Clean Harbors, Inc. — 2014 Q2 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, waste treatment, industrial, recycling, lodging and oil-and-gas field services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods. Management reorganized reporting into six segments: Technical Services, Industrial and Field Services, Oil Re-refining and Recycling, SK Environmental Services, Lodging Services, and Oil and Gas Field Services; prior-period segment data was recast.
Financial performance and position
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Total revenue | $858.5 million | $860.5 million | $1.705 billion | $1.723 billion |
| Income from operations | $67.1 million | $53.2 million | $97.0 million | $88.1 million |
| Operating margin | 7.8% | 6.2% | 5.7% | 5.1% |
| Net income | $28.7 million | $22.9 million | $37.6 million | $33.4 million |
| Net margin | 3.3% | 2.7% | 2.2% | 1.9% |
| Diluted EPS | $0.47 | $0.38 | $0.62 | $0.55 |
| Adjusted EBITDA | $135.8 million | $123.6 million | $237.8 million | $234.8 million |
| Adjusted EBITDA margin | 15.8% | 14.4% | 13.9% | 13.6% |
Revenue declined 0.2% in the quarter and 1.0% year to date, primarily because foreign currency translation reduced comparable revenue by approximately 2%, partly offset by Evergreen acquisition revenue. Operating income increased 26.1% in the quarter and 10.2% year to date, driven primarily by corporate cost-saving initiatives. Adjusted EBITDA increased 9.9% in the quarter and 1.3% year to date.
- Technical Services direct revenue increased 5.0% in the quarter and 5.5% year to date; incinerator utilization was 95.0% in the quarter and 91.0% year to date.
- Oil Re-refining and Recycling direct revenue increased 19.3% in the quarter and 3.1% year to date, principally from Evergreen, although year-to-date results were affected by a less favorable product mix and higher utilities and shutdown costs.
- Industrial and Field Services, Lodging Services, and Oil and Gas Field Services declined, reflecting lower oil-sands activity, project delays, pricing pressure, and foreign exchange effects.
- The effective tax rate rose to 39.1% in the quarter and 38.9% year to date, versus 35.1% and 34.2%, respectively, in 2013.
Cash flow, liquidity and debt
- Operating cash flow was $114.9 million for the first six months, down from $137.6 million, primarily because of working-capital changes and payments of liabilities outstanding at the beginning of the year.
- Investing cash flow was an outflow of $131.3 million, including $138.2 million of capital expenditures, $6.2 million for an acquisition, and $12.9 million of proceeds from marketable securities.
- Financing cash flow was an outflow of $14.9 million, including $14.7 million of share repurchases and $5.0 million of debt repayment.
- Cash and cash equivalents were $278.6 million at June 30, 2014, compared with $310.1 million at December 31, 2013. Foreign subsidiaries held $83.8 million; U.S. operations held approximately $194.8 million.
- Long-term obligations totaled $1.395 billion, consisting of $800 million of 5.25% senior notes due 2020 and $595 million of 5.125% senior notes due 2021. The revolving credit facility had no borrowings, $287.8 million available capacity, and $112.2 million of outstanding letters of credit.
- Management stated that the company was in compliance with debt covenants and expects operating cash flow, cash balances and available revolver capacity to meet anticipated liquidity needs.
Material changes, outlook and unusual items
- Clean Harbors acquired certain carbon-treatment and remediation-equipment assets on May 30, 2014 for approximately $6.2 million in cash. Evergreen, acquired in September 2013 for $56.3 million, continued to affect results.
- The company authorized up to $150 million of share repurchases. By June 30, it had repurchased approximately 273,000 shares for $16.2 million, with $133.8 million remaining under the authorization.
- Management anticipated approximately $250 million of 2014 capital spending, including the El Dorado incinerator project.
- Total environmental liabilities were $217.7 million at June 30, 2014, including $49.9 million of closure and post-closure liabilities and $167.8 million of remedial liabilities. Management expects these obligations to be paid over many years, but changes in environmental laws or conditions could accelerate or increase payments.
- Goodwill totaled $579.0 million. Oil Re-refining and Recycling had approximately $174.7 million of goodwill and a 2013 year-end estimated fair value less than 10% above carrying value. Oil and Gas Field Services had approximately $36.4 million of goodwill and experienced pricing pressure and lower activity. No interim impairment test was recorded, but future underperformance could result in a material impairment charge.
- Recorded legal and administrative reserves were $44.4 million, with potential additional exposure estimated at up to $3.5 million. Proceedings include environmental remediation, Superfund matters, product-liability claims, and commercial or employment claims.
- Foreign exchange, oil prices, refined-oil supply and product mix, oil-and-gas activity, pricing pressure, project delays, regulatory requirements and environmental liabilities remain important business risks. The filing reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether cost-saving initiatives can sustain the improved operating and Adjusted EBITDA margins despite modest or declining revenue.
- Progress and returns from the Evergreen and carbon-treatment acquisitions, including Oil Re-refining and Recycling product mix and operating costs.
- Actual 2014 capital expenditures versus the approximately $250 million expectation and the resulting effect on free cash flow.
- Liquidity after share repurchases, environmental expenditures, interest payments and scheduled debt obligations.
- Performance of the Oil Re-refining and Recycling and Oil and Gas Field Services reporting units and the potential for goodwill impairment.
- Developments in environmental, Superfund, product-liability and other legal proceedings, including the adequacy of recorded reserves and insurance or indemnification coverage.
- Adjusted EBITDA should be evaluated alongside GAAP income, cash flow and margins because the company-defined measure excludes interest, taxes, depreciation, amortization, environmental-liability accretion and other items.