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CLH > SEC Filings for CLH > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for CLEAN HARBORS INC

Form 10-Q for CLEAN HARBORS INC


7-Aug-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 SEC. 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 in the three and six months ended June 30, 2014 was $858.5 million and $1.71 billion, respectively, compared with $860.5 million and $1.72 billion in the three and six months ended June 30, 2013, respectively. These decreases in total revenues were primarily attributable to the effects of foreign currency translation which reduced revenue by approximately 2% in the three and six months ended June 30, 2014 from the comparable periods in 2013 partially offset by incremental revenues generated from the operations acquired as part of 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 three and six months ended June 30, 2014 was $67.1 million and $97.0 million, respectively, compared with $53.2 million and $88.1 million in the three and six months ended June 30, 2013, respectively. Increases in income from operations were primarily due to cost savings generated from corporate initiatives implemented in 2014 across several expense categories. Adjusted EBITDA for the three months ended June 30, 2014 increased 9.9% to $135.8 million from $123.6 million in the three months ended June 30, 2013 and increased 1.3% to $237.8 million in the six months ended June 30, 2014 from $234.8 million in the six months ended June 30, 2013. Additional information, including a reconciliation of Adjusted EBITDA to Net Income, appears below under the heading "Adjusted EBITDA."
Acquisitions
On September 13, 2013, we acquired 100% of the outstanding common shares of Evergreen for a final purchase price of $56.3 million in cash, net of cash acquired. Evergreen, headquartered in Irvine, California, specializes in the recovery and re-refining of used oil. 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.
On May 30, 2014, the Company acquired certain assets of a privately owned U.S. company which provides carbon treatment systems and rental remediation equipment. The purchase price for the acquisition was $6.1 million and is subject to customary post-closing purchase price adjustments based upon finalized working capital amounts. The acquired company has been integrated into the Technical Services segment.

Environmental Liabilities
(in thousands)                         June 30, 2014       December 31, 2013       $ Change        % Change
Closure and post-closure liabilities $        49,882     $            47,085     $     2,797            5.9  %

Remedial liabilities 167,827 172,498 (4,671 ) (2.7 )% Total environmental liabilities $ 217,709 $ 219,583 $ (1,874 ) (0.9 )%

Total environmental liabilities as of June 30, 2014 were $217.7 million, a decrease of 0.9%, or $1.9 million, compared to December 31, 2013 primarily due to expenditures and changes in estimates recorded to the statement of income partially offset by accretion.


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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 six months ended June 30, 2014, the net reduction in our environmental liabilities from changes in estimates recorded as a benefit within the statement of income was $1.4 million and primarily related to estimated cost adjustments for remediation across various sites.
Segment data
During the second quarter of 2014, we made changes to the manner in which we manage our business, make operating decisions and assess performance. These changes included the reassignment of certain departments among our operating segments in line with management reporting changes as well as the identification of Lodging Services as an additional segment. Under the new structure, our operations are managed in six reportable segments: Technical Services, Industrial and Field Services, Oil Re-refining and Recycling, SK Environmental Services, Lodging Services and Oil and Gas Field Services. The following discussion and related prior year segment information has been recast to conform to the current year presentation.
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 six months ended June 30, 2014 and 2013 (in thousands).


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                                                               Summary of Operations (in thousands)
                                        For the Three Months Ended                            For the Six Months Ended
                                                              $          %                                           $          %
                                 2014          2013         Change     Change       2014            2013          Change      Change
Third Party Revenues(1):
Technical Services            $ 256,798     $ 256,262     $    536      0.2%    $   493,579     $   490,201     $   3,378      0.7%
Industrial and Field Services   185,154       199,225      (14,071 )   (7.1)        347,114         368,846       (21,732 )   (5.9)
Oil Re-refining and Recycling   144,016       123,008       21,008      17.1        272,937         263,092         9,845      3.7
SK Environmental Services       171,324       166,523        4,801      2.9         332,712         326,325         6,387      2.0
Lodging Services                 42,872        46,685       (3,813 )   (8.2)         99,566         100,015          (449 )   (0.4)
Oil and Gas Field Services       58,177        68,444      (10,267 )   (15.0)       158,949         183,607       (24,658 )   (13.4)
Corporate Items(2)                  139           381         (242 )   (63.5)           290          (9,395 )       9,685     103.1
Total                         $ 858,480     $ 860,528     $ (2,048 )   (0.2)%   $ 1,705,147     $ 1,722,691     $ (17,544 )   (1.0)%
Direct Revenues(1):
Technical Services            $ 297,658     $ 283,390     $ 14,268      5.0%    $   572,272     $   542,600     $  29,672      5.5%
Industrial and Field Services   174,143       186,417      (12,274 )   (6.6)        324,500         342,300       (17,800 )   (5.2)
Oil Re-refining and Recycling    89,150        74,747       14,403      19.3        169,955         164,805         5,150      3.1
SK Environmental Services       194,631       198,730       (4,099 )   (2.1)        375,918         393,486       (17,568 )   (4.5)
Lodging Services                 43,797        47,993       (4,196 )   (8.7)        100,886         102,041        (1,155 )   (1.1)
Oil and Gas Field Services       59,774        70,133      (10,359 )   (14.8)       162,647         189,040       (26,393 )   (14.0)
Corporate Items(2)                 (673 )        (882 )        209      23.7         (1,031 )       (11,581 )      10,550      91.1
Total                           858,480       860,528       (2,048 )   (0.2)      1,705,147       1,722,691       (17,544 )   (1.0)
Cost of Revenues(3):
Technical Services              191,875       192,072         (197 )   (0.1)        381,650         370,765        10,885      2.9
Industrial and Field Services   129,603       137,416       (7,813 )   (5.7)        249,167         264,594       (15,427 )   (5.8)
Oil Re-refining and Recycling    69,718        57,980       11,738      20.2        133,827         126,325         7,502      5.9
SK Environmental Services       137,199       137,801         (602 )   (0.4)        267,472         276,952        (9,480 )   (3.4)
Lodging Services                 26,630        27,471         (841 )   (3.1)         64,563          57,852         6,711      11.6
Oil and Gas Field Services       51,286        59,609       (8,323 )   (14.0)       130,435         142,789       (12,354 )   (8.7)
Corporate Items(2)                  639         1,977       (1,338 )   (67.7)         5,555          11,073        (5,518 )   (49.8)
Total                           606,950       614,326       (7,376 )   (1.2)      1,232,669       1,250,350       (17,681 )   (1.4)
Selling, General &
Administrative Expenses:
Technical Services               21,486        21,928         (442 )   (2.0)         44,148          42,400         1,748      4.1
Industrial and Field Services    13,824        14,241         (417 )   (2.9)         28,245          29,134          (889 )   (3.1)
Oil Re-refining and Recycling     4,236         4,015          221      5.5           8,349          10,382        (2,033 )   (19.6)
SK Environmental Services        26,125        26,853         (728 )   (2.7)         54,314          55,452        (1,138 )   (2.1)
Lodging Services                  1,680         1,263          417      33.0          3,099           2,629           470      17.9
Oil and Gas Field Services        6,676         6,380          296      4.6          14,069          14,323          (254 )   (1.8)
Corporate Items                  41,704        47,932       (6,228 )   (13.0)        82,469          96,762       (14,293 )   (14.8)
Total                           115,731       122,612       (6,881 )   (5.6)        234,693         251,082       (16,389 )   (6.5)
Adjusted EBITDA:
Technical Services               84,297        69,390       14,907      21.5        146,474         129,435        17,039      13.2
Industrial and Field Services    30,716        34,760       (4,044 )   (11.6)        47,088          48,572        (1,484 )   (3.1)
Oil Re-refining and Recycling    15,196        12,752        2,444      19.2         27,779          28,098          (319 )   (1.1)
SK Environmental Services        31,307        34,076       (2,769 )   (8.1)         54,132          61,082        (6,950 )   (11.4)
Lodging Services                 15,487        19,259       (3,772 )   (19.6)        33,224          41,560        (8,336 )   (20.1)
Oil and Gas Field Services        1,812         4,144       (2,332 )   (56.3)        18,143          31,928       (13,785 )   (43.2)
Corporate Items                 (43,016 )     (50,791 )      7,775     (15.3)       (89,055 )      (105,857 )      16,802     (15.9)
Total                         $ 135,799     $ 123,590     $ 12,209      9.9%    $   237,785     $   234,818     $   2,967      1.3%


______________________


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 six months ended June 30, 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.


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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 $14.3 million and $29.7 million in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to growth in our treatment, storage and disposal network as a result of greater drum volumes and overall utilization. The utilization rate at our incinerators was 95.0% and 91.0% for the three and six months ended June 30, 2014, respectively, compared with 92.3% and 88.9% in the comparable period of 2013, and our landfill volumes increased by approximately 5.1% in six months ended June 30, 2014 from the comparable period in 2013.
Industrial and Field Services revenues decreased $12.3 million and $17.8 million in the three and six months ended June 30, 2014 from the comparable periods in 2013. The decrease was primarily due to decreased activity in the oil sands region, cyclicality of scheduled plant turnarounds and the effects of foreign currency translation.
Oil Re-refining and Recycling revenues increased $14.4 million, in the three months ended June 30, 2014 from the comparable period in 2013. The increase was primarily due to increased volumes resulting from our acquisition of Evergreen on September 13, 2013. Oil Re-refining and Recycling revenues increased $5.2 million, in the six months ended June 30, 2014 from the comparable period in 2013 also primarily due to increased volumes resulting from of our acquisition of Evergreen partially offset by lower sales mix between base oils and higher priced blended oils. In addition, revenues were negatively impacted as compared to the three and six months ended June 30, 2013 by the effects of foreign currency translation.
SK Environmental Services revenues decreased $4.1 million and $17.6 million in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to system integration changes which occurred in May of 2013 and changed the manner by which waste is tracked across the Company's disposal network and lower refined fuel oil sales period over period.
Lodging Services revenues decreased $4.2 million and $1.2 million in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to lower occupancy at our lodging and camp facilities due to an overall slowdown in the levels of activity in the Oil Sands region of Canada and the effects of foreign currency translation.
Oil and Gas Field Services revenues decreased $10.4 million and $26.4 million in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to project delays in exploration, pricing pressure in North America and the effects of foreign currency translation.
Corporate Items revenues during the six months ended June 30, 2013 included the impact of purchase accounting adjustments to deferred revenue balances 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 was flat in the three months ended June 30, 2014 from the comparable period in 2013. Technical Services cost of revenues increased $10.9 million, in the six months ended June 30, 2014 from the comparable period in 2013 primarily due to increases in materials and supplies, outside transportation and utilities. Profit margins have improved due to overall mix of waste handled and greater operating efficiencies.
Industrial and Field Services cost of revenues decreased $7.8 million and $15.4 million in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to decreased revenues in both periods. Oil Re-refining and Recycling cost of revenues increased $11.7 million and $7.5 million in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to the cost of the incremental revenue from our acquisition of Evergreen on September 13, 2013.
SK Environmental Services cost of revenues decreased $0.6 million and $9.5 million in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to system changes which occurred in May of 2013 and impacted how intercompany disposal charges are recorded between the SK Environmental Services segment and the Technical Services segment and lower refined fuel oil sales period over period.


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Lodging Services cost of revenues decreased $0.8 million, in the three months ended June 30, 2014 from the comparable period in 2013 primarily due to lower revenue. Lodging cost of revenues increased $6.7 million, in the six months ended June 30, 2014 from the comparable period in 2013 primarily due to increases in materials and supplies, subcontractors, equipment repairs and utilities associated with increased capacity partially offset by a decrease in catering.
Oil and Gas Field Services cost of revenues decreased $8.3 million and $12.4 million in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to salaries, internal maintenance expense and equipment repairs in connection with overall lower business activity and revenues.
Selling, General and Administrative Expenses Technical Services selling, general and administrative expenses remained approximately flat and increased $1.7 million in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to an increase in variable compensation partially offset by cost saving initiatives. Industrial and Field Services selling, general and administrative expenses decreased $0.4 million and $0.9 million in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to cost saving initiatives
Oil Re-refining and Recycling selling, general and administrative expenses remained flat in the three months ended June 30, 2014. Oil Re-refining and Recycling selling, general and administrative expenses decreased $2.0 million, in the six months ended June 30, 2014 from the comparable period in 2013 primarily due to cost saving initiatives.
SK Environmental Services selling, general and administrative expenses decreased $0.7 million and $1.1 million in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to cost saving initiatives partially offset by increases in variable compensation.
Lodging Services selling, general and administrative expenses increased $0.4 million and $0.5 million in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to increases in salaries and professional fees associated with increased capacity in both comparable periods. Oil and Gas Field Services selling, general and administrative expenses remained approximately flat in the three and six months ended June 30, 2014 from the comparable periods in 2013 primarily due to increases in compensation offset by cost saving initiatives.
Corporate Items selling, general and administrative expenses decreased $6.2 million and $14.3 million for the three and six months ended June 30, 2014, as compared to the same periods in 2013 primarily due to cost saving initiatives and acquisition related costs that did not reoccur in the six months ended 2014. 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.


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

                                            For the Three Months Ended        For the Six Months Ended
                                                     June 30,                         June 30,
                                                2014            2013            2014             2013
Net income                                $       28,672     $  22,902     $     37,632       $  33,404
Accretion of environmental liabilities             2,609         2,879            5,333           5,714
Depreciation and amortization                     66,075        67,468          135,431         127,474
Other expense (income)                               655        (1,655 )         (3,523 )        (2,180 )
Interest expense, net                             19,382        19,585           38,936          39,458
Pre-tax, non-cash acquisition accounting
inventory adjustment                                   -             -                -          13,559
Provision for income taxes                        18,406        12,411           23,976          17,389
Adjusted EBITDA                           $      135,799     $ 123,590     $    237,785       $ 234,818

Depreciation and Amortization
                                   For the Three Months Ended                           For the Six Months Ended
                               June 30,               2014 over 2013               June 30,                2014 over 2013
                           2014         2013       $ Change    % Change       2014          2013        $ Change    % Change
Depreciation of fixed
assets                  $ 54,280     $ 54,337     $    (57 )     (0.1 )%   $ 110,938     $ 102,905     $  8,033        7.8  %
Landfill and other
amortization              11,795       13,131       (1,336 )    (10.2 )%      24,493        24,569          (76 )     (0.3 )%
Total depreciation and
amortization            $ 66,075     $ 67,468     $ (1,393 )     (2.1 )%   $ 135,431     $ 127,474     $  7,957        6.2  %

Depreciation and amortization decreased 2.1%, or $1.4 million, in the three months ended June 30, 2014 from the comparable period in 2013 primarily due to decreased landfill amortization. Landfill and other amortization decreased primarily due to the decrease in volumes at our landfill facilities offset by additional amortization resulting from an increase in other intangibles balances from recent acquisitions.
Depreciation and amortization increased 6.2%, or $8.0 million, in the six months ended June 30, 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 decreased primarily due to the decrease in volumes at our landfill facilities offset by additional amortization resulting from an increase in other intangibles balances from recent acquisitions.

Other (Expense) Income
                                 For the Three Months Ended                        For the Six Months Ended
                              June 30,             2014 over 2013             June 30,              2014 over 2013
                          2014       2013       $ Change    % Change      2014        2013       $ Change     % Change
Other (expense) income  $ (655 )   $ 1,655     $ (2,310 )   (139.6 )%   $ 3,523     $ 2,180     $   1,343        61.6 %

Other (expense) income decreased $2.3 million in the three months ended June 30, 2014 from the comparable period in 2013 primarily due to losses on fixed asset disposals recorded in the second quarter of 2014 versus gains recorded in 2013. Other (expense) income increased $1.3 million in the six months ended June 30, 2014 from the comparable period in 2013 primarily due to gains recognized on the sale available-for-sale securities which occurred in 2014.


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Provision for Income Taxes
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