Business Context and Reporting Period
Clean Harbors, Inc. is a North American provider of environmental, energy and industrial services, including hazardous-waste treatment and disposal, industrial cleaning, emergency response, recycling, used-oil re-refining and parts-cleaning services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods.
The company reports Technical Services, Industrial and Field Services, Safety-Kleen, and Oil, Gas and Lodging Services. Results are affected by industrial activity, waste volumes, oil and gas activity, product pricing, acquisitions, weather and emergency-response projects.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $755.8 million | $729.5 million | $2.198 billion | $2.063 billion |
| Revenue growth | 3.6% | — | 6.5% | — |
| Income from operations | $47.7 million | $16.8 million | $99.8 million | $47.2 million |
| Operating margin | 6.3% | 2.3% | 4.5% | 2.3% |
| Net income (loss) | $12.1 million | $(10.3) million | $16.5 million | $(27.2) million |
| Net margin | 1.6% | (1.4)% | 0.8% | (1.3)% |
| Diluted EPS | $0.21 | $(0.18) | $0.29 | $(0.47) |
| Adjusted EBITDA | $123.0 million | $126.7 million | $323.8 million | $304.4 million |
| Adjusted EBITDA margin | 16.3% | 17.4% | 14.7% | 14.7% |
| Net cash from operating activities | — | — | $221.5 million | $178.8 million |
| Adjusted free cash flow | — | — | $99.1 million | $7.5 million |
Service revenue was $612.4 million in the third quarter and $1.784 billion for the nine months. Product revenue was $143.5 million and $414.1 million, respectively. Cost of revenues increased 5.6% in the quarter and 6.9% year to date, while SG&A increased 2.1% and 4.7%, respectively.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $361.7 million at September 30, 2017, compared with $307.0 million at December 31, 2016.
- The company generated $221.5 million of operating cash flow and used $121.4 million in investing activities during the first nine months.
- Capital expenditures were $127.7 million through September 30, compared with $175.3 million in the prior-year period. Management expects 2017 capital spending, net of disposals, of $160 million to $170 million.
- Total debt carrying value was $1.630 billion, consisting primarily of $400 million of senior secured notes due 2024, $400 million of 5.25% senior unsecured notes due 2020 and $845 million of 5.125% senior unsecured notes due 2021.
- The company entered into a $400 million senior secured term loan in June 2017 and used the proceeds to repurchase or redeem approximately $400 million of 2020 Notes. The refinancing generated a $7.9 million year-to-date loss on early extinguishment of debt.
- The $400 million revolving credit facility had no borrowings, approximately $238.3 million available capacity and $124.9 million of outstanding letters of credit at September 30, 2017.
- Management stated that the company was in compliance with all debt covenants and expected to continue meeting them. The company also expects operating cash flow to fund operations, internal investment, debt service and planned share repurchases.
- The company repurchased 0.5 million shares for $24.5 million during the first nine months. On October 31, 2017, the board authorized an additional $300 million of repurchases, increasing total available authorization to $375.7 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3.6% in the quarter and 6.5% year to date, driven primarily by Technical Services and Safety-Kleen.
- Technical Services direct revenue increased 6.1% in the quarter and 7.9% year to date, supported by higher waste volumes and the new El Dorado, Arkansas incinerator, which added 70,000 tons of annual network capacity. Incinerator utilization was 91.9% in the quarter and 86.0% year to date.
- Safety-Kleen direct revenue increased 5.6% in the quarter and 10.8% year to date, reflecting more favorable pricing and volumes for base and blended oils, acquisitions, organic growth and the OilPlus closed-loop initiative. Safety-Kleen year-to-date Adjusted EBITDA increased 10.7%.
- Industrial and Field Services direct revenue declined 4.8% in the quarter and 0.8% year to date. Excluding the effect of the Catalyst Services divestiture, management reported growth for the comparable periods, but third-quarter results were pressured by lower turnaround and project work and hurricane-related disruption.
- Oil, Gas and Lodging Services revenue increased 7.8% in the quarter but declined 3.2% year to date. Lodging revenue was affected by lower occupancy and pricing; fixed-lodge occupancy was 27% versus 49% in the prior-year quarter.
- Adjusted EBITDA declined 2.9% in the third quarter, primarily due to incremental hurricane-related transportation, facility-disruption and customer-volume costs, but increased 6.4% for the first nine months.
- Operating income and net income improved substantially because the prior-year periods included a $34.0 million goodwill impairment charge related to Lodging Services. The 2017 nine-month period also included a $31.6 million pretax gain on the sale of the non-core Transformer Services business.
- The company acquired Lonestar West for approximately $33.1 million, net of cash acquired, assumed and repaid approximately $16.8 million of debt, and completed two smaller Safety-Kleen-related acquisitions. It also sold Transformer Services for approximately $44.4 million of net proceeds.
Guidance, Outlook, Risks and Unusual Items
- Management provided expected 2017 capital spending of $160 million to $170 million, net of disposals. No consolidated revenue or earnings guidance was provided in the filing.
- Management expects environmental liabilities, totaling $185.4 million at September 30, 2017, to be payable over many years and generally funded through operating cash flow. Unanticipated regulatory changes or remediation requirements could accelerate or increase cash payments.
- Goodwill attributable to the Industrial Services reporting unit was $28.2 million. Management identified continuing risk of a future impairment, although no interim impairment indicator was identified through September 30, 2017.
- The company is monitoring long-lived assets in Oil and Gas Field Services because of lower historical results and continued weakness or volatility in oil and gas markets. No impairment was recorded at September 30, 2017, but further deterioration could result in impairment charges.
- Hurricanes affecting Texas, Florida and Puerto Rico caused facility disruptions, higher transportation costs and temporary reductions in customer production and waste volumes during the third quarter.
- Environmental and legal exposures include closure and post-closure obligations, remedial liabilities, Superfund sites, product-liability claims and regulatory proceedings. Recorded reserves for legal and administrative proceedings were $19.1 million, with an additional $1.8 million considered reasonably possible at September 30, 2017.
- The company was identified as a potentially responsible party or potential potentially responsible party at 129 Superfund sites. Potential liability at the Devil’s Swamp site in Louisiana cannot currently be estimated because the EPA had not selected a final remedy.
- The effective tax rate was unusually high at 51.0% for the quarter and 69.9% year to date, partly because tax benefits were not recognized for current losses of certain Canadian entities and because of tax expense associated with the Transformer Services sale.
- The company expects to adopt the new revenue standard, ASC 606, in the first quarter of 2018 using the modified retrospective method. Based on work completed at filing, management did not expect a material impact, although the assessment was not complete.
Investor Verification Items
- Verify whether the improved revenue and operating income trends persist after excluding the Transformer Services gain, prior-year goodwill impairment and other unusual items.
- Monitor quarterly Adjusted EBITDA, particularly the Industrial and Field Services segment and the effect of hurricane-related costs on margins.
- Assess Safety-Kleen profitability sensitivity to base-oil pricing, used-oil collection costs, product mix and integration of acquisitions.
- Review leverage, required term-loan amortization, refinancing risk for the 2020 and 2021 Notes, covenant headroom and revolving-credit availability.
- Evaluate the pace and funding of share repurchases against capital expenditures, acquisitions and debt-service requirements.
- Track goodwill and long-lived-asset impairment risk in Industrial Services and Oil and Gas Field Services.
- Review environmental reserves and potential unquantified liabilities, including Superfund, Devil’s Swamp, product-liability and regulatory matters.
- Confirm the eventual accounting and disclosure effects of ASC 606 and other pending accounting standards.