Clean Harbors, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, hazardous-waste, industrial, emergency-response, recycling and used-oil re-refining services across North America. It reports two operating segments: Environmental Services and Safety-Kleen Sustainability Solutions. This unaudited filing covers the three and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $1,363.1 million | $951.5 million | $3,888.5 million | $2,686.1 million |
| Operating income | $209.1 million | $104.8 million | $507.4 million | $265.7 million |
| Net income | $135.8 million | $65.4 million | $329.3 million | $154.3 million |
| Diluted EPS | $2.50 | $1.20 | $6.04 | $2.81 |
| Adjusted EBITDA | $308.6 million | $185.1 million | $797.9 million | $502.3 million |
| Adjusted EBITDA margin | 22.6% | 19.5% | 20.5% | 18.7% |
| Net cash from operations | Not separately provided | Not separately provided | $357.5 million | $368.2 million |
| Adjusted free cash flow | Not separately provided | Not separately provided | $118.1 million | $238.0 million |
Q3 revenue increased 43.3%, operating income increased 99.4%, and net income increased 107.5%. For the first nine months, revenue increased 44.8%, operating income increased 91.0%, and net income increased 113.5%. The reported effective tax rate was 25.0% for both Q3 and the first nine months of 2022.
Environmental Services direct revenue increased 45.7% in Q3 and 47.1% year to date, while Safety-Kleen Sustainability Solutions direct revenue increased 34.3% and 35.9%, respectively. Environmental Services incinerator utilization improved to 86% in Q3 and 87% year to date, compared with 82% and 83% in the respective 2021 periods.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $449.0 million at September 30, 2022, compared with $452.6 million at December 31, 2021. Cash and marketable securities totaled $514.1 million.
- Operating cash flow declined to $357.5 million from $368.2 million, primarily because of higher working capital, interest, incentive compensation and tax payments.
- Adjusted free cash flow declined to $118.1 million from $238.0 million, reflecting higher capital spending and working-capital investment.
- Capital expenditures were $244.5 million year to date versus $146.7 million in 2021. Management expects 2022 capital spending, net of disposals, of $325.0 million to $345.0 million, including approximately $45.0 million for the Kimball, Nebraska incinerator.
- Long-term debt carried at $2.5 billion, consisting principally of secured term loans due 2024 and 2028 and unsecured notes due 2027 and 2029. Net interest expense was $28.1 million in Q3 and $79.4 million year to date.
- The $400.0 million revolving credit facility had no outstanding borrowings, $292.6 million available capacity and $107.4 million of outstanding letters of credit at September 30, 2022. The company reported compliance with all debt covenants.
- Interest-rate swaps effectively fixed rates on $350.0 million of 2024 term loans and $600.0 million of 2028 term loans. The swaps had a $65.3 million derivative asset at September 30, 2022.
Material changes versus the prior comparable period
- The October 2021 HydroChemPSC acquisition materially increased Environmental Services industrial, field and emergency-response revenue and expenses. The acquired operations were fully integrated and contributed to the year-over-year growth.
- Revenue growth also reflected higher waste volumes, pricing initiatives, improved incinerator utilization, higher oil-product pricing and stronger demand for Safety-Kleen services.
- Inflation and supply-chain constraints increased labor, transportation, fuel, equipment and supply costs. Management stated that pricing actions, spread management and cost controls helped improve quarterly operating margins.
- Safety-Kleen’s cost of revenues as a percentage of direct revenue improved to 56.0% in Q3 and 60.0% year to date, versus 58.0% and 62.5% in the comparable periods.
- Accounts receivable and unbilled receivables increased to $1.16 billion from $887.7 million at year-end 2021, while inventories increased to $294.2 million from $250.7 million, reflecting business growth and strategic inventory investment.
- The company acquired a waste-oil collection and re-refining business for approximately $78.6 million and completed the sale of a non-core business line, recognizing an $8.9 million gain year to date.
- The company repurchased approximately 0.5 million shares for $44.2 million during the first nine months. Approximately $111.3 million remained available under the $600 million authorization at September 30, 2022.
Outlook, commentary, risks and unusual items
Management stated that expected operating cash flow should be sufficient to fund operations, capital expenditures, interest payments and internal investment needs, with cash and revolving-credit availability providing additional liquidity. The filing provides capital-spending guidance but does not provide explicit revenue, earnings or Adjusted EBITDA guidance.
- Key operating risks include inflation, labor and transportation costs, supply-chain disruptions, equipment-delivery delays, energy costs, commodity and used-oil feedstock pricing, foreign-currency movements, industrial demand, weather, competition and regulatory changes.
- Environmental liabilities totaled $224.0 million, including $106.8 million of closure and post-closure liabilities and $117.3 million of remedial liabilities. These obligations may increase if environmental laws change or remediation costs and timing differ from estimates.
- The company was associated with 131 Superfund-related sites, including six company-owned or leased facilities. Management believes recorded reserves are adequate and that potential additional liability is not reasonably expected to be material, but outcomes remain uncertain.
- Approximately 59 product-liability proceedings involving Safety-Kleen were outstanding at September 30, 2022. Insurance covered the claims settled or dismissed during the first nine months, but future coverage and ultimate exposure cannot be assured.
- Working-capital investment and higher capital expenditures reduced free cash flow despite substantial earnings growth. Approximately 30% of debt was subject to variable interest rates before the effect of hedging.
- The $8.9 million gain on the business disposition was unusual and non-recurring in nature. The filing also refers to a $3.0 million breakup fee related to termination of a proposed Vertex Energy asset acquisition.
Most important facts for investors to verify
- Whether pricing and cost-control initiatives can continue to offset inflation, labor, transportation and supply-chain pressures.
- The sustainability of Safety-Kleen’s favorable oil-product pricing and used-oil collection spread.
- HydroChemPSC integration performance, including revenue growth, margins, cash generation and leverage reduction.
- Progress and final cost of the Kimball, Nebraska incinerator and total 2022 capital spending relative to the $325 million–$345 million outlook.
- Working-capital conversion and the decline in adjusted free cash flow relative to operating cash flow.
- Debt maturities, variable-rate exposure, covenant headroom and the availability of the revolving credit facility after letters of credit.
- Changes in environmental liabilities, Superfund matters, product-liability claims and insurance coverage.
- The filing’s non-GAAP Adjusted EBITDA and adjusted free cash flow reconciliations, including comparability with other companies’ measures.