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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 SEPTEMBER 30, 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 001-34223

 


 

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

 

26,220,820

(Class)

 

(Outstanding at November 5, 2009)

 

 

 



Table of Contents

 

CLEAN HARBORS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION

 

 

 

Page No.

 

ITEM 1: Unaudited 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 Unaudited Consolidated Financial Statements

 

6

 

 

 

 

 

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

 

29

 

 

 

 

 

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

 

 

 

ITEM 4: Controls and Procedures

 

40

 

 

 

 

 

PART II: OTHER INFORMATION

 

41

 

 

 

 

 

Items No. 1 through 6

 

41

 

Signatures

 

46

 

 



Table of Contents

 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

(in thousands)

 

 

 

September 30,
2009

 

December 31,
2008

 

 

 

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

220,276

 

$

249,524

 

Marketable securities

 

804

 

175

 

Accounts receivable, net of allowances aggregating $6,827 and $6,723, respectively

 

255,436

 

174,990

 

Unbilled accounts receivable

 

20,198

 

5,545

 

Deferred costs

 

5,264

 

5,877

 

Prepaid expenses and other current assets

 

18,431

 

13,472

 

Supplies inventories

 

39,267

 

26,905

 

Deferred tax assets

 

12,415

 

12,564

 

Assets held for sale

 

20,232

 

 

Total current assets

 

592,323

 

489,052

 

Property, plant and equipment:

 

 

 

 

 

Land

 

30,187

 

26,399

 

Asset retirement costs (non-landfill)

 

1,849

 

1,761

 

Landfill assets

 

45,645

 

35,062

 

Buildings and improvements

 

139,345

 

127,466

 

Camp equipment

 

51,535

 

 

Vehicles

 

138,829

 

33,502

 

Equipment

 

458,318

 

310,459

 

Furniture and fixtures

 

1,695

 

1,663

 

Construction in progress

 

13,420

 

13,206

 

 

 

880,823

 

549,518

 

Less—accumulated depreciation and amortization

 

293,765

 

254,057

 

Total property, plant and equipment, net

 

587,058

 

295,461

 

Other assets:

 

 

 

 

 

Long-term investments

 

6,503

 

6,237

 

Deferred financing costs

 

10,356

 

3,044

 

Goodwill

 

49,699

 

24,578

 

Permits and other intangibles, net of accumulated amortization of $46,107 and $40,303, respectively

 

114,940

 

71,754

 

Deferred tax assets

 

 

5,454

 

Other

 

4,060

 

2,756

 

Total other assets

 

185,558

 

113,823

 

Total assets

 

$

1,364,939

 

$

898,336

 

 

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

 

1



Table of Contents

 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS (Continued)

 

LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY

 

(in thousands)

 

 

 

September 30,
2009

 

December 31,
2008

 

 

 

(unaudited)

 

 

 

Current liabilities:

 

 

 

 

 

Uncashed checks

 

$

10,406

 

$

7,733

 

Current portion of capital lease obligations

 

1,870

 

400

 

Accounts payable

 

83,931

 

63,885

 

Deferred revenue

 

21,936

 

24,190

 

Accrued expenses

 

89,144

 

67,901

 

Current portion of closure, post-closure and remedial liabilities

 

21,872

 

17,264

 

Liabilities held for sale

 

3,218

 

 

Total current liabilities

 

232,377

 

181,373

 

Other liabilities:

 

 

 

 

 

Closure and post-closure liabilities, less current portion of $10,315 and $6,383, respectively

 

23,994

 

26,254

 

Remedial liabilities, less current portion of $11,557 and $10,881, respectively

 

135,705

 

135,007

 

Long-term obligations

 

292,219

 

52,870

 

Capital lease obligations, less current portion

 

7,265

 

360

 

Unrecognized tax benefits and other long-term liabilities

 

81,988

 

73,427

 

Total other liabilities

 

541,171

 

287,918

 

 

 

 

 

 

 

Noncontrolling interest

 

2,345

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $.01 par value:

 

 

 

 

 

Authorized 40,000,000 shares; issued and outstanding 26,206,384 and 23,733,257 shares, respectively

 

262

 

237

 

Treasury stock

 

(1,948

)

(1,653

)

Shares held under employee participation plan

 

(1,599

)

 

Additional paid-in capital

 

475,487

 

353,950

 

Accumulated other comprehensive income (loss)

 

16,881

 

(688

)

Accumulated earnings

 

99,963

 

77,199

 

Total stockholders’ equity

 

589,046

 

429,045

 

Total liabilities, noncontrolling interest and stockholders’ equity

 

$

1,364,939

 

$

898,336

 

 

The accompanying notes are an integral part of these unaudited 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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

305,608

 

$

273,157

 

$

727,251

 

$

780,925

 

Cost of revenues (exclusive of items shown separately below)

 

210,900

 

187,063

 

500,667

 

535,641

 

Selling, general and administrative expenses

 

46,416

 

40,738

 

121,563

 

123,404

 

Accretion of environmental liabilities

 

2,644

 

2,682

 

7,928

 

8,078

 

Depreciation and amortization

 

18,649

 

11,414

 

42,951

 

32,695

 

Income from operations

 

26,999

 

31,260

 

54,142

 

81,107

 

Other income (expense)

 

111

 

(104

)

155

 

(149

)

Loss on early extinguishment of debt

 

(4,853

)

(4,251

)

(4,853

)

(4,251

)

Interest expense, net of interest income of $265 and $888 for the quarter and year-to-date ending 2009 and $1,458 and $3,952 for the quarter and year-to-date ending 2008, respectively

 

(6,556

)

(1,889

)

(9,545

)

(7,789

)

Income from continuing operations before provision for income taxes

 

15,701

 

25,016

 

39,899

 

68,918

 

Provision for income taxes

 

6,928

 

10,388

 

17,547

 

29,381

 

Income from continuing operations

 

8,773

 

14,628

 

22,352

 

39,537

 

Income from discontinued operations, net of tax

 

412

 

 

412

 

 

Net income

 

$

9,185

 

$

14,628

 

$

22,764

 

$

39,537

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

$

0.62

 

$

0.94

 

$

1.79

 

Diluted

 

$

0.36

 

$

0.61

 

$

0.93

 

$

1.75

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

25,420

 

23,423

 

24,322

 

22,052

 

Weighted average common shares outstanding plus potentially dilutive common shares

 

25,552

 

23,822

 

24,441

 

22,530

 

 

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

 

3



Table of Contents

 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

 

 

Nine Months
Ended September 30,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

22,764

 

$

39,537

 

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

 

 

 

 

 

Depreciation and amortization

 

42,951

 

32,695

 

Allowance for doubtful accounts

 

814

 

67

 

Amortization of deferred financing costs and debt discount

 

1,285

 

1,517

 

Accretion of environmental liabilities

 

7,928

 

8,078

 

Changes 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 benefit related to stock option exercises

 

410

 

3,425

 

Other (income) expense

 

(155

)

149

 

Write-off of deferred financing costs and debt discount

 

1,851

 

1,438

 

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

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(46,104

)

(39,218

)

Acquisitions, net of cash acquired

 

(54,031

)

(27,582

)

Costs to obtain or renew permits

 

(1,402

)

(2,184

)

Proceeds from sales of fixed assets and assets held for sale

 

302

 

449

 

Sales of marketable securities

 

 

4,350

 

Purchase of available-for-sale securities

 

 

(2,553

)

Net cash from investing activities

 

(101,235

)

(66,738

)

Cash flows from financing activities:

 

 

 

 

 

Change in uncashed checks

 

2,171

 

1,535

 

Proceeds from exercise of stock options

 

330

 

1,749

 

Remittance of shares, net

 

(295

)

(489

)

Proceeds from employee stock purchase plan

 

1,775

 

1,255

 

Proceeds from exercise of warrants

 

 

1,200

 

Deferred financing costs paid

 

(10,174

)

 

Payments on capital leases

 

(380

)

(1,848

)

Proceeds from issuance of common stock, net

 

 

173,541

 

Payment on acquired debt

 

(230,745

)

 

Principal payment on debt

 

(53,032

)

(50,000

)

Issuance of senior secured notes, net

 

292,107

 

 

Excess tax benefit of stock-based compensation

 

416

 

3,396

 

Net cash from financing activities

 

2,173

 

130,339

 

Effect of exchange rate change on cash

 

3,285

 

(3,600

)

(Decrease) increase in cash and cash equivalents

 

(29,248

)

133,421

 

Cash and cash equivalents, beginning of period

 

249,524

 

119,538

 

Cash and cash equivalents, end of period

 

$

220,276

 

$

252,959

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

Cash payments for interest and income taxes:

 

 

 

 

 

Interest paid

 

$

7,249

 

$

12,879

 

Income taxes paid

 

11,791

 

30,539

 

Non-cash investing and financing activities:

 

 

 

 

 

Property, plant and equipment accrued

 

$

3,187

 

$

5,333

 

Issuance of Clean Harbors common stock for Eveready common shares

 

118,427

 

 

 

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

 

4



Table of Contents

 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(in thousands)

 

 

 

Common Stock

 

 

 

Shares Held
Under

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Number
of
Shares

 

$ 0.01
Par
Value

 

Treasury
Stock

 

Employee
Participation
Plan

 

Additional
Paid-in
Capital

 

Comprehensive
Income

 

Other
Comprehensive
(Loss) Income

 

Accumulated
Earnings

 

Total
Stockholders’
Equity

 

Balance at January 1, 2009

 

23,733

 

$

237

 

$

(1,653

)

$

 

$

353,950

 

 

 

$

(688

)

$

77,199

 

$

429,045

 

Net income

 

 

 

 

 

 

$

22,764

 

 

22,764

 

22,764

 

Unrealized gain on long-term investments, net of taxes

 

 

 

 

 

 

684

 

684

 

 

684

 

Foreign currency translation

 

 

 

 

 

 

16,885

 

16,885

 

 

16,885

 

Comprehensive income

 

 

 

 

 

 

$

40,333

 

 

 

 

Stock-based compensation

 

24

 

 

 

 

649

 

 

 

 

 

649

 

Issuance of restricted shares, net of shares remitted

 

(6

)

 

(295

)

 

 

 

 

 

 

(295

)

Shares held under employee participation plan

 

 

 

 

(1,599

)

 

 

 

 

 

(1,599

)

Exercise of stock options

 

23

 

1

 

 

 

329

 

 

 

 

 

330

 

Issuance of common stock, net of issuance costs

 

2,392

 

24

 

 

 

118,374

 

 

 

 

 

118,398

 

Net tax benefit on exercise of stock options

 

 

 

 

 

410

 

 

 

 

 

410

 

Employee stock purchase plan

 

40

 

 

 

 

1,775

 

 

 

 

 

1,775

 

Balance at September 30, 2009

 

26,206

 

$

262

 

$

(1,948

)

$

(1,599

)

$

475,487

 

 

 

$

16,881

 

$

99,963

 

$

589,046

 

 

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

 

5



Table of Contents

 

CLEAN HARBORS, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

(1) BASIS OF PRESENTATION

 

The accompanying consolidated interim financial statements include the accounts of Clean Harbors, Inc. and its subsidiaries (collectively, “Clean Harbors” or the “Company”) and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) 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.

 

Certain reclassifications have been made to the Company’s consolidated statements of cash flows for the three and nine months ended September 30, 2008 and in the condensed consolidating statement of cash flows in Note 20, “Guarantor and Non-Guarantor Subsidiaries,” to conform to the current year presentation.

 

In preparing the accompanying unaudited consolidated financial statements, the Company has reviewed, as determined necessary by the Company’s management, events that have occurred after September 30, 2009, until the issuance of the financial statements, which occurred on November 9, 2009.

 

(2) SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited consolidated financial statements of the Company reflect the application of certain new or updated significant accounting policies as described below:

 

Property, Plant and Equipment (excluding landfill assets)

 

Property, plant and equipment are stated at cost and include amounts capitalized under capital lease obligations. Expenditures for major renewals and improvements which extend the life of the asset are capitalized. Items of an ordinary repair or maintenance nature are charged directly to operating expense as incurred. During the construction and development period of an asset, the costs incurred, including applicable interest costs, are classified as construction-in-progress.

 

The Company depreciates and amortizes the cost of these assets, using the straight-line method as follows:

 

Asset Classification

 

Estimated Useful Life

 

Buildings and improvements

 

 

 

Buildings

 

30 – 40 years

 

Land, leasehold and building improvements

 

5 – 40 years

 

Camp equipment

 

12 – 15 years

 

Vehicles

 

3 – 12 years

 

Equipment

 

 

 

Capitalized software and computer equipment

 

3 years

 

Containers and railcars

 

15 – 20 years

 

All other equipment

 

8 – 10 years

 

Furniture and fixtures

 

5 – 8 years

 

 

Land, leasehold and building improvements have a weighted average life of 14.1 years.

 

The Company recognizes an impairment in the carrying value of long-lived assets when the expected future undiscounted cash flows derived from the assets are less than their carrying value. For the three and nine months ended September 30, 2009 and 2008, the Company recorded no impairment charge related to long-lived assets.

 

Foreign Currency

 

Foreign subsidiary balances are translated according to the provisions of Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters (“ASC 830”). The Company has operations in Canada and Mexico, and also operates international locations in Bulgaria, China, Sweden, Singapore, Thailand and the United Kingdom. The functional currencies of Canada, Mexico,

 

6



Table of Contents

 

Singapore, Thailand and the United Kingdom are their respective local currencies.  The functional currencies of China and Bulgaria are the U.S. dollar and the Euro, respectively.  Assets and liabilities are translated to U.S. dollars at the exchange rate in effect at the balance sheet date and revenue and expenses at the average exchange rate for the period. Gains and losses from the translation of the consolidated financial statements of certain foreign subsidiaries into U.S. dollars are included in stockholders’ equity as a component of other comprehensive income. Gains and losses resulting from foreign currency transactions are recognized in the consolidated statements of income. Recorded balances that are denominated in a currency other than the functional currency are remeasured to the functional currency using the exchange rate at the balance sheet date and gains or losses are recorded in the statement of income.

 

Noncontrolling Interest

 

Noncontrolling interest is recorded for the entities that the Company consolidates but are not wholly owned by the Company. Noncontrolling interest is accounted for in accordance with ASC 810, Consolidations (“ASC 810”), and ASC 480, Distinguishing Liabilities from Equity (“ASC 480”).

 

Related Parties

 

The Company identifies related parties as entities in which the Company has an investment accounted for using the equity method or which are controlled or influenced by the Company’s executive officers or directors.

 

Reclassification of Segment Information

 

In connection with the July 2009 closing of the Eveready Inc. (“Eveready”) acquisition, the Company re-aligned and expanded its reportable operating segments.   Under the new structure, the Company’s operations are managed in four segments: Technical Services, Field Services, Industrial Services and Exploration Services. The Company operates within the United States, Puerto Rico, Canada, and Mexico and also operates international locations in Bulgaria, China, Sweden, Singapore, Thailand and the United Kingdom. No individual customer accounts for more than 10% of revenues.

 

Recent Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (“FASB”) approved its ASC as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The ASC, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. Accordingly, the Company has updated all references made to U.S. generally accepted accounting principles (“U.S. GAAP”) with the corresponding new ASC numbering system prescribed by the FASB. As the ASC is not intended to change or alter existing U.S. GAAP, it did not have any impact on the Company’s financial position, results of operations or cash flow.

 

In December 2007, the FASB issued ASC 805, Business Combinations (“ASC 805”). ASC 805 changes how business acquisitions are accounted for and impacts financial statements both on the acquisition date and in subsequent periods. ASC 805 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company adopted ASC 805 on January 1, 2009 and during the three and nine months ended September 30, 2009, expensed $2.9 million and $5.1 million, respectively, of acquisition costs that, prior to the adoption of ASC 805, would have been included as part of the respective purchase prices. In addition, under the provisions of ASC 805, future reversal of the Company’s current acquisition-related tax reserves of approximately $10.7 million (excluding interest and penalties) will be recorded in earnings, rather than as an adjustment to goodwill or acquisition related other intangible assets and will affect the Company’s annual effective income tax rate.  Due to the expiring statutes in Canada, the Company expects that acquisition related tax reserves will decrease by $7.5 million within the next twelve months, which will be recorded in earnings and therefore impact the effective income tax rate.

 

In February 2008, the FASB issued authoritative guidance which delayed the effective date of ASC 820, Fair Value Measurements (“ASC 820”) 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 such guidance 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 authoritative guidance amending the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC 350, Intangibles—Goodwill and Other (“ASC 350”). The intent of the amendment 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 ASC 805, and other U.S. GAAP. The Company adopted the amendment on January 1, 2009 and it did not have a material impact on the Company’s financial position, results of operations or cash flow.

 

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In June 2008, the FASB issued authoritative guidance that provides for all nonrefundable maintenance deposits paid by a lessee, under an arrangement accounted for as a lease, to 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 such guidance 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 authoritative guidance which requires additional disclosures for employers’ pension and other postretirement benefit plan assets. This guidance requires employers to disclose information about fair value measurements of plan assets similar to the disclosures required under ASC 820, the investment policies and strategies for the major categories of plan assets, and significant concentrations of risk within plan assets. This guidance is effective for the Company as of December 31, 2009. As the guidance 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.

 

On February 1, 2009, the Company adopted the FASB’s authoritative guidance which changed the accounting and reporting for minority interests to have such interests be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. The Company did not have any significant noncontrolling interests outstanding in any of its subsidiaries prior to the acquisition of Eveready on July 31, 2009, and therefore the adoption did not affect previously reported financial information. As of September 30, 2009, the noncontrolling interests in one of the Company’s subsidiaries acquired as part of the Eveready acquisition were redeemable securities under ASC 480 and have been recorded as temporary equity at their maximum redemption amount within the consolidated balance sheet. For the three and nine months ended September 30, 2009, the net income attributable to those noncontrolling interests was immaterial and was included in the Company’s net income.

 

In April 2009 the FASB issued authoritative 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 such guidance in the period ended March 31, 2009 and it did not have a material impact on the Company’s financial position, results of operations or cash flow.

 

In April 2009, the FASB issued authoritative guidance that 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 assess 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 such guidance in the period ended March 31, 2009, and has determined that the cumulative $0.5 million impairment related to the fair value of its auction rate securities continues to be temporary.

 

In April 2009, the FASB issued authoritative guidance that expands the fair value disclosures required for all financial instruments within the scope of ASC 825, Financial Instruments, to interim financial statements. The provisions of such guidance were effective for periods ending after June 15, 2009.  The Company adopted this guidance in the period ended June 30, 2009.  The adoption of such guidance only impacts quarterly disclosure requirements and therefore did not have an impact on the Company’s financial position, results of operations or cash flow.

 

In May 2009 the FASB issued authoritative guidance which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company adopted such guidance in the period ended June 30, 2009 and it did not have an impact on the Company’s financial position, results of operations or cash flow.

 

(3) BUSINESS COMBINATIONS

 

Eveready

 

On July 31, 2009, the Company acquired 100% of the outstanding common shares of Eveready, an Alberta corporation headquartered in Edmonton, Alberta.  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 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.

 

The following table summarizes the consideration paid for Eveready at the acquisition date (in thousands).

 

2.4 million shares of Clean Harbors common stock issued for Eveready common shares(1)

 

$

118,427

 

Cash paid for Eveready common shares

 

56,191

 

Shares held in the Eveready employee participation plan(2)

 

(1,783

)

Cash paid for Eveready deferred shares assumed(3)

 

100

 

Eveready credit facility assumed

 

168,561

 

Capital lease obligations assumed

 

21,214

 

Eveready debentures assumed(3)

 

47,144

 

Fair value of consideration transferred

 

$

409,854

 

 

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(1)                                 The value of Clean Harbors common stock used ($49.50) was the closing price of Clean Harbors common stock on the New York Stock Exchange on July 30, 2009.

 

(2)                                 The Eveready employee participation plan included 247,727 Eveready common shares that were held in the Eveready employee participation plan trust. Upon completion of the acquisition, the Eveready common shares held by that trust were exchanged for the same purchase amount of cash and ratio of shares of Clean Harbors common stock as the other outstanding Eveready common shares and will vest as they are earned in future periods in accordance with the plan’s terms and conditions. The Eveready employee participation plan consideration is reflected in the shares of Clean Harbors common stock and cash paid for Eveready common shares, and the amount still to be earned by the plan participants has been shown as a reduction of the estimated total purchase price.  The amount presented for the shares held in the employee participation plan trust is net of the value of shares vested as of July 31, 2009.

 

(3)                                 The outstanding Eveready deferred shares and Eveready debentures were paid off on July 31, 2009. The redemption price of the outstanding Eveready debentures was equal to 101% of the principal amount plus accrued interest.

 

In connection with the acquisition, the Company was required to obtain waivers from the lenders under the Company’s 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.  The Company 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. See Note 10, “Financing Arrangements.”

 

Acquisition related costs of $2.9 million and $4.8 million were included in selling, general and administrative expenses in the Company’s consolidated statements of income for the three and nine months ended September 30, 2009.

 

The following table summarizes the recognized amounts of identifiable assets acquired and liabilities assumed (in thousands). The fair value of all the acquired identifiable assets and liabilities summarized below is provisional pending finalization of the Company’s valuation.   Final determination of the fair value may result in further adjustments to the values presented below.

 

 

 

Asset (Liability)

 

Current assets (i)(ii)

 

$

121,787

 

Property, plant and equipment

 

271,752

 

Identifiable intangible assets

 

43,800

 

Other assets

 

1,481

 

Current liabilities (ii)

 

(38,437

)

Asset retirement obligations

 

(70

)

Other liabilities

 

(5,894

)

Noncontrolling interests (iii)

 

(5,484

)

Total identifiable net assets

 

$

388,935

 

Goodwill (iv)

 

20,919

 

 

 

$

409,854

 

 


(i)

The preliminary fair value of the financial assets acquired includes customer receivables with a preliminary fair value of $77.4 million. The gross amount due is $88.3 million.

 

 

(ii)

Includes assets and liabilities held for sale of $20.2 million and $3.2 million, respectively.

 

 

(iii)

The fair value of the noncontrolling interests approximate the maximum redemption prices on the date of the acquisition.

 

 

(iv)

Goodwill, which is attributable to expected operating and cross-selling synergies, is not expected to be deductible for tax purposes. Goodwill of $14.7 million, $5.4 million and $0.8 million has been recorded in the Industrial Services, Exploration Services and Field Services segments, respectively, however the amount and the allocation are subject to change pending the finalization of the Company’s valuation.

 

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In connection with the acquisition, the Company agreed with the Canadian Commissioner of Competition to divest Eveready’s Pembina Area Landfill, located near Drayton Valley, Alberta, due to its proximity to legacy Clean Harbors’ existing landfill in the region. The Pembina Area Landfill meets the held for sale criteria under ASC 360, Property, Plant and Equipment (“ASC 360”), and therefore the fair value of its assets and liabilities have been recorded as held for sale in the Company’s consolidated balance sheet as of September 30, 2009 and the results of its operations have been presented as discontinued operations on the consolidated statements of income for the three and nine months ended September 30, 2009.

 

The Company has determined that the presentation of Eveready net income is impracticable for the three and nine months ended September 30, 2009 due to the integration of Eveready operations into the Company upon acquisition. Revenues attributable to Eveready for the three and nine months ended September 30, 2009 were $71.2 million.

 

The following unaudited pro forma combined summary data presents information as if Eveready had been acquired at the beginning of the periods presented with financing obtained as described above and assumes that there were no other changes in the Company’s operations. The pro forma information does not necessarily reflect the actual results that would have occurred had the Company and Eveready been combined during the periods presented, nor is it necessarily indicative of the future results of operations of the combined companies (in thousands).

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Pro forma combined revenues

 

$

341,223

 

$

428,309

 

$

1,002,300

 

$

1,261,641

 

Pro forma combined net income

 

$

8,210

 

$

24,362

 

$

15,103

 

$

67,981

 

Earnings per share

 

$

0.33

 

$

0.93

 

$

0.61

 

$

2.71

 

 

EnviroSORT

 

On February 27, 2009, the Company acquired 100% of the outstanding stock of privately-held EnviroSORT Inc. (“EnviroSORT”) for a preliminary purchase price of $9.6 million. The preliminary purchase price included the assumption of $2.5 million of EnviroSORT debt and $0.2 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 recorded certain fair value adjustments and reduced goodwill to $2.9 million from $5.0 million during the three months ended September 30, 2009.  Goodwill has been allocated to the Technical Services segment and 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 less than $0.1 million and $0.3 million were included in selling, general, and administrative expenses for the three and nine months ended September 30, 2009, respectively.

 

Safety-Kleen Systems and Universal Environmental

 

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 material 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

 

The Company’s financial instruments consist of cash and cash equivalents, marketable securities, receivables, trade payables, auction rate securities and long-term debt. The estimated fair value of cash and cash equivalents, receivables, and trade payables approximate their carrying value due to the short maturity of these instruments. As of September 30, 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 September 30, 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 September 30, 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 Loan Program. The Company attributes the decline in the fair value of the securities from the original cost basis to external

 

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liquidity issues rather than credit issues.  During the nine month period ended September 30, 2009, the Company recorded an unrealized pre-tax gain of $0.3 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 maturity. In addition, as of September 30, 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 ASC 820 at September 30, 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
September 30,
2009

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

6,503

 

$

6,503

 

Marketable securities

 

$

804

 

$

 

$

 

$

804

 

 

The following table presents the changes in the Company’s long-term investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in ASC 820 during the nine months ended September 30, 2009 (in thousands):

 

 

 

2009

 

Balance at January 1, 2009

 

$

6,237

 

Total unrealized gains included in other comprehensive income

 

266

 

Balance at September 30, 2009

 

$

6,503

 

 

(5) SUPPLIES INVENTORY

 

The Company’s supplies inventory balance increased from $26.9 million at December 31, 2008 to $39.3 million at September 30, 2009, primarily due to the acquisition of Eveready. Eveready’s supplies inventory is similar to the supplies inventory historically carried by the Company which is primarily materials, parts, and supplies consumed in rendering services to customers.

 

(6) GOODWILL AND OTHER INTANGIBLE ASSETS

 

The changes to goodwill for the nine months ended September 30, 2009 were as follows (in thousands):

 

 

 

2009

 

Balance at January 1, 2009

 

$

24,578

 

Acquired from acquisitions

 

24,403

 

Foreign currency translation

 

718

 

Balance at September 30, 2009

 

$

49,699

 

 

The increase in goodwill during the nine months ended September 30, 2009 was primarily attributed to the acquisitions of Eveready and EnviroSORT and final purchase price acquisition costs related to Universal Environmental, Inc.  The goodwill related to Eveready and EnviroSORT include estimates that are subject to change based upon final fair value determinations.  Below is a summary of amortizable other intangible assets (in thousands):

 

 

 

September 30, 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

 

$

99,049

 

$

37,049

 

$

62,000

 

16.1

 

$

94,446

 

$

33,458

 

$

60,988

 

17.2

 

Customer lists and other intangible assets

 

61,998

 

9,058

 

52,940

 

8.5

 

17,611

 

6,845

 

10,766

 

6.2

 

 

 

$

161,047

 

$

46,107

 

$

114,940

 

11.4

 

$

112,057

 

$

40,303

 

$

71,754

 

13.6

 

 

The increase in the customer lists and other intangible assets was due to the acquisition of Eveready.  Amounts are provisional and subject to change upon completion of the final valuations.

 

Below is the expected amortization for the net carrying amount of finite lived intangible assets at September, 30, 2009 (in thousands):

 

Years Ending December 31,

 

Expected
Amortization

 

2009 (three months)

 

$

2,487

 

2010

 

9,966

 

2011

 

9,454

 

2012

 

9,302

 

2013

 

9,226

 

Thereafter

 

74,505

 

 

 

$

114,940

 

 

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(7) ACCRUED EXPENSES

 

Accrued expenses consisted of the following (in thousands):

 

 

 

September 30,
2009

 

December 31,
2008

 

Insurance

 

$

19,211

 

$

15,361

 

Interest

 

3,838

 

1,280

 

Accrued disposal costs

 

2,027

 

2,305

 

Accrued compensation and benefits

 

24,944

 

22,952

 

Real estate, sales and other taxes

 

8,957

 

4,702

 

Other items

 

30,167

 

21,301

 

 

 

$

89,144

 

$

67,901

 

 

(8) CLOSURE AND POST-CLOSURE LIABILITIES

 

The changes to closure and post-closure liabilities (also referred to as “asset retirement obligations”), for the nine months ended September 30, 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

 

Liabilities assumed in acquisitions

 

 

 

70

 

70

 

New asset retirement obligations

 

1,197

 

 

1,197

 

Accretion

 

2,225

 

702

 

2,927

 

Changes in estimate recorded to statement of income

 

(809

)

(237

)

(1,046

)

Settlement of obligations

 

(1,375

)

(400

)

(1,775

)

Currency translation and other

 

253

 

46

 

299

 

Balance at September 30, 2009

 

$

26,760

 

$

7,549

 

$

34,309

 

 

The benefit resulting from changes in estimate was 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. All of the landfill facilities included in the above were active as of September 30, 2009.

 

New asset retirement obligations incurred in the period January through July 2009 were discounted at the credit-adjusted risk-free rate of 10.57% and inflated at a rate of 1.02%. With the August 2009 offering of $300.0 million of senior secured notes and the discharge of the outstanding balance of the previous senior secured notes on which the initial 2009 rate had been based, the credit-adjusted risk-free rate was recalculated. Beginning in August 2009, new asset retirement obligations have been discounted at the rate of 9.37%.

 

On October 9, 2009 the Company submitted the terms of reference for an environmental assessment (“EA”) to the Environment Ministry of Ontario as the next step in a proposal to develop additional capacity at the Lambton landfill pursuant to the Ontario Environmental Assessment Act. Landfill amortization and accrual rates at Lambton have historically been based on an assumption of 7.8 million cubic yards of unpermitted yet highly probable airspace. The terms of reference included a request to reduce the highly probable airspace to 6.2 million cubic yards. In accordance with ASC 410, Asset Retirement and Environmental Obligations, and the Company’s policy relating to the criteria for including airspace as highly probable, the amortization and accrual rates will be adjusted on a prospective basis. Because of the long life of the landfill and the effect of discounting, the rate change is insignificant on the units-of-consumption basis. Additionally, the 1.6 million cubic yards of airspace that is not included in this EA will still be available for inclusion in a future expansion request.

 

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(9) REMEDIAL LIABILITIES

 

The changes to remedial liabilities for the nine months ended September 30, 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

 

189

 

3,140

 

1,672

 

5,001

 

Changes in estimate recorded to statement of income

 

(348

)

(2,033

)

1,093

 

(1,288

)

Settlement of obligations

 

(68

)

(2,438

)

(1,974

)

(4,480

)

Currency translation and other

 

342

 

65

 

1,734

 

2,141

 

Balance at September 30, 2009

 

$

5,227

 

$

89,025

 

$

53,010

 

$

147,262

 

 

The benefit resulting from changes in estimate for landfill sites and inactive sites was 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. The changes in estimate resulting in an increase to the non-landfill liabilities were primarily due 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.

 

(10) FINANCING ARRANGEMENTS

 

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

 

 

 

September 30,
2009

 

December 31,
2008

 

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

 

$

 

$

23,032

 

Revolving facility, due December 1, 2010

 

 

 

Synthetic letter of credit facility, due December 1, 2010

 

 

 

Term loan, at 2.97% on December 31, 2008, due December 1, 2010

 

 

30,000

 

Senior secured notes, at 7.625%, due August 15, 2016

 

300,000

 

 

Revolving credit facility, due July 31, 2013

 

 

 

Less unamortized issue discount

 

(7,781

)

(162

)

Long-term obligations

 

$

292,219

 

$

52,870

 

 

The following summarizes the principal financing activities of the Company during the nine months ended September 30, 2009:

 

·                 July 24, 2009: the Company repaid its $30.0 million term loan due in 2010;

 

·                 July 31, 2009: the Company discharged its $23.0 million of then outstanding senior secured notes due 2012 (the “former notes”) by calling such notes for redemption on August 31, 2009 and depositing with the trustee the redemption price of $23.7 million and accrued interest of $0.3 million through the redemption date;

 

·                 July 31, 2009: the Company replaced its previous $70.0 million revolving credit facility and $50.0 million synthetic letter of credit facility with a new $120 million revolving credit facility (described below);

 

·                 July 31, 2009: the Company assumed all outstanding Eveready debt including capital leases;

 

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·                 July 31, 2009: the Company repaid the Eveready convertible subordinated debentures at 101% principal plus accrued interest of $0.3 million; and

 

·                 August 14, 2009: the Company issued $300 million aggregate principal amount of 75/8% senior secured notes due 2016 for net proceeds of $292.1 million. Approximately $175.0 million of the net proceeds were used to repay all amounts outstanding under Eveready’s existing credit facility, certain capital leases, and fees, expenses and other costs relating to the repayment of such outstanding Eveready debt.  The Eveready credit facility was terminated in connection with the repayment of all amounts outstanding thereunder.

 

In connection with the above mentioned transactions, the Company recorded an aggregate $4.9 million loss on early extinguishment of debt, which included the $0.7 million prepayment penalty required by the indenture in connection with the redemption of the former notes, a $2.2 million prepayment penalty related to the repayment of all amounts outstanding under the Eveready credit facility, and non-cash expenses of $1.7 million related to unamortized financing costs and $0.1 million of unamortized discount on the former notes.

 

The principal terms of the senior secured notes and the revolving credit facility are as follows:

 

Senior Secured Notes.    Interest is payable semi-annually on February 15 and August 15 of each year beginning on February 15, 2010. The senior secured notes were issued pursuant to an indenture dated as of August 14, 2009 (the “indenture”), among the Company, as issuer, substantially all of the Company’s domestic subsidiaries, as guarantors, and U.S. Bank National Association, as trustee and senior secured notes collateral agent.

 

The fair value of the Company’s currently outstanding senior secured notes is based on quoted market prices and was $303.1 million at September 30, 2009.

 

The Company may redeem some or all of the senior secured notes at any time on or after August 15, 2012 at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the twelve-month period commencing on August 15 of the year set forth below, plus, in each case, accrued and unpaid interest, if any, to the date of redemption:

 

Year

 

Percentage

 

2012

 

103.813

%

2013

 

101.906

%

2014 and thereafter

 

100.000

%

 

At any time and from time to time prior to August 15, 2012, but not more than once in any twelve-month period, the Company may also redeem up to 10% of the original aggregate principal amount of the senior secured notes at a redemption price of 103% of the principal amount, plus any accrued and unpaid interest. Prior to August 15, 2012, the Company may also redeem up to 35% of the aggregate principal amount of the senior secured notes at a redemption price of 107.625% of the principal amount, plus any accrued and unpaid interest, using proceeds from certain equity offerings, and may also redeem some or all of the senior secured notes at a redemption price of 100% of the principal amount plus a make-whole premium and any accrued and unpaid interest. Holders may require the Company to repurchase the senior secured notes at a purchase price equal to 101% of the principal amount, plus any accrued and unpaid interest, upon a change of control of the Company.

 

The senior secured notes are guaranteed by substantially all the Company’s current and future domestic restricted subsidiaries. The senior secured notes are the Company’s and the guarantors’ senior secured obligations ranking equally, subject to the lien priorities summarized below, with all of the Company’s and the guarantors’ existing and future senior obligations (including obligations under the Company’s credit agreement) and senior to any future indebtedness that is expressly subordinated to the senior secured notes and the guarantees. The senior secured notes and the guarantees are secured by a first lien on substantially all of the assets of the Company and its domestic restricted subsidiaries (the “Notes Collateral”), except for accounts receivable, related general intangibles and instruments and proceeds related thereto (the “Revolver Collateral”) and certain other excluded collateral as provided in the indenture and subject to certain exceptions and permitted liens. The senior secured notes and the guarantees are also secured by a second lien on the Revolver Collateral that, along with a second lien on the Notes Collateral, secure the Company’s obligations under its revolving credit facility. The senior secured notes are not guaranteed by, or secured by the assets of, the Company’s foreign subsidiaries, including Eveready.

 

If the Company or its domestic subsidiaries sell assets under specified circumstances, the Company must offer to repurchase the senior secured notes from certain of the net proceeds of such sale at a purchase price equal to 100% of the principal amount, plus any accrued and unpaid interest, to the applicable repurchase date.

 

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In connection with the issuance of the senior secured notes, the Company and the guarantors entered into a registration rights agreement dated August 14, 2009, with the initial purchasers of the senior secured notes. Under the terms of the registration rights agreement, the Company and the guarantors are required to file with the SEC an exchange offer registration statement and use commercially reasonable efforts to cause the exchange offer to be consummated within 180 days following the issuance of the senior secured notes, thereby enabling holders to exchange the senior secured notes for registered senior secured notes with terms substantially identical to the terms of the senior secured notes. Under specified circumstances, including if the exchange offer would not be permitted by applicable law or SEC policy, the registration rights agreement would require that the Company and the guarantors file a shelf registration statement and use reasonable best efforts to have such registration statement declared effective within 90 days following the event giving rise to the requirement to file the shelf registration statement for the resale of the senior secured notes. If the Company and the guarantors default on their registration obligations under the registration rights agreement, additional interest (referred to as special interest), up to a maximum amount of 1.0% per annum, will be payable on the senior secured notes until all such registration defaults are cured.

 

Revolving Credit Facility.     Under the new revolving credit facility, the Company has the right to borrow and obtain letters of credit for a combined maximum of up to $120.0 million, with a sub-limit of $110.0 million for letters of credit. Availability under the new facility is subject to a borrowing base comprised of 85% of the Company’s and its U.S. subsidiaries’ eligible accounts receivable and 97% of eligible cash pledged under the new facility. The new facility has a term of four years. Bank of America, N.A. (“BofA”) is the administrative agent and collateral agent for the lenders and the issuing bank for letters of credit.

 

Borrowings under the revolving credit facility bear interest at a rate of, at the Company’s option, either (i) LIBOR plus an applicable margin ranging from 3.25% to 3.75% per annum based on the then level of the Company’s fixed charge coverage ratio or (ii) BofA’s base rate plus an applicable margin ranging from 2.25% to 2.75% per annum based on such fixed charge coverage ratio. In addition, there is an unused line fee, calculated on the then unused portion of the lenders’ $120.0 million maximum commitment, ranging from 0.50% to 0.75% per annum of the unused commitment. For outstanding letters of credit, the Company will pay to the lenders a fee equal to the then applicable LIBOR margin described above, and to BofA a standard fronting fee and customary fees and charges in connection with all amendments, extensions, draws and other actions with respect to letters of credit.  At September 30, 2009, the revolving credit facility had no outstanding loans, $31.3 million available to borrow and $88.7 million of letters of credit outstanding.

 

The Company’s obligations under the new revolving letter of credit facility (including revolving loans and reimbursement obligations for outstanding letters of credit) are guaranteed by substantially all of its U.S. subsidiaries and secured by a first lien on the Revolver Collateral and a second lien on the Notes Collateral as described above.

 

The credit agreement for the revolving credit facility requires the Company to maintain liquidity of not less than $50.0 million, and a consolidated fixed charge coverage ratio of not less than 1.00:1.  The consolidated fixed charge coverage ratio is defined as the ratio of (a) (i) consolidated EBITDA (as defined in the credit agreement), less the sum of (ii) aggregate amount of federal, state, local and foreign income taxes paid or payable in cash, (iii) the aggregate amount of all capital expenditures (other than those financed by certain indebtedness permitted under the credit agreement), (iv) the aggregate amount of all restricted payments, and (v) environmental expenditures, to (b) the sum of (i) consolidated interest charges to the extent paid or payable in cash, and (ii) the aggregate principal amount of all regularly scheduled principal payments paid or payable with respect to indebtedness, in each case of or by the Company and its subsidiaries for the most recently completed measurement period.

 

(11) HELD FOR SALE

 

In connection with the Company’s acquisition of Eveready, the Company agreed with the Canadian Commissioner of Competition to divest Eveready’s Pembina Area Landfill, located near Drayton Valley, Alberta, due to its proximity to legacy Clean Harbors’ existing landfill in the region. The Pembina Area Landfill meets the held for sale criteria under ASC 360 and therefore the fair values of its assets and liabilities less estimated costs to sell have been recorded as held for sale in the Company’s consolidated balance sheet in the Technical Services segment and the net income presented as income from discontinued operations on the consolidated statements of income at September 30, 2009.  For the three and nine months ended September 30, 2009, the Pembina Area Landfill recorded $0.9 million of revenues which are included in income from discontinued operations. At September 30, 2009, the components of assets and liabilities held for sale in the consolidated balance sheet were as follows (in thousands):

 

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September 30,
2009

 

Current assets

 

$

1,628

 

Property, plant and equipment, net

 

10,292

 

Permits and other intangibles

 

7,165

 

Deferred tax assets

 

1,147

 

Assets held for sale

 

$

20,232

 

 

 

 

 

Current liabilities

 

$

314

 

Closure and post-closure liabilities

 

2,904

 

Liabilities held for sale

 

$

3,218

 

 

(12) RELATED PARTY TRANSACTIONS

 

During each of the three and nine months ended September 30, 2009, the Company recorded no revenue from related party transactions and included $0.4 million in operating expenses and selling, general and administrative expenses. As at September 30, 2009, outstanding amounts collectible from or owing to related parties included in accounts receivable and accounts payable and accrued liabilities were immaterial.  All transactions occurred in the normal course of operations and were measured at their exchange amounts, which were established and agreed to as consideration by the related parties.

 

(13) NONCONTROLLING INTEREST

 

At the time of the Company’s acquisition of Eveready on July 31, 2009, there was an aggregate 7.89% noncontrolling interest in an Eveready subsidiary held by the former owners of Bullseye Directional Drilling (“Bullseye”) and Rodrigue Directional Drilling (“Rodrigue”) group of companies, which were acquired by Eveready in 2006.  Under the agreements with such former owners, Eveready then held a call option to acquire, and such former owners then held a put option to sell, such noncontrolling interests at certain prices to be determined in accordance with such agreements. In September 2009, such agreements were amended to provide that the options would be exercisable for fixed prices to be paid in cash on September 1, 2010 in the case of Bullseye and on December 1, 2010 in the case of Rodrigue. The agreement for the Bullseye noncontrolling interest was exercised in September 2009 and the Company reclassified the maximum redemption amount from temporary equity to accrued expenses at September 30, 2009. At September 30, 2009, the Company deemed the redemption of the Rodrigue noncontrolling interest to be probable and recorded the maximum redemption amount as temporary equity at September 30, 2009.  For the three and nine months ended September 30, 2009, the net income attributable to those noncontrolling interests was immaterial and was included in the Company’s net income.

 

(14) INCOME TAXES

 

The Company’s effective tax rates for the three and nine months ended September 30, 2009 were 43.6 percent and 43.8 percent, respectively, compared to 41.5 percent and 42.6 percent for the same periods in 2008. Earnings for the three and nine months ended September 30, 2009 decreased compared to the same periods in 2008; however, the overall permanent items that impact the effective tax rate increased primarily as a result of the non-deductible portion of acquisition costs related to the acquisition of Eveready, thereby resulting in the higher effective income tax rates.

 

As of September 30, 2009, the Company’s unrecognized tax benefits were $74.6 million which included $20.8 million of interest and $5.9 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.

 

Due to expiring statutes in Canada, the Company anticipates that total unrecognized tax benefits, other than adjustments for additional accruals for interest and penalties and foreign currency translation, will decrease by approximately $12.2 million within the

 

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next twelve months.  The $12.2 million includes interest and penalties of $4.7 million and is related to a business combination in Canada and, in accordance with ASC 805, will be recorded in earnings and therefore will impact the effective income tax rate.

 

(15) EARNINGS PER SHARE

 

The following table sets forth the calculation of the numerator and denominator used in the computation of basic and diluted net income per common share attributable to the Company’s common stockholders for the three- and nine-month periods ended September 30, 2009 and 2008 (in thousands except for per share amounts):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Numerator for basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

8,773

 

$

14,628

 

$

22,352

 

$

39,537

 

Income from discontinued operations

 

412

 

 

412

 

 

Net income

 

$

9,185

 

$

14,628

 

$

22,764

 

$

39,537

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic shares outstanding

 

25,420

 

23,423

 

24,322

 

22,052

 

Dilutive effect of equity-based compensation awards and warrants

 

132

 

399

 

119

 

478

 

Dilutive shares outstanding

 

25,552

 

23,822

 

24,441

 

22,530

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.34

 

$

0.62

 

$

0.92

 

$

1.79

 

Income from discontinued operations, net of tax

 

0.02

 

 

0.02

 

 

Net income

 

$

0.36

 

$

0.62

 

$

0.94

 

$

1.79

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

Income from continuing operations.

 

$

0.34

 

$

0.61

 

$

0.91

 

$

1.75

 

Income from discontinued operations, net of tax

 

0.02

 

 

0.02

 

 

Net income

 

$

0.36

 

$

0.61

 

$

0.93

 

$

1.75

 

 

For the three- and nine- month periods ended September 30, 2009 and 2008, the dilutive effect of all outstanding stock options, restricted stock and warrants is included in the above calculations. For the three- and nine-month periods ended September 30, 2009, the above calculation excluded the dilutive effects of 142 thousand outstanding performance stock awards for which the performance criteria were not attained at that time, 18 thousand stock options that were not then in-the-money, and 32 thousand unvested shares then held in the employee participation plan trust as described in Note 17, “Stock-Based Compensation and Employee Participation Plan.”  For the three- and nine-month periods ended September 30, 2008, the above calculation excluded the dilutive effects of 90 thousand outstanding performance stock awards for which the performance criteria were not attained at that time.

 

(16) STOCKHOLDERS’ EQUITY

 

As described in Note 3, “Business Combinations,” the Company acquired Eveready on July 31, 2009 and, as a portion of the consideration, the Company issued to Eveready shareholders $118.4 million in Clean Harbors’ common stock consisting of 2.4 million shares valued at $49.50 per Clean Harbors’ share (the closing price on the New York Stock Exchange on the day prior to the acquisition).

 

(17) STOCK-BASED COMPENSATION AND EMPLOYEE PARTICIPATION PLAN

 

Stock-Based Compensation

 

The following table summarizes the total number and type of awards granted during the three- and nine-month periods ended September 30, 2009, as well as the related weighted-average grant-date fair values:

 

 

 

Three Months Ended
September 30, 2009

 

Nine Months Ended
September 30, 2009

 

 

 

Shares

 

Weighted-
Average
Grant-Date
Fair Value

 

Shares

 

Weighted-
Average
Grant-Date
Fair Value

 

Restricted stock awards

 

38,000

 

$

55.05

 

43,400

 

$

54.75

 

Performance stock awards

 

7,804

 

53.47

 

68,251

 

45.76

 

Common stock awards

 

 

$

 

2,400

 

$

52.66

 

Total awards

 

45,804

 

 

 

114,051

 

 

 

 

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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 September 30, 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 nine months ended September 30, 2009 related to the 2009 performance stock awards.

 

In regards to the performance stock awards granted in 2008, management previously believed that the performance targets would be achieved and therefore recorded compensation expense during fiscal 2008 and during the first quarter of 2009.  As of June 30, 2009, based on the year-to-date results of operations, management determined that it was then not probable that the performance targets will be achieved, and therefore the cumulative expense recorded through March 31, 2009 of $1.7 million was reversed through sales, general and administrative expenses. As of September 30, 2009, management continued to believe that the performance targets will not be achieved and therefore recorded no compensation expense for the three or nine months ended September 30, 2009.

 

Employee Participation Plan

 

Prior to the Company’s acquisition of Eveready on July 31, 2009, Eveready’s predecessor had established an employee participation plan (the “Plan”) under which employees were offered an opportunity to purchase at the then market price up to a specified number of the predecessor’s units (“Purchased Units”) from the predecessor’s treasury. For each employee who elected to participate (a “Participant”), Eveready’s predecessor matched the Purchased Units with an equal number of units (“Matching Units”) purchased on the open market and deposited the Matching Units into a trust (the “Trust”), with 20% of the Matching Units vesting each December 31 from 2007 through 2011 provided the Participant remained employed by Eveready’s predecessor at the vesting date. Participants had the option to finance the Purchased Units with a loan from Bank of Montreal (“BMO Loan”), which carries an annual interest rate of LIBOR plus 0.5% for a term of 10 years with payment commencing in year six, secured by both the Purchased and the Matching Units. Upon the conversion of Eveready’s predecessor into Eveready effective December 31, 2008, the Purchased Units held by Participants and Matching Units held by the Trust were converted (on the same ratio as other outstanding units) into Eveready common shares.

 

When the Company acquired Eveready on July 31, 2009, the Eveready common shares held both by Participants and by the Trust were converted into cash and shares of the Company’s common stock on the same terms as other outstanding Eveready common shares. The Matching Units converted into 22 thousand shares of the Company’s common stock and will continue to be held in the Trust and vest according to the original vesting schedule.  The Company will pay a cash bonus to each Participant employed by the Company on December 31, 2011(or whose employment was or is involuntarily terminated by the Company either at the time of the acquisition or prior to December 31, 2011), to the extent (if any) that on December 31, 2011 there is a shortfall between (i) the amount which such employee originally paid for Purchased Units and (ii) the aggregate of (x) the market value on December 31, 2011(but not less than $48.00 per Company share) of the Purchased Units and Matching Units held by the Participant and (y) the cash portion  of the acquisition consideration received for such Participant’s Eveready shares as described above (“Shortfall Bonus”). To the extent that any Participant has an outstanding BMO loan balance on December 31, 2011, the amount of any such Shortfall Bonus (net of withholding taxes) shall first be applied against such outstanding loan balance, with the remainder (if any) of such net bonus paid to the Participant. The maximum amount of such Shortfall Bonus was $2.8 million on September 30, 2009.

 

The Company classifies the Plan as an equity award and compensation expense of $0.1 million was recognized for the three and nine months ended September 30, 2009.  The potential Shortfall Bonus is classified as a liability award and measured based on the award’s fair value at each reporting date until the date of settlement. The fair value of the Shortfall Bonus is determined to be the difference between (i) the Participants’ original investment in the Plan and (ii) the aggregate of the market value (but not less than $48.00 per Company share) of the Company’s shares derived from both Purchased Units and Matching Units and the cash portion of the acquisition consideration received, adjusted for the portion of requisite service that has been rendered as of the measurement date. Compensation cost for the period is based on the change or a portion of the change, depending on the percentage of the requisite service that has been rendered at the reporting date, in the fair value of the potential Shortfall Bonus. Compensation cost relating to the potential Shortfall Bonus for the three and nine months ended September 30, 2009 was $0.1 million.

 

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(18) 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 ASC 450, Contingencies. At September 30, 2009, the Company had recorded $27.5 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 $3.9 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.

 

As of September 30, 2009, the principal legal and administrative proceedings in which the Company was involved 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 September 30, 2009 and December 31, 2008, the Company had accrued $12.4 million and $10.6 million, respectively, for remedial liabilities relating to the Ville Mercier legal proceedings.   The increase resulted primarily from a foreign exchange rate adjustment due to the strengthening of the Canadian dollar and interest accretion.

 

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

 

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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 which ruled on October 13, 2009 on the procedural issue that the County did have standing to challenge the license in district court and remanded the case back to that court for further proceedings. Adams County filed a third suit directly against CHDT in 2007 again attempting to invalidate the license. That suit was 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 has contested 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 September 30, 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 60 sites which are subject to or are proposed to become subject to proceedings under federal or state Superfund laws. Of the 60 sites, two involve facilities that are now owned by the Company and 58 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 58 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 September 30, 2009 and December 31, 2008, the amount of the Company’s remaining reserves relating to the Marine Shale site was $3.7 million and $3.8 million, respectively.

 

Certain Other Third Party Sites.  At 14 of the 58 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 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.

 

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Table of Contents

 

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 September 30, 2009, there were four 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 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 further 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.

 

Guarantees

 

Each Participant of Eveready’s Employee Participation Plan (the “Plan”) described in Note 17, “Stock-Based Compensation and Employee Participation Plan,” had the option to finance the acquisition of Purchased Units either through the employee’s own funds or a loan to the Participant by Bank of Montreal (“BMO”) secured by both the Purchased and Matching Units. Because of the decline in the market value of the predecessor’s units and of Eveready shares subsequent to the purchase by the Participants of the Purchased Units, Eveready subsequently provided to BMO a guarantee of the BMO loans in the maximum amount at September 30, 2009 of Cdn $5.9 million (plus interest and collection costs).  At September 30, 2009, the aggregate amount of the Company’s guarantee, after giving effect to the market value on that date of the Company’s shares derived from the Purchased and Matching Units, which secure the BMO loans, was Cdn $1.5 million.

 

The Company has provided a guarantee to a certain financial institution for financing obtained by a contractor to purchase specific service and automotive equipment in supplying services to the Company. As of September 30, 2009, the total balance of all outstanding third party payments guaranteed by the Company was Cdn $1.0 million. The financing is collateralized by the specific equipment purchased and is due to mature between 2010 and 2011. The Company would be required to settle the guarantee if the contractor were to default on the obligation and the collateral held by the financial institution was not sufficient to repay the balance due.

 

(19) SEGMENT REPORTING

 

In the third quarter of 2009, in connection with the acquisition of Eveready, the Company re-aligned and expanded its reportable segments to include four reportable segments rather than two. Prior to the acquisition, the Company’s two reportable segments were Technical Services and Site Services. The new reportable segments include Technical Services, Field Services, Industrial Services and Exploration Services. Performance of the segments is evaluated on several factors, of which the primary financial measure is operating income before interest, taxes, depreciation, amortization, restructuring, severance charges, other refinancing-related expenses, (gain) loss on disposal of assets held for sale, other (income) expense, and loss on early extinguishment of debt  (“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 Company has reflected the impact of the change in its segment reporting in all periods presented to provide financial information that consistently reflects our current approach to managing the operations.

 

The operations not managed through the Company’s four 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 four segments.

 

The following table reconciles third party revenues to direct revenues for the three- and nine-month periods ended September 30, 2009 and 2008 (in thousands). Third party revenue is revenue billed to outside 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.

 

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Table of Contents

 

 

 

For the Three Months Ended September 30, 2009

 

 

 

Technical
Services

 

Field
Services

 

Industrial
Services

 

Exploration
Services

 

Corporate
Items

 

Totals

 

Third party revenues

 

$

168,251

 

$

59,848

 

$

69,395

 

$

8,038

 

$

76

 

$

305,608

 

Intersegment revenues, net

 

5,684

 

(5,982

)

305

 

309

 

(316

)

 

Direct revenues

 

$

173,935

 

$

53,866

 

$

69,700

 

$

8,347

 

$

(240

)

$

305,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2008

 

 

 

Technical
Services

 

Field
Services

 

Industrial
Services

 

Exploration
Services

 

Corporate
Items

 

Totals

 

Third party revenues

 

$

177,697

 

$

84,628

 

$

10,824

 

$

 

$

8

 

$

273,157

 

Intersegment revenues, net

 

7,665

 

(6,866

)

(297

)

 

(502

)

 

Direct revenues

 

$

185,362

 

$

77,762

 

$

10,527

 

$

 

$

(494

)

$

273,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2009

 

 

 

Technical
Services

 

Field
Services

 

Industrial
Services

 

Exploration
Services

 

Corporate
Items

 

Totals

 

Third party revenues

 

$

477,352

 

$

157,301

 

$

84,327

 

$

8,038

 

$

233

 

$

727,251

 

Intersegment revenues, net

 

16,518

 

(14,647

)

(770

)

309

 

(1,410

)

 

Direct revenues

 

$

493,870

 

$

142,654

 

$

83,557

 

$

8,347

 

$

(1,177

)

$

727,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2008

 

 

 

Technical
Services

 

Field
Services

 

Industrial
Services

 

Exploration
Services

 

Corporate
Items

 

Totals

 

Third party revenues

 

$

535,335

 

$

212,862

 

$

32,708

 

$

 

$

20

 

$

780,925

 

Intersegment revenues, net

 

19,486

 

(16,409

)

(1,363

)

 

(1,714

)

 

Direct revenues

 

$

554,821

 

$

196,453

 

$

31,345

 

$

 

$

(1,694

)

$

780,925

 

 

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 early extinguishment of debt to segments.

 

 

 

For the Three Months
Ended September 30,

 

For the Nine Months
Ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

Technical Services

 

$

49,126

 

$

46,937

 

$

129,409

 

$

137,161

 

Field Services

 

8,158

 

15,714

 

16,489

 

32,451

 

Industrial Services

 

9,226

 

2,059

 

10,451

 

6,054

 

Exploration Services

 

951

 

 

951

 

 

Corporate Items

 

(19,169

)

(19,354

)

(52,279

)

(53,786

)

Total

 

$

48,292

 

$

45,356

 

$

105,021

 

$

121,880

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to Consolidated Statements of Income:

 

 

 

 

 

 

 

 

 

Accretion of environmental liabilities

 

$

2,644

 

$

2,682

 

$

7,928

 

$

8,078

 

Depreciation and amortization

 

18,649

 

11,414

 

42,951

 

32,695

 

Income from operations

 

26,999

 

31,260

 

54,142

 

81,107

 

Other (income) expense

 

(111

)

104

 

(155

)

149

 

Loss on early extinguishment of debt

 

4,853

 

4,251

 

4,853

 

4,251

 

Interest expense, net of interest income

 

6,556

 

1,889

 

9,545

 

7,789

 

Income from continuing operations before provision for income taxes

 

$

15,701

 

$

25,016

 

$

39,899

 

$

68,918

 

 

The following table presents assets by reported segment and in the aggregate. Certain amounts presented below are subject to change pending the Company’s finalization of the valuation of the Eveready and EnviroSORT acquisitions (in thousands):

 

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Table of Contents

 

 

 

September 30,
2009

 

December 31,
2008

 

Property, plant and equipment, net

 

 

 

 

 

Technical Services (1)

 

$

270,860

 

$

234,582

 

Field Services

 

33,678

 

25,337

 

Industrial Services

 

219,330

 

5,285

 

Exploration Services

 

47,464

 

 

Corporate or other assets

 

26,018

 

30,257

 

Total property, plant and equipment, net

 

$

597,350

 

$

295,461

 

Intangible assets:

 

 

 

 

 

Technical Services (1)

 

 

 

 

 

Goodwill

 

$

26,216

 

$

22,417

 

Permits and other intangibles, net

 

71,959

 

64,818

 

Total Technical Services

 

98,175

 

87,235

 

Field Services

 

 

 

 

 

Goodwill

 

3,123

 

2,161

 

Permits and other intangibles, net

 

10,114

 

6,704

 

Total Field Services

 

13,237

 

8,865

 

Industrial Services

 

 

 

 

 

Goodwill

 

14,846

 

 

Permits and other intangibles, net

 

25,053

 

232

 

Total Industrial Services

 

39,899

 

232

 

Exploration Services

 

 

 

 

 

Goodwill

 

5,514

 

 

Permits and other intangibles, net

 

14,979

 

 

Total Exploration Services

 

20,493

 

 

Total

 

$

171,804

 

$

96,332

 

 


(1)   2009 balances included assets held for sale (see Note 11, “Held for Sale”.)

 

The following table presents the total assets by reported segment. Certain amounts presented below are subject to change pending the Company’s finalization of the valuation of the Eveready and EnviroSORT acquisitions (in thousands):

 

 

 

September 30,
2009

 

December 31,
2008

 

Technical Services

 

$

502,072

 

$

446,717

 

Field Services

 

66,024

 

43,672

 

Industrial Services

 

76,291

 

5,840

 

Exploration Services

 

50,223

 

 

Corporate Items

 

670,329

 

402,107

 

Total

 

$

1,364,939

 

$

898,336

 

 

The following table presents the total assets by geographical area. Certain amounts presented below are subject to change pending the Company’s finalization of the valuation of the Eveready and EnviroSORT acquisitions (in thousands):

 

 

 

September 30,
2009

 

December 31,
2008

 

United States

 

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