CLH

Clean Harbors, Inc. 10-Q Summary (Period Ended September 30, 2002)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002. The reporting period is dominated by the acquisition of the Chemical Services Division (CSD) assets from Safety-Kleen Corp. on September 7, 2002. This transaction significantly expanded Clean Harbors' geographic reach and hazardous waste disposal capabilities, making it the largest operator of such facilities in North America. The combined entity is projected to have annualized revenues of approximately $730 million.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 35.2% in the quarter and 11.9% for the nine-month period compared to 2001, driven almost entirely by the CSD acquisition.
• Operating Loss: The company reported an operating loss of $3.6 million for the quarter and $1.2 million for the nine months, compared to operating income of $3.1 million and $9.0 million in the respective 2001 periods. This decline is attributed to acquisition-related costs, restructuring charges, and integration expenses.
• Extraordinary Item: A significant non-cash extraordinary loss of $24.1 million was recorded due to the early extinguishment of debt (including a "Make Whole" payment on subordinated notes) to facilitate the acquisition.
• Balance Sheet Expansion: Total assets increased from $152.2 million (Dec 31, 2001) to $597.2 million (Sep 30, 2002), primarily due to the acquisition of property, plant, equipment, and intangible assets. Total liabilities increased significantly, including the assumption of approximately $266 million in environmental liabilities.

Guidance, Outlook, Risks, and Unusual Items

• Integration Challenges: Management notes that integrating the CSD's operations into Clean Harbors' systems has caused temporary productivity issues and revenue recognition delays. Full integration of U.S. systems is expected by December 31, 2002.
• Capital Markets Restriction: Due to Safety-Kleen's material deficiencies in financial controls, Clean Harbors cannot file registration statements for public securities offerings for up to three years until audited financial statements for the CSD are obtained. The company must rely on private financing.
• Debt Covenants: New financing agreements require the company to maintain specific EBITDA and fixed charge coverage ratios. Failure to meet these could trigger penalties or covenant defaults.
• Legal Contingencies: The company assumed various legal proceedings, including Superfund liabilities and a dispute regarding a "Make Whole" payment on subordinated notes, which the company is contesting in court as an unenforceable penalty.
• Environmental Liabilities: The company assumed significant environmental liabilities ($266 million). Future regulatory changes or unforeseen site conditions could require earlier or larger payments than currently estimated.

Investor Verification Checklist

• Debt Extinguishment Litigation: Verify the status of the lawsuit regarding the $17 million "Make Whole" payment on subordinated notes and the likelihood of recovery.
• Environmental Reserve Accuracy: Assess the adequacy of the $266 million environmental liability reserve, given the difficulty in estimating fair values for acquired sites.
• Integration Progress: Monitor the timeline for full system integration and the impact on revenue recognition and operational efficiency in Q4 2002.
• Covenant Compliance: Review upcoming quarterly reports to ensure the company meets the strict EBITDA and leverage covenants of its new $280 million financing package.
• Capital Market Access: Confirm the timeline for obtaining audited CSD financial statements to restore access to public capital markets.