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| CLHB > SEC Filings for CLHB > Form 10-Q on 6-Aug-2004 | All Recent SEC Filings |
6-Aug-2004
Quarterly Report
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 the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations-Factors That May Affect Future Results." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in the Company's Form 10-K filed with the Securities and Exchange Commission on March 15, 2004 and in other documents the Company files from time to time with the Securities and Exchange Commission.
Overview
The Company provides a wide range of environmental services and solutions to a diversified customer base in the United States, Puerto Rico, Mexico and Canada. The Company seeks 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.
Effective September 7, 2002, the Company purchased from Safety-Kleen Services, Inc. (the "Seller") and certain of the Seller's domestic subsidiaries substantially all of the assets of the Chemical Services Division (the "CSD") of Safety-Kleen Corp. ("Safety-Kleen"). That acquisition broadened the Company's disposal capabilities, geographic reach and significantly expanded the Company's network of hazardous waste disposal facilities. Following the acquisition, the Company became one of the largest providers of environmental services and the largest operator of hazardous waste treatment and disposal facilities in North America. The Company believes that the acquisition of hazardous waste facilities in new geographic areas will allow the Company to expand its service area and will continue to result in significant cost savings by allowing the Company to treat and dispose of hazardous waste internally that the Company previously paid third parties for and to eliminate redundant selling, general and administrative expenses and inefficient transportation costs.
The Company believes that significant synergies can be achieved by further integrating the former CSD operations into its business. Since the effective date of the acquisition, the Company has reduced and plans to continue to reduce expenses by use of common information management systems to minimize disposal costs outside the integrated network of facilities by sending waste to the disposal facilities that it now owns. The Company also has eliminated and plans to continue to eliminate duplicate costs relating to overlapping operations on a geographic basis. Although much of the integration of operations and reduction of the combined entities' overlapping costs has been completed, this process is still ongoing.
In addition, as part of the acquisition, the Company assumed certain environmental liabilities valued at $184.5 million. The Company now anticipates 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 now anticipated.
As further discussed in Item 4, "Controls and Procedures," Safety-Kleen has publicly disclosed that it had material deficiencies in many of its financial systems, processes and related internal controls. Due to the deficiencies in these systems and the Company's belief that it will be able to utilize its own systems in order to improve the operations of the former CSD, the decision was made to integrate the U.S. operations of the former CSD into the Company's business and financial reporting systems effective as of the acquisition date. Due to the acquisition of the CSD, the Company continues to experience deficiencies in certain of its internal controls. The Company has made significant progress in resolving the internal control weaknesses caused by the integration of the CSD into its systems, and the Company has on-going efforts to strengthen its internal controls.
Acquisition
In accordance with the Acquisition Agreement between the Seller and the Company dated February 22, 2002, as amended through September 6, 2002, the Company purchased the assets of the CSD for $26.6 million in net cash, and incurred direct costs related to the transaction of $9.7 million for a total purchase price of $36.3 million. In addition, the Company assumed with the transaction certain environmental liabilities valued at $184.5 million.
In connection with the acquisition of the CSD assets, the Company recorded integration liabilities of $12.6 million (after giving effect to subsequent net changes in estimates) which consisted primarily of lease costs, severance, environmental closure and other exit costs to close duplicative facilities and functions. Groups of employees severed and to be severed consist primarily of duplicative selling, general and administrative personnel and personnel at offices which were closed. The following table summarizes the activity of the purchase accounting liabilities recorded in connection with the acquisition of the CSD assets (dollars in thousands):
Severance Facilities
---------------------------- ---------------------------
Number of Number of
Employees Liability Facilities Liability Total
--------- ----------- ---------- ----------- -------
Balance at December 31, 2003 52 $ 676 9 $ 2,931 $ 3,607
Net change in estimate (10 ) - - 65 65
Utilized in the quarter ended March 31,
2004 (3 ) (184 ) - (499 ) (683 )
Utilized in the quarter ended June 30, 2004 (15 ) (154 ) - (111 ) (265 )
Interest accretion - - - 136 136
--------- - -- -------- - ---------- -- -------- - - ----- -
Balance at June 30, 2004 24 $ 338 9 $ 2,522 $ 2,860
--------- - -- -------- - ---------- -- -------- - - ----- -
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Environmental Liabilities
The changes to environmental liabilities for the six months ended June 30, 2004
are as follows (dollars in thousands):
Changes in
Estimate Currency
New Asset Charged Other Translations,
December 31, Retirement to Income Changes in Reclassifications June 30,
2003 Obligations Accretion Statement Estimates and Other Payments 2004
-------------- ------------- ----------- ------------ ----------- ------------------- --------- ---------
Landfill
retirement
liability $ 17,703 $ 461 $ 1,266 $ (608 ) $ (326 ) $ (14 ) $ (10 ) $ 18,472
Non-landfill
retirement
liability 7,992 - 470 8 - (14 ) (729 ) 7,727
Remediation for
landfill sites 5,525 - 118 (231 ) - (70 ) (258 ) 5,084
Remediation,
closure and
post-closure for
closed sites 97,535 - 2,155 (507 ) - (10 ) (2,732 ) 96,441
Remediation
(including
Superfund) for
non-landfill open
sites 54,376 - 1,198 (106 ) - (352 ) (676 ) 54,440
-- ----------- --- --------- -- -------- -- --------- - -- -------- - ---- -------------- - -- ------ - - -------
Total $ 183,131 $ 461 $ 5,207 $ (1,444 ) $ (326 ) $ (460 ) $ (4,405 ) $ 182,164
-- ----------- --- --------- -- -------- -- --------- - -- -------- - ---- -------------- - -- ------ - - -------
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The following table presents the remaining highly probable airspace from December 31, 2003 through June 30, 2004 (in thousands):
Highly Probable
Airspace
(Cubic Yards)
---------------
Remaining capacity at December 31, 2003 29,031
Consumed six months ended June 30, 2004 (368 )
Addition to highly probable airspace 45
--------------- -
Remaining capacity at June 30, 2004 28,708
--------------- -
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Commencing January 1, 2004, asset retirement obligations incurred are being discounted at the credit-adjusted risk-free rate of 12.5% and inflated at a rate of 1.2%.
Results of Operations
The Company's operations are managed as two segments: Technical Services and Site Services. Technical Services include treatment and disposal of industrial wastes via incineration, landfill or wastewater treatment, collection and transporting of containerized and bulk waste, categorization, specialized repackaging, treatment and disposal of laboratory chemicals and household hazardous wastes, which are referred to as CleanPack services, and the Apollo Onsite Service, which customizes
environmental programs at customer sites. This is accomplished through a 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. Site Services provide highly skilled experts utilizing specialty equipment and resources to perform services, such as site decontamination, remediation projects, selective demolition, emergency response, spill cleanup and vacuum services at the customer's site or another location. These services are dispatched on a scheduled or emergency basis. The Company also offers outsourcing services for customer environmental management programs, and provides analytical testing services, information management and personnel training services.
The following table sets forth for the periods indicated certain operating data associated with the Company's 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 the Annual Report on Form 10-K for the year ended December 31, 2003 and Item 1, "Financial Statements" in this report.
Percentage of Total Revenues
------------------------------------------------------------
For the Three Months For the Six Months
Ended Ended
June 30, June 30,
--------------------------- ------------------------
2004 2003 2004 2003
-------- -------- ------- -------
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues:
Disposal costs to third parties 3.3 5.0 3.9 4.9
Other cost of revenues 68.4 71.6 69.5 71.0
-------- ---- -------- -- ------- --- ------- --
Total cost of revenues 71.7 76.6 73.4 75.9
-------- ---- -------- -- ------- --- ------- --
Selling, general and administrative expenses 17.0 17.9 16.8 18.4
Accretion of environmental liabilities 1.6 1.6 1.7 1.7
Depreciation and amortization 3.9 3.8 3.8 4.1
Restructuring 0.0 0.0 0.0 0.0
-------- ---- -------- -- ------- --- ------- --
Income (loss) from operations 5.8 0.1 4.3 (0.1 )
Other income (expense) (4.1 ) 0.1 (0.4 ) 0.0
Loss on refinancing (4.4 ) 0.0 (2.3 ) 0.0
Interest (expense), net (3.4 ) (3.5 ) (3.5 ) (3.7 )
-------- ---- -------- -- ------- --- ------- --
Loss before provision for income taxes and cumulative
effect of change in accounting principle (6.1 ) (3.3 ) (1.9 ) (3.8 )
Provision for income taxes 1.4 0.7 1.2 0.7
-------- ---- -------- -- ------- --- ------- --
Net loss before cumulative effect of change in accounting
principle (7.5 ) (4.0 ) (3.1 ) (4.5 )
Cumulative effect of change in accounting principle, net
of tax 0.0 0.0 0.0 0.0
-------- ---- -------- -- ------- --- ------- --
Net loss (7.5 )% (4.0 )% (3.1 )% (4.5 )%
-------- ---- -------- -- ------- --- ------- --
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Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
The Company defines EBITDA as net income or loss, excluding interest, taxes, depreciation and amortization, accretion of environmental liabilities, restructuring charges, effects of discontinued operations, other non-recurring costs, and certain extraordinary or non-recurring gains or losses. The Company's management considers EBITDA to be a measurement of performance which provides useful information to both management and investors.
EBITDA should not be considered an alternative to net income or loss or other measurements under accounting principles generally accepted in the United States as an indicator of operating performance or to cash flows from operating, investing, or financing activities as a measure of liquidity. EBITDA does not reflect working capital changes, cash expenditures for interest, taxes, capital improvements or principal payments on indebtedness. Furthermore, the Company's measurement of EBITDA might be inconsistent with similar measures presented by other companies.
EBITDA for the three months ended June 30, 2004 is calculated as follows (in thousands):
Three Months
Ended
June 30, 2004
---------------
Net loss $ (12,127 )
Gain on sale of fixed assets (242 )
Change in value of embedded derivative 6,877
Loss on refinancing 7,099
Accretion of environmental liabilities 2,619
Interest expense, net 5,443
Provision for income taxes 2,314
Depreciation and amortization 6,256
Other non-recurring refinancing-related expense 1,126
-- ------------ -
EBITDA $ 19,365
-- ------------ -
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Three Months
Ended
June 30, 2004
---------------------------------
EBITDA $ 19,365
Adjustments to reconcile EBITDA from net cash provided by
operations:
Interest expense, net (5,443 )
Provision for income taxes (2,314 )
Allowance for doubtful accounts 334
Amortization of deferred financing costs 805
Foreign currency gain on intercompany transactions (546 )
Other non-recurring refinancing related expenses (1,126 )
Changes in assets and liabilities:
Accounts receivable (4,272 )
Unbilled accounts receivable (2,217 )
Prepaid expenses 1,317
Other assets (1,435 )
Accounts payable 4,105
Environmental liabilities (2,678 )
Other accrued expenses 2,776
Income tax payable 742
Other, net (472 )
-- ------------------------------ -
Net cash provided by operating activities $ 8,941
-- ------------------------------ -
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Performance of the Company's segments is evaluated on several factors of which the primary financial measure is EBITDA. The following table sets forth certain operating data associated with the Company's results of operations and summarizes EBITDA contribution by operating segment for the three- and six-month periods ended June 30, 2004 and 2003. The Company considers EBITDA contribution from each operating segment to include revenue attributable to each segment less operating expenses, which include cost of revenues and selling, general and administrative expenses. Revenue attributable to each segment is generally external or direct revenue from third party customers. Certain income or expenses of a non-recurring or unusual nature are not included in the operating segment 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 20, "Segment Reporting" of the Annual Report on Form 10-K for the year ended December 31, 2003 and Item 1, "Financial Statements" and in particular Note 14, "Segment Reporting" in this report (in thousands).
Summary of Operations
------------------------------------------------------------
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------- -------------------------
2004 2003 2004 2003
------------ --------- --------- ---------
Revenue:
Technical Services $ 114,839 $ 111,138 $ 216,069 $ 212,892
Site Services 46,736 60,818 88,101 100,120
Corporate Items 56 79 218 1,328
- ---------- - - ------- - - ------- - - ------- -
Total 161,631 172,035 304,388 314,340
- ---------- - - ------- - - ------- - - ------- -
Cost of Revenues:
Technical Services 82,392 78,791 160,314 155,078
Site Services 29,261 46,499 57,831 75,847
Corporate Items 4,189 6,507 5,157 7,486
- ---------- - - ------- - - ------- - - ------- -
Total 115,842 131,797 223,302 238,411
- ---------- - - ------- - - ------- - - ------- -
Selling, General & Administrative Expenses:
Technical Services 11,710 15,490 23,096 29,888
Site Services 4,426 4,606 8,599 8,770
Corporate Items 10,288 10,375 18,161 18,768
- ---------- - - ------- - - ------- - - ------- -
Total 26,424 30,471 49,856 57,426
- ---------- - - ------- - - ------- - - ------- -
EBITDA:
Technical Services 20,737 16,857 32,659 27,926
Site Services 13,049 9,713 21,671 15,503
Corporate Items (14,421 ) (16,803 ) (23,100 ) (24,926 )
- ---------- - - ------- - - ------- - - ------- -
Total $ 19,365 $ 9,767 $ 31,230 $ 18,503
- ---------- - - ------- - - ------- - - ------- -
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Revenues
Total revenues for the three months ended June 30, 2004 decreased $10.4 million to $161.6 million from $172.0 million for the comparable period in 2003. Technical Services revenues for the three months ended June 30, 2004 increased $3.7 million to $114.8 million from $111.1 million for the comparable period in . . .
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