Clean Harbors, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2012; filed August 9, 2012. Clean Harbors provides environmental, energy and industrial services across North America through Technical Services, Field Services, Industrial Services, and Oil and Gas Field Services. Prior-year segment data was recast for management reporting changes.
Key Financial Metrics
| ($ in thousands, except per-share data) | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $523,118 | $447,235 | $1,095,140 | $882,197 |
| Income from operations | $47,533 | $51,884 | $109,234 | $91,626 |
| Net income | $23,426 | $29,156 | $55,441 | $51,886 |
| Diluted EPS | $0.44 | $0.55 | $1.04 | $0.97 |
| Adjusted EBITDA | $88,701 | $81,227 | $189,649 | $148,818 |
| Cash flow from operations | Not separately provided | Not separately provided | $175,774 | $75,629 |
Margins: Q2 gross margin was 29.7%, compared with 31.2% in the prior-year quarter. Operating margin was 9.0% versus 11.6%, net margin was 4.4% versus 6.5%, and Adjusted EBITDA margin was approximately 17.0% versus 18.2%. Six-month operating margin was 10.0% versus 10.4%, net margin was 5.1% versus 5.9%, and Adjusted EBITDA margin was approximately 17.3% versus 16.9%.
Liquidity and capital: Cash and cash equivalents were $296.8 million at June 30, 2012, up from $260.7 million at December 31, 2011. Marketable securities were $9.7 million. The revolving credit facility had no borrowings, $163.5 million available, and $86.5 million of letters of credit outstanding. Capital expenditures were $83.0 million and acquisition spending was $43.0 million during the first six months.
Debt: The company had $520.0 million of 7.625% senior secured notes due 2016, with $523.5 million of long-term obligations including unamortized premium and discount. Capital lease obligations totaled $10.8 million. The company reported compliance with debt covenants at June 30, 2012.
Balance sheet: Total assets were $2.12 billion and stockholders’ equity was $960.9 million at June 30, 2012. Environmental liabilities totaled approximately $167.5 million, including closure, post-closure, and remedial obligations.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 17.0%; six-month revenue increased 24.1%.
- Q2 net income declined 19.7%, while six-month net income increased 6.9%. Higher revenue was offset by lower gross margin, increased depreciation and amortization, higher corporate costs, and a higher effective tax rate.
- Q2 Adjusted EBITDA increased 9.2%; six-month Adjusted EBITDA increased 27.4%.
- Industrial Services revenue increased 27.2% in Q2 and 33.3% year to date, supported by Canadian oil sands activity, lodging, specialty services, and acquisitions.
- Oil and Gas Field Services revenue increased 43.8% in Q2 and 73.9% year to date, primarily from Peak Energy Services and other 2011 acquisitions, cross-selling, and increased exploration activity.
- Technical Services revenue increased 6.5% in Q2 and 8.2% year to date. Incinerator utilization declined to 90.3% from 92.2%, although landfill volumes increased more than 60% year over year.
- Field Services Adjusted EBITDA declined 7.7% in Q2 and 19.0% year to date, despite modest revenue growth.
- Depreciation and amortization increased 43.5% in Q2 and 44.1% year to date, reflecting acquisitions and higher capital investment.
- Operating cash flow increased 132.4% year to date, primarily from favorable working-capital changes, including a $54.1 million reduction in accounts receivable.
Guidance, Outlook, Risks, and Unusual Items
- No specific quantitative earnings or revenue guidance is provided in the filing. Management expects operating cash flow, cash balances, marketable securities, and available revolver capacity to fund operations, capital expenditures, and potential acquisitions.
- Management expects continued focus on cost savings, strategic sourcing, facility upgrades, and technology. Results remain sensitive to emergency-response activity, oil and gas conditions, competitive pricing, fuel prices, and asset utilization.
- On July 30, 2012, after quarter-end, the company issued $800.0 million of 5.25% senior unsecured notes due 2020. Proceeds funded the purchase and redemption of the 2016 notes and left approximately $262.8 million for potential acquisitions and general corporate purposes.
- The company redeemed $30.0 million of 2016 notes on July 13, purchased $339.1 million through a tender offer on July 30, and called the remaining $150.9 million for redemption on August 15, 2012. It expects to record a $26.5 million loss on early extinguishment of debt.
- Unrecognized tax benefits and related reserves totaled $64.3 million, including $28.1 million of interest and penalties. Management believes approximately $63.1 million could decrease within the next twelve months if statutes of limitation expire, potentially affecting earnings and the effective tax rate.
- The company held $4.3 million of illiquid auction-rate securities. These securities retained AAA underlying ratings and continued to pay interest, but may not be readily saleable without a potential loss.
- Legal and environmental matters remain material. Reserves for legal and administrative proceedings were $30.5 million, with reasonably possible additional exposure of up to $2.7 million. The company is involved in 67 Superfund or potential Superfund sites and cannot currently estimate potential additional liability for the Devil’s Swamp cleanup.
- The filing states that no material changes occurred to previously disclosed risk factors. Forward-looking statements remain subject to regulatory, environmental, operating, acquisition, commodity, foreign-exchange, and financing risks.
- Disclosure controls were deemed effective, and no material changes to internal control over financial reporting were identified.
Most Important Facts to Verify
- Whether the post-quarter-end refinancing reduces interest expense and refinancing risk despite the $26.5 million expected debt-extinguishment charge.
- Whether Oil and Gas Field Services asset utilization and margins improve, particularly after the acquisitions and underutilization noted in Q2.
- Whether strong operating cash flow is sustained after working-capital benefits and while capital expenditures and acquisition activity remain elevated.
- The timing and accounting impact of the potential $63.1 million reduction in unrecognized tax benefits and related reserves.
- The adequacy of environmental and legal reserves, including exposure from Superfund sites, Ville Mercier, Marine Shale, and Devil’s Swamp.
- The recoverability and eventual liquidity of the $4.3 million auction-rate securities.
- The company’s ability to maintain margins as revenue growth increasingly reflects acquisitions, lodging, and oil and gas-related activities.