAS No. 157 to non-financial assets and
liabilities measured on a non-recurring basis will not have a material impact
on its consolidated financial statements. However, management will continue to
assess the potential effects of SFAS No. 157 as additional guidance
becomes available.
SFAS
157 establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1, defined
as observable inputs such as quoted prices in active markets; Level 2, defined
as inputs other than quoted prices in active markets that are either directly
or indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.
As
of March 31, 2008, the Company held certain assets that are required to be
measured at fair value on a recurring basis. These included, but were limited
to, the Companys auction rate securities
classified
as available for sale securities and
reflected at fair value. The fair
values of these securities as of March 31, 2008 were estimated utilizing a
discounted cash flow analysis or significant other observable inputs. The
discounted cash flow analyses considered, among other items, the
collateralization underlying the security investments, the creditworthiness of
the counterparty, the timing of expected future cash flows, and the expectation
of the next time the security is expected to have a successful
auction. These securities were also compared, when possible, to
other observable market data with similar characteristics to the securities
held by the Company. Prior to January 1,
2008, fair value was based on quoted market prices in the auction rate security
markets.
As of March 31, 2008, all
of the Companys auction rate securities continue to have AAA underlying
ratings. The underlying assets of the
Companys auction rate securities are student loans, which are substantially
insured by the Federal Family Education Loan Program.
As a result of the temporary declines in fair value for the Companys
auction rate securities, which the Company attributes to liquidity issues
rather than credit issues, the Company has recorded an unrealized pre-tax loss
of $0.9 million. The unrealized loss
resulted in an after tax reduction of $0.5 million to accumulated other
comprehensive income. The Company assessed this decline in value to
be temporary due to the relatively short period of time and the extent to which
the fair value has been less than par, the financial condition and near-term
prospects of the underlying issuers, and the anticipated recovery in the market
value. As of March 31, 2008, the
Company continued to earn interest on virtually all of its auction rate
security instruments. Any future fluctuation in fair value related
to these instruments that the Company deems to be temporary, including any
recoveries of previous write-downs, would be recorded to accumulated other
6
comprehensive
income. If the Company determines that any future fair value
adjustment were other than temporary, it would record a charge to earnings as
appropriate.
The
Companys assets measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS 157 at March 31, 2008, were as follows (in
thousands):
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Balance at
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate
securities
|
|
$
|
|
|
$
|
1,500
|
|
$
|
6,116
|
|
$
|
7,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based
on market conditions, the Company changed its valuation methodology for auction
rate securities to a discounted cash flow analysis or significant other
observable inputs, during first quarter 2008. Accordingly, these
securities changed from Level 1 to either Level 2 or Level 3 within SFAS 157s
hierarchy since the Companys initial adoption of SFAS 157 at January 1,
2008.
The
following table presents the Companys long-term investments measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) as
defined in SFAS 157 at March 31, 2008 (in thousands):
|
|
2008
|
|
Balance at
January 1, 2008
|
|
$
|
|
|
Transfer to
Level 3 from Level 1
|
|
7,000
|
|
Total unrealized
losses included in other comprehensive income
|
|
(884
|
)
|
Balance at
March 31, 2008
|
|
$
|
6,116
|
|
(3) BUSINESS
COMBINATIONS
On March 14,
2008, the Company acquired 100% of the outstanding stock of privately-held
Universal Environmental, Inc., an environmental services company
headquartered in Benicia, California, with a site office in Sparks,
Nevada. In conjunction with the
acquisition, the Company also acquired the land surrounding the California
office. The purchase price is subject
to post-closing adjustments based upon the amount by which Universal
Environmental, Inc.s net working capital as of the closing date exceeded
or was less than $1.0 million. The
preliminary calculation of the purchase price was $14.6 million and the
allocation of the preliminary purchase price to the assets acquired and
liabilities assumed are described in the table below. The primary reason for
the acquisition was to expand Site Services into new geographical locations.
On March 21, 2008, the Company acquired two
separate solvent recycling facilities, one in Chicago, Illinois and the other
in Hebron, Ohio, and the businesses associated with those facilities from
Safety-Kleen Systems, Inc. The
preliminary purchase price was $6.8 million and $6.0 million,
respectively, for the Chicago and Hebron businesses plus the assumption of an
estimated $2.6 million of environmental liabilities related to the Hebron facility and is subject to change
based on final direct costs of the acquisition.
The Company anticipates that these acquisitions will broaden the
services it can offer to customers and enhance its market share in the solvent
recycling business.
The calculations of the preliminary purchase price and
the preliminary allocation of assets acquired and liabilities assumed are as
follows (in thousands):
|
|
Universal
Environmental,
Inc. (1)
|
|
Hebron Ohio
Solvent
Recycling
Facility (2)
|
|
Chicago Illinois
Solvent
Recycling
Facility (3)
|
|
Preliminary
purchase price
|
|
|
|
|
|
|
|
Cash
consideration
|
|
$
|
12,706
|
|
$
|
6,600
|
|
$
|
5,900
|
|
Acquisition
costs
|
|
43
|
|
159
|
|
111
|
|
Estimated amount
due to the seller for working capital adjustments
|
|
1,879
|
|
|
|
|
|
Total estimated
purchase price
|
|
$
|
14,628
|
|
$
|
6,759
|
|
$
|
6,011
|
|
7
Preliminary
allocation of purchase price
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
3,833
|
|
$
|
196
|
|
$
|
333
|
|
Property, plant
and equipment
|
|
7,541
|
|
3,869
|
|
4,183
|
|
Goodwill
|
|
|
|
3,237
|
|
|
|
Customer lists
and other intangibles
|
|
4,254
|
|
2,800
|
|
1,536
|
|
Total assets
acquired
|
|
15,628
|
|
10,102
|
|
6,052
|
|
Liabilities
assumed
|
|
(1,000
|
)
|
(3,343
|
)
|
(41
|
)
|
Net assets
acquired
|
|
$
|
14,628
|
|
$
|
6,759
|
|
$
|
6,011
|
|
Management has
determined the preliminary purchase price allocations based on estimates of the
fair values of the tangible and intangible assets acquired and liabilities
assumed. Such amounts are subject to
adjustment based on the additional information necessary, as discussed below,
to determine fair values.
(1) An estimate of $0.4 million has been
calculated as negative goodwill, which represents the excess of the fair value
of the net assets acquired over the purchase price. Negative goodwill has been
proportionally allocated to property, plant and equipment ($0.3 million)
and customer lists and other intangibles ($0.1 million). The intangible
assets are being amortized over their useful lives of nine years. The purchase price and related allocation
are preliminarily determined and will be
revised for working capital adjustments, adjustments made to the purchase
price, additional information regarding tax assets, tax liabilities and tax
attributes, additional information regarding other liabilities assumed, and
revisions to preliminary estimates of the fair values of property, plant and
equipment and other intangibles.
(2) The
preliminary purchase price reflects an excess of the purchase price over the
fair value of the net assets acquired of approximately $3.2 million, which has
been recorded as goodwill. The entire
amount of goodwill has been assigned to the Technical Services segment and such
amount is not expected to be deductible for tax purposes. The purchase price and related allocation
are preliminarily determined and will be
revised as a result of adjustments made to the purchase price, additional
information regarding liabilities assumed, and revisions of preliminary
estimates of fair values of property, plant and equipment, goodwill and other
intangibles based on final valuations.
(3) An
estimate of $2.5 million has been calculated as negative goodwill, which
represents the excess of the fair value of the net assets acquired over the
purchase price. Negative goodwill has been proportionally allocated to
property, plant and equipment ($1.8 million) and customer lists and other
intangibles ($0.7 million). The intangible assets are being amortized over
their useful lives of 3 years to 10 years or a weighted average
period of 7 years. The purchase price and related allocation are
preliminarily determined and will be revised for adjustments made to the
purchase price, additional information regarding liabilities assumed, and
revisions to preliminary estimates of fair values of property, plant and
equipment and other intangibles based on final valuations.
The results
of operations of the acquired businesses
have been included in the Companys consolidated financial statements since the
respective dates of acquisition. On a proforma basis, the acquisitions
completed during the quarter were not material to the Companys results of
operations.
In August 2007,
the Company acquired certain assets owned by Romic Environmental Technologies
Corporation (Romic), which specialized in the collection and recycling of
both hazardous and non-hazardous waste materials, for $8.6 million. The
purchase price was subject to an adjustment equal to 40% of revenues generated
from Romic customers for the six-month period subsequent to the acquisition. The final contingent payment due Romic of
$2.2 million was paid, net of amounts due the Company, on March 31, 2008.
The following is
the calculation of the final purchase price and the final summary of assets
acquired and liabilities assumed after all purchase price adjustments as of March 31,
2008 (in thousands):
Final purchase
price
|
|
|
|
Cash
consideration
|
|
$
|
7,362
|
|
Acquisition
costs
|
|
883
|
|
Reduction of
existing Romic receivables
|
|
308
|
|
Total purchase
price
|
|
$
|
8,553
|
|
Summary of net
assets acquired
|
|
|
|
8
Other current
assets
|
|
$
|
114
|
|
Equipment
|
|
693
|
|
Customer list
and other intangibles
|
|
7,811
|
|
Total assets
acquired
|
|
8,618
|
|
Liabilities
assumed
|
|
(65
|
)
|
Net assets
acquired
|
|
$
|
8,553
|
|
|
|
|
|
|
|
Management has
determined the final purchase price allocation based on estimates of the fair
values of the tangible and intangible assets acquired and liabilities
assumed. Negative goodwill of $7.3
million was calculated, which represents the excess of the fair value of the
net assets acquired over the purchase price. In accordance with SFAS No. 141,
negative goodwill has been proportionally allocated to equipment
($0.6 million) and customer lists and other intangibles
($6.7 million). The intangible assets are being amortized over their
useful lives of 3.6 years to 11 years or a weighted average period of
8 years.
(4) LANDFILL ASSETS
Changes
to landfill assets for the three-month period ended March 31, 2008 were as
follows (in thousands):
|
|
2008
|
|
Balance at
January 1, 2008
|
|
$
|
29,925
|
|
Asset retirement
costs
|
|
346
|
|
Capital
additions
|
|
3,875
|
|
Changes in
estimates of landfill closure and post-closure liabilities
|
|
260
|
|
Currency
translation, reclassifications and other
|
|
(490
|
)
|
Balance at
March 31, 2008
|
|
$
|
33,916
|
|
Rates
used to amortize landfill assets are calculated based upon the dollar value of
estimated final liabilities discounted at the current year credit adjusted risk
free rate, the surveyed remaining airspace of the landfill, and the time
estimated to consume the remaining airspace. Consequently, rates vary for each
landfill and for each asset category, and change as they are recalculated each
year at the newly established discount rate for that year. The calculation of
landfill asset amortization expense per cubic yard was revised in the first
quarter of 2008 to include landfill cell construction. The calculation of the
average rate reported in the Companys March 30, 2007 Form 10-Q has
also been updated to include cell construction costs. During the three-month
periods ended March 31, 2008 and 2007, landfill assets were depreciated at
average rates of $8.33 and $6.80 per cubic yard, respectively. The increase in
the 2008 amortization rate resulted primarily from the inclusion of cell
construction cost estimates based on a re-evaluation of the future construction
costs for progressive trenches. Cell construction costs and the related
amortization are increasing as cells are constructed to replace cells that have
filled since the CSD acquisition.
(5) INVESTMENTS
As of March 31, 2008, the Companys investments
included $1.5 million of auction rate securities classified on the Companys
balance sheet as marketable securities and $6.1 million as non-current,
available for sale securities. Auction rate securities are generally long-term
debt instruments that provide liquidity through a Dutch auction process that
resets the applicable interest rate at predetermined calendar intervals,
generally every 28 days. This mechanism generally allows investors to
rollover their holdings and continue to own their respective securities (with
new interest rates set in the most recent auctions) or liquidate their holdings
by selling their securities at par value. Prior to January 1, 2008, the
Company generally invested in auction rate securities for short periods of time
as part of its cash management program. Due
to recent events in credit markets, the
auction events for some of these instruments held by the Company failed during the
first quarter of 2008. Subsequent
to March 31, 2008, the Company accepted an offer to purchase a $1.5
million auction rate security at par to be settled in the latter half of May 2008. As a result, the Company classified that
security as a short-term marketable security as of March 31, 2008. The Company is unable to determine when the
market for student loan collateralized instruments will recover. Except for the $1.5 million security for
which the Company has accepted an offer to purchase, the Company has therefore
classified the remaining auction rate securities as non-current and has
included them in long-term investments on its unaudited consolidated balance
sheet at March 31, 2008.
9
(6) GOODWILL
AND OTHER INTANGIBLE ASSETS
Below is a summary
of amortizable intangible assets (in thousands):
|
|
March 31, 2008
|
|
December 31, 2007
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Cost
|
|
Amortization
|
|
Net
|
|
Cost
|
|
Amortization
|
|
Net
|
|
Permits
|
|
$
|
98,546
|
|
$
|
31,668
|
|
$
|
66,878
|
|
$
|
98,391
|
|
$
|
30,902
|
|
$
|
67,489
|
|
Customer lists
and other intangible assets
|
|
21,472
|
|
5,797
|
|
15,675
|
|
12,861
|
|
5,541
|
|
7,320
|
|
|
|
$
|
120,018
|
|
$
|
37,465
|
|
$
|
82,553
|
|
$
|
111,252
|
|
$
|
36,443
|
|
$
|
74,809
|
|
The increase in customer
lists and other intangible assets is based primarily on preliminary estimates
of the fair values of intangible assets acquired during the quarter ended March 31,
2008. The goodwill balance as of March 31,
2008 also increased $3.2 million from December 31, 2007 as a result of the
acquisition of the Hebron, Ohio solvent recovery facility. The foregoing includes estimates that are
subject to change based upon final valuations.
(7) OTHER
ACCRUED EXPENSES
Other accrued
expenses consisted of the following (in thousands):
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Insurance
|
|
$
|
14,514
|
|
$
|
12,984
|
|
Interest
|
|
2,818
|
|
5,367
|
|
Accrued disposal
costs
|
|
2,905
|
|
2,998
|
|
Accrued
compensation and benefits
|
|
16,147
|
|
19,938
|
|
Other items
|
|
23,962
|
|
24,502
|
|
|
|
$
|
60,346
|
|
$
|
65,789
|
|
(8) CLOSURE AND POST-CLOSURE
LIABILITIES
The changes to closure and post-closure liabilities
for the three months ended March 31, 2008 were as follows (in thousands):
|
|
Landfill
|
|
Non-Landfill
|
|
|
|
|
|
Retirement
Liability
|
|
Retirement
Liability
|
|
Total
|
|
Balance at
January 1, 2008
|
|
$
|
22,896
|
|
$
|
6,833
|
|
$
|
29,729
|
|
Liabilities
assumed in acquisitions
|
|
|
|
418
|
|
418
|
|
New asset
retirement obligations
|
|
346
|
|
|
|
346
|
|
Accretion
|
|
758
|
|
209
|
|
967
|
|
Changes in
estimate recorded to statement of operations
|
|
|
|
14
|
|
14
|
|
Other changes in
estimates recorded to balance sheet
|
|
260
|
|
|
|
260
|
|
Settlement of
obligations
|
|
(74
|
)
|
(212
|
)
|
(286
|
)
|
Currency
translation and other
|
|
(73
|
)
|
(14
|
)
|
(87
|
)
|
Balance at
March 31, 2008
|
|
$
|
24,113
|
|
$
|
7,248
|
|
$
|
31,361
|
|
All of the landfill
facilities included above were active as of March 31, 2008.
Rates used to accrue closure and post-closure costs
are calculated based upon the dollar value of estimated final liabilities, the
surveyed remaining airspace of the landfill, and the time estimated to consume
the remaining airspace. Consequently, rates vary for each landfill, each open
cell within that landfill and for each accrual category, and are recalculated
each year. During the three months ended March 31, 2008 and 2007, asset
retirement obligations were accrued at an average rate of $1.54 and $2.01 per
cubic yard, respectively. The difference in the accrual rate of asset
retirement obligations resulted from differences in the individual rates for
the cells used during the respective year.
10
Anticipated
payments at March 31, 2008 (based on current estimated costs and
anticipated timing of necessary regulatory approvals to commence work on
closure and post-closure activities) for each of the next five years and
thereafter are as follows (in thousands):
Periods ending December 31,
|
|
|
|
Remaining nine
months of 2008
|
|
$
|
5,802
|
|
2009
|
|
7,494
|
|
2010
|
|
9,057
|
|
2011
|
|
2,011
|
|
2012
|
|
1,432
|
|
Thereafter
|
|
219,903
|
|
Undiscounted
closure and post-closure liabilities
|
|
245,699
|
|
Less: Reserves
to be provided (including discount of $125.8 million) over remaining site
lives
|
|
(214,338
|
)
|
Present value of
closure and post-closure liabilities
|
|
$
|
31,361
|
|
New asset retirement obligations incurred in 2008 are
being discounted at the credit-adjusted risk-free rate of 10.12% and inflated at a rate of 2.44%.
(9) REMEDIAL LIABILITIES
The
changes to remedial liabilities for the three months ended March 31, 2008
were as follows (in thousands):
|
|
|
|
|
|
Remedial
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
(Including
|
|
|
|
|
|
Remedial
|
|
Remedial
|
|
Superfund) for
|
|
|
|
|
|
Liabilities for
|
|
Liabilities for
|
|
Non-Landfill
|
|
|
|
|
|
Landfill Sites
|
|
Inactive Sites
|
|
Operations
|
|
Total
|
|
Balance at
January 1, 2008
|
|
$
|
5,682
|
|
$
|
88,619
|
|
$
|
60,458
|
|
$
|
154,759
|
|
Liabilities
assumed in acquisitions
|
|
|
|
|
|
2,585
|
|
2,585
|
|
Accretion
|
|
67
|
|
1,030
|
|
606
|
|
1,703
|
|
Changes in
estimate recorded to statement of operations
|
|
(171
|
)
|
(31
|
)
|
126
|
|
(76
|
)
|
Settlement of
obligations
|
|
(22
|
)
|
(1,014
|
)
|
(549
|
)
|
(1,585
|
)
|
Currency
translation and other
|
|
(107
|
)
|
114
|
|
(2,230
|
)
|
(2,223
|
)
|
Balance at
March 31, 2008
|
|
$
|
5,449
|
|
$
|
88,718
|
|
$
|
60,996
|
|
$
|
155,163
|
|
The $2.6 million of liabilities assumed relates to
remediation liabilities at the Companys solvent recovery facility at Hebron,
Ohio acquired in March 2008. Such remedial
liabilities have been preliminarily determined and are subject to adjustment.
Anticipated payments at March 31, 2008 (based on
current estimated costs and anticipated timing of necessary regulatory
approvals to commence work on remedial activities) for each of the next five
years and thereafter are as follows (in thousands):
Periods ending December 31,
|
|
|
|
Remaining nine
months of 2008
|
|
$
|
12,963
|
|
2009
|
|
10,850
|
|
2010
|
|
10,535
|
|
2011
|
|
12,157
|
|
2012
|
|
11,706
|
|
Thereafter
|
|
140,542
|
|
Undiscounted
remedial liabilities
|
|
198,753
|
|
Less: Discount
|
|
(43,590
|
)
|
Total remedial
liabilities
|
|
$
|
155,163
|
|
11
The anticipated
payments for long-term maintenance range from $4.9 million to
$8.8 million per year over the next five years. Spending on one-time
projects for the next five years ranges from $1.6 million to
$3.7 million per year. Legal and Superfund liabilities payments are
expected to be between $1.0 million and $6.4 million per year for the
next five years. These estimates are reviewed at least quarterly, and adjusted
as additional information becomes available.
(10) FINANCING ARRANGEMENTS
The following table is a
summary of the Companys financing arrangements (in thousands):
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Senior Secured
Notes, bearing interest at 11.25%, collateralized by a second-priority lien
on substantially all of the Companys assets within the United States except
for accounts receivable (maturity date of July 15, 2012)
|
|
$
|
91,518
|
|
$
|
91,518
|
|
Revolving
Facility
|
|
|
|
|
|
Term Loan with a
financial institution, bearing interest at the U.S. prime rate (5.66% at
March 31, 2008) plus 1.5%, or the Eurodollar rate (2.78% at
March 31, 2008) plus 2.50%, collateralized by a first-priority lien
(second priority as to accounts receivable) on substantially all of the
Companys assets within the United States (maturity date of December 1,
2010)
|
|
30,000
|
|
30,000
|
|
Less unamortized
issue discount
|
|
772
|
|
806
|
|
Long-term
obligations
|
|
$
|
120,746
|
|
$
|
120,712
|
|
The fair value of the Senior Secured Notes at March 31, 2008 and
2007 was $95.1 million and $99.5 million, respectively, and calculated based on
quoted prices in inactive markets (level 2 inputs).
The Company issued
the Senior Secured Notes on June 30, 2004, and established the Revolving
Facility and a $50.0 million synthetic letter of credit facility (the Synthetic
LC Facility) on December 1, 2005, under an amended and restated loan and
security agreement (the Amended Credit Agreement) which the Company then
entered into with the lenders under the Companys loan and security agreement
dated June 30, 2004 (the Original Credit Agreement).
At March 31,
2008, the Company had outstanding $91.5 million of Senior Secured Notes, a
$70.0 million Revolving Facility, a $50.0 million Synthetic LC Facility, and a
$30.0 million term loan (the Term Loan). The financing arrangements and
principal terms of each are discussed further in the Companys 2007 Annual
Report on Form 10-K. There have not been any material changes in our terms
and conditions during the first three months of 2008.
At March 31,
2008, the Company had no borrowings and $39.5 million of letters of credit
outstanding under its Revolving Facility, and the Company had approximately
$30.5 million available to borrow. At March 31, 2008, letters of
credit outstanding under the Companys Synthetic LC facility were $48.0
million.
As of March 31,
2008, the Company was in compliance with the covenants under all the Companys
debt agreements.
(11)
COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Companys
waste management services are regulated by federal, state, provincial and local
laws enacted to regulate discharge of materials into the environment,
remediation of contaminated soil and groundwater or otherwise protect the
environment. This ongoing regulation results in the Company frequently becoming
a party to judicial or administrative proceedings involving all levels of
governmental authorities and other interested parties. The issues involved in
such proceedings generally relate to applications for permits and licenses by
the Company and conformity with legal requirements, alleged violations of
existing permits and licenses or requirements to clean up contaminated sites.
At March 31, 2008, the Company was involved in various proceedings, the
principal of which are described in Note 11, Commitments and Contingencies to
the Companys audited financial statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2007. The disclosures below relate to material
contingencies associated with litigation existing at the end of the most recent
year or events subsequent to the end of the most recent fiscal year that have
occurred which had, or could have, a material impact on the Companys
consolidated financial statements.
12
Legal Proceedings
Related to Acquisition of CSD Assets
Effective September 7,
2002 (the Closing Date), the Company purchased from Safety-Kleen Services, Inc.
and certain of its domestic subsidiaries (collectively, the Sellers)
substantially all of the assets of the Chemical Services Division (the CSD)
of Safety-Kleen Corp. The Company purchased the CSD assets pursuant to a sale
order (the Sale Order) issued by the Bankruptcy Court for the District of
Delaware (the Bankruptcy Court) which had jurisdiction over the Chapter 11
proceedings involving the Sellers, and the Company therefore took title to the
CSD assets without assumption of any liability (including pending or threatened
litigation) of the Sellers except as expressly provided in the Sale Order.
However, under the Sale Order (which incorporated by reference certain
provisions of the Acquisition Agreement between the Company and Safety-Kleen
Services, Inc.), the Company became subject as of the Closing Date to
certain legal proceedings which are now either pending or threatened involving
the CSD assets. As of March 31, 2008, the Company had reserves of $32.8
million (substantially all of which the Company had established as part of the
purchase price for the CSD assets) relating to the Companys estimated
potential liabilities in connection with such legal proceedings. At December 31,
2007, the Company estimated that it was reasonably possible as that term is
defined in SFAS No. 5 (more than remote but less than likely), that the
amount of such total liabilities could be up to $3.8 million greater than the
$32.6 million reserve balance at December 31, 2007. The Company believes
that as of March 31, 2008, there has been no material change in the
reasonably possible amount of $3.8 million. The Company periodically adjusts
the aggregate amount of such reserves when such potential liabilities are paid
or otherwise discharged or additional relevant information becomes available.
Substantially all of the Companys legal proceedings liabilities are
environmental liabilities and, as such, are included in the tables of changes
to remedial liabilities disclosed as part of Note 9, Remedial Liabilities.
Ville
Mercier Legal Proceedings.
The CSD assets
included a subsidiary (the Mercier Subsidiary) which owns and operates a
hazardous waste incinerator in Ville Mercier, Quebec (the Mercier Facility).
A property owned by the Mercier Subsidiary adjacent to the current Mercier
Facility is now contaminated as a result of actions dating back to 1968, when
the Quebec government issued to the unrelated company which then owned the
Mercier Facility two permits to dump organic liquids into lagoons on the
property. By 1972, groundwater contamination had been identified, and the
Quebec government provided an alternate water supply to the municipality of
Ville Mercier.
In 1999, Ville
Mercier and three neighboring municipalities filed separate legal proceedings
against the Mercier Subsidiary and certain related companies together with
certain former officers and directors, as well as against the Government of
Quebec. The lawsuits assert that the defendants are jointly and severally
responsible for the contamination of groundwater in the region, which the
plaintiffs claim was caused by contamination from the former Ville Mercier
lagoons and which they claim caused each municipality to incur additional costs
to supply drinking water for their citizens since the 1970s and early 1980s.
The four municipalities claim a total of $1.6 million (CDN) as damages for
additional costs to obtain drinking water supplies and seek an injunctive order
to obligate the defendants to remediate the groundwater in the region. The
Quebec Government also sued the Mercier Subsidiary to recover approximately
$17.4 million (CDN) of alleged past costs for constructing and operating a
treatment system and providing alternative drinking water supplies. The Mercier
Subsidiary continues to assert that it has no responsibility for the
groundwater contamination in the region.
On September 26,
2007 the Minister of Sustainable Development, Environment and Parks issued a
Notice pursuant to Section 115.1 of the Environment Quality Act,
superceding Notices issued in 1992, which are the subject of the pending
litigation. The more recent Notice notifies the Mercier Subsidiary that, if the
Mercier Subsidiary does not take certain remedial measures at the site, the
Minister intends to undertake those measures at the site and claim direct and
indirect costs related to such measures. The Mercier Subsidiary continues to
assert that it has no responsibility for the matter and will contest any action
by the Ministry to impose costs for remedial measures on the Mercier
Subsidiary. At March 31, 2008 and December 31, 2007, the Company had
accrued $12.7 million and $13.1 million, respectively, for remedial
liabilities and associated legal costs relating to the Ville Mercier legal
proceedings.
Properties
Included in CSD Assets.
The CSD assets include a former hazardous waste incinerator and
landfill in Baton Rouge, Louisiana (BR Facility) undergoing remediation
pursuant to an order issued by the Louisiana Department of Environmental
Quality (the LDEQ). In December 2003, the Company received an
information request from the EPA pursuant to the Superfund Act concerning the
Devils Swamp Lake Site (Devils Swamp) in East Baton Rouge Parish,
Louisiana. On March 8, 2004, the EPA proposed to list Devils Swamp on the
National Priorities List for further investigations and possible remediation.
Devils Swamp includes a lake located downstream of an outfall ditch where
wastewaters and stormwaters have been discharged from the BR Facility, as well
as extensive swamplands adjacent to it. Contaminants of concern (COCs) cited
by the EPA as a basis for listing the site include substances of the kind found
in wastewaters discharged from the BR Facility in past operations. While the
Companys ongoing corrective actions at the BR
13
Facility may be
sufficient to address the EPAs concerns, there can be no assurance that
additional action will not be required and that the Company will not incur
material costs. In September 2007 the EPA sent Special Notice Letters to
certain generators of waste materials containing COCs that had shipped the COCs
to the BR Facility in the past and that EPA believes may be liable under
Superfund laws, requiring those generators to submit a good faith offer to
conduct a remedial investigation feasibility study directed towards the
eventual remediation of Devils Swamp. EPA sent a follow-up letter to the September 2007
letter on January 17, 2008, contacting the recipients to confirm a
negotiation and organizational meeting on January 31, 2008 at the EPAs
offices in Dallas, Texas. The Company participated in this meeting, and the
recipients of the notice letters conferred further with the Company by
teleconference on February 19th. The Company cannot estimate the Companys
potential additional liability for Devils Swamp associated with this
litigation.
Third
Party Superfund Sites.
Prior to the Closing Date, the
Sellers had generated or shipped hazardous wastes, which are present on an
aggregate of 35 sites owned by third parties, which have been designated as
federal or state Superfund sites and at which the Sellers, along with other
parties, had been designated as PRPs. Under the Acquisition Agreement and the
Sale Order, the Company agreed with the Sellers that it would indemnify the
Sellers against the Sellers share of the cleanup costs payable to governmental
entities in connection with those 35 sites, which were listed in Exhibit A
to the Sale Order (the Listed Third Party Sites). At 29 of the Listed Third
Party Sites, the Sellers had addressed, prior to the Companys acquisition of
the CSD assets in September 2002, the Sellers cleanup obligations to the
federal and state governments and to other PRPs by entering into consent
decrees or other settlement agreements or by participating in ongoing
settlement discussions or site studies and, in accordance therewith, the PRP
group is generally performing or has agreed to perform the site remediation
program with government oversight. With respect to two of those 29 Listed Third
Party Sites, certain developments have occurred since the Companys purchase of
the CSD assets which have affected the Companys estimated liabilities relating
to those sites. Of the remaining Listed Third Party Sites, the Company, on
behalf of the Sellers, is contesting with the governmental entities and PRP
groups involved the Sellers liability at two sites, has settled the Sellers
liability at two sites, and plans to fund participation by the Sellers as
settling PRPs at two sites. In addition, the Company has confirmed that the
Sellers were ultimately not named as PRPs at one site. With respect to all of
the 35 Listed Third Party Sites, the Company had reserves of $8.1 million
and $7.7 million at March 31, 2008 and December 31, 2007,
respectively.
By letters to the
Company dated between September 2004 and May 2006, the Sellers identified,
in addition to the 35 Listed Third Party Sites, five additional sites owned by
third parties which the EPA or a state environmental agency has designated as a
Superfund site or potential Superfund site and at which one or more of the
Sellers have been named as a PRP or potential PRP. In those letters, the
Sellers asserted that the Company has an obligation to indemnify the Sellers
for their share of the potential cleanup costs associated with such five
additional sites. The Company has responded to such letters from the Sellers by
stating that, under the Sale Order, the Company has no obligation to reimburse
the Sellers for any cleanup and related costs (if any) which the Sellers may
incur in connection with such additional sites. The Company intends to assist
the Sellers in providing information now in the Companys possession with
respect to such five additional sites and to participate in negotiations with
the government agencies and PRP groups involved. In addition, at one of those
five additional sites, the Company may have some liability independently of the
Sellers involvement with that site, and the Company may also have certain
defense and indemnity rights under contractual agreements for prior
acquisitions relating to that site. Accordingly, the Company is now
investigating that site further. However, the Company now believes that it has
no liabilities with respect to the potential cleanup of those five additional
sites that are both probable and estimable at this time, and the Company therefore
has not established any reserves for any potential liabilities of the Sellers
in connection therewith. At one site the potential liability of the Sellers is
de minimis
and a settlement has already
been offered to the Sellers to that effect, and at one site the Company
believes that the Sellers shipped no wastes or substances into the site and
therefore the Sellers have no liability. For the other three sites, the Company
cannot estimate the amount of the Sellers liabilities, if any, at this time.
Legal Proceedings
Not Related to CSD Assets
In addition to the
legal proceedings relating to the CSD assets, the Company is also involved in
certain legal proceedings related to environmental matters which have arisen
for other reasons.
Superfund
Sites Not Related to CSD Acquisition.
The Company
has been named as a PRP at 29 sites that are not related to the CSD
acquisition. Fourteen of these sites involve two subsidiaries which the Company
acquired from ChemWaste, a former subsidiary of Waste Management, Inc. As
part of that acquisition, ChemWaste agreed to indemnify the Company with
respect to any liability of those two subsidiaries for waste disposed of before
the Company acquired them. Accordingly, Waste Management is paying all costs of
defending those two subsidiaries in those 14 cases, including legal fees and
settlement costs.
14
As of March 31,
2008 and December 31, 2007, the Company had reserves of $0.6 million
and $0.6 million, respectively, for cleanup of Superfund sites not related
to the CSD acquisition at which either the Company or a predecessor has been
named as a PRP. However, there can be no guarantee that the Companys ultimate
liabilities for these sites will not materially exceed this amount or that
indemnities applicable to any of these sites will be available to pay all or a
portion of related costs. Included in the above noted reserve at both March 31,
2008 and December 31, 2007 is a potential liability where the Company was
issued an official Notice Letter in February 2007 pertaining to its
involvement at a state Superfund site in Niagara Falls, New York where it may
have incurred liability for past waste shipments. No indemnification exists for
this site.
Lopez Lawsuit.
The Company has been involved in several lawsuits
(collectively, the Lopez Lawsuit) arising out of a complaint originally filed
in 2003 by Mr. Eddie Lopez and his wife, Ms. Sandy Lopez, against
Clean Harbors Environmental Services, Inc. (CHES). The remaining active case is pending in the
United States District Court for the Northern District of Illinios (the District
Court).
The plaintiffs filed an amended complaint in the District Court on December 3,
2007, which alleges that Mr.
Lopez was exposed to toxic fumes and thereby suffered
severe injuries while employed by a Clean Harbors vendor to pick up dumpsters at the Clean Harbors
facility in Chicago, Illinois.
The amended complaint seeks
damages in an unspecified amount for personal injury, loss of income and loss
of consortium.
The
Company believes that the claims made against CHES in the Lopez Lawsuit are
fully defensible on the merits and intends to vigorously defend against such
claims.
On April 6, 2008, the insurance company that had originally been
notified and had agreed to indemnify and defend Clean Harbors but had issued a
reservation of rights letter filed a complaint in the District Court seeking a
declaratory judgment that it has no obligation to defend or indemnify Clean
Harbors. Clean Harbors has notified two
other insurance companies that have agreed to indemnify and defend Clean
Harbors but have also issued reservation of right letters.
The Company is now engaged in investigations
and ongoing discussions with its various insurance carriers as well as its
insurance broker concerning its rights to coverage for any potential
liabilities that may arise out of the Lopez Lawsuit, and the Company intends to
vigorously assert its rights to such coverage based on such investigations and
discussions. However, in the event that the plaintiffs were to prevail in the
Lopez Lawsuit and CHES general liability insurance carrier, umbrella liability
carrier and environmental impairment liability insurance carrier were to
successfully deny coverage, then the Company could be faced with potential
significant liabilities. In such an
event, the Company would vigorously pursue remedies against various third
parties relating thereto. At March 31, 2008, the Company had not recorded
any liability for this matter on the basis that such liability is not probable.
Regulatory Proceedings
From time to time, the
Company pays fines or penalties in regulatory proceedings relating primarily to
waste treatment, storage or disposal facilities. As of March 31, 2008,
there were two additional proceedings to those disclosed in the Companys
Annual Report on Form 10-K for the year ended December 31, 2007, and
for which the Company reasonably believes that the sanctions could equal or
exceed $100,000. The matters involve allegations that the Company (i) stored
polychlorinated biphenyls, or PCBs, in tanks in violation of a facilities permit; and (ii) improperly
managed containers prior to incineration in violation of a facilitys permit
and violated federal air regulations at an operating landfill as a result of a
few small fires. The Company does not believe that the fines or other penalties
in any of these matters will, individually or in the aggregate, have a material
adverse effect on its financial condition or results of operations.
(12) INCOME TAXES
The income tax expense for the first quarter of 2008
was based on the estimated effective tax rate for the year. The effective tax
rate decreased in 2008 as compared to the same period in 2007 primarily related
to a reduction in the expected amount of permanent differences for the year.
As of March 31, 2008 the Companys
unrecognized tax benefits were $69.2 million which included $15.3 million of
interest and $4.3 million of penalties.
The Company anticipates that total unrecognized tax
benefits other than adjustments for additional accruals for interest and
penalties and foreign currency translation, will decrease by approximately $2.1
million by March 31, 2009. The
$2.1 million was related to a business combination and as such will be recorded
as a reduction of intangible assets and will not impact the income tax
provision.
15
(13) EARNINGS PER SHARE
The following is a
reconciliation of basic and diluted income per share computations (in thousands
except for per share amounts):
|
|
Three Months Ended March 31, 2008
|
|
Three Months Ended March 31, 2007
|
|
|
|
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Basic income
attributable to common stockholders before effect of dilutive securities
|
|
$
|
8,922
|
|
20,357
|
|
$
|
0.44
|
|
$
|
3,432
|
|
19,750
|
|
$
|
0.17
|
|
Dilutive effect
of equity-based compensation awards and warrants
|
|
|
|
553
|
|
(0.01
|
)
|
69
|
|
887
|
|
|
|
Diluted income
attributable to common stockholders
|
|
$
|
8,922
|
|
20,910
|
|
$
|
0.43
|
|
$
|
3,501
|
|
20,637
|
|
$
|
0.17
|
|
(14) SEGMENT
REPORTING
The Company has
two reportable segments: Technical Services and Site Services. Performance of
the segments is evaluated on several factors, of which the primary financial
measure is operating income before interest, taxes, depreciation, amortization,
restructuring, severance charges, other refinancing-related expenses, (gain)
loss on disposal of assets held for sale, other (income) expense, and loss on
refinancing (Adjusted EBITDA Contribution). Transactions between the segments
are accounted for at the Companys estimate of fair value based on similar
transactions with outside customers.
The operations not
managed through the Companys two operating segments are presented herein as Corporate
Items. Corporate Items revenues consist of two different operations where the
revenues are insignificant. Corporate Items cost of revenues represents certain
central services that are not allocated to the segments for internal reporting
purposes. Corporate Items selling, general and administrative expenses include
typical corporate items such as legal, accounting and other items of a general
corporate nature that are not allocated to the Companys two segments.
The following table
reconciles third party revenues to direct revenues for the three-month periods
ended March 31, 2008 and 2007 (in thousands). Outside or third party
revenue is revenue billed to our customers by a particular segment. Direct
revenue is the revenue allocated to the segment performing the provided
service. The Company analyzes results of operations based on direct revenues
because the Company believes that these revenues and related expenses best
reflect the manner in which operations are managed. Certain reporting units
have been reclassified to conform to the current year presentation.
|
|
For the Three Months Ended March 31, 2008
|
|
|
|
Technical
Services
|
|
Site
Services
|
|
Corporate
Items
|
|
Total
|
|
Third party
revenues
|
|
$
|
166,312
|
|
$
|
76,190
|
|
$
|
7
|
|
$
|
242,509
|
|
Intersegment
revenues
|
|
11,402
|
|
5,128
|
|
71
|
|
16,601
|
|
Gross revenues
|
|
177,714
|
|
81,318
|
|
78
|
|
259,110
|
|
Intersegment
expenses
|
|
(5,745
|
)
|
(10,311
|
)
|
(545
|
)
|
(16,601
|
)
|
Direct revenues
|
|
$
|
171,969
|
|
$
|
71,007
|
|
$
|
(467
|
)
|
$
|
242,509
|
|
|
|
For the Three Months Ended March 31, 2007
|
|
|
|
Technical
Services
|
|
Site
Services
|
|
Corporate
Items
|
|
Total
|
|
Third party
revenues
|
|
$
|
139,721
|
|
$
|
65,304
|
|
$
|
(1
|
)
|
$
|
205,024
|
|
Intersegment
revenues (1)
|
|
29,192
|
|
5,610
|
|
188
|
|
34,990
|
|
Gross revenues
|
|
168,913
|
|
70,914
|
|
187
|
|
240,014
|
|
Intersegment
expenses(1)
|
|
(25,705
|
)
|
(8,733
|
)
|
(552
|
)
|
(34,990
|
)
|
Direct revenues
|
|
$
|
143,208
|
|
$
|
62,181
|
|
$
|
(365
|
)
|
$
|
205,024
|
|
16
(1)
Adjustments
of $14,232 and $65 for Technical Services and Site Services, respectively, were
made between intersegment expenses and intersegment revenues to correct amounts
previously reported. The adjustments
eliminate in consolidation and were considered immaterial.
The following table
presents information used by management by reported segment (in thousands). The
Company does not allocate interest expense, income taxes, depreciation,
amortization, accretion of environmental liabilities, non-recurring severance
charges, (gain) loss on disposal of assets held for sale, other (income)
expense, and loss on refinancing to segments.
|
|
For the Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Adjusted EBITDA:
|
|
|
|
|
|
Technical
Services
|
|
$
|
40,227
|
|
$
|
25,373
|
|
Site Services
|
|
7,885
|
|
8,578
|
|
Corporate Items
|
|
(14,967
|
)
|
(11,886
|
)
|
Total
|
|
33,145
|
|
22,065
|
|
|
|
|
|
|
|
Reconciliation
to Consolidated Statement of Operations:
|
|
|
|
|
|
Accretion of
environmental liabilities
|
|
2,670
|
|
2,474
|
|
Depreciation and
amortization
|
|
10,475
|
|
8,938
|
|
Income from
operations
|
|
20,000
|
|
10,653
|
|
Other (income)
expense
|
|
104
|
|
(6
|
)
|
Interest
expense, net of interest income
|
|
3,385
|
|
3,184
|
|
Income before
provision for income taxes
|
|
$
|
16,511
|
|
$
|
7,475
|
|
The
following table presents property, plant and equipment by reported segment and
in the aggregate (in thousands):
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Property, plant
and equipment, net
|
|
|
|
|
|
Technical
Services
|
|
$
|
225,027
|
|
$
|
216,796
|
|
Site Services
|
|
28,330
|
|
20,105
|
|
Corporate or
other assets
|
|
34,897
|
|
25,700
|
|
|
|
$
|
288,254
|
|
$
|
262,601
|
|
The
following table presents intangible assets by reported segment (in thousands):
Intangible
assets:
|
|
|
|
|
|
Technical
Services
|
|
|
|
|
|
Goodwill
|
|
$
|
24,661
|
|
$
|
21,424
|
|
Permits and
other intangibles, net
|
|
73,602
|
|
69,995
|
|
Total Technical
Services
|
|
98,263
|
|
91,419
|
|
Site Services
|
|
|
|
|
|
Goodwill
|
|
148
|
|
148
|
|
Permits and
other intangibles, net
|
|
8,951
|
|
4,814
|
|
Total Site
Services
|
|
9,099
|
|
4,962
|
|
Total
|
|
$
|
107,362
|
|
$
|
96,381
|
|
The following table
presents the total assets by reported segment (in thousands):
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Technical
Services
|
|
$
|
460,623
|
|
$
|
369,053
|
|
Site Services
|
|
54,217
|
|
37,710
|
|
Corporate Items
|
|
246,002
|
|
363,125
|
|
Total
|
|
$
|
760,842
|
|
$
|
769,888
|
|
17
The following table
presents the total assets by geographical area (in thousands):
|
|
March 31,
2008
|
|
December 31,
2007
|
|
United States
|
|
$
|
627,968
|
|
$
|
631,630
|
|
Canada
|
|
132,874
|
|
138,258
|
|
Total
|
|
$
|
760,842
|
|
$
|
769,888
|
|
(15) GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
On June 30, 2004,
$150.0 million of Senior Secured Notes were issued by the parent company,
Clean Harbors, Inc., and were guaranteed by all of the parents material
subsidiaries organized in the United States. The notes are not guaranteed by
the Companys Canadian and Mexican subsidiaries. The following presents
condensed consolidating financial statements for the parent company, the
guarantor subsidiaries and the non-guarantor subsidiaries, respectively.
Following
is the condensed consolidating balance sheet at March 31, 2008 (in thousands):
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
36,128
|
|
$
|
1,141
|
|
$
|
48,884
|
|
$
|
|
|
$
|
86,153
|
|
Intercompany
receivables
|
|
(276
|
)
|
|
|
188,668
|
|
(188,392
|
)
|
|
|
Other current
assets
|
|
12,923
|
|
213,406
|
|
24,953
|
|
|
|
251,282
|
|
Property, plant
and equipment, net
|
|
|
|
252,628
|
|
35,626
|
|
|
|
288,254
|
|
Investments in
subsidiaries
|
|
359,731
|
|
137,855
|
|
91,654
|
|
(589,240
|
)
|
|
|
Intercompany
note receivable
|
|
|
|
116,788
|
|
3,701
|
|
(120,489
|
)
|
|
|
Other long-term
assets
|
|
20,007
|
|
80,619
|
|
34,527
|
|
|
|
135,153
|
|
Total assets
|
|
$
|
428,513
|
|
$
|
802,437
|
|
$
|
428,013
|
|
$
|
(898,121
|
)
|
$
|
760,842
|
|
Liabilities and
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
43,912
|
|
$
|
129,140
|
|
$
|
19,908
|
|
$
|
|
|
$
|
192,960
|
|
Intercompany
payables
|
|
|
|
188,392
|
|
|
|
(188,392
|
)
|
|
|
Closure,
post-closure and remedial liabilities, net
|
|
|
|
145,934
|
|
18,529
|
|
|
|
164,463
|
|
Long-term
obligations
|
|
120,746
|
|
|
|
|
|
|
|
120,746
|
|
Capital lease
obligations, net
|
|
|
|
410
|
|
206
|
|
|
|
616
|
|
Intercompany
note payable
|
|
3,701
|
|
|
|
116,788
|
|
(120,489
|
)
|
|
|
Other long-term
liabilities
|
|
48,647
|
|
1,560
|
|
20,343
|
|
|
|
70,550
|
|
Total
liabilities
|
|
217,006
|
|
465,436
|
|
175,774
|
|
(308,881
|
)
|
549,335
|
|
Stockholders
equity
|
|
211,507
|
|
337,001
|
|
252,239
|
|
(589,240
|
)
|
211,507
|
|
Total
liabilities and stockholders equity
|
|
$
|
428,513
|
|
$
|
802,437
|
|
$
|
428,013
|
|
$
|
(898,121
|
)
|
$
|
760,842
|
|
18
Following
is the condensed consolidating balance sheet at December 31, 2007 (in
thousands):
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
35,925
|
|
$
|
32,301
|
|
$
|
51,312
|
|
$
|
|
|
$
|
119,538
|
|
Intercompany
receivables
|
|
2,521
|
|
|
|
80,521
|
|
(83,042
|
)
|
|
|
Other current
assets
|
|
12,287
|
|
220,060
|
|
28,553
|
|
|
|
260,900
|
|
Property, plant
and equipment, net
|
|
|
|
230,449
|
|
32,152
|
|
|
|
262,601
|
|
Investments in
subsidiaries
|
|
344,953
|
|
140,298
|
|
91,654
|
|
(576,905
|
)
|
|
|
Intercompany
note receivable
|
|
|
|
121,445
|
|
3,701
|
|
(125,146
|
)
|
|
|
Other long-term
assets
|
|
22,631
|
|
68,396
|
|
35,822
|
|
|
|
126,849
|
|
Total assets
|
|
$
|
418,317
|
|
$
|
812,949
|
|
$
|
323,715
|
|
$
|
(785,093
|
)
|
$
|
769,888
|
|
Liabilities and
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
43,504
|
|
$
|
143,672
|
|
$
|
23,677
|
|
$
|
|
|
$
|
210,853
|
|
Intercompany
payables
|
|
|
|
83,042
|
|
|
|
(83,042
|
)
|
|
|
Closure,
post-closure and remedial liabilities, net
|
|
|
|
145,752
|
|
19,878
|
|
|
|
165,630
|
|
Long-term
obligations
|
|
120,712
|
|
|
|
|
|
|
|
120,712
|
|
Capital lease
obligations, net
|
|
|
|
1,174
|
|
346
|
|
|
|
1,520
|
|
Intercompany
note payable
|
|
3,701
|
|
|
|
121,445
|
|
(125,146
|
)
|
|
|
Other long-term
liabilities
|
|
47,503
|
|
|
|
20,773
|
|
|
|
68,276
|
|
Total
liabilities
|
|
215,420
|
|
373,640
|
|
186,119
|
|
(208,188
|
)
|
566,991
|
|
Stockholders
equity
|
|
202,897
|
|
439,309
|
|
137,596
|
|
(576,905
|
)
|
202,897
|
|
Total
liabilities and stockholders equity
|
|
$
|
418,317
|
|
$
|
812,949
|
|
$
|
323,715
|
|
$
|
(785,093
|
)
|
$
|
769,888
|
|
19
Following is the
consolidating statement of operations for the three months ended March 31,
2008 (in thousands):
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
$
|
208,858
|
|
$
|
38,867
|
|
$
|
(5,216
|
)
|
$
|
242,509
|
|
Cost of revenues
|
|
|
|
149,325
|
|
26,085
|
|
(5,216
|
)
|
170,194
|
|
Selling, general
and administrative expenses
|
|
|
|
33,860
|
|
5,310
|
|
|
|
39,170
|
|
Accretion of
environmental liabilities
|
|
|
|
2,391
|
|
279
|
|
|
|
2,670
|
|
Depreciation and
amortization
|
|
|
|
9,211
|
|
1,264
|
|
|
|
10,475
|
|
Income from
operations
|
|
|
|
14,071
|
|
5,929
|
|
|
|
20,000
|
|
Other income
(expense)
|
|
|
|
(108
|
)
|
4
|
|
|
|
(104
|
)
|
Interest income
(expense)
|
|
(3,630
|
)
|
(169
|
)
|
414
|
|
|
|
(3,385
|
)
|
Equity in
earnings of subsidiaries
|
|
18,262
|
|
4,164
|
|
|
|
(22,426
|
)
|
|
|
Intercompany
dividend income (expense)
|
|
|
|
|
|
3,409
|
|
(3,409
|
)
|
|
|
Intercompany
interest income (expense)
|
|
|
|
3,289
|
|
(3,289
|
)
|
|
|
|
|
Income before
provision for income taxes
|
|
14,632
|
|
21,247
|
|
6,467
|
|
(25,835
|
)
|
16,511
|
|
Provision for
income taxes
|
|
5,710
|
|
329
|
|
1,550
|
|
|
|
7,589
|
|
Net income
|
|
$
|
8,922
|
|
$
|
20,918
|
|
$
|
4,917
|
|
$
|
(25,835
|
)
|
$
|
8,922
|
|
Following is the
consolidating statement of operations for the three months ended March 31,
2007 (in thousands):
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
$
|
177,591
|
|
$
|
30,982
|
|
$
|
(3,549
|
)
|
$
|
205,024
|
|
Cost of revenues
|
|
|
|
133,593
|
|
21,560
|
|
(3,549
|
)
|
151,604
|
|
Selling, general
and administrative expenses
|
|
|
|
24,593
|
|
6,762
|
|
|
|
31,355
|
|
Accretion of
environmental liabilities
|
|
|
|
2,258
|
|
216
|
|
|
|
2,474
|
|
Depreciation and
amortization
|
|
|
|
7,153
|
|
1,785
|
|
|
|
8,938
|
|
Income from
operations
|
|
|
|
9,994
|
|
659
|
|
|
|
10,653
|
|
Other income
|
|
|
|
6
|
|
|
|
|
|
6
|
|
Interest income
(expense)
|
|
(3,413
|
)
|
(77
|
)
|
306
|
|
|
|
(3,184
|
)
|
Equity in
earnings of subsidiaries
|
|
10,199
|
|
(18
|
)
|
|
|
(10,181
|
)
|
|
|
Intercompany
dividend income (expense)
|
|
|
|
|
|
2,921
|
|
(2,921
|
)
|
|
|
Intercompany
interest income (expense)
|
|
|
|
2,820
|
|
(2,820
|
)
|
|
|
|
|
Income before
provision for income taxes
|
|
6,786
|
|
12,725
|
|
1,066
|
|
(13,102
|
)
|
7,475
|
|
Provision for
income taxes
|
|
3,285
|
|
|
|
689
|
|
|
|
3,974
|
|
Net income
|
|
$
|
3,501
|
|
$
|
12,725
|
|
$
|
377
|
|
$
|
(13,102
|
)
|
$
|
3,501
|
|
20
Following is the
condensed consolidating statement of cash flows for the three months ended March 31,
2008 (in thousands):
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-Guarantor
Subsidiaries
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from
operating activities
|
|
$
|
(3,361
|
)
|
$
|
12,535
|
|
$
|
3,842
|
|
$
|
13,016
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
Additions to
property, plant and equipment
|
|
|
|
(14,855
|
)
|
(4,352
|
)
|
(19,207
|
)
|
Costs to obtain
or renew permits
|
|
|
|
(1,408
|
)
|
15
|
|
(1,393
|
)
|
Proceeds from
sales of fixed assets
|
|
|
|
7
|
|
|
|
7
|
|
Sale of
marketable securities
|
|
850
|
|
|
|
|
|
850
|
|
Acquisitions,
net of cash acquired
|
|
(27,427
|
)
|
|
|
|
|
(27,427
|
)
|
Net cash from
investing activities
|
|
(26,577
|
)
|
(16,256
|
)
|
(4,337
|
)
|
(47,170
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
Change in
uncashed checks
|
|
|
|
1,458
|
|
(56
|
)
|
1,402
|
|
Proceeds from
exercise of stock options
|
|
731
|
|
|
|
|
|
731
|
|
Proceeds from
employee stock purchase plan
|
|
379
|
|
|
|
|
|
379
|
|
Payments of
capital leases
|
|
|
|
(1,470
|
)
|
(196
|
)
|
(1,666
|
)
|
Excess tax
benefit of stock-based compensation
|
|
1,604
|
|
|
|
|
|
1,604
|
|
Intercompany
financing
|
|
27,427
|
|
(27,427
|
)
|
|
|
|
|
Interest
(payments) / received
|
|
|
|
|
|
|
|
|
|
Dividends (paid)
received
|
|
|
|
|
|
|
|
|
|
Net cash from
financing activities
|
|
30,141
|
|
(27,439
|
)
|
(252
|
)
|
2,450
|
|
Effect of
exchange rate change on cash
|
|
|
|
|
|
(1,681
|
)
|
(1,681
|
)
|
Increase
(decrease) in cash and cash equivalents
|
|
203
|
|
(31,160
|
)
|
(2,428
|
)
|
(33,385
|
)
|
Cash and cash
equivalents, beginning of period
|
|
35,925
|
|
32,301
|
|
51,312
|
|
119,538
|
|
Cash and cash
equivalents, end of period
|
|
$
|
36,128
|
|
$
|
1,141
|
|
$
|
48,884
|
|
$
|
86,153
|
|
21
Following is the
condensed consolidating statement of cash flows for the three months ended March 31,
2007 (in thousands):
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-Guarantor
Subsidiaries
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from
operating activities (1)
|
|
$
|
445
|
|
$
|
(2,727
|
)
|
$
|
(2,085
|
)
|
$
|
(4,367
|
)
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
Additions to
property, plant and equipment
|
|
|
|
(5,211
|
)
|
(511
|
)
|
(5,722
|
)
|
Costs to obtain
or renew permits
|
|
|
|
(64
|
)
|
|
|
(64
|
)
|
Proceeds from
sales of fixed assets
|
|
|
|
140
|
|
|
|
140
|
|
Cost of
available-for-sale securities
|
|
(850
|
)
|
(27
|
)
|
|
|
(877
|
)
|
Acquisition of
Ensco Caribe
|
|
(1,131
|
)
|
|
|
|
|
(1,131
|
)
|
Net cash from
investing activities
|
|
(1,981
|
)
|
(5,162
|
)
|
(511
|
)
|
(7,654
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
Change in
uncashed checks
|
|
|
|
(2,037
|
)
|
(2,121
|
)
|
(4,158
|
)
|
Proceeds from
exercise of stock options
|
|
740
|
|
|
|
|
|
740
|
|
Deferred
financing costs incurred
|
|
(32
|
)
|
|
|
|
|
(32
|
)
|
Proceeds from
employee stock purchase plan
|
|
260
|
|
|
|
|
|
260
|
|
Dividend
payments on preferred stock
|
|
(69
|
)
|
|
|
|
|
(69
|
)
|
Payments of
capital leases
|
|
|
|
(382
|
)
|
(55
|
)
|
(437
|
)
|
Other
|
|
(69
|
)
|
|
|
|
|
(69
|
)
|
Interest
(payments) / received
|
|
|
|
10,223
|
|
(10,223
|
)
|
|
|
Dividends (paid)
received
|
|
|
|
(11,777
|
)
|
11,777
|
|
|
|
Net cash from
financing activities
|
|
830
|
|
(3,973
|
)
|
(622
|
)
|
(3,765
|
)
|
Effect of
exchange rate change on cash
|
|
|
|
|
|
184
|
|
184
|
|
Decrease in cash
and cash equivalents
|
|
(706
|
)
|
(11,862
|
)
|
(3,034
|
)
|
(15,602
|
)
|
Cash and cash
equivalents, beginning of period
|
|
822
|
|
44,854
|
|
27,874
|
|
73,550
|
|
Cash and cash
equivalents, end of period
|
|
$
|
116
|
|
$
|
32,992
|
|
$
|
24,840
|
|
$
|
57,948
|
|
(1)
Adjustments
of $10,199 and $18 for Clean Harbors, Inc. and US Guarantor
Subsidiaries, respectively, were made between investing activities and
operating activities to correct amounts previously reported. The adjustments
eliminate in consolidation and were considered immaterial.
(16) SUBSEQUENT EVENT
On April 29, 2008,
the Company issued 2.875 million shares of common stock, including 375,000
shares of common stock issued upon exercise of an underwriters option, at a
public offering price of $63.75 per share.
After deducting the underwriter discount, the Company received net
proceeds, before offering expenses, of $174.1 million from the issuance. The Company expects to use the net proceeds
for one or more of the following: potential future acquisitions, repayment of
debt and working capital.
22
ITEM 2.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this quarterly
report contains forward-looking statements, which are generally identifiable by
use of the words believes, expects, intends, anticipates, plans to, estimates,
projects, or similar expressions. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in these forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 11, 2008 under the heading Risk
Factors and in other documents we file from time to time with the Securities
and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect managements opinions only as of the date hereof. We undertake no
obligation to revise or publicly release the results of any revision to these
forward-looking statements.
Overview
We provide a wide range
of environmental services and solutions to a diversified customer base in the
United States, Puerto Rico, Mexico and Canada. Throughout North America, we
perform environmental services through a network of service locations, and
operate incineration facilities, commercial landfills, wastewater treatment
operations, and transportation, storage and disposal facilities, as well as
polychlorinated biphenyls (PCB) management facilities and oil and used oil
products recycling facilities. In March 2008,
we also acquired and now operate two solvent recycling facilities. We seek to
be recognized by customers as the premier supplier of a broad range of
value-added environmental services based upon quality, responsiveness, customer
service, information technologies, breadth of product offerings and cost
effectiveness.
The wastes handled include
materials that are classified as hazardous because of their unique
properties, as well as other materials subject to federal and state
environmental regulation. We provide final treatment and disposal services
designed to manage hazardous and non-hazardous wastes, which cannot be
economically recycled or reused. We transport, treat and dispose of industrial
wastes for commercial and industrial customers, health care providers,
educational and research organizations, other environmental services companies
and governmental entities.
Our Technical Services collects and transports
containerized and bulk waste; performs categorization, specialized repackaging,
treatment and disposal of laboratory chemicals and household hazardous wastes,
which are referred to as CleanPack® services; and offers Apollo Onsite
Services, which customize environmental programs at customer sites. This is
accomplished through the network of service centers where a fleet of trucks,
rail or other transport is dispatched to pick up customers waste either on a
pre-determined schedule or on demand, and then to deliver waste to a permitted
facility. From the service centers, chemists can also be dispatched to a
customer location for the collection of chemical waste for disposal.
Our Site Services provide
highly skilled experts utilizing specialty equipment and resources to perform
services, such as industrial maintenance, surface remediation, groundwater
restoration, site and facility decontamination, emergency response, site remediation,
PCB disposal and oil disposal at the customers site or another location. These
services are dispatched on a scheduled or emergency basis.
Environmental Liabilities
We
have accrued environmental liabilities, as of March 31, 2008, of
approximately $186.5 million, substantially all of which we assumed as
part of our acquisition of substantially all of the assets of the Chemcial
Services Division, or CSD, of Safety-Kleen Corp. in September 2002 and
several subsequent acquisitions. We anticipate such liabilities will be payable
over many years and that cash flows generated from operations will be
sufficient to fund the payment of such liabilities when required. However,
events not now anticipated (such as future changes in environmental laws and
regulations) could require that such payments be made earlier or in greater
amounts than currently anticipated.
Closure and
Post-closure Liabilities
The changes to closure and post-closure liabilities
for the three months ended March 31, 2008 were as follows (in thousands):
23
|
|
Landfill
Retirement
Liability
|
|
Non-Landfill
Retirement
Liability
|
|
Total
|
|
Balance
at January 1, 2008
|
|
$
|
22,896
|
|
$
|
6,833
|
|
$
|
29,729
|
|
Liabilities
assumed in acquisitions
|
|
|
|
418
|
|
418
|
|
New
asset retirement obligations
|
|
346
|
|
|
|
346
|
|
Accretion
|
|
758
|
|
209
|
|
967
|
|
Changes
in estimate recorded to statement of operations
|
|
|
|
14
|
|
14
|
|
Other
changes in estimates recorded to balance sheet
|
|
260
|
|
|
|
260
|
|
Settlement
of obligations
|
|
(74
|
)
|
(212
|
)
|
(286
|
)
|
Currency
translation and other
|
|
(73
|
)
|
(14
|
)
|
(87
|
)
|
Balance
at March 31, 2008
|
|
$
|
24,113
|
|
$
|
7,248
|
|
$
|
31,361
|
|
Remedial Liabilities
The changes to remedial liabilities for the three
months ended March 31, 2008 were as follows (in thousands):
|
|
Remedial
Liabilities for
Landfill Sites
|
|
Remedial
Liabilities for
Inactive Sites
|
|
Remedial
Liabilities
(Including
Superfund) for
Non-Landfill
Operations
|
|
Total
|
|
Balance
at January 1, 2008
|
|
$
|
5,682
|
|
$
|
88,619
|
|
$
|
60,458
|
|
$
|
154,759
|
|
Liabilities
assumed in acquisitions
|
|
|
|
|
|
2,585
|
|
2,585
|
|
Accretion
|
|
67
|
|
1,030
|
|
606
|
|
1,703
|
|
Changes
in estimate recorded to statement of operations
|
|
(171
|
)
|
(31
|
)
|
126
|
|
(76
|
)
|
Settlement
of obligations
|
|
(22
|
)
|
(1,014
|
)
|
(549
|
)
|
(1,585
|
)
|
Currency
translation and other
|
|
(107
|
)
|
114
|
|
(2,230
|
)
|
(2,223
|
)
|
Balance
at March 31, 2008
|
|
$
|
5,449
|
|
$
|
88,718
|
|
$
|
60,996
|
|
$
|
155,163
|
|
The $2.6 million of liabilities assumed relates to
remediation liabilities at our solvent recovery facility at Hebron, Ohio
acquired in March 2008. Such
remedial liabilities have been preliminarily determined and are subject to
adjustment.
Results of Operations
The following table sets forth for the periods
indicated certain operating data associated with our results of operations.
This table and subsequent discussions should be read in conjunction with Item
6, Selected Financial Data, and Item 8, Financial Statements and
Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31,
2007 and Item 1, Financial Statements, in this report.
|
|
Percentage of
Revenues For the
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Revenues
|
|
100.0
|
%
|
100.0
|
%
|
Cost
of revenues (exclusive of items shown separately below):
|
|
70.2
|
|
73.9
|
|
Selling,
general and administrative expenses
|
|
16.2
|
|
15.3
|
|
Accretion
of environmental liabilities
|
|
1.1
|
|
1.2
|
|
Depreciation
and amortization
|
|
4.3
|
|
4.4
|
|
Income
from operations
|
|
8.2
|
|
5.2
|
|
Other
income (expense)
|
|
|
|
|
|
Interest
expense, net
|
|
(1.4
|
)
|
(1.6
|
)
|
Income
before provision for income taxes
|
|
6.8
|
|
3.6
|
|
Provision
for income taxes
|
|
3.1
|
|
1.9
|
|
Net
income
|
|
3.7
|
%
|
1.7
|
%
|
Earnings before Interest, Taxes,
Depreciation and Amortization (Adjusted EBITDA)
24
We define Adjusted EBITDA (a measure not defined under
generally accepted accounting principles) as the term EBITDA is defined in
our current credit agreement and indenture for covenant compliance purposes.
This definition is net income (loss) plus accretion of environmental
liabilities, depreciation and amortization, net interest expense, provision for
(benefit from) income taxes, non-recurring severance charges, other
non-recurring refinancing-related expenses, gain (loss) on sale of fixed
assets, loss on early extinguishment of debt, and cumulative effect of change
in accounting principle, net of tax.
Our management considers Adjusted EBITDA to be a
measurement of performance which provides useful information to both management
and investors. Adjusted EBITDA should not be considered an alternative to net
income or loss or other measurements under accounting principles generally
accepted in the United States. Because Adjusted EBITDA is not calculated
identically by all companies, our measurements of Adjusted EBITDA may not be
comparable to similarly titled measures reported by other companies.
The following is a reconciliation of net income to
Adjusted EBITDA for the three-month period ended March 31, 2008:
Net
income
|
|
$
|
8,922
|
|
Accretion
of environmental liabilities
|
|
2,670
|
|
Depreciation
and amortization
|
|
10,475
|
|
Interest
expense, net
|
|
3,385
|
|
Provision
for income taxes
|
|
7,589
|
|
Other
(income) loss
|
|
104
|
|
Adjusted
EBITDA
|
|
$
|
33,145
|
|
The following reconciles
Adjusted EBITDA to cash from operations for the three-month period ended March 31,
2008:
Adjusted
EBITDA
|
|
$
|
33,145
|
|
Interest
expense, net
|
|
(3,385
|
)
|
Provision
for income taxes
|
|
(7,589
|
)
|
Allowance
for doubtful accounts
|
|
(146
|
)
|
Amortization
of deferred financing costs and debt discount
|
|
609
|
|
Change
in environmental liability estimates
|
|
(62
|
)
|
Deferred
income taxes
|
|
(41
|
)
|
Stock-based
compensation
|
|
733
|
|
Excess
tax benefit of stock-based compensation
|
|
(1,604
|
)
|
Income
tax benefits related to stock option exercises
|
|
1,610
|
|
Changes
in assets and liabilities
|
|
|
|
Accounts
receivable
|
|
15,077
|
|
Other
current assets
|
|
(2,281
|
)
|
Accounts
payable
|
|
(7,365
|
)
|
Environmental
expenditures
|
|
(1,871
|
)
|
Other
current liabilities
|
|
(13,814
|
)
|
Net
cash from operating activities
|
|
$
|
13,016
|
|
Segment data
Performance of our segments is evaluated on several
factors of which the primary financial measure is Adjusted EBITDA. The following
table sets forth certain operating data associated with our results of
operations and summarizes Adjusted EBITDA contribution by operating segment for
the three months ended March 31, 2008 and 2007 (in thousands). We consider
the Adjusted EBITDA contribution from each operating segment to include revenue
attributable to each segment less operating expenses, which include cost of
revenues and selling, general and administrative expenses. Revenue attributable
to each segment is generally external or direct revenue from third party
customers. Certain income or expenses of a non-recurring or unusual nature are
not included in the operating segment Adjusted EBITDA contribution. This table
and subsequent discussions should be read in conjunction with Item 6, Selected
Financial Data, and Item 8, Financial Statements and Supplementary Data and
in particular Note 17, Segment Reporting of our Annual Report on Form 10-K
for the year ended December 31, 2007 and Item 1, Financial Statements
and in particular Note 14, Segment Reporting in this report.
25
|
|
For the
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007(1)
|
|
Direct
Revenues:
|
|
|
|
|
|
Technical
Services
|
|
$
|
171,969
|
|
$
|
143,208
|
|
Site
Services
|
|
71,007
|
|
62,181
|
|
Corporate
Items
|
|
(467
|
)
|
(365
|
)
|
Total
|
|
242,509
|
|
205,024
|
|
|
|
|
|
|
|
Cost
of Revenues:
|
|
|
|
|
|
Technical
Services
|
|
114,478
|
|
103,226
|
|
Site
Services
|
|
55,662
|
|
48,212
|
|
Corporate
Items
|
|
54
|
|
166
|
|
Total
|
|
170,194
|
|
151,604
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
Technical
Services
|
|
17,264
|
|
14,609
|
|
Site
Services
|
|
7,460
|
|
5,391
|
|
Corporate
Items
|
|
14,446
|
|
11,355
|
|
Total
|
|
39,170
|
|
31,355
|
|
|
|
|
|
|
|
Adjusted
EBITDA:
|
|
|
|
|
|
Technical
Services
|
|
40,227
|
|
25,373
|
|
Site
Services
|
|
7,885
|
|
8,578
|
|
Corporate
Items
|
|
(14,967
|
)
|
(11,886
|
)
|
Total
|
|
33,145
|
|
22,065
|
|
|
|
|
|
|
|
|
|
(1) Certain
reclassifications have been made to conform to the current year presentation.
Three months ended March 31, 2008
versus the three months ended March 31, 2007
Revenues
Total revenues for the three months ended March 31,
2008 increased $37.5 million to $242.5 million from $205.0 million for the
comparable period in 2007.
Technical Services revenues for the three months ended
March 31, 2008 increased $28.8 million to $172.0 million from $143.2
million for the comparable period in 2007. The primary increases in Technical
Services revenues consisted of increases in the pricing and volume of waste
processed through our facilities of $10.6 million and $3.5 million,
respectively. The increase was also attributable to new business from the Romic
acquisition in 2007, $3.9 million due to the strengthening of the Canadian
dollar in 2008 as compared to 2007, especially strong performance in the
transportation and disposal business line, as well as existing base business
holding strong across all regions.
Site Services revenues for the three months ended March 31,
2008 increased $8.8 million to $71.0 million from $62.2 million for the
comparable period in 2007. In the first
quarter of 2008, Site Services performed negligible large emergency response
projects. In the first quarter of 2007,
Site Services continued to perform emergency response work in the Gulf region
related to hurricanes Katrina and Rita. In 2007, this work accounted for $2.7
million of outside revenues, offset by intercompany costs of $0.5 million, resulting in direct revenue of
$2.2 million, or 3.5% of direct revenue for this segment. Base Site Services
revenue increased $10.8 million from the first quarter of 2008 compared to the
first quarter of 2007. This increase was due to a larger volume of remedial projects, particularly in the West
and South regions, an increase in mid-size emergency response projects, as well
as favorable volumes in the chemical recycling and distribution group. These
increases were augmented by strong base and project business in the Northeast,
South and West regions. An increase of
$0.4 million was attributed to the strengthening of the Canadian dollar in 2008
as compared to 2007.
Corporate Items revenues for the three months ended March 31,
2008 and 2007 were similar at $(467) thousand and $(365) thousand,
respectively.
There are many
factors which have impacted, and continue to impact, our revenues. These
factors include, but are not limited to: the level of emergency response
projects; competitive industry pricing, continued efforts by generators of
hazardous waste to reduce the amount of hazardous waste they produce,
significant consolidation among treatment and disposal companies, and
industry-wide overcapacity.
26
Cost of Revenues
Total cost of revenues for the three months ended March 31,
2008 increased $18.6 million to $170.2 million compared to $151.6 million for
the comparable period in 2007.
Technical Services cost of revenues increased $11.3
million to $114.5 million from $103.2 million for the comparable period in
2007. Cost of revenues for Technical Services increased $2.4 due to the
strengthening of the Canadian dollar in 2008 as compared to 2007, $2.4 million in building and equipment
repairs and maintenance expense, $1.8 million in outside disposal, $1.7 million
in employee labor and related costs, $1.0 million in taxes and insurance, $0.9
million in deferred costs, $0.6 million in utility expense, $0.4 million in
subcontractor costs, $0.4 million in downtime and turnaround expense and $0.1
million in transportation and discharge fees.
These increases were offset by a $0.6 million decrease in materials and
supplies cost.
Site Services
cost of revenues for the three months ended March 31, 2008 increased $7.4
million to $55.6 million from $48.2 million for the comparable period in
2007. Cost of revenues for the first
quarter of 2008 related to the performance of major emergency response jobs
decreased by $1.5 million from $1.6 million in 2007. Non-event Site Services cost of revenue
increased $9.0 million in 2008 as compared to 2007. Outside transportation and
disposal costs increased $3.1 million due to business mix, labor and related
costs were up $2.2 million due to expansion and growth, particularly in the
West and Northeast regions. Materials
and supplies increased $1.6 million primarily due to increased volume in the
South Region. Other areas resulting in
increased costs included vehicle and related expenses, $0.6 million, travel
expenses, $0.4 million and subcontracting expenses, $0.3 million. Cost of revenues increased $0.4 million due
to the strengthening of the Canadian dollar in 2008 as compared to 2007.
Corporate Items cost of revenues for the three months
ended March 31, 2008 and 2007 were similar at $0.1 million and $0.2
million, respectively.
We believe that our ability to manage operating costs
is important in our ability to remain price competitive. We continue to upgrade
the quality and efficiency of our waste treatment services through the
development of new technology and continued modifications and upgrades at our
facilities, and implementation of strategic sourcing initiatives. We plan to
continue to focus on achieving cost savings relating to purchased goods and
services through a strategic sourcing initiative. No assurance can be given
that our efforts to reduce future operating expenses will be successful.
Selling, General and Administrative
Expenses
Total selling, general and administrative expenses for
the three months ended March 31, 2008 increased $7.9 million to $39.2
million from $31.3 million for the comparable period in 2007.
Technical Services selling, general and administrative
expenses for the three months ended March 31, 2008 increased $2.7 million
to $17.3 million from $14.6 million for the comparable period in 2007 primarily
due to increased headcount and related labor costs required to support business
growth.
Site Services selling, general and administrative
expenses increased $2.1 million to $7.5 million for the three-month period
ended March 31, 2008 from $5.4 million for the corresponding period of the
preceding year. The increase was
primarily due to increased headcount and related labor costs required to
support business growth of $0.8 million, an increase in incentive compensation
of $0.5 million and a $0.5 million environmental change in estimate reduction
in 2007 that was not repeated in 2008.
Corporate Items selling, general and administrative
expenses for the three months ended March 31, 2008 increased $3.1 million
to $14.4 million from $11.3 million for the comparable period in 2007. $1.6 million of the increase resulted from
changes in environmental liability estimates which caused a benefit of $1.3
million in 2007 and a loss of $0.3 million in 2008. The remaining increase of $1.5 million arose
from an increase in incentive compensation of $2.8 million and health insurance
costs increasing by $0.8 million, mainly as a result of higher claims, and an
increase in salaries and stock-based compensation of $0.4 million, offset by
foreign exchange losses falling by $1.0, a decrease in severance costs of $0.9
million, a reduction of professional fees of $0.5 million, and other net
decreases of $0.1 million.
Adjusted EBITDA Contribution
The combined Adjusted EBITDA contribution by segment
for the three months ended March 31, 2008 increased $11.0
27
million
to $33.1 million from $22.1 million for the comparable period in 2007. The contribution of Technical Services
increased $14.8 million, Site Services contribution decreased $0.7 million and
Corporate Items costs increased $3.1 million.
The combined Adjusted EBITDA contribution was
comprised of revenues of $242.5 million and $205.0 million, net of cost of
revenues of $170.2 million and $151.6 million and selling, general and
administrative expenses of $39.2 million and $31.3 million for the three-month
periods ended March 31, 2008 and 2007, respectively.
Accretion of Environmental Liabilities
Accretion of environmental liabilities for the three
months ended March 31, 2008 increased $0.2 million to $2.7 million from
$2.5 million for the comparable period in 2007 primarily due to the annual
recalculation of the landfill accretion rate.
Depreciation and Amortization
Depreciation and amortization expense for the three
months ended March 31, 2008 increased $1.6 million to $10.5 million
from $8.9 million for the comparable period in 2007. The increase consisted
primarily of $0.7 million of depreciation of assets added to develop facilities
acquired as part of the Teris acquisition, $0.5 million of depreciation driven
by increased volumes at our landfill sites, $0.4 million of amortization of intangible
assets connected with the Romic acquisition, and a $0.3 million increase in
computer equipment and systems depreciation, offset by a $0.3 million reduction
in depreciation charged in 2007 in connection with the fire at our Thorold,
Ontario facility.
Interest Expense, Net
Interest expense, net of interest income for the three
months ended March 31, 2008 increased $0.2 million to $3.4 million from
$3.2 million for the comparable period in 2007 primarily due to a $0.4 million
decrease in the credit arising from the capitalization of interest expense
related to fixed assets, offset by a decrease of $0.2 million related to the
expiration of capital leases.
Income Taxes
Income tax expense for the three months ended March 31,
2008 increased $3.6 million to $7.6 million from $4.0 million for the
comparable period in 2007. Income tax expense for the first quarter of 2008
consisted of a current tax expense relating to the Canadian operations of $0.9
million, federal income tax of $3.6 million, a state income tax expense of $1.2
million, other foreign locations of $0.3 million and interest and penalties
related to tax contingencies of $1.6 million.
Income tax expense for the first quarter of 2007 consisted of a current
tax expense relating to the Canadian operations of $0.4 million, including
withholding taxes, federal income tax of $1.9 million, a state income tax expense
of $0.5 million relating to profitable operations in certain legal entities and
interest related to tax contingencies of $1.2 million.
SFAS
109, Accounting for Income Taxes, requires that a valuation allowance be
established when, based on an evaluation of available evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Accordingly, as of March 31, 2008 and December 31, 2007, we
had a remaining valuation allowance of approximately $10.0 million. The allowance consists of $8.6 million
of foreign tax credits and $1.4 million of federal and state net operating
loss carryforwards related to tax deductions for the exercise of non-qualified
stock options.
Management
has elected to continue its policy of recognizing interest and penalties
related to income tax matters as a component of income tax expense. The
liability for unrecognized tax benefits as of March 31, 2008 and December 31,
2007, included accrued interest and penalties of $19.6 million and
$17.8 million, respectively. Tax expense for the three months ended March 31,
2008 and 2007, included interest and penalties of $1.6 million and
$1.6 million respectively.
Net Income
Net income for the
three months ended March 31, 2008 was $8.9 million and included a
benefit of $0.1 million related to changes in our environmental
liabilities estimates. Net income for the three months ended March 31,
2007 was $3.5 and included a benefit of $1.9 million related to a change
in our estimated environmental liabilities.
28
Liquidity and Capital Resources
Cash and Cash Equivalents
Our primary
sources of liquidity are cash flows from operations, existing cash, marketable
securities, funds available to borrow under our revolving facility, and funds
raised in our April 2008 public offering of stock. As of March 31,
2008, cash and cash equivalents were $86.2 million, marketable securities
were $1.5 million, and funds available to borrow under the revolving
facility were $30.5 million.
We intend to use our existing cash and cash
equivalents, marketable securities and cash flow from operations to provide for
our working capital needs and to fund capital expenditures. We anticipate that
our cash flow provided by operating activities will provide the necessary funds
on a short- and long-term basis to meet operating cash requirements. We had
accrued environmental liabilities as of March 31, 2008 of approximately
$186.5 million, substantially all of which we assumed in connection with
our acquisition of the CSD assets in September 2002 and several subsequent
acquisitions. We anticipate such liabilities will be payable over many years
and that cash flow from operations will generally be sufficient to fund the
payment of such liabilities when required. However, events not anticipated
(such as future changes in environmental laws and regulations) could require
that such payments be made earlier or in greater amounts than currently
anticipated, which could adversely affect our results of operations, cash flow
and financial condition.
We assess our
liquidity in terms of our ability to generate cash to fund our operating,
investing, and financing activities. Our primary ongoing cash requirements will
be to fund operations, capital expenditures, and investments in line with our
business strategy. The first quarter of each fiscal year is typically a quarter
with heavier cash usage due to a semi-annual payment of interest on our
long-term debt and an annual payment associated with our incentive compensation
plan; however, we believe our future operating cash flows will be sufficient to
meet our future operating and investing cash needs. Furthermore, the funds
raised in our April 2008 public offering of stock and our ability to
obtain additional equity financing, as well as availability of borrowings under
our revolving credit facility, provide additional potential sources of
liquidity should they be required.
On April 29,
2008, we issued 2.875 million shares of common stock, including 375,000 shares
of common stock issued upon exercise of an underwriters option, at a public
offering price of $63.75 per share.
After deducting the underwriter discount, we received net proceeds,
before offering expenses, of $174.1 million from the issuance. We expect to use
the net proceeds for one or more of the following: potential future
acquisitions, repayment of debt and working capital.
Cash
Flows for the three months ended March 31, 2008
For the three months ended March 31, 2008, we had
a net increase of cash of $13.0 million from our operating activities. We
reported net income for the period of $8.9 million and non-cash expenses
of $14.3 million. These non-cash expenses consisted primarily of
$10.5 million for depreciation and amortization, $2.7 million for
accretion of environmental liabilities, $0.7 million for stock based
compensation and $0.6 million for amortization of deferred financing and debt.
Net uses of cash for working capital purposes totaled $10.3 million and
consisted primarily of a $2.6 million increase in prepaid expenses, $1.9
million of environmental expenditures, a $0.6 million increase in supplies
inventory, an increase of $0.3 million in other assets, a decrease of $7.4
million in accounts payable, a decrease of $5.6 million in other accrued
expenses, a $4.9 million decrease in accrued disposal costs, a decrease of $3.3
million in income taxes payable, offset by a decrease of $15.1 million in
accounts receivable and a reduction of $1.3 million in deferred costs.
For the three
months ended March 31, 2008, we used $47.2 million of net cash in our
investing activities. Uses of cash totaled $46.6 million and consisted
primarily of additions to property, plant, and equipment of $19.2 million,
acquisition costs of $27.4 million, and costs associated to obtain or
renew permits and intangibles of $1.4 million. Sources of cash totaled
$0.9 million from sales of marketable securities.
For the three months ended March 31, 2008, our
financing activities resulted in a net cash increase of $2.5 million and
consisted primarily of $1.6 million in excess tax benefit of stock-based
compensation, an increase of $1.4 million in uncashed checks, $0.7 million in
proceeds from the exercise of stock options and $0.4 million in proceeds from
the employee stock purchase plan, offset by $1.7 million payments on
capital leases.
Financing
Arrangements
At March 31,
2008, we had outstanding $91.5 million of eight-year senior secured notes due
2012 (the senior secured notes), a $70.0 million revolving credit facility
(the revolving facility), a $50.0 million synthetic letter of credit facility
(the synthetic LC Facility), and a $30.0 million term loan (the term loan). The financing arrangements and principal
29
terms of the each are
discussed further in our 2007 Annual Report on Form 10-K. There have not been any material changes in
such terms during the first three months of 2008.
The
indenture under which our senior secured notes are outstanding provides for
certain covenants, the most restrictive of which requires us, within 120 days
after the close of each twelve-month period ending on June 30 of each year
(beginning June 30, 2005 and ending on June 30, 2011) to apply an
amount equal to 50% of the periods Excess Cash Flow (as defined below) to
either prepay, repay, redeem or purchase our first-lien obligations under the
revolving facility and synthetic LC facility or to make offers (Excess Cash
Flow Offers) to repurchase all or part of the then outstanding senior secured
notes at an offering price equal to 104% of their principal amount plus accrued
interest. Excess Cash Flow is defined in the indenture as consolidated
earnings before interest, taxes, depreciation and amortization (EBITDA) less
interest expense, all taxes paid or accrued in the period, capital expenditures
made in cash during the period, and all cash spent on environmental monitoring,
remediation or relating to our environmental liabilities.
Excess
Cash Flow for the nine months ended March 31, 2008 was $28.1 million, and
we anticipate Excess Cash Flow will be generated from operations during the
three-month period ending June 30, 2008. Accordingly, we anticipate being
required, within 120 days following June 30, 2008, to offer to repurchase
the senior secured notes in the amount of 50% of the Excess Cash Flow generated
during the twelve-month period ending June 30, 2008. At March 31, 2008, the market price of
the senior secured notes was in excess of the amount at which we are required
to make Excess Cash Flow Offers for outstanding senior secured notes. Holders of senior secured notes may therefore
not accept an Excess Cash Flow Offer unless the trading price of the senior
secured notes declines prior to the time in 2008 at which we will be required
to make such an offer. To the extent the note holders do not accept an Excess
Cash Flow Offer based on the Excess Cash Flow earned through June 30,
2008, such Excess Cash Flow will not be included in the amount of Excess Cash
Flow earned in subsequent periods. However, the requirement to make Excess Cash
Flow Offers in respect of Excess Cash Flow earned in subsequent twelve-month
periods will remain in effect.
Liquidity
Impacts of Uncertain Tax Positions
As discussed in
Note 12, Income Taxes, to our financial statements included in
Item 8 of this report, we have significant liabilities associated with
potential tax liabilities and related interest and penalties aggregating $69.2
million. These liabilities are classified as other long-term liabilities in
our Consolidated Balance Sheet in accordance with the provision of FIN 48
adopted on January 1, 2007 because of the uncertainties involved. We are
not able to reasonably estimate when we would make any cash payments to settle
these liabilities, which related to unrecognized tax benefits for which the
statute of limitations might expire without examination by the respective
taxing authority. However, we do not
believe material cash payments will be required in the next 12 months.
Auction Rate Securities
As of March 31, 2008, our investments included
$1.5 million of auction rate securities classified on the our balance sheet as
marketable securities and $6.1 million as non-current, available for sale
securities. Auction rate securities are generally long-term debt instruments
that provide liquidity through a Dutch auction process that resets the
applicable interest rate at predetermined calendar intervals, generally every
28 days. This mechanism generally allows investors to rollover their
holdings and continue to own their respective securities (with new interest rates
set in the most recent auctions) or liquidate their holdings by selling their
securities at par value.
Prior to January 1, 2008, we generally invested
in auction rate securities for short periods of time as part of our cash
management program. Due
to recent events in credit markets, the
auction events for some of these instruments held by us failed during the first
quarter of 2008. Subsequent to March 31, 2008, we
accepted an offer to purchase a $1.5 million auction rate security at par to be
settled in the latter half of May 2008.
As a result, we classified that security as a short-term marketable
security as of March 31, 2008. We are
unable to determine when the market for student loan collateralized instruments
will recover. Except for the $1.5
million security for which we have accepted an offer to purchase, we have
therefore classified the remaining auction rate securities as non-current and
have included them in long-term investments on our unaudited consolidated
balance sheet at March 31, 2008.
30
As
of March 31, 2008, we held certain assets that are required to be measured
at fair value on a recurring basis. These included, but were limited to, our
auction rate securities
classified
as available for sale securities and reflected at fair value. The fair values of the securities are
estimated as of March 31, 2008 utilizing a discounted cash flow analysis
or significant other observable inputs. The discounted cash flow
analyses consider, among other items, the collateralization underlying the
security investments, the creditworthiness of the counterparty, the timing of
expected future cash flows, and the expectation of the next time the security
is expected to have a successful auction. These securities were also
compared, when possible, to other observable market data with similar
characteristics to the securities held by us. Prior to January 1,
2008, fair value was based on quoted market prices in the auction rate security
markets.
As of March 31, 2008, all of our auction rate
securities continue to have AAA underlying ratings. The underlying assets of our auction rate
securities are student loans, which are substantially insured by the Federal
Family Education Loan Program.
As a result of the temporary declines in fair
value for our auction rate securities, which we attribute to liquidity issues
rather than credit issues, we have recorded an unrealized pre-tax loss of $0.9
million. The unrealized loss resulted in
an after-tax reduction of $0.5 million to accumulated other comprehensive
income. We assessed this decline in value to be temporary due to the
relatively short period of time and the extent to which the fair value has been
less than par, the financial condition and near-term prospects of the
underlying issuers, and the anticipated recovery in the market value. As of March 31, 2008, we continued to
earn interest on virtually all of our auction rate security
instruments. Any future fluctuation in fair value related to these
instruments that we deem to be temporary, including any recoveries of previous
write-downs, would be recorded to accumulated other comprehensive
income. If we determine that any future fair value adjustment were other
than temporary, we would record a charge to earnings as appropriate.
Based on market conditions,
we changed our valuation methodology for auction rate securities to a
discounted cash flow analysis or significant other observable inputs, during
the first quarter of 2008. Accordingly, these securities changed
from Level 1 to either Level 2 or Level 3 within SFAS 157s hierarchy since our
initial adoption of SFAS 157 at January 1, 2008.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are subject to market risk on the interest that we
pay on our debt due to changes in the general level of interest rates. Our
philosophy in managing interest rate risk is to borrow at fixed rates for
longer time horizons to finance non-current assets and to borrow (to the
extent, if any, required) at variable rates for working capital and other
short-term needs. The following table provides information regarding our fixed
rate borrowings at March 31, 2008 (in thousands):
Scheduled Maturity Dates
|
|
Nine
Months
Remaining
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Total
|
|
Senior
secured notes
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
91,518
|
|
$
|
|
|
$
|
91,518
|
|
Capital
lease obligations
|
|
363
|
|
432
|
|
165
|
|
113
|
|
21
|
|
|
|
1,094
|
|
|
|
$
|
363
|
|
$
|
432
|
|
$
|
165
|
|
$
|
113
|
|
$
|
91,539
|
|
$
|
|
|
$
|
92,612
|
|
Weighted
average interest rate on fixed rate borrowings
|
|
11.5
|
%
|
11.5
|
%
|
11.5
|
%
|
11.5
|
%
|
11.5
|
%
|
11.5
|
%
|
|
|
In addition to the
fixed rate borrowings described in the above table, we had at March 31,
2008 (i) a revolving facility (the revolving facility) which allows us
to borrow or obtain letters of credit for up to $70.0 million, based upon
a formula of eligible accounts receivable, (ii) a $50.0 million
synthetic letter of credit facility (the synthetic LC facility) which allows
us to have issued up to $50.0 million of additional letters of credit, and
(iii) a $30.0 million term loan (the term loan). At March 31,
2008, we had: (i) no borrowings and $39.5 million of letters of
credit outstanding under the revolving facility and (ii) $48.0 million
of letters of credit outstanding under the synthetic LC facility. Borrowings
outstanding under the revolving facility bear interest at an annual rate of
either the U.S. or Canadian prime rate (depending on the currency of the
underlying loan), or the Eurodollar rate plus 1.50%, and we are required to pay
fees at an annual rate of 1.5% on the amount of letters of credit outstanding
under the revolving facility and an unused line fee of 0.125% per annum on the
unused portion of the revolving facility. As of March 31, 2008, we were
required to pay a quarterly participation fee at the annual rate of 2.85% on
the $50.0 million maximum amount of the synthetic LC facility and a
quarterly fronting fee at an annual rate of 0.30% of the average daily
aggregate amount of letters of credit outstanding under the synthetic LC
facility. The term loan bears interest, at our option, at the Eurodollar rate
plus 2.5% or the U.S. prime rate plus 1.5%. Had the interest rate on our
variable borrowings been 10% higher, we would have reported decreased net
income of $0.1 million for each of the three-month periods ended March 31,
2008 and 2007.
31
We are subject to market risks associated with our
investment in auction rate securities which aggregated $7.6 million as of March 31,
2008. Auction rate securities are generally long-term debt instruments that
provide liquidity through a Dutch auction process that resets the applicable
interest rate at predetermined calendar intervals, generally every 28 days.
This mechanism generally allows existing investors to rollover their holdings
and continue to own their respective securities or liquidate their holdings by
selling their securities at par value.
Prior to January 1, 2008, we generally invested in auction rate
securities for short periods of time as part of our cash management
program. Due
to recent events in credit markets, the
auction events for some of these instruments held by us failed during the first
quarter of 2008. Subsequent to March 31, 2008, we
accepted an offer to purchase a $1.5 million auction rate security at par to be
settled in the latter half of May 2008.
As a result, we classified that security as a short-term marketable
security as of March 31, 2008. We are
unable to determine when the market for student loan collateralized instruments
will recover. Except for the $1.5
million security for which we have accepted an offer to purchase, we have
therefore classified the remaining auction rate securities as non-current and
have included them in long-term investments on our unaudited consolidated
balance sheet at March 31, 2008.
Historically, we
have not entered into derivative or hedging transactions, nor have we entered
into transactions to finance off-balance sheet debt. We view our investment in
our Canadian and Mexican subsidiaries as long-term; thus, we have not entered
into any hedging transactions between the Canadian dollar and the U.S. dollar
or between the Mexican peso and the U.S. dollar. During the three-month periods
ended March 31, 2008 and 2007, total foreign currency gains were
$0.8 million and losses were $0.1 million, respectively, primarily
between U.S. and Canadian dollars. The Canadian subsidiaries transact
approximately 27.9% of their business in U.S. dollars and at any period end
have cash on deposit in U.S. dollars and outstanding U.S. dollar accounts
receivable related to these transactions. These cash and receivable accounts
are vulnerable to foreign currency translation gains or losses. During the
three-month periods ended March 31, 2008 and 2007, the U.S. dollar fell
0.2% and 0.6%, respectively against the
Canadian dollar, resulting in foreign currency exchange gains of
$0.9 million and exchange losses of $0.1 million, respectively.
Exchange rate movements also affect the translation of
Canadian generated profits and losses into U.S. dollars. The average exchange
rate for the three-month periods ended March 31, 2008 and 2007, was 1.00
and 1.17 Canadian dollars to the U.S. dollar, respectively. Had there been a
fluctuation in the Canadian exchange rate of 10%, we would have reported a
change in net income by approximately $1.7 million and $1.6 million
for the three-month periods ended March 31, 2008 and 2007, respectively.
We are subject to
minimal market risk arising from purchases of commodities since no significant
amount of commodities are used in the treatment of hazardous waste.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this Quarterly Report. As
described in more detail in our Annual Report on Form 10-K for the year
ended December 31, 2007, as filed on March 11, 2008, we identified a
material weakness in our internal control over financial reporting during work
performed related to Managements Annual Report on Internal Control over
Financial Reporting. Because the control
deficiencies leading to the material weakness were still present as of March 31,
2008, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and
15d-15(e), were not effective as of the end of the period covered by this
Quarterly Report.
A material
weakness is a deficiency, or combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the Companys annual or interim financial statements
will not be prevented or detected on a timely basis. Management determined the
Company did not maintain effective controls over financial reporting with
respect to income tax accounting. Specifically, errors were detected in the
annual tax accounting calculations resulting from: (i) historical tax
accounting analyses not being prepared in sufficient detail, (ii) current
period tax accounting calculations not being accurately prepared, and (iii) reviews
of tax accounting calculations not being performed
32
with sufficient precision.
Due to the number of errors identified resulting from these control
deficiencies and the absence of sufficient mitigating controls, management
concluded these errors, in the aggregate, constituted a material weakness in
internal control because there is a reasonable possibility that a material
misstatement of the Companys annual or interim financial statements will not
be prevented or detected on a timely basis.
Based on an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, there has been no significant change in our internal
control over financial reporting during the period covered by this Quarterly
Report, identified in connection with that evaluation, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
33
CLEAN
HARBORS, INC. AND SUBSIDIARIES
PART IIOTHER
INFORMATION
Item 1
Legal Proceedings
See Note 11, Commitments and Contingencies, to the
financial statements included in this report, which description is incorporated
herein by reference.
Item 1A
Risk Factors
During the three months ended
March 31, 2008, there were no material changes from the risk factors as
previously disclosed in Item 1A in the Companys Annual Report on Form 10-K
for the year ended December 31, 2007.
Item 2
Unregistered Sale of Equity Securities and Use of Proceeds
None.
Item 3
Defaults Upon Senior Debt
None.
Item 4
Submission of Matters to a Vote of Security Holders
None
Item 5
Other Information
None
Item 6
Exhibits
Item No.
|
|
Description
|
|
Location
|
4.28J
|
|
Joinder Agreement dated
as of March 21, 2008, made by Clean Harbors Recycling Services of
Ohio, LLC, Clean Harbors Recycling Services of Chicago, LLC and Clean
Harbors Development, LLC, in favor of (a) Credit Suisse, as
LC Facility Collateral Agent and LC Facility Administrative Agent,
and (b) Bank of America, N.A., as Administrative Agent for the
Revolving Facility
|
|
Filed herewith.
|
|
|
|
|
|
4.28K
|
|
Assumption Agreement
dated as of March 21, 2008, made by Clean Harbors Recycling Services of
Ohio, LLC, Clean Harbors Recycling Services of Chicago, LLC and Clean
Harbors Development, LLC, in favor of Credit Suisse, as Collateral Agent
and LC Facility Agent
|
|
Filed herewith.
|
|
|
|
|
|
4.32B
|
|
Supplemental Indenture
dated as of March 21, 2008, among Clean Harbors, Inc., Clean
Harbors Recycling Services of Chicago, LLC, Clean Harbors Recycling
Services of Ohio, LLC, Clean Harbors Development, LLC, and U.S. Bank
National Association, as Trustee
|
|
Filed herewith.
|
|
|
|
|
|
31
|
|
Rule 13a-14a/15d-14(a) Certifications
|
|
Filed herewith.
|
|
|
|
|
|
32
|
|
Section 1350
Certifications
|
|
Filed herewith.
|
34
CLEAN
HARBORS, INC. AND SUBSIDIARIES
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.
|
CLEAN HARBORS, INC.
|
|
Registrant
|
|
|
|
By:
|
/s/ ALAN
S. MCKIM
|
|
|
Alan S.
McKim
President and Chief Executive Officer
|
Date: May 12, 2008
|
By:
|
/s/
JAMES M. RUTLEDGE
|
|
|
James
M. Rutledge
Executive Vice President and
Chief Financial Officer
|
Date: May 12,
2008
35
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