Clean Harbors, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, energy and industrial services across North America, including hazardous-waste management, emergency response, industrial services, recycling, used-oil re-refining and lodging services. The filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. Results are unaudited.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $636.1 million | $732.5 million | Down 13.2% |
| Operating income (loss) | $(4.1) million | $7.3 million | Declined $11.4 million |
| Net income (loss) | $(20.9) million | $(7.1) million | Loss increased $13.8 million |
| Diluted loss per share | $(0.36) | $(0.12) | Loss increased $0.24 |
| Adjusted EBITDA | $67.3 million | $78.3 million | Down 14.0% |
| Adjusted EBITDA margin | 10.6% | 10.7% | Down approximately 0.1 percentage point |
| Operating margin | (0.6)% | 1.0% | Down approximately 1.6 percentage points |
| Net margin | (3.3)% | (1.0)% | Down approximately 2.3 percentage points |
| Cash flow from operations | $39.3 million | $84.8 million | Down 53.7% |
| Capital expenditures | $75.8 million | $52.9 million | Up $22.8 million |
| Cash used for acquisitions | $35.0 million | — | New acquisition spending |
At March 31, 2016, cash and cash equivalents were $355.3 million, compared with $184.7 million at December 31, 2015. Current assets were $1.064 billion and current liabilities were $465.5 million. The company reported $1.645 billion of principal debt, consisting of $800.0 million of 5.25% senior notes due 2020 and $845.0 million of 5.125% senior notes due 2021, with carrying value of $1.632 billion.
The company issued $250.0 million of additional 2021 Notes during the quarter. Its revolving credit facility had no outstanding borrowings, approximately $156.4 million available capacity and $145.2 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Revenue declined primarily because of weaker crude-oil markets, lower commodity pricing, reduced Canadian activity, foreign-currency effects and slower industrial production.
- Technical Services direct revenue fell 8.0%; incinerator utilization decreased to 86.6% from 90.9%, and landfill waste volumes declined 33%.
- Industrial and Field Services direct revenue declined 18.7%, largely due to lower Western Canadian maintenance and turnaround activity.
- Kleen Performance Products direct revenue declined 26.0% because of lower base- and blended-oil pricing, although Adjusted EBITDA improved to $4.6 million from a $4.5 million loss.
- SK Environmental Services direct revenue increased 7.8%, supported by acquisitions and organic growth; Adjusted EBITDA increased 30.3% to $35.5 million.
- Lodging Services direct revenue declined 53.5%; primary fixed-lodge occupancy fell to 23% from 50%.
- Oil and Gas Field Services direct revenue declined 40.0%, and serviced rig counts fell approximately 66%; the segment reported negative Adjusted EBITDA of $1.4 million.
- Corporate SG&A increased 16.9%, primarily due to higher severance costs and environmental-liability estimate changes, partly offset by cost savings.
- Operating cash flow declined because of working-capital timing, liability payments and higher inventory. Investing cash usage increased because of acquisitions and higher capital expenditures, including $21.0 million for the El Dorado, Arkansas incinerator.
Guidance, outlook, risks and unusual items
Management expects approximately $200 million of capital spending in 2016, including approximately $50 million for the El Dorado incinerator. Management believes operating cash flow, cash on hand and available revolver capacity will fund operating needs, capital expenditures, interest and planned stock repurchases. The company stated that it was in compliance with all debt covenants and expected to remain compliant.
Management identified continuing risks from depressed oil and gas prices, lower rig counts, weak Western Canadian activity, commodity-price volatility, foreign-currency movements, competitive pricing, seasonality, weather, industrial-production levels and fixed costs that cannot be reduced proportionately with revenue. Continued weakness in oil and energy markets could result in impairment of long-lived assets or goodwill, although no impairment indicators were identified through March 31, 2016.
Environmental liabilities totaled $189.5 million at March 31, 2016, including $58.1 million of closure and post-closure liabilities and $131.4 million of remedial liabilities. The company expects these obligations to be paid over many years, but changes in environmental laws or unforeseen events could accelerate or increase payments.
Legal and administrative proceeding reserves were $20.9 million, with potential additional reasonably possible liabilities of up to $1.8 million. The company was associated with 129 Superfund sites, and the ultimate liability for certain sites, including Devil’s Swamp, cannot presently be estimated with certainty. Safety-Kleen was involved in approximately 60 product-liability proceedings, for which insurance generally provides coverage, but future claims and uninsured punitive damages remain risks.
The company acquired an oil re-refinery facility in Nevada for approximately $35.0 million on February 3, 2016. Subsequent to quarter-end, on April 30, 2016, it acquired two blending and packaging plants in New Orleans and Brampton. The filing does not provide purchase-price details for the subsequent acquisition.
The effective tax rate was 10.9% in Q1 2016 versus 39.5% in Q1 2015. The lower benefit primarily reflected the inability to recognize tax benefits for current operating losses of certain Canadian entities. The company adopted ASU 2015-02 and ASU 2015-16 without material impact and was evaluating upcoming lease, revenue-recognition and stock-compensation standards.
Most important facts for investors to verify
- Whether oil and gas market conditions, rig counts and Western Canadian activity improve sufficiently to stabilize Oil and Gas Field Services, Lodging Services and Industrial and Field Services.
- Whether the charge-for-oil program and product-pricing actions sustainably restore Kleen Performance Products margins.
- Progress, cost and timing of the El Dorado incinerator project and the company’s ability to execute its approximately $200 million 2016 capital-spending plan.
- Operating cash-flow conversion and working-capital trends after the significant year-over-year decline in Q1 cash flow.
- Debt service capacity following the additional $250 million of 2021 Notes and continued compliance with debt covenants.
- Potential impairment exposure for oil-and-gas-related long-lived assets and goodwill if market weakness persists.
- Ultimate costs associated with environmental remediation, Superfund sites, product-liability claims and other legal proceedings beyond recorded reserves.
- Integration and performance of the Nevada re-refinery acquisition and the post-quarter-end blending and packaging acquisitions.