Clean Harbors, Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
Clean Harbors, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2014, with comparative results for the three months ended March 31, 2013. The company provides environmental, hazardous-waste management, industrial, field, oil-re-refining and oil-and-gas services through five reportable segments. Results include Evergreen Oil, acquired in September 2013 for approximately $55.9 million.
Financial performance and key metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $846.7 million | $862.2 million | Down 1.8% |
| Income from operations | $29.9 million | $34.8 million | Down 14.1% |
| Net income | $9.0 million | $10.5 million | Down 14.7% |
| Diluted EPS | $0.15 | $0.17 | Down $0.02 |
| Adjusted EBITDA | $102.0 million | $111.2 million | Down 8.3% |
| Net cash from operating activities | $4.6 million | $39.6 million | Down $35.0 million |
Gross profit was $220.9 million versus $226.1 million. Operating margin was approximately 3.5%, compared with 4.0% in the prior-year quarter; net margin was approximately 1.1%, compared with 1.2%. Adjusted EBITDA margin was approximately 12.0%, compared with 12.9%.
Operating results benefited from lower selling, general and administrative expense, including approximately $4.7 million of lower severance and integration costs. These benefits were more than offset by lower revenue and a $9.4 million increase in depreciation and amortization, primarily from acquisitions and recent capital expenditures. Other income increased to $4.2 million, primarily from a $3.3 million realized gain on marketable securities.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $249.0 million at March 31, 2014, down from $310.1 million at December 31, 2013. Marketable securities were $0.2 million, compared with $12.4 million at year-end.
- Cash used in investing activities was $62.3 million, including $75.0 million of capital expenditures and $1.1 million of additions to intangible assets, partly offset by $12.9 million of proceeds from marketable securities.
- Total long-term debt was $1.4 billion, consisting of $800 million of 5.25% senior notes due 2020 and $600 million of 5.125% senior notes due 2021. No balance was outstanding under the revolving credit facility.
- The $400 million revolving facility had $251.1 million available, with $148.9 million of outstanding letters of credit. Management stated that the company was in compliance with debt covenants.
- Management expects 2014 capital spending of approximately $240 million, including the El Dorado incinerator project.
- On February 25, 2014, the board authorized up to $150 million of common-stock repurchases. By March 31, the company had repurchased 25,000 shares for approximately $1.2 million, leaving approximately $148.8 million authorized.
Material changes versus the prior comparable period
- Technical Services direct revenue increased 5.9%, supported by higher drum volumes, remediation projects, improved incinerator utilization of 91.0% versus 88.9%, and a 24.8% increase in landfill volumes.
- Oil Re-refining and Recycling direct revenue decreased 9.5%, primarily because of lower oil prices and an unfavorable mix between base oils and higher-priced blended oils.
- SK Environmental Services direct revenue decreased 7.3%, primarily due to weather-related branch shutdowns.
- Oil and Gas Field Services direct revenue decreased 12.5%, reflecting lower Western Canadian rig counts, reduced surface-rental activity and continued weakness in seismic activity.
- Adjusted EBITDA declined in every operating segment except Technical Services. Oil and Gas Field Services EBITDA fell 40.8%, while SK Environmental Services EBITDA fell 18.7%.
- Operating cash flow fell sharply because of working-capital changes, including payments of liabilities outstanding at the beginning of the period. Management expects operating cash flow to improve during the remaining quarters of 2014.
- Accumulated other comprehensive loss increased to $61.1 million from $19.6 million at year-end, primarily due to a $39.6 million foreign-currency translation loss.
Guidance, outlook, commentary and risks
Management did not provide revenue or earnings guidance in the filing. It expects approximately $240 million of 2014 capital spending and believes operating cash flow, existing cash, and revolver availability will be sufficient to fund operations, capital expenditures, interest, and planned stock repurchases.
Total environmental liabilities were $217.2 million at March 31, 2014, including $48.4 million of closure and post-closure liabilities and $168.7 million of remedial liabilities. Management expects these obligations to be paid over many years, but changes in environmental laws or unexpected events could accelerate or increase required payments.
Goodwill totaled $565.1 million. The Oil Re-refining and Recycling reporting unit had approximately $170.1 million of goodwill and a fair value less than 10% above carrying value at December 31, 2013. Lower oil prices and unfavorable product mix caused weaker performance in the first quarter. The company concluded that fair value still more likely than not exceeded carrying value, but warned that future performance, oil prices, cash-flow assumptions or discount rates could result in a material impairment charge. Oil and Gas Field Services, with approximately $36.3 million of goodwill, was also subject to interim impairment analysis after weaker results.
The company had reserves of $42.3 million for legal and administrative proceedings and believed reasonably possible additional exposure could be approximately $3.4 million. Matters include environmental remediation, Superfund sites, product-liability claims, fee-related class actions and regulatory proceedings. Certain claims have insurance or indemnification coverage, but ultimate outcomes remain uncertain.
Management reported no material changes to previously disclosed risk factors, market-risk disclosures or internal control effectiveness.
Most important facts for investors to verify
- Whether operating cash flow improves as management expects after the first-quarter working-capital outflow.
- Progress toward the approximately $240 million 2014 capital-spending plan and its effect on leverage and liquidity.
- Performance of the Oil Re-refining and Recycling and Oil and Gas Field Services reporting units and the risk of goodwill impairment.
- Trends in oil prices, product mix, Canadian rig counts, seismic activity and foreign-currency exchange rates.
- Utilization, landfill volumes and pricing in Technical Services, which was the strongest segment in the quarter.
- Developments in environmental liabilities, Superfund matters, product-liability claims and class-action proceedings.
- Use of the remaining $148.8 million stock-repurchase authorization while cash flow remains comparatively weak.