CLEAN HARBORS INC annual report, FY2011

Clean Harbors, Inc. — FY2011 Form 10-K 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 fiscal year ended December 31, 2011; quarterly data includes the fourth quarter ended December 31, 2011. The company operated more than 200 locations and served over 60,000 customers.

During 2011, Clean Harbors acquired Peak Energy Services and three additional businesses, expanding its oil and gas, refinery-waste treatment, and industrial lodging capabilities. The company also implemented a two-for-one stock split, with all share and per-share information retroactively adjusted.

Key financial metrics

Metric	FY2011	FY2010	Change
Revenue	$1.984 billion	$1.731 billion	+14.6%
Income from operations	$217.7 million	$211.9 million	+2.7%
Net income	$127.3 million	$130.5 million	-2.5%
Diluted EPS	$2.39	$2.47	-3.2%
Adjusted EBITDA	$350.0 million	$314.7 million	+11.2%
Net cash from operating activities	$179.5 million	$224.1 million	-19.9%
Capital expenditures	$148.5 million	$116.5 million	+27.5%

Gross margin was 30.4%, compared with 30.1% in 2010. Operating margin was approximately 11.0%, compared with 12.2%; net margin was approximately 6.4%, compared with 7.5%.
Revenue by segment was approximately $830.5 million for Technical Services, $305.6 million for Field Services, $455.8 million for Industrial Services, and $392.8 million for Oil and Gas Field Services.
Adjusted EBITDA increased to $350.0 million, or approximately 17.6% of revenue. Segment contributions were $221.3 million, $52.6 million, $95.6 million, and $85.3 million, respectively, before corporate items of negative $104.7 million.
Cash and cash equivalents were $260.7 million at year-end, versus $302.2 million in 2010. Working capital was $510.1 million.
Total assets increased to $2.086 billion from $1.602 billion, primarily reflecting acquisitions and higher property, plant and equipment. Stockholders’ equity increased to $901.0 million.

Debt, liquidity, and cash flow

Senior secured notes totaled $520.0 million, bearing 7.625% interest and maturing August 15, 2016. Long-term obligations, including the current portion and unamortized premium, were $524.2 million.
The $250.0 million revolving credit facility had no borrowings outstanding and $167.4 million of borrowing availability at December 31, 2011. Letters of credit outstanding totaled $82.6 million.
Financing activities generated $258.7 million, primarily from issuing $250.0 million of additional senior secured notes. Investing activities used $480.2 million, including $337.0 million for acquisitions and $148.5 million for property, plant and equipment.
Management stated that operating cash flow, existing cash, marketable securities, and revolver availability were expected to fund operating needs, capital expenditures, interest payments, and potential acquisitions. The company expected 2012 capital spending of $175 million to $180 million.
The company was in compliance with its debt covenants at year-end and believed it was reasonably likely to remain compliant.

Material changes versus the prior comparable period

Revenue growth was broad-based but heavily influenced by acquisitions, increased Canadian activity, stronger oil and gas markets, and a favorable Canadian dollar translation effect of approximately $23.8 million.
Oil and Gas Field Services revenue increased 87.9%, and Industrial Services revenue increased 30.3%, primarily reflecting Peak and other acquisitions, higher Western Canadian activity, refinery turnaround work, and lodging utilization.
Technical Services revenue increased 15.3%, supported by pricing, product mix, and higher treatment and disposal volumes.
Reported Field Services revenue declined 32.7% because 2010 included $253.0 million of Gulf of Mexico and Michigan oil-spill revenue, while 2011 included only $43.6 million from the Yellowstone River spill. Excluding these projects, Field Services revenue increased approximately 30%.
Net income and EPS declined despite higher revenue and Adjusted EBITDA, primarily because depreciation and amortization increased 32.6% and net interest expense increased 41.0% following the additional debt issuance and credit-facility amendment.
Operating cash flow declined because of increased working-capital investment, including higher accounts receivable and other current assets.
In the fourth quarter, the company temporarily idled the Ville Mercier, Quebec incinerator for approximately 18 months. Management reported no impairment from the idling.

Outlook, commentary, risks, and unusual items

Management emphasized recurring customer relationships, cross-selling, geographic expansion, facility utilization, selective acquisitions, and cost and productivity initiatives as principal growth strategies.
The company does not expect the 2011 Yellowstone River oil-spill revenue, or the larger 2010 Gulf of Mexico and Michigan oil-spill revenue, to recur in 2012.
Environmental liabilities totaled $170.2 million at present value, including $135.3 million of remedial liabilities and $34.9 million of closure and post-closure liabilities. Undiscounted contractual environmental obligations were substantially higher.
Management estimated that remedial liabilities could be as much as $19.7 million higher than recorded. Legal and administrative reserves totaled $30.3 million, with reasonably possible additional exposure of up to $2.7 million.
The company was identified as a potential responsible party at 65 Superfund sites. Environmental liabilities are subject to changes in regulations, technology, enforcement, contamination estimates, and the ability of other responsible parties or indemnitors to pay.
Unrecognized tax benefits, including interest and penalties, totaled $63.0 million. The company stated that no material cash payments were expected in the next 12 months, although the timing of settlement could not be reasonably estimated.
Long-term risks include regulatory and permit requirements, operational and safety incidents, environmental and litigation exposure, acquisition integration, dependence on Western Canadian oil and gas activity, foreign-currency movements, competition, and substantial debt obligations.
The company held $4.2 million of auction-rate securities that remained illiquid because of failed auctions. It recorded a $0.5 million unrealized pre-tax loss that it considered temporary.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.

Important facts for investors to verify

Whether post-acquisition revenue and EBITDA contributions, particularly from Peak, persist after the initial acquisition period.
The sustainability of operating cash flow after the significant 2011 acquisition and capital-spending outlays.
Debt refinancing or repayment capacity before the $520.0 million of senior secured notes mature in 2016.
Changes in environmental, closure, remedial, Superfund, and legal liabilities, including potential amounts above recorded reserves.
Progress and eventual economics of the temporarily idled Ville Mercier incinerator.
Exposure to nonrecurring emergency-response projects and Western Canadian oil and gas activity.
Whether the stated $175 million to $180 million 2012 capital-spending plan changes because of regulatory or operating requirements.
The source filing’s geographic revenue disclosures should be reconciled where the presented 2010 comparative figures are not fully consistent across sections.