CLEAN HARBORS INC quarterly report, Q3 FY2013

Clean Harbors, Inc. — Q3 2013 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2013. The interim financial statements are unaudited. Clean Harbors provides environmental, energy and industrial services across North America and reports five segments: Technical Services, Oil Re-refining and Recycling, SK Environmental Services, Industrial and Field Services, and Oil and Gas Field Services.

Financial performance

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Revenue	$907.5 million	$533.8 million	$2.630 billion	$1.629 billion
Income from operations	$73.6 million	$56.7 million	$161.7 million	$166.0 million
Net income	$35.4 million	$12.4 million	$68.8 million	$67.8 million
Diluted EPS	$0.58	$0.23	$1.13	$1.27
Adjusted EBITDA	$146.0 million	$100.5 million	$380.8 million	$290.2 million
Cash flow from operations	Not separately provided	Not separately provided	$280.1 million	$232.7 million

Q3 revenue increased 70.0% and nine-month revenue increased 61.5%, primarily reflecting the December 2012 acquisition of Safety-Kleen. Q3 gross margin was 28.7%, compared with 30.1% in the prior-year quarter, as Safety-Kleen carried a lower margin. Calculated operating margins were approximately 8.1% for Q3 and 6.1% for the nine-month period; calculated net margins were approximately 3.9% and 2.6%, respectively.

Q3 Adjusted EBITDA increased 45.2%, while nine-month Adjusted EBITDA increased 31.2%. Corporate Items reduced Adjusted EBITDA by $43.7 million in Q3 and $149.5 million for nine months, compared with $25.1 million and $78.7 million, respectively, in the prior-year periods.

Cash flow, liquidity and capital structure

Cash and cash equivalents were $248.6 million at September 30, 2013, up from $229.8 million at December 31, 2012. Foreign subsidiaries held $59.7 million; U.S. operations held approximately $188.9 million.
Operating cash flow of $280.1 million exceeded capital expenditures of $207.6 million, but total investing cash use was $267.8 million, including $59.5 million for acquisitions and $4.4 million for permits and intangible assets.
Total debt consisted of $800.0 million of 5.25% senior unsecured notes due 2020 and $600.0 million of 5.125% senior unsecured notes due 2021. Long-term obligations totaled $1.400 billion.
The $400.0 million revolving credit facility had no outstanding borrowings, $262.3 million available capacity and $137.7 million of letters of credit outstanding.
Management stated that the company was in compliance with debt covenants and expected operating cash flow, cash balances and revolver availability to satisfy liquidity requirements.

Material changes versus prior comparable periods

Safety-Kleen was included for the first full reporting period after its December 28, 2012 acquisition for approximately $1.3 billion. The acquisition added the Oil Re-refining and Recycling and SK Environmental Services businesses and materially increased revenue, assets, depreciation and amortization, interest expense and corporate costs.
On September 13, 2013, Safety-Kleen acquired Evergreen Oil for approximately $57.0 million. The preliminary allocation included $3.2 million of goodwill; the purchase price remained subject to working-capital adjustment.
Q3 Technical Services direct revenue increased 19.9%, Industrial and Field Services increased 13.3%, and Oil and Gas Field Services increased 27.4%. Nine-month Oil and Gas Field Services direct revenue declined 4.2% because of lower Western Canadian rig counts and reduced surface-rental and seismic activity.
Q3 income from operations rose 29.7% despite higher depreciation and amortization and corporate expenses. Nine-month operating income declined 2.6%, primarily reflecting higher corporate costs, depreciation and amortization, and acquisition-related effects.
Prior-year Q3 net income included a $26.4 million loss on early extinguishment of debt; no comparable charge was recorded in 2013. Nine-month interest expense increased to $58.8 million from $33.8 million because of the company’s larger debt balance following 2012 financing transactions.
Other comprehensive income was a loss of $37.6 million for the nine months, primarily from foreign-currency translation, compared with income of $27.7 million in the prior-year period.

Outlook, risks and unusual items

No quantitative revenue or earnings guidance is provided in the filing. Management expects operating cash flow to fund operating needs, capital expenditures, interest payments and environmental liabilities, but notes that interim results are not necessarily indicative of full-year results.
Environmental liabilities totaled approximately $219.6 million and are expected to be paid over many years. Changes in environmental laws, remediation requirements, project costs or regulatory approvals could accelerate or increase payments.
The company had $41.8 million reserved for legal and administrative proceedings and believed potential additional liabilities could be as much as $3.4 million. Matters include Superfund sites, the Ville Mercier proceedings, Safety-Kleen product-liability claims and customer fee class actions.
The company was identified as a potentially responsible party at 122 Superfund sites. Potential liability is difficult to estimate, and the company could face costs beyond recorded reserves or indemnification coverage.
Approximately $4.4 million of auction-rate securities remained illiquid, although management considered the impairment temporary and stated that liquidity was sufficient without selling them.
Oil-related commodity derivatives were used to limit exposure to declines in oil indices; they also limit potential upside above contractual caps. The filing states that exposure was not expected to be material.
Management cited project timing, weather and flooding impacts, including delays at the Ruth Lake camp, as well as competitive pricing, emergency-response volumes, oil-and-gas conditions and fuel prices as operating variables.
Disclosure controls were deemed effective. Section 404 compliance work was extended to Safety-Kleen and Evergreen, with the combined internal-control assessment to be reported at December 31, 2013.

Investor verification points

Verify the extent to which revenue and EBITDA growth reflects Safety-Kleen and Evergreen acquisitions versus organic growth, pricing and volume changes.
Assess whether the lower post-acquisition gross margin and substantially higher corporate expenses improve as integration progresses.
Reconcile Adjusted EBITDA to GAAP earnings and operating cash flow, including the $13.6 million of non-cash acquisition-accounting adjustments recorded for nine months.
Monitor leverage, fixed interest obligations, revolver availability and compliance with debt covenants.
Review working-capital trends, particularly the $72.4 million operating cash outflow from accounts receivable in the nine-month period.
Evaluate environmental, Superfund, product-liability and class-action exposures against recorded reserves and available insurance or indemnities.
Confirm the final purchase-price allocations for Safety-Kleen and Evergreen, including goodwill, intangible assets and environmental liabilities.