Clean Harbors, Inc. 10-Q Summary
Reporting period: Three and six months ended June 30, 2023; filed August 2, 2023. Clean Harbors provides environmental, industrial, hazardous-waste management, emergency-response, recycling, used-oil re-refining and parts-cleaning services across North America. The company reports two segments: Environmental Services and Safety-Kleen Sustainability Solutions.
Financial Performance
| Metric | Q2 2023 | Q2 2022 | Change | Six months 2023 | Six months 2022 | Change |
|---|---|---|---|---|---|---|
| Total revenue | $1.398 billion | $1.356 billion | +3.1% | $2.705 billion | $2.525 billion | +7.1% |
| Income from operations | $189.8 million | $211.2 million | -10.1% | $310.8 million | $298.3 million | +4.2% |
| Net income | $115.8 million | $148.2 million | -21.9% | $188.2 million | $193.5 million | -2.7% |
| Diluted EPS | $2.13 | $2.71 | -21.4% | $3.46 | $3.54 | -2.3% |
| Adjusted EBITDA | $287.5 million | $309.1 million | -7.0% | $502.6 million | $489.3 million | +2.7% |
| Adjusted EBITDA margin | 20.6% | 22.8% | -2.2 pts | 18.6% | 19.4% | -0.8 pts |
| Net margin | 8.3% | 10.9% | Lower | 7.0% | 7.7% | Lower |
Segment trends
- Environmental Services: Direct revenue increased 7.5% in Q2 and 10.0% for the first six months. Adjusted EBITDA increased 13.5% in Q2 and 17.9% year to date, with margin improving to 26.1% in Q2 and 23.8% year to date. Growth reflected pricing, demand for industrial and core Safety-Kleen services, and the Thompson Industrial acquisition.
- Safety-Kleen Sustainability Solutions: Direct revenue declined 15.0% in Q2 and 5.1% year to date. Adjusted EBITDA fell 44.9% in Q2 and 36.3% year to date. Lower base-oil market pricing more than offset higher volumes, collection pricing and blended-oil sales.
- Foreign exchange: Canadian operations reduced consolidated direct revenue by approximately $8.5 million in Q2 and $18.6 million year to date.
Cash Flow, Liquidity and Capital Structure
- Six-month operating cash flow was $235.6 million, up from $132.0 million in the prior-year period.
- Adjusted free cash flow was $34.2 million, compared with an outflow of $13.0 million in 2022.
- Investing cash outflow was $347.3 million, including $204.3 million of capital expenditures and $120.6 million for acquisitions.
- Cash and cash equivalents were $238.8 million at June 30, 2023; short-term marketable securities were $87.3 million, for total cash and marketable securities of $326.1 million.
- Total debt at par was approximately $2.320 billion, with carrying value of $2.294 billion. Debt included $985 million of 2028 term loans, $545 million of 2027 notes, $300 million of 2029 notes and $500 million of 2031 notes.
- The company issued $500 million of 6.375% unsecured notes due 2031 and used the proceeds, cash and a temporary $114 million revolver borrowing to repay $614 million of 2024 term loans. The revolver borrowing was fully repaid by May 26, 2023.
- The $400 million revolving facility had no outstanding borrowings, approximately $274.8 million available capacity and $125.2 million of outstanding letters of credit at June 30, 2023.
- The company stated that it was in compliance with all debt covenants and expected to continue meeting them.
Material Changes and Unusual Items
- Thompson Industrial Services was acquired on March 31, 2023 for approximately $111.9 million in cash. The acquisition expands Environmental Services industrial operations in the southeastern United States; preliminary purchase accounting remains subject to final adjustments.
- The company recorded a $2.4 million loss on early extinguishment of debt in the first quarter of 2023.
- Q2 2022 included an $8.9 million gain on sale of a non-core business, which did not recur in 2023.
- Q2 interest expense increased 14.5% to $30.1 million because of higher interest rates. Management estimated an effective debt rate of approximately 5.96% for the remainder of 2023 under the prevailing interest-rate environment.
- Incinerator utilization was 84% in Q2 and 82% for the first six months, versus 90% and 88%, respectively, in the prior-year periods, due to maintenance outages, weather and other operational disruptions.
- Effective March 31, 2023, Michael L. Battles and Eric W. Gerstenberg became co-CEOs and the chief operating decision-maker became a committee comprising the two co-CEOs. The company continued to report the same two operating segments.
Outlook, Risks and Contingencies
- Management expects 2023 capital expenditures, net of disposals, of $400 million to $420 million, including $85 million to $90 million for the new Kimball, Nebraska incinerator.
- The Kimball project is expected to be completed in early 2025, with an estimated total cost of approximately $180 million. Approximately $87.5 million had been spent through June 30, 2023.
- Management believes future operating cash flow will fund operating needs, capital expenditures and environmental liabilities. Environmental liabilities totaled $232.9 million at June 30, 2023 and are expected to be paid over many years.
- Key operating sensitivities include industrial activity, waste volumes, incinerator capacity and outages, commodity and base-oil prices, used-oil collection costs, labor and transportation inflation, weather, foreign exchange, regulation, competition and customer demand.
- The company had reserves of $29.4 million for legal and administrative proceedings. It reported approximately 63 pending Safety-Kleen product-liability proceedings and involvement as a potentially responsible party or potential potentially responsible party at 131 Superfund-related sites. Management stated that liabilities beyond recorded reserves are not reasonably expected to be material, but ultimate outcomes remain uncertain.
- Letters of credit totaling $125.2 million support regulatory financial assurances for hazardous-waste facilities and could be drawn if the company fails to satisfy specified closure, post-closure or related obligations.
- The company identified no goodwill impairment triggering events, no material changes to reported risk factors and effective disclosure controls as of June 30, 2023.
Investor Verification Points
- Verify whether Environmental Services growth and margin gains can offset continued volatility in Safety-Kleen base-oil pricing and margins.
- Monitor execution, cost and timing of the Kimball incinerator project and total 2023 capital spending relative to the $400 million-$420 million estimate.
- Reconcile debt refinancing benefits against higher interest rates, the approximately 5.96% expected second-half effective rate and future maturity obligations.
- Assess acquisition integration and final purchase accounting for Thompson Industrial.
- Review incinerator utilization, maintenance outages, waste volumes and available treatment capacity.
- Track environmental liabilities, Superfund matters, product-liability claims, regulatory proceedings and the availability of related insurance or indemnification.
- Evaluate liquidity after capital expenditures, acquisitions, environmental expenditures, debt service and any further share repurchases; $97.3 million remained under the repurchase authorization at June 30, 2023.