Clean Harbors, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012, filed March 6, 2013. The filing is an annual report; fourth-quarter information is presented in unaudited quarterly data. Clean Harbors provides environmental, energy and industrial services across North America through Technical Services, Field Services, Industrial Services and Oil and Gas Field Services.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $2.188 billion | $1.984 billion | +10.3% |
| Income from operations | $202.2 million | $217.7 million | -7.1% |
| Net income | $129.7 million | $127.3 million | +1.9% |
| Diluted EPS | $2.40 | $2.39 | +0.4% |
| Adjusted EBITDA | $373.8 million | $350.0 million | +6.8% |
| Adjusted EBITDA margin | 17.1% | 17.6% | Down approximately 50 bps |
| Operating cash flow | $324.4 million | $179.5 million | +80.7% |
| Capital expenditures | $197.4 million | $148.5 million | +32.9% |
| Cash and cash equivalents | $229.8 million | $260.7 million | Down $30.9 million |
Gross margin declined to 29.6% from 30.4%, while operating margin declined to 9.2% from 11.0%. SG&A decreased to 12.5% of revenue from 12.8%, but depreciation and amortization increased to 7.4% of revenue from 6.2%, primarily due to acquisitions and increased capital investment.
Fourth-Quarter Information
- Revenue was $559.0 million, compared with $545.9 million in fourth-quarter 2011.
- Income from operations was $36.2 million, compared with $59.2 million in the prior-year quarter.
- Net income was $61.9 million, compared with $38.2 million in fourth-quarter 2011.
- Fourth-quarter 2012 net income benefited from a $52.4 million reduction in unrecognized tax benefits related primarily to the expiration of limitations on an historical Canadian debt restructuring transaction.
Material Changes Versus the Prior Comparable Period
- Safety-Kleen acquisition: Clean Harbors acquired Safety-Kleen on December 28, 2012 for approximately $1.3 billion. Because the acquisition occurred near year-end, Safety-Kleen contributed no material 2012 revenue or earnings, but its balance sheet was consolidated.
- The acquisition added approximately $436.7 million of goodwill, $421.4 million of permits and other intangibles, and $514.7 million of property, plant and equipment.
- Technical Services revenue increased 5.9%, Industrial Services increased 23.8%, and Oil and Gas Field Services increased 16.2%. Field Services revenue declined 7.8%, primarily because 2011 included $43.6 million of Yellowstone oil-spill work, while 2012 included approximately $11.7 million from Hurricane Sandy response.
- Incinerator utilization increased to 90% from 89%, and landfill volumes increased 58% year over year.
- Operating results were reduced by a $26.4 million loss on early extinguishment of debt related to the redemption of $520.0 million of 7.625% senior secured notes.
- The effective tax rate was negative 2% versus 31% in 2011, principally because of the $52.4 million tax-benefit item. The benefit is unusual and not representative of the underlying recurring tax rate.
Debt, Liquidity and Cash Flow
- At December 31, 2012, long-term obligations, including the current portion, were $1.408 billion, consisting primarily of $800.0 million of 5.25% senior unsecured notes due 2020 and $600.0 million of 5.125% senior unsecured notes due 2021.
- The company had no outstanding borrowings under its revolving facility at year-end and had approximately $117.4 million of borrowing and letter-of-credit availability at December 31, 2012. On January 17, 2013, the facility was increased from $250.0 million to $400.0 million, with approximately $267.4 million available thereafter.
- Letters of credit totaled $132.6 million, primarily supporting regulatory financial assurance requirements.
- Working capital was $517.7 million, compared with $510.1 million in 2011. Operating cash flow exceeded capital expenditures by approximately $127.0 million before acquisition spending.
- Investing cash outflows were $1.573 billion, driven primarily by the $1.3 billion Safety-Kleen acquisition and $197.4 million of capital expenditures. Financing cash inflows were $1.218 billion, principally from new debt and the issuance of 6.9 million common shares.
- Management stated that operating cash flow, cash balances and available revolver capacity should be adequate for operating needs, capital expenditures and debt service.
Outlook, Commentary, Risks and Unusual Items
- Management expected 2013 capital spending of approximately $260 million to $270 million, including approximately $0.6 million for environmental regulatory compliance.
- Management planned to integrate Safety-Kleen, pursue cross-selling and operating efficiencies, expand recycling and re-refining capabilities, and review reportable segments and reporting units in the first quarter of 2013.
- Pro forma combined revenue for Clean Harbors and Safety-Kleen was $3.530 billion for 2012, with pro forma net income of $125.4 million. The filing cautions that pro forma results are not necessarily indicative of future performance.
- Key risks include integration execution, substantial debt and interest obligations, dependence on oil and gas activity in Western Canada, oil-price exposure in Safety-Kleen’s re-refining business, foreign-currency fluctuations, competition, labor availability, regulatory compliance, permit renewal and environmental liabilities.
- Environmental liabilities totaled $221.5 million on a present-value basis, with undiscounted closure, post-closure and remedial obligations of approximately $507.0 million. Management identified approximately $21.5 million of reasonably possible additional remedial liabilities.
- The company was involved in proceedings involving 119 Superfund sites and inherited approximately 64 Safety-Kleen product-liability proceedings. The ultimate financial impact of the product-liability matters could not be estimated clearly in the filing.
- Goodwill impairment testing identified no impairment, although the Oil and Gas Field Services reporting unit had a relatively narrower margin of excess fair value and remained sensitive to oil prices and operating performance.
- The auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The internal-control assessment excluded Safety-Kleen because it was acquired on December 28, 2012; Safety-Kleen represented 44% of consolidated assets but 0% of 2012 consolidated revenue.
Investor Verification Items
- Verify the final purchase-price allocation for Safety-Kleen, including goodwill, intangible assets, environmental liabilities and any subsequent measurement-period adjustments.
- Assess whether Safety-Kleen produces the expected revenue, cash-flow and synergy benefits once fully included in 2013 results.
- Separate recurring earnings from the $52.4 million tax benefit and the $26.4 million debt-extinguishment loss.
- Monitor leverage, interest expense, debt maturities, revolver availability and the $132.6 million of letters of credit.
- Review environmental, Superfund, product-liability and regulatory contingencies, including the $221.5 million recorded environmental liability and possible additional exposure.
- Evaluate the sensitivity of Oil and Gas Field Services and Safety-Kleen to Western Canadian activity, oil prices, weather and commodity-price spreads.
- Reconcile reported annual and fourth-quarter margins after considering acquisition costs, emergency-response revenue and changing depreciation and amortization levels.