Business Context and Reporting Period
Clean Harbors, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company provides environmental, energy and industrial services across North America through Technical Services, Field Services, Industrial Services, and Oil and Gas Field Services.
During the quarter, Clean Harbors completed its acquisition of Peak Energy Services Ltd. for approximately $205.1 million, including assumed and repaid net debt. The company also realigned its management reporting structure and recast prior-period segment information. All share and per-share data reflect a subsequent two-for-one stock split.
Financial Performance and Liquidity
| Metric | Q2 2011 | Q2 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Revenue | $447.2 million | $471.6 million | $882.2 million | $826.5 million |
| Income from operations | $51.9 million | $71.9 million | $91.6 million | $95.5 million |
| Net income | $29.2 million | $57.9 million | $51.9 million | $68.4 million |
| Diluted EPS | $0.55 | $1.10 | $0.97 | $1.29 |
| Adjusted EBITDA | $81.2 million | $96.6 million | $148.8 million | $145.6 million |
| Cash flow from operations | Not separately provided | Not separately provided | $75.6 million | $97.3 million |
Second-quarter revenue declined 5.2%, primarily because the 2010 comparison included $108.6 million of Gulf of Mexico oil-spill work. Excluding that project, management reported broad-based growth across all segments. Six-month revenue increased 6.7%.
Gross margin was 31.2% in both second-quarter periods. Operating margin declined to 11.6% from 15.2%, while net margin declined to 6.5% from 12.3%. Adjusted EBITDA decreased 15.9% in the quarter but increased 2.2% for the first six months.
At June 30, 2011, cash and cash equivalents were $377.6 million, compared with $302.2 million at December 31, 2010. Total assets were $2.0 billion and stockholders’ equity was $857.4 million. The company generated $75.6 million of operating cash flow, used $267.2 million in investing activities, including $205.9 million for acquisitions and $65.5 million for capital expenditures, and generated $265.5 million from financing activities.
Debt consisted principally of $520.0 million of 7.625% senior secured notes due 2016, reported as $525.0 million of long-term obligations after premiums and discounts, plus $15.6 million of capital lease obligations. The revolving credit facility was increased to $250.0 million, with no borrowings outstanding at June 30. The company reported $82.3 million of letters of credit and stated that it was in compliance with its debt covenants.
Material Changes Versus Prior Comparable Period
- Technical Services revenue increased 18.3% in the quarter and 19.3% year to date, supported by pricing, higher facility volumes, incinerator utilization above 92%, and a 7% increase in landfill volumes.
- Field Services revenue declined 56.4% in the quarter and 37.4% year to date because the prior-year periods included the Gulf oil-spill project. Excluding that project, Field Services revenue increased more than 20% in the quarter.
- Industrial Services revenue increased 12.1% in the quarter and 14.0% year to date, supported by refinery shutdown work, Canadian oil-sands activity, lodging, and Peak-related revenue.
- Oil and Gas Field Services revenue increased 40.1% in the quarter and 37.8% year to date, reflecting Peak, drilling activity, and increased energy-sector demand.
- Selling, general and administrative expense increased 14.8% in the quarter and 17.5% year to date. Depreciation and amortization increased 21.9% in the quarter and 17.0% year to date, primarily from acquisitions and higher capital investment.
- Interest expense increased because of the additional $250.0 million senior secured notes issued in March 2011.
- The effective tax rate increased to 33.9% in the quarter and 35.4% year to date, versus 17.7% and 22.4%, respectively, in the prior-year periods. The comparison was affected by discrete tax benefits recorded in 2010.
Outlook, Risks, Contingencies, and Unusual Items
No formal quantitative earnings or revenue guidance is provided in the filing. Management expects operating cash flow, existing cash, marketable securities, and revolver availability to fund operations, capital expenditures, environmental obligations, and planned acquisitions.
- Peak integration, realization of expected synergies, and potential unknown Peak liabilities are identified as material risks.
- After quarter-end, the company acquired Destiny Resource Services for approximately CDN $38 million and signed agreements for two additional private-company acquisitions with a combined purchase price of approximately $100 million. These transactions were expected to be funded partly from cash; the proposed acquisitions remained subject to closing conditions.
- Environmental liabilities totaled approximately $172.1 million and may require higher or earlier payments if laws, regulations, or remediation requirements change.
- Recorded reserves for legal and administrative proceedings were $29.6 million, with reasonably possible additional exposure of up to $2.7 million. The company was involved in proceedings involving Ville Mercier, Superfund sites, and other environmental matters.
- The company held $5.3 million of illiquid auction-rate securities. These securities continued to pay interest and were rated AAA based on underlying collateral, but may not be readily saleable without a potential loss.
- Unrecognized tax benefits and related reserves totaled $67.5 million, including interest and penalties. Approximately $6.3 million was expected to decrease within twelve months due to expiring statutes of limitation, although the timing of cash payments was uncertain.
- Second-quarter net income included a $1.9 million gain from remeasuring the previously held Peak investment. Six-month other income also included $3.4 million of eminent-domain compensation.
Investor Verification Priorities
- Verify whether post-quarter-end acquisitions, particularly the two proposed acquisitions, closed and assess their purchase accounting and funding impact.
- Reconcile reported debt, revolver capacity, letters of credit, and covenant headroom after the Peak and subsequent acquisitions.
- Assess whether operating cash flow can support capital expenditures, acquisition spending, interest costs, and approximately $172.1 million of environmental liabilities.
- Separate sustainable segment growth from the unusually strong 2010 Gulf oil-spill comparison and monitor Field Services performance excluding that project.
- Review the final valuation of Peak’s provisional goodwill and intangible assets and the company’s ability to realize anticipated integration synergies.
- Monitor tax settlements, environmental proceedings, Superfund exposures, and the liquidity or impairment risk associated with auction-rate securities.