CLH

Clean Harbors, Inc. Q2 2009 Filing Summary

Business Context and Reporting Period

Clean Harbors, Inc. (Clean Harbors) provides environmental services and solutions across North America, operating through two primary segments: Technical Services (waste collection, treatment, and disposal) and Site Services (industrial maintenance and remediation). This Form 10-Q covers the quarterly period ended June 30, 2009. The company is a large accelerated filer incorporated in Massachusetts.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. Adjusted EBITDA is a non-GAAP measure defined by the company.

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 18.8% in Q2 2009 compared to Q2 2008, driven by the economic slowdown, reduced customer production levels, and a weakening Canadian dollar. Technical Services revenue fell 15.2%, while Site Services revenue dropped 27.4% due to a lack of emergency response projects.
• Profitability: Net income declined 46% year-over-year in Q2. However, gross profit margins remained relatively stable at 32.1% (vs. 32.8% in Q2 2008) due to cost control initiatives and lower fuel/energy costs.
• Segment Performance: Adjusted EBITDA for Site Services fell 48.4% year-over-year, significantly outpacing the 14.4% decline in Technical Services.
• Debt Structure: As of June 30, 2009, the company held $23.0M in senior secured notes and a $30.0M term loan, both classified as current liabilities due to planned repayment.

Guidance, Outlook, and Risks

• Subsequent Events (Post-June 30):
  • Debt Repayment: On July 24 and July 31, 2009, the company repaid its $30.0M term loan and redeemed its $23.0M senior secured notes, incurring a $1.5M loss on early extinguishment.
  • Major Acquisition: On July 31, 2009, Clean Harbors acquired Eveready Inc. for approximately $408M (cash, stock, and debt assumption). This acquisition will expand the company's industrial services and exploration services offerings.
  • Capital Markets: The company announced plans to offer $250M of senior secured notes due 2016 to repay indebtedness and fund general corporate purposes.
  • Segment Restructuring: Following the Eveready acquisition, the company will re-align into four operating segments: Technical Services, Field Services, Industrial Services, and Exploration Services.
• Risks and Contingencies:
  • Environmental Liabilities: The company has accrued approximately $180.8M in environmental liabilities, primarily from past acquisitions. While cash flow is expected to fund these, regulatory changes could increase costs.
  • Legal Proceedings: Significant ongoing litigation includes the Ville Mercier groundwater contamination case (accrued reserve of $11.5M) and various Superfund site proceedings. The company believes potential additional liabilities for Superfund sites are not material.
  • Auction Rate Securities: The company holds $6.5M in auction rate securities with a temporary unrealized loss of $0.5M. Liquidity issues in the market may prevent access to these funds without loss of principal.

Investor Verification Checklist

• Debt Refinancing: Verify the terms and pricing of the planned $250M senior secured note offering announced in August 2009.
• Eveready Integration: Monitor the integration progress of the Eveready Inc. acquisition and the impact on the new four-segment reporting structure.
• Environmental Reserves: Review updates on the Ville Mercier litigation and Superfund site liabilities, as these represent significant contingent obligations.
• Liquidity of Investments: Assess the status of the $6.5M auction rate securities and any potential impairment charges if the market does not recover.
• Cost Management: Evaluate whether the company can maintain gross margins in the face of continued economic headwinds and potential raw material price increases.