Clean Harbors, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, energy and industrial services across North America through Technical Services, Field Services, Industrial Services and Oil and Gas Field Services. The filing covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. Segment costs and prior-period information were recast to reflect management reporting changes.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $572.0 million | $435.0 million | Up 31.5% |
| Gross profit margin | 30.0% | 28.1% | Up 190 bps |
| Income from operations | $61.7 million | $39.7 million | Up 55.3% |
| Operating margin | 10.8% | 9.1% | Up 170 bps |
| Net income | $32.0 million | $22.7 million | Up 40.9% |
| Diluted EPS | $0.60 | $0.43 | Up $0.17 |
| Adjusted EBITDA | $100.9 million | $67.6 million | Up 49.4% |
| Cash from operating activities | $29.6 million | $14.9 million | Up 98.9% |
Revenue growth was driven by Technical Services, Industrial Services and Oil and Gas Field Services. Direct revenue increased 10.1% in Technical Services, declined 4.1% in Field Services, increased 39.4% in Industrial Services and increased 97.1% in Oil and Gas Field Services.
Cash used in investing activities was $35.8 million, including $27.7 million of capital expenditures, $8.8 million for acquisitions and $0.4 million for permits and other intangible assets. Cash used in financing activities was $13.8 million. Cash and cash equivalents declined to $241.5 million from $260.7 million at December 31, 2011.
At March 31, 2012, the company had $520.0 million of 7.625% senior secured notes due 2016, with carrying value of $523.8 million including premium and discount. The revolving credit facility had no borrowings, $164.8 million available, and $85.2 million of letters of credit outstanding. Management stated that debt covenants were satisfied.
Total assets were $2.09 billion and stockholders’ equity was $951.3 million at March 31, 2012. Current assets were $881.9 million versus current liabilities of $342.2 million. The company held $4.2 million of illiquid auction rate securities and $5.0 million of marketable securities.
Material changes versus the prior comparable period
- Revenue growth reflected higher incinerator utilization, increased landfill volumes, stronger Canadian oil sands activity, higher lodging utilization, increased exploration and drilling activity, and contributions from 2011 acquisitions, including Peak Energy Services.
- Incinerator utilization increased to 90% from 85%, while landfill volumes increased more than 19% year over year.
- Gross margin improved to 30.0% from 28.1%, which management attributed to higher revenue, cost controls, pricing initiatives and margin improvement programs.
- Adjusted EBITDA increased substantially, led by Oil and Gas Field Services, which increased segment Adjusted EBITDA 180.0%, and Industrial Services, which increased 42.6%.
- Interest expense increased to $11.3 million from $6.5 million, primarily because of the $250.0 million senior note issuance in March 2011 and the revolving credit facility amendment.
- Depreciation and amortization increased 44.7% to $36.8 million, primarily due to acquisitions and higher capital expenditures.
- The effective tax rate declined to 36.1% from 37.1%, reflecting utilization of foreign tax credits, lower accrued interest on uncertain tax benefits and a greater proportion of Canadian earnings.
Guidance, outlook, commentary and risks
The filing does not provide specific quantitative revenue, earnings or cash flow guidance. Management expects operating cash flow, existing cash, marketable securities and available revolver capacity to fund working capital, capital expenditures and potential acquisitions. Management also expects future operating cash flows to meet ongoing operating and investing needs.
Environmental liabilities totaled approximately $169.1 million. Management expects these obligations to be paid over many years, but changes in environmental laws or other unanticipated events could accelerate payments or increase required amounts.
The company had $36.2 million of unrecognized tax benefits and $27.5 million of accrued interest and penalties. Management believed approximately $62.4 million of tax reserves, including $27.2 million of interest and penalties, could decrease within twelve months if statutes of limitation expire; any realized amount would affect earnings and the effective tax rate.
Legal and administrative proceeding reserves totaled $31.0 million, with potential additional exposure estimated at up to $2.7 million. Key matters include the Ville Mercier groundwater proceedings, Superfund sites, the BR Facility and Marine Shale. Certain potential liabilities, including the Deer Trail, Casmalia and Devil’s Swamp matters, were not recorded because they were not considered probable or estimable.
Principal operating risks include environmental regulation and remediation obligations, litigation, dependence on oil and gas industry activity, emergency-response volumes, competitive pricing, fuel costs, acquisition integration, foreign currency fluctuations and the availability of illiquid auction rate securities. The filing states that there were no material changes to previously disclosed risk factors.
The company reported effective disclosure controls and procedures as of March 31, 2012, with no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the strong revenue and EBITDA growth, particularly in Oil and Gas Field Services, is sustainable after the contribution from 2011 acquisitions and favorable Canadian energy-market conditions.
- Progress on integrating acquisitions and the eventual completion of related purchase-price allocations.
- Cash conversion, working-capital requirements and the effect of semiannual interest payments and annual bonus payments on quarterly cash flow.
- Compliance with the 7.625% senior secured notes and revolving credit facility covenants, and the company’s ability to refinance or repay the $520.0 million notes due in 2016.
- Developments in environmental, Superfund and other legal contingencies, including potential liabilities not currently recorded.
- Resolution of the approximately $62.4 million potentially expiring tax reserve and the resulting effect on earnings and taxes.
- Liquidity and valuation of the $4.2 million auction rate securities, which remained illiquid despite AAA underlying ratings.
- Whether margin improvement continues as labor, materials, subcontractor and acquisition-related costs increase.