Clean Harbors, Inc. — Q3 2012 Form 10-Q Summary
Business Context and Reporting Period
Clean Harbors provides environmental, energy and industrial services across North America through Technical Services, Field Services, Industrial Services, and Oil and Gas Field Services. The filing covers the quarter and nine months ended September 30, 2012. Results are unaudited and prior-year segment data was recast for management reporting changes.
Financial Performance and Key Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $533.8 million | $556.1 million | $1,628.9 million | $1,438.3 million |
| Income from operations | $56.7 million | $66.8 million | $166.0 million | $158.4 million |
| Net income | $12.4 million | $37.1 million | $67.8 million | $89.0 million |
| Diluted EPS | $0.23 | $0.70 | $1.27 | $1.67 |
| Adjusted EBITDA | $100.5 million | $103.8 million | $290.2 million | $252.6 million |
| Cash from operating activities | Not separately provided | Not separately provided | $232.7 million | $151.3 million |
- Q3 revenue declined 4.0%, while nine-month revenue increased 13.3%.
- Q3 gross margin was 30.1%, compared with 30.5% in the prior-year quarter. Operating margin was approximately 10.6% versus 12.0%, and net margin was approximately 2.3% versus 6.7%.
- The nine-month operating margin was approximately 10.2% versus 11.0%; net margin was approximately 4.2% versus 6.2%.
- Depreciation and amortization rose to $41.3 million in Q3 and $116.8 million for the nine months, reflecting acquisitions and increased capital spending.
- Capital expenditures were $130.3 million for the first nine months. Acquisition spending was $92.5 million, compared with $337.0 million in the prior-year period.
- Cash and cash equivalents totaled $523.6 million at September 30, 2012, versus $260.7 million at December 31, 2011. Marketable securities totaled $11.1 million.
- Total assets were $2.45 billion and stockholders’ equity was $1.01 billion at September 30, 2012.
Material Changes Versus the Prior Comparable Period
- Technical Services revenue increased 6.0% in Q3 and 7.5% for the nine months, supported by higher incinerator, landfill, treatment and wastewater volumes. Incinerator utilization increased to 91.3% from 89.0%.
- Field Services revenue decreased 42.1% in Q3 and 19.1% year to date, primarily because the prior-year period included $41.5 million of Yellowstone River oil-spill emergency-response revenue.
- Industrial Services revenue increased 17.1% in Q3 and 27.5% year to date, driven by lodging, Canadian oil-sands activity, specialty services, turnaround work and acquisitions.
- Oil and Gas Field Services revenue decreased 14.4% in Q3 but increased 35.5% year to date. Q3 weakness reflected lower fluids-handling, surface-rental and exploration activity.
- Q3 Adjusted EBITDA decreased 3.2% to $100.5 million. Technical Services and Industrial Services improved, while Field Services and Oil and Gas Field Services declined.
- On July 30, 2012, the company issued $800.0 million of 5.25% senior unsecured notes due 2020 and redeemed or repurchased the outstanding $520.0 million of 7.625% senior secured notes. The refinancing produced a $26.4 million loss on early extinguishment of debt.
- Long-term debt increased to $800.0 million from $524.2 million at year-end 2011, while the company retained $163.4 million of revolver availability and had $86.6 million of letters of credit outstanding.
Cash Flow, Liquidity and Debt
- Operating cash flow increased 53.8% to $232.7 million for the first nine months, helped by higher depreciation and amortization and favorable working-capital changes, including a $59.9 million accounts-receivable benefit.
- Investing cash outflow was $226.4 million, consisting primarily of $130.3 million of capital expenditures and $92.5 million of acquisitions.
- Financing cash flow was $256.1 million, reflecting the $800.0 million note issuance partially offset by the $520.0 million debt repayment and related financing costs.
- The company stated that it was in compliance with debt covenants and expected to continue meeting them. The $250.0 million revolving credit facility had no borrowings, $163.4 million available capacity, and $86.6 million of outstanding letters of credit.
- Environmental liabilities totaled approximately $167.2 million. Management expects payment over many years but noted that regulatory changes or other unanticipated events could accelerate or increase payments.
Outlook, Commentary, Risks and Unusual Items
- Management expects operating cash flow, existing cash and revolver availability to support operating requirements, capital expenditures and planned investments, but the filing provides no formal earnings or revenue guidance.
- On October 26, 2012, Clean Harbors agreed to acquire Safety-Kleen for cash consideration of $1.25 billion, subject to working-capital and other adjustments. Closing was expected in the fourth quarter of 2012, subject to regulatory, shareholder and other conditions.
- The Safety-Kleen transaction had no financing contingency. The company was considering cash, debt and equity financing and had a backup commitment for up to $475.0 million of variable-rate secured loans and $375.0 million of unsecured senior increasing-rate bridge loans.
- Key acquisition risks include failure to close, integration difficulties, unknown Safety-Kleen liabilities, financing costs, transaction expenses, potential litigation and exposure to oil-price volatility.
- The company held $4.3 million of illiquid auction-rate securities. These securities remained AAA-rated and were considered temporarily impaired, but may not be readily saleable without a potential loss.
- The company had approximately $36.2 million of unrecognized tax benefits and $28.8 million of accrued interest and penalties. Management believed approximately $63.8 million could reverse within the next 12 months if relevant statutes of limitation expire; any reversal would affect earnings and the effective tax rate.
- Environmental and regulatory matters included reserves of $30.2 million for legal and administrative proceedings, with potential additional exposure estimated at up to $2.7 million. Certain Superfund and remediation liabilities cannot presently be estimated reliably.
- Oil and Gas Field Services performance remained sensitive to exploration activity, energy-sector conditions, equipment utilization, pricing and commodity-related demand.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2012, with no material changes to internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the Safety-Kleen acquisition closed as planned, its final purchase price and financing mix, and the resulting leverage and interest burden.
- Whether Field Services and Oil and Gas Field Services recovered from Q3 volume and activity declines.
- Post-refinancing debt covenants, revolver availability, interest expense and scheduled 2020 note maturity exposure.
- Actual integration benefits, purchase-price allocations and goodwill or intangible-asset impairment risk from recent and planned acquisitions.
- Progress and ultimate cash requirements for environmental, Superfund, remedial and closure liabilities.
- Whether the potential $63.8 million tax-benefit reversal occurred and how it affected earnings and cash taxes.
- Liquidity and recoverability of the auction-rate securities and any material change in foreign-exchange or commodity exposure.