Clean Harbors, Inc. — FY2013 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, oil re-refining and recycling, parts cleaning, industrial maintenance, emergency response, and oil-and-gas field services. This Form 10-K covers the fiscal year ended December 31, 2013. The company recast prior periods to reflect its new five-segment structure following the December 2012 acquisition of Safety-Kleen.
Reported segments were Technical Services, Oil Re-refining and Recycling, SK Environmental Services, Industrial and Field Services, and Oil and Gas Field Services. The company operated more than 400 service locations and employed approximately 13,000 full-time employees.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $3.510 billion | $2.188 billion | +60.4% |
| Income from operations | $220.6 million | $202.2 million | +9.1% |
| Net income | $95.6 million | $129.7 million | -26.3% |
| Diluted EPS | $1.57 | $2.40 | -34.6% |
| Adjusted EBITDA | $510.1 million | $373.8 million | +36.5% |
| Cash flow from operations | $415.8 million | $324.4 million | +28.2% |
| Capital expenditures | $280.2 million | $197.4 million | +41.2% |
Approximate margins were 27.6% gross, 6.3% operating, 2.7% net, and 14.5% Adjusted EBITDA. The decline in net income and EPS despite higher operating income primarily reflected higher interest expense, a higher effective tax rate, acquisition-related items, and the absence of the unusually large tax benefit recorded in 2012.
Cash and cash equivalents were $310.1 million at year-end, compared with $229.8 million in 2012. The company had a $400.0 million revolving credit facility, with approximately $259.7 million available to borrow and no outstanding revolving loan balance. Outstanding letters of credit totaled $140.3 million.
Long-term obligations were $1.400 billion, consisting primarily of $800.0 million of 5.25% senior unsecured notes due 2020 and $600.0 million of 5.125% senior unsecured notes due 2021. Net interest expense increased to $78.4 million from $47.3 million. Stockholders’ equity was $1.476 billion and total assets were $3.954 billion.
Material changes versus the prior comparable period
- Revenue growth was driven principally by the full-year contribution and integration of Safety-Kleen, acquired for approximately $1.26 billion on December 28, 2012.
- Safety-Kleen added the Oil Re-refining and Recycling and SK Environmental Services segments. FY2013 direct revenue was $337.0 million and $770.7 million, respectively.
- Technical Services direct revenue increased 15.7% to $1.148 billion, supported by higher drum and wastewater volumes, remediation projects, and Safety-Kleen integration.
- Industrial and Field Services direct revenue increased 10.1% to $867.0 million.
- Oil and Gas Field Services direct revenue decreased 2.4% to $399.5 million because of lower Western Canadian rig counts, surface-rental activity, and seismic activity.
- Adjusted EBITDA increased, but corporate costs rose substantially, including $17.5 million of Safety-Kleen integration costs and $13.6 million of non-cash acquisition accounting inventory adjustments.
- On September 13, 2013, the company acquired Evergreen Oil for approximately $55.9 million in cash, expanding used-oil collection and re-refining capacity in California.
- Operating cash flow improved, while investing cash usage declined sharply from 2012 because the prior year included the Safety-Kleen acquisition.
- Other comprehensive income turned into a $69.2 million loss, primarily because of foreign-currency translation, reducing accumulated other comprehensive income to a $19.6 million loss.
Guidance, outlook, commentary, risks and unusual items
Management expected approximately $200 million of capital spending in 2014, excluding $25 million to $30 million for construction of a new El Dorado, Arkansas incinerator projected for completion in late 2015. The new incinerator is expected to add approximately 65,000 tons of annual capacity.
Management stated that operating cash flow, existing cash, and available revolver capacity should be adequate for operating needs, capital expenditures, and potential acquisitions. The company also expected to continue pursuing cross-selling, cost and productivity initiatives, selective acquisitions, capacity expansion, and broader geographic coverage.
- Environmental liabilities totaled $219.6 million at year-end, including $47.1 million of closure and post-closure liabilities and $172.5 million of remedial liabilities. Undiscounted contractual environmental obligations were substantially higher.
- Management estimated reasonably possible additional remedial liabilities of up to $23.7 million. Legal and administrative reserves totaled $41.7 million, with up to $3.5 million of additional reasonably possible exposure.
- The company was identified as a potentially responsible party or potential indemnitor at 123 Superfund sites. Certain proceedings, including the Ville Mercier matter, Baton Rouge/Devil’s Swamp remediation, and Safety-Kleen product-liability and fee-class-action matters, remain subject to uncertainty.
- The Oil Re-refining and Recycling reporting unit’s fair value exceeded carrying value by less than 10%. Its approximately $171.2 million goodwill balance was exposed to lower oil prices, unfavorable sales mix, and weaker-than-expected performance.
- Oil-price volatility can compress margins because used-oil acquisition costs may remain fixed while re-refined-oil and recycled-fuel-oil selling prices decline.
- Key operating risks include hazardous-material releases, employee safety, regulatory noncompliance, permit renewal or expansion delays, insurance and financial-assurance availability, foreign-currency movements, seasonality, cyclical oil-and-gas demand, and integration of acquisitions.
- The company reported no goodwill, indefinite-lived intangible, or long-lived asset impairment charges for 2013. Its independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
- On February 25, 2014, the board authorized up to $150 million of common-stock repurchases. The company had not repurchased shares during 2013 and had no obligation to execute the new program.
Important facts for investors to verify
- Whether Safety-Kleen and Evergreen integration delivers the expected synergies and offsets higher corporate costs and depreciation.
- Progress, cost, permitting, and expected completion timing for the El Dorado incinerator expansion.
- Oil-price trends, base-oil and blended-oil volumes, sales mix, and the resulting risk to Oil Re-refining and Recycling margins and goodwill.
- Western Canadian rig counts, oil-sands activity, weather conditions, and performance of Oil and Gas Field Services.
- Debt-service capacity, covenant compliance, refinancing requirements for the 2020 and 2021 notes, and availability of revolver capacity after letters of credit.
- Changes in environmental liabilities, Superfund exposures, legal proceedings, insurance coverage, and required financial assurance.
- Whether the proposed share repurchase program is consistent with capital-spending, acquisition, and debt-reduction priorities.
- The effect of foreign-currency translation, particularly the Canadian dollar, on reported revenue, earnings, assets, and equity.