CLH

Clean Harbors, Inc. 2002 10-K Summary

Business Context and Reporting Period

This Annual Report covers the fiscal year ended December 31, 2002. Clean Harbors, Inc. operates in two segments: Technical Services (waste treatment, disposal, and logistics) and Site Services (industrial maintenance and remediation). The defining event of the period was the acquisition of the Chemical Services Division (CSD) of Safety-Kleen Corp. on September 7, 2002. This transaction expanded the Company's footprint to 52 active hazardous waste management properties across the U.S., Canada, Mexico, and Puerto Rico, positioning it as the largest operator of hazardous waste treatment facilities in North America.

Key Financial Metrics

Note: The 2002 Net Loss includes a $24.7 million extraordinary loss related to the early extinguishment of debt.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 39.2% to $350.1 million, driven primarily by the CSD acquisition. Technical Services revenue surged 82.2% to $223.9 million, while Site Services revenue declined slightly by 1.9% to $126.2 million due to the absence of large emergency response projects present in 2001.
• Profitability: Operating income decreased 28.6% to $12.8 million. This decline was due to increased costs of revenues (72.4% of revenue vs. 70.8% in 2001) and higher selling, general, and administrative expenses ($62.3 million vs. $44.5 million) associated with the acquisition and integration.
• Debt Structure: To finance the acquisition, the Company refinanced all outstanding debt, raising $280 million in total financing. This included $115 million in Senior Loans, $40 million in Subordinated Loans, and $25 million in Series C Convertible Preferred Stock.
• Environmental Liabilities: The Company assumed environmental liabilities valued at approximately $202.9 million as part of the CSD purchase price, a significant increase from the $1.9 million recorded in 2001.

Guidance, Outlook, and Risks

Outlook and Synergies: Management anticipates significant cost savings by internalizing waste disposal previously sent to third parties. The Company expects 2003 depreciation and amortization to be approximately $25 million and interest expense to be approximately $24 million. Capital spending for 2003 is estimated between $30 million and $35 million, with $15 million dedicated to complying with new EPA MACT standards for incinerators.

Material Risks and Contingencies:

• Internal Controls: The Company disclosed material weaknesses in internal controls related to environmental liability documentation, deferred revenue calculation, and expense recording, largely stemming from the integration of Safety-Kleen's systems.
• Legal Proceedings: Significant contingent liabilities exist regarding the Ville Mercier facility in Quebec (groundwater contamination) and the Marine Shale site in Louisiana. The Company believes these liabilities are not currently estimable. Additionally, the Company is litigating to recover a $17 million "Make Whole" penalty paid to former holders of Subordinated Notes.
• Regulatory Compliance: The Company faces significant capital expenditure requirements to meet new EPA Hazardous Waste Combustor Maximum Achievable Control Technology (HWC MACT) standards by September 2003.
• Capital Markets Access: Due to Safety-Kleen's historical financial deficiencies, the Company cannot file registration statements for public securities offerings until it can provide three years of audited financial statements for the acquired CSD assets.

Investor Verification Checklist

• Verify the final valuation of the CSD working capital, which is subject to binding arbitration and could adjust the purchase price.
• Monitor the resolution of the "Make Whole" litigation regarding the $17 million debt extinguishment penalty.
• Assess the progress of internal control remediation, specifically regarding environmental liability accruals and deferred revenue.
• Track compliance costs and timelines for the EPA HWC MACT standards at the Deer Park, Texas and Aragonite, Utah incinerators.
• Review the status of the Ville Mercier and Marine Shale legal proceedings for potential future liability accruals.