Clean Harbors, Inc. — Q2 2021 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. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Beginning in 2021, the reportable segments were reorganized as Environmental Services and Safety-Kleen Sustainability Solutions; prior periods were recast.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $926.5 million, up 30.5% | $1.735 billion, up 10.6% |
| Income from operations | $110.0 million vs. $60.2 million | $160.9 million vs. $105.7 million |
| Net income | $67.1 million vs. $29.0 million | $88.8 million vs. $40.6 million |
| Diluted EPS | $1.22 vs. $0.52 | $1.62 vs. $0.73 |
| Adjusted EBITDA | $187.8 million, up 35.8% | $317.2 million, up 20.1% |
| Adjusted EBITDA margin | 20.3% vs. 19.5% | 18.3% vs. 16.8% |
| Net cash from operating activities | $265.4 million for six months, up from $173.5 million | |
| Adjusted free cash flow | $176.9 million for six months vs. $71.9 million |
Calculated consolidated operating margins were approximately 11.9% for the second quarter and 9.3% for the first six months, compared with approximately 8.5% and 6.7%, respectively, in the prior-year periods. Net margins were approximately 7.2% and 5.1%, compared with 4.1% and 2.6%.
- Environmental Services direct revenue increased 18.2% in the quarter and 4.6% year to date. Segment Adjusted EBITDA was essentially flat in the quarter at $176.0 million and decreased 1.8% year to date to $316.3 million.
- Safety-Kleen Sustainability Solutions direct revenue increased 107.8% in the quarter and 41.9% year to date. Segment Adjusted EBITDA increased to $63.3 million in the quarter and $94.9 million year to date, primarily due to higher base- and blended-oil pricing and volumes, re-refinery efficiencies and spread management.
- Cash and cash equivalents were $595.6 million at June 30, 2021; cash plus short-term marketable securities totaled $666.3 million.
- Total debt at carrying value was approximately $1.555 billion, consisting principally of secured term loans and 2027 and 2029 senior notes. The $400 million revolving facility had no borrowings, $287.3 million of availability and $112.7 million of outstanding letters of credit.
- Capital expenditures were $92.0 million in the first six months, compared with $125.7 million. Management expects 2021 capital spending, net of disposals, of $190 million to $210 million.
- Total assets were $4.276 billion and stockholders’ equity was $1.410 billion at June 30, 2021.
Material changes versus the prior comparable period
- Results benefited from recovery in industrial activity after the COVID-19-related downturn in the second quarter of 2020, higher-value waste streams, increased industrial cleaning demand and improved Safety-Kleen oil pricing and volumes.
- COVID-19 disinfection, decontamination and disposal revenue declined as demand moderated, including a $38.5 million year-over-year decrease in the second quarter. Six-month COVID-related direct revenue was $39.7 million, including $11.5 million in the second quarter.
- Environmental Services incinerator utilization was 87% in the second quarter, consistent with the prior year, but six-month utilization declined to 83% from 86% due partly to severe weather in the first quarter.
- Safety-Kleen Sustainability Solutions cost of revenue improved to 60.8% of direct revenue in the quarter and 65.0% year to date, versus 78.4% and 75.9%, respectively, in 2020.
- Government-program benefits declined to $5.2 million in the second quarter and $10.6 million year to date, compared with $23.4 million in the second quarter and six months of 2020. Management does not expect significant future benefits.
- Operating cash flow increased despite a $31.0 million increase in cash taxes paid. Financing cash flow was a $60.5 million use, including $45.4 million of share repurchases; the prior-year period included net revolver borrowings.
- The company repurchased approximately 0.5 million shares for $45.4 million during the first six months. Approximately $164.4 million remained available under the $600 million authorization at June 30.
- The company reorganized the Safety-Kleen business and changed its operating segments. It also revised Adjusted EBITDA to add back stock-based compensation, with prior periods recast.
Outlook, transactions, risks and unusual items
- Management stated that demand and results had recovered to comparable with or above pre-pandemic levels for each segment as of the end of the second quarter, but expects COVID-19 response demand to continue slowing. The effect of COVID-19 variants remained uncertain.
- On June 29, 2021, the company agreed to acquire certain Vertex Energy used-oil collection and re-refinery assets for $140 million in cash, subject to approvals and customary conditions. The transaction was expected to close later in 2021 and would expand re-refining capacity and the collection network.
- On August 3, 2021, after the quarter end, the company agreed to acquire HydroChemPSC for $1.25 billion in cash, subject to adjustments and regulatory and other approvals. Management planned to use cash and long-term debt, including a financing commitment for up to $1.0 billion of term loans. Risks include delayed or failed closing, potential divestitures, a possible $50 million termination fee, financing-market exposure, transaction costs and integration challenges.
- The company was permitting a new Kimball, Nebraska incinerator, targeted for completion in early 2025, with estimated annual practical capacity of approximately 70,000 tons.
- Environmental liabilities totaled $205.9 million at June 30, 2021, including $93.5 million of closure and post-closure liabilities and $112.5 million of remedial liabilities. Management expects payment over many years but noted that regulatory changes or other unforeseen events could accelerate or increase costs.
- Legal and administrative reserves were $31.8 million. The company was involved in approximately 67 product-liability proceedings and had been identified as a potentially responsible party or potential party at 131 Superfund-related sites. Management did not believe liabilities beyond recorded amounts would be material, but certain outcomes remain uncertain.
- The company reported no goodwill impairment after reallocating goodwill among three reporting units. Interest-rate swaps effectively fixed rates on $350 million of term loans through 2024.
- Management concluded that disclosure controls were effective as of June 30, 2021 and reported no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether the Vertex and HydroChemPSC transactions closed on expected terms, including purchase-price adjustments, regulatory conditions and the amount and terms of incremental debt.
- The company’s post-acquisition leverage, covenant compliance, interest expense and liquidity after funding the $1.25 billion HydroChemPSC purchase.
- Whether Safety-Kleen’s favorable oil-product spread, pricing and re-refinery utilization remain sustainable as commodity prices change.
- The pace of decline in COVID-19 response revenue and whether underlying Environmental Services demand offsets that decline.
- Actual 2021 capital spending relative to the $190 million–$210 million expectation and the cost, permitting status and financing of the planned Kimball incinerator.
- Changes in environmental liabilities, Superfund exposures, product-liability claims and regulatory enforcement proceedings.
- The comparability of Adjusted EBITDA, given the 2021 change to add back stock-based compensation and the company’s use of this non-GAAP measure in compensation and debt-covenant assessments.