Clean Harbors, Inc. — Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, energy and industrial services across North America and selected international markets. The filing covers the quarter and six months ended June 30, 2010. Operations are reported in Technical Services, Field Services, Industrial Services and Exploration Services. Results reflect the July 2009 acquisition of Eveready and the April 2010 acquisition of Sturgeon & Son Transportation.
Key financial metrics
| Metric | Three months ended June 30, 2010 | Six months ended June 30, 2010 |
|---|---|---|
| Revenue | $471.6 million | $826.5 million |
| Income from operations | $71.9 million | $95.5 million |
| Net income | $57.9 million | $68.4 million |
| Diluted EPS | $2.19 | $2.59 |
| Adjusted EBITDA | $96.6 million | $145.6 million |
| Cash flow from operating activities | Not separately provided | $97.3 million |
Second-quarter gross margin was 31.2%, operating margin was 15.2% and net margin was 12.3%. Six-month gross margin was approximately 29.3%, operating margin was 11.6% and net margin was 8.3%.
Cash and cash equivalents were $295.3 million at June 30, 2010, compared with $233.5 million at December 31, 2009. Current assets were $751.5 million versus current liabilities of $320.9 million. Total debt consisted primarily of $300.0 million of 7.625% senior secured notes due 2016, reported net of discount at $292.9 million, plus $16.4 million of capital lease obligations. The revolving facility had no borrowings, $33.9 million of availability and $86.1 million of letters of credit outstanding.
Six-month investing cash use was $30.6 million, including $35.5 million of capital expenditures and $13.8 million for acquisitions, partly offset by asset-sale proceeds. Financing cash use was $3.4 million. Stockholders’ equity increased to $680.2 million from $613.8 million at year-end 2009.
Material changes versus the prior comparable period
- Second-quarter revenue increased 119.0% from $215.3 million to $471.6 million; six-month revenue increased 96.0% from $421.6 million to $826.5 million.
- Second-quarter net income increased from $8.6 million to $57.9 million, while six-month net income increased from $13.6 million to $68.4 million.
- Adjusted EBITDA increased 208.7% in the quarter and 156.7% for the six-month period, principally reflecting Eveready, Gulf of Mexico oil-spill response work and stronger legacy operations.
- Gulf oil-spill response generated approximately $109 million of second-quarter revenue, or about 23% of total revenue, and approximately $108.6 million of Field Services revenue in both the quarter and six-month comparisons as disclosed by management.
- Eveready contributed $131.6 million of second-quarter revenue and $273.5 million for the six months. Industrial Services and Exploration Services growth was primarily acquisition-related.
- Technical Services revenue increased 7.1% in the quarter and 4.4% for the six months. Incinerator utilization rose to 91% from 88%, and landfill volumes increased 17% year over year in the quarter.
- Gross margin declined to 31.2% from 32.1% in the quarter, primarily because Industrial Services has lower margins than the legacy Clean Harbors business.
- Net interest expense increased to $7.6 million in the quarter and $14.6 million for the six months, mainly due to the $300 million senior-notes issuance and refinancing completed in 2009.
Guidance, outlook, commentary, risks and unusual items
Management did not provide specific quantitative full-year revenue or earnings guidance in the filing. Management stated that operating cash flow, existing cash and available revolver capacity are expected to fund operating, investing and other cash requirements.
- The company expects continued benefit from environmental services, oil-sands and refinery activity, Eveready synergies and cost-management initiatives. Results remain sensitive to oil and gas conditions, emergency-response activity, pricing, fuel costs, weather and competitive conditions.
- The Gulf oil-spill work was a significant concentration and may not recur at the same level. One customer represented 14% of second-quarter revenue and 13% of net accounts receivable at June 30, 2010.
- Discontinued operations included the sale of the Pembina Area Landfill and the mobile industrial health business, producing $2.7 million of pretax gains and $2.8 million of after-tax income for the six months.
- Other unusual items included a $2.4 million gain on marketable-securities sales, a $3.1 million pretax favorable environmental-liability estimate change in the quarter, and a $13.7 million reduction in unrecognized tax benefits that materially lowered the effective tax rate.
- The effective tax rate was 17.7% for the quarter and 22.4% for the six months, versus 41.8% and 43.9%, respectively, in the prior-year periods. The tax-rate benefit was largely discrete and may not be indicative of future rates.
- Environmental liabilities totaled approximately $178.1 million. Legal and administrative proceeding reserves were $28.4 million, with reasonably possible additional exposure estimated at up to $4.7 million.
- The company was a potentially responsible party or potential responsible party at 61 Superfund sites. Certain matters, including Devil’s Swamp, Casmalia and other remediation proceedings, were not estimable or were not accrued because liability was not considered probable or estimable.
- Unrecognized tax benefits were $65.0 million at June 30, 2010, including $18.2 million of interest and $6.4 million of penalties. Management did not expect material cash payments for these liabilities in the next 12 months.
- Auction-rate securities of $5.3 million remained illiquid, although they retained AAA underlying ratings and continued to pay interest. The company reported a temporary unrealized loss of $0.4 million.
- Management reported compliance with debt covenants, effective disclosure controls and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Determine the sustainability of Gulf oil-spill revenue and Field Services margins after emergency-response activity subsides.
- Assess the contribution, integration progress and margin profile of Eveready and Sturgeon relative to acquisition-related costs and increased depreciation and amortization.
- Reconcile reported net income and EPS with the discrete tax benefit, discontinued-operations gains, securities gain and environmental-liability estimate changes.
- Monitor accounts receivable growth, customer concentration, collections and working-capital requirements, particularly as Gulf-related activity changes.
- Review environmental, Superfund, legal, tax and guarantee exposures against recorded reserves and available indemnifications.
- Evaluate leverage, fixed interest expense, letters of credit and the $33.9 million of unused revolver capacity.
- Confirm the liquidity and valuation assumptions for the $5.3 million of auction-rate securities and the timing of potential tax-benefit settlements.