Clean Harbors, Inc. — FY2014 Form 10-K Summary
Business context and reporting period
Clean Harbors provides environmental, energy and industrial services across North America, including hazardous-waste treatment and disposal, industrial and field services, used-oil re-refining and recycling, parts cleaning, lodging, and oil-and-gas field services. This Form 10-K covers the fiscal year ended December 31, 2014. The filing recasts prior periods for a revised six-segment structure: Technical Services, Industrial and Field Services, Oil Re-refining and Recycling, SK Environmental Services, Lodging Services, and Oil and Gas Field Services.
Key financial metrics
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Total revenue | $3.402 billion | $3.510 billion | Down 3.1% |
| Income from operations | $111.8 million | $220.6 million | Down 49.3% |
| Operating margin | 3.3% | 6.3% | Down approximately 3.0 points |
| Net income (loss) | $(28.3) million | $95.6 million | Declined $123.9 million |
| Diluted EPS | $(0.47) | $1.57 | Declined $2.04 |
| Adjusted EBITDA | $521.9 million | $510.1 million | Up 2.3% |
| Adjusted EBITDA margin | 15.3% | 14.5% | Up approximately 0.8 points |
| Cash flow from operations | $297.4 million | $415.8 million | Down 28.5% |
| Capital expenditures | $257.6 million | $280.2 million | Down 8.1% |
| Cash and equivalents | $246.9 million | $310.1 million | Down $63.2 million |
| Long-term obligations | $1.395 billion | $1.400 billion | Down $5.0 million |
The reported loss was primarily driven by a $123.4 million goodwill impairment charge for the Oil Re-refining and Recycling reporting unit. Excluding that charge, the filing reports a 2014 effective tax rate of 40.6%; the reported effective tax rate was 173.5% because the goodwill impairment did not generate a corresponding tax benefit.
Revenue and segment developments
- Technical Services third-party revenue increased 1.9% to $1.043 billion, supported by higher treatment, storage and disposal pricing. Incinerator utilization was 91.2% on 491,721 tons of practical annual capacity.
- Industrial and Field Services revenue declined 3.8% to $681.8 million, reflecting lower oil-sands activity, turnaround cyclicality, and foreign-currency effects.
- Oil Re-refining and Recycling revenue increased 0.9% to $533.6 million, but segment Adjusted EBITDA declined 9.5% to $51.6 million because lower base- and blended-oil prices pressured earnings.
- SK Environmental Services revenue increased 0.3% to $667.3 million and Adjusted EBITDA increased 1.1% to $114.0 million. The business performed approximately 900,000 parts-washer services and collected more than 200 million gallons of used oil.
- Lodging Services revenue declined 17.4% to $172.2 million and Adjusted EBITDA declined 23.5% to $61.4 million due to lower activity and pricing in Western Canada and expired camp contracts.
- Oil and Gas Field Services revenue declined 21.0% to $303.2 million and Adjusted EBITDA declined 40.9% to $40.1 million because of lower activity, project delays, competitive pricing pressure, and foreign-currency effects.
Cash flow, liquidity, debt and capital allocation
Operating cash flow was $297.4 million, pressured by working-capital movements, including increased inventories and timing of liability payments. Investing cash outflows were $258.3 million, including $257.6 million of property, plant and equipment additions and $16.2 million for acquisitions. Financing cash outflows were $93.9 million, primarily reflecting $104.3 million of share repurchases and $5.0 million of senior-note repayment.
The company had $246.9 million of cash and a $400.0 million revolving credit facility, with approximately $238.4 million available to borrow at year-end. The company had no outstanding revolving-credit borrowings and $134.5 million of letters of credit outstanding. Debt consisted primarily of $800.0 million of 5.25% senior unsecured notes due 2020 and $595.0 million of 5.125% senior unsecured notes due 2021. Management stated that the company was in compliance with its debt covenants and expected to remain compliant.
Management expected 2015 capital spending of approximately $200 million, plus approximately $50 million for construction of a new El Dorado, Arkansas incinerator. Planned asset sales of $25 million to $50 million were expected to result in net capital expenditures of approximately $200 million to $225 million. The company repurchased approximately 2.0 million shares for $104.3 million in 2014, with $45.7 million remaining under the authorization. No cash dividends were paid or expected in the foreseeable future.
Material changes versus the prior comparable period
- Revenue declined 3.1%, primarily because of lower activity in oil-and-gas-related, lodging, and industrial markets, with foreign-currency translation reducing revenue by approximately 2%.
- Reported operating income and net income deteriorated substantially because of the $123.4 million goodwill impairment charge.
- Adjusted EBITDA increased despite lower revenue, reflecting cost reductions, branch consolidations, headcount reductions, lower third-party rentals, increased maintenance internalization, procurement improvements, and reduced reliance on outside transportation.
- Goodwill declined from $571.0 million to $452.7 million, primarily due to the impairment charge and foreign-currency translation.
- Stockholders’ equity declined from $1.476 billion to $1.263 billion, reflecting the net loss, other comprehensive loss, and share repurchases.
- Foreign-currency translation generated an $88.7 million loss in other comprehensive income, contributing to a $119.6 million comprehensive loss.
- Environmental liabilities declined from $219.6 million to $205.8 million, while 2014 environmental expenditures were $20.2 million.
Guidance, outlook, commentary, risks and unusual items
- Management expected operating cash flow to fund ongoing operations, capital expenditures, interest payments, and planned share repurchases, supplemented by cash balances and revolving-credit availability.
- The company was constructing an El Dorado incinerator expected to be completed in late 2016 and add approximately 70,000 tons of annual capacity.
- On January 20, 2015, the company announced plans to carve out primarily its Oil and Gas Field Services segment into a standalone public company. The transaction could take more than 12 months and was subject to market conditions, regulatory approvals, debt-covenant compliance, securities filings, tax and structuring considerations, and board approval. Completion was not assured.
- On February 4, 2015, the company announced an agreement to acquire Thermo Fluids Inc. for a preliminary cash purchase price of $85.0 million, subject to customary adjustments and closing conditions. Completion was expected in March 2015.
- Oil and gas exposure was a major risk. Depressed and volatile oil and gas prices reduced customer activity, particularly in Western Canada, and created impairment risk for the Oil and Gas Field Services reporting unit. Its year-end estimated fair value exceeded carrying value by only 13%.
- Oil-product prices also created risk for the Oil Re-refining and Recycling business. Management warned that further price declines, cost misalignment, or higher discount rates could produce additional impairment charges.
- Environmental, regulatory, permitting, remediation, insurance, and financial-assurance obligations are material. Recorded environmental liabilities were $205.8 million, with undiscounted contractual environmental obligations of $483.8 million and required closure and post-closure financial assurance of $436.4 million.
- The company was involved in proceedings involving Superfund sites, the Ville Mercier contamination matter, a refinery-related insurance action, and approximately 59 Safety-Kleen product-liability proceedings. Legal reserves totaled $33.6 million, with up to $2.9 million of additional reasonably possible exposure identified for recorded legal matters.
- Seasonality affects waste volumes, industrial activity, lodging, and oil-and-gas field services. Weather, customer budget cycles, commodity prices, foreign exchange, safety performance, cyber incidents, and regulatory changes may cause significant volatility.
- The fourth quarter included an approximately $5.4 million tax benefit correcting tax expense recorded in the third quarter. Fourth-quarter 2014 revenue was $845.0 million and net income was $27.4 million, compared with $879.4 million and $26.8 million, respectively, in the fourth quarter of 2013.
Most important facts for an investor to verify
- Whether the reported net loss and reduced equity are appropriately evaluated after separating the non-cash goodwill impairment from recurring operating performance.
- Whether the cost-reduction program can offset continued weakness in Oil and Gas Field Services, Lodging Services, and oil-product pricing.
- The level and timing of cash generation relative to approximately $1.395 billion of debt, $430.2 million of future interest payments, capital expenditures, acquisitions, and share repurchases.
- The sensitivity of Oil Re-refining and Recycling and Oil and Gas Field Services goodwill to commodity prices, operating margins, forecast cash flows, and discount rates.
- The status, structure, funding impact, and debt-covenant implications of the proposed Oil and Gas Field Services carve-out.
- The closing and financing implications of the proposed $85.0 million Thermo Fluids acquisition.
- The adequacy of environmental reserves, insurance, surety bonds, letters of credit, and financial assurance relative to potential remediation and closure obligations.
- Whether the company’s substantial Canadian exposure and foreign-currency translation continue to affect revenue, earnings, cash, and asset values.