Clean Harbors, Inc. — Q3 2015 Form 10-Q Summary
Business Context and Reporting Period
Clean Harbors provides environmental, energy and industrial services across North America, including hazardous-waste management, emergency response, industrial services, recycling and used-oil re-refining. This unaudited report covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
On April 11, 2015, the company acquired Thermo Fluids Inc. through the acquisition of Heckmann Environmental Services for a preliminary purchase price of $77.1 million. The acquisition contributed $13.1 million of third-quarter revenue and $24.8 million of revenue for the first nine months.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $893.4 million | $851.5 million | $2,562.1 million | $2,556.6 million |
| Operating income (loss) | $94.0 million | $(42.7) million | $162.0 million | $54.3 million |
| Net income (loss) | $40.2 million | $(93.3) million | $43.5 million | $(55.7) million |
| Diluted EPS | $0.69 | $(1.55) | $0.74 | $(0.92) |
| Adjusted EBITDA | $165.6 million | $153.4 million | $407.0 million | $391.1 million |
| Adjusted EBITDA margin | 18.5% | 18.0% | 15.9% | 15.3% |
Q3 revenue increased 4.9%, while nine-month revenue was essentially flat, increasing 0.2%. Net margin was 4.5% in Q3 2015 versus negative 11.0% in Q3 2014; the nine-month net margin was 1.7% versus negative 2.2% in the prior-year period. The filing does not present a separate GAAP gross-margin subtotal; total cost of revenues was $634.6 million in Q3 and $1,833.8 million for the nine months.
- Cash flow: Nine-month operating cash flow was $309.6 million, up from $196.0 million. Capital expenditures were $190.0 million, acquisitions used $79.6 million, and investing cash outflow was $270.5 million.
- Liquidity: Cash and cash equivalents were $179.2 million at September 30, 2015, down from $246.9 million at December 31, 2014. The revolving credit facility had no borrowings, $232.0 million available capacity and $144.3 million of outstanding letters of credit.
- Debt: Long-term obligations totaled $1.395 billion, consisting of $800 million of 5.25% notes due 2020 and $595 million of 5.125% notes due 2021. The company reported compliance with debt covenants.
- Capital allocation: The company repurchased approximately 1.3 million shares for $69.8 million during the first nine months and had $125.8 million remaining under its $300 million authorization.
- Environmental liabilities: Closure, post-closure and remedial liabilities totaled $196.6 million, down from $205.8 million at year-end 2014.
Material Changes Versus the Prior Comparable Period
- Industrial and Field Services direct revenue increased 94.3% in Q3 and 63.3% for the nine months, primarily due to emergency-response work, including avian-flu and oil-spill projects, and higher U.S. refinery turnaround activity. Adjusted EBITDA increased 207.6% in Q3 and 116.4% for the nine months.
- Technical Services direct revenue declined 8.0% in Q3 and 3.8% for the nine months, reflecting lower landfill volumes, lower oil-and-gas waste streams and project delays. Adjusted EBITDA declined 9.1% and 6.1%, respectively.
- Kleen Performance Products direct revenue declined 12.2% in Q3 and 9.5% for the nine months due to lower oil-product pricing and volumes. Adjusted EBITDA declined 43.5% and 52.3%, respectively.
- Lodging Services direct revenue declined 61.7% in Q3 and 48.8% for the nine months. Primary fixed-lodge occupancy fell to 19% and 33%, respectively, from 67% and 61% in the prior-year periods.
- Oil and Gas Field Services direct revenue declined 29.4% in Q3 and 37.7% for the nine months. Rig counts serviced declined approximately 27% and 29%, respectively, reflecting lower oil prices, customer exploration budgets and project cancellations.
- Foreign-currency translation, principally from the weakening Canadian dollar, reduced direct revenue by approximately $32.4 million in Q3 and $81.7 million for the nine months.
- The company recorded a $32.0 million goodwill impairment charge in the Oil and Gas Field Services reporting unit during the second quarter of 2015. This compared with a $123.4 million impairment charge for Kleen Performance Products in Q3 2014.
Guidance, Outlook, Risks and Unusual Items
Management continued to target approximately $200 million of 2015 capital expenditures, excluding approximately $55 million expected for construction of the El Dorado incinerator. The company also continued planning the potential carve-out of its Lodging and Oil and Gas Field Services segments, but stated that timing, structure and completion remained uncertain and subject to market, regulatory, tax, cost, debt-covenant and board-approval conditions.
Management identified depressed oil prices, declining rig counts, lower customer budgets, reduced Canadian oil-sands activity and foreign-currency movements as significant pressures. Continued weakness could lead to additional goodwill or long-lived-asset impairments, particularly in Oil and Gas Field Services and Lodging Services.
Environmental, regulatory and litigation exposure remains material. Recorded reserves for legal and administrative proceedings were $30.0 million, with reasonably possible additional exposure of up to $2.4 million. The company was associated with 128 Superfund sites, although management stated that regulatory fines and penalties were not expected to be material in aggregate. Environmental liabilities could require earlier or greater payments if laws, regulations or site conditions change.
The financial statements were unaudited. Management concluded that disclosure controls were effective as of September 30, 2015, and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether emergency-response revenue was recurring or represented a temporary concentration that could normalize in later periods.
- The sustainability of improved Industrial and Field Services margins and the extent to which fixed costs can be reduced in weaker oil-related businesses.
- Oil-price, rig-count and Canadian-dollar assumptions underlying the Oil and Gas Field Services and Lodging Services outlook.
- Potential for additional goodwill or long-lived-asset impairments under continued energy-market weakness.
- Cash requirements for the El Dorado incinerator, planned capital expenditures, share repurchases and the potential segment carve-out.
- Debt maturities, covenant headroom, availability under the revolving facility and the effect of outstanding letters of credit on liquidity.
- Changes in environmental liabilities, Superfund matters, product-liability claims and other regulatory contingencies.