Clean Harbors, Inc. — FY2017 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 workforce lodging. The filing covers the fiscal year ended December 31, 2017; quarterly data shows fourth-quarter 2017 results separately.
The company operates through Technical Services, Industrial and Field Services, Safety-Kleen, and Oil, Gas and Lodging Services. Approximately 81.2% of 2017 revenue was generated in the United States and Puerto Rico and 18.7% in Canada.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $2,945.0 million | $2,755.2 million | Up 6.9% |
| Income from operations | $127.8 million | $69.2 million | Up $58.6 million |
| Operating margin | 4.3% | 2.5% | Improved |
| Net income (loss) | $100.7 million | $(39.9) million | Returned to profitability |
| Diluted EPS | $1.76 | $(0.69) | Improved |
| Adjusted EBITDA | $425.7 million | $400.4 million | Up 6.3% |
| Adjusted EBITDA margin | 14.5% | 14.5% | Approximately unchanged |
| Net cash from operating activities | $285.7 million | $259.6 million | Up $26.1 million |
| Adjusted free cash flow | $140.2 million | $61.1 million | Up $79.2 million |
| Cash and marketable securities | $357.6 million | $307.0 million | Up $50.6 million |
Service revenue was $2,398.7 million and product revenue was $546.3 million. Total assets were $3.71 billion and stockholders’ equity was $1.19 billion at year-end.
At December 31, 2017, debt consisted principally of $400.0 million of 5.25% senior unsecured notes due 2020, $845.0 million of 5.125% senior unsecured notes due 2021, and a $398.0 million senior secured term loan due 2024. The company also had $134.1 million of letters of credit and approximately $217.8 million of availability under its revolving credit facility. Management reported compliance with debt covenants.
Material changes versus the prior comparable period
- Technical Services revenue increased 8.3% to $1.14 billion, supported by higher waste volumes and the new El Dorado, Arkansas incinerator, which added approximately 70,000 tons of capacity. Landfill volumes increased 12.1%.
- Safety-Kleen revenue increased 9.2% to $1.09 billion, driven by improved oil-product pricing, acquisitions, organic growth, and the OilPlus closed-loop initiative. Segment Adjusted EBITDA increased 13.8% to $249.8 million.
- Industrial and Field Services revenue increased 2.0% to $593.7 million, but segment Adjusted EBITDA declined 16.0% to $43.0 million because of pricing pressure, acquisition integration costs, and lower margins.
- Oil, Gas and Lodging Services revenue was essentially flat at $119.6 million. Higher oil-and-gas activity was offset by lower lodging occupancy, room rates, and manufacturing revenue. The number of rigs serviced increased approximately 44%.
- The company completed the sale of its non-core Transformer Services business for approximately $45.5 million and recorded a pre-tax gain of $30.7 million.
- The company acquired four businesses for approximately $51.9 million, including Lonestar West, which expanded daylighting and hydro-excavation capabilities, and businesses supporting Safety-Kleen’s oil-products strategy.
- Capital expenditures declined to $159.9 million, compared with $219.4 million of additions to property, plant and equipment in 2016, primarily because the El Dorado incinerator construction program was substantially completed.
- Net income benefited from a provisional $93.0 million tax benefit related to the Tax Cuts and Jobs Act. Excluding that benefit, management indicated that 2017 would have included a $51.0 million tax provision.
Guidance, outlook, commentary, risks, and unusual items
Management expects 2018 capital expenditures, net of disposals, of approximately $170.0 million to $190.0 million, primarily reflecting incremental requirements from the Veolia industrial-cleaning acquisition and landfill cell construction. Management also expected Safety-Kleen margins to improve based on positive pricing trends and expected Technical Services margin improvement as incinerator utilization normalized.
On February 23, 2018, after year-end, Clean Harbors acquired Veolia’s U.S. Industrial Cleaning Division for approximately $120.0 million, subject to customary adjustments. Purchase accounting was still being prepared at the filing date.
- Major risks include environmental regulation, permit renewal or loss, remediation obligations, hazardous-material incidents, employee safety, insurance availability, cyber incidents, acquisitions and integration, foreign-currency movements, and severe weather or natural disasters.
- Environmental liabilities totaled $185.5 million at year-end, comprising $61.0 million of closure and post-closure liabilities and $124.5 million of remedial liabilities. Management estimated reasonably possible additional remedial liabilities of up to approximately $23.1 million.
- The company had identified itself or predecessors as potentially responsible parties at 129 Superfund sites. Legal and administrative reserves totaled $19.3 million, with reasonably possible additional exposure of up to approximately $1.8 million.
- Safety-Kleen was involved in approximately 52 product-liability proceedings. The filing states that insurance covered settled or dismissed claims during 2017, but future outcomes and coverage, particularly for punitive damages, remain uncertain.
- Oil-price and base-oil-price volatility can affect Safety-Kleen revenue, collection costs, product margins, and inventory values.
- Oil-and-gas and lodging operations remain exposed to Western Canadian energy activity, commodity prices, customer spending, pipeline-related delays, and lodge occupancy.
- No goodwill impairment was recorded in 2017, but the Industrial Services reporting unit had only a 13.7% estimated fair-value cushion over carrying value, making results sensitive to revenue growth, margins, and discount-rate assumptions.
- The filing contains no dividend guidance; the company has never paid cash dividends and does not expect to do so in the foreseeable future. The board authorized up to $600 million under the share-repurchase program, with $351.2 million remaining at year-end.
Most important facts for an investor to verify
- Whether the 2017 earnings improvement is sustainable excluding the $93.0 million provisional tax benefit, the $30.7 million divestiture gain, and the $7.9 million debt-extinguishment loss.
- Whether Technical Services margins improve after the El Dorado incinerator ramp-up and whether the added capacity achieves acceptable utilization and pricing.
- Whether Safety-Kleen’s improved pricing and OilPlus strategy continue to expand margins despite oil-price volatility and collection-cost changes.
- The integration, financing, and earnings contribution of the February 2018 Veolia acquisition.
- Debt maturity and refinancing requirements, especially the $400.0 million of notes due in 2020 and $845.0 million due in 2021, together with variable-rate exposure on the term loan.
- Actual cash requirements for environmental remediation, closure and post-closure obligations, letters of credit, leases, and self-insurance.
- Potential changes to the provisional Tax Act accounting, valuation allowances, and the company’s ability to use deferred tax assets.
- Future impairment risk in Industrial Services, Oil and Gas Field Services, and Lodging Services if energy-market conditions or operating forecasts deteriorate.