Clean Harbors, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. The interim financial statements are unaudited. Clean Harbors provides environmental, energy and industrial services through its Environmental Services and Safety-Kleen segments.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $849.1 million | $752.8 million | $1,598.9 million | $1,441.7 million |
| Income from operations | $64.4 million | $46.7 million | $75.3 million | $52.2 million |
| Net income | $30.7 million | $25.9 million | $18.1 million | $4.5 million |
| Diluted EPS | $0.54 | $0.45 | $0.32 | $0.08 |
| Adjusted EBITDA | $139.6 million | $120.7 million | $227.8 million | $200.8 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $129.7 million | $116.9 million |
| Adjusted free cash flow | Not separately provided | Not separately provided | $38.2 million | $30.3 million |
Total revenue increased 12.8% in the quarter and 10.9% year to date. Income from operations increased 37.7% in the quarter and 44.4% year to date. Net income increased 18.8% in the quarter and substantially exceeded the prior-year six-month result, which included a $31.7 million pretax gain on a business sale and a $6.0 million pretax loss on early debt extinguishment.
Approximate consolidated margins were:
- Operating margin: 7.6% in Q2 2018 versus 6.2% in Q2 2017; 4.7% for the first six months versus 3.6%.
- Net margin: 3.6% in Q2 2018 versus 3.4% in Q2 2017; 1.1% for the first six months versus 0.3%.
- Adjusted EBITDA margin: 16.4% in Q2 2018 versus 16.0% in Q2 2017; 14.2% for the first six months versus 13.9%.
At June 30, 2018, cash and cash equivalents were $197.1 million, down from $319.4 million at December 31, 2017. The company had $36.9 million of short-term marketable securities and approximately $244.3 million available under its $400.0 million revolving credit facility, with $132.4 million of outstanding letters of credit.
Total debt at June 30, 2018 was $1.629 billion, consisting primarily of $392.0 million under the term loan and $400.0 million and $845.0 million of senior unsecured notes due 2020 and 2021, respectively. The company reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Environmental Services: Direct revenue increased 15.2% in Q2 and 12.8% year to date. Growth reflected higher waste volumes and pricing, stronger industrial turnaround activity, higher incinerator utilization, acquisitions and favorable Canadian currency translation. Adjusted EBITDA increased 15.1% in Q2 and 10.1% year to date.
- Safety-Kleen: Direct revenue increased 8.5% in Q2 and 7.6% year to date, supported by oil-product pricing, volumes, blended-oil sales and core service growth. Adjusted EBITDA increased 21.2% in Q2 and 19.8% year to date.
- Cost trends: Environmental Services cost of revenue increased as a percentage of direct revenue, partly due to repairs at incinerators and a solvent recycling facility. Safety-Kleen cost of revenue declined as a percentage of direct revenue, reflecting improved spreads and operating leverage.
- Acquisition: On February 23, 2018, the company acquired Veolia’s U.S. Industrial Cleaning Business for $120.0 million in cash. The acquisition contributed $46.3 million of Q2 revenue and $63.9 million of year-to-date revenue, with $2.1 million and $3.3 million of pretax income, respectively.
- Operating reorganization: Environmental businesses were combined operationally and management changed its segment reporting. Prior periods were recast for the new Environmental Services and Safety-Kleen presentation.
- Accounting: The company adopted ASC 606 using the modified retrospective method, with no cumulative revenue adjustment. Adoption of income-tax accounting guidance reduced retained earnings by $1.6 million.
- Share repurchases: The company repurchased $26.5 million of common stock during the first six months and had $324.7 million remaining under its $600 million authorization at June 30, 2018.
Cash flow, capital spending and outlook
Operating cash flow increased $12.7 million year over year, driven by higher operating income and lower interest payments, partially offset by greater working-capital requirements. Investing cash outflow increased to $216.1 million, primarily because of the Veolia acquisition and the absence of prior-year proceeds from the sale of the Transformer Services business. Capital expenditures were $94.1 million through June 30, 2018.
Management expected 2018 capital spending, net of disposals, to be approximately $170.0 million to $190.0 million. Management also stated that operating cash flow was expected to remain above prior-year levels and believed available cash, operating cash flow and revolver capacity would be sufficient to fund operations, capital expenditures, debt service and planned share repurchases.
After quarter-end, the company increased term-loan borrowings by $350.0 million, bringing term-loan principal outstanding to $746.0 million as of July 19, 2018. It used proceeds to purchase $322.0 million of the 2020 Notes and subsequently redeemed the remaining $78.0 million of those notes on August 1, 2018, borrowing $50.0 million under the revolving facility. The company intended to enter into an interest-rate swap covering $350.0 million of variable-rate debt.
Risks, contingencies and unusual items
- Environmental liabilities totaled $186.8 million at June 30, 2018, including $65.5 million of closure and post-closure liabilities and $121.3 million of remedial liabilities. Future environmental-law changes or unanticipated remediation needs could accelerate or increase cash requirements.
- The company was involved in legal and administrative proceedings and had recorded $21.6 million of related reserves. It believed reasonably possible additional exposure could be approximately $1.7 million. Certain product-liability claims, Superfund sites and regulatory matters have uncertain ultimate outcomes.
- The company had been identified as a potential responsible party at 127 Superfund sites. Potential liability at the Devil’s Swamp site in Louisiana could not yet be estimated because the EPA had not selected a final remedy.
- Safety-Kleen was involved in approximately 60 product-liability proceedings as of June 30, 2018. Insurance covered settled or dismissed claims during the first half of the year, but future claims may not be fully insured.
- Safety-Kleen results remain sensitive to crude oil and Group II base-oil prices, used-oil collection costs, product mix and transportation and fuel costs. Environmental Services results are sensitive to industrial activity, waste volumes, pricing, weather, seasonality, competition and emergency-response activity.
- The company expected the new lease accounting standard, effective January 1, 2019, to materially affect the consolidated balance sheet through recognition of additional lease assets and liabilities.
- The company reported foreign-currency translation losses of $21.5 million in other comprehensive income for the first six months, principally related to the Canadian dollar.
Important facts for investors to verify
- Reconcile reported GAAP earnings with Adjusted EBITDA and adjusted free cash flow, which are non-GAAP measures and may not be comparable with other companies.
- Assess the effect of the Veolia acquisition on organic growth, margins, integration costs and leverage.
- Verify post-quarter-end debt refinancing, the remaining revolver availability, interest-rate swap terms and compliance with debt covenants.
- Monitor cash conversion, working-capital usage and capital spending against management’s $170.0 million to $190.0 million 2018 outlook.
- Review environmental liabilities, Superfund matters, product-liability claims and potential exposure at the Devil’s Swamp site.
- Evaluate the sustainability of Safety-Kleen’s pricing and margins given volatility in oil prices and used-oil collection costs.
- Confirm the impact of ASC 842 lease adoption and any changes to the provisional Tax Cuts and Jobs Act accounting.