Clean Harbors, Inc. — Q3 2019 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, energy and industrial services through its Environmental Services and Safety-Kleen segments in North America. The filing covers the quarter and nine months ended September 30, 2019; comparative figures are for the corresponding 2018 periods. Financial statements are unaudited.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $891.7 million | $843.2 million | $2.541 billion | $2.442 billion |
| Income from operations | $80.4 million | $65.7 million | $177.1 million | $141.1 million |
| Operating margin | 9.0% | 7.8% | 7.0% | 5.8% |
| Net income | $36.4 million | $31.1 million | $73.6 million | $49.2 million |
| Diluted EPS | $0.65 | $0.55 | $1.31 | $0.87 |
| Adjusted EBITDA | $156.6 million | $141.3 million | $408.1 million | $369.1 million |
| Adjusted EBITDA margin | 17.6% | 16.8% | 16.1% | 15.1% |
| Net cash from operations | Not separately provided | Not separately provided | $284.7 million | $247.2 million |
| Adjusted free cash flow | $91.6 million | $64.4 million | $119.1 million | $102.6 million |
At September 30, 2019, cash and cash equivalents were $282.2 million and short-term marketable securities were $46.9 million, for combined liquidity of $329.1 million. Total assets were $4.022 billion and stockholders’ equity was $1.236 billion.
Debt at carrying value was $1.563 billion, consisting primarily of $736.6 million of secured term loans and $845.0 million principal amount of unsecured notes issued in July 2019. The company had no revolver borrowings, approximately $231.1 million of revolver availability, and $147.2 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Total revenue increased 5.8% in Q3 and 4.1% for the first nine months. Environmental Services direct revenue rose 8.1% in Q3 and 5.7% year to date; Safety-Kleen direct revenue rose 1.7% and 1.3%, respectively.
- Environmental Services benefited from improved pricing and a more profitable waste-stream mix. Incinerator utilization increased to 91.5% in Q3 from 83.5%, although nine-month utilization declined to 83.1% from 86.9% because of first-quarter downtime at the Deer Park facility following a neighboring-facility fire.
- Safety-Kleen growth in core services and blended oil sales was partly offset by lower base-oil pricing and volumes.
- Adjusted EBITDA increased 10.9% in Q3 and 10.6% year to date. Environmental Services drove most of the improvement, while Safety-Kleen EBITDA was broadly stable.
- Operating margin improved to 9.0% from 7.8% in Q3 and to 7.0% from 5.8% for the first nine months, reflecting revenue growth and operating leverage.
- Net income increased 17.0% in Q3 and 49.6% year to date. Results included a $6.1 million loss on early extinguishment of debt in both the quarter and nine-month period.
- Operating cash flow increased $37.5 million year to date. Capital expenditures were $174.5 million, compared with $150.7 million in the prior-year period; acquisitions used $29.5 million versus $151.0 million in 2018.
Guidance, outlook, commentary and unusual items
- Management expects 2019 capital spending, net of disposals, of approximately $190 million to $210 million.
- Management expects operating cash flow to continue improving year over year and believes available cash, operating cash flow and revolver capacity are adequate to fund operations, capital expenditures, interest, environmental obligations and planned share repurchases.
- In July 2019, the company issued $545.0 million of 4.875% notes due 2027 and $300.0 million of 5.125% notes due 2029. It repurchased $701.0 million and redeemed the remaining $144.0 million of 5.125% notes due 2021.
- The company adopted the new lease standard on January 1, 2019, recognizing $185.5 million of operating lease right-of-use assets and $188.5 million of lease liabilities at adoption. Management stated that the adoption did not materially affect earnings or cash flows.
- Environmental liabilities totaled $191.4 million at September 30, 2019, including $74.2 million of closure and post-closure liabilities and $117.3 million of remedial liabilities. Management expects these obligations to be payable over many years, but changes in environmental laws or unexpected events could accelerate or increase payments.
- Legal and administrative reserves were $24.0 million. The company is involved in product-liability matters, Superfund proceedings, environmental remediation matters and regulatory proceedings. The ultimate exposure for certain matters, including the Devil’s Swamp site, cannot be estimated clearly.
- The IRS is auditing tax years 2014–2016. Management does not expect material adjustments, although the ultimate outcome is not known.
- Foreign-currency translation reduced revenue by $1.5 million in Q3 and $13.1 million year to date. Safety-Kleen remains exposed to commodity pricing, particularly base oils and crude-oil-related markets.
- Management reported compliance with all debt covenants as of September 30, 2019 and stated that it believes continued compliance is reasonably likely. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Reconcile Adjusted EBITDA and adjusted free cash flow to GAAP measures; both are non-GAAP metrics and may not be comparable with other companies.
- Assess leverage, refinancing risk, interest-rate exposure and the $400 million revolver’s actual availability after letters of credit.
- Monitor environmental, remedial, Superfund and product-liability claims, including exposures that may exceed recorded reserves.
- Evaluate whether Environmental Services pricing, waste mix and incinerator utilization remain durable and whether Safety-Kleen’s base-oil exposure continues to pressure results.
- Compare actual 2019 capital spending with the $190 million–$210 million outlook and assess its effect on free cash flow.
- Review the effects of the July debt refinancing, the $6.1 million extinguishment loss and future interest expense.
- Confirm the impact of lease adoption, acquisitions, share repurchases and foreign-currency movements on reported trends.