Clean Harbors, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Clean Harbors provides environmental and industrial services across North America through two segments: Environmental Services and Safety-Kleen. Environmental Services collects, treats, recycles and disposes of hazardous and non-hazardous waste and provides industrial, remediation and emergency-response services. Safety-Kleen provides parts cleaning, waste and used-oil collection, oil re-refining, recycled lubricants and related products.
The filing covers the fiscal year ended December 31, 2020. The filing is an annual report, not a standalone fourth-quarter report. Results were materially affected by the COVID-19 pandemic, including customer shutdowns, lower industrial and automotive activity, reduced oil demand and lower oil-product pricing.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $3.144 billion | $3.412 billion | Down 7.9% |
| Income from operations | $251.3 million | $229.5 million | Up 9.5% |
| Net income | $134.8 million | $97.7 million | Up 37.9% |
| Diluted EPS | $2.42 | $1.74 | Up 39.1% |
| Adjusted EBITDA | $555.3 million | $540.3 million | Up 2.8% |
| Adjusted EBITDA margin | 17.7% | 15.8% | Up 190 basis points |
| Net margin | 4.3% | 2.9% | Improved |
| Operating cash flow | $430.6 million | $413.2 million | Up $17.4 million |
| Adjusted free cash flow | $265.0 million | $208.5 million | Up $56.5 million |
Service revenue was $2.725 billion, down from $2.843 billion, while product revenue was $419.5 million, down from $569.3 million. Environmental Services direct revenue was $2.137 billion, down 4.5%; Safety-Kleen direct revenue was $1.010 billion, down 14.3%.
Environmental Services Adjusted EBITDA increased 16.5% to $520.0 million, while Safety-Kleen Adjusted EBITDA declined 18.8% to $229.2 million. Consolidated cost of revenues declined 10.5%, and selling, general and administrative expense declined 6.8%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $519.1 million; short-term marketable securities were $51.9 million. Combined cash and marketable securities totaled $571.0 million, compared with $414.4 million at year-end 2019.
- Long-term debt at carrying value was $1.557 billion, including $7.5 million current debt. Debt at par was $1.572 billion, consisting primarily of $727.2 million of secured term loans and $845.0 million of senior unsecured notes.
- The secured term loans mature in 2024; the unsecured notes mature in 2027 and 2029. The company had no outstanding revolving-credit borrowings at year-end and reported approximately $264.0 million of availability.
- Outstanding letters of credit totaled $120.6 million, primarily supporting insurance and regulatory financial-assurance requirements.
- Stockholders’ equity increased to $1.342 billion from $1.270 billion. The company repurchased 1.2 million shares for $74.8 million and had $209.9 million remaining under its $600.0 million authorization.
- Capital expenditures, net of disposals, were $186.6 million. Management expects 2021 capital spending, net of disposals, of approximately $185.0 million to $205.0 million.
Material changes versus the prior comparable period
- COVID-19 reduced industrial, remediation, waste-disposal, automotive and oil-product demand. The company completed nearly 14,000 COVID-19 response projects that generated $120.4 million of direct revenue, but this did not offset broader revenue losses.
- Environmental Services revenue declined primarily because customers postponed industrial turnarounds, remediation projects and waste-disposal activity. Incinerator utilization remained approximately 84%, and higher-value waste streams supported revenue and profitability.
- Safety-Kleen revenue declined because of customer shutdowns, lower automotive travel, lower base- and blended-oil volumes and reduced recycled-fuel-oil demand. Used-motor-oil collection revenue increased $41.1 million because of pricing increases despite lower collection volumes.
- Safety-Kleen temporarily idled nearly half of its re-refinery capacity in April 2020 because of reduced used-oil availability and product demand. Capacity returned to mid-2019 levels by year-end.
- Cost reductions, improved revenue mix and $42.3 million of non-repayable CARES Act and Canadian wage-subsidy benefits helped increase Adjusted EBITDA despite lower revenue. The company also deferred $35.4 million of employer payroll taxes, payable in equal installments in the fourth quarters of 2021 and 2022.
- The effective tax rate fell to 22.8% from 34.1%, aided largely by the release of a valuation allowance related to certain Canadian entities and amended tax filings.
- The company acquired a Safety-Kleen-related business for $8.8 million and recorded a $3.4 million loss on the sale of non-core businesses.
- The Altair landfill reached permitted capacity and the company began closing it. The company also decided to close the Westmorland hazardous landfill because of permitting and operating costs. No goodwill or long-lived-asset impairment was recorded.
Outlook, commentary, risks and unusual items
Management expected gradual improvement in Safety-Kleen core-service demand as vaccination programs progressed, but stated that COVID-19 effects, oil demand, product pricing and automotive activity remained uncertain. Management expected continued demand for COVID-19 response services but could not determine their prevalence in 2021.
- Environmental liabilities totaled $202.7 million at year-end, including $87.9 million of closure and post-closure liabilities and $114.8 million of remedial liabilities. The filing identifies significant estimation uncertainty from environmental conditions, regulatory requirements, remediation technologies and timing of expenditures.
- Undiscounted contractual obligations totaled $2.659 billion, including debt principal, interest, environmental liabilities and lease payments.
- Approximately $491.6 million of U.S. and $58.2 million of Canadian closure and post-closure costs required regulatory financial assurance.
- The company faces operational, safety, environmental, regulatory, cybersecurity, insurance, labor, foreign-exchange and acquisition-integration risks. Loss of permits, significant environmental claims, uninsured liabilities or higher insurance and surety costs could materially affect results.
- Safety-Kleen was involved in approximately 68 product-liability proceedings at year-end. The company had reserves of $29.8 million for legal and administrative proceedings and stated that reasonably possible additional liability was not expected to be material, although outcomes remain uncertain.
- The company was identified as a potentially responsible party or potential potentially responsible party at 130 Superfund sites. Management estimated reasonably possible additional remedial liabilities of up to $22.2 million above recorded remedial liabilities.
- Interest-rate exposure remains on $377.2 million of variable-rate term loans not covered by swaps. A 100-basis-point change in the applicable average interest rate was estimated to affect annual interest expense by approximately $3.7 million.
- The company’s independent auditor, Deloitte & Touche LLP, issued unqualified opinions on the financial statements and internal control over financial reporting. Remedial liabilities were identified as the critical audit matter.
Most important facts for an investor to verify
- Whether industrial, automotive and oil-related demand recovered sufficiently after 2020 to support revenue growth, particularly in Safety-Kleen.
- Whether the improved Adjusted EBITDA margin can be sustained without the $42.3 million of government-program benefits recorded in 2020.
- The timing and cost of debt maturities, especially the $727.2 million term loans due in 2024, and the company’s ability to maintain covenant compliance.
- Actual 2021 capital spending versus the $185.0 million to $205.0 million expectation and the resulting effect on free cash flow.
- Changes in environmental, closure, remedial and self-insurance liabilities, including potential costs beyond recorded reserves.
- The financial and operating effects of the Altair and Westmorland landfill closures and future permitting decisions.
- Any goodwill or long-lived-asset impairments if COVID-19 effects, economic weakness or lower oil-product demand persist.
- Whether share repurchases remain appropriate given debt levels, liquidity needs and the absence of a cash dividend.