Clean Harbors, Inc. — 2Q 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, industrial services, emergency response, recycling and oil re-refining. This unaudited filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
On April 11, 2015, the Company acquired Thermo Fluids Inc. through its acquisition of Heckmann Environmental Services for a preliminary purchase price of approximately $77.1 million. Thermo Fluids contributed $11.7 million of revenue during the six months ended June 30, 2015.
Financial performance and key metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Total revenue | $936.2 million | $858.5 million | $1,668.7 million | $1,705.1 million |
| Income from operations | $60.8 million | $67.1 million | $68.1 million | $97.0 million |
| Net income | $10.4 million | $28.7 million | $3.3 million | $37.6 million |
| Diluted EPS | $0.18 | $0.47 | $0.06 | $0.62 |
| Adjusted EBITDA | $163.1 million | $135.8 million | $241.4 million | $237.8 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $193.8 million | $114.9 million |
Second-quarter revenue increased 9.1%, while six-month revenue declined 2.1%. Approximate operating margins were 6.5% for the quarter and 4.1% for the six months, versus 7.8% and 5.7%, respectively, in the prior-year periods. Approximate net margins were 1.1% and 0.2%, versus 3.3% and 2.2%.
Service revenue increased substantially, but product revenue declined. Second-quarter Industrial and Field Services revenue benefited from emergency-response work, including avian-flu and oil-spill projects. Oil-related businesses, Canadian lodging operations and oil re-refining were pressured by low oil prices, lower activity and unfavorable foreign exchange.
At June 30, 2015, cash and cash equivalents were $173.6 million, compared with $246.9 million at December 31, 2014. Current assets were $1.16 billion and current liabilities were $697.2 million. The Company had $1.395 billion of senior unsecured notes outstanding, consisting of $800 million due in 2020 and $595 million due in 2021. No revolver borrowings were outstanding; $242.8 million was available under the $400 million revolving facility, subject to borrowing-base limitations, and letters of credit totaled $144.9 million.
Six-month investing cash outflows were $204.2 million, including $124.1 million of capital expenditures and $79.6 million for acquisitions. Financing cash outflows were $56.2 million, including $32.2 million of share repurchases. The Company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Second-quarter revenue rose $77.7 million, or 9.1%, primarily from $174.3 million of incremental emergency-response revenue in Industrial and Field Services.
- Six-month revenue declined $36.4 million, or 2.1%, primarily because of lower Oil and Gas Field Services, Lodging Services and Oil Re-refining and Recycling revenue.
- Adjusted EBITDA increased 20.1% in the quarter and 1.5% year to date, but GAAP operating income declined because of a $32.0 million goodwill impairment charge.
- The Oil and Gas Field Services reporting unit recorded a full impairment of its $32.0 million goodwill balance. Management lowered its 2015 revenue-growth assumption for the unit from 1% growth to a 24% contraction and reduced its 2015 EBITDA-margin assumption from 13% to 6%.
- The effective tax rate was 74.6% for the quarter and 88.6% year to date. Excluding the impairment charge, effective tax rates were 41.8% and 42.2%, respectively, compared with 39.1% and 38.9% in 2014.
- Accumulated other comprehensive loss increased to $176.0 million from $110.8 million at year-end, primarily because of $65.2 million of foreign-currency translation losses.
- The share-repurchase authorization was increased to $300 million. Approximately 2.5 million shares had been repurchased for $136.5 million through June 30, leaving approximately $163.5 million authorized.
Guidance, outlook, risks and unusual items
- Management continued to target approximately $200 million of 2015 capital expenditures, excluding approximately $50 million expected for the El Dorado incinerator.
- Management expected operating cash flow, existing cash and revolver availability to fund operations, capital expenditures, interest, environmental liabilities and planned share repurchases.
- The planned carve-out was expanded to include the entire Lodging Services segment along with Oil and Gas Field Services. Timing could exceed 12 months, and completion remains subject to market conditions, tax and financing considerations, regulatory approvals, securities filings and board approval.
- Key operating risks include continued low oil prices, declining rig counts, reduced exploration and production budgets, lower Canadian activity, foreign-exchange volatility, product-price pressure in base oils, weather and emergency-project variability, and underutilized or unavailable facilities.
- Environmental liabilities totaled $200.6 million at June 30, 2015, including $51.8 million of closure and post-closure liabilities and $148.8 million of remedial liabilities. The Company stated that future regulatory changes or unexpected remediation requirements could accelerate or increase payments.
- Legal and administrative proceeding reserves totaled $30.6 million, with reasonably possible additional exposure estimated at up to $2.5 million. The Company is involved in Superfund, product-liability, regulatory and other environmental proceedings, and some ultimate liabilities cannot be estimated reliably.
- The filing states that disclosure controls were effective as of June 30, 2015 and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the Oil and Gas Field Services downturn persists and produces additional impairment of goodwill or other long-lived assets.
- Whether emergency-response revenue was temporary and whether underlying demand supports the higher second-quarter Adjusted EBITDA.
- Progress, cost and timing of the proposed Lodging Services and Oil and Gas Field Services carve-out.
- Actual 2015 capital expenditures, including the El Dorado incinerator, and resulting free cash flow after capital spending.
- Cash conversion of the significant second-quarter increases in accounts receivable and accounts payable.
- Compliance with debt covenants and the availability of the revolving facility after letters of credit and borrowing-base restrictions.
- Potential changes in environmental, Superfund, product-liability and other legal exposures beyond recorded reserves.
- The sustainability of share repurchases given lower cash balances, acquisition spending and $1.395 billion of senior debt.