Clean Harbors, Inc. — 2018 Form 10-K Summary
Business context and reporting period
Clean Harbors provides environmental, energy and industrial services throughout North America and operates the Safety-Kleen used-oil recycling, parts-cleaning and related services business. The filing covers the fiscal year ended December 31, 2018, including fourth-quarter results. Beginning in the first quarter of 2018, the Company reorganized its operations and reported two segments: Environmental Services and Safety-Kleen.
The 2018 results include the February 2018 acquisition of Veolia’s U.S. Industrial Cleaning Business and an additional privately owned business acquired in August 2018. Combined preliminary consideration for the 2018 acquisitions was approximately $151.3 million, funded with cash on hand.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $3.300 billion | $2.945 billion | Up 12.1% |
| Income from operations | $182.6 million | $127.8 million | Up $54.8 million |
| Net income | $65.6 million | $100.7 million | Down $35.1 million |
| Diluted EPS | $1.16 | $1.76 | Down $0.60 |
| Adjusted EBITDA | $491.0 million | $425.7 million | Up 15.4% |
| Net cash from operations | $373.2 million | $285.7 million | Up $87.5 million |
| Adjusted free cash flow | $195.3 million | $140.2 million | Up $55.1 million |
| Capital expenditures, net of disposals | $177.9 million | Not clearly provided in the filing text | — |
Service revenue was $2.709 billion and product revenue was $591.1 million. Operating margin was approximately 5.5% in 2018 versus 4.3% in 2017. Net margin was approximately 2.0% versus 3.4%, primarily because 2017 included a $93.0 million net tax benefit from the Tax Cuts and Jobs Act.
- Environmental Services: Direct revenue increased 15.3% to $2.141 billion and Adjusted EBITDA increased 18.5% to $380.9 million. The Veolia Business contributed $154.0 million of revenue but a $0.9 million pretax loss, including acquisition-related depreciation and amortization.
- Safety-Kleen: Direct revenue increased 6.7% to $1.161 billion and Adjusted EBITDA increased 12.9% to $282.0 million. Growth reflected stronger oil-product pricing, higher base and blended oil volumes, and continued expansion of core services.
- Margins and utilization: Environmental Services cost of revenue declined to 73.6% of direct revenue from 74.0%; Safety-Kleen cost of revenue declined to 62.5% from 63.5%. Incinerator utilization was 86.7%, down from 87.6%, but higher-margin waste mix and pricing more than offset the decline.
- Liquidity: Cash and cash equivalents plus marketable securities were $279.4 million at year-end, down from $357.6 million. The $400.0 million revolving credit facility had approximately $235.4 million available and no outstanding borrowings at year-end.
- Debt: Principal debt consisted of $845.0 million of 5.125% senior unsecured notes due 2021 and $742.2 million of senior secured term loans due 2024. The Company had $130.1 million of standby letters of credit. Net debt paydown during 2018 was $55.8 million.
Material changes versus the prior comparable period
- Revenue and operating income improved substantially, supported by acquisitions, improved pricing, more favorable waste-stream mix, operating leverage and the Environmental Services reorganization.
- Net income and EPS declined despite stronger operating performance because 2017 benefited from the $93.0 million tax-reform benefit and a $30.7 million pretax gain on the sale of the Transformer Services business. In 2018, the Company recorded a $2.5 million loss on early extinguishment of debt.
- Operating cash flow increased, but investing cash outflows rose to $349.7 million from $203.3 million, primarily because of acquisitions and higher capital spending.
- The Company refinanced the remaining $400.0 million of 2020 Notes in 2018 with additional term loans and effectively fixed the interest rate on $350.0 million of variable-rate debt at approximately 4.67% through interest-rate swaps.
- Environmental liabilities increased to $190.9 million from $185.5 million, reflecting accretion, acquisition-related obligations and changes in estimates, partly offset by $10.1 million of environmental expenditures.
- Common-share repurchases totaled $45.1 million in 2018, leaving approximately $306.1 million available under the $600 million authorization. The Company does not pay a cash dividend.
Guidance, outlook, commentary, risks and unusual items
Management expects 2019 capital spending, net of disposals, to be approximately $190 million to $210 million. The Company believes operating cash flow, existing cash and revolving-credit availability will satisfy current operating, investing and repurchase needs. No revenue or earnings guidance is provided in the filing text.
- Management expects benefits from cross-selling, network utilization, cost and productivity initiatives, the Environmental Services reorganization and integration of acquisitions.
- Safety-Kleen remains exposed to volatility in crude oil, Group II base-oil, recycled-fuel-oil and used-oil collection pricing, as well as raw-material and transportation costs.
- Environmental operations are exposed to regulatory changes, permit renewals, remediation obligations, Superfund liability, facility incidents, safety events, weather, natural disasters, economic cycles and demand for large cleanup projects.
- Total debt was $1.587 billion at par value, and variable-rate debt creates interest-rate exposure. A 100-basis-point change in the applicable variable rates could change annual interest expense by approximately $4.0 million.
- Closure, post-closure and remedial liabilities had an undiscounted contractual amount of approximately $462.9 million compared with a $190.9 million present-value accrual. Required financial assurance totaled $506.3 million across U.S. and Canadian facilities.
- The Company had reserves of $25.4 million for legal and administrative proceedings and estimated reasonably possible additional liabilities of up to $1.8 million. It was identified as a potential responsible party at 128 Superfund sites.
- Safety-Kleen was involved in approximately 67 product-liability proceedings at year-end. The Company states that insurance covered settled or dismissed claims during 2018, but future coverage and outcomes cannot be assured.
- The Company is monitoring IMO 2020, which could affect marine-fuel demand, vacuum gas oil pricing, base-oil economics and used-oil availability.
- The Company expects adoption of the lease standard on January 1, 2019 to add approximately $180 million to $220 million of right-of-use assets and lease liabilities, without a material expected effect on earnings or cash flows.
Most important facts for investors to verify
- Whether the revenue and Adjusted EBITDA gains persist after the Veolia acquisition’s first full year and whether integration produces the expected synergies.
- Progress toward 2019 capital-spending guidance and the effect of capital intensity on adjusted free cash flow.
- Debt maturities, refinancing plans for the $845.0 million of notes due in 2021, covenant compliance and exposure to unhedged variable-rate debt.
- Actual trends in Safety-Kleen oil-product spreads, used-oil collection pricing and commodity volatility.
- Changes in environmental liabilities, remediation estimates, permits, financial-assurance renewals and Superfund or other legal exposures.
- Potential impairment risk for oil-and-gas field services and lodging assets if Western Canadian activity remains weak.
- Reconciliation and comparability of the non-GAAP measures Adjusted EBITDA and adjusted free cash flow with GAAP results.
- The filing reports effective disclosure controls and internal control over financial reporting, with an unqualified independent auditor opinion.