CLH

Clean Harbors, Inc. 10-Q Summary (Period Ended June 30, 2003)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, for Clean Harbors, Inc., a provider of environmental services and solutions in the U.S., Canada, Mexico, and Puerto Rico. The reporting period is significantly impacted by the integration of the Chemical Services Division (CSD) acquired from Safety-Kleen Corp. in September 2002. The company operates through two primary segments: Technical Services (waste treatment, disposal, and logistics) and Site Services (remediation and industrial maintenance).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 177% year-over-year, driven primarily by the inclusion of the CSD acquisition. Technical Services revenue grew 153% and Site Services revenue grew 87%.
• Profitability Decline: Despite revenue growth, the company reported a net loss of $13.9 million compared to a net income of $0.2 million in the prior year. This was due to increased operating costs, higher interest expense ($11.5 million vs. $4.8 million), and accretion of environmental liabilities ($5.5 million).
• Cost Structure: Cost of revenues as a percentage of revenue increased to 75.9% from 71.4%. However, disposal costs paid to third parties decreased as a percentage of revenue (4.9% vs. 10.6%) due to the internalization of waste disposal capabilities.
• Accounting Changes: The company adopted SFAS No. 143 (Asset Retirement Obligations) in Q1 2003, resulting in a cumulative effect adjustment of $8,000 and significant changes to how environmental liabilities are recorded and accreted.

Guidance, Outlook, and Risks

• Loan Covenant Violations: The company failed to meet EBITDA covenants under its Revolving Credit Facility and Senior/Subordinated Loans. It has negotiated amendments (Third and Second Amendments) to reset covenants, but this resulted in higher interest rates and amendment fees. Future compliance is not guaranteed.
• Liquidity Needs: The company is required to post an additional $20 million in cash collateral by September 30, 2003, to support letters of credit for financial assurance obligations. It expects to fund this via the Revolving Credit Facility or operating cash flow.
• Environmental Liabilities: Total environmental liabilities stand at $166.9 million. The company estimates it is "reasonably possible" that liabilities could be up to $20.1 million higher than recorded. Contingent liabilities related to the Ville Mercier facility and Marine Shale site are not currently estimable.
• Internal Controls: Due to the integration of CSD systems, the company identified material weaknesses in internal controls regarding environmental liability documentation, deferred revenue calculation, and expense recording. Management is implementing remediation plans.
• Capital Markets Access: Due to Safety-Kleen's historical financial deficiencies, the company cannot file audited pro forma statements for the CSD. This restricts the company's ability to file registration statements for public securities offerings for up to three years.

Investor Verification Checklist

• Verify the company's ability to meet the amended EBITDA and fixed charge coverage ratios to avoid further covenant breaches or interest rate penalties.
• Monitor the status of the $20 million cash collateral requirement for letters of credit and its impact on liquidity.
• Review updates on the quantification of contingent environmental liabilities (Ville Mercier and Marine Shale) which could result in material future charges.
• Assess the progress of internal control remediation, particularly regarding the integration of CSD financial systems.
• Track the reduction of third-party disposal costs as the company fully utilizes its newly acquired internal disposal facilities.