Business Context and Reporting Period
Clean Harbors, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 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. The filing recasts prior-period segment information to reflect the company’s 2011 management structure.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $556.1 million | $487.7 million | $1.438 billion | $1.314 billion |
| Income from operations | $66.8 million | $73.4 million | $158.4 million | $168.9 million |
| Net income | $37.1 million | $38.8 million | $89.0 million | $107.2 million |
| Diluted EPS | $0.70 | $0.73 | $1.67 | $2.03 |
| Adjusted EBITDA | $103.8 million | $98.8 million | $252.6 million | $244.4 million |
| Cash flow from operations | Not separately provided | Not separately provided | $151.3 million | $153.9 million |
- Q3 revenue increased 14.0%; nine-month revenue increased 9.4%.
- Q3 gross margin was 30.5%, compared with 31.2% in the prior-year quarter. Operating margin was approximately 12.0%, compared with 15.0%; nine-month operating margin was approximately 11.0%, compared with 12.9%.
- Q3 net income declined 4.4%, while nine-month net income declined 16.9%. The nine-month 2010 result included $2.8 million of discontinued-operations income.
- Adjusted EBITDA increased 5.1% in Q3 and 3.4% for the nine months, but corporate items and higher depreciation, amortization and interest expense pressured GAAP earnings.
- At September 30, 2011, cash and cash equivalents were $257.2 million, current assets were $826.3 million, and current liabilities were $393.6 million.
- Long-term obligations were $524.6 million, consisting primarily of $520.0 million of 7.625% senior secured notes due 2016. Capital lease obligations totaled $16.1 million.
- The company had a $250.0 million revolving credit facility and reported no borrowings under it. Management stated that approximately $167.4 million of additional borrowing and letter-of-credit capacity was available after considering outstanding obligations.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based outside of emergency-response comparisons. Q3 2011 included $41.5 million from the Yellowstone River oil spill, versus $123.8 million from Gulf of Mexico and Michigan oil-spill projects in Q3 2010. Excluding oil-spill work, management reported broad-based growth across segments.
- Technical Services revenue increased 17.0% in Q3 and 18.4% for the nine months, supported by pricing, higher landfill and treatment volumes, and increased incinerator utilization.
- Field Services revenue decreased 36.2% in Q3 and 36.8% for the nine months because prior-year oil-spill activity was substantially larger. Excluding oil-spill projects, Field Services revenue increased.
- Industrial Services revenue increased 43.8% in Q3 and 23.0% for the nine months, driven by lodging, refinery shutdown work, Canadian oil-sands activity, and acquisitions.
- Oil and Gas Field Services revenue increased 131.4% in Q3 and 67.6% for the nine months, primarily reflecting Peak Energy Services and other acquisitions, increased Western Canadian activity, and higher oil prices.
- Depreciation and amortization increased 51.2% in Q3 and 28.6% for the nine months because of acquisitions and higher capital investment. Net interest expense increased to $10.9 million in Q3 and $28.0 million for the nine months, primarily after the March 2011 note issuance.
- Cash used in investing activities rose to $445.6 million from $72.1 million, principally due to $337.0 million of acquisitions and $113.6 million of capital expenditures.
- The company issued $250.0 million of additional senior secured notes in March 2011 and completed the acquisition of Peak Energy Services for approximately $205.1 million, including assumed net debt. It also completed three additional acquisitions in Q3 for approximately $144.2 million.
Outlook, Commentary, Risks and Unusual Items
- The filing does not provide formal revenue or earnings guidance. Management expects operating cash flow, existing cash, marketable securities, and revolving-credit availability to fund operating needs, capital expenditures, interest, environmental liabilities, and potential acquisitions.
- Management expects approximately $167.5 million of environmental liabilities to be paid over many years, but warns that changes in environmental laws or unforeseen events could accelerate payments or increase their amount.
- On November 2, 2011, the company announced plans to temporarily idle its Ville Mercier, Quebec, hazardous-waste incinerator for approximately 18 months beginning in Q1 2012. Management expected fourth-quarter 2011 idling and severance costs to be immaterial and reported no impairment from the planned idling.
- Unrecognized tax benefits and related reserves totaled $68.2 million, including $22.0 million of interest and $6.6 million of penalties. Approximately $5.9 million may decrease within the following 12 months, although management did not expect material cash payments for uncertain tax positions during that period.
- Auction-rate securities of $4.2 million remained illiquid, although they retained AAA underlying ratings and continued to pay interest. The company recorded an unrealized pre-tax loss of approximately $0.5 million and assessed the decline as temporary.
- Recorded reserves for legal and administrative proceedings totaled $29.2 million, with reasonably possible additional exposure estimated at up to $2.6 million. Environmental and Superfund matters include Ville Mercier, Devil’s Swamp, Marine Shale, and numerous third-party sites.
- Principal risks include integration of multiple acquisitions, potential unknown acquired liabilities, exposure to environmental regulation and remediation claims, dependence on oil-and-gas and industrial activity, emergency-response project volatility, substantial debt and letters of credit, foreign-currency exposure, and potential covenant or refinancing pressure.
- Management reported effective disclosure controls as of September 30, 2011 and no material changes in internal control over financial reporting, while noting that acquired businesses were being incorporated into the Section 404 compliance program.
Important Facts for Investors to Verify
- Whether Peak and the other 2011 acquisitions achieve expected synergies and operating performance, and whether provisional purchase-price allocations, goodwill, and intangible valuations require adjustment.
- The sustainability of revenue and margins excluding unusually large emergency-response projects and the effect of future oil-spill or other remediation work.
- Free cash flow after the significant acquisition program and capital expenditures, including the ability to service $520.0 million of senior secured notes due in 2016.
- The availability and borrowing-base limitations of the revolving credit facility, including $82.6 million of outstanding letters of credit and the company’s reported covenant compliance.
- Potential cash requirements from environmental liabilities, Superfund proceedings, legal contingencies, tax reserves, and the Ville Mercier idling.
- The liquidity and eventual recoverability of the $4.2 million of auction-rate securities and the $10.5 million asset related to a disputed recovery from a privately held investment.
- Management’s estimates for impairment risk, particularly for goodwill, acquired intangible assets, and facilities affected by changes in operating conditions.