Clean Harbors, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020. The filing is unaudited and covers Clean Harbors’ Environmental Services and Safety-Kleen segments. Results were materially affected by the COVID-19 pandemic, customer shutdowns, reduced industrial activity, lower automotive travel, and lower oil demand and pricing.
Financial Performance and Position
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $779.3 million | $891.7 million | $2.348 billion | $2.541 billion |
| Income from operations | $83.9 million | $80.4 million | $189.6 million | $177.1 million |
| Net income | $54.9 million | $36.4 million | $95.5 million | $73.6 million |
| Diluted EPS | $0.99 | $0.65 | $1.71 | $1.31 |
| Adjusted EBITDA | $161.2 million | $156.6 million | $419.2 million | $408.1 million |
| Cash flow from operations | Not separately provided | Not separately provided | $317.4 million | $284.7 million |
| Adjusted free cash flow | Not separately provided | Not separately provided | $195.5 million | $119.1 million |
Margins: Q3 operating margin was approximately 10.8%, compared with 9.0% in the prior-year quarter; nine-month operating margin was approximately 8.1%, compared with 7.0%. Adjusted EBITDA margin was 20.7% in Q3 2020 versus 17.6% in Q3 2019, and 17.9% for the nine-month period versus 16.1%.
- Environmental Services direct revenue declined 10.0% in Q3 and 4.1% for the nine-month period. Segment Adjusted EBITDA increased 15.8% and 17.9%, respectively.
- Safety-Kleen direct revenue declined 17.8% in Q3 and 14.2% for the nine-month period. Segment Adjusted EBITDA declined 15.5% and 18.1%, respectively.
- COVID-19-related decontamination and emergency response services generated $28.9 million of Q3 direct revenue and $88.9 million for the first nine months.
- Government programs under the CARES Act and Canada Emergency Wage Subsidy reduced operating expenses by $13.3 million in Q3 and $36.7 million for the nine-month period. These benefits do not require repayment.
Cash, Debt, and Liquidity
- Cash and cash equivalents were $475.7 million at September 30, 2020, compared with $372.0 million at December 31, 2019. Cash plus marketable securities totaled $532.3 million.
- Net cash used in investing activities was $160.3 million, including $150.4 million of capital expenditures. Net cash used in financing activities was $52.0 million.
- Debt carrying value was approximately $1.558 billion, consisting primarily of $721.5 million of secured term loans, $545.0 million of 2027 senior notes, and $300.0 million of 2029 senior notes, plus the current term-loan portion.
- The $400 million revolving credit facility had approximately $249.1 million available at September 30, 2020, with $123.5 million of outstanding letters of credit. A temporary $150 million draw made in March was fully repaid by July.
- The revolving credit facility was amended on October 28, 2020, extending its termination date to October 28, 2025. Debt maturities are limited to approximately $7.5 million of annual term-loan payments before the term loans mature in June 2024.
- Management reported compliance with debt covenants and believed liquidity was adequate for current needs.
Material Changes and Unusual Items
- Revenue fell 12.6% in Q3 and 7.6% for the first nine months, primarily from pandemic-related reductions in industrial, technical, automotive, and oil-related activity.
- Cost controls, improved service mix, lower capital spending, and government subsidies supported higher operating income and Adjusted EBITDA despite lower revenue.
- Safety-Kleen oil-product revenue was pressured by lower sales volumes and pricing. Used motor oil collection revenue increased because of pricing increases despite lower collection volumes.
- Nearly half of Safety-Kleen’s oil-refinery capacity was temporarily shut in April; capacity restored to approximately 90% by the end of Q3 as oil demand improved.
- The Company acquired a Northeast U.S. oil re-refining business for $8.8 million and recognized preliminary goodwill of $1.4 million.
- The Company began closing one commercial landfill, increasing closure and post-closure liabilities by $4.5 million. Updated regulatory requirements increased remedial liabilities by $3.3 million for an inactive site and $1.8 million for a Superfund site.
- Environmental liabilities totaled $199.8 million at September 30, 2020, up 5.2% from year-end 2019.
- The effective tax rate declined to 20.0% in Q3 and 27.0% for the nine-month period, compared with 32.8% and 35.1%, respectively, in the prior-year periods. The Q3 rate benefited from a $1.1 million release of uncertain tax positions and recognition of certain Canadian tax benefits.
- The Company repurchased approximately 0.7 million shares for $39.5 million during the first nine months. Approximately $245.1 million remained available under the $600 million authorization at September 30.
Outlook, Risks, and Contingencies
- Management expected COVID-19 response demand to continue, but stated that it had not offset lost industrial and service activity. Safety-Kleen demand was expected to remain affected by automotive activity, customer shutdowns, oil demand, and oil pricing.
- Management projected 2020 capital spending, net of disposals, of approximately $176 million to $196 million, including $21.1 million spent on the corporate headquarters.
- The filing states that the duration and severity of COVID-19 effects remain uncertain and that prolonged disruption could materially harm operations, cash flows, and financial results.
- Goodwill and long-lived asset reviews identified no impairment-triggering event as of September 30, 2020. A prolonged economic slowdown, continued weak oil demand, or further deterioration in operating conditions could result in future material impairment charges.
- The Company had recorded $29.9 million of reserves for legal and administrative proceedings. It was identified as a potential responsible party at 130 Superfund sites, although management did not expect liabilities beyond recorded amounts to be material.
- Approximately 69 product-liability proceedings involving Safety-Kleen were pending at September 30, 2020. Insurance was generally expected to cover these claims, but ultimate outcomes and aggregate liabilities remained uncertain.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Key Facts for Investors to Verify
- Whether industrial, automotive, and oil-related demand recovered sufficiently after September 30, 2020 to support revenue growth.
- The sustainability of margin expansion after excluding $36.7 million of government-program benefits recognized during the first nine months.
- Safety-Kleen refinery utilization, used-oil collection volumes, product pricing, and segment EBITDA recovery.
- Actual 2020 capital expenditures versus the $176 million to $196 million projection and the resulting free cash flow.
- COVID-19 developments and their potential effects on customer operations, labor availability, transportation, and emergency-response demand.
- Changes in environmental liabilities, landfill closure costs, Superfund obligations, and product-liability claims.
- Future impairment testing assumptions for goodwill and oil-related assets, particularly if weak demand or pricing persists.