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CLH > SEC Filings for CLH > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for CLEAN HARBORS INC

Form 10-Q for CLEAN HARBORS INC


7-Nov-2013

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 Form 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 March 6, 2013, 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.
Following our acquisition of Safety-Kleen in December 2012, we made changes in 2013 to the manner in which we manage our business, make operating decisions and assess our performance. The amounts presented for all periods herein have been recast to reflect the impact of such changes. Under the new structure, we report the business in five reportable segments, including:
         Technical Services - provides 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.


         Oil Re-refining and Recycling - processes used oil into high quality
          base and blended lubricating oils which are then sold to third party
          customers, and provides recycling of oil in excess of Safety-Kleen's
          current re-refining capacity into recycled fuel oil which is then sold
          to third parties. Processing into base and blended lubricating oils
          takes place in the Company's three owned and operated re-refineries and
          recycling of oil into recycled fuel oil takes place in one of the
          Company's used oil terminals.


         SK Environmental Services - provides a broad range of environmental
          services, such as parts cleaning, containerized waste services, oil
          collection, and other complementary products and services, including
          vacuum services, allied products and other environmental services.


         Industrial and Field 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. Also 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.


         Oil & 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.

Acquisition of Safety-Kleen
On December 28, 2012, we acquired 100% of the outstanding common shares of Safety-Kleen 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 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, $369.3 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.


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Summary of Operations
During the three months ended September 30, 2013, our revenues were $907.5 million, compared with $533.8 million during the three months ended September 30, 2012. The 70% increase in revenue was primarily driven by our acquisition of Safety-Kleen in December 2012.
Our Technical Services revenues accounted for 34% of our total revenues for the three months ended September 30, 2013. The year-over-year increase in revenues of 20% resulted from our acquisition of Safety-Kleen delivering high utilization and volumes into our disposal network, as well as our integration of a portion of the Safety-Kleen business into our Technical Services segment. The utilization rate at our incinerators was 93.5% for the three months ended September 30, 2013, compared with 91.3% in the comparable period of 2012, and our landfill volumes increased by approximately 7% year-over-year as a result of large-scale project work.
Our Oil Re-refining and Recycling revenues accounted for 9% of our total revenues for the three months ended September 30, 2013. During the third quarter, the pricing environment in Group II base oil was stable and posted industry prices increased by 10 cents per gallon late in the quarter. Revenue increased from the second quarter as a result of higher total volume of base oil and blended oil sales, improved base oil pricing and increased by-products sales volumes.
Our SK Environmental Services revenues accounted for 21% of our total revenues for the three months ended September 30, 2013. Demand for our containerized waste services, parts washers, vacuum services and allied products was consistent with prior quarters. In addition, our waste oil collection volumes were up slightly in the quarter, increasing 1% from second quarter levels. Our Industrial and Field Services revenues accounted for 24% of our total revenues for the three months ended September 30, 2013. The year-over-year increase in revenue of 13% was primarily due to positive contributions from several acquisitions resulting in increases in our turnaround services business and our field services business. This growth was tempered by a loss of a contract and softness in our lodging business. Our lodging business was impacted by the delay in completing the construction of the Ruth Lake camp due to flooding and weather issues.
Our Oil and Gas Field Services revenues accounted for 12% of our total revenues for the three months ended September 30, 2013. The year-over-year increase of 27% was primarily due to an increase in our seismic business in Western Canada, continued expansion in the U.S., and flood and oil-spill cleanup work in the region.
Our cost of revenues increased from $372.9 million during the three months ended September 30, 2012 to $647.1 million during the three months ended September 30, 2013. Our cost of revenues increased primarily due to our acquisition of Safety-Kleen in December 2012. Our gross profit margin was 28.7% for the three months ended September 30, 2013, compared to 30.1% in the same period last year. The year-over-year decrease in gross margin percentage was primarily due to the acquisition of Safety-Kleen, which carries a lower margin.
During the three months ended September 30, 2013, our effective tax rate was 34.7%, compared with 33.8% for the same period last year. The increase in the effective tax rate for the three months ended September 30, 2013 was primarily attributable to a small decline in the year-to-date rate recorded during the three months ended September 30, 2012.
Environmental Liabilities
The net decrease in our estimated environmental liabilities during the nine months ended September 30, 2013 was $1.9 million, including favorable benefits from changes in environmental liability estimates of $2.4 million. The favorable benefits over the past few years from changes in environmental liability estimates were 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. During the nine months ended September 30, 2013, the $2.4 million favorable benefit from changes in environmental liability estimates primarily related to a reduction in remedial liabilities for one inactive site that recently received site closure approval and resulted in reevaluating and removing certain compensation costs. 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, provision for income taxes and pre-tax, non-cash acquisition accounting adjustments. Also excluded are loss on early extinguishment of debt, other income (expense) and income from discontinued operations, net of tax as these amounts are not considered part of usual business operations. 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


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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.
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 stand-alone 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,
                                     2013              2012              2013               2012
Net income                     $       35,361     $     12,359     $      68,765       $      67,800
Accretion of environmental
liabilities                             2,914            2,488             8,628               7,409
Depreciation and
amortization                           69,430           41,300           196,904             116,794
Other expense (income)                    150               91            (2,030 )               465
Loss on early extinguishment
of debt                                     -           26,385                 -              26,385
Interest expense, net                  19,326           11,596            58,784              33,836
Pre-tax, non-cash
acquisition accounting
adjustments                                 -                -            13,559                   -
Provision for income taxes             18,771            6,308            36,160              37,487
Adjusted EBITDA                $      145,952     $    100,527     $     380,770       $     290,176


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

                                                          For the Nine Months Ended
                                                                September 30,
                                                           2013                 2012
Adjusted EBITDA                                     $       380,770       $      290,176
Interest expense, net                                       (58,784 )            (33,836 )
Provision for income taxes                                  (36,160 )            (37,487 )
Allowance for doubtful accounts                               5,281                  809
Amortization of deferred financing costs and
debt discount                                                 2,539                1,173
Change in environmental liability estimates                  (2,417 )             (3,553 )
Deferred income taxes                                           272                 (494 )
Stock-based compensation                                      6,389                5,235
Excess tax benefit of stock-based compensation               (1,589 )             (1,786 )
Income tax benefits related to stock option
exercises                                                     1,579                1,776
Prepayment penalty on early extinguishment of
debt                                                              -              (21,044 )
Environmental expenditures                                  (15,928 )             (7,833 )
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable                                         (72,377 )             59,881
Inventories                                                   1,710               (7,692 )
Other current assets                                         11,860               12,822
Accounts payable                                             37,257              (18,969 )
Other current and long-term liabilities                      19,712               (6,486 )
Net cash from operating activities                  $       280,114       $      232,692

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 summarize Adjusted EBITDA contribution by reportable segment for the three and nine months ended September 30, 2013 and 2012 (in thousands). We consider the Adjusted EBITDA contribution from each 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 segment Adjusted EBITDA contribution. Prior year amounts presented have been recast to reflect the changes made to our segment presentation in the first quarter of 2013 as described in Note 17, "Segment Reporting." 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 18, "Segment Reporting," included in our Annual Report on Form 10-K for the year ended December 31, 2012 and Item 1, "Unaudited Financial Statements" and in particular Note 17, "Segment Reporting," in this report.


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Three months ended September 30, 2013 versus the three months ended

September 30, 2012
                                                Summary of Operations (in thousands)
                                              For the Three Months Ended September 30,
                                                                           $               %
                                        2013             2012           Change          Change
Third Party Revenues:
Technical Services                 $    269,465      $   247,355     $    22,110            8.9  %
Oil Re-refining and Recycling           151,565                -         151,565              -
SK Environmental Services               150,535                -         150,535              -
Industrial and Field Services           227,754          203,371          24,383           12.0
Oil and Gas Field Services              107,627           82,812          24,815           30.0
Corporate Items                             589              268             321          119.8
Total                              $    907,535      $   533,806     $   373,729           70.0  %

Direct Revenues:
Technical Services                 $    305,835      $   254,971     $    50,864           19.9  %
Oil Re-refining and Recycling            86,647                -          86,647              -
SK Environmental Services               187,051                -         187,051              -
Industrial and Field Services           220,505          194,594          25,911           13.3
Oil and Gas Field Services              107,831           84,640          23,191           27.4
Corporate Items                            (334 )           (399 )            65          (16.3 )
Total                                   907,535          533,806         373,729           70.0

Cost of Revenues (exclusive of
items shown separately) (1):
Technical Services                      204,425          169,484          34,941           20.6
Oil Re-refining and Recycling            63,282                           63,282              -
SK Environmental Services               138,779                -         138,779              -
Industrial and Field Services           157,692          138,105          19,587           14.2
Oil and Gas Field Services               79,961           63,725          16,236           25.5
Corporate Items                           2,980            1,626           1,354           83.3
Total                                   647,119          372,940         274,179           73.5

Selling, General &
Administrative Expenses:
Technical Services                       22,561           17,246           5,315           30.8
Oil Re-refining and Recycling             4,473                -           4,473              -
SK Environmental Services                25,321                -          25,321              -
Industrial and Field Services            14,717           13,211           1,506           11.4
Oil and Gas Field Services                7,016            6,783             233            3.4
Corporate Items                          40,376           23,099          17,277           74.8
Total                                   114,464           60,339          54,125           89.7

Adjusted EBITDA:
Technical Services                       78,849           68,241          10,608           15.5
Oil Re-refining and Recycling            18,892                -          18,892              -
SK Environmental Services                22,951                -          22,951              -
Industrial and Field Services            48,096           43,278           4,818           11.1
Oil and Gas Field Services               20,854           14,132           6,722           47.6
Corporate Items                         (43,690 )        (25,124 )       (18,566 )         73.9
Total                              $    145,952      $   100,527     $    45,425           45.2  %


______________________


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


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Direct Revenues
Technical Services revenues increased 19.9%, or $50.9 million, in the three months ended September 30, 2013 from the comparable period in 2012 primarily due to our acquisition of Safety-Kleen delivering high utilization and volumes into our disposal network, as well as our integration of a portion of the Safety-Kleen business into our Technical Services segment. The utilization rate at our incinerators was 93.5% for the three months ended September 30, 2013, compared with 91.3% in the comparable period of 2012, and our landfill volumes increased by approximately 7% year-over-year.
The increases in Oil Re-refining and Recycling and SK Environmental Services revenues for the three months ended September 30, 2013 were due to our acquisition of Safety-Kleen in December 2012.
Industrial and Field Services revenues increased 13.3%, or $25.9 million, in the three months ended September 30, 2013 from the comparable period in 2012 primarily due to positive contributions from several acquisitions resulting in increases in our turnaround services business and our field services business. This growth was tempered by a loss of a contract and softness in our lodging business. Our lodging business was impacted by the delay in completing the construction of the Ruth Lake camp due to flooding and weather issues. Oil and Gas Field Services revenues increased 27.4%, or $23.2 million, in the three months ended September 30, 2013 from the comparable period in 2012 primarily due to an increase in our seismic business in Western Canada, continued expansion in the U.S., and flood and oil-spill cleanup work. 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 20.6%, or $34.9 million, in the three months ended September 30, 2013 from the comparable period in 2012 primarily due to increases in salary and labor expenses ($10.4 million), materials and supplies ($8.0 million), outside transportation ($5.9 million), outside disposal and rail costs ($4.1 million), subcontractor and temporary fees ($3.3 million) and vehicle expense and equipment repair costs ($2.2 million), offset partially by a reduction in materials for reclaim ($5.2 million). These increases relate partially to the integration of a portion of the Safety-Kleen business into the Technical Services segment.
The increases in Oil Re-refining and Recycling and SK Environmental Services cost of revenues for the three months ended September 30, 2013 were due to our acquisition of Safety-Kleen in December 2012.
Industrial and Field Services cost of revenues increased 14.2%, or $19.6 million, in the three months ended September 30, 2013 from the comparable period in 2012 primarily due to increased salary and labor cost and materials and supplies costs associated with our acquisitions during 2012.
Oil and Gas Field Services cost of revenues increased 25.5%, or $16.2 million, in the three months ended September 30, 2013 from the comparable period in 2012 primarily due to increases in salary and labor costs, subcontractor costs and materials and supplies costs related to the flood cleanup work in Western Canada and the large seismic project work and cleanup work in North Western Canada.
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, 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 30.8%, or $5.3 million, in the three months ended September 30, 2013 from the comparable period in 2012 primarily due to year-over-year changes in environmental liabilities estimates and increased compensation costs. The increases in Oil Re-refining and Recycling and SK Environmental Services selling, general and administrative expenses for the three months ended September 30, 2013 were due to our acquisition of Safety-Kleen in December 2012. Industrial and Field Services selling, general and administrative expenses increased 11.4%, or $1.5 million, in the three months ended September 30, 2013 from the comparable period in 2012 primarily due to increased compensation costs.


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Oil and Gas Field Services selling, general and administrative expenses increased 3.4%, or $0.2 million, for the three months ended September 30, 2013, from the comparable period in 2012. The increase was primarily due to increased compensation costs.
Corporate Items selling, general and administrative expenses increased 74.8%, or $17.3 million, for the three months ended September 30, 2013, as compared to the same period in 2012 primarily due to our acquisition of Safety-Kleen in December 2012 resulting in increases in compensation costs, computer expenses, travel costs, professional fees and rent expense. We also incurred a year-over-year increase in severance costs of $0.8 million, and an increase in professional fees related to acquisitions of $0.9 million. These increases were partially offset by a net reduction in year-over-year changes in environmental liability estimates.

Depreciation and Amortization

                                            For the Three Months Ended
. . .
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