Clean Harbors, Inc. — 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 cleaning, recycling, used-oil re-refining and parts-cleaning services. The filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Following a 2018 reorganization, the company reports two operating segments: Environmental Services and Safety-Kleen.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $843.2 million | $755.8 million | $2.442 billion | $2.198 billion |
| Income from operations | $65.7 million | $47.7 million | $141.1 million | $99.8 million |
| Net income | $31.1 million | $12.1 million | $49.2 million | $16.5 million |
| Diluted EPS | $0.55 | $0.21 | $0.87 | $0.29 |
| Adjusted EBITDA | $141.3 million | $123.0 million | $369.1 million | $323.8 million |
| Operating cash flow | Not separately provided | Not separately provided | $247.2 million | $221.5 million |
| Adjusted free cash flow | Not separately provided | Not separately provided | $102.6 million | $99.1 million |
Revenue increased 11.6% in the quarter and 11.1% year to date. Approximate consolidated operating margins were 7.8% in Q3 and 5.8% for the first nine months; approximate net margins were 3.7% and 2.0%, respectively. Adjusted EBITDA margins were approximately 16.8% and 15.1%.
- Environmental Services direct revenue increased 14.9% in Q3 and 13.5% year to date; Adjusted EBITDA increased 18.4% and 13.0%, respectively.
- Safety-Kleen direct revenue increased 6.2% in Q3 and 7.1% year to date; Adjusted EBITDA increased 13.1% and 17.2%, respectively.
- Cash and cash equivalents were $215.5 million at September 30, 2018, compared with $319.4 million at December 31, 2017. Short-term marketable securities totaled $37.4 million.
- Capital expenditures were $150.7 million through nine months, and acquisitions used $151.0 million of cash. Investing cash outflow was $299.5 million.
- Total debt carrying value was $1.624 billion, consisting primarily of $736.6 million of term loans, $845.0 million of 5.125% senior notes due 2021 and $50.0 million drawn under the revolving facility. Approximately $194.4 million remained available under the $400.0 million revolver, subject to outstanding letters of credit.
- The company stated that it was in compliance with all debt covenants at September 30, 2018.
Material changes versus the prior comparable period
- The February 2018 acquisition of Veolia’s U.S. Industrial Cleaning Business contributed $44.9 million of Q3 revenue and $108.8 million of nine-month revenue. The acquisition generated $2.5 million of nine-month pre-tax income and was financed with cash.
- A further acquisition completed August 31, 2018 generated preliminary goodwill of $16.0 million; the filing does not provide a separate revenue or earnings contribution.
- Debt was refinanced: the company added $350.0 million of term loans and borrowed $50.0 million on its revolver to purchase or redeem the remaining $400.0 million of 2020 senior notes. This produced a $2.5 million pre-tax loss on early extinguishment of debt in 2018.
- 2017 results included a $31.6 million pre-tax gain from selling the non-core Transformer Services business, making year-to-year net income comparisons less representative.
- The effective tax rate declined to 26.6% in Q3 and 36.3% for nine months, versus 51.0% and 69.9% in 2017, primarily due to the lower U.S. federal tax rate, reduced unrecognized tax benefits and discrete tax benefits.
- The company repurchased 0.6 million shares for $33.6 million during the first nine months. Approximately $317.6 million remained available under the $600 million authorization at September 30, 2018.
- ASC 606 revenue recognition and other accounting changes were adopted in 2018. The company said ASC 606 did not require a cumulative-effect adjustment and had limited effect beyond disclosures. Adoption of the new lease standard is planned for January 1, 2019 and is expected to materially increase reported assets and liabilities.
Guidance, outlook, management commentary and risks
- Management expects 2018 capital spending, net of disposals, to be $170 million to $190 million.
- Management believes operating cash flow, cash balances and revolver availability will be sufficient for operating needs, capital expenditures, interest payments, strategic investments and the stock-repurchase program.
- Environmental Services performance depends on industrial activity, waste volumes, facility utilization, pricing, weather, competition, operating efficiency and emergency-response demand. Q3 incinerator utilization declined to 83.5% from 91.9% in the prior-year quarter because of more facility downtime; nine-month utilization increased to 86.9% from 86.0%.
- Safety-Kleen is exposed to volatility in crude oil and Group II base-oil prices, product mix, used-oil collection economics, raw-material costs and transportation expenses.
- Total environmental liabilities were $188.1 million at September 30, 2018, including $67.4 million of closure and post-closure liabilities and $120.7 million of remedial liabilities. Management expects payments over many years but cautions that regulatory changes or unforeseen events could accelerate or increase these obligations.
- The company had $21.8 million of reserves for legal and administrative proceedings and estimated that reasonably possible additional exposure could be as much as $1.7 million. It was involved in 128 Superfund-related sites, although the ultimate liability is difficult to estimate.
- The filing identifies product-liability claims, environmental remediation, regulatory enforcement, foreign-currency movements, interest-rate exposure and potential capital needs as material risk areas. The company uses interest-rate swaps to effectively fix rates on $350.0 million of term loans.
- No material changes to previously disclosed risk factors were reported, and management concluded that disclosure controls were effective as of September 30, 2018.
Important facts for investors to verify
- Whether Veolia integration and the 2018 reorganization deliver the expected revenue, cost-sharing and cross-selling benefits.
- The sustainability of margin improvement, particularly Safety-Kleen’s exposure to base-oil pricing and Environmental Services’ facility utilization.
- Debt reduction capacity, interest-rate exposure on variable-rate term loans and remaining revolver availability after letters of credit.
- Actual 2018 capital spending relative to the $170 million–$190 million outlook and the resulting free-cash-flow conversion.
- Potential changes to environmental, Superfund, product-liability and regulatory reserves, including unresolved Devil’s Swamp exposure.
- The balance-sheet impact and implementation status of ASC 842 lease accounting beginning January 1, 2019.
- The effect of share repurchases on leverage, liquidity and per-share earnings.