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 MARCH 31, 2009

 

 

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o 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 6, 2009)

 

 

 



Table of Contents

 

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

Unaudited Consolidated Statements of Income

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

18

 

 

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

25

 

 

ITEM 4: Controls and Procedures

26

 

 

PART II: OTHER INFORMATION

26

 

 

Items No. 1 through 6

26

Signatures

27

 



Table of Contents

 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

(in thousands)

 

 

 

March 31, 
2009

 

December 31,
2008

 

 

 

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

226,961

 

$

249,524

 

Marketable securities

 

270

 

175

 

Accounts receivable, net of allowances aggregating $6,205 and $6,723, respectively

 

150,297

 

174,990

 

Unbilled accounts receivable

 

6,385

 

5,545

 

Deferred costs

 

5,116

 

5,877

 

Prepaid expenses and other current assets

 

17,553

 

13,472

 

Supplies inventories

 

27,119

 

26,905

 

Deferred tax assets

 

12,514

 

12,564

 

Total current assets

 

446,215

 

489,052

 

Property, plant and equipment:

 

 

 

 

 

Land

 

26,726

 

26,399

 

Asset retirement costs (non-landfill)

 

1,758

 

1,761

 

Landfill assets

 

38,812

 

35,062

 

Buildings and improvements

 

131,722

 

127,466

 

Vehicles

 

45,387

 

33,502

 

Equipment

 

315,249

 

310,459

 

Furniture and fixtures

 

1,663

 

1,663

 

Construction in progress

 

11,649

 

13,206

 

 

 

572,966

 

549,518

 

Less—accumulated depreciation and amortization

 

263,251

 

254,057

 

 

 

309,715

 

295,461

 

Other assets:

 

 

 

 

 

Long-term investments

 

6,312

 

6,237

 

Deferred financing costs

 

2,688

 

3,044

 

Goodwill

 

29,765

 

24,578

 

Permits and other intangibles, net of accumulated amortization of $41,263 and $40,303, respectively

 

70,264

 

71,754

 

Deferred tax assets

 

5,464

 

5,454

 

Other

 

2,623

 

2,756

 

Total other assets

 

117,116

 

113,823

 

Total assets

 

$

873,046

 

898,336

 

 

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

 

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Table of Contents

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

(in thousands except per share amounts)

 

 

 

March 31, 
2009

 

December 31,
2008

 

 

 

(unaudited)

 

 

 

Current liabilities:

 

 

 

 

 

Uncashed checks

 

$

7,108

 

$

7,733

 

Current portion of capital lease obligations

 

189

 

400

 

Accounts payable

 

48,866

 

63,885

 

Deferred revenue

 

21,399

 

24,190

 

Accrued expenses

 

55,473

 

67,901

 

Current portion of closure, post-closure and remedial liabilities

 

17,838

 

17,264

 

Total current liabilities

 

150,873

 

181,373

 

Other liabilities:

 

 

 

 

 

Closure and post-closure liabilities, less current portion of $5,376 and $6,383, respectively

 

27,432

 

26,254

 

Remedial liabilities, less current portion of $12,462 and $10,881, respectively

 

133,589

 

135,007

 

Long-term obligations

 

52,880

 

52,870

 

Capital lease obligations, less current portion

 

295

 

360

 

Unrecognized tax benefits and other long-term liabilities

 

74,476

 

73,427

 

Total other liabilities

 

288,672

 

287,918

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $.01 par value:

 

 

 

 

 

Authorized 40,000,000 shares; issued and outstanding 23,757,541 and 23,733,257 shares, respectively

 

238

 

237

 

Treasury stock

 

(1,809

)

(1,653

)

Additional paid-in capital

 

355,332

 

353,950

 

Accumulated other comprehensive loss

 

(2,414

)

(688

)

Accumulated earnings

 

82,154

 

77,199

 

Total stockholders’ equity

 

433,501

 

429,045

 

Total liabilities and stockholders’ equity

 

$

873,046

 

$

898,336

 

 

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

 

2



Table of Contents

 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

(in thousands except per share amounts)

 

 

 

Three Months Ended
March 31,

 

 

 

2009

 

2008

 

Revenues

 

$

206,306

 

$

242,509

 

Cost of revenues (exclusive of items shown separately below)

 

143,513

 

170,194

 

Selling, general and administrative expenses

 

37,369

 

39,170

 

Accretion of environmental liabilities

 

2,650

 

2,670

 

Depreciation and amortization

 

12,061

 

10,475

 

Income from operations

 

10,713

 

20,000

 

Other income (expense)

 

33

 

(104

)

Interest (expense), net of interest income of $390 and $1,062, respectively

 

(1,380

)

(3,385

)

Income before provision for income taxes

 

9,366

 

16,511

 

Provision for income taxes

 

4,411

 

7,589

 

Net income

 

$

4,955

 

$

8,922

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.21

 

$

0.44

 

Diluted

 

$

0.21

 

$

0.43

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

23,748

 

20,357

 

Weighted average common shares outstanding plus potentially dilutive common shares

 

23,862

 

20,910

 

 

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

 

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CLEAN HARBORS, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

 

 

Three Months
Ended March 31,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

4,955

 

$

8,922

 

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

 

 

 

 

 

Depreciation and amortization

 

12,061

 

10,475

 

Allowance for doubtful accounts

 

502

 

(146

)

Amortization of deferred financing costs and debt discount

 

366

 

609

 

Accretion of environmental liabilities

 

2,650

 

2,670

 

Changes in environmental liability estimates

 

(230

)

(62

)

Deferred income taxes

 

(353

)

(41

)

Stock-based compensation

 

762

 

733

 

Excess tax benefit of stock-based compensation

 

(18

)

(1,604

)

Income tax benefit related to stock option exercises

 

17

 

1,610

 

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

 

(33

)

104

 

Environmental expenditures

 

(2,213

)

(1,871

)

Changes in assets and liabilities, net of acquisitions

 

 

 

 

 

Accounts receivable

 

25,212

 

15,077

 

Other current assets

 

(2,389

)

(2,281

)

Accounts payable

 

(12,825

)

(7,365

)

Other current liabilities

 

(16,553

)

(13,814

)

Net cash from operating activities

 

11,911

 

13,016

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(23,936

)

(19,207

)

Acquisitions, net of cash acquired

 

(6,209

)

(27,427

)

Costs to obtain or renew permits

 

(264

)

(1,393

)

Proceeds from sales of fixed assets and assets held for sale

 

50

 

7

 

Sales of marketable securities

 

 

850

 

Net cash from investing activities

 

(30,359

)

(47,170

)

Cash flows from financing activities:

 

 

 

 

 

Change in uncashed checks

 

(595

)

1,402

 

Proceeds from exercise of stock options

 

67

 

731

 

Remittance of shares

 

(156

)

 

Proceeds from employee stock purchase plan

 

585

 

379

 

Payments on capital leases

 

(273

)

(1,666

)

Payment on acquired debt

 

(2,538

)

 

Excess tax benefit of stock-based compensation

 

18

 

1,604

 

Net cash from financing activities

 

(2,892

)

2,450

 

Effect of exchange rate change on cash

 

(1,223

)

(1,681

)

Decrease in cash and cash equivalents

 

(22,563

)

(33,385

)

Cash and cash equivalents, beginning of period

 

249,524

 

119,538

 

Cash and cash equivalents, end of period

 

$

226,961

 

86,153

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

Cash payments for interest and income taxes:

 

 

 

 

 

Interest paid

 

$

2,150

 

$

6,386

 

Income taxes paid

 

4,741

 

9,568

 

Non-cash investing and financing activities:

 

 

 

 

 

Liabilities assumed in acquisition

 

$

3,901

 

$

 

Property, plant and equipment accrued

 

$

3,558

 

$

5,099

 

 

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

 

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Table of Contents

 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(in thousands)

 

 

 

Common Stock

 

 

 

 

 

 

 

Accumulated 

 

 

 

 

 

 

 

Number
of 
Shares

 

S 0.01
Par
Value

 

Treasury
Stock

 

Additional
Paid-in 
Capital

 

Comprehensive
Income

 

Other
Comprehensive
Loss

 

Accumulated
Earnings

 

Total 
Stockholder’s
Equity

 

Balance at January 1, 2009

 

23,733

 

$

237

 

$

(1,653

)

$

353,950

 

 

 

$

(688

)

$

77,199

 

$

429,045

 

Net income

 

 

 

 

 

$

4,955

 

 

4,955

 

4,955

 

Unrealized gain on long-term investments, net of taxes

 

 

 

 

 

157

 

157

 

 

157

 

Foreign currency translation

 

 

 

 

 

(1,883

)

(1,883

)

 

(1,883

)

Comprehensive income

 

 

 

 

 

$

3,229

 

 

 

 

Stock-based compensation

 

12

 

 

 

762

 

 

 

 

 

762

 

Issuance of restricted shares, net of shares remitted

 

(4

)

 

(156

)

 

 

 

 

 

 

(156

)

Exercise of stock options

 

6

 

1

 

 

66

 

 

 

 

 

67

 

Net tax deficit on exercise of stock options

 

 

 

 

(31

)

 

 

 

 

(31

)

Employee stock purchase plan

 

11

 

 

 

585

 

 

 

 

 

585

 

Balance at March 31, 2009

 

23,758

 

$

238

 

$

(1,809

)

$

355,332

 

 

 

$

(2,414

)

$

82,154

 

$

433,501

 

 

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, 2008.

 

(2) RECENT ACCOUNTING PRONOUNCEMENTS

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R changes how business acquisitions are accounted for and impacts financial statements both on the acquisition date and in subsequent periods. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company adopted SFAS No. 141R on January 1, 2009 and has expensed $0.6 million of acquisition related costs that, prior to the adoption of SFAS No. 141R, would have been included as part of the purchase price. In addition, under the provisions of SFAS 141R, future reversal of the Company’s current acquisition-related tax reserves of approximately $11.1 million, to the extent (if any) that the Company concludes in the future that such reversal is then appropriate, will be recorded in earnings, rather than as an adjustment to goodwill or acquisition related other intangible assets. If recognized, this will affect the Company’s annual effective income tax rate.

 

In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which delayed the effective date of SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), for non-financial assets and non-financial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. The Company adopted FSP 157-2 on January 1, 2009 and it did not have a material impact on the Company’s financial position, results of operations or cash flow.

 

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 (“SFAS No. 142”). 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 (“SFAS No. 141”), and other US generally accepted accounting principles (“GAAP”). The Company adopted FSP SFAS No. 142-3 on January 1, 2009 and it did not have a material 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.  The Company adopted EITF No. 08-3 on January 1, 2009 and it did not have a material impact on the Company’s financial position, results of operations or cash flow.

 

In December 2008, the FASB issued FSP FAS No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP FAS 132(R)-1”), which requires additional disclosures for employers’ pension and other postretirement benefit plan assets. As pension and other postretirement benefit plan assets were not included within the scope of SFAS No. 157, FSP FAS 132(R)-1 requires employers to disclose information about fair value measurements of plan assets similar to the disclosures required under SFAS No. 157, the investment policies and strategies for the major categories of plan assets, and significant concentrations of risk within plan assets. FSP FAS 132(R)-1 is effective for the Company as of December 31, 2009. As FSP FAS 132(R)-1 provides only disclosure requirements, the adoption of this standard will have no material impact on the Company’s financial position, results of operations or cash flow.

 

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Table of Contents

 

In April 2009, the FASB issued two FASB Staff Positions (“FSP”) to provide additional guidance regarding (1) measuring the fair value of financial instruments when a market becomes inactive and quoted prices may reflect distressed transactions and (2) recording impairment charges on investments in debt instruments. The FASB also issued a third FSP to require disclosure of fair values of certain financial instruments in interim financial statements. These FSPs, further described below, are effective for interim and annual periods ending after June 15, 2009, but can be early adopted for interim and annual periods ended after March 15, 2009.

 

FSP SFAS No. 157-4, Determining Whether a Market for an Asset or Liability is Active or Inactive and Determining When a Transaction is  Distressed (“FSP SFAS 157-4”), provides additional guidance to highlight and expand on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for an asset or liability.  The Company adopted FSP SFAS 157-4 in the period ended March 31, 2009. The adoption of FSP SFAS No. 157-4 did not have a material impact on the Company’s financial position, results of operations or cash flow.

 

FSP SFAS No. 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2/124-2”), changes the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of an impairment charge to be recorded in earnings. To determine whether an other-than-temporary impairment exits, an entity will asses the likelihood of selling the security prior to recovering its cost basis, rather than assessing whether it has the intent and ability to hold a security to recovery.  The Company adopted FSP SFAS 115-2/124-2 in the period ended March 31, 2009, and has determined that the cumulative $0.7 million impairment related to the fair value of its auction rate securities continues to be temporary.

 

FSP FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP No. 107-1), expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, Disclosures About Fair Value of Financial Instruments, to interim financial statements. The provisions of this FSP are effective for periods ending after June 15, 2009, and can only be early adopted for periods ended after March 15, 2009 with an entity’s simultaneous adoption of FSP SFAS 157-4 and FSP FAS 115-2.  The Company intends to adopt FSP No. 107-1 effective for the period ending June 30, 2009.  FSP No. 107-1 will impact future quarterly disclosures only and therefore will have no impact on the Company’s financial position, results of operations or cash flow.

 

(3) BUSINESS COMBINATIONS

 

On February 27, 2009, the Company acquired 100% of the outstanding stock of privately-held EnviroSORT Inc. (“EnviroSORT”) for a preliminary purchase price of $9.9 million. The preliminary purchase price included the assumption of $2.5 million of debt and $0.4 million of preliminary post-closing adjustments. The Company paid down the balance of the $2.5 million assumed debt on the acquisition date. The acquisition of EnviroSORT is expected to complement and expand the Company’s operations in Western Canada.  The preliminary purchase price is subject to post-closing adjustments which are based upon the amount by which EnviroSORT’s net working capital, as of the closing date, was greater or less than $0.5 million.  The Company has recorded $5.1 million of goodwill to the Technical Services segment, but that amount is preliminary pending the final fair value determinations. The balance of any goodwill is not expected to be deductible for tax purposes.  Acquisition-related costs of $0.2 million were included in selling, general, and administrative expenses for the three months ended March 31, 2009.

 

During the three months ended March 31, 2009, the Company finalized the purchase accounting for the March 2008 acquisitions of two solvent recycling facilities from Safety-Kleen Systems, Inc. and of Universal Environmental, Inc.  There were no adjustments to the purchase price of the solvent recycling facilities after December 31, 2008.  Additional acquisition costs of $0.1 million were recorded against the purchase price of Universal Environmental, Inc., resulting in a final purchase price of $15.1 million.   These additional acquisition costs resulted in an increase of $0.1 million to goodwill.  The working capital adjustment was also finalized and resulted in an increase of less than $0.1 million owed to the seller.

 

(4) FAIR VALUE MEASUREMENTS

 

As of March 31, 2009, the Company held certain auction rate securities and marketable securities that are required to be measured at fair value on a recurring basis. The auction rate securities are classified as available for sale and the fair value of these securities as of March 31, 2009 was estimated utilizing a discounted cash flow analysis. The discounted cash flow analysis 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. The auction rate securities were also compared, when possible, to other observable market data with similar characteristics to the securities held by the Company.

 

As of March 31, 2009, 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

 

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Loan Program. The Company attributes the decline in the fair value of the securities to external liquidity issues rather than credit issues.  During the three month period ended March 31, 2009, the Company recorded an unrealized pre-tax gain of $0.1 million which is included in accumulated other comprehensive income. The Company assessed the decline in value to be temporary because the Company does not intend to sell the securities and it is more likely than not that it will not have to sell the securities before their recovery. In addition, as of March 31, 2009, the Company continued to earn interest on all of its auction rate securities.

 

The Company’s assets measured at fair value on a recurring basis subject to the disclosure requirements of SFAS No. 157, Fair Value Measurement (SFAS 157), at March 31, 2009, 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, 2009

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

6,312

 

$

6,312

 

Marketable securities

 

$

270

 

$

 

$

 

$

270

 

 

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, 2009 (in thousands):

 

 

 

2009

 

Balance at January 1, 2009

 

$

6,237

 

Total unrealized gains included in other comprehensive income

 

75

 

Balance at March 31, 2009

 

$

6,312

 

 

(5) GOODWILL AND OTHER INTANGIBLE ASSETS

 

The goodwill balance as of March 31, 2009 increased $5.2 million from December 31, 2008 to $29.8 million.   The increase was attributed to the acquisition of EnviroSORT ($5.1 million) and final purchase price acquisition costs related to Universal Environmental, Inc. ($0.1 million).   The goodwill related to EnviroSORT includes estimates that are subject to change based upon final fair value determinations.   Below is a summary of amortizable other intangible assets (in thousands):

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

Cost

 

Accumulated
Amortization

 

Net

 

Weighted
Average
Amortization
Period
(in years)

 

Cost

 

Accumulated
Amortization

 

Net

 

Weighted
Average
Amortization
Period
(in years)

 

Permits

 

$

93,954

 

$

34,028

 

$

59,926

 

17.6

 

$

94,446

 

$

33,458

 

$

60,988

 

17.2

 

Customer lists and other intangible assets

 

17,573

 

7,235

 

10,338

 

6.0

 

17,611

 

6,845

 

10,766

 

6.2

 

 

 

$

111,527

 

$

41,263

 

$

70,264

 

13.7

 

$

112,057

 

$

40,303

 

$

71,754

 

13.6

 

 

(6) ACCRUED EXPENSES

 

Accrued expenses consisted of the following (in thousands):

 

 

 

March 31, 
2009

 

December 31, 
2008

 

Insurance

 

$

16,372

 

$

15,361

 

Interest

 

631

 

1,280

 

Accrued disposal costs

 

2,059

 

2,305

 

Accrued compensation and benefits

 

13,388

 

22,952

 

Other items

 

23,023

 

26,003

 

 

 

$

55,473

 

$

67,901

 

 

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(7) CLOSURE AND POST-CLOSURE LIABILITIES

 

The changes to closure and post-closure liabilities for the three months ended March 31, 2009 were as follows (in thousands):

 

 

 

Landfill
Retirement 
Liability

 

Non-Landfill
Retirement 
Liability

 

Total

 

Balance at January 1, 2009

 

$

25,269

 

$

7,368

 

$

32,637

 

New asset retirement obligations

 

515

 

 

515

 

Accretion

 

786

 

226

 

1,012

 

Changes in estimate recorded to statement of income

 

(247

)

6

 

(241

)

Settlement of obligations

 

(877

)

(194

)

(1,071

)

Currency translation and other

 

(37

)

(7

)

(44

)

Balance at March 31, 2009

 

$

25,409

 

$

7,399

 

$

32,808

 

 

All of the landfill facilities included in the above were active as of March 31, 2009.

 

New asset retirement obligations incurred in 2009 are being discounted at the credit-adjusted risk-free rate of 10.57% and inflated at a rate of 1.02%.

 

(8) REMEDIAL LIABILITIES

 

The changes to remedial liabilities for the three months ended March 31, 2009 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, 2009

 

$

5,112

 

$

90,291

 

$

50,485

 

$

145,888

 

Accretion

 

61

 

1,039

 

538

 

1,638

 

Changes in estimate recorded to statement of income

 

 

 

11

 

11

 

Settlement of obligations

 

(20

)

(746

)

(376

)

(1,142

)

Currency translation and other

 

(57

)

(10

)

(277

)

(344

)

Balance at March 31, 2009

 

$

5,096

 

$

90,574

 

$

50,381

 

$

146,051

 

 

(9) FINANCING ARRANGEMENTS

 

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

 

 

 

March 31,
2009

 

December 31,
2008

 

Senior secured notes, at 11.25%, due July 15, 2012

 

$

23,032

 

$

23,032

 

Revolving facility, due December 1, 2010

 

 

 

Synthetic letter of credit facility, due December 1, 2010

 

 

 

Term loan, at 3.02% and 2.97% on March 31, 2009 and December 31, 2008, respectively, due December 1, 2010

 

30,000

 

30,000

 

Less unamortized issue discount

 

(152

)

(162

)

Long-term obligations

 

$

52,880

 

$

52,870

 

 

At March 31, 2009, the revolving facility had $30.5 million available to borrow, and $39.5 million of letters of credit outstanding. The synthetic line of credit facility had $48.0 million of letters of credit outstanding.  The financing arrangements and principal terms of each are discussed further in the Company’s 2008 Annual Report on Form 10-K. There have not been any material changes in such terms during the first three months of 2009.

 

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(10) COMMITMENTS AND CONTINGENCIES

 

Legal and Administrative 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 legal 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 alleged responsibility arising under federal or state Superfund laws to remediate contamination at properties owned either by the Company or by other parties (“third party sites”) to which either the Company or prior owners of certain of the Company’s facilities shipped wastes.

 

The Company records actual or potential liabilities related to legal or administrative proceedings in accordance with SFAS No. 5. At March 31, 2009, the Company had recorded $24.2 million of reserves in the Company’s financial statements for actual or potential liabilities related to the legal and administrative proceedings in which the Company was then involved, the principal of which are described below, and the Company believes that it is reasonably possible that the amount of such potential liabilities could be as much as $3.1 million more. The Company periodically adjusts the aggregate amount of such reserves when such actual or potential liabilities are paid or otherwise discharged, new claims arise, or additional relevant information about existing or potential claims becomes available. Because all of such reasonably possible additional liabilities relate to remedial liabilities, they are reflected in the tables of reasonably possible additional liabilities under the column heading “Remedial Liabilities (Including Superfund) for Non-Landfill Operations” in Note 8, “Remedial Liabilities.”

 

As of March 31, 2009, the principal legal and administrative proceedings in which the Company was involved, or which had been terminated during the three-month period then ended, were as follows:

 

Ville Mercier.  In September 2002, the Company acquired the stock of a subsidiary (the “Mercier Subsidiary”) which owns a hazardous waste incinerator in Ville Mercier, Quebec (the “Mercier Facility”). The property adjacent to the Mercier Facility, which is also owned by the Mercier Subsidiary, is now contaminated as a result of actions dating back to 1968, when the Government of Quebec issued to a company unrelated to the Mercier Subsidiary 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 the Government of Quebec. The lawsuits assert that the defendants are jointly and severally responsible for the contamination of groundwater in the region, 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.

 

On September 26, 2007, the Quebec Minister of Sustainable Development, Environment and Parks issued a Notice pursuant to Section 115.1 of the Environment Quality Act, superseding 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 groundwater contamination in the region and will contest any action by the Ministry to impose costs for remedial measures on the Mercier Subsidiary. The Company also continues to pursue settlement options. At March 31, 2009 and December 31, 2008, the Company had accrued $10.5 million and $10.6 million, respectively, for remedial liabilities relating to the Ville Mercier legal proceedings.

 

CH El Dorado.  In August 2006, the Company purchased all of the outstanding membership interests in Teris LLC (“Teris”) and changed the name of Teris to Clean Harbors El Dorado, LLC (“CH El Dorado”). At the time of the acquisition, Teris was, and CH El Dorado now is, involved in certain legal proceedings arising from a fire on January 2, 2005, at the incineration facility owned and operated by Teris in El Dorado, Arkansas.

 

CH El Dorado is defending vigorously the claims asserted against Teris in those proceedings, and the Company believes that the resolution of those proceedings will not have a materially adverse affect on the Company’s financial position, results of operations or cash flows. In addition to CH El Dorado’s defenses to the lawsuits, the Company will be entitled to rely upon an indemnification from the seller of the membership interests in Teris which is contained in the purchase agreement for those interests. Under that agreement, the seller agreed to indemnify (without any deductible amount) the Company against any damages which the Company might suffer as a result of the lawsuits to the extent that such damages are not fully covered by insurance or the reserves which Teris

 

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had established on its books prior to the acquisition. The seller’s parent also guaranteed the indemnification obligation of the seller to the Company.

 

Deer Trail, Colorado Facility.  Since April 5, 2006, the Company has been involved in various legal proceedings which have arisen as a result of the issuance by the Colorado Department of Public Health and Environment (“CDPHE”) of a radioactive materials license (“RAD License”) to a Company subsidiary, Clean Harbors Deer Trail, LLC (“CHDT”) to accept certain low level radioactive materials known as “NORM/TENORM” wastes for disposal. Adams County, the county where the CHDT facility is located, filed two suits against the CDPHE in Colorado effectively seeking to invalidate the license. The two suits filed in 2006 were both dismissed and those dismissals were upheld by the Colorado Court of Appeals. Adams County appealed those rulings to the Colorado Supreme Court, where they are now pending. Adams County filed a third suit directly against CHDT in 2007 again attempting to invalidate the license. That suit was also dismissed on November 14, 2008, and Adams County has now appealed that dismissal to the Colorado Court of Appeals. The Company continues to believe that the grounds asserted by the County are factually and legally baseless and will contest the appeal vigorously. The Company has not recorded any liability for this matter on the basis that such liability is currently neither probable nor estimable.

 

Superfund Proceedings

 

As of March 31, 2009, the Company has been notified that either the Company or the prior owners of certain of the Company’s facilities for which the Company may have certain indemnification obligations have been identified as potentially responsible parties (“PRPs”) or potential PRPs in connection with 59 sites which are subject to or are proposed to become subject to proceedings under federal or state Superfund laws. Of the 59 sites, two involve facilities that are now owned by the Company and 57 involve third party sites to which either the Company or the prior owners shipped wastes. In connection with each site, the Company has estimated the extent, if any, to which it may be subject, either directly or as a result of any such indemnification provisions, for cleanup and remediation costs, related legal and consulting costs associated with PRP investigations, settlements, and related legal and administrative proceedings. The amount of such actual and potential liability is inherently difficult to estimate because of, among other relevant factors, uncertainties as to the legal liability (if any) of the Company or the prior owners of certain of the Company’s facilities to contribute a portion of the cleanup costs, the assumptions that must be made in calculating the estimated cost and timing of remediation, the identification of other PRPs and their respective capability and obligation to contribute to remediation efforts, and the existence and legal standing of indemnification agreements (if any) with prior owners, which may either benefit the Company or subject the Company to potential indemnification obligations.

 

The Company’s potential liability for cleanup costs at the two facilities now owned by the Company and at 35 (the “Listed Third Party Sites”) of the 57 third party sites arose out of the Company’s 2002 acquisition of substantially all of the assets (the “CSD assets”) of the Chemical Services Division of Safety-Kleen Corp. As part of the purchase price for the CSD assets, the Company became liable as the owner of these two facilities and also agreed to indemnify the prior owners of the CSD assets against their share of certain cleanup costs for the Listed Third Party Sites payable to governmental entities under federal or state Superfund laws. Of the 35 Listed Third Party Sites, 18 are currently requiring expenditures on remediation, ten are now settled, six are not currently requiring expenditures on remediation, and at one site the Company is contesting the prior owner’s liability with the PRP group. The status of the two facilities owned by the Company (the Wichita Property and the BR Facility) and two of the Listed Third Party Sites (the Breslube-Penn and Casmalia Sites) are further described below. Also further described below are one third party site (the Marine Shale Site) at which the Company has been named a PRP as a result of its acquisition of the CSD assets but disputes that it has any cleanup or related liabilities, certain of the other third party sites which are not related to the Company’s acquisition of the CSD assets, and certain notifications which the Company has received about other third party sites.

 

Wichita Property.  The Company acquired in 2002 as part of the CSD assets a service center located in Wichita, Kansas (the “Wichita Property”). The Wichita Property is one of several properties located within the boundaries of a 1,400 acre state-designated Superfund site in an old industrial section of Wichita known as the North Industrial Corridor Site. Along with numerous other PRPs, the former owner executed a consent decree relating to such site with the EPA, and the Company is continuing its ongoing remediation program for the Wichita Property in accordance with that consent decree. The Company also acquired rights under an indemnification agreement between the former owner and an earlier owner of the Wichita Property, which the Company anticipates but cannot guarantee will be available to reimburse certain such cleanup costs.

 

BR Facility.  The Company acquired in 2002 as part of the CSD assets a former hazardous waste incinerator and landfill in Baton Rouge (“BR Facility”), for which operations had been previously discontinued by the prior owner. In September 2007, the EPA issued a Special Notice Letter to the Company related to the Devil’s Swamp Lake Site (“Devil’s Swamp”) in East Baton Rouge Parish, Louisiana. Devil’s Swamp includes a lake located downstream of an outfall ditch where wastewater and stormwater have been discharged, and Devil’s Swamp is proposed to be included on the National Priorities List due to the presence of Contaminants of Concern (“COC”) cited by the EPA. These COCs include substances of the kind found in wastewater and stormwater discharged from the BR Facility in past operations. The EPA originally requested COC generators to submit a good faith offer to conduct a remedial investigation feasibility study directed towards the eventual remediation of the site. The Company is currently performing corrective

 

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actions at the BR Facility under an order issued by the Louisiana Department of Environmental Quality (the “LDEQ”). The Company cannot presently estimate the potential additional liability for the Devil’s Swamp cleanup until a final remedy is selected by the EPA.

 

Breslube-Penn Site.  At one of these 35 Listed Third Party Sites, the Breslube-Penn Site, the EPA brought suit in 1997 in the U.S. District Court for the Western District of Pennsylvania against a large number of PRPs for recovery of the EPA’s response costs in connection with that site. The named defendants are alleged to be jointly and severally liable for the remediation of the site and all response costs associated with the site. One of the prior owners, GSX Chemical Services of Ohio (“GSX”), was a named defendant in the original complaint. In 2006, the EPA filed an amended complaint naming the Company as defendant, alleging that the Company was the successor in interest to the liability of GSX.

 

Casmalia Site.  At one of these 35 Listed Third Party Sites, the Casmalia Resources Hazardous Waste Management Facility (the “Casmalia Site”) in Santa Barbara County, California, the Company received from the EPA a request for information in May 2007. In that request, the EPA is seeking information about the extent to which, if at all, the prior owner transported or arranged for disposal of waste at the Casmalia Site. The Company has not recorded any liability for this new matter on the basis that such transporter or arranger liability is currently neither probable nor estimable.

 

Marine Shale Site.  Prior to 1996, Marine Shale Processors, Inc. (“Marine Shale”) operated a kiln in Amelia, Louisiana 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 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.

 

On May 11, 2007, the EPA and the LDEQ issued a Special Notice to the Company and other PRPs, seeking a good faith offer to address site remediation at the former Marine Shale facility. Certain of the former owners of the CSD assets were major customers of Marine Shale, but Marine Shale was not included as a Listed Third Party Site in connection with the Company’s acquisition of the CSD assets and the Company was never a customer of Marine Shale. Although the Company believes that it is not liable (either directly or under any indemnification obligation) for cleanup costs at the Marine Shale site, the Company elected to join with other parties which had been notified that are potentially PRPs in connection with Marine Shale site to form a group (the “Site Group”) to retain common counsel 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. The Site Group made a good faith settlement offer to the EPA on November 29, 2007, and negotiations among the EPA, the LDEQ and the Site Group with respect to the Marine Shale site are ongoing. As of both March 31, 2009 and December 31, 2008, the amount of the Company’s remaining reserves relating to the Marine Shale site was $3.8 million.

 

Certain Other Third Party Sites.  At 14 of the 57 third party sites, the Company has an indemnification agreement with ChemWaste, a former subsidiary of Waste Management, Inc. and the prior owner. The agreement indemnifies the Company with respect to any liability at the 14 sites for waste disposed prior to the Company’s acquisition of the sites. Accordingly, Waste Management is paying all costs of defending those subsidiaries in those 14 cases, including legal fees and settlement costs. However, there can be no guarantee that the Company’s ultimate liabilities for these sites will not materially exceed the amount recorded or that indemnities applicable to any of these sites will be available to pay all or a portion of related costs. The Company does not have an indemnity agreement with respect to any of the other remaining sites not discussed above, however the Company believes that its additional potential liability, if any, to contribute to the cleanup of such remaining sites will not, in the aggregate, exceed $100,000.

 

Other Notifications.  Between September 2004 and May 2006, the Company also received notices from certain of the prior owners of the CSD assets seeking indemnification from the Company at five third party sites which are not included in the 57 third party sites described above that have been designated as Superfund sites or potential Superfund sites and for which those prior owners have been identified as PRPs or potential PRPs. The Company has responded to such letters asserting that the Company has no obligation to indemnify those prior owners for any cleanup and related costs (if any) which they may incur in connection with these five sites. The Company intends to assist those prior owners by providing information that is now in the Company’s possession with respect to those five sites and, if appropriate to participate in negotiations with the government agencies and PRP groups involved. The Company has also investigated the sites to determine the existence of potential liabilities independent from the liability of those former owners, and concluded that at this time the Company is not liable for any portion of the potential cleanup of the five sites, and therefore has not established a reserve.

 

Federal, State and Provincial Enforcement Actions

 

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, 2009, there were three proceedings for which the Company reasonably believes that the sanctions could equal or exceed $100,000. The Company does not believe that the fines or other penalties in these or any of the other

 

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regulatory proceedings will, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations.  One of such other regulatory proceedings is described below.

 

Thorold Fire.  On February 19, 2007, an explosion and fire occurred at the Company’s Thorold facility in Ontario during non-business hours destroying a storage warehouse and damaging several nearby buildings on site. No employee casualties or injuries were reported. On October 23, 2007 the Ontario Ministry of the Environment announced that it had concluded its investigation into the fire and that there were no grounds to initiate action against the Company. This action by the Ontario Ministry of the Environment followed a prior pronouncement by the provincial Ministry of Health that there were no long-term health impacts from the fire. Despite the earlier pronouncements, on February 12, 2009 the Ontario Ministry of the Environment initiated proceedings against one of the Company’s Canadian subsidiaries in the Ontario Court of Justice alleging three violations of the Environmental Protection Act. The Company is evaluating this matter and cannot presently estimate the potential liability.

 

(11) INCOME TAXES

 

The Company’s effective income tax rate for the three months ended March 31, 2009 and 2008 was approximately 47% and 46%, respectively.  The increase in the effective tax rate was primarily attributable to lower profits as compared to the proportion of interest and penalties accrued on unrecognized tax benefits.

 

As of March 31, 2009 the Company’s unrecognized tax benefits were $69.8 million which included $18.0 million of interest and $5.5 million of penalties.  As of December 31, 2008 the Company’s unrecognized tax benefits were $68.7 million which included $17.0 million of interest and $5.2 million of penalties.

 

(12) 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, 2009

 

Three Months Ended March 31, 2008

 

 

 

Income

 

Shares

 

Per Share
Amount

 

Income

 

Shares

 

Per Share
Amount

 

Basic income attributable to common stockholders before effect of dilutive securities

 

$

4,955

 

23,748

 

$

0.21

 

$

8,922

 

20,357

 

$

0.44

 

Dilutive effect of equity-based compensation awards and warrants

 

 

114

 

 

69

 

887

 

(0.01

)

Diluted income attributable to common stockholders

 

$

4,955

 

23,862

 

$

0.21

 

$

8,991

 

21,244

 

$

0.43

 

 

For the three-month periods ended March 31, 2009 and 2008, the dilutive effect of all outstanding options, restricted stock and warrants is included in the above calculations. For the three-month period ended March 31, 2009, excluded from the above calculation were the dilutive effects of 139 thousand outstanding performance stock awards as the performance criteria were not attained at that time and 21 thousand options that were not in-the-money.

 

(13) STOCK-BASED COMPENSATION

 

During the three-month period ended March 31, 2009, the Company granted 59,353 performance stock awards with a weighted-average grant-date fair value of $44.58.

 

The performance stock awards granted in 2009 are subject to achieving predetermined revenue and EBITDA targets for a specified period of time and service conditions.   If the Company does not achieve the performance goals by December 31, 2010, the shares will be forfeited in their entirety.  As of March 31, 2009 management did not believe that it was probable that the performance targets will be achieved, as it is early in the award achievement period.  As a result, no compensation expense was recognized during the three months ended March 31, 2009.

 

(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)

 

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expense, and loss on refinancing (“Adjusted EBITDA”). 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, 2009 and 2008 (in thousands). 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.

 

 

 

For the Three Months Ended March 31, 2009

 

 

 

Technical
Services

 

Site
Services

 

Corporate
Items

 

Totals

 

Third party revenues

 

$

143,349

 

$

62,876

 

$

81

 

$

206,306

 

Intersegment revenues, net

 

7,717

 

(7,124

)

(593

)

 

Direct revenues

 

$

151,066

 

$

55,752

 

$

(512

)

$

206,306

 

 

 

 

For the Three Months Ended March 31, 2008

 

 

 

Technical
Services

 

Site
Services

 

Corporate
Items

 

Totals

 

Third party revenues

 

$

166,312

 

$

76,190

 

$

7

 

$

242,509

 

Intersegment revenues, net

 

5,657

 

(5,183

)

(474

)

 

Direct revenues

 

$

171,969

 

$

71,007

 

$

(467

)

$

242,509

 

 

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,

 

 

 

2009

 

2008

 

Adjusted EBITDA:

 

 

 

 

 

Technical Services

 

$

35,265

 

$

40,227

 

Site Services

 

5,898

 

7,885

 

Corporate Items

 

(15,739

)

(14,967

)

Total

 

25,424

 

33,145

 

 

 

 

 

 

 

Reconciliation to Consolidated Statement of Income:

 

 

 

 

 

Accretion of environmental liabilities

 

2,650

 

2,670

 

Depreciation and amortization

 

12,061

 

10,475

 

Income from operations

 

10,713

 

20,000

 

Other (income) expense

 

(33

)

104

 

Interest expense, net of interest income

 

1,380

 

3,385

 

Income before provision for income taxes

 

$

9,366

 

16,511

 

 

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

 

 

 

March 31,
2009

 

December 31,
2008

 

Property, plant and equipment, net

 

 

 

 

 

Technical Services

 

$

246,014

 

$

232,912

 

Site Services

 

34,727

 

31,982

 

Corporate or other assets

 

28,974

 

30,567

 

Total property, plant and equipment, net

 

$

309,715

 

$

295,461

 

Intangible assets:

 

 

 

 

 

Technical Services

 

 

 

 

 

Goodwill

 

$

27,490

 

$

22,417

 

Permits and other intangibles, net

 

61,843

 

63,003

 

Total Technical Services

 

89,333

 

85,420

 

Site Services

 

 

 

 

 

Goodwill

 

2,275

 

2,161

 

Permits and other intangibles, net

 

8,421

 

8,751

 

Total Site Services

 

10,696

 

10,912

 

Total

 

$

100,029

 

$

96,332

 

 

14



Table of Contents

 

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

 

 

 

March 31,
2009

 

December 31,
2008

 

Technical Services

 

$

456,785

 

$

441,422

 

Site Services

 

57,481

 

53,677

 

Corporate Items

 

358,780

 

403,237

 

Total

 

$

873,046

 

$

898,336

 

 

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

 

 

 

March 31,
2009

 

December 31,
2008

 

United States

 

$

746,680

 

$

771,751

 

Canada

 

126,366

 

126,585

 

Total

 

$

873,046

 

$

898,336

 

 

(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. As of March 31, 2009, the principal balance of the outstanding senior secured notes was $23.0 million. The notes are not guaranteed by the Company’s Canadian, Mexican and Puerto Rican wholly-owned 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, 2009 (in thousands):

 

 

 

Clean
Harbors, Inc.

 

U.S. Guarantor
Subsidiaries

 

Foreign
Non-Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

132,175

 

$

46,595

 

$

48,191

 

$

 

$

226,961

 

Intercompany receivables

 

 

 

78,410

 

(78,410

)

 

Other current assets

 

12,352

 

181,749

 

25,153

 

 

219,254

 

Property, plant and equipment, net

 

 

275,785

 

33,930

 

 

309,715

 

Investments in subsidiaries

 

426,726

 

171,742

 

91,654

 

(690,122

)

 

Intercompany note receivable

 

 

95,712

 

3,701

 

(99,413

)

 

Other long-term assets

 

14,724

 

74,156

 

28,236

 

 

117,116

 

Total assets

 

$

585,977

 

$

845,739

 

$

309,275

 

$

(867,945

)

$

873,046

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

979

 

$

134,299

 

$

15,595

 

$

 

$

150,873

 

Intercompany payables

 

39,963

 

38,447

 

 

(78,410

)

 

Closure, post-closure and remedial liabilities, net

 

 

145,780

 

15,241

 

 

161,021

 

Long-term obligations

 

52,880

 

 

 

 

52,880

 

Capital lease obligations, net

 

 

234

 

61

 

 

295

 

Intercompany note payable

 

3,701

 

 

95,712

 

(99,413

)

 

Other long-term liabilities

 

54,953

 

3,910

 

15,613

 

 

74,746

 

Total liabilities

 

152,476

 

322,670

 

142,222

 

(177,823

)

439,545

 

Stockholders’ equity

 

433,501

 

523,069

 

167,053

 

(690,122

)

433,501

 

Total liabilities and stockholders’ equity

 

$

585,977

 

$

845,739

 

$

309,275

 

$

(867,945

)

$

873,046

 

 

15



Table of Contents

 

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

 

 

 

Clean
Harbors, Inc.

 

U.S. Guarantor
Subsidiaries

 

Foreign
Non-Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

121,894

 

$

67,934

 

$

59,696

 

$

 

$

249,524

 

Intercompany receivables

 

 

 

72,072

 

(72,072

)

 

Other current assets

 

20,970

 

196,914

 

21,644

 

 

239,528

 

Property, plant and equipment, net

 

 

264,160

 

31,301

 

 

295,461

 

Investments in subsidiaries

 

418,048

 

169,135

 

91,654

 

(678,837

)

 

Intercompany note receivable

 

 

98,039

 

3,701

 

(101,740

)

 

Other long-term assets

 

14,650

 

75,005

 

24,168

 

 

113,823

 

Total assets

 

$

575,562

 

$

871,187

 

$

304,236

 

$

(852,649

)

$

898,336

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

1,627

 

$

163,928

 

$

15,818

 

$

 

$

181,373

 

Intercompany payables

 

34,552

 

37,520

 

 

(72,072

)

 

Closure, post-closure and remedial liabilities, net

 

 

145,650

 

15,611

 

 

161,261

 

Long-term obligations

 

52,870

 

 

 

 

52,870

 

Capital lease obligations, net

 

 

270

 

90

 

 

360

 

Intercompany note payable

 

3,701

 

 

98,039

 

(101,740

)

 

Other long-term liabilities

 

53,766

 

3,867

 

15,794

 

 

73,427

 

Total liabilities

 

146,516

 

351,235

 

145,352

 

(173,812

)

469,291

 

Stockholders’ equity

 

429,046

 

519,952

 

158,884

 

(678,837

)

429,045

 

Total liabilities and stockholders’ equity

 

$

575,562

 

$

871,187

 

$

304,236

 

$

(852,649

)

$

898,336

 

 

Following is the consolidating statement of income for the three months ended March 31, 2009 (in thousands):

 

 

 

Clean
Harbors, Inc.

 

U.S. Guarantor
Subsidiaries

 

Foreign
Non-Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

180,777

 

$

29,815

 

$

(4,286

)

$

206,306

 

Cost of revenues

 

 

126,963

 

20,836

 

(4,286

)

143,513

 

Selling, general and administrative expenses

 

 

32,112

 

5,257

 

 

37,369

 

Accretion of environmental liabilities

 

 

2,428

 

222

 

 

2,650

 

Depreciation and amortization

 

 

10,837

 

1,224

 

 

12,061

 

Income from operations

 

 

8,437

 

2,276

 

 

10,713

 

Other income

 

 

31

 

2

 

 

33

 

Interest income (expense)

 

(1,230

)

(2,853

)

2,703

 

 

(1,380

)

Equity in earnings of subsidiaries

 

10,403

 

2,082

 

 

(12,485

)

 

Intercompany dividend income (expense)

 

 

 

2,748

 

(2,748

)

 

Intercompany interest income (expense)

 

 

2,651

 

(2,651

)

 

 

Income before provision for income taxes

 

9,173

 

10,348

 

5,078

 

(15,233

)

9,366

 

Provision for income taxes

 

4,218

 

106

 

87

 

 

4,411

 

Net income

 

$

4,955

 

$

10,242

 

$

4,991

 

$

(15,233

)

$

4,955

 

 

Following is the consolidating statement of income 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

 

 

16



Table of Contents

 

Following is the condensed consolidating statement of cash flows for the three months ended March 31, 2009 (in thousands):

 

 

 

Clean
Harbors, Inc.

 

U.S. Guarantor
Subsidiaries

 

Foreign
Non-Guarantor
Subsidiaries

 

Total

 

 

 

 

 

 

 

 

 

 

 

Net cash from operating activities

 

$

9,767

 

$

3,879

 

$

(1,735

)

$

11,911

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(23,494

)

(442

)

(23,936

)

Costs to obtain or renew permits

 

 

(261

)

(3

)

(264

)

Proceeds from sales of fixed assets

 

 

48

 

2

 

50

 

Acquisitions, net of cash acquired

 

(15

)

 

(6,194

)

(6,209

)

Net cash from investing activities

 

(15

)

(23,707

)

(6,637

)

(30,359

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Change in uncashed checks

 

 

(434

)

(161

)

(595

)

Proceeds from exercise of stock options

 

67

 

 

 

67

 

Proceeds from employee stock purchase plan

 

585

 

 

 

585

 

Remittance of shares

 

(156

)

 

 

(156

)

Excess tax benefit of stock-based compensation

 

18

 

 

 

18

 

Payments of capital leases

 

 

(259

)

(14

)

(273

)

Payment on acquired debt

 

 

 

(2,538

)

(2,538

)

Intercompany financing

 

15

 

(15

)

 

 

Interest (payments) / received

 

 

10,055

 

(10,055

)

 

Dividends (paid) received

 

 

(10,858

)

10,858

 

 

Net cash from financing activities

 

529

 

(1,511

)

(1,910

)

(2,892

)

Effect of exchange rate change on cash

 

 

 

(1,223

)

(1,223

)

Increase (decrease) in cash and cash equivalents

 

10,281

 

(21,339

)

(11,505

)

(22,563

)

Cash and cash equivalents, beginning of period

 

121,894

 

67,934

 

59,696

 

249,524

 

Cash and cash equivalents, end of period

 

$

132,175

 

$

46,595

 

$

48,191

 

$

226,961

 

 

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

)

 

 

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

 

$

48,884

 

$

86,153

 

 

17



Table of Contents

 

(16) SUBSEQUENT EVENT

 

On April 29, 2009 the Company signed a definitive agreement to acquire Eveready Inc. (“Eveready”), an Alberta corporation headquartered in Edmonton, Alberta, for a total purchase price of approximately USD $387 million, based upon an agreed upon price for Clean Harbors’ common stock of USD $48.81 per share.  Eveready provides industrial maintenance and production, lodging, and exploration services to the oil and gas, chemical, pulp and paper, manufacturing and power generation industries.  The Company will acquire 100% of Eveready’s outstanding common shares in exchange for approximately USD $49 million in cash (approximately USD $2.64 for each Eveready share), USD $118 million (at the agreed price) in Clean Harbors’ common stock consisting of 2.4 million shares (a ratio of 0.1304 Clean Harbors shares for each Eveready share), and the assumption or payment of approximately USD $220 million of Eveready debt.  The Company anticipates receiving the required approvals and closing the acquisition during the third quarter of 2009. The Company anticipates that this acquisition will enhance the Company’s presence in the industrial services market, broaden the range of services the Company can offer customers of both companies, and advance the Company’s position in the Canadian marketplace.

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

In addition to historical information, this quarterly report contains forward-looking statements, which are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009 under the heading “Risk Factors” and in other documents we file from time to time with the Securities and Exchange Commission.  Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

 

General

 

We provide a wide range of environmental services and solutions to a diversified customer base in the United States, Puerto Rico, Mexico and Canada. Throughout North America, we perform environmental services through a network of service locations, and operate incineration facilities, commercial landfills, wastewater treatment operations, solvent recycling facilities and transportation, storage and disposal facilities, as well as polychlorinated biphenyls (“PCB”) management facilities and oil and used oil products recycling facilities.  We seek to be recognized by customers as the premier supplier of a broad range of value-added environmental services based upon quality, responsiveness, customer service, information technologies, breadth of product offerings and cost effectiveness. We view our broad range of services as two major segments—Technical Services and Site Services.

 

Our Technical Services collects and transports containerized and bulk waste; performs categorization, specialized repackaging, treatment and disposal of laboratory chemicals and household hazardous wastes, which are referred to as CleanPack® services; and offers Apollo Onsite Services, which customize environmental programs at customer sites. This is accomplished through the network of service centers where a fleet of trucks, rail or other transport is dispatched to pick up customers’ waste either on a pre-determined schedule or on demand, and then to deliver waste to a permitted facility. From the service centers, chemists can also be dispatched to a customer location for the collection of chemical waste for disposal.

 

Our Site Services provide highly skilled experts utilizing specialty equipment and resources to perform services, such as industrial maintenance, surface remediation, groundwater restoration, site and facility decontamination, emergency response, site remediation, PCB disposal and oil disposal at the customer’s site or another location. These services are dispatched on a scheduled or emergency basis.

 

18



Table of Contents

 

Overview

 

During the three months ended March 31, 2009, our revenues were $206.3 million compared with $242.5 million during the three months ended March 31, 2008. The first quarter of the year has historically been our seasonally weakest quarter due to the timing of customer projects and the effect weather conditions can have on our operations and volumes.  In 2009, our first quarter revenues were further impacted by the current economic environment, severe winter weather in parts of North America, reductions in fuel recovery fees, and the continued weakness of the Canadian dollar.

 

In our Technical Services segment, these factors translated into decreased volumes at our transportation, storage, and disposal facilities and waste water treatment plants, which were partially offset by the volumes processed through the solvent recycling facilities that we acquired from Safety-Kleen Systems, Inc. in 2008. Incinerator utilization was down to 83.5% for the three months ended March 31, 2009, compared to 92.8% in the same three months in 2008.  This decline was partially caused by more down days for routine maintenance during the first quarter of 2009 and the addition of 40 thousand tons of capacity during the past 12 months. Landfill volumes were essentially in-line with the volumes in the first quarter of 2008.

 

The decline in our Site Services segment revenues was predominantly attributable to the factors described above, with most of our service lines down due to a combination of weather and the economy. We also did not perform any significant emergency response projects during the quarter.

 

Our costs of revenues decreased from $170.2 million in the first quarter of 2008 to $143.5 million in the first quarter of 2009. This decrease in expenses is primarily due to the reduction in revenues, but was also attributable to decreases in fuel and energy costs, our continued initiative to actively manage our costs, and specific cost cutting measures initiated as a response to the current economic environment.  An example of our continued initiative to manage our costs was our focus on reducing outside transportation expenses by expanding our internal transportation fleet, making better use of our rail capabilities and capturing related increased efficiencies. These measures helped reduce outside transportation expense in the current period. Even with declines in revenues and increases in costs for certain raw materials, our cost control initiatives enabled us to maintain a stable gross profit margin of 30.4% for the three months ended March 31, 2009, compared to 29.8% for the same period ended March 31, 2008.

 

During the first quarter of 2009, we completed the acquisition of EnviroSORT Inc., a company focused primarily on providing specialized container management, waste management and recycling services to the oil and gas drilling industry in the Canadian provinces of Alberta, British Columbia, and Saskatchewan. We also announced in April that we signed a definitive agreement to acquire Eveready Inc., a Canadian-based company that provides industrial maintenance and production, lodging, and exploration services to the oil and gas, chemical, pulp and paper, manufacturing and power generation industries.  We expect to receive the required approvals and close the acquisition during the third quarter of this year. We anticipate that both of these acquisitions will enhance and broaden our service offerings, generate significant cross-selling opportunities, increase our presence in Canada, and expand our position in the industrial services market.

 

19



Table of Contents

 

Environmental Liabilities

 

We have accrued environmental liabilities, as of March 31, 2009, of approximately $178.9 million, substantially all of which we assumed as part of our acquisitions of the Chemical Services Division, or “CSD,” of Safety-Kleen Corp. in 2002, Teris LLC in 2006, and one of the two solvent recycling facilities we purchased from Safety-Kleen Systems, Inc. in 2008. We anticipate such liabilities will be payable over many years and that cash flows generated from operations will be sufficient to fund the payment of such liabilities when required. However, events not now anticipated (such as future changes in environmental laws and regulations) could require that such payments be made earlier or in greater amounts than currently anticipated.

 

The Company realized a net benefit in the three months ended March 31, 2009, of $0.2 million related to changes in our environmental liability estimates. Changes in environmental liability estimates include changes in landfill retirement liability estimates, which are recorded as cost of revenues, and changes in non-landfill retirement and remedial liability estimates, which are recorded as selling, general, and administrative costs.  During the three months ended March 31, 2009, the net $0.2 million benefit was recorded as cost of revenues.

 

Results of Operations

 

The following table sets forth for the periods indicated certain operating data associated with our results of operations. This table and subsequent discussions should be read in conjunction with Item 6, “Selected Financial Data,” and Item 8, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K for the year ended December 31, 2008 and Item 1, “Financial Statements,” in this report.

 

 

 

Percentage of
Revenues For the
Three Months Ended
March 31,

 

 

 

2009

 

2008

 

Revenues

 

100.0

%

100.0

%

Cost of revenues (exclusive of items shown separately below):

 

69.6

 

70.2

 

Selling, general and administrative expenses

 

18.1

 

16.2

 

Accretion of environmental liabilities

 

1.3

 

1.1

 

Depreciation and amortization

 

5.8

 

4.3

 

Income from operations

 

5.2

 

8.2

 

Other income (expense)

 

 

 

Interest expense, net

 

(0.7

)

(1.4

)

Income before provision for income taxes

 

4.5

 

6.8

 

Provision for income taxes

 

2.1

 

3.1

 

Net income

 

2.4

%

3.7

%

 

Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)

 

We define Adjusted EBITDA (a measure not defined under generally accepted accounting principles) as the term “EBITDA” is defined in our current credit agreement and indenture for covenant compliance purposes. This definition is net income (loss) plus accretion of environmental liabilities, depreciation and amortization, net interest expense, provision for (benefit from) income taxes, non-recurring severance charges, other non-recurring refinancing-related expenses, gain (loss) on sale of fixed assets, loss on early extinguishment of debt, and cumulative effect of change in accounting principle, net of tax.

 

Our management considers Adjusted EBITDA to be a measurement of performance which provides useful information to both management and investors. Adjusted EBITDA should not be considered an alternative to net income (loss) or other measurements under accounting principles generally accepted in the United States. Because Adjusted EBITDA is not calculated identically by all companies, our measurements of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

 

The following is a reconciliation of net income to Adjusted EBITDA:

 

 

 

For the Three Months
Ended March 31,

 

 

 

2009

 

2008

 

Net income

 

$

4,955

 

$

8,922

 

Accretion of environmental liabilities

 

2,650

 

2,670

 

Depreciation and amortization

 

12,061

 

10,475

 

Interest expense, net

 

1,380

 

3,385