UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURTIES EXCHANGE ACT OF 1934

 

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

 

 

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

FOR THE TRANSTION PERIOD FROM              TO              

 

Commission File Number 0-16379

 


 

CLEAN HARBORS, INC.

(Exact name of registrant as specified in its charter)

 

Massachusetts

 

04-2997780

(State of Incorporation)

 

(IRS Employer Identification No.)

 

 

 

42 Longwater Drive, Norwell, MA

 

02061-9149

(Address of Principal Executive Offices)

 

(Zip Code)

 

(781) 792-5000
(Registrant’s Telephone Number, Including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  x No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes  o   No   x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock, $.01 par value

 

23,328,008

(Class)

 

(Outstanding at May 8, 2008)

 

 

 



 

CLEAN HARBORS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION

 

 

Page No.

ITEM 1: Financial Statements

 

Consolidated Balance Sheets

1

Consolidated Statements of Operations

3

Consolidated Statements of Cash Flows

4

Consolidated Statements of Stockholders’ Equity

5

Notes to Consolidated Financial Statements

6

 

 

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

31

 

 

ITEM 4: Controls and Procedures

32

 

 

PART II: OTHER INFORMATION

 

 

 

Items No. 1 through 6

34

Signatures

35

 



 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

(in thousands)

 

 

 

March 31, 
2008

 

December 31,
2007

 

 

 

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

86,153

 

$

119,538

 

Marketable securities

 

1,500

 

850

 

Accounts receivable, net of allowances aggregating $6,331 and $6,105 respectively

 

180,411

 

193,126

 

Unbilled accounts receivable

 

15,051

 

14,703

 

Deferred costs

 

6,136

 

7,359

 

Prepaid expenses and other current assets

 

12,918

 

10,098

 

Supplies inventories

 

23,395

 

22,363

 

Deferred tax assets

 

11,497

 

11,491

 

Properties held for sale

 

374

 

910

 

Total current assets

 

337,435

 

380,438

 

Property, plant and equipment:

 

 

 

 

 

Land

 

26,217

 

22,273

 

Asset retirement costs (non-landfill)

 

1,784

 

1,438

 

Landfill assets

 

33,916

 

29,925

 

Buildings and improvements

 

118,543

 

112,469

 

Vehicles

 

32,497

 

22,854

 

Equipment

 

285,983

 

274,619

 

Furniture and fixtures

 

1,554

 

1,454

 

Construction in progress

 

17,209

 

18,702

 

 

 

517,703

 

483,734

 

Less—accumulated depreciation and amortization

 

229,449

 

221,133

 

 

 

288,254

 

262,601

 

Other assets:

 

 

 

 

 

Long-term investments

 

6,116

 

8,500

 

Deferred financing costs

 

5,306

 

5,881

 

Goodwill

 

24,809

 

21,572

 

Permits and other intangibles, net of accumulated amortization of $37,465 and $36,443, respectively

 

82,553

 

74,809

 

Deferred tax assets

 

12,317

 

12,176

 

Other

 

4,052

 

3,911

 

 

 

135,153

 

126,849

 

Total assets

 

$

760,842

 

$

769,888

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1



 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

(in thousands except per share amounts)

 

 

 

March 31, 
2008

 

December 31,
2007

 

 

 

(unaudited)

 

 

 

Current liabilities:

 

 

 

 

 

Uncashed checks

 

$

6,854

 

$

5,489

 

Current portion of capital lease obligations

 

478

 

1,251

 

Accounts payable

 

74,509

 

81,309

 

Deferred revenue

 

25,061

 

29,730

 

Other accrued expenses

 

60,346

 

65,789

 

Current portion of closure, post-closure and remedial liabilities

 

22,061

 

18,858

 

Income taxes payable

 

3,651

 

8,427

 

Total current liabilities

 

192,960

 

210,853

 

Other liabilities:

 

 

 

 

 

Closure and post-closure liabilities, less current portion of $6,227 and $5,527, respectively

 

25,134

 

24,202

 

Remedial liabilities, less current portion of $15,834 and $13,331, respectively

 

139,329

 

141,428

 

Long-term obligations

 

120,746

 

120,712

 

Capital lease obligations, less current portion

 

616

 

1,520

 

Unrecognized tax benefits and other long-term liabilities

 

70,550

 

68,276

 

Total other liabilities

 

356,375

 

356,138

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $.01 par value:

 

 

 

 

 

Authorized 40,000,000 shares; issued and outstanding 20,433,117 and 20,327,533 shares, respectively

 

204

 

203

 

Treasury stock

 

(1,451

)

(1,170

)

Additional paid-in capital

 

170,105

 

166,653

 

Accumulated other comprehensive income

 

14,014

 

17,498

 

Accumulated earnings

 

28,635

 

19,713

 

Total stockholders’ equity

 

211,507

 

202,897

 

Total liabilities and stockholders’ equity

 

$

760,842

 

$

769,888

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2



 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(in thousands except per share amounts)

 

 

 

Three Months Ended
March 31,

 

 

 

2008

 

2007

 

Revenues

 

$

242,509

 

$

205,024

 

Cost of revenues (exclusive of items shown separately below)

 

170,194

 

151,604

 

Selling, general and administrative expenses

 

39,170

 

31,355

 

Accretion of environmental liabilities

 

2,670

 

2,474

 

Depreciation and amortization

 

10,475

 

8,938

 

Income from operations

 

20,000

 

10,653

 

Other (expense) income

 

(104

)

6

 

Interest (expense), net of interest income of $1,062 and $795, respectively

 

(3,385

)

(3,184

)

Income before provision for income taxes

 

16,511

 

7,475

 

Provision for income taxes

 

7,589

 

3,974

 

Net income

 

8,922

 

3,501

 

Dividends on Series B preferred stock

 

 

69

 

Net income attributable to common stockholders

 

$

8,922

 

$

3,432

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic income attributable to common stockholders

 

$

0.44

 

$

0.17

 

Diluted income attributable to common stockholders

 

$

0.43

 

$

0.17

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

20,357

 

19,750

 

Weighted average common shares outstanding plus potentially dilutive common shares

 

20,910

 

20,637

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

 

 

Three Months
Ended March 31,

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

8,922

 

$

3,501

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

Depreciation and amortization

 

10,475

 

8,938

 

Allowance for doubtful accounts

 

(146

)

(330

)

Amortization of deferred financing costs and debt discount

 

609

 

474

 

Accretion of environmental liabilities

 

2,670

 

2,474

 

Changes in environmental liability estimates

 

(62

)

(1,929

)

Deferred income taxes

 

(41

)

(5,056

)

Stock-based compensation

 

733

 

894

 

Excess tax benefit of stock-based compensation

 

(1,604

)

 

Income tax benefits related to stock option exercises

 

1,610

 

 

(Gain) loss on sale of fixed assets and assets held for sale

 

104

 

6

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

15,077

 

10,586

 

Other current assets

 

(2,281

)

(779

)

Accounts payable

 

(7,365

)

(11,506

)

Other current liabilities

 

(13,814

)

(9,953

)

Environmental expenditures

 

(1,871

)

(1,687

)

Net cash from operating activities

 

13,016

 

(4,367

)

Cash flows from investing activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(19,207

)

(5,722

)

Acquisitions, net of cash acquired

 

(27,427

)

(1,131

)

Costs to obtain or renew permits

 

(1,393

)

(64

)

Proceeds from sales of fixed assets and assets held for sale

 

7

 

140

 

Sales of marketable securities

 

850

 

 

Purchase of available-for-sale securities

 

 

(877

)

Net cash from investing activities

 

(47,170

)

(7,654

)

Cash flows from financing activities:

 

 

 

 

 

Change in uncashed checks

 

1,402

 

(4,158

)

Proceeds from exercise of stock options

 

731

 

740

 

Deferred financing costs paid

 

 

(32

)

Proceeds from employee stock purchase plan

 

379

 

260

 

Dividend payments on preferred stock

 

 

(69

)

Payments on capital leases

 

(1,666

)

(437

)

Other

 

 

(69

)

Excess tax benefit of stock-based compensation

 

1,604

 

 

Net cash from financing activities

 

2,450

 

(3,765

)

Effect of exchange rate change on cash

 

(1,681

)

184

 

(Decrease) in cash and cash equivalents

 

(33,385

)

(15,602

)

Cash and cash equivalents, beginning of period

 

119,538

 

73,550

 

Cash and cash equivalents, end of period

 

$

86,153

 

$

57,948

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

Cash payments for interest and income taxes:

 

 

 

 

 

Interest paid

 

$

6,386

 

$

5,680

 

Income taxes paid

 

9,568

 

5,789

 

Non-cash investing and financing activities:

 

 

 

 

 

Property, plant and equipment accrued

 

$

5,099

 

$

2,255

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(in thousands)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number
of 
Shares

 

S 0.01
Par
Value

 

Treasury
Stock

 

Additional
Paid-in 
Capital

 

Comprehensive
Income

 

Accumulated 
Other 
Comprehensive
Income

 

Accumulated
Earnings

 

Total 
Stockholder’s
Equity

 

Balance at January 1, 2008

 

20,328

 

$

203

 

$

(1,170

)

$

166,653

 

 

 

$

17,498

 

$

19,713

 

$

202,897

 

Net income

 

 

 

 

 

$

8,922

 

 

8,922

 

8,922

 

Unrealized loss on long-term investments, net of taxes (see Note 5)

 

 

 

 

 

(548

)

(548

)

 

(548

)

Foreign currency translation

 

 

 

 

 

(2,936

)

(2,936

)

 

(2,936

)

Comprehensive income

 

 

 

 

 

$

5,438

 

 

 

 

Stock-based compensation

 

9

 

 

 

733

 

 

 

 

 

733

 

Issuance of restricted shares, net of shares remitted

 

4

 

 

(281

)

 

 

 

 

 

 

(281

)

Exercise of stock options

 

82

 

1

 

 

730

 

 

 

 

 

731

 

Tax benefit on exercise of stock options

 

 

 

 

1,610

 

 

 

 

 

1,610

 

Employee stock purchase plan

 

10

 

 

 

379

 

 

 

 

 

379

 

Balance at March 31, 2008

 

20,433

 

$

204

 

$

(1,451

)

$

170,105

 

 

 

$

14,014

 

$

28,635

 

$

211,507

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(1) BASIS OF PRESENTATION

 

The accompanying consolidated interim financial statements include the accounts of Clean Harbors, Inc. and its wholly-owned subsidiaries (collectively, “Clean Harbors” or the “Company”) and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, include all adjustments which, except as described elsewhere herein, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The financial statements presented herein should be read in connection with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

Certain reclassifications have been made to Note 14, “Segment Reporting” and Note 15, “Guarantor and Non-Guarantor Subsidiaries” prior year information to conform to the current year presentation.

 

(2)  NEW ACCOUNTING PRONOUNCEMENTS

 

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. The Company has adopted the provisions of SFAS 157 as of January 1, 2008, for financial instruments. Although the adoption of SFAS 157 did not materially impact its financial condition, results of operations, or cash flow, the Company is now required to provide additional disclosures as part of its financial statements.  In February 2008, the FASB issued FSP No. SFAS 157-2 (FSP 157-2) which delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, for one year.  The Company currently expects the application of the fair value framework established by SFAS No. 157 to non-financial assets and liabilities measured on a non-recurring basis will not have a material impact on its consolidated financial statements. However, management will continue to assess the potential effects of SFAS No. 157 as additional guidance becomes available.

 

SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

As of March 31, 2008, the Company held certain assets that are required to be measured at fair value on a recurring basis. These included, but were limited to, the Company’s auction rate securities classified as available for sale securities and reflected at fair value.   The fair values of these securities as of March 31, 2008 were estimated utilizing a discounted cash flow analysis or significant other observable inputs.  The discounted cash flow analyses considered, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security is expected to have a successful auction.  These securities were also compared, when possible, to other observable market data with similar characteristics to the securities held by the Company.  Prior to January 1, 2008, fair value was based on quoted market prices in the auction rate security markets.

 

As of March 31, 2008, all of the Company’s auction rate securities continue to have AAA underlying ratings. The  underlying assets of the Company’s auction rate securities are student loans, which are substantially insured by the Federal Family Education Loan Program.  As a result of the temporary declines in fair value for the Company’s auction rate securities, which the Company attributes to liquidity issues rather than credit issues, the Company has recorded an unrealized pre-tax loss of $0.9 million.  The unrealized loss resulted in an after tax reduction of $0.5 million to accumulated other comprehensive income.  The Company assessed this decline in value to be temporary due to the relatively short period of time and the extent to which the fair value has been less than par, the financial condition and near-term prospects of the underlying issuers, and the anticipated recovery in the market value.  As of March 31, 2008, the Company continued to earn interest on virtually all of its auction rate security instruments.  Any future fluctuation in fair value related to these instruments that the Company deems to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other

 

6



 

comprehensive income.  If the Company determines that any future fair value adjustment were other than temporary, it would record a charge to earnings as appropriate.

 

The Company’s assets measured at fair value on a recurring basis subject to the disclosure requirements of SFAS 157 at March 31, 2008, were as follows (in thousands):

 

 

 

Quoted Prices in
Active Markets
for Identical 
Assets 
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant 
Unobservable
Inputs
(Level 3)

 

Balance at 
March 31, 2008

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

1,500

 

$

6,116

 

$

7,616

 

 

Based on market conditions, the Company changed its valuation methodology for auction rate securities to a discounted cash flow analysis or significant other observable inputs, during first quarter 2008.  Accordingly, these securities changed from Level 1 to either Level 2 or Level 3 within SFAS 157’s hierarchy since the Company’s initial adoption of SFAS 157 at January 1, 2008.

 

The following table presents the Company’s long-term investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in SFAS 157 at March 31, 2008 (in thousands):

 

 

 

2008

 

Balance at January 1, 2008

 

$

 

Transfer to Level 3 from Level 1

 

7,000

 

Total unrealized losses included in other comprehensive income

 

(884

)

Balance at March 31, 2008

 

$

6,116

 

 

(3) BUSINESS COMBINATIONS

 

 On March 14, 2008, the Company acquired 100% of the outstanding stock of privately-held Universal Environmental, Inc., an environmental services company headquartered in Benicia, California, with a site office in Sparks, Nevada.  In conjunction with the acquisition, the Company also acquired the land surrounding the California office.   The purchase price is subject to post-closing adjustments based upon the amount by which Universal Environmental, Inc.’s net working capital as of the closing date exceeded or was less than $1.0 million.   The preliminary calculation of the purchase price was $14.6 million and the allocation of the preliminary purchase price to the assets acquired and liabilities assumed are described in the table below. The primary reason for the acquisition was to expand Site Services into new geographical locations.

 

On March 21, 2008, the Company acquired two separate solvent recycling facilities, one in Chicago, Illinois and the other in Hebron, Ohio, and the businesses associated with those facilities from Safety-Kleen Systems, Inc. The  preliminary purchase price was $6.8 million and $6.0 million, respectively, for the Chicago and Hebron businesses plus the assumption of an estimated $2.6 million of environmental liabilities related to the  Hebron facility and is subject to change based on final direct costs of the acquisition.  The Company anticipates that these acquisitions will broaden the services it can offer to customers and enhance its market share in the solvent recycling business.

 

The calculations of the preliminary purchase price and the preliminary allocation of assets acquired and liabilities assumed are as follows (in thousands):

 

 

 

Universal 
Environmental,
Inc. (1)

 

Hebron Ohio
Solvent
Recycling
Facility (2)

 

Chicago Illinois
Solvent 
Recycling 
Facility (3)

 

Preliminary purchase price

 

 

 

 

 

 

 

Cash consideration

 

$

12,706

 

$

6,600

 

$

5,900

 

Acquisition costs

 

43

 

159

 

111

 

Estimated amount due to the seller for working capital adjustments

 

1,879

 

 

 

Total estimated purchase price

 

$

14,628

 

$

6,759

 

$

6,011

 

 

7



 

Preliminary allocation of purchase price

 

 

 

 

 

 

 

Current assets

 

$

3,833

 

$

196

 

$

333

 

Property, plant and equipment

 

7,541

 

3,869

 

4,183

 

Goodwill

 

 

3,237

 

 

Customer lists and other intangibles

 

4,254

 

2,800

 

1,536

 

Total assets acquired

 

15,628

 

10,102

 

6,052

 

Liabilities assumed

 

(1,000

)

(3,343

)

(41

)

Net assets acquired

 

$

14,628

 

$

6,759

 

$

6,011

 

 

Management has determined the preliminary purchase price allocations based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed.  Such amounts are subject to adjustment based on the additional information necessary, as discussed below, to determine fair values.

 


(1) An estimate of $0.4 million has been calculated as negative goodwill, which represents the excess of the fair value of the net assets acquired over the purchase price. Negative goodwill has been proportionally allocated to property, plant and equipment ($0.3 million) and customer lists and other intangibles ($0.1 million). The intangible assets are being amortized over their useful lives of nine years.  The purchase price and related allocation are  preliminarily determined and will be revised for working capital adjustments, adjustments made to the purchase price, additional information regarding tax assets, tax liabilities and tax attributes, additional information regarding other liabilities assumed, and revisions to preliminary estimates of the fair values of property, plant and equipment and other intangibles.

 

(2) The preliminary purchase price reflects an excess of the purchase price over the fair value of the net assets acquired of approximately $3.2 million, which has been recorded as goodwill.  The entire amount of goodwill has been assigned to the Technical Services segment and such amount is not expected to be deductible for tax purposes.   The purchase price and related allocation are  preliminarily determined and will be revised as a result of adjustments made to the purchase price, additional information regarding liabilities assumed, and revisions of preliminary estimates of fair values of property, plant and equipment, goodwill and other intangibles based on final valuations.

 

(3) An estimate of $2.5 million has been calculated as negative goodwill, which represents the excess of the fair value of the net assets acquired over the purchase price. Negative goodwill has been proportionally allocated to property, plant and equipment ($1.8 million) and customer lists and other intangibles ($0.7 million). The intangible assets are being amortized over their useful lives of 3 years to 10 years or a weighted average period of 7 years. The purchase price and related allocation are preliminarily determined and will be revised for adjustments made to the purchase price, additional information regarding liabilities assumed, and revisions to preliminary estimates of fair values of property, plant and equipment and other intangibles based on final valuations.

 

The results of  operations of the acquired businesses have been included in the Company’s consolidated financial statements since the respective dates of acquisition. On a proforma basis, the acquisitions completed during the quarter were not material to the Company’s results of operations.

 

In August 2007, the Company acquired certain assets owned by Romic Environmental Technologies Corporation (“Romic”), which specialized in the collection and recycling of both hazardous and non-hazardous waste materials, for $8.6 million. The purchase price was subject to an adjustment equal to 40% of revenues generated from Romic customers for the six-month period subsequent to the acquisition.  The final contingent payment due Romic of $2.2 million was paid, net of amounts due the Company, on March 31, 2008.

 

The following is the calculation of the final purchase price and the final summary of assets acquired and liabilities assumed after all purchase price adjustments as of March 31, 2008 (in thousands):

 

Final purchase price

 

 

 

Cash consideration

 

$

7,362

 

Acquisition costs

 

883

 

Reduction of existing Romic receivables

 

308

 

Total purchase price

 

$

8,553

 

Summary of net assets acquired

 

 

 

 

8



 

Other current assets

 

$

114

 

Equipment

 

693

 

Customer list and other intangibles

 

7,811

 

Total assets acquired

 

8,618

 

Liabilities assumed

 

(65

)

Net assets acquired

 

$

8,553

 

 

Management has determined the final purchase price allocation based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed.  Negative goodwill of $7.3 million was calculated, which represents the excess of the fair value of the net assets acquired over the purchase price. In accordance with SFAS No. 141, negative goodwill has been proportionally allocated to equipment ($0.6 million) and customer lists and other intangibles ($6.7 million). The intangible assets are being amortized over their useful lives of 3.6 years to 11 years or a weighted average period of 8 years.

 

(4) LANDFILL ASSETS

 

Changes to landfill assets for the three-month period ended March 31, 2008 were as follows (in thousands):

 

 

 

2008

 

Balance at January 1, 2008

 

$

29,925

 

Asset retirement costs

 

346

 

Capital additions

 

3,875

 

Changes in estimates of landfill closure and post-closure liabilities

 

260

 

Currency translation, reclassifications and other

 

(490

)

Balance at March 31, 2008

 

$

33,916

 

 

Rates used to amortize landfill assets are calculated based upon the dollar value of estimated final liabilities discounted at the current year credit adjusted risk free rate, the surveyed remaining airspace of the landfill, and the time estimated to consume the remaining airspace. Consequently, rates vary for each landfill and for each asset category, and change as they are recalculated each year at the newly established discount rate for that year. The calculation of landfill asset amortization expense per cubic yard was revised in the first quarter of 2008 to include landfill cell construction. The calculation of the average rate reported in the Company’s March 30, 2007 Form 10-Q has also been updated to include cell construction costs. During the three-month periods ended March 31, 2008 and 2007, landfill assets were depreciated at average rates of $8.33 and $6.80 per cubic yard, respectively. The increase in the 2008 amortization rate resulted primarily from the inclusion of cell construction cost estimates based on a re-evaluation of the future construction costs for progressive trenches. Cell construction costs and the related amortization are increasing as cells are constructed to replace cells that have filled since the CSD acquisition.

 

(5) INVESTMENTS

 

As of March 31, 2008, the Company’s investments included $1.5 million of auction rate securities classified on the Company’s balance sheet as marketable securities and $6.1 million as non-current, available for sale securities. Auction rate securities are generally long-term debt instruments that provide liquidity through a Dutch auction process that resets the applicable interest rate at predetermined calendar intervals, generally every 28 days. This mechanism generally allows investors to rollover their holdings and continue to own their respective securities (with new interest rates set in the most recent auctions) or liquidate their holdings by selling their securities at par value. Prior to January 1, 2008, the Company generally invested in auction rate securities for short periods of time as part of its cash management program.  Due to recent events in credit markets, the auction events for some of these instruments held by the Company failed during the first quarter of 2008.  Subsequent to March 31, 2008, the Company accepted an offer to purchase a $1.5 million auction rate security at par to be settled in the latter half of May 2008.  As a result, the Company classified that security as a short-term marketable security as of March 31, 2008. The Company is unable to determine when the market for student loan collateralized instruments will recover.  Except for the $1.5 million security for which the Company has accepted an offer to purchase, the Company has therefore classified the remaining auction rate securities as non-current and has included them in long-term investments on its unaudited consolidated balance sheet at March 31, 2008.

 

9



 

(6) GOODWILL AND OTHER INTANGIBLE ASSETS

 

Below is a summary of amortizable intangible assets (in thousands):

 

 

 

March 31, 2008

 

December 31, 2007

 

 

 

 

 

Accumulated 

 

 

 

 

 

Accumulated 

 

 

 

 

 

Cost

 

Amortization

 

Net

 

Cost

 

Amortization

 

Net

 

Permits

 

$

98,546

 

$

31,668

 

$

66,878

 

$

98,391

 

$

30,902

 

$

67,489

 

Customer lists and other intangible assets

 

21,472

 

5,797

 

15,675

 

12,861

 

5,541

 

7,320

 

 

 

$

120,018

 

$

37,465

 

$

82,553

 

$

111,252

 

$

36,443

 

$

74,809

 

 

The increase in customer lists and other intangible assets is based primarily on preliminary estimates of the fair values of intangible assets acquired during the quarter ended March 31, 2008.   The goodwill balance as of March 31, 2008 also increased $3.2 million from December 31, 2007 as a result of the acquisition of the Hebron, Ohio solvent recovery facility.  The foregoing includes estimates that are subject to change based upon final valuations.

 

(7) OTHER ACCRUED EXPENSES

 

Other accrued expenses consisted of the following (in thousands):

 

 

 

March 31, 
2008

 

December 31, 
2007

 

Insurance

 

$

14,514

 

$

12,984

 

Interest

 

2,818

 

5,367

 

Accrued disposal costs

 

2,905

 

2,998

 

Accrued compensation and benefits

 

16,147

 

19,938

 

Other items

 

23,962

 

24,502

 

 

 

$

60,346

 

$

65,789

 

 

(8) CLOSURE AND POST-CLOSURE LIABILITIES

 

The changes to closure and post-closure liabilities for the three months ended March 31, 2008 were as follows (in thousands):

 

 

 

Landfill

 

Non-Landfill 

 

 

 

 

 

 Retirement 
Liability

 

Retirement 
Liability

 

Total

 

Balance at January 1, 2008

 

$

22,896

 

$

6,833

 

$

29,729

 

Liabilities assumed in acquisitions

 

 

418

 

418

 

New asset retirement obligations

 

346

 

 

346

 

Accretion

 

758

 

209

 

967

 

Changes in estimate recorded to statement of operations

 

 

14

 

14

 

Other changes in estimates recorded to balance sheet

 

260

 

 

260

 

Settlement of obligations

 

(74

)

(212

)

(286

)

Currency translation and other

 

(73

)

(14

)

(87

)

Balance at March 31, 2008

 

$

24,113

 

$

7,248

 

$

31,361

 

 

All of the landfill facilities included above were active as of March 31, 2008.

 

Rates used to accrue closure and post-closure costs are calculated based upon the dollar value of estimated final liabilities, the surveyed remaining airspace of the landfill, and the time estimated to consume the remaining airspace. Consequently, rates vary for each landfill, each open cell within that landfill and for each accrual category, and are recalculated each year. During the three months ended March 31, 2008 and 2007, asset retirement obligations were accrued at an average rate of $1.54 and $2.01 per cubic yard, respectively. The difference in the accrual rate of asset retirement obligations resulted from differences in the individual rates for the cells used during the respective year.

 

10



 

Anticipated payments at March 31, 2008 (based on current estimated costs and anticipated timing of necessary regulatory approvals to commence work on closure and post-closure activities) for each of the next five years and thereafter are as follows (in thousands):

 

Periods ending December 31,

 

 

 

Remaining nine months of 2008

 

$

5,802

 

2009

 

7,494

 

2010

 

9,057

 

2011

 

2,011

 

2012

 

1,432

 

Thereafter

 

219,903

 

Undiscounted closure and post-closure liabilities

 

245,699

 

Less: Reserves to be provided (including discount of $125.8 million) over remaining site lives

 

(214,338

)

Present value of closure and post-closure liabilities

 

$

31,361

 

 

New asset retirement obligations incurred in 2008 are being discounted at the credit-adjusted risk-free rate of 10.12%  and inflated at a rate of 2.44%.

 

(9) REMEDIAL LIABILITIES

 

The changes to remedial liabilities for the three months ended March 31, 2008 were as follows (in thousands):

 

 

 

 

 

 

 

Remedial 

 

 

 

 

 

 

 

 

 

Liabilities 

 

 

 

 

 

 

 

 

 

(Including 

 

 

 

 

 

Remedial 

 

Remedial 

 

Superfund) for

 

 

 

 

 

Liabilities for

 

Liabilities for

 

Non-Landfill

 

 

 

 

 

Landfill Sites

 

Inactive Sites

 

Operations

 

Total

 

Balance at January 1, 2008

 

$

5,682

 

$

88,619

 

$

60,458

 

$

154,759

 

Liabilities assumed in acquisitions

 

 

 

2,585

 

2,585

 

Accretion

 

67

 

1,030

 

606

 

1,703

 

Changes in estimate recorded to statement of operations

 

(171

)

(31

)

126

 

(76

)

Settlement of obligations

 

(22

)

(1,014

)

(549

)

(1,585

)

Currency translation and other

 

(107

)

114

 

(2,230

)

(2,223

)

Balance at March 31, 2008

 

$

5,449

 

$

88,718

 

$

60,996

 

$

155,163

 

 

The $2.6 million of liabilities assumed relates to remediation liabilities at the Company’s solvent recovery facility at Hebron, Ohio acquired in March 2008.   Such remedial liabilities have been preliminarily determined and are subject to adjustment.

 

Anticipated payments at March 31, 2008 (based on current estimated costs and anticipated timing of necessary regulatory approvals to commence work on remedial activities) for each of the next five years and thereafter are as follows (in thousands):

 

Periods ending December 31,

 

 

 

Remaining nine months of 2008

 

$

12,963

 

2009

 

10,850

 

2010

 

10,535

 

2011

 

12,157

 

2012

 

11,706

 

Thereafter

 

140,542

 

Undiscounted remedial liabilities

 

198,753

 

Less: Discount

 

(43,590

)

Total remedial liabilities

 

$

155,163

 

 

11



 

The anticipated payments for long-term maintenance range from $4.9 million to $8.8 million per year over the next five years. Spending on one-time projects for the next five years ranges from $1.6 million to $3.7 million per year. Legal and Superfund liabilities payments are expected to be between $1.0 million and $6.4 million per year for the next five years. These estimates are reviewed at least quarterly, and adjusted as additional information becomes available.

 

 (10) FINANCING ARRANGEMENTS

 

The following table is a summary of the Company’s financing arrangements (in thousands):

 

 

 

March 31, 
2008

 

December 31, 
2007

 

Senior Secured Notes, bearing interest at 11.25%, collateralized by a second-priority lien on substantially all of the Company’s assets within the United States except for accounts receivable (maturity date of July 15, 2012)

 

$

91,518

 

$

91,518

 

Revolving Facility

 

 

 

Term Loan with a financial institution, bearing interest at the U.S. prime rate (5.66% at March 31, 2008) plus 1.5%, or the Eurodollar rate (2.78% at March 31, 2008) plus 2.50%, collateralized by a first-priority lien (second priority as to accounts receivable) on substantially all of the Company’s assets within the United States (maturity date of December 1, 2010)

 

30,000

 

30,000

 

Less unamortized issue discount

 

772

 

806

 

Long-term obligations

 

$

120,746

 

$

120,712

 

 

The fair value of the Senior Secured Notes at March 31, 2008 and 2007 was $95.1 million and $99.5 million, respectively, and calculated based on quoted prices in inactive markets (level 2 inputs).

 

The Company issued the Senior Secured Notes on June 30, 2004, and established the Revolving Facility and a $50.0 million synthetic letter of credit facility (the “Synthetic LC Facility”) on December 1, 2005, under an amended and restated loan and security agreement (the “Amended Credit Agreement”) which the Company then entered into with the lenders under the Company’s loan and security agreement dated June 30, 2004 (the “Original Credit Agreement”).

 

At March 31, 2008, the Company had outstanding $91.5 million of Senior Secured Notes, a $70.0 million Revolving Facility, a $50.0 million Synthetic LC Facility, and a $30.0 million term loan (the “Term Loan”). The financing arrangements and principal terms of each are discussed further in the Company’s 2007 Annual Report on Form 10-K. There have not been any material changes in our terms and conditions during the first three months of 2008.

 

At March 31, 2008, the Company had no borrowings and $39.5 million of letters of credit outstanding under its Revolving Facility, and the Company had approximately $30.5 million available to borrow. At March 31, 2008, letters of credit outstanding under the Company’s Synthetic LC facility were $48.0 million.

 

As of March 31, 2008, the Company was in compliance with the covenants under all the Company’s debt agreements.

 

(11) COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

The Company’s waste management services are regulated by federal, state, provincial and local laws enacted to regulate discharge of materials into the environment, remediation of contaminated soil and groundwater or otherwise protect the environment. This ongoing regulation results in the Company frequently becoming a party to judicial or administrative proceedings involving all levels of governmental authorities and other interested parties. The issues involved in such proceedings generally relate to applications for permits and licenses by the Company and conformity with legal requirements, alleged violations of existing permits and licenses or requirements to clean up contaminated sites. At March 31, 2008, the Company was involved in various proceedings, the principal of which are described in Note 11, “Commitments and Contingencies” to the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.  The disclosures below relate to material contingencies associated with litigation existing at the end of the most recent year or events subsequent to the end of the most recent fiscal year that have occurred which had, or could have, a material impact on the Company’s consolidated financial statements.

 

12



 

Legal Proceedings Related to Acquisition of CSD Assets

 

Effective September 7, 2002 (the “Closing Date”), the Company purchased from Safety-Kleen Services, Inc. and certain of its domestic subsidiaries (collectively, the “Sellers”) substantially all of the assets of the Chemical Services Division (the “CSD”) of Safety-Kleen Corp. The Company purchased the CSD assets pursuant to a sale order (the “Sale Order”) issued by the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) which had jurisdiction over the Chapter 11 proceedings involving the Sellers, and the Company therefore took title to the CSD assets without assumption of any liability (including pending or threatened litigation) of the Sellers except as expressly provided in the Sale Order. However, under the Sale Order (which incorporated by reference certain provisions of the Acquisition Agreement between the Company and Safety-Kleen Services, Inc.), the Company became subject as of the Closing Date to certain legal proceedings which are now either pending or threatened involving the CSD assets. As of March 31, 2008, the Company had reserves of $32.8 million (substantially all of which the Company had established as part of the purchase price for the CSD assets) relating to the Company’s estimated potential liabilities in connection with such legal proceedings. At December 31, 2007, the Company estimated that it was “reasonably possible” as that term is defined in SFAS No. 5 (“more than remote but less than likely”), that the amount of such total liabilities could be up to $3.8 million greater than the $32.6 million reserve balance at December 31, 2007. The Company believes that as of March 31, 2008, there has been no material change in the reasonably possible amount of $3.8 million. The Company periodically adjusts the aggregate amount of such reserves when such potential liabilities are paid or otherwise discharged or additional relevant information becomes available. Substantially all of the Company’s legal proceedings liabilities are environmental liabilities and, as such, are included in the tables of changes to remedial liabilities disclosed as part of Note 9, “Remedial Liabilities.”

 

Ville Mercier Legal Proceedings.  The CSD assets included a subsidiary (the “Mercier Subsidiary”) which owns and operates a hazardous waste incinerator in Ville Mercier, Quebec (the “Mercier Facility”). A property owned by the Mercier Subsidiary adjacent to the current Mercier Facility is now contaminated as a result of actions dating back to 1968, when the Quebec government issued to the unrelated company which then owned the Mercier Facility two permits to dump organic liquids into lagoons on the property. By 1972, groundwater contamination had been identified, and the Quebec government provided an alternate water supply to the municipality of Ville Mercier.

 

In 1999, Ville Mercier and three neighboring municipalities filed separate legal proceedings against the Mercier Subsidiary and certain related companies together with certain former officers and directors, as well as against the Government of Quebec. The lawsuits assert that the defendants are jointly and severally responsible for the contamination of groundwater in the region, which the plaintiffs claim was caused by contamination from the former Ville Mercier lagoons and which they claim caused each municipality to incur additional costs to supply drinking water for their citizens since the 1970’s and early 1980’s. The four municipalities claim a total of $1.6 million (CDN) as damages for additional costs to obtain drinking water supplies and seek an injunctive order to obligate the defendants to remediate the groundwater in the region. The Quebec Government also sued the Mercier Subsidiary to recover approximately $17.4 million (CDN) of alleged past costs for constructing and operating a treatment system and providing alternative drinking water supplies. The Mercier Subsidiary continues to assert that it has no responsibility for the groundwater contamination in the region.

 

On September 26, 2007 the Minister of Sustainable Development, Environment and Parks issued a Notice pursuant to Section 115.1 of the Environment Quality Act, superceding Notices issued in 1992, which are the subject of the pending litigation. The more recent Notice notifies the Mercier Subsidiary that, if the Mercier Subsidiary does not take certain remedial measures at the site, the Minister intends to undertake those measures at the site and claim direct and indirect costs related to such measures. The Mercier Subsidiary continues to assert that it has no responsibility for the matter and will contest any action by the Ministry to impose costs for remedial measures on the Mercier Subsidiary. At March 31, 2008 and December 31, 2007, the Company had accrued $12.7 million and $13.1 million, respectively, for remedial liabilities and associated legal costs relating to the Ville Mercier legal proceedings.

 

Properties Included in CSD Assets. The CSD assets include a former hazardous waste incinerator and landfill in Baton Rouge, Louisiana (“BR Facility”) undergoing remediation pursuant to an order issued by the Louisiana Department of Environmental Quality (the “LDEQ”). In December 2003, the Company received an information request from the EPA pursuant to the Superfund Act concerning the Devil’s Swamp Lake Site (“Devil’s Swamp”) in East Baton Rouge Parish, Louisiana. On March 8, 2004, the EPA proposed to list Devil’s Swamp on the National Priorities List for further investigations and possible remediation. Devil’s Swamp includes a lake located downstream of an outfall ditch where wastewaters and stormwaters have been discharged from the BR Facility, as well as extensive swamplands adjacent to it. Contaminants of concern (“COCs”) cited by the EPA as a basis for listing the site include substances of the kind found in wastewaters discharged from the BR Facility in past operations. While the Company’s ongoing corrective actions at the BR

 

13



 

Facility may be sufficient to address the EPA’s concerns, there can be no assurance that additional action will not be required and that the Company will not incur material costs. In September 2007 the EPA sent Special Notice Letters to certain generators of waste materials containing COCs that had shipped the COCs to the BR Facility in the past and that EPA believes may be liable under Superfund laws, requiring those generators to submit a good faith offer to conduct a remedial investigation feasibility study directed towards the eventual remediation of Devil’s Swamp. EPA sent a follow-up letter to the September 2007 letter on January 17, 2008, contacting the recipients to confirm a negotiation and organizational meeting on January 31, 2008 at the EPA’s offices in Dallas, Texas. The Company participated in this meeting, and the recipients of the notice letters conferred further with the Company by teleconference on February 19th. The Company cannot estimate the Company’s potential additional liability for Devil’s Swamp associated with this litigation.

 

Third Party Superfund Sites.  Prior to the Closing Date, the Sellers had generated or shipped hazardous wastes, which are present on an aggregate of 35 sites owned by third parties, which have been designated as federal or state Superfund sites and at which the Sellers, along with other parties, had been designated as PRPs. Under the Acquisition Agreement and the Sale Order, the Company agreed with the Sellers that it would indemnify the Sellers against the Sellers’ share of the cleanup costs payable to governmental entities in connection with those 35 sites, which were listed in Exhibit A to the Sale Order (the “Listed Third Party Sites”). At 29 of the Listed Third Party Sites, the Sellers had addressed, prior to the Company’s acquisition of the CSD assets in September 2002, the Sellers’ cleanup obligations to the federal and state governments and to other PRPs by entering into consent decrees or other settlement agreements or by participating in ongoing settlement discussions or site studies and, in accordance therewith, the PRP group is generally performing or has agreed to perform the site remediation program with government oversight. With respect to two of those 29 Listed Third Party Sites, certain developments have occurred since the Company’s purchase of the CSD assets which have affected the Company’s estimated liabilities relating to those sites. Of the remaining Listed Third Party Sites, the Company, on behalf of the Sellers, is contesting with the governmental entities and PRP groups involved the Sellers’ liability at two sites, has settled the Sellers’ liability at two sites, and plans to fund participation by the Sellers as settling PRPs at two sites. In addition, the Company has confirmed that the Sellers were ultimately not named as PRPs at one site. With respect to all of the 35 Listed Third Party Sites, the Company had reserves of $8.1 million and $7.7 million at March 31, 2008 and December 31, 2007, respectively.

 

By letters to the Company dated between September 2004 and May 2006, the Sellers identified, in addition to the 35 Listed Third Party Sites, five additional sites owned by third parties which the EPA or a state environmental agency has designated as a Superfund site or potential Superfund site and at which one or more of the Sellers have been named as a PRP or potential PRP. In those letters, the Sellers asserted that the Company has an obligation to indemnify the Sellers for their share of the potential cleanup costs associated with such five additional sites. The Company has responded to such letters from the Sellers by stating that, under the Sale Order, the Company has no obligation to reimburse the Sellers for any cleanup and related costs (if any) which the Sellers may incur in connection with such additional sites. The Company intends to assist the Sellers in providing information now in the Company’s possession with respect to such five additional sites and to participate in negotiations with the government agencies and PRP groups involved. In addition, at one of those five additional sites, the Company may have some liability independently of the Sellers’ involvement with that site, and the Company may also have certain defense and indemnity rights under contractual agreements for prior acquisitions relating to that site. Accordingly, the Company is now investigating that site further. However, the Company now believes that it has no liabilities with respect to the potential cleanup of those five additional sites that are both probable and estimable at this time, and the Company therefore has not established any reserves for any potential liabilities of the Sellers in connection therewith. At one site the potential liability of the Sellers is de minimis and a settlement has already been offered to the Sellers to that effect, and at one site the Company believes that the Sellers shipped no wastes or substances into the site and therefore the Sellers have no liability. For the other three sites, the Company cannot estimate the amount of the Sellers’ liabilities, if any, at this time.

 

Legal Proceedings Not Related to CSD Assets

 

In addition to the legal proceedings relating to the CSD assets, the Company is also involved in certain legal proceedings related to environmental matters which have arisen for other reasons.

 

Superfund Sites Not Related to CSD Acquisition.  The Company has been named as a PRP at 29 sites that are not related to the CSD acquisition. Fourteen of these sites involve two subsidiaries which the Company acquired from ChemWaste, a former subsidiary of Waste Management, Inc. As part of that acquisition, ChemWaste agreed to indemnify the Company with respect to any liability of those two subsidiaries for waste disposed of before the Company acquired them. Accordingly, Waste Management is paying all costs of defending those two subsidiaries in those 14 cases, including legal fees and settlement costs.

 

14



 

As of March 31, 2008 and December 31, 2007, the Company had reserves of $0.6 million and $0.6 million, respectively, for cleanup of Superfund sites not related to the CSD acquisition at which either the Company or a predecessor has been named as a PRP. However, there can be no guarantee that the Company’s ultimate liabilities for these sites will not materially exceed this amount or that indemnities applicable to any of these sites will be available to pay all or a portion of related costs. Included in the above noted reserve at both March 31, 2008 and December 31, 2007 is a potential liability where the Company was issued an official Notice Letter in February 2007 pertaining to its involvement at a state Superfund site in Niagara Falls, New York where it may have incurred liability for past waste shipments. No indemnification exists for this site.

 

Lopez Lawsuit.  The Company has been involved in several lawsuits (collectively, the “Lopez Lawsuit”) arising out of a complaint originally filed in 2003 by Mr. Eddie Lopez and his wife, Ms. Sandy Lopez, against Clean Harbors Environmental Services, Inc. (“CHES”).  The remaining active case is pending in the United States District Court for the Northern District of Illinios (the “District Court”).The plaintiffs filed an amended complaint in the District Court on December 3, 2007, which alleges that Mr. Lopez was exposed to toxic fumes and thereby suffered severe injuries while employed by a Clean Harbors’ vendor to  pick up dumpsters at the “Clean Harbors facility” in Chicago, Illinois. The amended complaint seeks damages in an unspecified amount for personal injury, loss of income and loss of consortium. The Company believes that the claims made against CHES in the Lopez Lawsuit are fully defensible on the merits and intends to vigorously defend against such claims.

 

On April 6, 2008, the insurance company that had originally been notified and had agreed to indemnify and defend Clean Harbors but had issued a reservation of rights letter filed a complaint in the District Court seeking a declaratory judgment that it has no obligation to defend or indemnify Clean Harbors.  Clean Harbors has notified two other insurance companies that have agreed to indemnify and defend Clean Harbors but have also issued reservation of right letters.

 

The Company is now engaged in investigations and ongoing discussions with its various insurance carriers as well as its insurance broker concerning its rights to coverage for any potential liabilities that may arise out of the Lopez Lawsuit, and the Company intends to vigorously assert its rights to such coverage based on such investigations and discussions. However, in the event that the plaintiffs were to prevail in the Lopez Lawsuit and CHES’ general liability insurance carrier, umbrella liability carrier and environmental impairment liability insurance carrier were to successfully deny coverage, then the Company could be faced with potential significant liabilities.  In such an event, the Company would vigorously pursue remedies against various third parties relating thereto. At March 31, 2008, the Company had not recorded any liability for this matter on the basis that such liability is not probable.

 

Regulatory Proceedings

 

From time to time, the Company pays fines or penalties in regulatory proceedings relating primarily to waste treatment, storage or disposal facilities. As of March 31, 2008, there were two additional proceedings to those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, and for which the Company reasonably believes that the sanctions could equal or exceed $100,000. The matters involve allegations that the Company (i) stored polychlorinated biphenyls, or “PCBs,” in tanks in violation of  a facilities permit; and (ii) improperly managed containers prior to incineration in violation of a facility’s permit and violated federal air regulations at an operating landfill as a result of a few small fires. The Company does not believe that the fines or other penalties in any of these matters will, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations.

 

 (12) INCOME TAXES

 

The income tax expense for the first quarter of 2008 was based on the estimated effective tax rate for the year. The effective tax rate decreased in 2008 as compared to the same period in 2007 primarily related to a reduction in the expected amount of permanent differences for the year.

 

  As of March 31, 2008 the Company’s unrecognized tax benefits were $69.2 million which included $15.3 million of interest and $4.3 million of penalties.

 

The Company anticipates that total unrecognized tax benefits other than adjustments for additional accruals for interest and penalties and foreign currency translation, will decrease by approximately $2.1 million by March 31, 2009.   The $2.1 million was related to a business combination and as such will be recorded as a reduction of intangible assets and will not impact the income tax provision.

 

15



 

(13) EARNINGS PER SHARE

 

The following is a reconciliation of basic and diluted income per share computations (in thousands except for per share amounts):

 

 

 

Three Months Ended March 31, 2008

 

Three Months Ended March 31, 2007

 

 

 

Income

 

Shares

 

Per Share
Amount

 

Income

 

Shares

 

Per Share
Amount

 

Basic income attributable to common stockholders before effect of dilutive securities

 

$

8,922

 

20,357

 

$

0.44

 

$

3,432

 

19,750

 

$

0.17

 

Dilutive effect of equity-based compensation awards and warrants

 

 

553

 

(0.01

)

69

 

887

 

 

Diluted income attributable to common stockholders

 

$

8,922

 

20,910

 

$

0.43

 

$

3,501

 

20,637

 

$

0.17

 

 

 (14) SEGMENT REPORTING

 

The Company has two reportable segments: Technical Services and Site Services. Performance of the segments is evaluated on several factors, of which the primary financial measure is operating income before interest, taxes, depreciation, amortization, restructuring, severance charges, other refinancing-related expenses, (gain) loss on disposal of assets held for sale, other (income) expense, and loss on refinancing (“Adjusted EBITDA Contribution”). Transactions between the segments are accounted for at the Company’s estimate of fair value based on similar transactions with outside customers.

 

The operations not managed through the Company’s two operating segments are presented herein as “Corporate Items.” Corporate Items revenues consist of two different operations where the revenues are insignificant. Corporate Items cost of revenues represents certain central services that are not allocated to the segments for internal reporting purposes. Corporate Items selling, general and administrative expenses include typical corporate items such as legal, accounting and other items of a general corporate nature that are not allocated to the Company’s two segments.

 

The following table reconciles third party revenues to direct revenues for the three-month periods ended March 31, 2008 and 2007 (in thousands). Outside or third party revenue is revenue billed to our customers by a particular segment. Direct revenue is the revenue allocated to the segment performing the provided service. The Company analyzes results of operations based on direct revenues because the Company believes that these revenues and related expenses best reflect the manner in which operations are managed. Certain reporting units have been reclassified to conform to the current year presentation.

 

 

 

For the Three Months Ended March 31, 2008

 

 

 

Technical
Services

 

Site
Services

 

Corporate
Items

 

Total

 

Third party revenues

 

$

166,312

 

$

76,190

 

$

7

 

$

242,509

 

Intersegment revenues

 

11,402

 

5,128

 

71

 

16,601

 

Gross revenues

 

177,714

 

81,318

 

78

 

259,110

 

Intersegment expenses

 

(5,745

)

(10,311

)

(545

)

(16,601

)

Direct revenues

 

$

171,969

 

$

71,007

 

$

(467

)

$

242,509

 

 

 

 

For the Three Months Ended March 31, 2007

 

 

 

Technical
Services

 

Site
Services

 

Corporate
Items

 

Total

 

Third party revenues

 

$

139,721

 

$

65,304

 

$

(1

)

$

205,024

 

Intersegment revenues (1)

 

29,192

 

5,610

 

188

 

34,990

 

Gross revenues

 

168,913

 

70,914

 

187

 

240,014

 

Intersegment expenses(1)

 

(25,705

)

(8,733

)

(552

)

(34,990

)

Direct revenues

 

$

143,208

 

$

62,181

 

$

(365

)

$

205,024

 

 

16



 


(1)                                  Adjustments of $14,232 and $65 for Technical Services and Site Services, respectively, were made between intersegment expenses and intersegment revenues to correct amounts previously reported.   The adjustments eliminate in consolidation and were considered immaterial.

 

The following table presents information used by management by reported segment (in thousands). The Company does not allocate interest expense, income taxes, depreciation, amortization, accretion of environmental liabilities, non-recurring severance charges, (gain) loss on disposal of assets held for sale, other (income) expense, and loss on refinancing to segments.

 

 

 

For the Three Months Ended
March 31,

 

 

 

2008

 

2007

 

Adjusted EBITDA:

 

 

 

 

 

Technical Services

 

$

40,227

 

$

25,373

 

Site Services

 

7,885

 

8,578

 

Corporate Items

 

(14,967

)

(11,886

)

Total

 

33,145

 

22,065

 

 

 

 

 

 

 

Reconciliation to Consolidated Statement of Operations:

 

 

 

 

 

Accretion of environmental liabilities

 

2,670

 

2,474

 

Depreciation and amortization

 

10,475

 

8,938

 

Income from operations

 

20,000

 

10,653

 

Other (income) expense

 

104

 

(6

)

Interest expense, net of interest income

 

3,385

 

3,184

 

Income before provision for income taxes

 

$

16,511

 

$

7,475

 

 

The following table presents property, plant and equipment by reported segment and in the aggregate (in thousands):

 

 

 

March 31,
2008

 

December 31,
2007

 

Property, plant and equipment, net

 

 

 

 

 

Technical Services

 

$

225,027

 

$

216,796

 

Site Services

 

28,330

 

20,105

 

Corporate or other assets

 

34,897

 

25,700

 

 

 

$

288,254

 

$

262,601

 

 

The following table presents intangible assets by reported segment (in thousands):

 

Intangible assets:

 

 

 

 

 

Technical Services

 

 

 

 

 

Goodwill

 

$

24,661

 

$

21,424

 

Permits and other intangibles, net

 

73,602

 

69,995

 

Total Technical Services

 

98,263

 

91,419

 

Site Services

 

 

 

 

 

Goodwill

 

148

 

148

 

Permits and other intangibles, net

 

8,951

 

4,814

 

Total Site Services

 

9,099

 

4,962

 

Total

 

$

107,362

 

$

96,381

 

 

The following table presents the total assets by reported segment (in thousands):

 

 

 

March 31,
2008

 

December 31,
2007

 

Technical Services

 

$

460,623

 

$

369,053

 

Site Services

 

54,217

 

37,710

 

Corporate Items

 

246,002

 

363,125

 

Total

 

$

760,842

 

$

769,888

 

 

17



 

The following table presents the total assets by geographical area (in thousands):

 

 

 

March 31,
2008

 

December 31,
2007

 

United States

 

$

627,968

 

$

631,630

 

Canada

 

132,874

 

138,258

 

Total

 

$

760,842

 

$

769,888

 

 

(15) GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

 

On June 30, 2004, $150.0 million of Senior Secured Notes were issued by the parent company, Clean Harbors, Inc., and were guaranteed by all of the parent’s material subsidiaries organized in the United States. The notes are not guaranteed by the Company’s Canadian and Mexican subsidiaries. The following presents condensed consolidating financial statements for the parent company, the guarantor subsidiaries and the non-guarantor subsidiaries, respectively.

 

Following is the condensed consolidating balance sheet at March 31, 2008 (in thousands):

 

 

 

Clean
Harbors, Inc.

 

U.S. Guarantor
Subsidiaries

 

Foreign
Non-Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,128

 

$

1,141

 

$

48,884

 

$

 

$

86,153

 

Intercompany receivables

 

(276

)

 

188,668

 

(188,392

)

 

Other current assets

 

12,923

 

213,406

 

24,953

 

 

251,282

 

Property, plant and equipment, net

 

 

252,628

 

35,626

 

 

288,254

 

Investments in subsidiaries

 

359,731

 

137,855

 

91,654

 

(589,240

)

 

Intercompany note receivable

 

 

116,788

 

3,701

 

(120,489

)

 

Other long-term assets

 

20,007

 

80,619

 

34,527

 

 

135,153

 

Total assets

 

$

428,513

 

$

802,437

 

$

428,013

 

$

(898,121

)

$

760,842

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

43,912

 

$

129,140

 

$

19,908

 

$

 

$

192,960

 

Intercompany payables

 

 

188,392

 

 

(188,392

)

 

Closure, post-closure and remedial liabilities, net

 

 

145,934

 

18,529

 

 

164,463

 

Long-term obligations

 

120,746

 

 

 

 

120,746

 

Capital lease obligations, net

 

 

410

 

206

 

 

616

 

Intercompany note payable

 

3,701

 

 

116,788

 

(120,489

)

 

Other long-term liabilities

 

48,647

 

1,560

 

20,343

 

 

70,550

 

Total liabilities

 

217,006

 

465,436

 

175,774

 

(308,881

)

549,335

 

Stockholders’ equity

 

211,507

 

337,001

 

252,239

 

(589,240

)

211,507

 

Total liabilities and stockholders’ equity

 

$

428,513

 

$

802,437

 

$

428,013

 

$

(898,121

)

$

760,842

 

 

18



 

Following is the condensed consolidating balance sheet at December 31, 2007 (in thousands):

 

 

 

Clean
Harbors, Inc.

 

U.S. Guarantor
Subsidiaries

 

Foreign
Non-Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,925

 

$

32,301

 

$

51,312

 

$

 

$

119,538

 

Intercompany receivables

 

2,521

 

 

80,521

 

(83,042

)

 

Other current assets

 

12,287

 

220,060

 

28,553

 

 

260,900

 

Property, plant and equipment, net

 

 

230,449

 

32,152

 

 

262,601

 

Investments in subsidiaries

 

344,953

 

140,298

 

91,654

 

(576,905

)

 

Intercompany note receivable

 

 

121,445

 

3,701

 

(125,146

)

 

Other long-term assets

 

22,631

 

68,396

 

35,822

 

 

126,849

 

Total assets

 

$

418,317

 

$

812,949

 

$

323,715

 

$

(785,093

)

$

769,888

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

43,504

 

$

143,672

 

$

23,677

 

$

 

$

210,853

 

Intercompany payables

 

 

83,042

 

 

(83,042

)

 

Closure, post-closure and remedial liabilities, net

 

 

145,752

 

19,878

 

 

165,630

 

Long-term obligations

 

120,712

 

 

 

 

120,712

 

Capital lease obligations, net

 

 

1,174

 

346

 

 

1,520

 

Intercompany note payable

 

3,701

 

 

121,445

 

(125,146

)

 

Other long-term liabilities

 

47,503

 

 

20,773

 

 

68,276

 

Total liabilities

 

215,420

 

373,640

 

186,119

 

(208,188

)

566,991

 

Stockholders’ equity

 

202,897

 

439,309

 

137,596

 

(576,905

)

202,897

 

Total liabilities and stockholders’ equity

 

$

418,317

 

$

812,949

 

$

323,715

 

$

(785,093

)

$

769,888

 

 

19



 

Following is the consolidating statement of operations for the three months ended March 31, 2008 (in thousands):

 

 

 

Clean
Harbors, Inc.

 

U.S. Guarantor
Subsidiaries

 

Foreign
Non-Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

208,858

 

$

38,867

 

$

(5,216

)

$

242,509

 

Cost of revenues

 

 

149,325

 

26,085

 

(5,216

)

170,194

 

Selling, general and administrative expenses

 

 

33,860

 

5,310

 

 

39,170

 

Accretion of environmental liabilities

 

 

2,391

 

279

 

 

2,670

 

Depreciation and amortization

 

 

9,211

 

1,264

 

 

10,475

 

Income from operations

 

 

14,071

 

5,929

 

 

20,000

 

Other income (expense)

 

 

(108

)

4

 

 

(104

)

Interest income (expense)

 

(3,630

)

(169

)

414

 

 

(3,385

)

Equity in earnings of subsidiaries

 

18,262

 

4,164

 

 

(22,426

)

 

Intercompany dividend income (expense)

 

 

 

3,409

 

(3,409

)

 

Intercompany interest income (expense)

 

 

3,289

 

(3,289

)

 

 

Income before provision for income taxes

 

14,632

 

21,247

 

6,467

 

(25,835

)

16,511

 

Provision for income taxes

 

5,710

 

329

 

1,550

 

 

7,589

 

Net income

 

$

8,922

 

$

20,918

 

$

4,917

 

$

(25,835

)

$

8,922

 

 

Following is the consolidating statement of operations for the three months ended March 31, 2007 (in thousands):

 

 

 

Clean
Harbors, Inc.

 

U.S. Guarantor
Subsidiaries

 

Foreign
Non-Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

177,591

 

$

30,982

 

$

(3,549

)

$

205,024

 

Cost of revenues

 

 

133,593

 

21,560

 

(3,549

)

151,604

 

Selling, general and administrative expenses

 

 

24,593

 

6,762

 

 

31,355

 

Accretion of environmental liabilities

 

 

2,258

 

216

 

 

2,474

 

Depreciation and amortization

 

 

7,153

 

1,785

 

 

8,938

 

Income from operations

 

 

9,994

 

659

 

 

10,653

 

Other income

 

 

6

 

 

 

6

 

Interest income (expense)

 

(3,413

)

(77

)

306

 

 

(3,184

)

Equity in earnings of subsidiaries

 

10,199

 

(18

)

 

(10,181

)

 

Intercompany dividend income (expense)

 

 

 

2,921

 

(2,921

)

 

Intercompany interest income (expense)

 

 

2,820

 

(2,820

)

 

 

Income before provision for income taxes

 

6,786

 

12,725

 

1,066

 

(13,102

)

7,475

 

Provision for income taxes

 

3,285

 

 

689

 

 

3,974

 

Net income

 

$

3,501

 

$

12,725

 

$

377

 

$

(13,102

)

$

3,501

 

 

20



 

Following is the condensed consolidating statement of cash flows for the three months ended March 31, 2008 (in thousands):

 

 

 

Clean
Harbors, Inc.

 

U.S. Guarantor
Subsidiaries

 

Foreign
Non-Guarantor
Subsidiaries

 

Total

 

 

 

 

 

 

 

 

 

 

 

Net cash from operating activities

 

$

(3,361

$

12,535

 

$

3,842

 

$

13,016

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(14,855

)

(4,352

)

(19,207

)

Costs to obtain or renew permits

 

 

(1,408

)

15

 

(1,393

)

Proceeds from sales of fixed assets

 

 

7

 

 

7

 

Sale of marketable securities

 

850

 

 

 

850

 

Acquisitions, net of cash acquired

 

(27,427

)

 

 

(27,427

)

Net cash from investing activities

 

(26,577

)

(16,256

)

(4,337

)

(47,170

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Change in uncashed checks

 

 

1,458

 

(56

)

1,402

 

Proceeds from exercise of stock options

 

731

 

 

 

731

 

Proceeds from employee stock purchase plan

 

379

 

 

 

379

 

Payments of capital leases

 

 

(1,470

)

(196

)

(1,666

)

Excess tax benefit of stock-based compensation

 

1,604

 

 

 

1,604

 

Intercompany financing

 

27,427

 

(27,427

)

 

 

Interest (payments) / received

 

 

 

 

 

Dividends (paid) received

 

 

 

 

 

Net cash from financing activities

 

30,141

 

(27,439

)

(252

)

2,450

 

Effect of exchange rate change on cash

 

 

 

(1,681

)

(1,681

)

Increase (decrease) in cash and cash equivalents

 

203

 

(31,160

)

(2,428

)

(33,385

)

Cash and cash equivalents, beginning of period

 

35,925

 

32,301

 

51,312

 

119,538

 

Cash and cash equivalents, end of period

 

$

36,128

 

$

1,141

 

$