Clean Harbors, Inc. 2016 Form 10-K Summary
Business context and reporting period
Clean Harbors is a North American provider of environmental, energy and industrial services, including hazardous-waste treatment and disposal, industrial and field services, used-oil collection and re-refining, parts cleaning, oil-and-gas services, and lodging. This filing covers the fiscal year ended December 31, 2016; quarterly information is included but the filing is an annual report. During the fourth quarter, management reorganized and recast prior periods into six operating segments: Technical Services, Industrial Services, Field Services, Safety-Kleen, Oil and Gas Field Services, and Lodging Services.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $2.755 billion | $3.275 billion | Down 15.9% |
| Income from operations | $69.2 million | $187.6 million | Down 63.1% |
| Operating margin | 2.5% | 5.7% | Down 3.2 percentage points |
| Net income (loss) | $(39.9) million | $44.1 million | Turned to a loss |
| Diluted EPS | $(0.69) | $0.76 | Down $1.45 |
| Adjusted EBITDA | $400.4 million | $504.2 million | Down 20.6% |
| Adjusted EBITDA margin | 14.5% | 15.4% | Down 0.9 percentage points |
| Operating cash flow | $259.6 million | $396.4 million | Down $136.8 million |
| Capital expenditures | $219.4 million | $257.2 million | Down $37.8 million |
- Service revenue was $2.281 billion and product revenue was $474.4 million. Total cost of revenues was $1.933 billion, and SG&A was $422.0 million.
- Cash and cash equivalents were $307.0 million at year-end, compared with $184.7 million in 2015.
- Total assets were $3.682 billion and stockholders’ equity was $1.084 billion.
- Long-term obligations were $1.633 billion, consisting primarily of $800.0 million of 5.25% senior unsecured notes due 2020 and $845.0 million of 5.125% senior unsecured notes due 2021.
- The company had no revolver borrowings, approximately $195.2 million of revolver availability, and $132.6 million of outstanding letters of credit.
- Net cash used in investing activities was $361.8 million, including $206.9 million for acquisitions. Financing activities generated $220.2 million, primarily from issuing $250.0 million of additional 2021 notes.
Material changes versus the prior comparable period
- Revenue declined primarily because 2015 included $313.8 million of large emergency-response revenue that did not recur, while industrial activity, oil-and-gas activity, commodity pricing and Canadian foreign-exchange translation also weakened.
- Technical Services revenue fell 7.2% to $1.057 billion; landfill volumes declined 34% and incinerator utilization fell to 88.8% from 90.9%.
- Industrial and Field Services revenue fell 41.2% to $582.2 million, and Adjusted EBITDA fell 68.3% to $51.2 million.
- Safety-Kleen revenue increased 5.8% to $996.1 million and Adjusted EBITDA increased 27.4% to $219.5 million, supported by acquisitions, the charge-for-oil program and cost improvements. Lower base- and blended-oil pricing reduced revenue by approximately $73.0 million.
- Oil, Gas and Lodging Services revenue fell 42.1% to $119.9 million and Adjusted EBITDA declined to negative $3.3 million. Rig counts serviced fell approximately 40% year over year.
- The company acquired seven businesses for approximately $205.0 million, primarily to expand used-oil collection, re-refining, blending and packaging. The acquisitions contributed approximately $69.8 million of 2016 direct revenue.
- Clean Harbors sold its non-core catalyst services business for approximately $50.6 million, or $49.2 million net of cash retained, recognizing a $16.9 million pretax gain.
- A $34.0 million goodwill impairment charge was recorded for Lodging Services, compared with a $32.0 million impairment charge for Oil and Gas Field Services in 2015. The 2016 impairment reflected prolonged weakness in Western Canada’s oil sands, project delays, lower forecasts and Fort McMurray forest-fire impacts.
- Environmental liabilities decreased modestly to $186.3 million from $188.2 million. Environmental-liability expenditures were $12.2 million in 2016 versus $20.1 million in 2015.
Guidance, outlook, management commentary and risks
- Management expected 2017 capital spending, net of disposals, of approximately $160 million to $170 million.
- A new El Dorado, Arkansas incinerator entered service in early 2017 and was expected to add approximately 70,000 tons of annual capacity.
- Management cited cost reductions in headcount, branch consolidation, third-party rentals, maintenance, procurement, supply chain and transportation as partially offsetting lower volumes and pricing.
- Key outlook sensitivities include crude-oil and base-oil prices, Western Canadian exploration and lodging demand, industrial production, emergency-response activity, waste volumes, pricing, the Canadian dollar and seasonality.
- Environmental regulation creates ongoing permitting, compliance, remediation, closure and post-closure obligations. Estimated regulatory financial-assurance requirements were $442.3 million for U.S. facilities and $41.7 million for Canadian facilities.
- The company had identified potential responsibility or indemnification obligations at 129 Superfund sites and was involved in approximately 60 Safety-Kleen product-liability proceedings. The filing states that ultimate outcomes cannot be predicted with assurance.
- Remedial liabilities were $128.0 million, with management estimating reasonably possible additional liabilities of up to $23.4 million. Recorded legal and administrative reserves were $22.0 million, with up to $1.9 million of additional reasonably possible exposure.
- Management stated that the company was in compliance with debt covenants and believed operating cash flow, cash balances and revolver availability were adequate to fund operations, capital spending, interest, acquisitions and planned stock repurchases. No dividend was paid or expected in the foreseeable future.
- Foreign-currency sensitivity was material: management estimated that a 10% strengthening or weakening of the Canadian dollar would change 2016 net income by approximately $10.1 million.
Most important facts for investors to verify
- Whether revenue and Adjusted EBITDA stabilize after the loss of 2015 emergency-response projects and amid ongoing Western Canadian weakness.
- Recovery in Oil, Gas and Lodging Services, including rig counts, lodge occupancy, customer budgets and pipeline-project timing.
- Safety-Kleen acquisition integration, charge-for-oil economics, base-oil pricing and the profitability of the OilPlus closed-loop initiative.
- Leverage, refinancing requirements for the $800.0 million 2020 notes and $845.0 million 2021 notes, interest burden and revolver availability.
- Actual 2017 capital spending versus the $160 million to $170 million expectation and the ramp-up of the new Arkansas incinerator.
- Changes in environmental, remedial and closure liabilities, required financial assurance, Superfund matters and product-liability claims.
- Potential additional goodwill or long-lived-asset impairments if oil-and-gas, lodging or industrial conditions remain depressed.
- Cash conversion and working-capital needs, particularly inventory growth associated with the closed-loop oil initiative.