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| CLH > SEC Filings for CLH > Form 10-K on 6-Mar-2013 | All Recent SEC Filings |
6-Mar-2013
Annual Report
• Field Services-provides 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, 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, production servicing, surface rentals, seismic services, and directional boring services to the energy sector serving oil and gas exploration, production, and power generation.
During the quarter ended March 31, 2012, we re-assigned certain departments
among our Technical Services, Field Services, Industrial Services and Oil and
Gas Field Services segments to support management reporting changes. We have
recast the 2011 and 2010 segment information presented below to conform to our
2012 segmentation reporting.
On December 28, 2012, we acquired 100% of the outstanding common shares of
Safety-Kleen, Inc. for approximately $1.3 billion (see Recent Developments
below). Prior to the acquisition, Safety-Kleen and its wholly-owned subsidiaries
(collectively, "Safety-Kleen") reported its business in two reportable segments,
consisting of:
• Oil Re-Refining Services-processes used oil at two owned and operated oil
re-refineries into high quality base and blended lubricating oils, which
are then sold to third party customers.
• Environmental Services-provides a broad range of environmental services, such as parts cleaning, containerized waste services, oil collection, recycling of oil in excess of current re-refining capacity into recycled fuel oil which is then sold to third parties, and other complimentary products and services, including vacuum services, allied products, total project management and other environmental services.
As stated in Item 8, "Financial Statements and Supplementary Data," no revenue, expense, income or loss of Safety-Kleen is included in our consolidated results of operations for the year ended December 31, 2012 due to the immateriality of the operating results subsequent to the December 28, 2012 acquisition date. Safety-Kleen's balance sheet amounts have been reported in total for purposes of our consolidated balance sheet and the segment disclosures as of December 31, 2012. With the acquisition, we are reviewing our consolidated operations and organizational structure on a go forward basis. We expect to adjust our reportable segments and reporting units in the first quarter of our 2013 fiscal year after completion of our review.
Recent Developments
Acquisition of Safety-Kleen
On December 28, 2012, we acquired 100% of the outstanding common shares of
Safety-Kleen, Inc. for approximately $1.3 billion. The purchase price consisted
of an all-cash purchase price of $1.25 billion, plus a $7.3 million adjustment
for the amount by which the estimated net working capital (excluding cash) of
Safety-Kleen, Inc. and its subsidiaries (collectively "Safety-Kleen") on the
closing date exceeded $50.0 million. The purchase price is subject to adjustment
upon finalization of Safety-Kleen's net working capital balance (excluding cash)
as of the closing date. We financed the purchase through a combination of
approximately $300.0 million of existing cash, $369.5 million in net proceeds
from our public offering of 6.9 million shares of our common stock, and
approximately $589.0 million in net proceeds from our private debt offering of
$600.0 million of 5.125% senior unsecured notes due 2021. Safety-Kleen,
headquartered in Richardson, Texas, is the largest re-refiner and recycler of
used oil in North America and a leading provider of parts cleaning and
environmental services to commercial, industrial and automotive customers. In
conjunction with the transaction, Safety-Kleen, Inc. and its subsidiaries became
wholly-owned subsidiaries of Clean Harbors. We acquired Safety-Kleen because we
believe Safety-Kleen is a good strategic fit, enabling us to (i) penetrate the
small quantity waste generator market, (ii) broaden our waste treatment
capabilities to include re-refining waste oil and expanded recycling
capabilities, (iii) drive a substantial increase in waste volumes into our
existing waste disposal treatment network, (iv) capitalize on the growing demand
for recycled products including re-refined oil, (v) enhance our commitment to
sustainability, (vi) leverage the combined sales forces to maximize
cross-selling opportunities, (vii) add an immediately accretive (exclusive of
transaction costs) business to accelerate growth, (viii) leverage operating
efficiencies through the combined company and (ix) add to our cash flow.
Public Offering of 6.9 Million Common Shares
On December 3, 2012, we issued 6.9 million shares of our common stock, including 900,000 shares of common stock issued upon exercise of the underwriters' option, at a public offering price of $56.00 per share. After deducting the underwriter discount and offering expenses, we received net proceeds of $369.5 million from the issuance which we used to pay a portion of the purchase price to acquire Safety-Kleen on December 28, 2012.
$600.0 Million Private Debt Offering
On December 7, 2012, we issued through a private placement $600.0 million
aggregate principal amount of 5.125% senior unsecured notes due 2021 ("2021
Notes"). The 2021 Notes bear interest at a rate of 5.125% per annum and mature
on June 1, 2021. Interest is payable semi-annually on June 1 and December 1 of
each year, commencing on June 1, 2013. We may redeem some or all of the 2021
Notes before maturity at stated redemption prices. See Note 11, "Financing
Arrangements," to our consolidated financial statements included in Item 8,
"Financial Statements and Supplementary Data," for a more detailed description
of the 2021 Notes. After deducting the initial purchasers' discount and offering
expenses, we received net proceeds of approximately $589.0 million from the
issuance which we used to pay a portion of the purchase price to acquire
Safety-Kleen on December 28, 2012.
$800.0 Million Private Debt Offering
On July 30, 2012, we issued $800.0 million aggregate principal amount of 5.25%
senior unsecured notes due 2020 ("2020 Notes"). The 2020 Notes bear interest at
a rate of 5.25% per annum and mature on August 1, 2020. Interest is payable
semi-annually on August 1 and February 1 of each year, commencing on February 1,
2013. We may redeem some or all of the 2020 Notes before maturity at stated
redemption prices. See Note 11, "Financing Arrangements," to our consolidated
financial statements included in Item 8, "Financial Statements and Supplementary
Data," for a more detailed description of the 2020 Notes. After deducting the
initial purchaser's discount and offering expenses, we received net proceeds of
$752.8 million from the issuance, of which we used $490.0 million to finance the
purchase and redemption of all of the then outstanding $490.0 million aggregate
principal amount of our 7.625% senior secured notes, with the remaining net
proceeds used to finance our 2012 acquisitions and for general corporate
purposes.
Revolving Credit Facility
On January 17, 2013, we increased our previous $250.0 million revolving credit
facility to a $400.0 million revolving credit facility as described further in
Note 11, "Financing Arrangements," to our consolidated financial statements
included in Item 8, "Financial Statements and Supplementary Data."
Other 2012 Acquisitions
We acquired (i) 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; (ii) 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;
and (iii) during the fourth quarter of 2012, the shares and assets of certain
subsidiaries of a privately owned company that is engaged in the business of
providing catalyst loading and unloading services in the United States and
Canada. The combined purchase price for these acquisitions was approximately
$107.5 million, including the assumption and payment of debt of $7.7 million and
post-closing adjustments of $0.7 million based upon the assumed target amounts
of working capital.
Summary of Operations
During the year ended December 31, 2012, our revenues increased 10% to $2.19
billion compared with $1.98 billion during the year ended December 31, 2011.
Revenues for the year ended December 31, 2012 included our emergency response
efforts related to Hurricane Sandy of approximately $11.7 million. Revenues for
the prior year included revenue from our emergency response efforts related to
the Yellowstone River oil spill in Montana of $43.6 million.
Our Field Services revenues accounted for 11% of our total revenues for the year
ended December 31, 2012. Exclusive of our emergency response efforts during the
years ended December 31, 2012 and 2011, the year-over-year increase in Field
Services revenues of approximately 5% resulted primarily from large-scale
project work and ongoing maintenance work.
Our Technical Services revenues accounted for 43% of our total revenues for the
year ended December 31, 2012. In our Technical Services segment, we achieved
year-over-year revenue growth of 6%. Incinerator utilization was 90% for the
year ended December 31, 2012, compared to 89% in 2011, and landfill volumes
increased 58% year-over-year.
Our Industrial Services revenues accounted for 26% of our total revenues for the
year ended December 31, 2012. The year-over-year increase in revenue of 24% was
primarily due to continued investment in the oil sands region of Canada,
incremental revenues from refinery turnaround work, revenues associated with our
acquisitions, and high utilization rates at the camps in our lodging business.
Our Oil and Gas Field Services revenues accounted for 20% of our total revenues
for the year ended December 31, 2012. The year-over-year increase of 16% was
primarily due to contributions from our acquisitions.
Our costs of revenues increased from $1.38 billion for the year ended
December 31, 2011 to $1.54 billion for the year ended December 31, 2012
primarily due to costs associated with our acquisitions in 2012 and 2011 and
because of our increased revenues. Our gross profit margin was 29.6% for the
year ended December 31, 2012, which is down slightly from 30.4% in the same
period last year.
Environmental Liabilities
The net reductions in our estimated environmental liabilities during each of
2012, 2011 and 2010 were due primarily to changes in estimates. The benefits
over the past few years were primarily due to the successful introduction of new
technology for remedial activities, favorable results from environmental studies
of the on-going remediation, including favorable regulatory approvals, and lower
project costs realized by utilizing internal labor and equipment. The principal
changes in estimates were from the following items:
In 2012, the net reduction of $8.5 million primarily related to five sites.
Updates to the scope of future work at two sites led to a reduction in the
related remedial liabilities; and installation of new technology at a third site
and favorable environmental studies at a fourth site also led to a reduction in
remedial liabilities. The estimated savings from these four sites were partially
offset by an increase in non-landfill retirement liabilities of $1.1 million
primarily related to one site where the timing of the closure was accelerated.
In 2011, the net reduction of $2.8 million primarily related to four sites.
Installation of a solar array system led to lower estimated future utility costs
at one site; favorable environmental studies and regulatory approvals were
achieved at a second and third site; and utilization of internal labor rather
than external contractors at the fourth site enabled us to reduce our estimate
of remediation costs. The estimated savings from the four sites were partially
offset by an increase in remedial liabilities recorded at a fifth site due to a
change in estimated costs following finalization of the corrective action plan.
In 2010, the net reduction of $8.3 million primarily related to three sites.
Favorable environmental studies at one site led to favorable regulatory
approvals and a reduction in the remediation period; and implementation of solar
sippers at a second site and installation of additional equipment at a third
site resulted in reductions to the estimated future utility costs due to
increased efficiencies.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of our assets, liabilities, revenues
and expenses, and related disclosures of contingent liabilities. The following
are the areas that we believe require the greatest amount of judgments or
estimates in the preparation of the financial statements: revenue allowance,
allowance for doubtful accounts, accounting for landfills, non-landfill closure
and post-closure liabilities, remedial liabilities, goodwill, permits and other
intangible assets, insurance accruals, legal matters, and provision for income
taxes. Our management reviews critical accounting estimates with the Audit
Committee of our Board of Directors on an ongoing basis and as needed prior to
the release of our annual financial statements. See also Note 2, "Significant
Accounting Policies," in Item 8, "Financial Statements and Supplementary Data,"
of this report, which discusses the significant assumptions used in applying our
accounting policies.
Revenue Allowance. Due to the nature of our business and the complex invoices
that result from the services we provide, customers may withhold payments and
attempt to renegotiate amounts invoiced. In addition, for some of the services
we provide, our invoices are based on quotes that can either generate credits or
debits when the actual revenue amount is known. Based on our industry knowledge
and historical trends, we record a revenue allowance accordingly. Increases in
overall sales volumes and the expansion of our customer base in recent years
have also increased the volume of additions and deductions to the allowance
during the year, as well as increased the amount of the allowance at the end of
the year.
Our revenue allowance is intended to cover the net amount of revenue adjustments
that may need to be credited to customers' accounts in future periods. We
determine the appropriate total revenue allowance by evaluating the following
factors on a customer-by-customer basis as well as on a consolidated level:
historical collection trends, age of outstanding receivables, existing economic
conditions and other information as deemed applicable. Revenue allowance
estimates can differ materially from the actual adjustments, but historically
our revenue allowance has been sufficient to cover the net amount of the reserve
adjustments issued in subsequent reporting periods.
Allowance for Doubtful Accounts. We establish an allowance for doubtful
accounts to cover accounts receivable that may not be collectible. In
establishing the allowance for doubtful accounts, we analyze the collectability
of accounts that are large or past due. A considerable amount of judgment is
required to make this assessment, based on detailed analysis of the aging of our
receivables, the creditworthiness of our customers, our historical bad debts and
other adjustments and current economic trends. Accounts receivable written off
in subsequent periods can differ materially from the allowance for doubtful
accounts provided, but historically our provision has been adequate.
Landfill Accounting. We amortize landfill improvements and certain
landfill-related permits over their estimated useful lives. The
units-of-consumption method is used to amortize land, landfill cell
construction, asset retirement costs and remaining landfill cells and sites. We
also utilize the units-of-consumption method to record closure and post-closure
obligations for landfill cells and sites. Under the units-of-consumption method,
we include future estimated construction and asset retirement costs, as well as
costs incurred to date, in the amortization base of the landfill assets.
Additionally, where appropriate, as discussed below, we include probable
expansion airspace that has yet to be permitted in the calculation of the total
remaining useful life of the landfill. If it is determined that expansion
capacity should no longer be considered in calculating the recoverability of a
landfill asset, we may be required to recognize an asset impairment or incur
significantly higher amortization expense. If at any time we make the decision
to abandon the expansion effort, the capitalized costs related to the expansion
effort are expensed immediately.
Landfill Assets-Landfill assets include the costs of landfill site acquisition,
permits and cell construction incurred to date. These amounts are amortized
under the units-of-consumption method such that the asset is completely
amortized when the landfill ceases accepting waste.
Landfill Capacity-Landfill capacity, which is the basis for the amortization of
landfill assets and for the accrual of final closure and post-closure
obligations, represents total permitted airspace plus unpermitted airspace that
management believes is probable of ultimately being permitted based on
established criteria. Our management applies the following criteria for
evaluating the probability of obtaining a permit for future expansion airspace
at existing sites, which provides management a basis to evaluate the likelihood
of success of unpermitted expansions:
• Personnel are actively working to obtain the permit or permit
modifications (land use, state and federal) necessary for expansion of an
existing landfill, and progress is being made on the project.
• Management expects to submit the application within the next year and to receive all necessary approvals to accept waste within the next five years.
• At the time the expansion is included in management's estimate of the landfill's useful economic life, it is probable that the required approvals will be received within the normal application and processing time periods for approvals in the jurisdiction in which the landfill is located.
• The Company or other owner of the landfill has a legal right to use or obtain the right to use the land associated with the expansion plan.
• There are no significant known political, technical, legal or business restrictions or other issues that could impair the success of such expansion.
• A financial feasibility analysis has been completed and the results demonstrate that the expansion will have a positive financial and operational impact such that management is committed to pursuing the expansion.
• Additional airspace and related additional costs, including permitting, final closure and post-closure costs, have been estimated based on the conceptual design of the proposed expansion.
Exceptions to the criteria set forth above are approved through a
landfill-specific approval process that includes approval from our Chief
Financial Officer and review by the Audit Committee of our Board of Directors.
As of December 31, 2012, there was one unpermitted expansion at one location
included in management's landfill calculation, which represented 20.96% of our
remaining airspace at that date. As of December 31, 2012 and 2011, none of the
unpermitted expansions were considered exceptions to management's established
criteria described above. If actual expansion airspace is significantly
different from management's estimate of expansion airspace, the amortization
rates used for the units-of-consumption method would change, therefore impacting
our profitability. If we determine that there is less actual expansion airspace
at a landfill, this would increase amortization expense recorded and decrease
profitability, while if we determine a landfill has more actual expansion
airspace, amortization expense would decrease and profitability would increase.
Landfill Final Closure and Post-Closure Liabilities-The balance of landfill
final closure and post-closure liabilities at December 31, 2012 and 2011 was
$26.7 million and $25.8 million, respectively. We have material financial
commitments for the costs associated with requirements of the EPA and the
comparable regulatory agency in Canada for landfill final closure and
post-closure activities. In the United States, the landfill final closure and
post-closure requirements are established under the standards of the EPA, and
are implemented and applied on a state-by-state basis. We develop estimates for
the cost of these activities based on our evaluation of site-specific facts and
circumstances, such as the existence of structures and other landfill
improvements that would need to be dismantled, the amount of groundwater
monitoring and leachate management expected to be performed, and the length of
the post-closure period as determined by the applicable regulatory agency.
Included in our cost estimates are our interpretation of current regulatory
requirements and proposed regulatory changes. Such estimates may change in the
future due to various circumstances including, but not limited to, permit
modifications, changes in legislation or regulations, technological changes and
results of environmental studies. We perform zero-based reviews of these
estimated liabilities at least every five years or sooner if the occurrence of a
significant event is likely to change the timing or amount of the currently
estimated expenditures. We consider a significant event to be a new regulation
or an amendment to an existing regulation, a new permit or modification to an
existing permit, or a change in the market price of a significant cost item. Our
cost estimates are calculated using internal sources as well as input from third
party experts. These costs are measured at estimated fair value using present
value techniques, and therefore changes in the estimated timing of closure and
post-closure activities would affect the liability, the value of the related
asset, and our results of operations.
Final closure costs are the costs incurred after the site ceases to accept
waste, but before the landfill is certified as closed by the applicable state or
provincial regulatory agency. These costs generally include the costs required
to cap the final cell of the landfill (if not included in cell closure), to
dismantle certain structures for landfills and other landfill improvements and
regulation-mandated groundwater monitoring, and for leachate management.
Post-closure costs involve the maintenance and monitoring of a landfill site
that has been certified closed by the applicable regulatory agency. These costs
generally include groundwater monitoring and leachate management. Regulatory
post-closure periods are generally 30 years after landfill closure. Final
closure and post-closure obligations are accrued on a units-of-consumption
basis, such that the present value of the final closure and post-closure
obligations are fully accrued at the date the landfill discontinues accepting
waste.
Non-Landfill Closure and Post-Closure Liabilities. The balance of our
non-landfill closure and post-closure liabilities at December 31, 2012 and 2011
was $27.6 million and $9.1 million, respectively. We base estimates for
non-landfill closure and post-closure liabilities on our interpretations of
existing permit and regulatory requirements for closure and post-closure
maintenance and monitoring. Our cost estimates are calculated using internal
sources as well as input from third party experts. We use probability scenarios
to estimate when future operations will cease and inflate the current cost of
closing the non-landfill facility on a probability weighted basis using the
appropriate inflation rate and then discounting the future value to arrive at an
estimated present value of closure and post-closure costs. The estimates for
non-landfill closure and post-closure liabilities are inherently uncertain due
to the possibility that permit and regulatory requirements will change in the
future, impacting the estimation of total costs and the timing of the
expenditures. We review non-landfill closure and post-closure
liabilities for changes to key assumptions that would impact the amount of the
recorded liabilities. Changes that would prompt us to revise a liability
estimate include changes in legal requirements that impact our expected closure
plan or scope of work, in the market price of a significant cost item, in the
probability scenarios as to when future operations at a location might cease, or
in the expected timing of the cost expenditures. Changes in estimates for
non-landfill closure and post-closure events immediately impact the required
liability and the value of the corresponding asset. If a change is made to a
fully-consumed asset, the adjustment is charged immediately to expense. When a
change in estimate relates to an asset that has not been fully consumed, the
adjustment to the asset is recognized in income prospectively as a component of
amortization. Historically, material changes to non-landfill closure and
post-closure estimates have been infrequent.
Remedial Liabilities. The balance of our remedial liabilities at December 31,
2012 and 2011 was $167.2 million and $135.3 million, respectively. See Note 10,
"Remedial Liabilities," to our consolidated financial statements for the three
years ended December 31, 2012, for the changes to the remedial liabilities
during the years ended December 31, 2012 and 2011. Remedial liabilities are
. . .
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