Clean Harbors, Inc. 2020 Q2 Form 10-Q Summary
Business Context and Reporting Period
Clean Harbors provides environmental, industrial, hazardous-waste management, emergency-response, recycling, parts-washer and used-oil re-refining services across North America through its Environmental Services and Safety-Kleen segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared primarily with the corresponding 2019 periods.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $710.0 million | $868.7 million | $1.5686 billion | $1.6495 billion |
| Income from operations | $60.2 million | $73.0 million | $105.7 million | $96.8 million |
| Net income | $29.0 million | $36.2 million | $40.6 million | $37.2 million |
| Diluted EPS | $0.52 | $0.65 | $0.73 | $0.66 |
| Adjusted EBITDA | $135.5 million | $149.8 million | $258.1 million | $251.5 million |
| Adjusted EBITDA margin | 19.1% | 17.2% | 16.5% | 15.2% |
| Net cash from operating activities | Not separately provided | Not separately provided | $173.5 million | $138.5 million |
| Adjusted free cash flow | Not separately provided | Not separately provided | $71.9 million | $27.5 million |
Calculated consolidated operating margin was approximately 8.5% for the quarter and 6.7% for the six-month period. Net margin was approximately 4.1% for the quarter and 2.6% for the six-month period.
- Environmental Services direct revenue declined 11.8% in the quarter and 0.8% for the six-month period. Segment Adjusted EBITDA increased 17.2% and 19.1%, respectively.
- Safety-Kleen direct revenue declined 29.9% in the quarter and 12.2% for the six-month period. Segment Adjusted EBITDA declined 41.4% and 19.8%, respectively.
- Cash and cash equivalents were $447.4 million at June 30, 2020, compared with $372.0 million at December 31, 2019. Cash and marketable securities totaled $506.7 million.
- Total debt obligations at carrying value were $1.634 billion, including $1.627 billion of long-term obligations and $7.5 million current obligations. Debt at par was $1.650 billion.
- The company had $135.3 million available under its $400.0 million revolving credit facility at June 30, 2020, with $142.5 million of outstanding letters of credit. The remaining $75.0 million revolver balance was repaid on July 28, 2020.
- Capital expenditures were $125.7 million for the first six months, and management expected 2020 capital spending of $176.0 million to $196.0 million, including the corporate headquarters purchase.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue decreased 18.3%, primarily because COVID-19 reduced industrial activity, customer-site operations, automotive travel, waste volumes and demand for oil-related products.
- Product revenue fell to $72.2 million from $153.6 million in the second quarter, principally reflecting lower Safety-Kleen oil volumes and pricing.
- Environmental Services benefited from approximately $50.0 million of COVID-19-related emergency-response revenue in the quarter and approximately $60.0 million in the first half. Incinerator utilization was 87% in the quarter and 86% for the first half.
- Safety-Kleen was adversely affected by lower base-oil, blended-oil, recycled-fuel-oil and refinery-byproduct sales, as well as reduced containerized-waste, vacuum and parts-washer activity. Used-motor-oil collection revenue increased and partially offset the decline.
- The company recorded a $23.4 million benefit from CARES Act employee-retention credits and the Canadian Emergency Wage Subsidy, reducing cost of revenues and selling, general and administrative expenses.
- Operating cash flow increased $35.0 million year over year, partly because the company deferred approximately $25.0 million of payroll and income-tax payments under pandemic-related relief provisions.
- The company drew $150.0 million on its revolver on March 31, 2020, repaid $75.0 million on June 29, 2020 and repaid the balance after quarter-end.
- Environmental liabilities increased to $195.1 million from $189.8 million, including a $4.5 million increase related to beginning closure of one commercial landfill and a $1.8 million increase for a Superfund remediation estimate.
- The company acquired a northeastern U.S. oil re-refining business for $8.9 million in April 2020 and recognized preliminary goodwill of $1.5 million.
Outlook, Commentary, Risks and Unusual Items
Management expected COVID-19 to continue affecting operations throughout the remainder of 2020. Lower industrial activity, customer shutdowns, reduced waste volumes, lower automotive activity, declining oil demand and lower oil-product pricing were expected to weigh on both segments. COVID-19 emergency-response and decontamination work was expected to continue but was not expected to fully offset lost activity.
Nearly half of Safety-Kleen’s oil-refinery capacity was temporarily shut during April 2020 because of reduced feedstock availability and product demand. Certain facilities returned to service in July, bringing production to approximately 70% of total capacity. Management also cited ongoing cost reductions and reduced capital expenditures as measures to preserve liquidity.
- Management concluded that COVID-19 had not created a goodwill or long-lived-asset impairment triggering event at June 30, 2020. A prolonged downturn, further oil-demand deterioration or sustained weakness in Safety-Kleen Oil could result in material future impairment charges.
- Environmental liabilities may require higher or earlier payments if environmental laws, regulatory requirements or remediation conditions change.
- The company was involved in approximately 130 Superfund sites and approximately 67 product-liability proceedings related to Safety-Kleen products. Recorded reserves for legal and administrative proceedings were $23.5 million; management did not expect additional potential liability to be material, although outcomes remain uncertain.
- The company had approximately $112.5 million of remedial liabilities and $82.6 million of closure and post-closure liabilities at June 30, 2020.
- Interest-rate swaps covering $350.0 million of term loans had a $39.0 million liability at quarter-end, contributing to accumulated other comprehensive loss.
- The company remained in compliance with its debt covenants and stated that it expected to continue meeting them.
- The board’s $600.0 million share-repurchase authorization had $267.3 million remaining at June 30, 2020. Approximately $17.3 million was spent on repurchases during the first half, with no program repurchases during the second quarter.
Important Facts for Investors to Verify
- Whether economic activity, customer reopenings and oil demand recover sufficiently to improve Environmental Services and Safety-Kleen volumes.
- The sustainability of Environmental Services margin and Adjusted EBITDA gains after excluding the $23.4 million government-program benefit.
- The timing and amount of deferred payroll and income-tax payments and their effect on future operating cash flow.
- Actual 2020 capital expenditures relative to the $176.0 million to $196.0 million expected range.
- Available revolver capacity, outstanding letters of credit, covenant compliance and the company’s debt-repayment requirements.
- Potential impairment risk for goodwill and long-lived assets, particularly within Safety-Kleen Oil and oil- and gas-related operations.
- Changes in landfill closure obligations, Superfund remediation estimates, product-liability claims and other environmental contingencies.
- Whether future share repurchases remain appropriate given pandemic-related uncertainty and capital requirements.