Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURTIES EXCHANGE ACT OF 1934
|
|
|
|
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
2008
|
|
|
OR
|
|
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
FOR THE TRANSITION PERIOD
FROM
TO
|
Commission File Number 0-16379
CLEAN HARBORS, INC.
(Exact
name of registrant as specified in its charter)
Massachusetts
|
|
04-2997780
|
(State of
Incorporation)
|
|
(IRS Employer
Identification No.)
|
|
|
|
42
Longwater Drive, Norwell, MA
|
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02061-9149
|
(Address of
Principal Executive Offices)
|
|
(Zip Code)
|
(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
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
(Do not check if a smaller reporting company)
|
|
|
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
|
|
23,724,730
|
(Class)
|
|
(Outstanding at
November 5, 2008)
|
Table of Contents
CLEAN
HARBORS, INC.
QUARTERLY
REPORT ON FORM 10-Q
TABLE OF
CONTENTS
Table of Contents
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
ASSETS
(in thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
(unaudited)
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
252,959
|
|
$
|
119,538
|
|
Marketable securities
|
|
428
|
|
850
|
|
Accounts receivable, net of allowances
aggregating $6,778 and $6,105, respectively
|
|
186,249
|
|
193,126
|
|
Unbilled accounts receivable
|
|
10,469
|
|
14,703
|
|
Deferred costs
|
|
6,382
|
|
7,359
|
|
Prepaid expenses and other current assets
|
|
6,335
|
|
10,098
|
|
Supplies inventories
|
|
27,196
|
|
22,363
|
|
Deferred tax assets
|
|
11,497
|
|
11,491
|
|
Properties held for sale
|
|
|
|
910
|
|
Total current assets
|
|
501,515
|
|
380,438
|
|
Property, plant and equipment:
|
|
|
|
|
|
Land
|
|
26,570
|
|
22,273
|
|
Asset retirement costs (non-landfill)
|
|
1,780
|
|
1,438
|
|
Landfill assets
|
|
35,084
|
|
29,925
|
|
Buildings and improvements
|
|
127,103
|
|
112,469
|
|
Vehicles
|
|
31,571
|
|
22,854
|
|
Equipment
|
|
303,826
|
|
274,619
|
|
Furniture and fixtures
|
|
1,648
|
|
1,454
|
|
Construction in progress
|
|
14,741
|
|
18,702
|
|
|
|
542,323
|
|
483,734
|
|
Lessaccumulated depreciation and
amortization
|
|
247,925
|
|
221,133
|
|
Total property, plant and equipment, net
|
|
294,398
|
|
262,601
|
|
Other assets:
|
|
|
|
|
|
Long-term investments
|
|
6,625
|
|
8,500
|
|
Deferred financing costs
|
|
3,776
|
|
5,881
|
|
Goodwill
|
|
22,726
|
|
21,572
|
|
Permits and other intangibles, net of
accumulated amortization of $39,971 and $36,443, respectively
|
|
76,228
|
|
74,809
|
|
Deferred tax assets
|
|
11,480
|
|
12,176
|
|
Other
|
|
4,194
|
|
3,911
|
|
Total other assets
|
|
125,029
|
|
126,849
|
|
Total assets
|
|
$
|
920,942
|
|
$
|
769,888
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
1
Table of Contents
LIABILITIES
AND STOCKHOLDERS EQUITY
(in thousands except per share
amounts)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
(unaudited)
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Uncashed checks
|
|
$
|
6,966
|
|
$
|
5,489
|
|
Current portion of long-term debt
|
|
18,486
|
|
|
|
Current portion of capital lease
obligations
|
|
484
|
|
1,251
|
|
Accounts payable
|
|
73,294
|
|
81,309
|
|
Deferred revenue
|
|
25,784
|
|
29,730
|
|
Other accrued expenses
|
|
68,977
|
|
65,789
|
|
Current portion of closure, post-closure
and remedial liabilities
|
|
17,073
|
|
18,858
|
|
Income taxes payable
|
|
172
|
|
8,427
|
|
Total current liabilities
|
|
211,236
|
|
210,853
|
|
Other liabilities:
|
|
|
|
|
|
Closure and post-closure liabilities, less
current portion of $6,333 and $5,527, respectively
|
|
25,746
|
|
24,202
|
|
Remedial liabilities, less current portion
of $10,740 and $13,331, respectively
|
|
136,968
|
|
141,428
|
|
Long-term debt
|
|
52,722
|
|
120,712
|
|
Capital lease obligations, less current
portion
|
|
421
|
|
1,520
|
|
Unrecognized tax benefits and other
long-term liabilities
|
|
73,841
|
|
68,276
|
|
Total other liabilities
|
|
289,698
|
|
356,138
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Common stock, $.01 par value:
|
|
|
|
|
|
Authorized 40,000,000 shares; issued and
outstanding 23,505,582 and 20,327,533 shares, respectively
|
|
235
|
|
203
|
|
Treasury stock
|
|
(1,659
|
)
|
(1,170
|
)
|
Additional paid-in capital
|
|
350,573
|
|
166,653
|
|
Accumulated other comprehensive income
|
|
11,609
|
|
17,498
|
|
Retained earnings
|
|
59,250
|
|
19,713
|
|
Total stockholders equity
|
|
420,008
|
|
202,897
|
|
Total liabilities and stockholders equity
|
|
$
|
920,942
|
|
$
|
769,888
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
2
Table of Contents
CLEAN HARBORS, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share
amounts)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
273,157
|
|
|
245,507
|
|
$
|
780,925
|
|
$
|
689,239
|
|
Cost of revenues (exclusive of items shown
separately below)
|
|
187,063
|
|
169,007
|
|
535,641
|
|
485,893
|
|
Selling, general and administrative
expenses
|
|
40,738
|
|
38,092
|
|
123,404
|
|
107,643
|
|
Accretion of environmental liabilities
|
|
2,682
|
|
2,715
|
|
8,078
|
|
7,743
|
|
Depreciation and amortization
|
|
11,414
|
|
9,814
|
|
32,695
|
|
27,801
|
|
Income from operations
|
|
31,260
|
|
25,879
|
|
81,107
|
|
60,159
|
|
Other (expense) income
|
|
(104
|
)
|
61
|
|
(149
|
)
|
62
|
|
Loss on early extinguishment of debt
|
|
(4,251
|
)
|
|
|
(4,251
|
)
|
|
|
Interest (expense), net of interest income
of $1,458 and $3,952 for the quarter and year-to-date ending 2008 and $1,166
and $2,713 for the quarter and year-to-date ending 2007, respectively
|
|
(1,889
|
)
|
(3,022
|
)
|
(7,789
|
)
|
(9,901
|
)
|
Income before provision for income taxes
|
|
25,016
|
|
22,918
|
|
68,918
|
|
50,320
|
|
Provision for income taxes
|
|
10,388
|
|
9,978
|
|
29,381
|
|
22,691
|
|
Net income
|
|
14,628
|
|
12,940
|
|
39,537
|
|
27,629
|
|
Dividends on Series B preferred stock
|
|
|
|
69
|
|
|
|
206
|
|
Net income attributable to common
stockholders
|
|
$
|
14,628
|
|
12,871
|
|
$
|
39,537
|
|
$
|
27,423
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic income attributable to common
stockholders
|
|
$
|
0.62
|
|
0.65
|
|
$
|
1.79
|
|
$
|
1.39
|
|
Diluted income attributable to common
stockholders
|
|
$
|
0.61
|
|
0.63
|
|
$
|
1.75
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
23,423
|
|
19,840
|
|
22,052
|
|
19,788
|
|
Weighted average common shares outstanding
plus potentially dilutive common shares
|
|
23,822
|
|
20,686
|
|
22,530
|
|
20,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
3
Table of Contents
CLEAN
HARBORS, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
Nine Months
Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
39,537
|
|
$
|
27,629
|
|
Adjustments to reconcile net income to net
cash from operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
32,695
|
|
27,801
|
|
Loss on early extinguishment of debt
|
|
4,251
|
|
|
|
Allowance for doubtful accounts
|
|
67
|
|
212
|
|
Amortization of deferred financing costs
and debt discount
|
|
1,517
|
|
1,462
|
|
Accretion of environmental liabilities
|
|
8,078
|
|
7,743
|
|
Changes in environmental liability
estimates
|
|
(1,515
|
)
|
(2,289
|
)
|
Deferred income taxes
|
|
1,910
|
|
(5,055
|
)
|
Stock-based compensation
|
|
2,782
|
|
2,903
|
|
Excess tax benefit of stock-based compensation
|
|
(3,396
|
)
|
|
|
Income tax benefits related to stock option
exercises
|
|
3,425
|
|
|
|
Loss (gain) on sale of fixed assets and
assets held for sale
|
|
149
|
|
(62
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
8,490
|
|
(8,408
|
)
|
Other current assets
|
|
1,998
|
|
(10,526
|
)
|
Accounts payable
|
|
(8,761
|
)
|
193
|
|
Other current liabilities
|
|
(2,430
|
)
|
13,081
|
|
Environmental expenditures
|
|
(12,564
|
)
|
(4,901
|
)
|
Net cash from operating activities
|
|
76,233
|
|
49,783
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
(39,218
|
)
|
(23,814
|
)
|
Acquisitions, net of cash acquired
|
|
(27,582
|
)
|
(7,192
|
)
|
Costs to obtain or renew permits
|
|
(2,184
|
)
|
(986
|
)
|
Proceeds from sales of fixed assets and
assets held for sale
|
|
449
|
|
503
|
|
Sales of marketable securities
|
|
4,350
|
|
|
|
Purchase of available-for-sale securities
|
|
(2,553
|
)
|
(1,010
|
)
|
Net cash from investing activities
|
|
(66,738
|
)
|
(32,499
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Change in uncashed checks
|
|
1,535
|
|
(6,739
|
)
|
Proceeds from exercise of stock options
|
|
1,749
|
|
1,303
|
|
Proceeds from employee stock purchase plan
|
|
1,255
|
|
850
|
|
Proceeds from exercise of warrants
|
|
1,200
|
|
|
|
Remittance of shares
|
|
(489
|
)
|
|
|
Payments on capital leases
|
|
(1,848
|
)
|
(1,163
|
)
|
Proceeds from issuance of common stock, net
|
|
173,541
|
|
|
|
Principal payment on debt
|
|
(50,000
|
)
|
|
|
Prepayment penalty on early extinguishment
of debt
|
|
(2,813
|
)
|
|
|
Excess tax benefit of stock-based
compensation
|
|
3,396
|
|
1,536
|
|
Deferred financing costs paid
|
|
|
|
(32
|
)
|
Dividend payments on preferred stock
|
|
|
|
(206
|
)
|
Other
|
|
|
|
(69
|
)
|
Net cash from financing activities
|
|
127,526
|
|
(4,520
|
)
|
Effect of exchange rate changes on cash
|
|
(3,600
|
)
|
5,542
|
|
Increase in cash and cash equivalents
|
|
133,421
|
|
18,306
|
|
Cash and cash equivalents, beginning of
period
|
|
119,538
|
|
73,550
|
|
Cash and cash equivalents, end of period
|
|
$
|
252,959
|
|
$
|
91,856
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
Cash payments for interest and income
taxes:
|
|
|
|
|
|
Interest paid
|
|
$
|
12,879
|
|
$
|
11,156
|
|
Income taxes paid
|
|
30,539
|
|
9,868
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
Property, plant and equipment accrued
|
|
$
|
5,333
|
|
$
|
4,387
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
4
Table of Contents
CLEAN
HARBORS, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
|
|
Common Stock
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Number
|
|
$ 0.01
|
|
|
|
Additional
|
|
Other
|
|
Other
|
|
|
|
Total
|
|
|
|
of
|
|
Par
|
|
Treasury
|
|
Paid-in
|
|
Comprehensive
|
|
Comprehensive
|
|
Retained
|
|
Stockholders
|
|
|
|
Shares
|
|
Value
|
|
Stock
|
|
Capital
|
|
Income
|
|
Income
|
|
Earnings
|
|
Equity
|
|
Balance at January 1, 2008
|
|
|
20,328
|
|
$
|
203
|
|
$
|
(1,170
|
)
|
$
|
166,653
|
|
|
|
$
|
17,498
|
|
$
|
19,713
|
|
$
|
202,897
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
39,537
|
|
|
|
39,537
|
|
39,537
|
|
Unrealized loss on long-term investments,
net of taxes (see Note 2)
|
|
|
|
|
|
|
|
|
|
(232
|
)
|
(232
|
)
|
|
|
(232
|
)
|
Unrealized loss on securities, net of taxes
|
|
|
|
|
|
|
|
|
|
(64
|
)
|
(64
|
)
|
|
|
(64
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
(5,593
|
)
|
(5,593
|
)
|
|
|
(5,593
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
$
|
33,648
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
150
|
|
1
|
|
|
|
1,199
|
|
|
|
|
|
|
|
1,200
|
|
Stock-based compensation
|
|
(4
|
)
|
|
|
|
|
2,782
|
|
|
|
|
|
|
|
2,782
|
|
Remittance of shares
|
|
(31
|
)
|
|
|
(489
|
)
|
|
|
|
|
|
|
|
|
(489
|
)
|
Exercise of stock options
|
|
160
|
|
2
|
|
|
|
1,747
|
|
|
|
|
|
|
|
1,749
|
|
Issuance of common stock, net of issuance
costs of $576
|
|
2,875
|
|
29
|
|
|
|
173,512
|
|
|
|
|
|
|
|
173,541
|
|
Tax benefit on exercise of stock options
|
|
|
|
|
|
|
|
3,425
|
|
|
|
|
|
|
|
3,425
|
|
Employee stock purchase plan
|
|
28
|
|
|
|
|
|
1,255
|
|
|
|
|
|
|
|
1,255
|
|
Balance at September 30, 2008
|
|
23,506
|
|
$
|
235
|
|
$
|
(1,659
|
)
|
$
|
350,573
|
|
|
|
$
|
11,609
|
|
$
|
59,250
|
|
$
|
420,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
5
Table of Contents
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 17, Guarantor and Non-Guarantor Subsidiaries prior
year information to conform to the current year presentation.
(2) RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued Statement No. 157, Fair Value
Measurements
(SFAS No. 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 No. 157 as of January 1, 2008.
Although the adoption of SFAS No. 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
FASB Staff Position (FSP) No. 157-2 (FSP SFAS No. 157-2)
which delays the effective date of SFAS No. 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 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.
SFAS No. 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.
In October 2008, the FASB issued FASB Staff
Position No. FAS 157-3, Determining the Fair Value of a Financial Asset
in a Market That Is Not Active (FSP 157-3), which clarifies the application of
SFAS No. 157 when the market for a financial asset is inactive.
Specifically, FSP 157-3 clarifies how (1) managements internal
assumptions should be considered in measuring fair value when observable data
are not present, (2) observable market information from an inactive market
should be taken into account, and (3) the use of broker quotes or pricing
services should be considered in assessing the relevance of observable and
unobservable data to measure fair value. FSP 157-3 was effective upon issuance,
including prior periods for which financial statements had not been issued. The
implementation of this standard did not have a material impact on our
consolidated financial position and results of operations.
As of September 30, 2008, the Company held
certain assets that are required to be measured at fair value on a recurring
basis. These included, but were not limited to, the Companys auction rate
securities
classified
as
available for sale and reflected at fair value.
The fair values of these securities as of September 30, 2008 were
estimated utilizing a discounted cash flow analysis. 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 September 30, 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 external liquidity issues rather than credit issues, the Company has
recorded an unrealized pre-tax loss of $0.4 million during the nine-month
period ended September 30, 2008.
There was no adjustment during the
6
Table of Contents
three-month period ended September 30,
2008. The year-to-date unrealized loss
resulted in an after tax reduction for the nine-month period ended September 30,
2008 of $0.2 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 September 30, 2008, the Company
continued to earn interest on 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 comprehensive
income. If the Company determines that any future fair value adjustments
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 No. 157 at September 30,
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
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$
|
|
|
$
|
|
|
$
|
6,625
|
|
$
|
6,625
|
|
Marketable securities
|
|
$
|
428
|
|
$
|
|
|
$
|
|
|
$
|
428
|
|
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, the inputs used to value these securities changed
from Level 1 to either Level 2 or Level 3 within SFAS No. 157s hierarchy since
the Companys initial adoption of SFAS No. 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 No. 157 at September 30, 2008 (in thousands):
|
|
2008
|
|
Balance at January 1, 2008
|
|
$
|
|
|
Transfer to Level 3 from Level 1
|
|
7,000
|
|
Unrealized losses included in other
comprehensive income
|
|
(884
|
)
|
Balance at March 31, 2008
|
|
6,116
|
|
Unrealized gains included in other
comprehensive income
|
|
509
|
|
Balance at June 30, 2008
|
|
6,625
|
|
Unrealized losses included in other
comprehensive income
|
|
|
|
Balance at September 30, 2008
|
|
$
|
6,625
|
|
In April 2008, the FASB
issued FASB Staff Position SFAS No. 142-3,
Determination of the Useful Life of Intangible Assets
(FSP
SFAS No. 142-3). FSP SFAS No. 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
. The
intent of this FSP is to improve the consistency between the useful life of a
recognized intangible asset and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141 (revised
2007),
Business Combinations
, and
other US GAAP. FSP SFAS No. 142-3 is effective for the Company
on January 1, 2009. The Company is evaluating the impact of adopting FSP
SFAS No. 142-3 on the Companys financial position and results of
operations.
In May 2008, the FASB
issued SFAS No. 162,
The Hierarchy
of Generally Accepted Accounting Principles
, (SFAS No. 162),
which becomes effective 60 days following the SECs approval of the Public
Company Accounting Oversight Board (PCAOB) amendments to US Auditing
Standards (AU) Section 411,
The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles
. SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with US GAAP. This standard is not expected to have an
impact on the Companys financial position, results of operations or cash flow.
In
June 2008, the FASB Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue No. 08-3,
Accounting
by Lessees for Maintenance Deposits under Lease Agreements
(EITF No. 08-3).
EITF No. 08-3 provides that all nonrefundable maintenance deposits paid by
a lessee, under an arrangement accounted for as a lease, should be accounted
7
Table of Contents
for as a deposit. When the underlying
maintenance is performed, the deposit is expensed or capitalized in accordance
with the lessees maintenance accounting policy. Once it is determined that an
amount on deposit is not probable of being used to fund future maintenance
expense, it is recognized as additional rent expense at that time. EITF No. 08-3
is effective for the Company on January 1, 2009. The Company is evaluating
the impact of adopting EITF No. 08-3 on the Companys financial position,
results of operations and cash flows.
(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
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. under two separate purchase agreements. During the second quarter, the Company
determined that the purchase of these facilities should be treated as one unit
of accounting. Accordingly, the purchase
price, assets acquired and liabilities assumed have been combined as one
acquisition for accounting purposes. As
of September 30, 2008, the combined preliminary purchase price was $12.9
million for the Hebron and Chicago businesses.
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. In conjunction with
the acquisition of Hebron, the Company entered into a dry cleaning service
agreement with Safety-Kleen System, Inc. whereby the Company will handle
and dispose of dry cleaning solvents for a two year period. The Company will receive a minimum of $9.0
million in revenue over this period.
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)
|
|
Solvent
Recycling
Facilities (2)
|
|
Preliminary purchase price
|
|
|
|
|
|
Cash consideration
|
|
$
|
12,706
|
|
$
|
12,500
|
|
Acquisition costs
|
|
106
|
|
370
|
|
Estimated amount due to the seller for
working capital adjustments
|
|
1,835
|
|
|
|
Total estimated purchase price
|
|
$
|
14,647
|
|
$
|
12,870
|
|
Preliminary allocation of purchase price
|
|
|
|
|
|
Current assets
|
|
$
|
4,049
|
|
$
|
530
|
|
Property, plant and equipment
|
|
7,873
|
|
13,671
|
|
Goodwill
|
|
|
|
1,153
|
|
Customer lists and other intangibles
|
|
3,987
|
|
900
|
|
Total assets acquired
|
|
15,909
|
|
16,254
|
|
Liabilities assumed
|
|
(1,262
|
)
|
(3,384
|
)
|
Net assets acquired
|
|
$
|
14,647
|
|
$
|
12,870
|
|
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 $0.3 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 ($0.2 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 any remaining working capital
adjustments and additional information regarding tax assets, tax liabilities
and tax attributes.
8
Table of Contents
(2) The preliminary purchase price reflects
an excess of the purchase price over the fair value of the net assets acquired
of approximately $1.2 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 and additional
information regarding liabilities assumed.
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 first 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 (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
|
|
|
|
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
proportionally allocated to equipment ($0.6 million) and customer lists
and other intangibles ($6.7 million). The intangible assets are being
amortized over a weighted average useful life of 8 years.
(4) LANDFILL ASSETS
Changes to landfill assets for the nine-month
period ended September 30, 2008 were as follows (in thousands):
|
|
2008
|
|
Balance at January 1, 2008
|
|
$
|
29,925
|
|
Asset retirement costs
|
|
862
|
|
Capital additions
|
|
4,818
|
|
Changes in estimates of landfill closure
and post-closure liabilities
|
|
348
|
|
Currency translation
|
|
(869
|
)
|
Balance at September 30, 2008
|
|
$
|
35,084
|
|
(5) INVESTMENTS
As of September 30, 2008, the Companys
investments included $6.6 million of auction rate securities classified on the
Companys balance sheet as non-current, available for sale securities. 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 nine months of 2008. The Company is unable to determine when the
market for student loan collateralized instruments will recover and therefore
has classified the auction rate securities as non-current and has included them
in long-term investments on its unaudited consolidated balance sheet at September 30,
2008.
9
Table of Contents
(6) GOODWILL AND OTHER INTANGIBLE ASSETS
Below is a summary of amortizable intangible
assets (in thousands):
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Cost
|
|
Amortization
|
|
Net
|
|
Cost
|
|
Amortization
|
|
Net
|
|
Permits
|
|
$
|
98,477
|
|
$
|
33,423
|
|
$
|
65,054
|
|
$
|
98,391
|
|
$
|
30,902
|
|
$
|
67,489
|
|
Customer lists and other intangible assets
|
|
17,722
|
|
6,548
|
|
11,174
|
|
12,861
|
|
5,541
|
|
7,320
|
|
|
|
$
|
116,199
|
|
$
|
39,971
|
|
$
|
76,228
|
|
$
|
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 March 2008. The goodwill balance as of September 30,
2008 also increased $1.2 million from December 31, 2007 as a result of the
acquisition of the solvent recovery facilities.
The foregoing includes estimates that are subject to change based upon
final fair value determination.
(7) OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the
following (in thousands):
|
|
September 30,
2008
|
|
December 31,
2007
|
|
Insurance
|
|
$
|
15,477
|
|
$
|
12,984
|
|
Interest
|
|
1,663
|
|
5,367
|
|
Accrued disposal costs
|
|
2,471
|
|
2,998
|
|
Accrued compensation and benefits
|
|
22,476
|
|
19,938
|
|
Other items
|
|
26,890
|
|
24,502
|
|
|
|
$
|
68,977
|
|
$
|
65,789
|
|
(8) CLOSURE AND POST-CLOSURE LIABILITIES
The changes to closure and post-closure liabilities for the nine months
ended September 30, 2008 were as follows (in thousands):
|
|
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
|
|
862
|
|
|
|
862
|
|
Accretion
|
|
2,276
|
|
645
|
|
2,921
|
|
Changes in estimate recorded to statement
of operations
|
|
(527
|
)
|
529
|
|
2
|
|
Other changes in estimates recorded to
balance sheet
|
|
348
|
|
|
|
348
|
|
Settlement of obligations
|
|
(1,088
|
)
|
(951
|
)
|
(2,039
|
)
|
Currency translation and other
|
|
(138
|
)
|
(24
|
)
|
(162
|
)
|
Balance at September 30, 2008
|
|
$
|
24,629
|
|
$
|
7,450
|
|
$
|
32,079
|
|
All of the landfill facilities included above
were active as of September 30, 2008.
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%.
10
Table of Contents
(9) REMEDIAL LIABILITIES
The changes to remedial liabilities for the
nine months ended September 30, 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
|
|
198
|
|
3,112
|
|
1,847
|
|
5,157
|
|
Changes in estimate recorded to statement
of operations
|
|
(175
|
)
|
(38
|
)
|
(1,304
|
)
|
(1,517
|
)
|
Settlement of obligations
|
|
(74
|
)
|
(2,811
|
)
|
(7,640
|
)
|
(10,525
|
)
|
Currency translation and other
|
|
(190
|
)
|
714
|
|
(3,275
|
)
|
(2,751
|
)
|
Balance at September 30, 2008
|
|
$
|
5,441
|
|
$
|
89,596
|
|
$
|
52,671
|
|
$
|
147,708
|
|
The $2.6
million of liabilities assumed relates to remediation liabilities at one of the
Companys solvent recovery facilities acquired in March 2008. Such remedial liabilities have been
preliminarily determined and are subject to adjustment upon finalization of the
purchase price.
(10) FINANCING ARRANGEMENTS
The following
table is a summary of the Companys financing arrangements (in thousands):
|
|
September 30,
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)
|
|
$
|
41,518
|
|
$
|
91,518
|
|
Revolving facility
|
|
|
|
|
|
Term loan with a financial institution,
bearing interest at the U.S. prime rate (5.00% at September 30, 2008)
plus 1.5%, or the Eurodollar rate (2.47% at September 30, 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
|
|
(310
|
)
|
(806
|
)
|
Less debt classified as current
|
|
(18,486
|
)
|
|
|
Long-term debt
|
|
$
|
52,722
|
|
$
|
120,712
|
|
The fair value of the senior secured notes at September 30,
2008 and December 31, 2007 was $42.9 million and $93.8 million,
respectively, and calculated based on quoted prices for identical or similar
liabilities in markets that are not active (Level 2 inputs).
On July 28, 2008, pursuant to a redemption
notice delivered on June 25, 2008, the Company redeemed $50.0 million
principal amount of outstanding senior secured notes. The redemption resulted
in a $4.3 million loss on early extinguishment of debt, which included a
$2.8 million prepayment penalty and a write-off of unamortized financing
costs and unamortized discount, of $1.1 million and $0.4 million, respectively.
At September 30,
2008, the revolving facility had $30.3 million available to borrow, and $39.7
million of letters of credit outstanding. The synthetic line of credit facility
had $48.0 million of letters of credit outstanding.
The indenture under which the Companys senior
secured notes are outstanding provides for certain covenants, the most
restrictive of which requires the Company, 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 (the Excess Cash
Flow Amount) equal to 50% of the periods Excess Cash Flow (as defined below)
to either (i) prepay, repay, redeem or purchase the Companys first-lien
obligations under the revolving facility and synthetic letter of credit
facility or capitalized lease obligations or (ii) 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%
11
Table of Contents
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.
On October 8, 2008, the Company made an Excess Cash
Flow Offer in accordance with the terms described above based on the Companys
Excess Cash Flow Amount of $19.2 million for the twelve-month period ended June
30, 2008. In response to tenders received from note holders prior to the
expiration of the offer on November 7, 2008, the Company has agreed to purchase
on November 12, 2008 an aggregate of $18.5 million principal amount of
outstanding senior secured notes for a purchase price of $19.2 million and also
then pay approximately $0.7 million of accrued interest through the purchase
date on the purchased notes.
(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 September 30, 2008, the Company was involved in various proceedings
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.
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 September 30,
2008, the Company had reserves of $25.6 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 September 30, 2008, the reasonably
possible potential liability has been reduced to $3.1 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
12
Table of Contents
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 September 30,
2008 and December 31, 2007, the Company had accrued $12.1 million and
$13.1 million, respectively, for remedial liabilities 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
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. Negotiations with EPA and the COCs
generators are progressing. The Company
cannot presently estimate the Companys potential additional liability for
Devils Swamp associated with this investigation.
Marine Shale Processors.
A portion of the reserves which the Company
maintained as of September 30, 2008 for potential legal liabilities
associated with the CSD assets relates to Marine Shale Processors, Inc. (Marine
Shale) located in Amelia, Louisiana. Marine Shale operated a kiln which
incinerated waste producing a vitrified aggregate as a by-product. Marine Shale
contended that its operation recycled waste into a useful product,
i.e., vitrified aggregate, and therefore was exempt from regulation under
the Resource Conservation Recovery Act (RCRA) and permitting requirements as
a hazardous waste incinerator under applicable federal and state environmental
laws. The EPA contended that Marine Shale was a sham-recycler subject to the
regulation and permitting requirements as a hazardous waste incinerator under
RCRA, that its vitrified aggregate by-product was a hazardous waste, and that
Marine Shales continued operation without required permits was illegal.
Litigation between the EPA and Marine Shale began in 1990 and continued until July 1996
when the U.S. Fifth Circuit Court of Appeals ordered Marine Shale to shutdown
its operations. During the course of its operation, Marine Shale produced
thousands of tons of aggregate, some of which was sold as fill material at
various locations in the vicinity of Amelia, Louisiana, but most of which was
stockpiled on the premises of the Marine Shale facility. Almost all of this
aggregate has since been moved to a nearby site owned by an affiliate of Marine
Shale, known as Recycling Park, Inc. (RPI). In accordance with a court
order authorizing the movement of this material to this offsite location, all
of the materials located at the RPI site comply with the land disposal
restrictions of RCRA. Approximately 7,000 tons of aggregate remain on the
Marine Shale site. Moreover, as a result of past operations, soil and
groundwater contamination may exist on the Marine Shale facility and the RPI
site.
On May 11, 2007, the EPA and the LDEQ
issued a Special Notice to the Company, seeking a good faith offer to address
site remediation at the former Marine Shale facility. Other PRPs also received
Special Notices, and the other PRPs and the Company have formed a group (the Site
Group) and common counsel for the Site Group has been chosen. The Site Group
made a good faith settlement offer to the EPA on November 29, 2007.
Although the Company was never a customer of Marine Shale and does not believe
that it is liable for the Sellers liability as a customer at the Marine Shale
site, the Company has elected to join with the Site Group and participate in
further negotiations with the EPA and the LDEQ regarding a remedial
investigation feasibility study directed towards the eventual remediation of
the Marine Shale site. As of
13
Table of Contents
September 30,
2008 and December 31, 2007, the amount of the Companys remaining reserves
relating to the Marine Shale site was $3.7 million and $3.6 million, respectively.
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 $3.5 million
and $7.7 million at September 30, 2008 and December 31, 2007,
respectively. The decrease in 2008 was
primarily due to one specific site discussed below.
With respect
to one of the 35 Listed Third Party Sites (the Helen Kramer Landfill Site),
the Sellers had entered into settlement agreements with certain members of the
PRP group which agreed to perform the cleanup of that site in accordance with a
consent decree with governmental entities, in return for which the Sellers
received a conditional release from such governmental entities. Following the
Sellers commencement of their bankruptcy proceeding, the Sellers failed to
satisfy their payment obligations to those PRPs under those settlement
agreements.
In November 2003, certain of the PRPs
made a demand directly on the Company for the Sellers share of the cleanup
costs incurred by those PRPs with respect to the Helen Kramer Landfill Site. In
February 2005 the Company commenced litigation against those PRPs that
progressed through various courts for the past three years. In the fourth
quarter of 2007, the Company established $3.1 million of reserves for this
matter. In the third quarter of 2008,
the Company reached a settlement with the defendants which ended the litigation
in exchange for the Companys payment of $3.3 million.
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 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.
14
Table of Contents
Other Legal
Proceedings Related to CSD Assets
Plaquemine, Louisiana Facility.
In addition to the
legal proceedings related to the acquisition of the CSD assets described above,
subsequent to the acquisition in September 2002 various plaintiffs filed
five lawsuits based in part upon allegations relating to ownership and
operation of a deep injection well facility near Plaquemine, Louisiana which
Clean Harbors Plaquemine, LLC (CH Plaquemine), one of the Companys
subsidiaries, acquired as part of the CSD assets. On October 17, 2006, CH
Plaquemine (which operated at a loss during the past two years prior to that
date) ceased operations and filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code. The Company believes that the filing
of that Chapter 11 petition by CH Plaquemine has had no adverse effect on the
Companys other operations.
On September 13, 2007, the Bankruptcy
Court approved a global settlement of the five lawsuits described above and
another, non-material suit filed by one of the plaintiffs in such lawsuits,
pursuant to which CH Plaquemine has agreed to settle all of the pending
lawsuits, subject to certain contingencies and court proceedings which must
still take place before the settlement can be consummated. The Company had
recorded a reserve of $2.2 million as of December 31, 2007 pertaining to
this potential settlement. A plan of
reorganization and disclosure statement were filed in January 2008. In
August 2008, a settlement payment of $2.2 million was made to fund the
subsidiarys settlement of all of the pending lawsuits, effectively ending the
litigation. On September 30, 2008, the subsidiarys plan of reorganization
became effective, and the subsidiary has now emerged from bankruptcy
protection.
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.
As of both September 30, 2008 and December 31,
2007, the Company had reserves of $0.6 million 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 September 30, 2008 and December 31, 2007 was 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.
Along with numerous other PRPs at this site, the Company has signed a
Consent Order with the New York regulators committing to conduct further site
investigations.
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 rights
letters.
15
Table of Contents
In October, the Company
received notification that insurance coverage will be provided. The Company now believes that there will be
no material impact on its financial condition, results of operations or cash
flows resulting from this lawsuit.
State and Provincial 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 September 30, 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 facilitys 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.
London, Ontario Facility
. On or about July 7, 2008 the Company was
advised by the Crown that it intended to withdraw its appeal of the Ontario
Superior Courts October 23, 2007 ruling upholding a lower court ruling
quashing charges filed against a Company subsidiary. This action by the Crown will terminate these
proceedings without liability to the Company.
(12) INCOME TAXES
The income tax expense for the three- and nine-month
periods ended September 30, 2008 and 2007 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 the increase in
pre-tax book income while permanent items remained relatively constant.
As of September 30, 2008 the Companys
unrecognized tax benefits were $72.0 million which included $17.8 million of
interest and $4.9 million of penalties.
As
of December 31, 2007, the Companys unrecognized tax benefits were $67.8
million which included $13.8 million of interest and $4.0 million of penalties.
The increase in unrecognized tax benefits
relates entirely to accrued interest and penalties.
Due to expiring statues in Canada, 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 within the next twelve
months. The $2.1 million is related to
a business combination in Canada and as such will be recorded as a reduction of
intangible assets and will not impact the income tax provision.
(13) EARNINGS PER SHARE
The following is a
reconciliation of basic and diluted earnings per share computations (in
thousands except for per share amounts):
|
|
Three Months Ended September, 2008
|
|
Three Months Ended September, 2007
|
|
|
|
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Basic income attributable to common
stockholders before effect of dilutive securities
|
|
$
|
14,628
|
|
23,423
|
|
$
|
0.62
|
|
$
|
12,871
|
|
19,840
|
|
$
|
0.65
|
|
Dilutive effect of equity-based
compensation awards and warrants
|
|
|
|
399
|
|
(0.01
|
)
|
69
|
|
846
|
|
(0.02
|
)
|
Diluted income attributable to common
stockholders
|
|
$
|
14,628
|
|
23,822
|
|
$
|
0.61
|
|
$
|
12,940
|
|
20,686
|
|
$
|
0.63
|
|
|
|
Nine Months Ended September 30, 2008
|
|
Nine Months Ended September 30, 2007
|
|
|
|
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Basic income attributable to common
stockholders before effect of dilutive securities
|
|
$
|
39,537
|
|
22,052
|
|
$
|
1.79
|
|
$
|
27,423
|
|
19,788
|
|
$
|
1.39
|
|
Dilutive effect of equity-based
compensation awards and warrants
|
|
|
|
478
|
|
(0.04
|
)
|
206
|
|
927
|
|
(0.06
|
)
|
Diluted income attributable to common
stockholders
|
|
$
|
39,537
|
|
22,530
|
|
$
|
1.75
|
|
$
|
27,629
|
|
20,715
|
|
$
|
1.33
|
|
16
Table of Contents
(14)
STOCKHOLDERS EQUITY
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 and offering expenses, the
Company received net proceeds of $173.5 million from the issuance.
(15) STOCK-BASED COMPENSATION
The following table summarizes the total number and
type of awards granted during the three and nine-month periods ended September 30,
2008, as well as the related weighted-average grant-date fair values:
|
|
Three Months Ended
September 30, 2008
|
|
Nine Months Ended
September 30, 2008
|
|
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Stock options
|
|
|
|
$
|
|
|
18,000
|
|
$
|
33.33
|
|
Restricted stock awards
|
|
|
|
|
|
1,000
|
|
69.78
|
|
Performance stock awards
|
|
1,380
|
|
68.00
|
|
92,936
|
|
66.21
|
|
Common stock awards
|
|
|
|
$
|
|
|
2,700
|
|
$
|
66.18
|
|
Total awards
|
|
1,380
|
|
|
|
114,636
|
|
|
|
The performance stock
awards granted in 2008 are subject to achieving predetermined revenue and
EBITDA targets by December 31, 2009 and also include continued service
conditions. If the Company does not
achieve the performance goals by the end of 2009, the shares will be forfeited
in their entirety. For the three and
nine months ended September 30, 2008, management believed that it was probable
that the performance targets will be achieved.
(16) 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- and
nine-month periods ended September 30, 2008 and 2007 (in thousands). The
Company has modified the presentation to combine intersegment revenues and
expenses. The modification had no impact on the third party and direct revenue
amounts previously reported. 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 amounts have been reclassified to conform to
the current year presentation.
17
Table of Contents
|
|
For the Three Months Ended September 30, 2008
|
|
|
|
Technical
Services
|
|
Site
Services
|
|
Corporate
Items
|
|
Total
|
|
Third party revenues
|
|
$
|
169,767
|
|
$
|
103,383
|
|
$
|
7
|
|
$
|
273,157
|
|
Intersegment revenues, net
|
|
9,186
|
|
(8,685
|
)
|
(501
|
)
|
|
|
Direct revenues
|
|
$
|
178,953
|
|
$
|
94,698
|
|
$
|
(494
|
)
|
$
|
273,157
|
|
|
|
For the Three Months Ended September 30, 2007
|
|
|
|
Technical
Services
|
|
Site
Services
|
|
Corporate
Items
|
|
Total
|
|
Third party revenues
|
|
$
|
170,421
|
|
$
|
75,071
|
|
$
|
15
|
|
$
|
245,507
|
|
Intersegment revenues, net
|
|
4,254
|
|
(3,894
|
)
|
(360
|
)
|
|
|
Direct revenues
|
|
$
|
174,675
|
|
$
|
71,177
|
|
$
|
(345
|
)
|
$
|
245,507
|
|
|
|
For the Nine Months Ended September 30, 2008
|
|
|
|
Technical
Services
|
|
Site
Services
|
|
Corporate
Items
|
|
Total
|
|
Third party revenues
|
|
$
|
515,233
|
|
$
|
265,672
|
|
$
|
20
|
|
$
|
780,925
|
|
Intersegment revenues, net
|
|
22,191
|
|
(20,477
|
)
|
(1,714
|
)
|
|
|
Direct revenues
|
|
$
|
537,424
|
|
$
|
245,195
|
|
$
|
(1,694
|
)
|
$
|
780,925
|
|
|
|
For the Nine Months Ended September 30, 2007
|
|
|
|
Technical
Services
|
|
Site
Services
|
|
Corporate
Items
|
|
Total
|
|
Third party revenues
|
|
$
|
475,297
|
|
$
|
213,914
|
|
$
|
28
|
|
$
|
689,239
|
|
Intersegment revenues, net
|
|
11,889
|
|
(10,996
|
)
|
(893
|
)
|
|
|
Direct revenues
|
|
$
|
487,186
|
|
$
|
202,918
|
|
$
|
(865
|
)
|
$
|
689,239
|
|
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, gain or loss on disposal
of assets held for sale, other income or expense, or losses on refinancing to its
reported segments.
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
Technical Services
|
|
45,443
|
|
43,482
|
|
133,231
|
|
110,180
|
|
Site Services
|
|
19,266
|
|
13,227
|
|
42,435
|
|
34,014
|
|
Corporate Items
|
|
(19,353
|
)
|
(18,301
|
)
|
(53,786
|
)
|
(48,491
|
)
|
Total
|
|
45,356
|
|
38,408
|
|
121,880
|
|
95,703
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Consolidated Statements
of Operations:
|
|
|
|
|
|
|
|
|
|
Accretion of environmental liabilities
|
|
2,682
|
|
2,715
|
|
8,078
|
|
7,743
|
|
Depreciation and amortization
|
|
11,414
|
|
9,814
|
|
32,695
|
|
27,801
|
|
Income from operations
|
|
31,260
|
|
25,879
|
|
81,107
|
|
60,159
|
|
Other expense (income)
|
|
104
|
|
(61
|
)
|
149
|
|
(62
|
)
|
Loss on early extinguishment of debt
|
|
4,251
|
|
|
|
4,251
|
|
|
|
Interest expense, net of interest income
|
|
1,889
|
|
3,022
|
|
7,789
|
|
9,901
|
|
Income before provision for income taxes
|
|
$
|
25,016
|
|
$
|
22,918
|
|
$
|
68,918
|
|
|
50,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Table of Contents
The following table presents property, plant and equipment by reported
segment and in the aggregate (in thousands):
|
|
September 30,
2008
|
|
December 31,
2007
|
|
Property, plant and equipment, net
|
|
|
|
|
|
Technical Services
|
|
$
|
233,133
|
|
$
|
216,796
|
|
Site Services
|
|
30,880
|
|
20,105
|
|
Corporate or other assets
|
|
30,385
|
|
25,700
|
|
|
|
$
|
294,398
|
|
$
|
262,601
|
|
The following table
presents intangible assets by reported segment (in thousands):
|
|
September 30,
2008
|
|
December 31,
2007
|
|
Intangible assets:
|
|
|
|
|
|
Technical Services
|
|
|
|
|
|
Goodwill
|
|
$
|
22,578
|
|
$
|
21,424
|
|
Permits and other intangibles, net
|
|
67,033
|
|
69,995
|
|
Total Technical Services
|
|
89,611
|
|
91,419
|
|
Site Services
|
|
|
|
|
|
Goodwill
|
|
148
|
|
148
|
|
Permits and other intangibles, net
|
|
9,195
|
|
4,814
|
|
Total Site Services
|
|
9,343
|
|
4,962
|
|
Total
|
|
$
|
98,954
|
|
$
|
96,381
|
|
The following table
presents the total assets by reported segment (in thousands):
|
|
September 30,
2008
|
|
December 31,
2007
|
|
Technical Services
|
|
$
|
453,399
|
|
$
|
369,053
|
|
Site Services
|
|
56,195
|
|
37,710
|
|
Corporate Items
|
|
411,348
|
|
363,125
|
|
Total
|
|
$
|
920,942
|
|
$
|
769,888
|
|
The following table
presents the total assets by geographical area (in thousands):
|
|
September 30,
2008
|
|
December 31,
2007
|
|
United States
|
|
$
|
776,941
|
|
$
|
631,630
|
|
Canada
|
|
144,001
|
|
138,258
|
|
Total
|
|
$
|
920,942
|
|
$
|
769,888
|
|
(17) 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.
As of September 30, 2008, the principal balance of the outstanding
senior secured notes was $41.5 million.
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.
19
Table of Contents
Following
is the condensed consolidating balance sheet at September 30, 2008 (in
thousands):
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
137,005
|
|
$
|
59,222
|
|
$
|
56,732
|
|
$
|
|
|
$
|
252,959
|
|
Intercompany receivables
|
|
|
|
|
|
82,030
|
|
(82,030
|
)
|
|
|
Other current assets
|
|
11,423
|
|
206,752
|
|
30,381
|
|
|
|
248,556
|
|
Property, plant and equipment, net
|
|
|
|
258,169
|
|
36,229
|
|
|
|
294,398
|
|
Investments in subsidiaries
|
|
414,133
|
|
157,881
|
|
91,654
|
|
(663,668
|
)
|
|
|
Intercompany note receivable
|
|
|
|
113,240
|
|
3,701
|
|
(116,941
|
)
|
|
|
Other long-term assets
|
|
20,098
|
|
73,843
|
|
31,088
|
|
|
|
125,029
|
|
Total assets
|
|
$
|
582,659
|
|
$
|
869,107
|
|
$
|
331,815
|
|
$
|
(862,639
|
)
|
$
|
920,942
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
21,795
|
|
$
|
167,064
|
|
$
|
22,377
|
|
$
|
|
|
$
|
211,236
|
|
Intercompany payables
|
|
32,640
|
|
49,390
|
|
|
|
(82,030
|
)
|
|
|
Closure, post-closure and remedial
liabilities, net
|
|
|
|
144,564
|
|
18,150
|
|
|
|
162,714
|
|
Long-term debt
|
|
52,722
|
|
|
|
|
|
|
|
52,722
|
|
Capital lease obligations, net
|
|
|
|
306
|
|
115
|
|
|
|
421
|
|
Intercompany note payable
|
|
3,701
|
|
|
|
113,240
|
|
(116,941
|
)
|
|
|
Other long-term liabilities
|
|
51,793
|
|
1,650
|
|
20,398
|
|
|
|
73,841
|
|
Total liabilities
|
|
162,651
|
|
362,974
|
|
174,280
|
|
(198,971
|
)
|
500,934
|
|
Stockholders equity
|
|
420,008
|
|
506,133
|
|
157,535
|
|
(663,668
|
)
|
420,008
|
|
Total liabilities and stockholders equity
|
|
$
|
582,659
|
|
$
|
869,107
|
|
$
|
331,815
|
|
$
|
(862,639
|
)
|
$
|
920,942
|
|
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 debt
|
|
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
|
|
20
Table of Contents
Following is the
consolidating statement of operations for the three months ended September 30,
2008 (in thousands):
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
$
|
234,006
|
|
$
|
38,693
|
|
$
|
458
|
|
$
|
273,157
|
|
Cost of revenues
|
|
|
|
164,607
|
|
21,998
|
|
458
|
|
187,063
|
|
Selling, general and administrative
expenses
|
|
22
|
|
35,226
|
|
5,490
|
|
|
|
40,738
|
|
Accretion of environmental liabilities
|
|
|
|
2,410
|
|
272
|
|
|
|
2,682
|
|
Depreciation and amortization
|
|
|
|
10,091
|
|
1,323
|
|
|
|
11,414
|
|
Income from operations
|
|
(22
|
)
|
21,672
|
|
9,610
|
|
|
|
31,260
|
|
Other expense
|
|
|
|
(92
|
)
|
(12
|
)
|
|
|
(104
|
)
|
Loss on early extinguishment of debt
|
|
(4,251
|
)
|
|
|
|
|
|
|
(4,251
|
)
|
Interest (expense) income
|
|
(1,894
|
)
|
(230
|
)
|
235
|
|
|
|
(1,889
|
)
|
Equity in earnings of subsidiaries
|
|
28,508
|
|
6,509
|
|
|
|
(35,017
|
)
|
|
|
Intercompany dividend income
|
|
|
|
|
|
3,286
|
|
(3,286
|
)
|
|
|
Intercompany interest income (expense)
|
|
|
|
3,170
|
|
(3,170
|
)
|
|
|
|
|
Income before provision for income taxes
|
|
22,341
|
|
31,029
|
|
9,949
|
|
(38,303
|
)
|
25,016
|
|
Provision for income taxes
|
|
7,713
|
|
317
|
|
2,358
|
|
|
|
10,388
|
|
Net income
|
|
$
|
14,628
|
|
$
|
30,712
|
|
$
|
7,591
|
|
$
|
(38,303
|
)
|
$
|
14,628
|
|
Following is the
consolidating statement of operations for the three months ended September 30,
2007 (in thousands):
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
$
|
210,638
|
|
$
|
34,769
|
|
$
|
100
|
|
$
|
245,507
|
|
Cost of revenues
|
|
|
|
147,526
|
|
21,381
|
|
100
|
|
169,007
|
|
Selling, general and administrative
expenses
|
|
|
|
31,164
|
|
6,928
|
|
|
|
38,092
|
|
Accretion of environmental liabilities
|
|
|
|
2,453
|
|
262
|
|
|
|
2,715
|
|
Depreciation and amortization
|
|
|
|
8,425
|
|
1,389
|
|
|
|
9,814
|
|
Income from operations
|
|
|
|
21,070
|
|
4,809
|
|
|
|
25,879
|
|
Other income
|
|
|
|
56
|
|
5
|
|
|
|
61
|
|
Interest (expense) income
|
|
(3,478
|
)
|
52
|
|
404
|
|
|
|
(3,022
|
)
|
Equity in earnings of subsidiaries
|
|
27,114
|
|
5,738
|
|
|
|
(32,852
|
)
|
|
|
Intercompany dividend income
|
|
|
|
|
|
3,275
|
|
(3,275
|
)
|
|
|
Intercompany interest income (expense)
|
|
|
|
3,183
|
|
(3,183
|
)
|
|
|
|
|
Income before provision for income taxes
|
|
23,636
|
|
30,099
|
|
5,310
|
|
(36,127
|
)
|
22,918
|
|
Provision for income taxes
|
|
10,696
|
|
316
|
|
(1,034
|
)
|
|
|
9,978
|
|
Net income
|
|
$
|
12,940
|
|
$
|
29,783
|
|
$
|
6,344
|
|
$
|
(36,127
|
)
|
$
|
12,940
|
|
Following is the
consolidating statement of operations for the nine months ended September 30,
2008 (in thousands):
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
$
|
671,349
|
|
$
|
114,747
|
|
$
|
(5,171
|
)
|
$
|
780,925
|
|
Cost of revenues
|
|
|
|
469,907
|
|
70,905
|
|
(5,171
|
)
|
535,641
|
|
Selling, general and administrative
expenses
|
|
22
|
|
105,760
|
|
17,622
|
|
|
|
123,404
|
|
Accretion of environmental liabilities
|
|
|
|
7,252
|
|
826
|
|
|
|
8,078
|
|
Depreciation and amortization
|
|
|
|
28,904
|
|
3,791
|
|
|
|
32,695
|
|
Income from operations
|
|
(22
|
)
|
59,526
|
|
21,603
|
|
|
|
81,107
|
|
Other expense
|
|
|
|
(142
|
)
|
(7
|
)
|
|
|
(149
|
)
|
Loss on early extinguishment of debt
|
|
(4,251
|
)
|
|
|
|
|
|
|
(4,251
|
)
|
Interest (expense) income
|
|
(8,511
|
)
|
(378
|
)
|
1,100
|
|
|
|
(7,789
|
)
|
Equity in earnings of subsidiaries
|
|
75,068
|
|
15,033
|
|
|
|
(90,101
|
)
|
|
|
Intercompany dividend income
|
|
|
|
|
|
10,083
|
|
(10,083
|
)
|
|
|
Intercompany interest income (expense)
|
|
|
|
9,727
|
|
(9,727
|
)
|
|
|
|
|
Income before provision for income taxes
|
|
62,284
|
|
83,766
|
|
23,052
|
|
(100,184
|
)
|
68,918
|
|
Provision for income taxes
|
|
22,747
|
|
973
|
|
5,661
|
|
|
|
29,381
|
|
Net income
|
|
$
|
39,537
|
|
$
|
82,793
|
|
$
|
17,391
|
|
$
|
(100,184
|
)
|
$
|
39,537
|
|
21
Table of Contents
Following is the
consolidating statement of operations for the nine months ended September 30,
2007 (in thousands):
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
$
|
594,864
|
|
$
|
98,450
|
|
$
|
(4,075
|
)
|
$
|
689,239
|
|
Cost of revenues
|
|
|
|
426,097
|
|
63,871
|
|
(4,075
|
)
|
485,893
|
|
Selling, general and administrative
expenses
|
|
|
|
85,740
|
|
21,903
|
|
|
|
107,643
|
|
Accretion of environmental liabilities
|
|
|
|
7,021
|
|
722
|
|
|
|
7,743
|
|
Depreciation and amortization
|
|
|
|
23,152
|
|
4,649
|
|
|
|
27,801
|
|
Income from operations
|
|
|
|
52,854
|
|
7,305
|
|
|
|
60,159
|
|
Other income (expense)
|
|
|
|
69
|
|
(7
|
)
|
|
|
62
|
|
Interest (expense) income
|
|
(10,334
|
)
|
(517
|
)
|
950
|
|
|
|
(9,901
|
)
|
Equity in earnings of subsidiaries
|
|
59,184
|
|
6,373
|
|
|
|
(65,557
|
)
|
|
|
Intercompany dividend income
|
|
|
|
|
|
9,313
|
|
(9,313
|
)
|
|
|
Intercompany interest income (expense)
|
|
|
|
9,009
|
|
(9,009
|
)
|
|
|
|
|
Income before provision for income taxes
|
|
48,850
|
|
67,788
|
|
8,552
|
|
(74,870
|
)
|
50,320
|
|
Provision for income taxes
|
|
21,221
|
|
617
|
|
853
|
|
|
|
22,691
|
|
Net income
|
|
$
|
27,629
|
|
$
|
67,171
|
|
$
|
7,699
|
|
$
|
(74,870
|
)
|
$
|
27,629
|
|
Following is the condensed consolidating statement of cash flows for
the nine months ended September 30, 2008 (in thousands):
|
|
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-
Guarantor
Subsidiaries
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
|
$
|
(29,109
|
)
|
$
|
87,004
|
|
$
|
18,338
|
|
$
|
76,233
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
|
|
|
(30,783
|
)
|
(8,435
|
)
|
(39,218
|
)
|
Costs to obtain or renew permits
|
|
|
|
|
|
(2,310
|
)
|
126
|
|
(2,184
|
)
|
Proceeds from sales of fixed assets
|
|
|
|
|
|
442
|
|
7
|
|
449
|
|
Purchase of available-for-sale securities
|
|
|
|
(2,000
|
)
|
|
|
(553
|
)
|
(2,553
|
)
|
Sale of marketable securities
|
|
|
|
4,350
|
|
|
|
|
|
4,350
|
|
Acquisitions, net of cash acquired
|
|
|
|
(27,582
|
)
|
|
|
|
|
(27,582
|
)
|
Net cash from investing activities
|
|
|
|
(25,232
|
)
|
(32,651
|
)
|
(8,855
|
)
|
(66,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Change in uncashed checks
|
|
|
|
|
|
1,766
|
|
(231
|
)
|
1,535
|
|
Proceeds from exercise of stock options
|
|
|
|
1,749
|
|
|
|
|
|
1,749
|
|
Proceeds from employee stock purchase plan
|
|
|
|
1,255
|
|
|
|
|
|
1,255
|
|
Proceeds from exercise of warrants
|
|
|
|
1,200
|
|
|
|
|
|
1,200
|
|
Remittance of shares
|
|
|
|
(489
|
)
|
|
|
|
|
(489
|
)
|
Payments of capital leases
|
|
|
|
|
|
(1,616
|
)
|
(232
|
)
|
(1,848
|
)
|
Proceeds from issuance of common stock, net
|
|
|
|
173,541
|
|
|
|
|
|
173,541
|
|
Principal payment on debt
|
|
|
|
(50,000
|
)
|
|
|
|
|
(50,000
|
)
|
Prepayment penalty on early extinguishment
of debt
|
|
|
|
(2,813
|
)
|
|
|
|
|
(2,813
|
)
|
Excess tax benefit of stock-based
compensation
|
|
|
|
3,396
|
|
|
|
|
|
3,396
|
|
Intercompany financing
|
|
|
|
27,582
|
|
(27,582
|
)
|
|
|
|
|
Net cash from financing activities
|
|
|
|
155,421
|
|
(27,432
|
)
|
(463
|
)
|
127,526
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
(3,600
|
)
|
(3,600
|
)
|
Increase in cash and cash equivalents
|
|
|
|
101,080
|
|
26,921
|
|
5,420
|
|
133,421
|
|
Cash and cash equivalents, beginning of
period
|
|
|
|
35,925
|
|
32,301
|
|
51,312
|
|
119,538
|
|
Cash and cash equivalents, end of period
|
|
|
|
$
|
137,005
|
|
$
|
59,222
|
|
$
|
56,732
|
|
$
|
252,959
|
|
22
Table of Contents
Following is the condensed consolidating statement of cash flows for
the nine months ended September 30, 2007 (in thousands):
|
|
Clean
Harbors, Inc.
|
|
U.S. Guarantor
Subsidiaries
|
|
Foreign
Non-
Guarantor
Subsidiaries
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities (1)
|
|
$
|
4,285
|
|
$
|
35,561
|
|
$
|
9,937
|
|
$
|
49,783
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
|
(20,819
|
)
|
(2,995
|
)
|
(23,814
|
)
|
Costs to obtain or renew permits
|
|
|
|
(984
|
)
|
(2
|
)
|
(986
|
)
|
Proceeds from sales of fixed assets
|
|
|
|
208
|
|
295
|
|
503
|
|
Cost of available-for-sale securities
|
|
(1,010
|
)
|
|
|
|
|
(1,010
|
)
|
Acquisition costs
|
|
(7,192
|
)
|
|
|
|
|
(7,192
|
)
|
Net cash from investing activities
|
|
(8,202
|
)
|
(21,595
|
)
|
(2,702
|
)
|
(32,499
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Change in uncashed checks
|
|
|
|
(5,910
|
)
|
(829
|
)
|
(6,739
|
|
Proceeds from exercise of stock options
|
|
1,303
|
|
|
|
|
|
1,303
|
|
Deferred financing costs incurred
|
|
(32
|
)
|
|
|
|
|
(32
|
)
|
Proceeds from employee stock purchase plan
|
|
850
|
|
|
|
|
|
850
|
|
Dividend payments on preferred stock
|
|
(206
|
)
|
|
|
|
|
(206
|
)
|
Payments of capital leases
|
|
|
|
(1,007
|
)
|
(156
|
)
|
(1,163
|
)
|
Other
|
|
(69
|
)
|
|
|
|
|
(69
|
)
|
Excess tax benefit of stock-based
compensation
|
|
1,536
|
|
|
|
|
|
1,536
|
|
Interest (payments) / received
|
|
|
|
10,223
|
|
(10,223
|
)
|
|
|
Dividends (paid) received
|
|
|
|
(11,777
|
)
|
11,777
|
|
|
|
Net cash from financing activities
|
|
3,382
|
|
(8,471
|
)
|
569
|
|
(4,520
|
)
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
5,542
|
|
5,542
|
|
(Decrease) increase in cash and cash
equivalents
|
|
(535
|
)
|
5,495
|
|
13,346
|
|
18,306
|
|
Cash and cash equivalents, beginning of
period
|
|
822
|
|
44,854
|
|
27,874
|
|
73,550
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
287
|
|
$
|
50,349
|
|
$
|
41,220
|
|
$
|
91,856
|
|
(1)
|
Adjustments of ($59,184) and ($6,373) for Clean
Harbors, Inc. and U.S. 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.
|
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.
23
Table of Contents
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 our 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 September 30,
2008, of approximately $179.8 million, substantially all of which we
assumed as part of our acquisition of substantially all of the assets of the
Chemical 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.
The Company realized a net benefit in the
nine months ended September 30, 2008, of $1.5 million related to changes
in our environmental liability estimates. Changes in environmental liability
estimates include changes in landfill retirement liability estimates, which are
recorded as cost of revenues, and changes in non-landfill retirement and
remedial liability estimates, which are recorded as selling, general, and
administrative costs. During the nine
months ended September 30, 2008, the net $1.5 million benefit included a
$0.5 million benefit recorded as cost of revenues and a $1.0 million benefit
recorded as selling, general, and administrative costs.
Closure and
Post-closure Liabilities
The changes to
closure and post-closure liabilities for the nine months ended September 30,
2008 were as follows (in thousands):
|
|
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
|
|
862
|
|
|
|
862
|
|
Accretion
|
|
2,276
|
|
645
|
|
2,921
|
|
Changes in estimate recorded to statement
of operations
|
|
(527
|
)
|
529
|
|
2
|
|
Other changes in estimates recorded to
balance sheet
|
|
348
|
|
|
|
348
|
|
Settlement of obligations
|
|
(1,088
|
)
|
(951
|
)
|
(2,039
|
)
|
Currency translation and other
|
|
(138
|
)
|
(24
|
)
|
(162
|
)
|
Balance at September 30, 2008
|
|
$
|
24,629
|
|
$
|
7,450
|
|
$
|
32,079
|
|
24
Table of Contents
Remedial Liabilities
The changes to
remedial liabilities for the nine months ended September 30, 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
|
|
198
|
|
3,112
|
|
1,847
|
|
5,157
|
|
Changes in estimate recorded to statement
of operations
|
|
(175
|
)
|
(38
|
)
|
(1,304
|
)
|
(1,517
|
)
|
Settlement of obligations
|
|
(74
|
)
|
(2,811
|
)
|
(7,640
|
)
|
(10,525
|
)
|
Currency translation and other
|
|
(190
|
)
|
714
|
|
(3,275
|
)
|
(2,751
|
)
|
Balance at September 30, 2008
|
|
$
|
5,441
|
|
$
|
89,596
|
|
$
|
52,671
|
|
$
|
147,708
|
|
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 upon finalization of the purchase price.
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 Total Revenues
|
|
|
|
For the Three Months
Ended
September 30,
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of revenues (exclusive of items shown
separately below)
|
|
68.5
|
|
68.8
|
|
68.6
|
|
70.5
|
|
Selling, general and administrative
expenses
|
|
14.9
|
|
15.5
|
|
15.8
|
|
15.6
|
|
Accretion of environmental liabilities
|
|
1.0
|
|
1.2
|
|
1.0
|
|
1.2
|
|
Depreciation and amortization
|
|
4.2
|
|
4.0
|
|
4.2
|
|
4.0
|
|
Income from operations
|
|
11.4
|
|
10.5
|
|
10.4
|
|
8.7
|
|
Loss on early extinguishment of debt
|
|
(1.6
|
)
|
|
|
(0.5
|
)
|
|
|
Interest (expense), net of interest income
|
|
(0.7
|
)
|
(1.2
|
)
|
(1.0
|
)
|
(1.4
|
)
|
Income before provision for income taxes
|
|
9.1
|
|
9.3
|
|
8.9
|
|
7.3
|
|
Provision for income taxes
|
|
3.8
|
|
4.0
|
|
3.8
|
|
3.3
|
|
Net income
|
|
5.3
|
%
|
5.3
|
%
|
5.1
|
%
|
4.0
|
%
|
Earnings before Interest, Taxes,
Depreciation and Amortization (Adjusted EBITDA)
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.
25
Table of Contents
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. Adjusted EBITDA
is not calculated identically by all companies and therefore 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- and nine-month
periods ended September 30, 2008 and 2007 (in thousands):
|
|
For the three months ended:
|
|
For the nine months ended:
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
September 30,
2008
|
|
September 30,
2007
|
|
Net income
|
|
$
|
14,628
|
|
$
|
12,940
|
|
$
|
39,537
|
|
$
|
27,629
|
|
Accretion of environmental liabilities
|
|
2,682
|
|
2,715
|
|
8,078
|
|
7,743
|
|
Depreciation and amortization
|
|
11,414
|
|
9,814
|
|
32,695
|
|
27,801
|
|
Loss on early extinguishment of debt
|
|
4,251
|
|
|
|
4,251
|
|
|
|
Interest expense, net
|
|
1,889
|
|
3,022
|
|
7,789
|
|
9,901
|
|
Provision for income taxes
|
|
10,388
|
|
9,978
|
|
29,381
|
|
22,691
|
|
Other expense (income)
|
|
104
|
|
(61
|
)
|
149
|
|
(62
|
)
|
Adjusted EBITDA
|
|
$
|
45,356
|
|
$
|
38,408
|
|
$
|
121,880
|
|
$
|
95,703
|
|
The following
reconciles Adjusted EBITDA to cash from operations for the nine-month periods
ended September 30, 2008 and 2007 (in thousands):
|
|
2008
|
|
2007
|
|
Adjusted EBITDA
|
|
$
|
121,880
|
|
$
|
95,703
|
|
Interest expense, net
|
|
(7,789
|
)
|
(9,901
|
)
|
Provision for income taxes
|
|
(29,381
|
)
|
(22,691
|
)
|
Allowance for doubtful accounts
|
|
67
|
|
212
|
|
Amortization of deferred financing costs
and debt discount
|
|
1,517
|
|
1,462
|
|
Change in environmental estimates
|
|
(1,515
|
)
|
(2,289
|
)
|
Deferred income taxes
|
|
1,910
|
|
(5,055
|
)
|
Stock-based compensation
|
|
2,782
|
|
2,903
|
|
Excess tax benefit of stock-based
compensation
|
|
(3,396
|
)
|
|
|
Income tax benefits related to stock option
exercises
|
|
3,425
|
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
Accounts receivable
|
|
8,490
|
|
(8,408
|
)
|
Other current assets
|
|
1,998
|
|
(10,526
|
)
|
Accounts payable
|
|
(8,761
|
)
|
193
|
|
Other current liabilities
|
|
(2,430
|
)
|
13,081
|
|
Environmental expenditures
|
|
(12,564
|
)
|
(4,901
|
)
|
Net cash from operating activities
|
|
$
|
76,233
|
|
$
|
49,783
|
|
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- and nine-month periods ended September 30, 2008 and 2007
(in thousands). The Adjusted EBITDA contribution from each operating segment
includes revenue attributable to each segment less operating expenses, which
include cost of revenues and selling, general and administrative expenses.
Revenues attributable to each segment are 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 16, Segment Reporting
in this report.
26
Table of Contents
Three months ended September 30, 2008
versus the three months ended September 30, 2007
|
|
Summary of Operations (in thousands)
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
|
|
|
|
$
|
|
%
|
|
|
|
2008
|
|
2007(1)
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Direct Revenues:
|
|
|
|
|
|
|
|
|
|
Technical Services
|
|
$
|
178,953
|
|
$
|
174,675
|
|
$
|
4,278
|
|
2.4
|
%
|
Site Services
|
|
94,698
|
|
71,177
|
|
23,521
|
|
33.0
|
|
Corporate Items
|
|
(494
|
)
|
(345
|
)
|
(149
|
)
|
(43.2
|
)
|
Total
|
|
273,157
|
|
245,507
|
|
27,650
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
Technical Services
|
|
119,226
|
|
115,931
|
|
3,295
|
|
2.8
|
|
Site Services
|
|
66,934
|
|
51,478
|
|
15,456
|
|
30.0
|
|
Corporate Items
|
|
903
|
|
1,598
|
|
(695
|
)
|
(43.5
|
)
|
Total
|
|
187,063
|
|
169,007
|
|
18,056
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General & Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
Technical Services
|
|
14,284
|
|
15,262
|
|
(978
|
)
|
(6.4
|
)
|
Site Services
|
|
8,498
|
|
6,472
|
|
2,026
|
|
31.3
|
|
Corporate Items
|
|
17,956
|
|
16,358
|
|
1,598
|
|
9.8
|
|
Total
|
|
40,738
|
|
38,092
|
|
2,646
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
Technical Services
|
|
45,443
|
|
43,482
|
|
1,961
|
|
4.5
|
|
Site Services
|
|
19,266
|
|
13,227
|
|
6,039
|
|
45.7
|
|
Corporate Items
|
|
(19,353
|
)
|
(18,301
|
)
|
(1,052
|
)
|
(5.7
|
)
|
Total
|
|
$
|
45,356
|
|
$
|
38,408
|
|
$
|
6,948
|
|
18.1
|
%
|
(1) Certain amounts have been
reclassified to conform to the current year presentation.
Revenues
Technical
Services revenues increased 2.4 %, or $4.3 million, in the third quarter of
2008 from the comparable period in 2007 due to increases in pricing ($10.5
million), new business, increases in fuel recovery fees, and stronger
performance in the transportation and disposal business lines, partially offset
by a nationwide reduction in landfill volumes ($11.3 million). The new business
was generated primarily from the acquisitions of two solvent recovery
facilities.
Site
Services revenues increased 33%, or $23.5 million, in the third quarter of 2008
from the comparable period in 2007 due to several significant emergency
response projects ($9.1 million), pricing increases, and new business. The new business reflected primarily
increases in services for existing customers and the effect of the Universal
Environmental acquisition.
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.
Cost of Revenues
Technical
Services costs of revenues increased 2.8%, or $3.3 million, in the third
quarter of 2008 from the comparable period in 2007 due to higher vehicle and
fuel related costs ($3.6 million), labor expenses ($1.8 million), and materials
and other costs ($1.7 million). These increases were partially offset by a
decrease in outside transportation costs ($3.8 million).
27
Table of
Contents
Site
Services costs of revenues increased 30.0%, or $15.5 million, in the third
quarter of 2008 from the comparable period in 2007 due to increases in
subcontractor ($4.4 million), labor ($3.8 million), vehicle and fuel ($3.2
million), and material and other costs ($4.1 million). The increase in
subcontractor costs was related to the increase in the size of the emergency response
projects. The increase in labor costs
was attributable to business growth and the Universal Environmental
acquisition.
Corporate Items costs of revenues decreased 43.5%, or
$0.7 million, in the third quarter of 2008 from the comparable period in 2007
due primarily to a reduction in insurance premiums.
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
Technical
Services selling, general and administrative expenses decreased 6.4% or $1.0
million in the third quarter of 2008 from the comparable period in 2007 due to
a favorable change in environmental liability estimate ($1.3 million), offset
by an increase in professional fees ($0.3).
Site
Services selling, general and administrative expenses increased 31.3%, or $2.0
million, in the third quarter of 2008 from the comparable period in 2007 due to
increases in labor costs and incentive compensation. The increase in labor
costs was due to our expansion into the West and Mid-West Regions.
Corporate
Items selling, general and administrative expenses increased 9.8%, or $1.6
million, in the third quarter of 2008 from the comparable period in 2007
primarily due to increases in salaries and bonuses ($1.2 million), professional
fees ($0.6 million), unfavorable changes in environmental liability estimates
at two closed facilities ($0.8 million), and other expenses ($0.3 million). The
increases were partially offset by the weakening of the Canadian dollar ($1.6
million). The increase in professional fees was primarily attributable to the
termination of negotiations relating to a proposed acquisition during the
quarter. Increases in salaries and bonuses were due to expansion and improved
performance.
Depreciation and Amortization
|
|
Three Months Ended
September 30
|
|
|
|
2008
|
|
2007
|
|
Depreciation of fixed assets
|
|
$
|
8,780
|
|
$
|
7,022
|
|
Landfill and other amortization
|
|
2,634
|
|
2,792
|
|
Total depreciation and amortization
|
|
$
|
11,414
|
|
$
|
9,814
|
|
Depreciation and amortization increased 16.3% in the
third quarter of 2008 compared to the same period in 2007. Depreciation of
fixed assets increased due to increased capital expenditures in recent periods
and acquisitions. Landfill and other amortization decreased due to decreases in
landfill disposal volumes.
Loss on Early Extinguishment of Debt
On July 28, 2008,
pursuant to a redemption notice delivered on June 25, 2008, we redeemed
$50.0 million principal amount of
senior secured notes,
recognizing a $4.3 million loss on early extinguishment of debt in the period
ended September 30, 2008. This loss
consisted of a $2.8 million prepayment penalty and a write-off of
the $1.1 million unamortized portion of
financing costs and $0.4 million of unamortized discount on the redeemed notes.
28
Table of Contents
Interest Expense, Net
|
|
Three Months Ended
September 30
|
|
|
|
2008
|
|
2007
|
|
Interest expense
|
|
$
|
3,347
|
|
$
|
4,188
|
|
Interest income
|
|
(1,458
|
)
|
(1,166
|
)
|
Interest expense, net
|
|
$
|
1,889
|
|
$
|
3,022
|
|
Interest
expense, net decreased 37.5% in the third quarter of 2008 compared to the same
period in 2007. Interest expense decreased due to the early termination of
capital leases, a reduction in interest rates, and the July 2008
redemption of $50.0 million principal amount of outstanding senior secured
notes. Interest income increased due to the interest earned on the proceeds
from the issuance of common stock in April 2008.
Income Taxes
Income tax expense for the three months ended September 30,
2008 increased 4%, or $0.4 million, to $10.4 million from $10.0 million for the
comparable period in 2007 mainly due to higher income before taxes. Income tax
expense for the third quarter of 2008 consisted of a current tax expense
relating to the Canadian operations of $2.0 million, federal income tax of $5.2
million, a state income tax expense of $1.9 million, other foreign locations of
$0.1 million, and interest and penalties of $1.2 million related to tax
contingencies. Income tax expense for
the third quarter of 2007 consisted of a current tax benefit relating to the
Canadian operations of $1.7 million, federal income tax expense of $8.5
million, and a state income tax expense of $1.7 million relating to profitable
operations in certain legal entities and interest and penalties of $1.5 million
related to tax contingencies.
SFAS No. 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 September 30, 2008 and December 31,
2007, our valuation allowance remained at approximately $10.0 million.
Management
recognizes interest and penalties related to income tax matters as a component
of income tax expense. The liability for unrecognized tax benefits as of September 30,
2008 and December 31, 2007, included gross accrued interest and penalties
of $22.7 million and $17.8 million, respectively. Tax expense for
each of the three months ended September 30, 2008 and 2007 included
interest and penalties, net of tax, of $1.2 million.
Nine months ended September 30,
2008 versus the nine months ended September 30, 2007
|
|
Summary of Operations (in thousands)
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
|
|
|
$
|
|
%
|
|
|
|
2008
|
|
2007(1)
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Direct Revenues:
|
|
|
|
|
|
|
|
|
|
Technical Services
|
|
$
|
537,424
|
|
$
|
487,186
|
|
$
|
50,238
|
|
10.3
|
%
|
Site Services
|
|
245,195
|
|
202,918
|
|
42,277
|
|
20.8
|
|
Corporate Items
|
|
(1,694
|
)
|
(865
|
)
|
(829
|
)
|
95.8
|
|
Total
|
|
780,925
|
|
689,239
|
|
91,686
|
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
Technical Services
|
|
355,054
|
|
331,725
|
|
23,329
|
|
7.0
|
|
Site Services
|
|
178,994
|
|
150,626
|
|
28,368
|
|
18.8
|
|
Corporate Items
|
|
1,593
|
|
3,542
|
|
(1,949
|
)
|
(55.0
|
)
|
Total
|
|
535,641
|
|
485,893
|
|
49,748
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General & Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
Technical Services
|
|
49,139
|
|
45,281
|
|
3,858
|
|
8.5
|
|
Site Services
|
|
23,766
|
|
18,278
|
|
5,488
|
|
30.0
|
|
Corporate Items
|
|
50,499
|
|
44,084
|
|
6,415
|
|
14.6
|
|
Total
|
|
123,404
|
|
107,643
|
|
15,761
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
Technical Services
|
|
133,231
|
|
110,180
|
|
23,051
|
|
20.9
|
|
Site Services
|
|
42,435
|
|
34,014
|
|
8,421
|
|
24.8
|
|
Corporate Items
|
|
(53,786
|
)
|
(48,491
|
)
|
(5,295
|
)
|
10.9
|
|
Total
|
|
$
|
121,880
|
|
$
|
95,703
|
|
$
|
26,177
|
|
27.4
|
%
|
29
Table of Contents
Revenues
Technical
Services revenues increased 10.3 %, or $50.2 million, in the nine months ended September 30,
2008 from the comparable period in 2007 due to increases in pricing ($35.2
million), new business, the strengthening of the Canadian dollar ($5.7
million), and stronger performance in the transportation and disposal business
lines, partially offset by a nationwide reduction in landfill volumes ($13.6
million). The new business was generated primarily from the acquisitions of
Romic and two solvent recovery facilities.
Site
Services revenues increased 20.8%, or $42.3 million, in the nine months ended September 30,
2008 from the comparable period in 2007 due to several significant emergency
response projects ($7.2 million), pricing increases, new business, improvement
in our large project business growth ($6.9 million), organic growth, and the
strengthening of the Canadian dollar ($0.7 million). The new business reflected primarily increases
in services for existing customers and the effect of the Universal
Environmental acquisition.
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.
Cost of Revenues
Technical
Services costs of revenues increased 7.0%, or $23.3 million, in the nine months
ended September 30, 2008 from the comparable period in 2007 primarily due
to higher labor expenses ($8.0 million), vehicle and fuel related costs ($10.5
million), utility expense ($3.6 million), foreign exchange ($3.6 million), and outside
disposal costs ($3.0 million). These increases were partially offset by a
decrease in outside transportation costs ($8.0 million). The increase in labor costs was attributable
in part to the recent acquisitions of two solvent recovery facilities. The increase in vehicle costs and the
decrease in equipment rental costs were partly attributable to the Companys
effort to internalize equipment costs through capital expenditures. The effect
of foreign exchange on costs of revenues was due to the strengthening Canadian
dollar during the period.
Site
Services costs of revenues increased 18.8%, or $28.4 million, in the nine
months ended September 30, 2008 from the comparable period in 2007 due to
increases in labor ($9.0 million), vehicle and fuel ($6.8 million),
subcontractor ($4.3 million), outside transportation and disposal ($4.2
million), and material and other costs ($3.5 million). Also increasing costs of
revenues was the strengthening of the Canadian dollar ($0.6 million). The
increase in subcontractor costs was related to the increase in the size of the
emergency response projects occurring during the period. The increase in labor costs was attributable
to the Universal Environmental acquisition.
Corporate Items costs of revenues decreased 55.0%, or
$1.9 million, in the nine months ended September 30, 2008 from the
comparable period in 2007 primarily due to a reduction in licensing and
insurance costs.
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
Technical
Services selling, general and administrative expenses increased 8.5%, or $3.9
million, in the nine months ended September 30, 2008 from the comparable
period in 2007 due to increases in labor costs and incentive compensation
30
Table of
Contents
($4.7
million), professional fees ($0.5 million), and the strengthening Canadian
dollar ($0.2). These increases were offset by a favorable change in
environmental liability estimate ($1.5 million).
Site
Services selling, general and administrative expenses increased 30.0%, or $5.5
million, in the nine months ended September 30, 2008 from the comparable
period in 2007 due to increases in labor costs and incentive compensation ($4.8
million), travel expenses ($0.5), and office rent ($0.2 million). The increase
in labor costs and office rent was due to our expansion into the West and
Mid-West Regions.
Corporate Items selling, general and administrative
expenses increased 14.6%, or $6.4 million, in the nine months ended September 30,
2008 from the comparable period in 2007 primarily due to increases in salaries
and bonuses ($6.0 million), professional fees ($2.0 million), and unfavorable
changes in environmental liability estimates at two closed facilities ($2.3
million). The increases were partially offset by foreign currency translation gains
on US dollars held in Canada ($3.9 million). The increase in professional fees
was primarily attributable to the termination of negotiations relating to a
proposed acquisition during the period ended September 30, 2008. Increases in salaries and bonuses were due to
expansion and improved performance.
Depreciation and
Amortization
|
|
Nine Months Ended
September 30
|
|
|
|
2008
|
|
2007
|
|
Depreciation of fixed assets
|
|
$
|
24,265
|
|
$
|
19,907
|
|
Landfill and other amortization
|
|
8,430
|
|
7,894
|
|
Total depreciation and amortization
|
|
$
|
32,695
|
|
$
|
27,801
|
|
Depreciation and amortization increased 17.6% in the
nine months ended September 30, 2008 compared to the same period in 2007.
Depreciation of fixed assets increased due to increased capital expenditures in
recent periods and acquisitions. Landfill and other amortization increased due
to increases in amortization of permits and other intangibles related to the
recent acquisitions.
Loss on Early Extinguishment of Debt
On July 28, 2008, pursuant to a redemption notice
delivered on June 25, 2008, we redeemed $50.0 million principal amount of
outstanding senior secured notes, recognizing a $4.3 million loss on early
extinguishment of debt in the period ended September 30, 2008. This loss consisted of a $2.8 million
prepayment penalty and a write-off of the $1.1 million unamortized portion of
financing costs and $0.4 million of unamortized discount on the redeemed notes.
Interest Expense, Net
|
|
Nine Months Ended
September 30
|
|
|
|
2008
|
|
2007
|
|
Interest expense
|
|
$
|
11,741
|
|
$
|
12,614
|
|
Interest income
|
|
(3,952
|
)
|
(2,713
|
)
|
Interest expense, net
|
|
$
|
7,789
|
|
$
|
9,901
|
|
Interest
expense, net decreased 21.3% in the nine months ended September 30, 2008
compared to the same period in 2007. Interest expense decreased due to the
termination of capital leases, a reduction in interest rates and the July 2008
redemption of the $50.0 million principal amount of outstanding senior secured
notes. Interest income increased due to the interest earned on the proceeds
from the issuance of common stock in April 2008.
Income Taxes
Income tax expense for the nine months ended September 30,
2008 increased 29.5% or $6.7 million to $29.4 million from $22.7 million for
the comparable period in 2007 mainly due to higher income before taxes. Income tax expense for the nine months ended September 30,
2008 consisted of a current tax expense relating to the Canadian operations of
$3.6 million, federal income tax of $15.6 million, a state income tax expense
of $5.2 million, other foreign locations of $0.8 million and interest and
penalties of $4.2 million related to tax contingencies. Income tax expense for the nine months ended September 30,
2007 consisted of a current tax benefit relating to the Canadian operations of
$0.8 million, federal income tax
31
Table of Contents
of
$15.7 million, a state income tax expense of $3.6 million, and interest and
penalties of $4.2 million related to tax contingencies.
SFAS No.
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 September 30, 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 state net
operating loss carryforwards related to tax deductions for the exercise of
non-qualified stock options.
Management
recognizes interest and penalties related to income tax matters as a component
of income tax expense. The liability for unrecognized tax benefits as of September 30,
2008 and December 31, 2007, included gross accrued interest and penalties
of $22.7 million and $17.8 million, respectively. Tax expense for
each of the nine months ended September 30, 2008 and 2007 included
interest and penalties, net of tax, of $4.2 million.
Liquidity and Capital Resources
Major
changes in our financial position resulted from:
·
During the first nine months of 2008 we
acquired Universal Environmental, Inc. and two solvent recycling
facilities for a preliminary aggregate purchase price of $27.5 million.
·
In April 2008 we issued 2.875 million
shares of common stock for net proceeds of $173.5 million. We expect to use the net proceeds for one or
more of the following: potential future acquisitions, repayment of debt and
working capital.
·
In July 2008, pursuant to a redemption
notice delivered on June 25, 2008, we redeemed $50.0 million principal
amount of outstanding senior secured notes and paid prepayment penalties of
$2.8 million.
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 September 30, 2008, cash and cash equivalents were
$253.0 million and funds available to borrow under the revolving facility
were $30.3 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 September 30, 2008 of approximately $179.8 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.
Cash
from operating activities in the first nine months of 2008 was $76.2 million,
an increase of 53.1%, or $26.5 million, compared with cash from operating
activities in the first nine months of 2007. The increase was primarily the
result of price increases, new business generated from acquisitions and
stronger performance in the transportation and disposal business lines.
Cash
used for investing activities in the first nine months of 2008 was $66.7
million, an increase of 105%, or $34.2 million, compared with cash used for
investing activities in the first nine months of 2007. The increase was primarily the result of
acquisition costs and an increase in capital expenditures, partially offset by
the sale of marketable securities.
Cash
from financing activities in the first nine months of 2008 was $127.5 million,
an increase of $132.0 million, compared to cash used for financing activities
in the first nine months of 2007. The increase was primarily the result of
proceeds from the issuance of common stock, partially offset by redemption of
$50 million principal amount of outstanding senior secured notes.
32
Table
of Contents
Financing Arrangements
At September 30, 2008, we had outstanding $41.5 million of senior
secured notes due 2012, a $70.0 million revolving credit facility, a $50.0
million synthetic letter of credit facility, and a $30.0 million term
loan. The financing arrangements and
principal terms of the each are discussed further in our 2007 Annual Report on Form 10-K.
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 (the Excess Cash Flow Amount) equal to 50% of the
periods Excess Cash Flow (as defined below) to either (i) prepay, repay,
redeem or purchase our first-lien obligations under the revolving credit
facility and synthetic letter of credit facility or capitalized lease
obligations or (ii) 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.
On October 8, 2008, we made an Excess Cash Flow
Offer in accordance with the terms described above based on our Excess Cash
Flow Amount of $19.2 million for the twelve-month period ended June 30, 2008.
In response to tenders received from note holders prior to the expiration of
the offer on November 7, 2008, we have agreed to purchase on November 12, 2008
an aggregate of $18.5 million principal amount of outstanding senior secured notes
for a purchase price of $19.2 million and also then pay approximately $0.7
million of accrued interest through the purchase date on the purchased notes.
As of September 30,
2008, the Company was in compliance with the covenants of all of the Companys debt
agreements.
Liquidity Impacts of Uncertain Tax Positions
As discussed in Note 12, Income Taxes,
to our financial statements included in Item 1 of this report, we have
significant liabilities associated with potential tax liabilities and related
interest and penalties aggregating $72.0 million. These liabilities are
classified as other long-term liabilities in our unaudited 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 September 30, 2008, our long-term investments included $6.6
million of available for sale auction rate securities. With the liquidity
issues experienced in global credit and capital markets, these auction rate
securities have experienced multiple failed auctions and as a result are
currently not liquid. All of our auction rate securities are secured by student
loans, which are substantially insured by the Federal Family Education Loan
Program. Additionally, all of our auction rate securities maintain the highest
credit rating of AAA. All of these securities continue to pay interest
according to their stated terms with interest rates resetting generally every
28 days.
We believe we have
sufficient liquidity to fund operations and do not plan to access these funds
in the foreseeable future. During the second quarter we accepted an offer to
purchase a $1.5 million auction rate security at par and it was settled in May 2008.
In the unlikely event that we need to access the funds that are in an illiquid
state, we may not be able to do so without the possible loss of principal,
until a future auction for these investments is successful, another secondary
market evolves for these securities, they are redeemed by the issuer, or they
mature. If we are unable to sell these securities in the market or they are not
redeemed, we could be required to hold them to maturity. These securities are currently
reflected at their fair value utilizing a discounted cash flow analysis. As of September 30, 2008, we have
recorded an unrealized pre-tax loss of $0.4 million, which we assess as
temporary. We will continue to monitor and evaluate these investments on an
ongoing basis for other than temporary impairment and record a charge to
earnings as appropriate.
33
Table
of Contents
Other Stockholder
Matters
On May 15, 2008 and September 23, 2008, we granted a total of
92,936 performance share awards that are subject to achieving predetermined
revenue and EBITDA targets by December 31, 2009 and also include continued
service conditions. If the Company does
not achieve the performance goals by the end of 2009, the shares will be
forfeited in their entirety. For the
three- and nine-month periods ended September 30, 2008, we believed that
it was probable that the performance targets will be achieved.
In July 2008, warrants for an aggregate of 150,000 shares were
exercised for $1.2 million in cash. As
of September 30, 2008, warrants for an aggregate of 198,690 shares
remained outstanding. These remaining
warrants were exercised in October 2008 for $1.6 million.
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 September 30, 2008 (in thousands):
Scheduled Maturity Dates
|
|
Three
Months
Remaining
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Total
|
|
Senior secured notes
|
|
$
|
18,486
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
23,032
|
|
$
|
|
|
$
|
41,518
|
|
Capital lease obligations
|
|
174
|
|
432
|
|
165
|
|
113
|
|
21
|
|
|
|
905
|
|
|
|
$
|
18,660
|
|
$
|
432
|
|
$
|
165
|
|
$
|
113
|
|
$
|
23,053
|
|
$
|
|
|
$
|
42,423
|
|
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 September 30, 2008 (i) a
$70.0 million revolving facility (ii) a $50.0 million synthetic LC
facility, and (iii) a $30.0 million term loan. At September 30,
2008, we had: (i) no borrowings and $39.7 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 September 30, 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 less than $0.1 million and $0.1 million for the three-month
periods ended September 30, 2008 and 2007, respectively, and $0.1 million
and $0.2 million for the nine-month periods ended September 30, 2008 and
2007, respectively.
We are subject to market risks associated with our
investment in auction rate securities which aggregated $6.6 million as of September 30,
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 these instruments held by us failed during the first nine
months of 2008. We are
unable to determine when the market for student loan collateralized instruments
will recover; therefore, we have classified the auction rate securities as
non-current and have included them in long-term investments on our unaudited
consolidated balance sheet at September 30, 2008.
34
Table
of Contents
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- and nine-month periods
ended September 30, 2008, total foreign currency gains were
$0.6 million and $1.2 million, respectively, primarily between U.S.
and Canadian dollars. During the three- and nine-month periods ended September 30,
2007, total foreign currency losses were $1.0 million and
$2.7 million, respectively, primarily between U.S. and Canadian dollars.
The fluctuation for the three- and nine-month periods ended September 30,
2008 and 2007 for Mexico was not material to the Company. The Canadian
subsidiaries transact approximately 24.4% 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- and nine-month periods ended September 30, 2008,
the U.S. dollar rose 3.9% and 6.8%, respectively against the Canadian dollar,
resulting in foreign currency exchange gains of $0.6 million and
$1.2 million, respectively. During
the three- and nine-month periods ended September 30, 2007, the U.S.
dollar fell 6.8% and 17.0%, respectively against the Canadian dollar, resulting
in foreign currency exchange losses of $1.0 million and $2.8 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 nine-month periods ended September 30, 2008 and 2007 was 1.02
and 1.10 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
$0.6 million and $1.2 million for the nine-month periods ended September 30,
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 September 30, 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. In response to the weakness identified, the
Company has taken measurable steps to remediate this condition in 2008.
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 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 except as described below.
35
Table
of Contents
We have implemented, or plan to implement,
certain measures to remediate the material weakness relating to the Companys
income tax accounting identified in the Companys 2007 Annual Report on Form 10-K. As of the date of the filing of this
Quarterly Report on Form 10-Q, the Company has implemented or is in the
process of implementing the following measures:
·
Hired an
experienced Tax Director and Tax Manager
·
Assessed the
adequacy of internal resources, hired additional resources and continued to
recruit additional staff
·
Strengthened the
oversight and review of tax calculations and compliance documentation
·
Engaged
consultants to simplify, enhance and test the tax provision process, including
identification of contemporaneous documentation.
We believe that these remediation actions
represent ongoing improvement measures.
Furthermore, while we have taken steps to remediate the material
weakness, the effectiveness of our remediation efforts will not be known until
we can test those controls in connection with the management evaluation of
internal controls over financial reporting that we will perform as of December 31,
2008.
36
Table
of Contents
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 nine months ended September 30, 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
|
|
|
|
|
|
31
|
|
Rule 13a-14a/15d-14(a) Certifications
|
|
Filed herewith.
|
|
|
|
|
|
32
|
|
Section 1350 Certifications
|
|
Filed herewith.
|
37
Table of Contents
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: November 10, 2008
|
|
|
|
|
By:
|
/s/ JAMES M.
RUTLEDGE
|
|
James M. Rutledge
|
|
Executive Vice President and
|
|
Chief Financial Officer
|
|
|
|
|
Date: November 10, 2008
|
|
|
|
|
|
38
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