Business context and reporting period
Clean Harbors, Inc. filed its Form 10-K for the fiscal year ended December 31, 2010. The company provides environmental, energy and industrial services through Technical Services, Field Services, Industrial Services and Exploration Services. It operated more than 175 locations, including 52 active hazardous-waste management properties, and served more than 50,000 customers across North America and selected international markets.
The filing is an annual report rather than a quarterly filing; fourth-quarter 2010 information is included in the unaudited quarterly data. Results benefited from a full year of the July 2009 Eveready acquisition and significant Gulf of Mexico and Michigan oil-spill response work.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $1,731.2 million | $1,074.2 million | +61.2% |
| Gross profit margin | 30.1% | 29.9% | +0.2 percentage points |
| Income from operations | $211.9 million | $82.1 million | +158.3% |
| Net income | $130.5 million | $36.7 million | +255.7% |
| Diluted earnings per share | $4.93 | $1.47 | +235.4% |
| Adjusted EBITDA | $314.7 million | $157.6 million | +99.7% |
| Cash from operating activities | $224.1 million | $93.3 million | +140.3% |
| Cash used in investing activities | $(125.7) million | $(118.4) million | Higher use of cash |
| Cash from financing activities | $(32.2) million | $3.6 million | Change primarily from debt repayment |
Operating margin increased to 12.2% from 7.6%, while net margin increased to 7.5% from 3.4%. The 2010 effective tax rate was 31%, compared with 42% in 2009, aided by a $14.3 million net benefit from releases of tax-reserve interest and penalties after statutes of limitation expired.
At December 31, 2010, cash and cash equivalents were $302.2 million, working capital was $446.3 million, total assets were $1.60 billion and stockholders’ equity was $780.8 million. Accounts receivable increased to $332.7 million from $274.9 million, reflecting business growth and the timing of collections.
Debt consisted primarily of $270.0 million of 7.625% senior secured notes due August 2016, with $264.0 million recorded net of discount, plus $14.8 million of capital lease obligations. The company had no borrowings under its $120.0 million revolving credit facility, $33.9 million of additional borrowing availability and $86.1 million of outstanding letters of credit. The company reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Revenue growth was driven by the full-year contribution from Eveready, oil-spill response work, improved legacy operations and a $11.6 million favorable Canadian-dollar translation effect.
- Oil-spill response work in the Gulf of Mexico and Michigan generated $253.0 million of third-party revenue, approximately 15% of total revenue. Management stated that this event-related revenue was not expected to recur in 2011.
- Technical Services revenue increased 7.0% to $720.6 million; incinerator utilization rose to 90% from 86%, and landfill volumes increased 28%.
- Field Services revenue increased 148.8% to $460.9 million, primarily because of the oil-spill projects. Adjusted EBITDA increased to $114.1 million from $21.2 million.
- Industrial Services revenue increased 153.5% to $504.8 million, primarily reflecting a full year of Eveready operations, stronger Alberta oil-sands activity, refinery turnaround work and lodging utilization.
- Exploration Services revenue increased 154.7% to $46.8 million, although depressed natural-gas prices limited exploration and drilling activity.
- SG&A increased 26.1% to $205.8 million, while depreciation and amortization increased 42.5% to $92.5 million due largely to acquisitions and capital investment.
- Interest expense increased 74.6% to $27.9 million following the 2009 senior-notes issuance and revolving-credit refinancing.
- The company redeemed $30.0 million of senior secured notes in September 2010 and recorded a $2.3 million loss on early extinguishment of debt.
- The company sold the Pembina Area Landfill and its mobile industrial health business, recording $2.8 million of after-tax income from discontinued operations.
Guidance, outlook, management commentary, risks and unusual items
Management expected 2011 capital expenditures of approximately $135 million to $145 million, including approximately $3 million for environmental-regulatory compliance. Management expected operating cash flow, existing cash, marketable securities and available revolver capacity to fund operating and investing needs.
A January 2011 agreement contemplated the acquisition of Badger Daylighting for approximately CDN $247 million, including assumed net debt. The transaction was subject to regulatory, shareholder and customary closing conditions and was expected to close in the second quarter of 2011.
Environmental liabilities totaled $176.3 million at year-end, including $137.6 million of remedial liabilities and $38.7 million of closure and post-closure liabilities. The filing estimated undiscounted closure, post-closure and remedial obligations of $453.1 million. Management also identified up to $20.6 million of reasonably possible additional remedial liabilities.
The company was involved in proceedings involving the Ville Mercier facility, Superfund sites, former facilities and other environmental matters. Recorded reserves for legal and administrative proceedings were $29.7 million, with up to $2.8 million of reasonably possible additional exposure. Certain matters, including the Devil’s Swamp cleanup, could not yet be reasonably estimated.
Key risks include operational accidents, hazardous-material releases, safety performance, extensive permitting and regulatory requirements, environmental liabilities, competition and pricing pressure, seasonality, foreign-currency exposure, dependence on Western Canadian oil and gas activity, workforce availability, potential asset impairments and substantial debt and letter-of-credit obligations.
The company held $5.4 million of illiquid auction-rate securities at year-end and recorded a $0.3 million unrealized pre-tax loss considered temporary. It also had $65.9 million of unrecognized tax benefits, including interest and penalties; management did not expect material cash payments related to these liabilities within the next 12 months.
Goodwill impairment testing resulted in no impairment charge. Exploration Services had $9.0 million of goodwill, and its estimated fair value exceeded carrying value by more than 10%, but management identified revenue, EBITDA, capital expenditures, market conditions and the weighted-average cost of capital as important sensitivities.
The company had no cash dividend policy or foreseeable plans to pay dividends. Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts an investor should verify
- How much 2010 earnings and cash flow depended on the $253.0 million of nonrecurring oil-spill revenue and whether underlying margins remained durable after its completion.
- The extent to which 2010 growth reflects the Eveready acquisition rather than organic growth, including integration benefits and acquisition-related leverage.
- Actual 2011 capital spending, the financing and closing status of the proposed Badger acquisition, and the effect on leverage and liquidity.
- Future cash payments for the $176.3 million environmental liability balance and the potential $20.6 million of additional remedial exposure.
- Availability and renewal of the insurance, surety bonds and letters of credit supporting approximately $346.8 million of required closure and post-closure financial assurance.
- Performance of Exploration Services and the potential for a future goodwill impairment if Western Canadian activity, contract awards or operating assumptions weaken.
- Collection of the materially higher accounts receivable balance and adequacy of revenue and doubtful-account allowances.
- Resolution of the Ville Mercier, Superfund, Devil’s Swamp and other environmental proceedings, including liabilities not currently estimable.