Clean Harbors, Inc. — Q1 2011 Form 10-Q Summary
Business Context and Reporting Period
Clean Harbors provides environmental, energy and industrial services across North America and serves more than 50,000 customers through over 175 locations. The filing covers the unaudited quarter ended March 31, 2011, compared with the quarter ended March 31, 2010.
Management reorganized reporting into four segments: Technical Services, Field Services, Industrial Services, and Oil and Gas Field Services. Prior-period segment information was recast to conform to the new structure.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $435.0 million | $354.9 million | 22.6% increase |
| Income from operations | $39.7 million | $23.6 million | 68.3% increase |
| Net income | $22.7 million | $10.4 million | 117.9% increase |
| Diluted EPS | $0.86 | $0.40 | Increase |
| Adjusted EBITDA | $67.6 million | $49.0 million | 38.0% increase |
| Cash from operating activities | $14.9 million | $(8.2) million | Improved |
Gross margin improved to 28.1% from 26.6%, while operating margin increased to 9.1% from 6.7%. Net margin was 5.2% versus 2.9%. The effective tax rate declined to 37.1% from 41.0%, primarily because of increased Canadian earnings and Canada’s lower tax rates.
At March 31, 2011, cash and cash equivalents were $531.8 million, marketable securities were $4.1 million, and total current assets were $997.9 million. The company had $37.6 million available under its revolving credit facility, with $82.4 million of letters of credit outstanding.
Senior secured notes totaled $520.0 million of principal, bearing interest at 7.625% and maturing in August 2016. Including bond premium and discount, reported long-term obligations were $525.4 million. Capital lease obligations totaled $13.4 million. The company stated that it was in compliance with debt covenants.
Capital expenditures were $34.1 million, acquisitions used $2.2 million, and net cash from investing activities was $(35.2) million. Financing activities generated $248.6 million, principally from the March 24 issuance of $250.0 million of additional senior secured notes. Ending stockholders’ equity was $821.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased across every segment, led by Oil and Gas Field Services, up 36.1%; Field Services increased 25.5%, Technical Services 20.3%, and Industrial Services 16.0%.
- Technical Services benefited from higher treatment, storage and disposal volumes, increased wastewater volumes, pricing, and product mix. Oil and gas-related demand benefited from prolonged cold weather, drilling activity, and increased production investment.
- Field Services included a $3.2 million year-over-year increase in emergency response work, primarily related to Gulf of Mexico oil spill response efforts.
- Adjusted EBITDA increased to $67.6 million, with contributions from Technical Services of $45.3 million, Industrial Services of $23.3 million, Oil and Gas Field Services of $14.7 million, and Field Services of $6.3 million.
- Operating cash flow improved from a use of $8.2 million to cash generation of $14.9 million, primarily due to higher operating earnings and a smaller increase in accounts receivable.
- Cash increased by $229.6 million, largely because of the additional senior secured notes issuance. The company also paid approximately $21.4 million in bonuses and commissions related to 2010.
Outlook, Commentary, Risks and Unusual Items
Management expects cash from operations, existing cash and marketable securities, and available revolver capacity to fund operations, capital expenditures, interest payments and potential acquisitions. No quantitative earnings or revenue guidance was provided in the filing.
Management identified sensitivity to weather, fuel prices and fuel-recovery fees, oil and gas industry conditions, emergency response activity, competitive pricing, and foreign exchange rates. A 10% change in the Canadian dollar relative to the U.S. dollar would have affected reported quarterly net income by approximately $0.9 million.
- Other income included a $3.4 million pre-tax eminent-domain compensation payment related to rail rights at the San Jose hazardous-waste facility. Management does not expect a material effect on future operations.
- Environmental liabilities were approximately $172.6 million. Management expects payment over many years, but changes in environmental laws or unforeseen events could accelerate or increase required payments.
- The company had $30.4 million of reserves for legal and administrative proceedings and believed potential liabilities could be up to $2.8 million higher. It was involved in Superfund-related matters involving 62 sites.
- Long-term unrecognized tax benefits and related reserves were $66.9 million, including $20.5 million of interest and $6.6 million of penalties. Approximately $6.2 million may decrease within twelve months as statutes of limitation expire, although the timing of cash payments is uncertain.
- The company held $5.4 million of auction-rate securities subject to failed auctions and limited liquidity. The securities retained AAA underlying ratings and continued to pay interest; management assessed the unrealized loss as temporary.
- The proposed Badger Daylighting acquisition was terminated on April 26, 2011 after Badger shareholders and option holders failed to approve it. Badger is obligated to reimburse up to CDN $1.5 million of qualifying expenses.
- On April 5, 2011, the company agreed to acquire Peak Energy Services for approximately CDN $200 million, including assumed net debt. Closing was subject to regulatory and shareholder approvals and was expected during the second quarter of 2011.
Important Facts for Investors to Verify
- Whether the revenue and margin improvements are sustainable after favorable emergency response activity, weather conditions, pricing actions and Canadian currency translation.
- The intended use of the $255.6 million net proceeds from the additional notes, including funding for the proposed Peak acquisition and capital expenditures.
- Debt-service capacity and refinancing risk associated with $520.0 million of senior secured notes due in 2016.
- The timing and ultimate cost of environmental, Superfund, remedial and other legal liabilities.
- The liquidity and recoverability of the $5.4 million auction-rate securities.
- Required approvals, financing and closing terms for the proposed Peak acquisition, and the final reimbursement from Badger.
- Future tax effects associated with the $66.9 million of unrecognized tax benefits and related reserves.