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| CLH > SEC Filings for CLH > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
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 under Item 1A, "Risk Factors," in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009, under Item 1A, "Risk Factors," included in Part II-Other Information in this report, and in other documents we file from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.
General
We are a leading provider of environmental, energy and industrial services throughout North America. We serve over 50,000 customers, including a majority of Fortune 500 companies, thousands of smaller private entities and numerous federal, state and local governmental agencies. We have more than 175 locations, including over 50 waste management facilities, throughout North America in 37 U.S. states, seven Canadian provinces, Mexico and Puerto Rico. We also operate international locations in Bulgaria, China, Sweden, Singapore, Thailand and the United Kingdom.
In connection with the closing of the Eveready acquisition, we re-aligned and expanded our reportable segments. This new structure reflects the way management makes operating decisions and manages the growth and profitability of the business. The amounts presented for all periods herein have been recast to reflect the impact of such changes. Under the new structure, we report the business in four operating segments, including:
† Technical Services - provide a broad range of hazardous material management services including the packaging, collection, transportation, treatment and disposal of hazardous and non-hazardous waste at Company owned incineration, landfill, wastewater, and other treatment facilities.
† Field Services - provide a wide variety of environmental cleanup services on customer sites or other locations on a scheduled or emergency response basis including tank cleaning, decontamination, remediation, and spill cleanup.
† Industrial Services - provide industrial and specialty services, such as high-pressure and chemical cleaning, catalyst handling, decoking, material processing and industrial lodging services to refineries, chemical plants, pulp and paper mills, and other industrial facilities.
† Exploration Services - provide exploration and directional boring services to the energy sector serving oil and gas exploration, production, and power generation.
Overview
During the third quarter of 2009, we completed the Eveready acquisition and integrated the Eveready operations with our existing systems and processes. Eveready is 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 the acquisition to extend our capabilities in both the environmental and industrial services marketplace, providing cross-selling opportunities for the combined organization and significantly broadening our presence throughout Canada.
The purchase price of the acquisition totaled $410 million and included the issuance of 2.4 million of our common shares, the assumption of $237 million of Eveready debt, and a cash payment of $56 million to existing Eveready shareholders. The acquisition was announced in April 2009, and as a condition to the approval of the purchase by the Canadian Commissioner of Competition, we agreed to divest Eveready's Pembina Area Landfill, located near Drayton Valley, Alberta, due to its proximity to our existing landfill in the region.
In connection with the acquisition, we were required to obtain waivers from the lenders under our and Eveready's respective existing credit agreements to allow for the completion of the acquisition and the repayment of Eveready's existing 7% convertible subordinated debentures, and also concurrently with or following the acquisition to secure financing sufficient to pay off or restructure substantially all of the remaining Eveready indebtedness. We obtained the necessary waivers prior to
the close of the acquisition and subsequently met the financing requirement on August 14, 2009 by issuing $300.0 million aggregate principal amount of 75/8% senior secured notes for net proceeds of $292.1 million. The proceeds of the offering were used to repay and terminate substantially all of the outstanding Eveready debt (other than certain capital leases) assumed in connection with the acquisition and pay certain related fees and expenses.
Environmental Liabilities
We have accrued environmental liabilities, as of September 30, 2009, of approximately $181.6 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. The Pembina Area Landfill, which we have agreed to divest, is subject to $2.9 million of environmental liabilities that are recorded in liabilities held for sale. 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.
We realized a net benefit in the nine months ended September 30, 2009, of $2.3 million related to changes in our environmental liability estimates. Changes in environmental liability estimates include changes in landfill retirement liability estimates, which are recorded in cost of revenues, and changes in non-landfill retirement and remedial liability estimates, which are recorded in selling, general, and administrative costs. During the nine months ended September 30, 2009, a benefit of approximately $0.8 million was recorded in cost of revenues and a benefit of approximately $1.5 million was recorded in sales, general and administrative expenses. Of the total $2.3 million net benefit recorded for the nine months ended September 30, 2009, $1.0 million resulted from changes in estimate in closure and post closure liabilities primarily due to closing a landfill cell and surrendering the remaining cell closure reserve as well as delays in timing of certain final cell closure and certain remedial projects spending. The remaining net benefit of $1.3 million related to changes in estimate in remedial liabilities and resulted from a $2.4 million benefit for landfill sites and inactive sites due primarily to (i) the successful introduction of new technology for remedial activities and (ii) the net discounting effect of delays in timing for completion of certain remedial projects and updated site information. This benefit was offset by changes in estimate resulting in an increase to the non-landfill liabilities due primarily to (i) new regulatory compliance obligations, (ii) the net of timing changes and implementation of technology upgrades, and (iii) the discounting effect of delays in certain remedial projects.
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 Total Revenues
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
2009 2008 2009 2008
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues (exclusive of
items shown separately below) 69.0 68.5 68.8 68.6
Selling, general and
administrative expenses 15.2 14.9 16.7 15.8
Accretion of environmental
liabilities 0.9 1.0 1.1 1.0
Depreciation and amortization 6.1 4.2 5.9 4.2
Income from operations 8.8 11.4 7.4 10.4
Other income (expense) - - - -
Loss on early extinguishment of
debt (1.6 ) (1.6 ) (0.7 ) (0.5 )
Interest expense, net of
interest income (2.1 ) (0.7 ) (1.3 ) (1.0 )
Income from continuing
operations before provision for
income taxes 5.1 9.1 5.5 8.9
Provision for income taxes 2.2 3.8 2.4 3.8
Income from continuing
operations 2.9 - 3.1 -
Income from discontinued
operations, net of tax 0.1 - 0.0 -
Net income 3.0 % 5.3 % 3.1 % 5.1 %
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Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted
EBITDA")
We define Adjusted EBITDA (a measure not defined under generally accepted accounting principles) as net income plus accretion of environmental liabilities, depreciation and amortization, net interest expense, provision for income taxes, non-recurring severance charges, other non-recurring refinancing-related expenses, gain (loss) on sale of fixed assets, and loss on early extinguishment of debt.
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 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 For the nine months ended
September 30, September 30,
2009 2008 2009 2008
Net income $ 9,185 $ 14,628 $ 22,764 $ 39,537
Accretion of environmental
liabilities 2,644 2,682 7,928 8,078
Depreciation and amortization 18,649 11,414 42,951 32,695
Loss on early extinguishment
of debt 4,853 4,251 4,853 4,251
Interest expense, net 6,556 1,889 9,545 7,789
Other (income) expense (111 ) 104 (155 ) 149
Provision for income taxes 6,928 10,388 17,547 29,381
Income from discontinued
operations, net of tax (412 ) - (412 ) -
Adjusted EBITDA $ 48,292 $ 45,356 $ 105,021 $ 121,880
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The following reconciles Adjusted EBITDA to cash from operations:
For the Nine Months
ended September 30,
2009 2008
Adjusted EBITDA $ 105,021 121,880
Interest expense, net (9,545 ) (7,789 )
Provision for income taxes (17,547 ) (29,381 )
Income from discontinued operations 412 -
Allowance for doubtful accounts 814 67
Amortization of deferred financing costs and debt discount 1,285 1,517
Change in environmental liability estimates (2,334 ) (1,515 )
Deferred income taxes 1,113 1,910
Stock-based compensation 649 2,782
Excess tax benefit of stock-based compensation (416 ) (3,396 )
Income tax benefits related to stock option exercises 410 3,425
Prepayment penalty on early extinguishment of debt (3,002 ) (2,813 )
Environmental expenditures (6,255 ) (12,564 )
Changes in assets and liabilities, net of acquisitions
Accounts receivable 2,843 8,490
Other current assets (3,845 ) 1,998
Accounts payable 127 (8,761 )
Other current liabilities (3,201 ) (2,430 )
Net cash from operating activities $ 66,529 $ 73,420
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Segment data
Performance of our segments is evaluated on several factors of which the primary financial measure is Adjusted EBITDA. The following table sets forth certain operating data associated with our results of operations and summarizes Adjusted EBITDA contribution by operating segment for the three and nine months ended September 30, 2009 and 2008 (in thousands). We consider the Adjusted EBITDA contribution from each operating segment to include revenue attributable to each segment less operating expenses, which include cost of revenues and selling, general and administrative expenses. Revenue attributable to each segment is generally external or direct revenue from third party customers. Certain income or expenses of a non-recurring or unusual nature are not included in the operating segment Adjusted EBITDA contribution. Amounts presented have been recast to reflect the changes made to our segment presentation as a result of the changes in how we manage our business made upon our acquisition of Eveready. This
table and subsequent discussions should be read in conjunction with Item 6, "Selected Financial Data," and Item 8, "Financial Statements and Supplementary Data" and in particular Note 16, "Segment Reporting" of our Annual Report on Form 10-K for the year ended December 31, 2008 and Item 1, "Financial Statements" and in particular Note 19, "Segment Reporting" in this report.
Three months ended September 30, 2009 versus the three months ended September 30, 2008
Summary of Operations (in thousands)
For the Three Months Ended September 30,
$ %
2009 2008 Change Change
Direct Revenues:
Technical Services $ 173,935 $ 185,362 $ (11,427 ) (6.2 )%
Field Services 53,866 77,762 (23,896 ) (30.7 )
Industrial Services 69,700 10,527 59,173 562
Exploration Services 8,347 - 8,347 -
Corporate Items (240 ) (494 ) 254 (51.4 )
Total 305,608 273,157 32,451 11.9
Cost of Revenues (exclusive
of items shown separately)
(1):
Technical Services 109,742 123,650 (13,908 ) (11.2 )
Field Services 40,470 54,895 (14,425 ) (26.3 )
Industrial Services 53,154 7,615 45,539 598
Exploration Services 6,573 - 6,573 -
Corporate Items 961 903 58 6.4
Total 210,900 187,063 23,837 12.7
Selling, General &
Administrative Expenses:
Technical Services 15,067 14,775 292 (2.0 )
Field Services 5,238 7,153 (1,915 ) (26.8 )
Industrial Services 7,320 854 6,466 757
Exploration Services 823 - 823 -
Corporate Items 17,968 17,956 12 (0.1 )
Total 46,416 40,738 5,678 13.9
Adjusted EBITDA (2):
Technical Services 49,126 46,937 2,189 4.7
Field Services 8,158 15,714 (7,556 ) (48.1 )
Industrial Services 9,226 2,058 7,168 348
Exploration Services 951 - 951 -
Corporate Items (19,169 ) (19,353 ) 184 (1.0 )
Total $ 48,292 $ 45,356 $ 2,936 6.5 %
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(2) See Item 2, "Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"), for a discussion of Adjusted EBITDA.
Revenues
Technical Services revenues decreased 6.2%, or $11.4 million, in the three months ended September 30, 2009 from the comparable period in 2008 primarily due to reductions in volumes being processed through our facilities network ($8.8 million), changes in product mix and pricing ($2.2 million), reduction in fuel recovery fees, a decline in base business, and the weakening Canadian dollar ($1.6 million). These decreases were somewhat offset by increases in incinerator and landfill volumes ($6.9 million).
Field Services revenues decreased 30.7%, or $23.9 million, in the three months ended September 30, 2009 from the comparable period in 2008 primarily due to a decline in base business, a reduction in the volume of long-term project business ($8.8 million), a reduction in event related revenues ($7.3 million), decreases in oil pricing ($4.3) million, and the weakening of the Canadian dollar ($0.3 million).
The increases in Industrial Services and Exploration Services revenues for the three months ended September 30, 2009 were due to the acquisition of Eveready.
There are many factors which have impacted, and continue to impact, our revenues. These factors include, but are not limited to: the current economic slowdown, the reduced level of emergency response projects, competitive industry pricing, and the effects of lower fuel prices on our fuel recovery fee.
Cost of Revenues
Technical Services costs of revenues decreased 11.2%, or $13.9 million, in the three months ended September 30, 2009 from the comparable period in 2008 primarily due to reductions in fuel costs ($3.6 million), utilities ($2.0 million), salary and labor expenses ($2.0 million), materials and supplies ($1.7 million), rail costs ($1.7 million), and the weakening of the Canadian dollar ($0.8 million).
Field Services costs of revenues decreased 26.3%, or $14.4 million, in the three months ended September 30, 2009 from the comparable period in 2008 primarily due to decreases in subcontractor and temporary fees ($4.0 million), labor and related expenses ($2.4 million), outside transportation and disposal costs ($2.2 million), fuel charges ($1.8 million), travel costs ($1.2 million) and the weakening of the Canadian dollar ($0.2 million). The decrease in outside transportation and disposal costs was partially attributable to Company-wide initiatives to maximize the utilization of Company owned resources.
The increases in Industrial Services and Exploration Services cost of revenues for the three months ended September 30, 2009 were due to the acquisition of Eveready.
Corporate Items costs of revenues were flat for the three months ended September 30, 2009, as compared to the same period in 2008.
We believe that our ability to manage operating costs is important in our ability to remain price competitive. We continue to upgrade the quality and efficiency of our waste treatment services through the development of new technology and continued modifications and upgrades at our facilities, and implementation of strategic sourcing initiatives. We plan to continue to focus on achieving cost savings relating to purchased goods and services through a strategic sourcing initiative. No assurance can be given that our efforts to reduce future operating expenses will be successful.
Selling, General and Administrative Expenses
Technical Services selling, general and administrative expenses increased 2.0% or $0.3 million in the three months ended September 30, 2009 from the comparable period in 2008 primarily due to year-over-year unfavorable changes in environmental liability estimates partially offset by reductions in salary expenses and professional fees.
Field Services selling, general and administrative expenses decreased 26.8%, or $1.9 million, in the three months ended September 30, 2009 from the comparable period in 2008 primarily due to reductions in salaries and commissions.
The increases in Industrial Services and Exploration Services selling, general and administrative expenses for the three months ended September 30, 2009 were due to the acquisition of Eveready.
Corporate Items selling, general and administrative expenses were flat for the three months ended September 30, 2009, as compared to the same period in 2008. A reduction in salaries, stock-based compensation and bonuses ($1.2 million) and year-over-year favorable changes in environmental liability estimates ($1.9 million) were offset primarily by an increase in year-over-year acquisition related costs of $2.5 million and the impact on our balance sheet of the weakening of the Canadian dollar ($1.0 million).
Depreciation and Amortization
Three Months Ended
September 30,
2009 2008
Depreciation of fixed assets $ 14,680 $ 8,780
Landfill and other amortization 3,969 2,634
Total depreciation and amortization $ 18,649 $ 11,414
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Depreciation and amortization increased 63.4% in the third quarter of 2009 compared to the same period in 2008. Depreciation of fixed assets increased primarily due to the acquisition of Eveready and other increased capital expenditures in recent periods. Landfill and other amortization increased primarily due to the increase in other intangibles resulting from the acquisition of Eveready.
Interest Expense, Net
Three Months Ended
September 30,
2009 2008
Interest expense $ 6,821 $ 3,347
Interest income (265 ) (1,458 )
Interest expense, net $ 6,556 $ 1,889
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Interest expense, net increased $4.7 million in the third quarter of 2009 compared to the same period in 2008. The increase in interest expense was primarily due to the issuance of $300.0 million in senior secured notes in August 2009 and the refinancing of our revolving credit facility. The reduction of interest income in the same period was due to a reduction in the interest rates being earned on our cash balances.
Nine months ended September 30, 2009 versus the nine months ended September 30, 2008
Summary of Operations (in thousands)
For the Nine Months Ended September 30,
$ %
2009 2008 Change Change
Direct Revenues:
Technical Services $ 493,870 $ 554,821 $ (60,951 ) (11.0 )%
Field Services 142,654 196,453 (53,799 ) (27.4 )
Industrial Services 83,557 31,345 52,212 167
Exploration Services 8,347 - 8,347 -
Corporate Items (1,177 ) (1,694 ) 517 (30.5 )
Total 727,251 780,925 (53,674 ) (6.9 )
Cost of Revenues (exclusive
of items shown separately)
(1):
Technical Services 316,400 367,182 (50,782 ) (13.8 )
Field Services 109,979 144,415 (34,436 ) (23.8 )
Industrial Services 63,764 22,451 41,313 184
Exploration Services 6,573 - 6,573 -
Corporate Items 3,951 1,593 2,358 148
Total 500,667 535,641 (34,974 ) (6.5 )
Selling, General &
Administrative Expenses:
Technical Services 48,061 50,478 (2,417 ) (4.8 )
Field Services 16,186 19,587 (3,401 ) (17.4 )
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