Clean Harbors, Inc. 2020 Q1 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, hazardous-waste management, industrial, emergency-response, recycling and used-oil re-refining services across North America. The company reports two operating segments: Environmental Services and Safety-Kleen. This unaudited report covers the three months ended March 31, 2020, compared primarily with the three months ended March 31, 2019.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $858.6 million | $780.8 million | 10.0% increase |
| Income from operations | $45.5 million | $23.7 million | 92.0% increase |
| Net income | $11.6 million | $1.0 million | Increase of $10.6 million |
| Diluted EPS | $0.21 | $0.02 | Increase of $0.19 |
| Adjusted EBITDA | $122.6 million | $101.7 million | 20.6% increase |
| Net cash from operating activities | $33.7 million | $29.7 million | Increase of $3.9 million |
| Adjusted free cash flow | $(26.2) million | $(24.9) million | Higher outflow of $1.3 million |
Revenue grew 10.0%. Operating margin improved to approximately 5.3% from 3.0%, net margin improved to approximately 1.3% from 0.1%, and Adjusted EBITDA margin increased to 14.3% from 13.0% of direct revenue. The effective tax rate was 45.6%, compared with 86.0% in the prior-year quarter.
Environmental Services direct revenue increased 11.3% to $566.4 million, supported by higher incinerator utilization, more favorable waste streams and increased emergency-response activity. Safety-Kleen direct revenue increased 7.6% to $293.2 million, primarily due to higher volumes and pricing for base-oil and blended-oil products.
At March 31, 2020, cash and cash equivalents were $432.2 million and short-term marketable securities were $62.1 million, for total cash and marketable securities of $494.3 million. Total assets were $4.13 billion and stockholders’ equity was $1.21 billion.
Long-term obligations, including current obligations and net of debt issuance costs, totaled approximately $1.71 billion. Debt included $725.3 million of secured term loans, $545.0 million of 2027 senior notes, $300.0 million of 2029 senior notes and $150.0 million drawn on the revolving credit facility. The company had approximately $80.7 million of remaining revolver availability and $141.2 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Revenue increased by $77.7 million, or 10.0%.
- Environmental Services Adjusted EBITDA increased 21.7% to $108.9 million; Safety-Kleen Adjusted EBITDA increased 11.6% to $61.1 million.
- Income from operations benefited from higher revenue, improved Environmental Services cost leverage and the absence of certain favorable prior-year items that affected comparability, including a $5.5 million litigation resolution and a $5.4 million trade-receivable recovery in 2019.
- Q1 2020 included a $3.1 million loss on the sale of businesses; no comparable loss was recorded in Q1 2019.
- Operating cash flow increased, but capital expenditures rose to $82.8 million from $58.9 million, partly because the company purchased its Norwell, Massachusetts headquarters.
- The company repurchased approximately 0.3 million shares for $17.3 million, compared with approximately 0.1 million shares for $6.3 million in the prior-year quarter.
- Accumulated other comprehensive loss increased by $59.3 million, primarily from foreign-currency translation losses and unrealized losses on interest-rate hedges.
Guidance, outlook, risks and unusual items
Management stated that Q1 results were not significantly affected by COVID-19, although customer-site slowdowns and closures began late in March. The company expects COVID-19 to adversely affect operating results during Q2 and the remainder of 2020, and expects 2020 profitability to be below prior expectations. Management said the future impact could not be reasonably estimated with certainty.
COVID-19 increased demand for contagion decontamination and other emergency-response services, but management does not expect this increase to fully offset weaker demand. Safety-Kleen was particularly affected by customer shutdowns, lower automotive activity, reduced used-motor-oil collection and weaker oil-related demand and pricing. In April 2020, the company temporarily shuttered nearly half of its oil-refinery production capacity because of reduced used-motor-oil feedstock.
To preserve liquidity, management was pursuing cost reductions, reducing planned 2020 capital expenditures by more than $50 million from previous forecasts and considering eligible government programs. The filing does not provide formal revenue or earnings guidance.
The company drew $150.0 million on its revolving credit facility on March 31, 2020 as a precaution. Management stated that it was in compliance with debt covenants and expected to remain compliant. No debt maturities other than approximately $7.5 million of annual term-loan payments were identified before the revolver expires in November 2021.
The company initiated a plan to close one commercial landfill, increasing closure and post-closure liabilities by approximately $4.2 million. Total environmental liabilities were $191.3 million at March 31, 2020. Management concluded that COVID-19 and oil-market deterioration had not yet triggered goodwill or other long-lived-asset impairment, but warned that prolonged disruption, weaker demand, lower oil pricing or reduced share prices could result in material future impairment charges.
Legal and administrative reserves were $23.6 million. The company identified approximately 130 Superfund sites involving current or former facilities or third-party sites, and stated that the ultimate liability for certain matters, including the Devil’s Swamp site, cannot be estimated with certainty. Management did not expect reasonably possible liabilities beyond recorded amounts to have a material effect, but litigation and environmental obligations remain contingent risks.
Important facts for investors to verify
- Whether COVID-19-driven customer shutdowns, lower automotive activity and used-oil shortages caused the expected deterioration in Q2 and full-year 2020 results.
- The pace and amount of planned capital-expenditure reductions and cost-reduction initiatives.
- Available borrowing capacity after considering the $150 million revolver draw and outstanding letters of credit.
- Compliance with debt covenants and refinancing or repayment plans before the November 2021 revolver expiration.
- Potential goodwill or long-lived-asset impairment exposure, particularly in Safety-Kleen Oil and oil- and gas-related operations.
- The final cost and timing of the commercial-landfill closure and other environmental liabilities.
- Developments in Superfund, product-liability, regulatory and other legal proceedings, including the Devil’s Swamp matter.
- The sustainability of improved incinerator utilization, waste-stream pricing and emergency-response demand after pandemic-related conditions normalize.