Business Context and Reporting Period
Clean Harbors, Inc. is a North American provider of environmental, energy and industrial services, including hazardous-waste management, emergency response, industrial services, recycling, used-oil re-refining and parts-cleaning services. Operations are managed through Environmental Services and Safety-Kleen. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Financial Performance and Position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $868.7 million | $849.1 million | $1,649.5 million | $1,598.9 million |
| Income from operations | $73.0 million | $64.4 million | $96.8 million | $75.3 million |
| Operating margin | 8.4% | 7.6% | 5.9% | 4.7% |
| Net income | $36.2 million | $30.7 million | $37.2 million | $18.1 million |
| Diluted EPS | $0.65 | $0.54 | $0.66 | $0.32 |
| Adjusted EBITDA | $149.8 million | $139.6 million | $251.5 million | $227.8 million |
| Adjusted EBITDA margin | 17.2% | 16.4% | 15.2% | 14.2% |
| Net cash from operations | Not separately provided | Not separately provided | $138.5 million | $129.7 million |
| Adjusted free cash flow | $52.4 million | $29.7 million | $27.5 million | $38.2 million |
Q2 revenue increased 2.3% year over year and six-month revenue increased 3.2%. The Environmental Services segment generated direct revenue of $563.1 million in Q2 and $1.072 billion for the six months; Safety-Kleen generated $306.0 million and $578.5 million, respectively.
At June 30, 2019, cash and cash equivalents were $204.5 million and short-term marketable securities were $55.2 million. Total assets were $4.0 billion and stockholders’ equity was $1.2 billion. Cash and marketable securities totaled $259.7 million, compared with $279.4 million at December 31, 2018.
Debt at June 30, 2019 consisted principally of $738.5 million of term loans and $845.0 million of 5.125% senior unsecured notes due 2021, with carrying-value long-term obligations of $1.563 billion. The $400.0 million revolving credit facility had no borrowings; approximately $217.0 million was available, subject to $153.5 million of outstanding letters of credit.
Material Changes Versus the Prior Comparable Period
- Adjusted EBITDA increased 7.4% in Q2 and 10.4% for the six months, led by Environmental Services, which increased six-month Adjusted EBITDA 21.5%.
- Environmental Services revenue benefited from improved pricing and a more profitable waste-stream mix, as well as the Veolia acquisition for the six-month comparison. Incinerator utilization declined to 81.7% in Q2 and 79.2% for the six months from 89.8% and 88.5%, respectively, in 2018, primarily because of maintenance-related downtime and a first-quarter fire-related disruption at the Deer Park facility.
- Safety-Kleen Q2 revenue increased 3.9%, supported by core services, blended-oil sales and used-motor-oil collection. Six-month growth was 1.1%, as higher core-service and blended-oil revenue was partly offset by lower base-oil volumes and pricing.
- Net income increased substantially for the six-month period, partly reflecting higher operating income and a lower effective tax rate of 37.2% versus 48.0% in 2018.
- Operating cash flow increased $8.8 million, but adjusted free cash flow declined $10.7 million for the six months because capital expenditures increased to $118.4 million from $94.1 million.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing approximately $185.5 million of right-of-use assets and $188.5 million of lease liabilities at adoption, without a material impact on earnings or cash flow.
- The company completed acquisitions totaling approximately $25.3 million during the first half of 2019 and recorded preliminary goodwill of approximately $12.5 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2019 capital spending, net of disposals, of approximately $190 million to $210 million, compared with $118.4 million spent during the first six months.
- Management expected fewer incinerator downtime days in the second half of 2019 than in the second half of 2018 and expected operating cash flow to improve year over year.
- Management stated that liquidity and expected operating cash flow should be sufficient for operations, capital expenditures, interest, environmental liabilities and planned share repurchases. The company was in compliance with its debt covenants at June 30, 2019.
- On July 2, 2019, after quarter-end, the company issued $545.0 million of 4.875% notes due 2027 and $300.0 million of 5.125% notes due 2029. It repurchased $701.0 million of the 2021 notes and redeemed the remaining $144.0 million on July 17, 2019. The company expected to record an approximately $6.0 million loss on debt extinguishment in the third quarter.
- Key operating sensitivities include industrial activity, waste volumes and pricing, incinerator and landfill utilization, commodity prices for base and blended oils, raw-material and transportation costs, foreign-currency movements and regulatory requirements.
- Environmental liabilities totaled $194.1 million at June 30, 2019, including $75.8 million of closure and post-closure liabilities and $118.3 million of remedial liabilities. Future environmental regulations or remediation requirements could accelerate or increase cash payments.
- The company had reserves of $24.1 million for legal and administrative proceedings, with potential additional exposure estimated at up to $1.8 million. Product-liability claims, Superfund sites, regulatory proceedings and the unresolved potential cleanup liability at the Devil’s Swamp site remain contingencies.
- The Canadian dollar reduced consolidated revenue by approximately $5.0 million in Q2 and $11.6 million for the six months. No material changes to previously disclosed risk factors were reported.
Investor Verification Priorities
- Verify the sustainability of Environmental Services pricing and margin gains against lower incinerator utilization and facility downtime.
- Monitor Safety-Kleen exposure to base-oil pricing, product mix, used-oil collection costs and commodity-market volatility.
- Reconcile planned 2019 capital spending with adjusted free cash flow and liquidity.
- Confirm the post-quarter-end debt refinancing, the resulting interest burden and the third-quarter debt-extinguishment charge.
- Review environmental liabilities, Superfund matters, Devil’s Swamp exposure and product-liability claims for changes in estimated cash costs.
- Assess covenant headroom, revolving-credit availability and the effect of letters of credit on usable liquidity.
- Distinguish management’s non-GAAP Adjusted EBITDA and adjusted free cash flow from GAAP earnings and operating cash flow.