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CLH > SEC Filings for CLH > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for CLEAN HARBORS INC

Form 10-Q for CLEAN HARBORS INC


8-May-2014

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 3, 2014, 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.
Highlights

Total revenues for the first three months of 2014 decreased 1.8% to $846.7 million from $862.2 million in the first three months of 2013. Decreases in total revenue were primarily attributable to negative impacts of foreign currency translation partially offset by revenues from the September 2013 acquisition of Evergreen Oil, Inc. ("Evergreen"). Changes in segment revenues are more fully described in our Segment Performance section below under the heading "Direct Revenues." Income from operations in the first three months of 2014 was $29.9 million compared with $34.8 million in the first three months of 2013. Decreases in income from operations were primarily due to decreased revenues and increased depreciation and amortization expense from our recent acquisitions, partially offset by decreases in consolidated selling general and administrative expenses inclusive of $4.7 million in severance and integration costs. Adjusted EBITDA decreased 8.3% to $102.0 million for the first three months of 2014 from $111.2 million for the first three months of 2013. Additional information, including a reconciliation of Adjusted EBITDA to Net Income, appears below under the heading "Adjusted EBITDA."

Acquisition of Evergreen Oil, Inc.
On September 13, 2013, we acquired 100% of the outstanding common shares of Evergreen Oil, Inc. for approximately $55.9 million in cash, net of cash acquired. The final purchase price remains subject to adjustment upon finalization of Evergreen's net working capital balance as of the closing date. Evergreen, headquartered in Irvine, California, specializes in the recovery and re-refining of used oil and is currently the second-largest collector of used oil in California. Evergreen owns and operates one of the only oil re-refining operations in the western United States and also offers other ancillary environmental services, including parts cleaning and containerized waste services, vacuum services and hazardous waste management services. The acquisition of Evergreen enables us to further penetrate the small quantity waste generator market and further expand its oil re-refining, oil recycling and waste treatment capabilities. Financial information and results of Evergreen have been recorded in our consolidated financial statements since acquisition and are primarily included in the Oil Re-refining and Recycling segment.

Environmental Liabilities
(in thousands)                         March 31, 2014       December 31, 2013       $ Change        % Change
Closure and post-closure liabilities $         48,438     $            47,085     $     1,353            2.9  %

Remedial liabilities 168,722 172,498 (3,776 ) (2.2 )% Total environmental liabilities $ 217,160 $ 219,583 $ (2,423 ) (1.1 )%

Total environmental liabilities as of March 31, 2014 were $217.2 million, a decrease of 1.1%, or $2.4 million, compared to the comparable period in 2013 primarily due to expenditures and changes in estimates recorded to the statement of income partially offset by accretion.
We anticipate our environmental liabilities, substantially all of which we assumed in connection with our acquisitions, will be payable over many years and that cash flow from operations will generally be sufficient to fund the payment of such liabilities when required. However, events not anticipated (such as future changes in environmental laws and regulations) could require that such payments be made earlier or in greater amounts than currently anticipated, which could adversely affect our results of operations, cash flow and financial condition.
In the three months ended March 31, 2014, the net reduction in our environmental liabilities from changes in estimates recorded to the statement of income was $0.8 million and primarily related to timing changes for various projects.


Table of Contents

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 months ended March 31, 2014 and 2013 (in thousands).

                                               Summary of Operations (in thousands)
                                               For the Three Months Ended March 31,
                                         2014           2013         $ Change       % Change
Third Party Revenues(1):
Technical Services                   $  236,781     $  233,939     $    2,842           1.2  %
Oil Re-refining and Recycling           137,986        146,931         (8,945 )        (6.1 )
SK Environmental Services               152,322        152,955           (633 )        (0.4 )
Industrial and Field Services           215,676        221,418         (5,742 )        (2.6 )
Oil and Gas Field Services              103,751        116,696        (12,945 )       (11.1 )
Corporate Items(2)                          151         (9,776 )        9,927         101.5
Total                                $  846,667     $  862,163     $  (15,496 )        (1.8 )%
Direct Revenues(1):
Technical Services                   $  274,614     $  259,210     $   15,404           5.9  %
Oil Re-refining and Recycling            81,773         90,370         (8,597 )        (9.5 )
SK Environmental Services               180,318        194,444        (14,126 )        (7.3 )
Industrial and Field Services           204,719        208,200         (3,481 )        (1.7 )
Oil and Gas Field Services              105,601        120,638        (15,037 )       (12.5 )
Corporate Items(2)                         (358 )      (10,699 )       10,341          96.7
Total                                   846,667        862,163        (15,496 )        (1.8 )
Cost of Revenues(3):
Technical Services                      189,775        178,693         11,082           6.2
Oil Re-refining and Recycling            64,146         68,450         (4,304 )        (6.3 )
SK Environmental Services               130,235        139,046         (8,811 )        (6.3 )
Industrial and Field Services           154,944        155,829           (885 )        (0.6 )
Oil and Gas Field Services               81,703         84,910         (3,207 )        (3.8 )
Corporate Items(2)                        4,916          9,096         (4,180 )       (46.0 )
Total                                   625,719        636,024        (10,305 )        (1.6 )
Selling, General & Administrative
Expenses:
Technical Services                       22,662         20,472          2,190          10.7
Oil Re-refining and Recycling             4,195          6,608         (2,413 )       (36.5 )
SK Environmental Services                28,107         28,358           (251 )        (0.9 )
Industrial and Field Services            15,634         16,025           (391 )        (2.4 )
Oil and Gas Field Services                7,599          8,177           (578 )        (7.1 )
Corporate Items                          40,765         48,830         (8,065 )       (16.5 )
Total                                   118,962        128,470         (9,508 )        (7.4 )
Adjusted EBITDA:
Technical Services                       62,177         60,045          2,132           3.6
Oil Re-refining and Recycling            13,432         15,312         (1,880 )       (12.3 )
SK Environmental Services                21,976         27,040         (5,064 )       (18.7 )
Industrial and Field Services            34,141         36,346         (2,205 )        (6.1 )
Oil and Gas Field Services               16,299         27,551        (11,252 )       (40.8 )
Corporate Items                         (46,039 )      (55,066 )        9,027         (16.4 )

Total $ 101,986 $ 111,228 $ (9,242 ) (8.3 )%



(1) Third party revenue is revenue billed to outside customers by a particular segment. Direct revenue is revenue allocated to the segment performing the provided service.

(2) Corporate Items revenues and costs of revenues for the three months ended March 31, 2013 includes purchase price measurement period adjustments.

(3) Cost of revenue is shown exclusive of items shown separately on the statements of income which consist of (i) accretion of environmental liabilities and (ii) depreciation and amortization.


Table of Contents

Direct Revenues
There are many factors which have impacted, and continue to impact, our revenues. These factors include, but are not limited to: foreign currency translation, acquisitions, the general conditions of the oil and gas industries, competitive industry pricing, the effects of fuel prices on our fuel recovery fees, and the level of emergency response projects.
Technical Services revenues increased 5.9%, or $15.4 million, in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to growth in our treatment, storage and disposal network as a result of greater drum volumes and increases in remediation projects. These increases were partially offset by negative impacts from foreign currency translation as the U.S. dollar strengthened against the Canadian dollar. The utilization rate at our incinerators was 91.0% for the three months ended March 31, 2014, compared with 88.9% in the comparable period of 2013, and our landfill volumes increased by approximately 24.8% in the three months ended March 31, 2014 from the comparable period in 2013.
Oil Re-refining and Recycling revenues decreased 9.5%, or $8.6 million, in the three months ended March 31, 2014 from the comparable period in 2013. The decrease was primarily due to lower overall oil pricing and sales mix between base oils and higher priced blended oils, partially offset by increases in volumes. Revenues were further negatively impacted as compared to the first quarter of 2013 by the effects of foreign currency translation. SK Environmental Services revenues decreased 7.3%, or $14.1 million, in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to numerous weather related shutdowns in the branch network.
Industrial and Field Services revenues decreased 1.7%, or $3.5 million, in the three months ended March 31, 2014 from the comparable period in 2013. During the first quarter of 2014, we recognized increased revenues relative to our lodging business, offset by negative impacts of foreign currency translation from the comparable period in 2013.
Oil and Gas Field Services revenues decreased 12.5%, or $15.0 million, in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to lower rig counts in Western Canada that resulted in a reduction in surface rental activity and continued decline in the level of seismic activities, along with negative impacts from foreign currency translation. Corporate Items revenues increased $10.3 million in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to the impact of purchase accounting adjustments to deferred revenue balances recorded in 2013 that did not reoccur in 2014.
Cost of Revenues
We believe that our ability to manage operating costs is important to our ability to remain price competitive. We continue to upgrade the quality and efficiency of our waste treatment services through the development of new technology and continued modifications at our facilities, and implementation of strategic sourcing initiatives.
Technical Services cost of revenues increased 6.2%, or $11.1 million, in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to increases in materials and supplies, outside transportation, utilities and turnaround costs.
Oil Re-refining and Recycling cost of revenues decreased 6.3%, or $4.3 million, in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to decreases to overall inventory costs and outside transportation as a result of lower sales levels. These decreases are partially offset by increases in transportation expense, maintenance and utilities costs. SK Environmental Services cost of revenues decreased 6.3%, or $8.8 million, in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to decreases in solvent costs and vehicle expense as a result of decreased sales activity.
Industrial and Field Services cost of revenues decreased 0.6%, or $0.9 million, in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to increases in material and supplies, subcontractors, equipment rentals and utilities partially offset by decreases in salary, benefits and catering costs.
Oil and Gas Field Services cost of revenues decreased 3.8%, or $3.2 million, in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to decreases in salary and benefits partially offset by increases in subcontractors, equipment rentals and materials and supplies.
Corporate Items cost of revenues decreased 46.0%, or $4.2 million, in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to the impact on Safety-Kleen's non-cash acquisition inventory accounting adjustments at December 28, 2012 which did not reoccur during 2014. Decreases were also realized related to salary, benefits and insurance costs as compared to the first quarter of 2013.


Table of Contents

Selling, General and Administrative Expenses Technical Services selling, general and administrative expenses increased 10.7%, or $2.2 million, in the three months ended March 31, 2014 from the comparable period in 2013. As a percentage of revenue, selling, general and administrative expenses remained flat at approximately 8% in both the three months ended March 31, 2014 and 2013.
Oil Re-refining and Recycling selling, general and administrative expenses decreased 36.5%, or $2.4 million, in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to savings generated from cost cutting initiatives.
SK Environmental Services selling, general and administrative expenses decreased 0.9%, or $0.3 million, in the three months ended March 31, 2014 from the comparable period in 2013.
Industrial and Field Services selling, general and administrative expenses decreased 2.4%, or $0.4 million, in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to savings generated from cost cutting initiatives.
Oil and Gas Field Services selling, general and administrative expenses decreased 7.1%, or $0.6 million, in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to savings generated from cost cutting initiatives.
Corporate Items selling, general and administrative expenses decreased 16.5%, or $8.1 million, for the three months ended March 31, 2014, as compared to the same period in 2013 primarily due to decreases in system integration expenses related to our acquisition of Safety-Kleen on December 28, 2012, as well as decreases in salary, employee benefits and professional fees.
Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted
EBITDA")
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 ("GAAP"). Adjusted EBITDA is not calculated identically by all companies, therefore 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 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 certain expenses relating to transactions not reflective of our core operations.
The information about our 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 lenders and 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 the 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 standalone and a comparative basis.
The following is a reconciliation of net income to Adjusted EBITDA (in thousands):

                                                                 For the Three Months Ended
                                                                          March 31,
                                                                    2014              2013
Net income                                                    $       8,960       $    10,502
Accretion of environmental liabilities                                2,724             2,835
Depreciation and amortization                                        69,356            60,006
Other income                                                         (4,178 )            (525 )
Interest expense, net                                                19,554            19,873
Pre-tax, non-cash acquisition accounting inventory adjustment             -            13,559
Provision for income taxes                                            5,570             4,978
Adjusted EBITDA                                               $     101,986       $   111,228


Table of Contents

Depreciation and Amortization
                                              For the Three Months Ended
                                          March 31,             2014 over 2013
                                      2014        2013       $ Change    % Change
Depreciation of fixed assets        $ 56,658    $ 48,568    $   8,090       16.7 %
Landfill and other amortization       12,698      11,438        1,260       11.0 %
Total depreciation and amortization $ 69,356    $ 60,006    $   9,350       15.6 %

Depreciation and amortization increased 15.6%, or $9.4 million, in the three months ended March 31, 2014 from the comparable period in 2013. Depreciation of fixed assets increased primarily due to acquisitions and other increased capital expenditures in recent periods. Landfill and other amortization increased primarily due to the increase in volumes at our landfill facilities and additional amortization resulting from an increase in other intangibles balances from recent acquisitions.
Other Income
For the Three Months Ended March 31, 2014 over 2013 2014 2013 $ Change % Change Other income $ 4,178 $ 525 $ 3,653 695.8 %

Other income increased $3.7 million in the three months ended March 31, 2014 from the comparable period in 2013 primarily due to a realized gain of $3.3 million on the sale of our available-for-sale securities.

Provision for Income Taxes
                                      For the Three Months Ended
                                 March 31,              2014 over 2013
                             2014        2013        $ Change      % Change
Provision for income taxes $ 5,570     $ 4,978     $    592           11.9 %
Effective income tax rate     38.3 %      32.2 %

Income tax expense for the three months ended March 31, 2014 increased $0.6 million to $5.6 million from $5.0 million for the comparable period in 2013, while the effective tax rate for the three months ended March 31, 2014 was 38.3% compared to 32.2% for the same period in 2013. The increase in the effective tax rate for the three months ended March 31, 2014 was primarily attributable to the greater percentage of taxable earnings in the US versus Canada and the release of an unrecognized tax benefit recorded in 2013.
A valuation allowance is required to be established when, based on an evaluation of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At March 31, 2014 and December 31, 2013, we had a remaining valuation allowance of $29.7 million. The allowance as of March 31, 2014 and December 31, 2013 consisted of $13.4 million of foreign tax credits, $7.0 million of state net operating loss carryforwards, $7.5 million of foreign net operating loss carryforwards and $1.8 million for the deferred tax assets of a Canadian subsidiary.

Liquidity and Capital Resources
                                          For the Three Months Ended March 31,
(in thousands)                                2014                     2013
Net cash from operating activities    $          4,596         $           39,589
Net cash used in investing activities          (62,334 )                  (72,250 )
Net cash from financing activities                (334 )                   25,634


Table of Contents

Net cash from operating activities
Net cash from operating activities for the three months ended March 31, 2014 was $4.6 million, a decrease of 88.4%, or $35.0 million, compared with net cash from operating activities for the comparable period in 2013. The change was primarily the result of a net increase in working capital driven by the payment of liabilities existing at the beginning of the period. We anticipate that operating cash flows will increase in quarterly periods for the remainder of the year as has been consistent with prior periods. Net cash used in investing activities
Net cash used in investing activities for the year ended March 31, 2014 was $62.3 million, a decrease of 13.7%, or $9.9 million, compared with cash used in investing activities for the comparable period in 2013. The change was primarily the result of an increase in capital expenditures offset by proceeds from the sale of marketable securities.
Net cash from financing activities
Net cash from financing activities for the year ended March 31, 2014 was $0.3 million, compared to net cash from financing activities of $26.0 million for the comparable period in 2013. The change in net cash from financing activities during the three month ended March 31, 2014 was primarily due to the change in uncashed checks.
Working Capital
We intend to use our existing cash and cash equivalents, marketable securities and cash flow from operations primarily to provide for our working capital needs and to fund capital expenditures and potential future acquisitions. We anticipate that our cash flow provided by operating activities will provide the necessary funds on both a short- and long-term basis to meet operating cash requirements.
At March 31, 2014, cash and cash equivalents totaled $249.0 million, compared to $310.1 million at December 31, 2013. At March 31, 2014, cash and cash equivalents held by foreign subsidiaries totaled $47.3 million and were readily convertible into other foreign currencies including U.S. dollars. At March 31, 2014, the cash and cash equivalent balances for our U.S. operations were $201.7 million. Our U.S. operations had net operating cash from operations of $2.5 million for the three months ended March 31, 2014. Additionally, we have available a $400.0 million revolving credit facility of which $251.1 million was available to borrow at March 31, 2014. Based on the above and on our current plans, we believe that our U.S. operations have adequate financial resources to satisfy their liquidity needs without being required to repatriate earnings from foreign subsidiaries. Accordingly, although repatriation to the U.S. of foreign earnings would generally be subject to U.S. income taxation, net of any available foreign tax credits, we have not recorded any deferred tax liability related to such repatriation since we intend to permanently reinvest foreign earnings outside the U.S.
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our primary ongoing cash requirements will be to fund operations, capital expenditures, interest payments and investments in line with our business strategy. We believe our future operating cash flows will be sufficient to meet our future operating and investing cash needs as well as any cash needs relating to the stock repurchase program. Furthermore, the existing cash balances and the availability of additional borrowings under our revolving credit facility provide potential sources of liquidity should they be required. Common Stock Repurchase Program
On February 25, 2014, our Board of Directors authorized the repurchase of up to $150 million of our common stock. We intend to fund the repurchases through available cash resources. The repurchase program authorizes us to purchase our common stock on the open market from time to time. The share repurchases will be made in a manner that complies with applicable U.S. securities laws. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, cash required for future business plans, trading volume and other conditions. We have no obligation to repurchase stock under . . .

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