Clean Harbors, Inc. — 2022 Q1 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, hazardous-waste management, industrial, emergency-response, recycling and used-oil re-refining services across North America. The company reports two operating segments: Environmental Services and Safety-Kleen Sustainability Solutions. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Results include HydroChemPSC, acquired on October 8, 2021, for an adjusted purchase price of approximately $1.225 billion. HydroChemPSC contributed significantly to Environmental Services revenue growth.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $1,169.1 million | $808.1 million | 44.7% increase |
| Income from operations | $87.1 million | $50.9 million | 71.3% increase |
| Net income | $45.3 million | $21.7 million | 108.5% increase |
| Diluted EPS | $0.83 | $0.39 | Increase |
| Adjusted EBITDA | $180.3 million | $129.5 million | 39.2% increase |
| Adjusted EBITDA margin | 15.4% | 16.0% | Down 0.6 percentage points |
| Net cash from/(used in) operating activities | $(38.6) million | $103.0 million | Decrease |
| Adjusted free cash flow | $(107.6) million | $62.3 million | Decrease |
| Capital expenditures | $70.3 million | $41.9 million | Increase |
Reported gross margin was approximately 27.9%, compared with 30.6% in the prior-year quarter. Operating margin improved to approximately 7.4% from 6.3%, while net margin increased to approximately 3.9% from 2.7%. The lower gross and Adjusted EBITDA margins primarily reflected business mix, inflationary cost pressures and the addition of lower-margin industrial services.
Environmental Services direct revenue increased 44.7% to $947.4 million, and segment Adjusted EBITDA increased 30.9% to $183.6 million. Safety-Kleen Sustainability Solutions direct revenue increased 44.4% to $221.6 million, and segment Adjusted EBITDA increased 64.0% to $51.9 million, primarily from higher base-oil and blended-oil pricing.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $339.6 million at March 31, 2022, down from $452.6 million at December 31, 2021.
- Cash and short-term marketable securities totaled $414.9 million at March 31, 2022, compared with $534.3 million at year-end 2021.
- Total debt at carrying value was approximately $2.531 billion, including $17.5 million classified as current debt.
- Debt consisted primarily of $717.7 million of 2024 secured term loans, $997.5 million of 2028 secured term loans, $545.0 million of 2027 unsecured notes and $300.0 million of 2029 unsecured notes.
- The $400.0 million revolving credit facility had no borrowings, approximately $290.3 million available capacity and $109.7 million of outstanding letters of credit.
- Management stated that it expected future operating cash flow, existing cash and revolver availability to be sufficient for operating and internal investing needs, and believed the company would continue to comply with debt covenants.
Material changes versus the prior comparable period
- Revenue growth reflected the HydroChemPSC acquisition, organic growth in Environmental Services and higher pricing for Safety-Kleen oil products.
- Environmental Services industrial-service revenue increased $184.4 million, including approximately $155.8 million from HydroChemPSC. Technical-services revenue increased $63.8 million.
- Incinerator utilization improved to 85% from 80%, partly because the prior-year period was affected by significant weather events.
- Field and emergency-response revenue increased despite a $19.5 million decline in COVID-19 decontamination revenue.
- Costs increased because of higher labor, transportation, equipment, supplies, energy and raw-material costs. Environmental Services cost of revenue increased to 72.3% of direct revenue from 68.9%; Safety-Kleen Sustainability Solutions improved to 68.6% from 70.6%.
- Operating cash flow declined sharply because of increased working capital, higher incentive compensation and interest payments, and increased capital spending.
- Interest expense increased to $25.0 million from $17.9 million, primarily reflecting acquisition-related debt.
- The effective tax rate declined to 27.8% from 31.5%, largely because certain Canadian entities generated fewer unbenefited losses.
- The company repurchased approximately 41,000 shares for $3.7 million during the quarter. Approximately $151.7 million remained available under the $600.0 million repurchase authorization.
Guidance, outlook, commentary, risks and unusual items
- Management forecast 2022 capital spending, net of disposals, of $310 million to $330 million, including approximately $40 million to $45 million for the new Kimball, Nebraska incinerator. $4.6 million had been spent on that project through March 31, 2022.
- Management cited inflationary pressures in labor, transportation, supplies and energy, and stated that pricing actions, cost monitoring and operational improvements were being used to mitigate margin impacts.
- Safety-Kleen benefited from favorable product pricing and spread management, although higher product prices also increased the cost of used-oil feedstock.
- Environmental liabilities totaled $225.4 million, comprising $100.7 million of closure and post-closure liabilities and $124.7 million of remedial liabilities, up 6.9% from December 31, 2021. The increase primarily reflected liabilities assumed in a 2022 real-estate acquisition.
- The company had $36.2 million of reserves for legal and administrative proceedings. Management did not believe potential liabilities beyond recorded reserves would materially affect financial position, results of operations or cash flow, but environmental, Superfund, product-liability and regulatory matters remain subject to uncertainty.
- The company was identified as a potentially responsible party or potential responsible party at 131 Superfund-related sites. Management stated that potential liability is difficult to estimate and could exceed $1 million at three sites.
- Interest-rate swaps fixed rates on portions of the variable-rate term loans, reducing exposure to rate increases but creating fair-value and hedge-accounting exposures.
- No material changes were reported to the risk factors in the 2021 Form 10-K, and management reported effective disclosure controls with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Separate the organic contribution from the HydroChemPSC acquisition when assessing revenue and Adjusted EBITDA growth.
- Monitor whether inflation, labor and transportation costs continue to compress Environmental Services margins.
- Assess the sustainability of Safety-Kleen’s favorable oil-product pricing and the related cost of used-oil feedstock.
- Reconcile the substantial decline in operating cash flow and adjusted free cash flow with reported earnings and the company’s working-capital requirements.
- Track leverage, interest expense, variable-rate debt exposure, covenant compliance and revolver availability.
- Verify execution and funding requirements for the $310 million to $330 million 2022 capital-spending plan and the Kimball incinerator project.
- Review environmental liabilities, Superfund exposures, product-liability claims, regulatory proceedings and the adequacy of related reserves and insurance.
- Consider that Adjusted EBITDA and adjusted free cash flow are non-GAAP measures and may not be comparable with similarly titled measures used by other companies.