Clean Harbors, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, hazardous-waste, industrial, emergency-response, recycling and used-oil re-refining services in North America. The filing covers the unaudited three months ended March 31, 2024, compared with the three months ended March 31, 2023. Reportable segments are Environmental Services and Safety-Kleen Sustainability Solutions (SKSS).
Financial performance and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $1,376.7 million | $1,307.4 million | 5.3% |
| Income from operations | $125.5 million | $121.0 million | 3.7% |
| Net income | $69.8 million | $72.4 million | (3.5%) |
| Diluted EPS | $1.29 | $1.33 | $(0.04) |
| Adjusted EBITDA | $230.1 million | $215.1 million | 7.0% |
| Adjusted EBITDA margin | 16.7% | 16.5% | 0.2 percentage points |
| Net cash from operating activities | $18.5 million | $28.0 million | $(9.5) million |
| Adjusted free cash flow | $(118.4) million | $(51.8) million | $(66.5) million |
Service revenue increased to $1,151.9 million from $1,053.2 million, while product revenue declined to $224.8 million from $254.2 million. The implied gross margin was approximately 29.4%, compared with 28.7% in the prior-year quarter. Operating margin was approximately 9.1%, compared with 9.2%; net margin was approximately 5.1%, compared with 5.5%.
- Environmental Services: Direct revenue increased 9.5% to $1,172.5 million, and Adjusted EBITDA increased 15.8% to $264.5 million. Segment margin improved to 22.6% from 21.3%.
- SKSS: Direct revenue declined 13.7% to $204.1 million, and Adjusted EBITDA declined 28.4% to $29.7 million. Segment margin fell to 14.6% from 17.5%, primarily because of lower base-oil pricing and somewhat lower volumes.
- Cash flow: Operating cash flow was affected by higher working-capital balances and interest payments. Capital expenditures were $137.9 million, compared with $81.7 million, driven by the Baltimore strategic project, the Kimball, Nebraska incinerator and fleet and equipment investments.
- Balance sheet: Cash and cash equivalents were $337.8 million and short-term marketable securities were $104.8 million at March 31, 2024. Total assets were $6.94 billion and stockholders’ equity was $2.31 billion.
- Debt and liquidity: Long-term debt at carrying value was $2.78 billion, up from $2.29 billion at December 31, 2023. The company issued $500.0 million of incremental secured term loans, receiving $494.7 million net of discount and financing costs. Its $400.0 million revolving facility had no borrowings, $268.0 million available capacity and $132.0 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Environmental Services benefited from pricing, growth across service offerings and contributions from Thompson Industrial and HEPACO. Technical services revenue increased $41.0 million, industrial services revenue increased $23.0 million, core Safety-Kleen service revenue increased $20.9 million and field and emergency-response revenue increased $15.4 million.
- SKSS revenue declined primarily because base-oil revenue fell $28.0 million, recycled fuel oil and refinery by-product revenue fell $9.6 million, and contract-packaging revenue fell $5.7 million. These declines were partly offset by higher blended-oil and used-oil collection revenue.
- Corporate SG&A increased 14.9% to $67.2 million, including higher labor and benefits costs, acquisition-related severance and professional fees.
- Interest expense increased 38.3% to $28.5 million. The prior-year period included an $8.3 million benefit from settling interest-rate swaps and a $2.4 million loss on early debt extinguishment; neither item occurred in Q1 2024.
- On March 22, 2024, Clean Harbors acquired HEPACO for approximately $395.4 million in cash. On March 1, 2024, it acquired another oil-collection and re-refining business for approximately $68.9 million. The acquisitions added approximately $201.0 million of goodwill and $150.2 million of permits and other intangible assets on a preliminary basis.
- Foreign-currency effects contributed to a $4.3 million net other comprehensive loss, partly offset by gains on interest-rate hedges.
Guidance, outlook, risks and unusual items
- Management expects 2024 capital spending, net of disposals, to be approximately $400 million to $430 million. This includes approximately $65 million to complete the Kimball incinerator and approximately $20 million for the Baltimore strategic project.
- The Kimball incinerator is expected to be completed in late 2024. Total project spending was $155.2 million through March 31, 2024, with approximately $51.7 million remaining.
- Management states that future operating cash flow is expected to fund ongoing operations and internal investing needs and believes the company will continue to comply with debt covenants. The filing does not provide a full-year revenue or earnings outlook.
- Key operating sensitivities include industrial activity, waste volumes, pricing, incineration capacity, regulatory changes including PFAS requirements, weather, labor and transportation costs, energy costs, commodity oil prices and the spread between used-oil collection costs and oil-product prices.
- Environmental liabilities totaled $229.4 million at March 31, 2024, including $119.6 million of closure and post-closure liabilities and $109.8 million of remedial liabilities. Management expects these obligations to be paid over many years, but regulatory changes or unexpected events could accelerate or increase payments.
- The company had approximately 70 pending Safety-Kleen product-liability proceedings and was identified as a potentially responsible party or potential potentially responsible party at 131 Superfund-related sites. Recorded reserves for legal and administrative proceedings were $28.5 million. Management stated that additional liabilities beyond recorded reserves are not reasonably expected to be material, but ultimate outcomes are uncertain.
- Goodwill and acquisition accounting for the 2024 acquisitions remain provisional and may change during the measurement period.
- The company stated that disclosure controls were effective as of March 31, 2024, with no material changes to internal control over financial reporting and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile Adjusted EBITDA and adjusted free cash flow to GAAP measures and assess whether the first-quarter cash outflow is seasonal or indicative of sustained working-capital pressure.
- Verify the final purchase-price accounting, operating contribution and integration performance of HEPACO and the additional SKSS acquisition.
- Monitor leverage, interest expense, variable-rate debt exposure and the $268.0 million of available revolver capacity after the incremental term-loan issuance.
- Assess whether SKSS margins recover as base-oil pricing, product mix and used-oil collection economics change.
- Track execution, remaining costs and completion timing for the Kimball incinerator and Baltimore project, as well as total 2024 capital spending against the $400 million to $430 million expectation.
- Review environmental, Superfund and product-liability exposures, including the adequacy of reserves and insurance coverage.
- Confirm the effect of future regulatory changes, including PFAS requirements and the phased-in SEC climate-related disclosure rules, which management was still evaluating.