Clean Harbors, Inc. — Q2 2017 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, energy and industrial services across North America, including hazardous-waste management, industrial services, used-oil recycling and parts-cleaning services. The filing covers the quarter and six months ended June 30, 2017, with comparisons to the corresponding 2016 periods. Results are unaudited.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $752.8 million | $697.5 million | $1.442 billion | $1.334 billion |
| Operating income | $46.7 million | $34.5 million | $52.2 million | $30.4 million |
| Net income (loss) | $25.9 million | $4.0 million | $4.5 million | $(16.9) million |
| Diluted EPS | $0.45 | $0.07 | $0.08 | $(0.29) |
| Adjusted EBITDA | $120.7 million | $110.4 million | $200.8 million | $177.8 million |
| Net cash from operations | Not separately provided | Not separately provided | $116.9 million | $120.1 million |
| Adjusted free cash flow | Not separately provided | Not separately provided | $30.3 million | $(0.8) million |
Revenue increased 7.9% in the quarter and 8.1% for the six months. Approximate consolidated margins were: Q2 gross margin 30.9%, operating margin 6.2% and net margin 3.4%; six-month gross margin 29.5%, operating margin 3.6% and net margin 0.3%. Adjusted EBITDA margin was approximately 16.0% in Q2 and 13.9% for the six months.
At June 30, 2017, cash and cash equivalents were $446.4 million, compared with $307.0 million at December 31, 2016. Total debt at carrying value was $1.734 billion, including $107.8 million classified as current. The company had no borrowings under its $400.0 million revolving credit facility; approximately $225.3 million was available, subject to $125.9 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Safety-Kleen direct revenue increased 9.1% in Q2 and 13.8% for the six months, driven by acquisitions, improved pricing for base and blended oils, and organic growth.
- Technical Services direct revenue increased 11.1% in Q2 and 8.9% for the six months, primarily from higher waste volumes. The El Dorado, Arkansas hazardous-waste incinerator added approximately 70,000 tons of annual capacity.
- Industrial and Field Services direct revenue increased 1.5% in both periods; excluding the Catalyst Services business sold in 2016, underlying growth was substantially higher.
- Oil, Gas and Lodging Services direct revenue increased 6.1% in Q2 but declined 8.0% for the six months, reflecting lower manufacturing and seismic-support activity.
- Q2 operating income benefited from stronger operating performance and a $31.7 million pretax gain on the sale of the Transformer Services business. The sale closed June 30 and was not classified as a discontinued operation.
- The company recorded a $6.0 million loss on early extinguishment of debt related to the repurchase of approximately $296.2 million principal amount of 2020 Notes.
- The company entered into a $400.0 million senior secured term loan due 2024, used partly to repurchase the 2020 Notes. On August 1, 2017, it redeemed an additional approximately $103.8 million principal amount of 2020 Notes.
Outlook, commentary, risks and unusual items
- Management expects 2017 capital spending, net of disposals, of approximately $160 million to $170 million.
- Management stated that operating cash flow, existing cash and revolver availability should be sufficient for operations, capital expenditures, interest payments and planned stock repurchases.
- Management identified sensitivity to industrial production, waste volumes, pricing, competition, weather, emergency-response activity, crude-oil and base-oil prices, oil-and-gas activity, foreign exchange and acquisition integration.
- Environmental liabilities totaled $186.0 million at June 30, 2017, including $59.8 million of closure and post-closure liabilities and $126.2 million of remedial liabilities. Management expects payments over many years but warned that regulatory changes or unforeseen events could accelerate or increase costs.
- The company had reserves of $20.8 million for legal and administrative proceedings and believed reasonably possible additional exposure could be approximately $1.8 million. It is involved in Superfund matters involving 129 sites and approximately 62 Safety-Kleen product-liability proceedings; ultimate liabilities for certain matters cannot be estimated with assurance.
- The company continued monitoring goodwill and long-lived assets, particularly those associated with oil-and-gas operations. No impairment was recorded as of June 30, 2017, but continued weakness in energy markets could lead to future impairment.
- On July 14, 2017, the company acquired Lonestar West Inc. for approximately $34.0 million in cash and assumed approximately $17.4 million of debt, which was subsequently repaid. The acquisition expands hydro-excavation and daylighting services.
- The company had no material changes to previously disclosed risk factors and reported effective disclosure controls as of June 30, 2017.
Important facts for investors to verify
- Whether revenue growth and Adjusted EBITDA improvement continue after excluding the $31.7 million divestiture gain and other unusual items.
- The post-redemption debt balance, interest expense and covenant capacity following the term-loan refinancing and August 2017 note redemption.
- Whether the $160 million to $170 million 2017 capital-spending outlook is achieved and how spending affects free cash flow.
- Safety-Kleen pricing, acquisition synergies and re-refinery maintenance costs.
- Oil-and-gas and lodging demand, crude-oil prices and potential impairment risk for related long-lived assets.
- Progress and purchase-accounting effects from the Lonestar acquisition.
- Changes in environmental, Superfund, product-liability and regulatory exposures beyond recorded reserves.
- The effect of the planned adoption of the new revenue-recognition standard beginning in the first quarter of 2018.