Clean Harbors, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. The interim financial statements are unaudited. Clean Harbors provides environmental, industrial, hazardous-waste management, emergency-response, used-oil recycling, re-refining and related services across the United States and Canada. The company reports Environmental Services and Safety-Kleen Sustainability Solutions as operating segments.
Financial Performance and Position
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $1.366 billion | $1.363 billion | $4.071 billion | $3.889 billion |
| Income from operations | $154.4 million | $209.1 million | $465.1 million | $507.4 million |
| Net income | $91.3 million | $135.8 million | $279.5 million | $329.3 million |
| Diluted EPS | $1.68 | $2.50 | $5.14 | $6.04 |
| Adjusted EBITDA | $255.0 million | $308.6 million | $757.7 million | $797.9 million |
| Adjusted EBITDA margin | 18.7% | 22.6% | 18.6% | 20.5% |
| Net cash from operations | Not separately provided | Not separately provided | $455.7 million | $357.5 million |
| Adjusted free cash flow | Not separately provided | Not separately provided | $148.9 million | $118.1 million |
Reported revenue was essentially flat in the third quarter, increasing 0.2%, while nine-month revenue increased 4.7%. Q3 operating margin was approximately 11.3%, compared with 15.3% in the prior-year quarter; nine-month operating margin was approximately 11.4%, compared with 13.0%. Q3 net margin was approximately 6.7%, compared with 10.0%; nine-month net margin was approximately 6.9%, compared with 8.5%.
- Environmental Services: Direct revenue increased 5.5% in Q3 and 8.5% for the nine months. Adjusted EBITDA increased 10.9% in Q3 to $289.0 million and 15.3% for the nine months to $822.9 million. Q3 margin improved to 25.2% from 24.0%; nine-month margin improved to 24.3% from 22.8%.
- Safety-Kleen Sustainability Solutions: Direct revenue declined 20.7% in Q3 and 10.7% for the nine months, primarily because of lower base-oil pricing. Adjusted EBITDA declined 69.8% in Q3 to $31.1 million and 50.0% for the nine months to $126.0 million. Q3 margin fell to 14.2% from 37.3%.
- Cash and liquidity: Cash and cash equivalents were $336.0 million and short-term marketable securities were $84.0 million at September 30, 2023, totaling $420.0 million versus $554.6 million at December 31, 2022. The company had $277.6 million available under its $400.0 million revolving credit facility, with $122.4 million of letters of credit outstanding.
- Debt: Long-term debt at carrying value was $2.293 billion, down from $2.415 billion at year-end 2022. The company issued $500.0 million of 6.375% senior notes due 2031 and used the proceeds, borrowings and cash to repay $614.0 million of 2024 term loans. There were no revolver borrowings at September 30, 2023.
- Capital expenditures: Property, plant and equipment additions were $311.9 million for the nine months, compared with $244.5 million in 2022. The company spent approximately $57.1 million on the Kimball, Nebraska incinerator during the period.
Material Changes Versus the Prior Comparable Period
- Environmental Services growth and improved pricing more than offset lower Safety-Kleen oil-product pricing at the revenue level, but consolidated profitability declined because Safety-Kleen margins contracted sharply.
- Base-oil revenue declined $54.1 million in Q3 and $85.8 million for the nine months despite higher volumes. Higher used-oil collection pricing and increased blended-oil volumes partially offset the decline.
- Environmental Services incinerator utilization was 86% in Q3, unchanged year over year, but nine-month utilization fell to 83% from 87% because of unplanned maintenance outages and significant weather events earlier in 2023.
- Operating cash flow increased $98.2 million, while investing cash use increased $165.1 million, primarily because of higher capital spending, the Thompson Industrial acquisition and investment activity.
- SG&A increased 12.7% in Q3 and 10.2% for the nine months. Depreciation and amortization increased 5.2% in Q3 and 2.6% for the nine months.
- The company acquired Thompson Industrial Services on March 31, 2023, for a net purchase price of approximately $110.9 million. The acquisition expanded Environmental Services industrial operations in the southeastern United States; its reported contribution was immaterial to consolidated results.
- The company adopted a co-CEO structure effective March 31, 2023, with Michael L. Battles and Eric W. Gerstenberg serving as co-CEOs. Management continued to report the same two operating segments.
Outlook, Risks and Unusual Items
- Management expects 2023 capital spending, net of disposals, of approximately $400 million to $420 million, including about $85 million for the Kimball incinerator. The project’s estimated total cost is approximately $180 million, with completion anticipated in late 2024.
- Management expects cash from operations to fund anticipated capital spending and believes operating cash flow, existing cash and revolver availability will meet foreseeable liquidity needs.
- The company expects an effective debt interest rate of approximately 5.45% for the remainder of 2023 under the current interest-rate environment and debt portfolio.
- Key risks include commodity-driven base-oil pricing and used-oil collection costs; industrial and automotive demand; incinerator capacity and outages; weather; inflation in labor, transportation and energy; competition; regulatory changes; environmental liabilities; and foreign-currency effects.
- Environmental liabilities totaled $231.6 million at September 30, 2023, including $119.9 million of closure and post-closure liabilities and $111.7 million of remedial liabilities. Management expects payments over many years but cautions that regulatory changes or other events could accelerate or increase required payments.
- The company had reserves of $31.0 million for legal and administrative proceedings. It was associated with 131 Superfund-related sites and faced approximately 65 pending Safety-Kleen product-liability proceedings. Management believes amounts beyond recorded reserves are not reasonably expected to be material, although outcomes cannot be predicted with assurance.
- Unusual or nonrecurring items included a $2.4 million loss on early extinguishment of debt in 2023, an $8.3 million interest benefit from settling interest-rate swaps, and an $8.9 million gain on a business sale in the 2022 comparable period.
Investor Verification Priorities
- Verify whether lower base-oil prices and higher re-refinery costs continue to pressure Safety-Kleen revenue and margins.
- Track Environmental Services incinerator utilization, pricing, project activity and the benefits from the Thompson Industrial acquisition.
- Compare actual 2023 capital spending with the $400 million to $420 million outlook and monitor the Kimball incinerator’s cost and completion schedule.
- Assess leverage, interest expense, maturity dates, variable-rate exposure and compliance with debt covenants.
- Monitor operating cash flow and adjusted free cash flow after elevated capital expenditures, acquisitions and environmental payments.
- Review developments in Superfund, product-liability and other environmental proceedings, including the adequacy of recorded reserves and insurance coverage.
- Consider the limitations of non-GAAP Adjusted EBITDA and adjusted free cash flow and reconcile them to GAAP results.