Table of Contents

 

 

 

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 JUNE 30, 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

 

23,527,234

(Class)

 

(Outstanding at August 7, 2008)

 

 

 



Table of Contents

 

CLEAN HARBORS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

Page No.

PART I: FINANCIAL INFORMATION

 

 

ITEM 1: Financial Statements

 

 

Consolidated Balance Sheets

 

1

Unaudited Consolidated Statements of Operations

 

3

Unaudited Consolidated Statements of Cash Flows

 

4

Unaudited 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

 

35

 

 

 

ITEM 4: Controls and Procedures

 

36

 

 

 

PART II: OTHER INFORMATION

 

 

 

 

 

Items No. 1 through 6

 

37

Signatures

 

38

 



Table of Contents

 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

(in thousands)

 

 

 

June 30,
2008

 

December 31,
2007

 

 

 

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

281,893

 

$

119,538

 

Marketable securities

 

438

 

850

 

Accounts receivable, net of allowances aggregating $6,475 and $6,105, respectively

 

185,228

 

193,126

 

Unbilled accounts receivable

 

10,235

 

14,703

 

Deferred costs

 

5,795

 

7,359

 

Prepaid expenses and other current assets

 

11,369

 

10,098

 

Supplies inventories

 

24,660

 

22,363

 

Deferred tax assets

 

11,497

 

11,491

 

Properties held for sale

 

374

 

910

 

Total current assets

 

531,489

 

380,438

 

Property, plant and equipment:

 

 

 

 

 

Land

 

26,632

 

22,273

 

Asset retirement costs (non-landfill)

 

1,786

 

1,438

 

Landfill assets

 

34,937

 

29,925

 

Buildings and improvements

 

122,457

 

112,469

 

Vehicles

 

31,629

 

22,854

 

Equipment

 

300,053

 

274,619

 

Furniture and fixtures

 

1,632

 

1,454

 

Construction in progress

 

15,263

 

18,702

 

 

 

534,389

 

483,734

 

Less—accumulated depreciation and amortization

 

238,871

 

221,133

 

 

 

295,518

 

262,601

 

Other assets:

 

 

 

 

 

Long-term investments

 

6,625

 

8,500

 

Deferred financing costs

 

5,228

 

5,881

 

Goodwill

 

22,523

 

21,572

 

Permits and other intangibles, net of accumulated amortization of $39,035 and $36,443, respectively

 

77,805

 

74,809

 

Deferred tax assets

 

12,158

 

12,176

 

Other

 

3,842

 

3,911

 

 

 

128,181

 

126,849

 

Total assets

 

$

955,188

 

$

769,888

 

 

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

 

1



Table of Contents

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

(in thousands except per share amounts)

 

 

 

June 30,
2008

 

December 31,
2007

 

 

 

(unaudited)

 

 

 

Current liabilities:

 

 

 

 

 

Uncashed checks

 

$

7,531

 

$

5,489

 

Current portion of long-term debt

 

69,224

 

 

Current portion of capital lease obligations

 

482

 

1,251

 

Accounts payable

 

72,273

 

81,309

 

Deferred revenue

 

23,492

 

29,730

 

Other accrued expenses

 

65,878

 

65,789

 

Current portion of closure, post-closure and remedial liabilities

 

22,795

 

18,858

 

Income taxes payable

 

 

8,427

 

Total current liabilities

 

261,675

 

210,853

 

Other liabilities:

 

 

 

 

 

Closure and post-closure liabilities, less current portion of $5,896 and $5,527, respectively

 

25,877

 

24,202

 

Remedial liabilities, less current portion of $16,899 and $13,331, respectively

 

138,634

 

141,428

 

Long-term debt

 

51,557

 

120,712

 

Capital lease obligations, less current portion

 

556

 

1,520

 

Unrecognized tax benefits and other long-term liabilities

 

71,979

 

68,276

 

Total other liabilities

 

288,603

 

356,138

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $.01 par value:

 

 

 

 

 

Authorized 40,000,000 shares; issued and outstanding 23,367,030 and 20,327,533 shares, respectively

 

234

 

203

 

Treasury stock

 

(1,557

)

(1,170

)

Additional paid-in capital

 

346,585

 

166,653

 

Accumulated other comprehensive income

 

15,026

 

17,498

 

Retained earnings

 

44,622

 

19,713

 

Total stockholders’ equity

 

404,910

 

202,897

 

Total liabilities and stockholders’ equity

 

$

955,188

 

$

769,888

 

 

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

 

2



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CLEAN HARBORS, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(in thousands except per share amounts)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

265,259

 

$

238,708

 

$

507,768

 

$

443,732

 

Cost of revenues (exclusive of items shown separately below)

 

178,384

 

165,282

 

348,578

 

316,886

 

Selling, general and administrative expenses

 

43,496

 

38,196

 

82,666

 

69,551

 

Accretion of environmental liabilities

 

2,726

 

2,554

 

5,396

 

5,028

 

Depreciation and amortization

 

10,806

 

9,049

 

21,281

 

17,987

 

Income from operations

 

29,847

 

23,627

 

49,847

 

34,280

 

Other (expense) income

 

59

 

(5

)

(45

)

1

 

Interest (expense), net of interest income of $1,431 and $2,493 for the quarter and year-to-date ending 2008 and $753 and $1,548 for the quarter and year-to-date ending 2007, respectively

 

(2,515

)

(3,695

)

(5,900

)

(6,879

)

Income before provision for income taxes

 

27,391

 

19,927

 

43,902

 

27,402

 

Provision for income taxes

 

11,404

 

8,739

 

18,993

 

12,713

 

Net income

 

15,987

 

11,188

 

24,909

 

14,689

 

Dividends on Series B preferred stock

 

 

69

 

 

138

 

Net income attributable to common stockholders

 

$

15,987

 

$

11,119

 

$

24,909

 

$

14,551

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic income attributable to common stockholders

 

$

0.71

 

$

0.56

 

$

1.16

 

$

0.74

 

Diluted income attributable to common stockholders

 

$

0.70

 

$

0.54

 

$

1.14

 

$

0.71

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

22,437

 

19,817

 

21,392

 

19,773

 

Weighted average common shares outstanding plus potentially dilutive common shares

 

22,936

 

20,661

 

21,907

 

20,683

 

 

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

 

3



Table of Contents

 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

 

 

Six Months
Ended June 30,

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

24,909

 

$

14,689

 

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

 

 

 

 

 

Depreciation and amortization

 

21,281

 

17,987

 

Allowance for doubtful accounts

 

50

 

(410

)

Amortization of deferred financing costs and debt discount

 

1,076

 

1,001

 

Accretion of environmental liabilities

 

5,396

 

5,028

 

Changes in environmental liability estimates

 

(255

)

(1,666

)

Deferred income taxes

 

(41

)

(5,056

)

Stock-based compensation

 

1,785

 

1,967

 

Excess tax benefit of stock-based compensation

 

(2,598

)

 

Income tax benefits related to stock option exercises

 

2,618

 

 

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

 

45

 

(1

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

10,370

 

(6,373

)

Other current assets

 

3,474

 

(6,189

)

Accounts payable

 

(9,144

)

(5,830

)

Other current liabilities

 

(12,631

)

3,616

 

Environmental expenditures

 

(4,054

)

(3,435

)

Net cash from operating activities

 

42,281

 

15,328

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(30,085

)

(15,852

)

Acquisitions, net of cash acquired

 

(27,583

)

(1,487

)

Costs to obtain or renew permits

 

(1,354

)

(112

)

Proceeds from sales of fixed assets and assets held for sale

 

65

 

442

 

Sales of marketable securities

 

4,350

 

 

Purchase of available-for-sale securities

 

(2,374

)

(1,035

)

Net cash from investing activities

 

(56,981

)

(18,044

)

Cash flows from financing activities:

 

 

 

 

 

Change in uncashed checks

 

2,077

 

3,037

 

Proceeds from exercise of stock options

 

1,214

 

1,193

 

Proceeds from employee stock purchase plan

 

776

 

542

 

Payments on capital leases

 

(1,707

)

(870

)

Proceeds from issuance of common stock, net

 

173,570

 

 

Excess tax benefit of stock-based compensation

 

2,598

 

 

Deferred financing costs paid

 

 

(32

)

Dividend payments on preferred stock

 

 

(138

)

Other

 

 

(69

)

Net cash from financing activities

 

178,528

 

3,663

 

Effect of exchange rate changes on cash

 

(1,473

)

2,859

 

Increase in cash and cash equivalents

 

162,355

 

3,806

 

Cash and cash equivalents, beginning of period

 

119,538

 

73,550

 

Cash and cash equivalents, end of period

 

$

281,893

 

$

77,356

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

Cash payments for interest and income taxes:

 

 

 

 

 

Interest paid

 

$

7,289

 

$

3,835

 

Income taxes paid

 

22,564

 

8,223

 

Non-cash investing and financing activities:

 

 

 

 

 

Property, plant and equipment accrued

 

$

4,272

 

$

3,608

 

 

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

 

4


 


Table of Contents

 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(in thousands)

 

 

 

Common Stock

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Number
of
Shares

 

$ 0.01
Par
Value

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Comprehensive
Income

 

Other
Comprehensive
Income

 

Retained
Earnings

 

Total
Stockholders’
Equity

 

Balance at January 1, 2008

 

20,328

 

$

203

 

$

(1,170

)

$

166,653

 

 

 

$

17,498

 

$

19,713

 

$

202,897

 

Net income

 

 

 

 

 

$

24,909

 

 

24,909

 

24,909

 

Unrealized loss on long-term investments, net of taxes (see Note 2)

 

 

 

 

 

(232

)

(232

)

 

(232

)

Unrealized gain on securities, net of taxes

 

 

 

 

 

69

 

69

 

 

69

 

Foreign currency translation

 

 

 

 

 

(2,309

)

(2,309

)

 

(2,309

)

Comprehensive income

 

 

 

 

 

$

22,437

 

 

 

 

Stock-based compensation

 

15

 

 

 

1,785

 

 

 

 

 

1,785

 

Issuance of restricted shares, net of shares remitted

 

6

 

 

(387

)

 

 

 

 

 

 

(387

)

Exercise of stock options

 

124

 

2

 

 

1,212

 

 

 

 

 

1,214

 

Issuance of common stock, net of issuance costs of $547

 

2,875

 

29

 

 

173,541

 

 

 

 

 

173,570

 

Tax benefit on exercise of stock options

 

 

 

 

2,618

 

 

 

 

 

2,618

 

Employee stock purchase plan

 

19

 

 

 

776

 

 

 

 

 

776

 

Balance at June 30, 2008

 

23,367

 

$

234

 

$

(1,557

)

$

346,585

 

 

 

$

15,026

 

$

44,622

 

$

404,910

 

 

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

 

5



Table of Contents

 

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 16, “Segment Reporting” and Note 17, “Guarantor and Non-Guarantor Subsidiaries” prior year information to conform to the current year presentation.

 

(2) RECENT 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. 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 FASB Staff Position (“FSP”)  No. 157-2 (“FSP SFAS No. 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 expects the application of the fair value framework established by SFAS 157 to non-financial assets and liabilities measured on a non-recurring basis will not have a material impact on its consolidated financial statements.

 

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 June 30, 2008, the Company held certain assets that are required to be measured at fair value on a recurring basis. These included, but were not limited to, the Company’s auction rate securities classified as available for sale and reflected at fair value.  The fair values of these securities as of June 30, 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 June 30, 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 gain of $0.5 million and a pre-tax loss of $0.4 million during the three- and six-month periods ended June 30, 2008, respectively.  The year-to-date unrealized loss resulted in an after tax reduction for the six-month period ended June 30, 2008 of $0.2 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 June 30, 2008, the Company continued to earn interest on 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 comprehensive income.  If the Company determines that any future fair value adjustments were other than temporary, it would record a charge to earnings as appropriate.

 

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Table of Contents

 

The Company’s assets measured at fair value on a recurring basis subject to the disclosure requirements of SFAS 157 at June 30, 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
June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

6,625

 

$

6,625

 

Marketable securities

 

$

438

 

$

 

$

 

$

438

 

 

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 June 30, 2008 (in thousands):

 

 

 

2008

 

Balance at January 1, 2008

 

$

 

Transfer to Level 3 from Level 1

 

7,000

 

Unrealized losses included in other comprehensive income

 

(884

)

Balance at March 31, 2008

 

6,116

 

Unrealized gains included in other comprehensive income

 

509

 

Balance at June 30, 2008

 

$

6,625

 

 

In April 2008, the FASB issued FASB Staff Position SFAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP SFAS No. 142-3”). FSP SFAS No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007), Business Combinations, and other US GAAP. FSP SFAS No. 142-3 is effective for the Company on January 1, 2009. The Company is evaluating the impact of adopting FSP SFAS No. 142-3 on the Company’s financial position and results of operations.

 

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (“SFAS No. 162”), which becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to US Auditing Standards (“AU”) Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with US GAAP. This standard is not expected to have an impact on the Company’s financial position, results of operations or cash flow.

 

In June 2008, the FASB Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 08-3, Accounting by Lessees for Maintenance Deposits under Lease Agreements (“EITF No. 08-3”). EITF No. 08-3 provides that all nonrefundable maintenance deposits paid by a lessee, under an arrangement accounted for as a lease, should be accounted for as a deposit. When the underlying maintenance is performed, the deposit is expensed or capitalized in accordance with the lessee’s maintenance accounting policy. Once it is determined that an amount on deposit is not probable of being used to fund future maintenance expense, it is recognized as additional rent expense at that time. EITF No. 08-3 is effective for the Company on January 1, 2009. The Company is evaluating the impact of adopting EITF No. 08-3 on the Company’s financial position, results of operations and cash flows.

 

(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 $14.4 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.

 

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On March 21, 2008, the Company acquired two 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. under two separate purchase agreements.  During the second quarter, the Company determined that the purchase of these facilities should be treated as one unit of accounting.  Accordingly, the purchase price, assets acquired and liabilities assumed have been combined as one acquisition for accounting purposes.  As of June 30, 2008, the combined preliminary purchase price was $12.9 million for the Hebron and Chicago businesses.  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.  In conjunction with the acquisition of Hebron, the Company entered into a dry cleaning service agreement with Safety-Kleen System, Inc. whereby the Company will handle and dispose of dry cleaning solvents for a two year period.  The Company will receive a minimum of $9.0 million in revenue over this period.

 

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)

 

Solvent
Recycling
Facilities (2)

 

Preliminary purchase price

 

 

 

 

 

Cash consideration

 

$

12,706

 

$

12,500

 

Acquisition costs

 

103

 

367

 

Estimated amount due to the seller for working capital adjustments

 

1,570

 

 

Total estimated purchase price

 

$

14,379

 

$

12,867

 

Preliminary allocation of purchase price

 

 

 

 

 

Current assets

 

$

3,783

 

$

529

 

Property, plant and equipment

 

7,841

 

13,671

 

Goodwill

 

 

951

 

Customer lists and other intangibles

 

3,971

 

1,100

 

Total assets acquired

 

15,595

 

16,251

 

Liabilities assumed

 

(1,216

)

(3,384

)

Net assets acquired

 

$

14,379

 

$

12,867

 

 

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 any remaining working capital adjustments, 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 $1.0 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 the fair values of property, plant and equipment, goodwill 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 first 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

 

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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 (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

 

 

 

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 proportionally allocated to equipment ($0.6 million) and customer lists and other intangibles ($6.7 million). The intangible assets are being amortized over a weighted average useful life of 8 years.

 

(4) LANDFILL ASSETS

 

Changes to landfill assets for the six-month period ended June 30, 2008 were as follows (in thousands):

 

 

 

2008

 

Balance at January 1, 2008

 

$

29,925

 

Asset retirement costs

 

567

 

Capital additions

 

4,521

 

Changes in estimates of landfill closure and post-closure liabilities

 

305

 

Currency translation, reclassifications and other

 

(381

)

Balance at June 30, 2008

 

$

34,937

 

 

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.

 

(5) INVESTMENTS

 

As of June 30, 2008, the Company’s investments included $6.6 million of auction rate securities classified on the Company’s balance sheet as non-current, available for sale securities.  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 six months of 2008.  The Company is unable to determine when the market for student loan collateralized instruments will recover and therefore has classified the auction rate securities as non-current and has included them in long-term investments on its unaudited consolidated balance sheet at June 30, 2008.

 

(6) GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

 

 

June 30, 2008

 

December 31, 2007

 

 

 

 

 

Accumulated

 

 

 

 

 

Accumulated

 

 

 

 

 

Cost

 

Amortization

 

Net

 

Cost

 

Amortization

 

Net

 

Permits

 

$

98,866

 

$

32,767

 

$

66,099

 

$

98,391

 

$

30,902

 

$

67,489

 

Customer lists and other intangible assets

 

17,974

 

6,268

 

11,706

 

12,861

 

5,541

 

7,320

 

 

 

$

116,840

 

$

39,035

 

$

77,805

 

$

111,252

 

$

36,443

 

$

74,809

 

 

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The increase in customer lists and other intangible assets is based primarily on preliminary estimates of the fair values of intangible assets acquired during March 2008.   The goodwill balance as of June 30, 2008 also increased $1.0 million from December 31, 2007 as a result of the acquisition of the solvent recovery facilities.  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):

 

 

 

June 30,
2008

 

December 31,
2007

 

Insurance

 

$

15,319

 

$

12,984

 

Interest

 

5,394

 

5,367

 

Accrued disposal costs

 

2,536

 

2,998

 

Accrued compensation and benefits

 

19,273

 

19,938

 

Other items

 

23,356

 

24,502

 

 

 

$

65,878

 

$

65,789

 

 

(8) CLOSURE AND POST-CLOSURE LIABILITIES

 

The changes to closure and post-closure liabilities for the six months ended June 30, 2008 were as follows (in thousands):

 

 

 

Landfill
Retirement
Liability

 

Non-Landfill
Retirement
Liability

 

Total

 

Balance at January 1, 2008

 

$

22,896

 

$

6,833

 

$

29,729

 

Liabilities assumed in acquisitions

 

 

418

 

418

 

New asset retirement obligations

 

567

 

 

567

 

Accretion

 

1,536

 

426

 

1,962

 

Changes in estimate recorded to statement of operations

 

(527

)

108

 

(419

)

Other changes in estimates recorded to balance sheet

 

305

 

 

305

 

Settlement of obligations

 

(153

)

(567

)

(720

)

Currency translation and other

 

(57

)

(12

)

(69

)

Balance at June 30, 2008

 

$

24,567

 

$

7,206

 

$

31,773

 

 

All of the landfill facilities included above were active as of June 30, 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.   Asset retirement obligations were accrued at an average rate of $1.29 and $1.43 per cubic yard during the three- and six-month periods ended June 30, 2008, respectively and $1.62 and $1.81 per cubic yard during the three- and six-month periods ended June 30, 2007, 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.

 

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 six months ended June 30, 2008 were as follows (in thousands):

 

 

 

Remedial
Liabilities for
Landfill Sites

 

Remedial
Liabilities for
Inactive Sites

 

Remedial
Liabilities
(Including
Superfund) for
Non-Landfill
Operations

 

Total

 

Balance at January 1, 2008

 

$

5,682

 

$

88,619

 

$

60,458

 

$

154,759

 

Liabilities assumed in acquisitions

 

 

 

2,585

 

2,585

 

Accretion

 

133

 

2,074

 

1,227

 

3,434

 

Changes in estimate recorded to statement of operations

 

(171

)

(9

)

344

 

164

 

Settlement of obligations

 

(51

)

(1,947

)

(1,336

)

(3,334

)

Currency translation and other

 

(85

)

120

 

(2,110

)

(2,075

)

Balance at June 30, 2008

 

$

5,508

 

$

88,857

 

$

61,168

 

$

155,533

 

 

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The $2.6 million of liabilities assumed relates to remediation liabilities at one of the Company’s solvent recovery facilities acquired in March 2008.    Such remedial liabilities have been preliminarily determined and are subject to adjustment upon finalization of the purchase price.

 

(10) FINANCING ARRANGEMENTS

 

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

 

 

 

June 30,
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 (5.00% at June 30, 2008) plus 1.5%, or the Eurodollar rate (2.38% at June 30, 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

 

(737

)

(806

)

Less debt classified as current

 

(69,224

)

 

Long-term debt

 

$

51,557

 

$

120,712

 

 

The fair value of the Senior Secured Notes at June 30, 2008 and December 31, 2007 was $92.5 million and $93.8 million, respectively, and calculated based on quoted prices for identical or similar liabilities in markets that are not active (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 June 30, 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 other material changes in the Company’s terms and conditions during the first six months of 2008.  See Note 18, “Subsequent Events” for the redemption of $50.0 million principal amount of outstanding Senior Secured Notes on July 28, 2008.

 

At June 30, 2008, the Company had no borrowings and $38.8 million of letters of credit outstanding under its Revolving Facility, and the Company had approximately $31.2 million available to borrow. At June 30, 2008, letters of credit outstanding under the Company’s Synthetic LC facility were $48.0 million.

 

The indenture under which the Company’s Senior Secured Notes are outstanding provides for certain covenants, the most restrictive of which requires the Company, within 120 days after the close of each twelve-month period ending on June 30 of each year (beginning June 30, 2005 and ending on June 30, 2011) to apply an amount equal to 50% of the period’s Excess Cash Flow (as defined below) to either (i) prepay, repay, redeem or purchase the Company’s first-lien obligations under the Revolving Facility and Synthetic LC Facility or capitalized lease obligations or (ii) make offers (“Excess Cash Flow Offers”) to repurchase all or part of the then outstanding Senior Secured Notes at an offering price equal to 104% of their principal amount plus accrued interest. “Excess Cash Flow” is defined in the Indenture as consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) less interest expense, all taxes paid or accrued in the period, capital expenditures made in cash during the period, and all cash spent on environmental monitoring, remediation or relating to our environmental liabilities.

 

The Company is required, within 120 days following June 30, 2008, to offer to repurchase, at 104% of the principal amount, the Senior Secured Notes in the amount of $19.2 million of the Excess Cash Flow generated during the twelve-month period ended

 

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June 30, 2008.  To the extent the Note holders do not accept an Excess Cash Flow Offer based on the Excess Cash Flow earned through June 30, 2008, such Excess Cash Flow will not be included in the amount of Excess Cash Flow earned in subsequent comparable annual periods. However, the Indenture’s requirement to make Excess Cash Flow Offers in respect of Excess Cash Flow earned in subsequent periods will remain in effect.

 

As of June 30, 2008, the Company was in compliance with the covenants of all of 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 June 30, 2008, the Company was involved in various proceedings 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.

 

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 June 30, 2008, the Company had reserves of $33.3 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 June 30, 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.

 

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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 June 30, 2008 and December 31, 2007, the Company had accrued $13.0 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 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. Negotiations with EPA and the COC’s generators are progressing.  The Company cannot estimate the Company’s potential additional liability for Devil’s Swamp associated with this investigation.

 

Marine Shale Processors.  A portion of the reserves which the Company maintained as of June 30, 2008 for potential legal liabilities associated with the CSD assets relates to Marine Shale Processors, Inc. (“Marine Shale”) located in Amelia, Louisiana. Marine Shale operated a kiln which incinerated waste producing a vitrified aggregate as a by-product. Marine Shale contended that its operation recycled waste into a useful product, i.e., vitrified aggregate, and therefore was exempt from regulation under the Resource Conservation Recovery Act (“RCRA”) and permitting requirements as a hazardous waste incinerator under applicable federal and state environmental laws. The EPA contended that Marine Shale was a “sham-recycler” subject to the regulation and permitting requirements as a hazardous waste incinerator under RCRA, that its vitrified aggregate by-product was a hazardous waste, and that Marine Shale’s continued operation without required permits was illegal. Litigation between the EPA and Marine Shale began in 1990 and continued until July 1996 when the U.S. Fifth Circuit Court of Appeals ordered Marine Shale to shutdown its operations. During the course of its operation, Marine Shale produced thousands of tons of aggregate, some of which was sold as fill material at various locations in the vicinity of Amelia, Louisiana, but most of which was stockpiled on the premises of the Marine Shale facility. Almost all of this aggregate has since been moved to a nearby site owned by an affiliate of Marine Shale, known as Recycling Park, Inc. (“RPI”). In accordance with a court order authorizing the movement of this material to this offsite location, all of the materials located at the RPI site comply with the land disposal restrictions of RCRA. Approximately 7,000 tons of aggregate remain on the Marine Shale site. Moreover, as a result of past operations, soil and groundwater contamination may exist on the Marine Shale facility and the RPI site.

 

On May 11, 2007, the EPA and the LDEQ issued a Special Notice to the Company, seeking a good faith offer to address site remediation at the former Marine Shale facility. Other PRPs also received Special Notices, and the other PRPs and the Company have formed a group (the “Site Group”) and common counsel for the Site Group has been chosen. The Site Group made a good faith settlement offer to the EPA on November 29, 2007. Although the Company was never a customer of Marine Shale and does not believe that it is liable for the Sellers’ liability as a customer at the Marine Shale site, the Company has elected to join with the Site Group and participate in further negotiations with the EPA and the LDEQ regarding a remedial investigation feasibility study directed towards the eventual remediation of the Marine Shale site. As of June 30, 2008 and December 31, 2007, the amount of the Company’s remaining reserves relating to the Marine Shale site was $3.7 million and $3.6 million, respectively.

 

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

 

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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 $8.2 million and $7.7 million at June 30, 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.

 

As of both June 30, 2008 and December 31, 2007, the Company had reserves of $0.6 million 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 June 30, 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.  Along with numerous other PRPs at this site, the Company has signed a Consent Order with the New York regulators committing to conduct further site investigations.

 

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

 

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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 rights 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 June 30, 2008, the Company had not recorded any liability for this matter on the basis that such liability is not probable.

 

State and Provincial 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 June 30, 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 facility’s 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.

 

London, Ontario Facility.  On or about July 7, 2008 the Company was advised by the Crown that it intended to withdraw its appeal of the Ontario Superior Court’s October 23, 2007 ruling upholding a lower court ruling quashing charges filed against a Company subsidiary.  This action by the Crown will terminate these proceedings without liability to the Company.

 

(12) INCOME TAXES

 

The income tax expense for the three- and six-month periods ended June 30, 2008 and 2007 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 the increase in pre-tax book income while permanent items remained relatively constant.

 

  As of June 30, 2008 the Company’s unrecognized tax benefits were $71.2 million which included $16.9 million of interest and $4.6 million of penalties.  As of December 31, 2007, the Company’s unrecognized tax benefits were $67.8 million which included $13.8 million of interest and $4.0 million of penalties. The increase in unrecognized tax benefits relates entirely to accrued interest and 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 June 30, 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.

 

(13) EARNINGS PER SHARE

 

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

 

 

 

Three Months Ended June, 2008

 

Three Months Ended June, 2007

 

 

 

Income

 

Shares

 

Per Share
Amount

 

Income

 

Shares

 

Per Share
Amount

 

Basic income attributable to common stockholders before effect of dilutive securities

 

$

15,987

 

22,437

 

$

0.71

 

$

11,119

 

19,817

 

$

0.56

 

Dilutive effect of equity-based compensation awards and warrants

 

 

499

 

(0.01

)

69

 

844

 

(0.02

)

Diluted income attributable to common stockholders

 

$

15,987

 

22,936

 

$

0.70

 

$

11,188

 

20,661

 

$

0.54

 

 

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Table of Contents

 

 

 

Six Months Ended June 30, 2008

 

Six Months Ended June 30, 2007

 

 

 

Income

 

Shares

 

Per Share
Amount

 

Income

 

Shares

 

Per Share
Amount

 

Basic income attributable to common stockholders before effect of dilutive securities

 

$

24,909

 

21,392

 

$

1.16

 

$

14,551

 

19,773

 

$

0.74

 

Dilutive effect of equity-based compensation awards and warrants

 

 

515

 

(0.02

)

138

 

910

 

(0.03

)

Diluted income attributable to common stockholders

 

$

24,909

 

21,907

 

$

1.14

 

$

14,689

 

20,683

 

$

0.71

 

 

(14) STOCKHOLDERS’ EQUITY

 

On April 29, 2008, the Company issued 2.875 million shares of common stock, including 375,000 shares of common stock issued upon exercise of an underwriters’ option, at a public offering price of $63.75 per share.   After deducting the underwriter discount and offering expenses, the Company received net proceeds of $173.6 million from the issuance.

 

(15) STOCK-BASED COMPENSATION

 

The following table summarizes the total number and type of awards granted during the three and six-month periods ended June 30, 2008, as well as the related weighted-average grant-date fair values:

 

 

 

Three and Six Months Ended
June 30, 2008

 

 

 

Shares

 

Weighted-
Average
Grant-Date
Fair Value

 

Stock options

 

18,000

 

$

33.33

 

Restricted stock awards

 

1,000

 

69.78

 

Performance stock awards

 

91,556

 

66.18

 

Common stock awards

 

2,700

 

$

66.18

 

Total awards

 

113,256

 

 

 

 

The performance stock awards granted in 2008 are subject to achieving predetermined revenue and EBITDA targets by December 31, 2009 and also include continued service conditions.   If the Company does not achieve the performance goals by the end of 2009, the shares will be forfeited in their entirety.  For the three and six months ended June 30, 2008, management believed that it was probable that the performance targets will be achieved.

 

(16) 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- and six-month periods ended June 30, 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 amounts have been reclassified to conform to the current year presentation.

 

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Table of Contents

 

 

 

For the Three Months Ended June 30, 2008

 

 

 

Technical
Services

 

Site
Services

 

Corporate
Items

 

Total

 

Third party revenues

 

$

179,154

 

$

86,099

 

$

6

 

$

265,259

 

Intersegment revenues

 

10,507

 

12,495

 

41

 

23,043

 

Gross revenues

 

189,661

 

98,594

 

47

 

288,302

 

Intersegment expenses

 

(3,159

)

(19,104

)

(780

)

(23,043

)

Direct revenues

 

$

186,502

 

$

79,490

 

$

(733

)

$

265,259

 

 

 

 

For the Three Months Ended June 30, 2007

 

 

 

Technical
Services

 

Site
Services

 

Corporate
Items

 

Total

 

Third party revenues

 

$

165,155

 

$

73,539

 

$

14

 

$

238,708

 

Intersegment revenues (1)

 

13,248

 

2,945

 

138

 

16,331

 

Gross revenues

 

178,403

 

76,484

 

152

 

255,039

 

Intersegment expenses(1)

 

(9,100

)

(6,924

)

(307

)

(16,331

)

Direct revenues

 

$

169,303

 

$

69,560

 

$

(155

)

$

238,708

 

 

 

 

For the Six Months Ended June 30, 2008

 

 

 

Technical
Services

 

Site
Services

 

Corporate
Items

 

Total

 

Third party revenues

 

$

345,466

 

$

162,289

 

$

13

 

$

507,768

 

Intersegment revenues

 

18,705

 

16,154

 

125

 

34,984

 

Gross revenues

 

364,171

 

178,443

 

138

 

542,752

 

Intersegment expenses

 

(5,700

)

(27,946

)

(1,338

)

(34,984

)

Direct revenues

 

$

358,471

 

$

150,497

 

$

(1,200

)

$

507,768

 

 

 

 

For the Six Months Ended June 30, 2007

 

 

 

Technical
Services

 

Site
Services

 

Corporate
Items

 

Total

 

Third party revenues

 

$

304,876

 

$

138,843

 

$

13

 

$

443,732

 

Intersegment revenues (2)

 

23,153

 

6,881

 

320

 

30,354

 

Gross revenues

 

328,029

 

145,724

 

333

 

474,086

 

Intersegment expenses(2)

 

(15,519

)

(13,982

)

(853

)

(30,354

)

Direct revenues

 

$

312,510

 

$

131,742

 

$

(520

)

$

443,732

 

 


(1)          Adjustments of $42,326 and $2,275 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.

(2)          Adjustments of $75,845 and $3,884 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.

 

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Table of Contents

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

Technical Services

 

47,560

 

41,325

 

87,787

 

66,698

 

Site Services

 

15,284

 

12,209

 

23,169

 

20,787

 

Corporate Items

 

(19,465

)

(18,304

)

(34,432

)

(30,190

)

Total

 

43,379

 

35,230

 

76,524

 

57,295

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to Consolidated Statements of Operations:

 

 

 

 

 

 

 

 

 

Accretion of environmental liabilities

 

2,726

 

2,554

 

5,396

 

5,028

 

Depreciation and amortization

 

10,806

 

9,049

 

21,281

 

17,987

 

Income from operations

 

29,847

 

23,627

 

49,847

 

34,280

 

Other (income) expense

 

(59

)

5

 

45

 

(1

)

Interest expense, net of interest income

 

2,515

 

3,695

 

5,900

 

6,879

 

Income before provision for income taxes

 

$

27,391

 

$

19,927

 

$

43,902

 

$

27,402

 

 

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

 

 

 

June 30,
2008

 

December 31,
2007

 

Property, plant and equipment, net

 

 

 

 

 

Technical Services

 

$

232,899

 

$

216,796

 

Site Services

 

28,891

 

20,105

 

Corporate or other assets

 

33,728

 

25,700

 

 

 

$

295,518

 

$

262,601

 

 

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

 

Intangible assets:

 

 

 

 

 

Technical Services

 

 

 

 

 

Goodwill

 

$

22,375

 

$

21,424

 

Permits and other intangibles, net

 

68,391

 

69,995

 

Total Technical Services

 

90,766

 

91,419

 

Site Services

 

 

 

 

 

Goodwill

 

148

 

148

 

Permits and other intangibles, net

 

9,414

 

4,814

 

Total Site Services

 

9,562

 

4,962

 

Total

 

$

100,328

 

$

96,381

 

 

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

 

 

 

June 30,
2008

 

December 31,
2007

 

Technical Services

 

$

457,012

 

$

369,053

 

Site Services

 

54,435

 

37,710

 

Corporate Items

 

443,741

 

363,125

 

Total

 

$

955,188

 

$

769,888

 

 

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

 

 

 

June 30,
2008

 

December 31,
2007

 

United States

 

$

814,152

 

$

631,630

 

Canada

 

141,036

 

138,258

 

Total

 

$

955,188

 

$

769,888

 

 

18



Table of Contents

 

(17) 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 June 30, 2008 (in thousands):

 

 

 

Clean
Harbors, Inc.

 

U.S. Guarantor
Subsidiaries

 

Foreign
Non-
Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

196,758

 

$

33,640

 

$

51,495

 

$

 

$

281,893

 

Intercompany receivables

 

 

6,844

 

26,605

 

(33,449

)

 

Other current assets

 

12,157

 

209,883

 

27,556

 

 

249,596

 

Property, plant and equipment, net

 

 

258,581

 

36,937

 

 

295,518

 

Investments in subsidiaries

 

389,041

 

150,208

 

91,654

 

(630,903

)

 

Intercompany note receivable

 

 

117,820

 

3,701

 

(121,521

)

 

Other long-term assets

 

20,244

 

73,457

 

34,480

 

 

128,181

 

Total assets

 

$

618,200

 

$

850,433

 

$

272,428

 

$

(785,873

)

$

955,188

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

75,036

 

$

165,268

 

$

21,371

 

$

 

$

261,675

 

Intercompany payables

 

33,449

 

 

 

(33,449

)

 

Closure, post-closure and remedial liabilities, net

 

 

145,574

 

18,937

 

 

164,511

 

Long-term debt

 

51,557

 

 

 

 

51,557

 

Capital lease obligations, net

 

 

416

 

140

 

 

556

 

Intercompany note payable

 

3,701

 

 

117,820

 

(121,521

)

 

Other long-term liabilities

 

49,547

 

1,582

 

20,850

 

 

71,979

 

Total liabilities

 

213,290

 

312,840

 

179,118

 

(154,970

)

550,278

 

Stockholders’ equity

 

404,910

 

537,593

 

93,310

 

(630,903

)

404,910

 

Total liabilities and stockholders’ equity

 

$

618,200

 

$

850,433

 

$

272,428

 

$

(785,873

)

$

955,188

 

 

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 debt

 

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



Table of Contents

 

Following is the consolidating statement of operations for the three months ended June 30, 2008 (in thousands):

 

 

 

Clean
Harbors, Inc.

 

U.S. Guarantor
Subsidiaries

 

Foreign
Non-
Guarantor
Subsidiaries

 

Consolidating 
Adjustments

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

228,485

 

$

37,187

 

$

(413

)

$

265,259

 

Cost of revenues

 

 

155,975

 

22,822

 

(413

)

178,384

 

Selling, general and administrative expenses

 

 

36,674

 

6,822

 

 

43,496

 

Accretion of environmental liabilities

 

 

2,451

 

275

 

 

2,726

 

Depreciation and amortization

 

 

9,602

 

1,204

 

 

10,806

 

Income from operations

 

 

23,783

 

6,064

 

 

29,847

 

Other income (expense)

 

 

58

 

1

 

 

59

 

Interest income (expense)

 

(2,987

)

21

 

451

 

 

(2,515

)

Equity in earnings of subsidiaries

 

28,298

 

4,360

 

 

(32,658

)

 

Intercompany dividend income (expense)

 

 

 

3,388

 

(3,388

)

 

Intercompany interest income (expense)

 

 

3,268

 

(3,268

)

 

 

Income before provision for income taxes

 

25,311

 

31,490

 

6,636

 

(36,046

)

27,391

 

Provision for income taxes

 

9,324

 

327

 

1,753

 

 

11,404

 

Net income

 

$

15,987

 

$

31,163

 

$

4,883

 

$

(36,046

)

$

15,987

 

 

Following is the consolidating statement of operations for the three months ended June 30, 2007 (in thousands):

 

 

 

Clean
Harbors, Inc.

 

U.S. Guarantor
Subsidiaries

 

Foreign
Non-
Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

206,635

 

$

32,699

 

$

(626

)

$

238,708

 

Cost of revenues

 

 

144,978

 

20,930

 

(626

)

165,282

 

Selling, general and administrative expenses

 

 

29,983

 

8,213

 

 

38,196

 

Accretion of environmental liabilities