Clean Harbors, Inc. — 2018 Q1 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, energy and industrial services across North America, including hazardous-waste management, industrial cleaning, emergency response, recycling, re-refining and parts-cleaning services. The unaudited report covers the three months ended March 31, 2018, compared with the same period in 2017.
Following a first-quarter reorganization, the company reports two operating segments: Environmental Services and Safety-Kleen. Prior-period segment information was recast for comparability.
Financial performance and key metrics
- Revenue: $749.8 million, up 8.8% from $688.9 million. Service revenue increased to $619.7 million from $560.2 million; product revenue increased to $130.1 million from $128.7 million.
- Operating income: $11.0 million, compared with $5.4 million. Operating margin improved to approximately 1.5% from 0.8%.
- Net loss: $12.6 million, or $0.22 per diluted share, compared with a $21.4 million loss, or $0.37 per share.
- Adjusted EBITDA: $88.3 million, up 10.1% from $80.1 million. Environmental Services generated $61.4 million and Safety-Kleen generated $61.9 million.
- Gross margin: Approximately 27.1%, versus 27.9% in the prior-year quarter. Environmental Services cost of revenue increased to 78.4% of direct revenue from 76.4%, while Safety-Kleen improved to 63.9% from 65.8%.
- Operating cash flow: $51.9 million, down from $57.1 million. Management attributed the decline primarily to higher incentive payments and increased working capital.
- Adjusted free cash flow: $8.5 million, down from $15.7 million, after $44.2 million of capital expenditures.
- Capital expenditures: $44.2 million in the quarter. Full-year 2018 capital spending guidance was $170 million to $190 million, net of disposals.
- Cash and liquidity: Cash and cash equivalents were $186.4 million at March 31, 2018, down from $319.4 million at year-end. Approximately $237.0 million was available under the $400.0 million revolving credit facility, with no revolver borrowings and $132.9 million of outstanding letters of credit.
- Debt: Total debt at carrying value was $1.629 billion, consisting primarily of $400.0 million of 2020 notes, $845.0 million of 2021 notes and approximately $397.0 million of secured term loans due 2024. The company reported compliance with all debt covenants.
- Environmental liabilities: Closure and post-closure liabilities were $64.1 million and remedial liabilities were $122.4 million, for total environmental liabilities of $186.5 million.
Material changes versus the prior comparable period
- Environmental Services direct revenue increased 10.2% to $472.4 million, driven by higher waste volumes, emergency response work, project activity, acquisitions and favorable Canadian currency translation.
- Safety-Kleen direct revenue increased 6.6% to $278.0 million, primarily from improved base and blended oil pricing, growth in environmental services and acquisitions. Oil product pricing contributed approximately $15.0 million of incremental revenue.
- The company acquired Veolia’s U.S. Industrial Cleaning Business on February 23, 2018, for $120.0 million in cash. The acquisition contributed $17.6 million of first-quarter revenue and added $15.9 million of preliminary goodwill.
- Environmental Services margins weakened because of higher labor, equipment, supply and repair costs. Safety-Kleen margins improved through better management of oil-product pricing spreads and input costs.
- Net cash declined by $133.0 million, principally because of the Veolia acquisition, capital expenditures, share repurchases and debt repayment.
- The company repurchased approximately 0.3 million shares for $14.3 million. The remaining authorization was $336.9 million at March 31, 2018.
- Foreign currency translation produced a $16.6 million other comprehensive loss, primarily from the Canadian dollar, compared with a $5.8 million translation gain in the prior-year quarter.
Guidance, outlook, commentary and risks
Management expects operating cash flow for the remainder of 2018 to exceed prior-year levels and believes existing cash, operating cash flow and revolver availability will be sufficient to fund operations, capital expenditures, interest, environmental obligations and planned share repurchases.
Management identified sensitivity to industrial activity, waste volumes, seasonality, weather, emergency-response demand, pricing, competition, operating efficiency, commodity and crude-oil prices, used-oil collection costs, foreign exchange and regulatory changes. Environmental liabilities may require earlier or larger payments if laws or circumstances change.
The company disclosed legal and administrative reserves of $19.9 million and estimated reasonably possible additional exposure of up to $1.7 million. It remains involved in Superfund matters involving 127 sites, product-liability proceedings involving approximately 59 cases, and the Devil’s Swamp environmental investigation, for which potential additional liability cannot presently be estimated.
The company adopted revenue-recognition guidance under ASC 606 and income-tax guidance for intra-entity transfers in 2018. Adoption of the income-tax standard reduced retained earnings by $1.6 million. The company expects the new lease standard, effective January 1, 2019, to materially affect the balance sheet through recognition of lease assets and liabilities.
The effective tax rate was negative 31.9%, compared with negative 14.5% in the prior-year quarter, partly because tax benefits were not recognized for losses of certain Canadian entities. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the Veolia acquisition delivers the expected operating synergies and improves Environmental Services margins after integration.
- Whether the projected $170 million to $190 million of 2018 capital spending and environmental obligations remain consistent with cash-generation expectations.
- The sustainability of Safety-Kleen’s improved oil-product pricing spreads and exposure to crude-oil and base-oil price volatility.
- Progress in converting higher revenue and Adjusted EBITDA into stronger operating and adjusted free cash flow.
- Debt maturities, covenant compliance, refinancing options and the effect of the company’s share-repurchase program on liquidity.
- Potential changes in Superfund, product-liability, regulatory and Devil’s Swamp obligations beyond recorded reserves.
- The balance-sheet impact of adopting the lease standard in 2019 and any subsequent adjustments related to the Tax Cuts and Jobs Act.