Clean Harbors Inc.

(Ticker: CLH-USAA) Forensic Research (FR)

$56.87 JLT – 3/24/2015

Clean Harbors – CLH-USAA –

Company description
Clean Harbors, Inc. provides environmental, energy and industrial services in Canada and in the USA. In its technical service division,
the Company provides hazardous material management services. In its industrial and Field Services division, it provides high
pressure and chemical cleaning, material processing, environmental clean-up services and lodging services. CLH also provides oil re-
refining and recycling as well as parts cleaning, containerized waste services, oil collection, and other complementary products and
services

Summary
CLH’s organic revenue growth has declined in the past two years and may be declining at a faster pace than the reported 3.1%
decrease. While the decline in organic growth is now partly apparent, the impact of this decline on earnings is masked by aggressive
cost recognition practices (lower remedial liabilities, lower depreciation, increase in deferred costs and lower accrued expenses) as
well as by an increase in gain on sale of investments. These items may have helped reported FY14 EBT by at least 23% and could
make CLH’s aggressive FY15 (+13%) and FY16 (+22%) earnings growth targets even harder to reach.

FR Severity Rating: 1.5/3.0 – Moderate Concerns

1- Acquisitions are masking CLH’s actual organic revenue growth

a. Organic Revenue Growth declined vs FY13 and was at most negative 3.1% in FY14
Reported revenue declined in FY14, but CLH’s organic revenue may be declining at a faster pace. The Company however,
does not provide enough information in its filings to allow an accurate assessment of the extent of the ongoing organic
revenue deterioration.
CLH’s business combination disclosures are sparse, inconsistent in their level of precision and broadly inadequate for an
assessment of the Company’s organic revenue and earnings growth. For some of its acquisitions however, CLH provides a
pro forma metric which allows us to approximate organic growth. In the organic growth calculation presented below (Table
0), we compare the reported revenue in a given year to the revenue in the previous year adjusted to include a full year of
sales for the companies acquired during that (previous) year. This calculation is a conservative estimate, as we should
concurrently be excluding from current year revenues, revenues of companies acquired in the current year, a figure that is
generally not disclosed by CLH. In its FY14 and FY13 10-K, CLH provided no pro forma metrics for current year acquisitions
so we used the reported metrics to estimate FY14 “unadjusted organic revenue growth”. Despite using this conservative
approach and not excluding the impact of Evergreen (FY13 acquisition) from the FY14 organic growth calculation, CLH’s
“organic” revenue growth negative was 3.1% and 2.8% in FY14 and in FY13 and was flat in FY12 (0.1% - Table 0).

CLH does not provide enough disclosures to allow us to calculate organic net income growth.

Table 0 - Organic Revenue Growth

in $mils., %
FY11 Reported Revenue 1984.1
FY11 Pro forma for Peak and 3Q acquisitions 2186.3
FY12 Reported Revenue 2187.9
FY12 Organic Revenue Growth 0.1%
Clean Harbors Inc. (Ticker: CLH-USAA) Forensic Research (FR)
$56.87 JLT – 3/24/2015

2012 Pro forma for FY12 Acquisitions 3610.3

FY12 Reported Revenue 2187.9
FY13 Reported Revenue 3509.7
FY13 Organic Revenue Growth FY13 (2.8%)

FY14 Reported 3401.6

FY13 Acquisitions ?
FY13 Pro forma for FY13 Acquisitions ?
FY13 Reported Revenue 3509.7
FY14 Unadjusted Organic Revenue Growth (3.1%)

b. FY14 and FY13 Acquisitions recorded in Technical Services division (CLH’s only growth division) and Oil Re-
refining and recycling division actual revenue pressure
In September 2013, CLH acquired Evergreen and included the Company in the Oil re-refining segment. In FY14, the
Company acquired two companies which were included in its Technical services divisions. While CLH does not disclose the
amount of revenue related to these acquisitions we note that the two divisions had the highest growth rate in FY14.

c. Oil re-refining sales likely to be pressured further

2- Several trends suggest that CLH may experience significant future margin pressure
Several items helped CLH’s FY14 reported EBT. Specifically, the Company’s performance was inflated by, a reduction in its
remedial liabilities, a decline in its fixed asset depreciation rate and the recognition of a higher amount of gains on sale of
investments. We estimate that these items boosted FY14 EBT by 23% (Table 1). Adjusted for these items, CLH’s reported
EBT growth was negative 14% instead of the reported 13% growth. Additionally, unfavorable trends in other accounts
(deferred costs, accrued expenses) while not fully quantifiable, could also result in future earnings growth pressure.

Table 1 – Summary of EBT boosts

in $ mils., % FY1 FY1 FY14 FY13

6 (e) 5 (e)
Low Remedial Liability 24.6
Lower Depreciation of Assets 10.8
Increase in Other income 2.7

Total Pre-tax Boost 38.1

Income Before Tax 161.9 143.9

Total Boost / EBT 23%

Depreciation and Other income Boost / EBT 8%
Reported EBT Growth 22% 13% 13%
Reported EBT Growth ex Total Boosts (14%)
Reported EBT Growth ex Depreciation and Other Income 3.2%
Boosts

Decline in remedial liabilities (landfill and non-landfill)

Clean Harbors Inc. (Ticker: CLH-USAA) Forensic Research (FR)
$56.87 JLT – 3/24/2015

Remedial liabilities reflect “the costs of removal or containment of contaminated material, treatment of potentially
contaminated groundwater and maintenance and monitoring costs necessary to comply with regulatory requirements”.
CLH’s remedial liabilities have declined materially in the last three years, in absolute terms and when compared to metrics
most likely to drive the liabilities : “highly probable airspace” (useable landfill capacity) and total number of disposal sites
(landfills, incinerators, wastewater treatment facilities and Superfund sites).
In fact, since the Safe-Kleen acquisition in late 2012, CLH has been merely depleting its remedial liabilities through a
combination of materially higher claims/expenditures, low reserve accretion and reversals of estimates, which have both
directly and indirectly boosted operating income.
As a result of this depletion CLH’s remedial liability per million cubic yard declined to 5.08 from 5.88 in FY13 and 6.19 in
FY12 (Table 2). If CLH had recorded the same amount of environmental liability per cubic yard of airspace than it had in
FY13, operating income would have been $24.6mil. (11%) lower.
Similarly, CLH’s liability per site (at owned sited) declined to an all-time low of $0.86mil. down from $0.91mil and $2.29 in
FY13 and FY12 respectively(Table 3).
The reduction in environmental liability is particularly concerning in a context of growing remedial expenditure for CLH.
While there could be several reasons driving a reduction in liability, it is generally not a sustainable source of earnings and
earnings growth. Unless CLH finds a way to materially reduce the pace at which it incurs environmental remediation
expenses in the near future, the impact of these expenditures on the income statement will grow significantly in FY15 and
FY16.

Table 2 – Remedial Liability and Highly Probable Airspace

in $ mils. FY14 FY13 FY12

Highly probable airspace (Cub. Yards ‘000) 30,544 29,323 29,643

Remedial liabilities
Accretion 6.2 6.8 5.9
Changes in estimates (2.7) (3.3) (9.7)
Expenditures (18.1) (14.9) (7.3)

Total Remedial Liability 155.1 172.5 183.4

Net remedial liability expense 3.4 3.5 -3.7

Remedial liability / million cubic yard of airspace 5.08 5.88 6.19

Table 3 – Remedial Liabilities and Number of Sites

in $ mils. FY14 FY13 FY12 FY11 FY10

Baton Rouge LA 26.4 29.4 32.2 37.2 37.5
Bridgeport NJ 18.7 19.5 21.6 21.5 23.9
Mercier Quebec 13.0 14.0 14.6 13.6 13.9
Linden NJ 8.4 0.0 0.0 0.0 0.0
All other incinerators, landfills etc. 74.5 94.5 98.41 46.6 45.0
(CLH-owned)

1
Balances adjusted for the purchase accounting restatement recorded in FY13 for the Safety Kleen acquisition
Clean Harbors Inc. (Ticker: CLH-USAA) Forensic Research (FR)
$56.87 JLT – 3/24/2015

All other incinerators, landfills 87 104 43 34 32

etc.- number of sites
Superfund sites liability (third 14.0 15.1 16.62 7.2 8.2
party owned)
Superfund sites number of sites 23 30 29 13 13

CLH owned sites - Liability per site 0.86 0.91 2.29 1.37 1.41
Third party owned sites - Liability 0.61 0.50 0.57 0.55 0.63
per site

Total Remedial Liability 155.1 172.5 183.4 126.1 128.5

Lower depreciation of fixed assets

CLH’s depreciation expressed as a percentage of average gross fixed assets declined to 9.8% in FY14 from 10.3% in FY14 and
10.3% in FY13 (Table 4). Had CLH kept depreciation/gross fixed assets at FY13 levels, operating income would have been
$10.8mil. (5%) lower. CLH’s fixed assets include its landfill assets, which the Company has also been depreciating at a slower
pace in the past two years.

Table 4 – Depreciation of Fixed Assets

in $ mils., % FY14 FY13 FY12

PP&E (Gross) 2564.3 2417.4 2144.7
PP&E (Gross ex in progress) 2518.7 2359.4 1430.13
PP&E Average (Gross ex in progress) 2439.0 2236.1 1396.4
Depreciation (inc. Landfill assets) 239.4 229.4 144.4
Depreciation / PP&E Average 9.8% 10.3% 10.3%
Boost 10.8

Increase in Other Income

In FY14, CLH’s other income grew by $2.7mil. relative to FY13 – from $1.7mil. to $4.4mil – “primarily due to gains
recognized from the sale of investments which occurred in 2014”. These sources of earnings growth are in our view
unsustainable as evidenced by the fluctuating amounts recorded by CLH as other income/expense in the last three years.

in $ mils. FY14 FY13 FY12

Other Income 4.4 1.7 (0.8)

Higher level of deferred costs per dollar of deferred revenue

CLH defers “commissions and other incremental direct costs, (…) relating to deferred revenue from the Company’s parts
and cleaning services, containerized waste services and vacuum services”. CLH’s deferred costs expressed as a percentage
of deferred revenues declined grew to 30.2% up from 29.1%, 13.5% and 18.3% in FY13, FY12 and FY11 (Table 5). The
materiality of the increase observed over the last three years is particularly concerning. These trends suggest that the

2
Balances adjusted for the purchase accounting restatement recorded in FY13 for the Safety Kleen acquisition
3
Excludes Gross Value of Safety-Kleen PP&E – We took the 12/31/11 Gross PP&E value which probably understates the actual acquisition fair value.
Clean Harbors Inc. (Ticker: CLH-USAA) Forensic Research (FR)
$56.87 JLT – 3/24/2015

Company is either deferring costs more aggressively or incurring more costs per dollar of revenue in its parts and cleaning
services, containerized waster services and vacuum services business, which could result in additional earnings growth
pressure in future reporting periods.

Table 5 – Deferred Revenue and Deferred Costs

in $ mils., % Dec- Sep- Jun- Mar- Dec- Sep- Jun- Mar- Dec- Sep- Jun- Mar- Dec-
31- 30- 30- 31- 31- 30- 30- 31- 31- 30- 30- 31- 31-
2014 2014 2014 2014 2013 2013 2013 2013 2012 2012 2012 2012 2011
Deferred Costs 19.0 18.7 17.9 16.5 16.1 17.1 17.3 17.0 6.9 7.0 7.3 5.8 5.9
Deferred Revenues 63.0 63.9 61.6 56.5 55.5 61.9 63.4 62.2 51.0 29.1 32.0 29.2 32.3

Deferred Costs / Deferred 30.2% 29.2% 29.1% 29.3% 29.1% 27.6% 27.2% 27.3% 13.5% 24.1% 22.7% 19.8% 18.3%
Revenue

Decline in Accrued Expenses

CLH’s accrued expenses expressed as a percentage of TTM sales declined to 6.5% in FY14 from 6.7% in FY13 and 7.5% in
FY11 (Table 6). The ongoing decline in accrued expenses is questionable, particularly because the main driver is CLH’s Other
Accrued Expense account. While the impact of these reductions is difficult to quantify, to the extent that it was driven by
the delayed recognition of costs, we estimate that the decline may have benefited operating income by $10.0mil.

Table 6 – Other Accrued Expenses Declined Materially in FY14

in $ mils., % FY14 FY13 FY12 FY11 FY10

Insurance 58.9 58.0 48.2 21.7 19.7
Interest 20.5 20.7 20.1 15.4 7.8
Accrued disposal costs 1.8 2.5 2.2
Accrued compensation 59.0 60.9 70.3 56.0 44.5
Income, real estate and other taxes 38.3 38.9 35.6 14.9 19.5
Other 42.8 58.3 56.4 37.5 22.3

Total Accrued Expenses 219.6 236.8 232.4 148.0 116.1

Total Accrued Expenses / TTM Sales 6.5% 6.7% 10.6%4 7.5% 6.7%

4
Metric distorted by the late year acquisition of Safety-Kleen