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Text: I'm Dave Martin of Harsco.
For a discussion of such risks and uncertainties to the Risk Factors section in our most recent 10-K and 10-Q.
The third quarter developed largely as we anticipated on a consolidated basis with our environmental businesses improving sequentially, while our rail business, which did not see a significant impact from COVID through Q2, was affected by weak demand and an unfavorable product mix.
Overall, EBITDA was consistent with our expectations, while cash flow was better.
Revenues in our environmental businesses, which represent more than 80% of total Harsco revenue, were up 15% versus the second quarter.
Volumes were up in all waste categories, led by hazardous medical waste.
Retail and industrial waste volumes were also up by double digits, while steel waste or LST, was up high single digits.
Revenue was also up in the contaminated materials segment with strength in the dredge business, offsetting weakness in our high-margin soils business, which has been affected by softness in large nonresidential construction projects in the Mid-Atlantic and Northeast regions.
Our key priorities have remained consistent for most of 2020: Keeping our people safe during the pandemic, preserving liquidity, capturing the value of the ESOL acquisition and executing our operational recovery plan in rail.
I'm very pleased with the execution on each of these critical initiatives during the third quarter.
The number of COVID cases across our employee population has remained steady at modest levels for several months.
And we have not experienced any significant disruption to our operations related to employee health.
The degree of employee compliance with our global COVID-related principles is quite high, and has served to counter the worrisome trends across the general populations of the more than 30 countries in which we operate.
Pete will comment on our liquidity position in a moment, but I would like to recognize Pete and his finance organization for their outstanding management of our cash flow and liquidity position over the last several months.
Cash flow continues to be strong and is well above the 2019 level despite the impact of COVID on cash earnings.
The integration and value capture of the ESOL acquisition continues at a brisk pace.
The vast majority of our value actions have been launched and the corresponding benefits for the year will be ahead of our original plan.
These actions range from logistics and disposal optimization to various SG&A and commercial initiatives.
This past week, David Stanton, the Clean Earth President and I visited a number of our sites across the U.S. was energizing to again see firsthand, the tremendous opportunities we have to grow the business and improve the efficiency of its operations.
The operational recovery program at Rail is on track to deliver against its objectives by the end of the year.
The backlog in Rail remains at record high levels, so the SCOR program is oriented toward ensuring we have the appropriate capacity, competency and governance principles in place, to deliver high-quality products to our customers on time.
In terms of next steps, we plan to establish and sustain the lean based operating model required for a best-in-class supply chain and fulfillment capability.
Looking ahead, we expect our end markets to continue to improve throughout the quarter and into 2021, with recovery in our environmental businesses leading that of our Rail business.
Our Q4 outlook reflects these positive trends in both Harsco Environmental and in Clean Earth.
We are not yet comfortable providing more specific guidance for next year given the current economic situation, and the potential impacts on our planning process.
In terms of management focus, we will continue to execute our current programs and strengthen our balance sheet.
Together with the expected improvements in our end markets, these actions should build on our foundation and enable us to take the meaningful next steps in our portfolio transformation.
In the third quarter, Harsco's revenues totaled $509 million, and adjusted EBITDA totaled $59 million.
Our revenues increased 14% over the second quarter of this year with each of our businesses realizing a nice improvement in revenues from the second quarter when we believe the impacts of the pandemic peaked for most of our end markets.
The sequential improvement in revenue ranged from a 20% increase at Clean Earth, to a 9% increase at Harsco Environmental.
Our third quarter adjusted EBITDA of $59 million is consistent with our expectations in August and is comparable to our adjusted EBITDA result in Q2, despite the unfavorable timing impact of certain expenditures we discussed on our earnings call last quarter.
These incremental items consisting largely of the timing of insurance and compensation related amounts, negatively affected the quarter-on-quarter comps by approximately $10 million.
Otherwise, underlying performance improved compared with Q2 as a result of volume growth driven by the ongoing economic recovery, and strong underlying operating performance within our businesses.
Including at ESOL, where margins improved considerably as our integration and operational improvement actions began to take hold.
And as you may recall, Q3 was our first full quarter of owning ESOL after we acquired it in April.
Relative to our expectations at the beginning of the quarter, our results were aided by better top line and margin performance in Harsco Environmental and lower corporate spending as a result of our ongoing focus on managing costs.
Our EBITDA in the third quarter of 2019 totaled $87 million.
The change year-on-year clearly reflects the ongoing impact of the pandemic on end market demand as well as the fact that the prior year quarter was particularly strong due to a favorable mix in both Rail and Clean Earth.
Harsco's adjusted earnings per share from continuing operations for the third quarter was $0.08.
And lastly, our free cash flow totaled $18 million in Q3, a strong performance considering that this figure is net of approximately $14 million of tax-related outflows that we had deferred from the second quarter.
This figure compares with free cash flow of $5 million in the third quarter of 2019.
And year-to-date, our free cash flow is now $10 million positive, significantly improved from 2019.
Capital spending discipline and improved working capital performance have been the main drivers of the improvement this year and should continue to be so for the foreseeable future.
Generating positive free cash flow is clearly an important focus for us and we expect to generate positive free cash flow in Q4 as well.
Revenues totaled $223 million and adjusted EBITDA was $40 million, translating to a margin of 18%.
This EBITDA figure compares to $60 million in the prior year with the change driven by pandemic effects on the demand for services and applied products as well as related impacts on new site ramp-ups.
Steel output at our customer sites declined approximately 6% on a continuing site basis compared with the prior year quarter.
Relative to the second quarter of this year, Harsco Environmental's revenues rose 9% on a similar improvement in steel volumes.
Adjusted EBITDA was unchanged quarter-on-quarter.
However, as I mentioned earlier, the comp to Q2 was negatively impacted by the timing of expenses, which totaled approximately $5 million for HE.
So I believe these results again illustrate strong performance by our Harsco Environmental team and their ongoing focus on operational excellence and financial discipline in controlling operating expenses.
Harsco Environmental's free cash flow totaled $32 million in the quarter and now totaled $64 million for the year.
This year-to-date figure compares with free cash flow of $10 million in the prior year.
The improvement during 2020 has largely been driven by lower capital spending and cash generated from working capital, as I mentioned earlier.
For the quarter, revenues were $194 million, and adjusted EBITDA totaled $20 million.
Compared to the third quarter of 2019, our dredged material processing business had a strong quarter.
And the inclusion of ESOL offset the volume pressures linked to the pandemic in our legacy Clean Earth has waste business.
Our soils business was impacted by less favorable mix and delays in nonresidential construction projects, again due to the pandemic.
Relative to the second quarter of 2020, revenues increased roughly 20% with ESOL and legacy Clean Earth experiencing similar improvements.
By line of business, the sequential revenue growth was most significant in medical and dredge material processing, followed by industrial and retail hazardous waste.
ESOL contributed nearly $130 million of revenue in the quarter.
And it's great to see the ESOL business bounce back from Q2 when many medical facilities and industrial plants as well as a good number of retail stores were closed.
And I believe this illustrates the recurring and essential nature of its revenues and its resilience during atypical business cycles.
Further, ESOL's margin performance improvement was also very positive in the quarter.
Additional volume helped in the quarter, but I believe this result is more importantly, a direct positive reflection on the improvement initiatives that we've only begun to implement.
ESOL's run rate EBITDA as a result is now above pre-acquisition levels despite the pandemic.
Last quarter, I mentioned that we expect to realize approximately $5 million of benefits in 2020 from our initiatives.
Today, I'm confident we will exceed this target.
And as a reminder, the major improvement levers we're pursuing are our disposal optimization, site productivity, inbound and outbound logistics, procurement and commercial initiatives.
Although we still have some work to do in order to achieve our goal of doubling ESOL's EBITDA within three years, we're off to a great start.
Lastly, on the Clean Earth segment, free cash flow and cash conversion remains impressive.
The segment's free cash flow totaled $17 million in the quarter and year-to-date, it now stands at $38 million versus adjusted EBITDA of $42 million.
Rail revenues increased to $93 million, while the segment's adjusted EBITDA declined to $5 million in the third quarter.
The change in EBITDA relative to the prior year quarter can be principally attributed to a less favorable mix across all product categories and lower aftermarket and pro train volumes due to the pandemic headwinds affecting our customers, which became more pronounced during the quarter.
These impacts were partially offset by lower SG&A spending.
While economic conditions related to the pandemic clearly hit the low point in Q2 for Clean Earth and Environmental, that wasn't the case for Rail, as the end markets continue to feel pressures from pandemic-related headwinds on freight and passenger rail demand.
As we started to see early this quarter, this has created some deferrals of our customers' capital spending versus their original plans.
And accordingly, the demand for short-cycle products across all business lines in Rail was soft.
While Rail traffic and ridership has started to improve, the outlook is still fairly volatile given the pandemic headwinds.
Furthermore, our business generally lags leading indicators such as traffic and ridership by a few quarters.
We have some important customer discussions in the coming weeks about their forthcoming capital spending plans and are cautiously optimistic that we will see some further improvements late in the year and early 2021.
Now bright spot continues to be business development in our backlog, where we continue to see opportunities to bid on larger, longer-term contracts despite softness in the short-cycle market, and we've had a number of notable sizable wins during the quarter.
These wins included a follow-on option contract with the New York City Transit Authority to supply them with additional vehicles and a new contract with the Chicago Transit Authority to supply them with snow removal vehicles.
As a result, Rail's backlog remains robust, totaling more than $450 million at the end of the quarter.
So before moving to our outlook on slide eight, let me comment on our balance sheet.
Our financial flexibility remains strong.
Our leverage, as expected stood at 4.5 times and our liquidity totaled $325 million at the end of the quarter.
Reducing our leverage is a top priority for us and our goal remains to reduce our leverage to below 2.5 times within a couple of years.
Now let me turn to the outlook on slide eight With the exception of our Rail business, our visibility and confidence has continued to improve in recent months.
And as a result, we believe we're in a position to provide some quantitative guidance for the fourth quarter.
As you all know, the current economic environment continues to be fluid, and recent COVID infection trends are not favorable.
However, with this in mind and based on the current market environment, we see fourth quarter total Harsco adjusted EBITDA ranging from $58 million to $63 million.
Business conditions are expected to improve modestly for Clean Earth and Harsco Environmental during Q4 relative to the third quarter.
For these two segments, Q4 margins are projected to be stable versus the third quarter.
Rail results in the fourth quarter are currently expected to be similar to the third quarter performance, and corporate costs are expected to be modestly above Q3 levels.
Also, we expect our free cash flow to be between $20 million and $25 million in the fourth quarter.
And this outcome would place our free cash flow for the full year north of $30 million.
Now as I mentioned earlier, this outlook does not contemplate any meaningful impact to our business from any new lockdowns or restrictions, which may be implemented by state or national governments as a result of negative COVID developments.
Nonetheless, despite the unusual conditions we've all experienced these past few months, I'm very pleased with the performance, discipline and focus on execution by each of our businesses and keeping our people safe while delivering our strong results to date.
And I expect this to continue into the fourth quarter and into 2021.

user
compname says q3 adjusted earnings per share $0.08 from continuing operations.
q3 adjusted earnings per share $0.08 from continuing operations.
q3 revenue $509 million versus refinitiv ibes estimate of $474.1 million.
expects its q4 ebitda to be within a range of $58 million to $63 million.

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