Clean Harbors, Inc. — Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
Clean Harbors provides environmental, energy, industrial, hazardous-waste management, emergency-response, recycling, re-refining and parts-cleaning services across North America. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $780.8 million | $749.8 million | +4.1% |
| Income from operations | $23.7 million | $11.0 million | +116% |
| Operating margin | 3.0% | 1.5% | +1.5 percentage points |
| Net income (loss) | $1.0 million | $(12.6) million | Improved by $13.6 million |
| Diluted EPS | $0.02 | $(0.22) | Improved |
| Adjusted EBITDA | $101.7 million | $88.3 million | +15.2% |
| Adjusted EBITDA margin | 13.0% | 11.8% | +1.2 percentage points |
| Operating cash flow | $29.7 million | $51.9 million | $(22.2) million |
| Adjusted free cash flow | $(24.9) million | $8.5 million | Decreased by $33.3 million |
Environmental Services direct revenue increased 7.7% to $509.0 million, while Safety-Kleen direct revenue decreased 2.0% to $272.5 million. Environmental Services Adjusted EBITDA rose 45.7% to $89.5 million; Safety-Kleen Adjusted EBITDA declined 11.5% to $54.8 million.
At March 31, 2019, cash and cash equivalents were $167.4 million and short-term marketable securities were $57.5 million, for total cash and marketable securities of $224.8 million. Total assets were $3.88 billion and stockholders’ equity was $1.17 billion.
Debt consisted primarily of $740.3 million of senior secured term loans and $845.0 million of 5.125% senior unsecured notes due 2021. Carrying value of long-term obligations was $1.56 billion. The company had no borrowings under its $400.0 million revolving credit facility, approximately $209.1 million of borrowing availability and $153.3 million of outstanding letters of credit. Management reported compliance with all debt covenants.
Capital expenditures were $58.9 million in the quarter. The company repurchased approximately $6.3 million of common stock and had $299.7 million remaining under its repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by the Veolia industrial-cleaning acquisition and improved pricing and waste-stream mix in Environmental Services.
- Environmental Services cost of revenue increased 3.9%, below its 7.7% revenue growth, producing operating leverage.
- Safety-Kleen results were pressured by severe Midwest weather, lower base-oil volumes and lower base- and blended-oil pricing. Parts-washer revenue also declined, partly offset by growth in containerized-waste, vacuum and direct blended-oil services.
- Consolidated SG&A declined slightly. Environmental Services benefited from a $5.5 million favorable litigation resolution and a $5.4 million recovery of previously reserved trade receivables. Corporate SG&A increased $6.8 million, including higher variable compensation, stock-based compensation and salaries.
- Operating cash flow and adjusted free cash flow declined because of higher working-capital needs, incentive compensation payments and increased capital spending.
- Investing cash usage declined substantially because Q1 2018 included the $120.0 million Veolia acquisition payment.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $185.5 million of right-of-use assets and $188.5 million of lease liabilities at adoption, without a material impact on earnings or cash flows.
- On March 1, 2019, the company acquired assets complementary to Safety-Kleen for $10.4 million and recorded preliminary goodwill of $6.8 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects Environmental Services’ favorable pricing and mix trend to continue and expects Safety-Kleen performance to improve as weather conditions and base-oil pricing improve.
- Management expects 2019 capital spending, net of disposals, of approximately $190 million to $210 million.
- Management expects full-year Corporate Items SG&A to be slightly higher than in 2018 and believes future operating cash flow will improve year over year through higher earnings.
- The effective tax rate was unusually high at 86.0%, primarily because tax benefits for losses at certain Canadian entities were not recognized. The filing states that $4.1 million of such benefits were not recorded in Q1 2019.
- Environmental liabilities totaled $193.4 million, including $74.4 million of closure and post-closure liabilities and $119.0 million of remedial liabilities. Future environmental laws, remediation requirements and timing changes could increase cash needs.
- The company had $23.8 million of reserves for legal and administrative proceedings and believed reasonably possible additional liabilities could be approximately $1.8 million. Product-liability, Superfund, regulatory and other environmental proceedings remain ongoing; ultimate exposure for certain matters cannot be estimated reliably.
- Incinerator utilization declined to 76.6% from 87.3%, partly because of unplanned downtime at the Deer Park facility following a fire at a neighboring facility.
- Results remain exposed to industrial activity, weather, foreign-currency movements, commodity and base-oil pricing, waste volumes, regulatory requirements, competition, emergency-response activity and operating disruptions.
Important Facts for Investors to Verify
- Whether Environmental Services’ acquisition-related growth, pricing and favorable waste-stream mix persist after the comparison benefit from Veolia.
- Whether Safety-Kleen volumes, pricing and margins recover as weather and base-oil markets improve.
- Progress toward the $190 million–$210 million 2019 capital-spending plan and restoration of positive adjusted free cash flow.
- Debt refinancing or repayment plans for the $845.0 million of notes due in 2021 and the company’s continued covenant compliance.
- The development and ultimate cost of Superfund, remedial, product-liability and other environmental proceedings, including the Devil’s Swamp matter.
- Whether the unusually high effective tax rate normalizes and whether previously unrecognized Canadian tax benefits become usable.
- The impact of foreign exchange, facility downtime, regulatory changes and commodity pricing on revenue, margins and liquidity.