Clean Harbors, Inc. — Q3 2010 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 Exploration Services. The filing covers the three and nine months ended September 30, 2010, with comparative periods ended September 30, 2009. Results include the Eveready acquisition for a full quarter in 2010 versus two months in the 2009 third quarter, as well as Gulf of Mexico and Michigan oil-spill response work.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $487.7 million | $305.6 million | $1.314 billion | $727.3 million |
| Income from operations | $73.4 million | $27.0 million | $168.9 million | $54.1 million |
| Net income | $38.8 million | $9.2 million | $107.2 million | $22.8 million |
| Diluted EPS | $1.47 | $0.36 | $4.06 | $0.93 |
| Adjusted EBITDA | $98.8 million | $48.3 million | $244.4 million | $105.0 million |
| Cash flow from operations | Not provided | Not provided | $153.9 million | $66.5 million |
Q3 gross margin was 31.2%, compared with 31.0% in the prior-year quarter. Operating margin was approximately 15.0% versus 8.8%, and net margin was approximately 8.0% versus 3.0%. Nine-month operating margin was approximately 12.9% versus 7.4%, while net margin was approximately 8.2% versus 3.1%.
At September 30, 2010, cash and cash equivalents were $280.9 million, marketable securities were $2.8 million, and current assets were $744.4 million against current liabilities of $314.2 million. Total assets were $1.566 billion and stockholders’ equity was $737.8 million.
Capital expenditures were $74.7 million through nine months, and management expected approximately $100 million of capital expenditures for full-year 2010. Net cash used in investing activities was $72.1 million. Cash increased $47.4 million from year-end 2009.
Debt consisted primarily of $270.0 million of 7.625% senior secured notes due 2016, net of unamortized discount, plus $16.1 million of capital lease obligations. The company redeemed $30.0 million of senior notes on September 28, 2010 and recorded a $2.3 million loss on extinguishment. The revolving credit facility had no borrowings, $34.0 million available capacity and $86.0 million of letters of credit outstanding.
Material changes versus the prior comparable period
- Q3 revenue increased 59.6%, and nine-month revenue increased 80.7%. The principal drivers were the Eveready acquisition, oil-spill response work and growth in the legacy business.
- Oil-spill projects generated $123.8 million of third-party Field Services revenue in Q3 and $232.4 million in the first nine months, representing approximately 25% of total Q3 revenue.
- Q3 Field Services revenue increased 257.7%, Industrial Services revenue increased 61.4%, Technical Services revenue increased 5.1% and Exploration Services revenue increased 14.2%.
- Q3 Adjusted EBITDA increased 104.5%; nine-month Adjusted EBITDA increased 132.7%. Field Services and Industrial Services provided most of the improvement, while Technical Services Adjusted EBITDA declined 2.6% in Q3 and 2.1% year-to-date.
- Accounts receivable increased to $344.3 million from $274.9 million at year-end 2009, and unbilled accounts receivable increased to $26.2 million from $12.3 million. The nine-month operating cash flow increase was partly offset by a $63.7 million increase in accounts receivable.
- The company acquired Sturgeon & Son Transportation in April 2010 for a final purchase price of $14.9 million and completed sales of the Pembina Area Landfill and mobile industrial health business.
- The effective tax rate declined to 38.6% for Q3 and 29.1% for nine months, versus 43.6% and 43.8%, respectively. The nine-month rate benefited from a $14.0 million reduction in unrecognized tax benefits.
Guidance, outlook, commentary, risks and unusual items
Management stated that existing cash, operating cash flow and available revolver capacity were expected to fund operations, capital expenditures and potential acquisitions. The filing does not provide a formal revenue or earnings forecast. It does provide expected 2010 capital expenditures of approximately $100 million.
Management reported that Gulf and Michigan spill cleanup was largely completed, with spill-related personnel declining materially in the Gulf during Q3. The duration and level of future emergency-response work remain uncertain. Exploration Services was seasonally weak and continued to be affected by depressed natural-gas prices.
Environmental liabilities totaled approximately $176.2 million. Management expects these obligations to be paid over many years, but changes in environmental laws, regulations, remediation requirements or cost estimates could accelerate or increase payments. Remedial liabilities were $140.3 million and closure and post-closure liabilities were $36.0 million at September 30, 2010.
The company had $29.4 million of reserves for legal and administrative proceedings and believed reasonably possible additional exposure could be up to $3.6 million. It was involved in 62 Superfund sites; certain liabilities, including Devil’s Swamp cleanup costs, were not presently estimable. The filing also describes the Ville Mercier, Deer Trail, Breslube-Penn, Casmalia and Marine Shale matters.
Unrecognized tax benefits were $65.6 million, including $19.0 million of interest and $6.5 million of penalties. Management did not expect material cash payments related to these liabilities during the next 12 months, although the timing cannot be reasonably estimated.
The company held $5.4 million of illiquid auction-rate securities. These securities continued to pay interest and were supported by highly rated, substantially insured student loans, but could require holding to maturity or incur a loss if liquidity deteriorates. The company had no derivatives or hedging transactions.
Most important facts for investors to verify
- How much revenue and cash flow was non-recurring or spill-related, and the expected impact as those projects wind down.
- Whether the elevated accounts receivable and unbilled receivables convert to cash without material collection losses.
- The sustainability of Eveready-related revenue, operating synergies and Industrial Services margins after full-year integration.
- Compliance with debt covenants, remaining revolver availability and future debt maturities or refinancing needs.
- The adequacy of environmental, Superfund, legal and tax reserves, including potentially unestimable remediation exposures.
- Actual full-year capital expenditures versus the approximately $100 million expectation and the resulting effect on free cash flow.
- The performance and impairment sensitivity of Exploration Services, goodwill and other intangible assets, despite no impairment charge from the September 30, 2010 interim test.