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CLH > SEC Filings for CLH > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for CLEAN HARBORS INC

Form 10-Q for CLEAN HARBORS INC


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Forward-Looking Statements

In addition to historical information, this Quarterly Report on 10-Q 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 under Item 1A, "Risk Factors," in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 29, 2012, under Item 1A, "Risk Factors," included in Part II-Other Information in this report, 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 management's 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.

General

We are a leading provider of environmental, energy and industrial services throughout North America. We serve over 60,000 customers, including a majority of Fortune 500 companies, thousands of smaller private entities and numerous federal, state, provincial and local governmental agencies. We have more than 200 locations, including over 50 waste management facilities, throughout North America in 38 U.S. states, seven Canadian provinces, Mexico and Puerto Rico.

During the three months ended March 31, 2012, we re-assigned certain departments among the segments to support management reporting changes. Accordingly, we re-allocated shared departmental costs among our segments. We have recast the prior year segment information to conform to the current year presentation.

We report our business in four operating segments, consisting of:

         Technical Services - provide a broad range of hazardous material
          management services including the packaging, collection,
          transportation, treatment and disposal of hazardous and non-hazardous
          waste at Company owned incineration, landfill, wastewater, and other
          treatment facilities.


         Field Services - provide a wide variety of environmental cleanup
          services on customer sites or other locations on a scheduled or
          emergency response basis including tank cleaning, decontamination,
          remediation, and spill cleanup.


         Industrial Services - provides industrial and specialty services, such
          as high-pressure and chemical cleaning, catalyst handling, decoking,
          material processing, surface rentals and industrial lodging services to
          refineries, chemical plants, oil sands facilities, pulp and paper
          mills, and other industrial facilities.


         Oil and Gas Field Services - provides fluid handling, fluid hauling,
          down hole servicing, exploration, mapping and directional boring
          services to the energy sector serving oil and gas exploration,
          production, and power generation.

Technical Services and Field Services are included as part of Clean Harbors Environmental Services, and Industrial Services and Oil and Gas Field Services are included as part of Clean Harbors Energy and Industrial Services.

Acquisitions

The Company acquired during the second quarter of 2012 all of the outstanding stock of a privately owned Canadian company which provides workforce accommodations, camp catering and fresh food services to the remote industries of natural resources and during the third quarter of 2012 certain assets of a privately owned U.S. company that is engaged in the business of materials handling services that includes a variety of support equipment to provide customers with a sole source for any dredging and dewatering project. The combined purchase price for these acquisitions were approximately $83.7 million, including the assumption and payment of debt of $7.7 million, and post-closing adjustments of $3.9 million based upon the assumed target amounts of working capital.

Additionally, on October 26, 2012, the Company signed the Merger Agreement which provides that, subject to the terms and conditions contained in the Merger Agreement, the Company will acquire 100% of Safety-Kleen, Inc. ("Safety-Kleen"), a


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Delaware corporation headquartered in Richardson, Texas. Safety-Kleen is the largest re-refiner and recycler of used oil in North America and a leading provider of parts cleaning and environmental services. Safety-Kleen services commercial and industrial customers in the U.S., Canada and Puerto Rico. The proposed addition of Safety-Kleen aligns with the Company's acquisition strategy of increasing density in its existing markets and establishing leadership positions in new markets.
Under the terms of the Merger Agreement, the Company will pay to Safety-Kleen shareholders cash consideration in an amount equal to $1.25 billion plus the amount of cash and cash equivalents held by Safety-Kleen on the closing date less the amount of debt held by Safety-Kleen on the closing date, plus or minus, as applicable, the amount by which Safety-Kleen's working capital (excluding cash) on the closing date exceeds or is less than $50 million.
The Merger Agreement is not subject to a financing contingency. The Company has received a backup financing commitment from Goldman Sachs Bank USA, but is considering other financing options, which may include a combination of existing cash, debt and equity. The acquisition is subject to approval by regulators and the Safety-Kleen shareholders, as well as other customary closing conditions, and is expected to be completed by the end of 2012. The Merger Agreement is subject to termination by either the Company or Safety-Kleen under certain circumstances.

Summary of Operations

During the three months ended September 30, 2012, our revenues were $533.8 million, compared with $556.1 million
during the three months ended September 30, 2011. Although our Technical Services and Industrial Services segments experienced revenue growth during the three months ended September 30, 2012, the year-over-year revenue decrease was driven primarily due to decreases in the level of emergency response work within our Field Service segment as well as decreases in our Oil and Gas Field Service segment.

Our Technical Services revenues accounted for 45% of our total revenues for the three months ended September 30, 2012. The year-over-year increase in revenues of 6% was primarily due to increases in volumes being processed through our incinerators, landfills, treatment, storage and disposal facilities, and waster water treatment plants. The utilization rate at our incinerators was 91.3% for the three months ended September 30, 2012, compared with 89.0% in the comparable period of 2011, and an increase in our landfill volumes.

Our Field Services revenues accounted for 11% of our total revenues for the three months ended September 30, 2012. The year-over-year decrease in revenue of 42% resulted primarily from a decreased level of emergency response work during the three months ended September 30, 2012. During the three months ended September 30, 2011, Field Services performed emergency response work to the Yellowstone River oil spill in Montana which accounted for $41.5 million of our third party revenues.

Our Industrial Services revenues accounted for 27% of our total revenues for the three months ended September 30, 2012. The year-over-year increase in revenue of 17% was primarily due to an increase in our lodging business, particularly our fixed lodging locations, growth in the oil sands region of Canada an increase in a broad array of our specialty services and a higher level of turnaround work year-over-year.

Our Oil and Gas Field Services revenues accounted for 17% of our total revenues for the three months ended September 30, 2012. The year-over-year decrease of 14% was primarily due to a reduction in fluids handling and surface rental activity, decreased exploration activities and a reduction in the energy services business.

Our cost of revenues decreased from $386.5 million during the three months ended September 30, 2011 to $372.9 million during the three months ended September 30, 2012. Our cost of revenues decreased primarily due to the lack of emergency response work in 2012. Our gross profit margin was 30.1% for the three months ended September 30, 2012, compared to 30.5% in the same period last year. The year-over-year decrease in gross margin was primarily due to decreased gross margin in our Oil and Gas Field Services segment.

During the three months ended September 30, 2012, our effective tax rate was 33.8%, compared with 33.7% for the same period last year.

Environmental Liabilities

We have accrued environmental liabilities as of September 30, 2012, of approximately $167.2 million, substantially all of which we assumed as part of 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


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greater amounts than currently anticipated.

We realized a net benefit in the nine months ended September 30, 2012 of $3.6 million related to changes in our environmental liability estimates. Changes in environmental liability estimates include changes in landfill retirement liability estimates, which are recorded in cost of revenues, and changes in non-landfill retirement and remedial liability estimates, which are recorded in selling, general and administrative costs. During the nine months ended September 30, 2012, a charge of approximately $0.5 million was recorded in cost of revenues and a benefit of approximately $4.1 million was recorded in selling, general and administrative expenses. See further detail discussed in Note 7, "Closure and Post-Closure Liabilities," and Note 8, "Remedial Liabilities," to our consolidated financial statements included in Item 1 of this report.

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, 2011, and Item 1, "Financial
Statements," in this report.
                                                      Percentage of Total Revenues
                                      For the Three Months Ended         For the Nine Months Ended
                                            September 30,                      September 30,
                                        2012              2011             2012              2011

Revenues                                100.0  %           100.0  %        100.0  %           100.0  %
Cost of revenues (exclusive of
items shown separately below)            69.9               69.5            70.0               70.0
Selling, general and
administrative expenses                  11.3               11.8            12.1               12.4
Accretion of environmental
liabilities                               0.5                0.4             0.5                0.5
Depreciation and amortization             7.7                6.2             7.2                6.0
Income from operations                   10.6               12.1            10.2               11.1
Other (expense) income                      -                  -               -                0.4
Loss on early extinguishment of
debt                                     (4.9 )                -            (1.6 )                -
Interest expense, net of
interest income                          (2.2 )             (2.0 )          (2.1 )             (2.0 )
Income before provision for
income taxes                              3.5               10.1             6.5                9.5
Provision for income taxes                1.2                3.4             2.3                3.3
Net Income                                2.3  %             6.7  %          4.2  %             6.2  %

Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted
EBITDA")

We define Adjusted EBITDA (a measure not defined under generally accepted accounting principles) as net income plus accretion of environmental liabilities, depreciation and amortization, net interest expense and provision for income taxes, less other income and income from discontinued operations, net of tax. Our management considers Adjusted EBITDA to be a measurement of performance which provides useful information to both management and investors. Adjusted EBITDA should not be considered an alternative to net income or other measurements under generally accepted accounting principles in the United States ("GAAP"). Because Adjusted EBITDA is not calculated identically by all companies, our measurements of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

We use Adjusted EBITDA to enhance our understanding of our core operating performance, which represents our views concerning our performance in the ordinary, ongoing and customary course of our operations. We historically have found it helpful, and believe that investors have found it helpful, to consider an operating measure that excludes expenses such as debt extinguishment and related costs relating to transactions not reflective of our core operations.

The information about our core operating performance provided by this financial measure is used by our management for a variety of purposes. We regularly communicate Adjusted EBITDA results to our board of directors and discuss with the board our interpretation of such results. We also compare our Adjusted EBITDA performance against internal targets as a key factor in determining cash bonus compensation for executives and other employees, largely because we believe that this measure is indicative of how the fundamental business is performing and is being managed.


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We also provide information relating to our Adjusted EBITDA so that analysts, investors and other interested persons have the same data that we use to assess our core operating performance. We believe that Adjusted EBITDA should be viewed only as a supplement to the GAAP financial information. We also believe, however, that providing this information in addition to, and together with, GAAP financial information permits the foregoing persons to obtain a better understanding of our core operating performance and to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance on a standalone and a comparative basis.

The following is a reconciliation of net income to Adjusted EBITDA (in thousands):

                                      For the Three Months Ended             For the Nine Months Ended
                                            September 30,                          September 30,
                                        2012                  2011             2012              2011
Net income                     $       12,359            $     37,133     $      67,800     $     89,019
Accretion of environmental
liabilities                             2,488                   2,435             7,409            7,231
Depreciation and
amortization                           41,300                  34,604           116,794           87,000
Other expense (income)                     91                    (164 )             465           (5,931 )
Loss on early extinguishment
of debt                                26,385                       -            26,385                -
Interest expense, net                  11,596                  10,927            33,836           28,047
Provision for income taxes              6,308                  18,896            37,487           47,283
Adjusted EBITDA                $      100,527            $    103,831     $     290,176     $    252,649

The following reconciles Adjusted EBITDA to cash from operations (in thousands):

                                                          For the Nine Months Ended
                                                                September 30,
                                                           2012                 2011
Adjusted EBITDA                                     $       290,176       $      252,649
Interest expense, net                                       (33,836 )            (28,047 )
Provision for income taxes                                  (37,487 )            (47,283 )
Allowance for doubtful accounts                                 809                  623
Amortization of deferred financing costs and
debt discount                                                 1,173                1,230
Change in environmental liability estimates                  (3,553 )             (2,467 )
Deferred income taxes                                          (494 )               (197 )
Stock-based compensation                                      5,235                5,329
Excess tax benefit of stock-based compensation               (1,786 )             (1,949 )
Income tax benefits related to stock option
exercises                                                     1,776                1,949
Eminent domain compensation                                       -                3,354
Prepayment penalty on early extinguishment of
debt                                                        (21,044 )                  -
Environmental expenditures                                   (7,833 )             (8,551 )
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable                                          59,881              (32,670 )
Other current assets                                          5,130              (14,113 )
Accounts payable                                            (18,969 )             30,241
Other current and long-term liabilities                      (6,486 )             (8,762 )
Net cash from operating activities                  $       232,692       $      151,336

Segment data

Performance of our segments is evaluated on several factors of which the primary financial measure is Adjusted EBITDA. The following tables set forth certain operating data associated with our results of operations and summarizes Adjusted EBITDA contribution by operating segment for the three months ended September 30, 2012 and 2011 (in thousands). We consider the Adjusted EBITDA contribution from each operating segment to include revenue attributable to each segment less


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operating expenses, which include cost of revenues and selling, general and administrative expenses. Revenue attributable to each segment is generally external or direct revenue from third party customers. Certain income or expenses of a non-recurring or unusual nature are not included in the operating segment Adjusted EBITDA contribution. Amounts presented have been recast to reflect the changes made to our segment presentation as a result of the changes made in the first quarter of 2012 in how we manage our business. This table and subsequent discussions should be read in conjunction with Item 6, "Selected Financial Data" and Item 8, "Financial Statements and Supplementary Data" included in our Annual Report on Form 10-K for the year ended December 31, 2011, Item 8, "Financial Statements and Supplementary Data" and in particular Note 14, "Segment Reporting," included in our Current Report on Form 8-K filed on July 16, 2012 and Item 1, "Unaudited Financial Statements" and in particular Note 14, "Segment Reporting," in this report.

Three months ended September 30, 2012 versus the three months ended September

30, 2011
                                               Summary of Operations (in thousands)
                                             For the Three Months Ended September 30,
                                                                          $                %
                                     2012               2011            Change           Change

Direct Revenues:

Technical Services             $     242,106       $    228,358     $     13,748             6.0  %
Field Services                        57,663             99,520          (41,857 )         (42.1 )
Industrial Services                  144,521            123,468           21,053            17.1
Oil and Gas Field Services            89,915            105,014          (15,099 )         (14.4 )
Corporate Items                         (399 )             (307 )            (92 )          30.0
Total                                533,806            556,053          (22,247 )          (4.0 )

Cost of Revenues (exclusive
of items shown separately)
(1):
Technical Services                   158,508            147,282           11,226             7.6
Field Services                        46,158             74,248          (28,090 )         (37.8 )
Industrial Services                   98,760             89,410            9,350            10.5
Oil and Gas Field Services            67,888             72,204           (4,316 )          (6.0 )
Corporate Items                        1,626              3,374           (1,748 )         (51.8 )
Total                                372,940            386,518          (13,578 )          (3.5 )

Selling, General &
Administrative Expenses:
Technical Services                    16,266             18,545           (2,279 )         (12.3 )
Field Services                         5,798              5,954             (156 )          (2.6 )
Industrial Services                    7,901              8,125             (224 )          (2.8 )
Oil and Gas Field Services             7,275              7,748             (473 )          (6.1 )
Corporate Items                       23,099             25,332           (2,233 )          (8.8 )
Total                                 60,339             65,704           (5,365 )          (8.2 )

Adjusted EBITDA:
Technical Services                    67,332             62,531            4,801             7.7
Field Services                         5,707             19,318          (13,611 )         (70.5 )
Industrial Services                   37,860             25,933           11,927            46.0
Oil and Gas Field Services            14,752             25,062          (10,310 )         (41.1 )
Corporate Items                      (25,124 )          (29,013 )          3,889           (13.4 )

Total $ 100,527 $ 103,831 $ (3,304 ) (3.2 )%



(1) Items shown separately consist of (i) accretion of environmental liabilities and (ii) depreciation and amortization.


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Revenues

Technical Services revenues increased 6.0%, or $13.7 million, in the three months ended September 30, 2012 from the comparable period in 2011 primarily due to increases in volumes being processed through our incinerators, landfills, treatment, storage and disposal facilities, and waste water treatment plants. The utilization rate at our incinerators was 91.3% for the three months ended September 30, 2012, compared with 89.0% in the comparable period of 2011, and our landfill volumes increased due to several large scale projects and Bakken Oil Fields related activity.

Field Services revenues decreased 42.1%, or $41.9 million, in the three months ended September 30, 2012 from the comparable period in 2011 primarily due to the decreased level of emergency response work. During the three months ended September 30, 2011, Field Services performed emergency response work to the Yellowstone River oil spill in Montana which accounted for $41.5 million of our third party revenues.

Industrial Services revenues increased 17.1%, or $21.1 million, in the three months ended September 30, 2012 from the comparable period in 2011 primarily due to an increase in our lodging business, particularly our fixed lodging locations ($11.9 million), growth in the oil sands region of Canada, an increase in a broad array of our specialty services, and a higher level of turnaround work year-over-year. These increases resulted partially from revenues associated with our acquisitions in 2012 and 2011, including Peak in June 2011.

Oil and Gas Field Services revenues decreased 14.4%, or $15.1 million, in the three months ended September 30, 2012 from the comparable period in 2011 primarily due to a reduction in fluids handling and surface rentals activity related to the acquisition of Peak in June 2011 ($7.9 million), decreased exploration activities ($5.9 million), and a reduction in the energy services business ($4.6 million). During the three months ended June 30, 2012, we began repositioning some of our solids control assets and rental equipment as a result of the shift earlier this year by many energy producers away from some dry gas wells toward liquid gas and oil plays.

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, the general conditions of the oil and gas industries, competitive industry pricing, and the effects of fuel prices on our fuel recovery fees.

Cost of Revenues

Technical Services cost of revenues increased 7.6%, or $11.2 million, in the three months ended September 30, 2012 from the comparable period in 2011 primarily due to increases in outside transportation ($3.3 million), materials for reclaim ($3.2 million), salary and labor expenses ($2.0 million), outside disposal and rail costs ($1.1 million).

Field Services cost of revenues decreased 37.8%, or $28.1 million, in the three months ended September 30, 2012 from the comparable period in 2011 primarily due to decreases in the level of emergency response work including the Yellowstone River oil spill in Montana during the three months ended September 30, 2011 ($28.1 million).

Industrial Services cost of revenues increased 10.5%, or $9.4 million, in the three months ended September 30, 2012 from the comparable period in 2011 primarily due to increased salary and labor expenses associated with acquisitions during 2012 and 2011.

Oil and Gas Field Services cost of revenues decreased 6.0%, or $4.3 million, in the three months ended September 30, 2012 from the comparable period in 2011 primarily due to costs related to a reduction in fluids handling and surface rentals activity, decreased exploration activities and a reduction in the energy services business.

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 . . .

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