Clean Harbors, Inc. — 2016 Q2 Form 10-Q Summary
Business context and reporting period
Clean Harbors is a North American provider of environmental, energy and industrial services, including hazardous-waste management, emergency response, industrial cleaning, recycling, used-oil re-refining and parts-cleaning services. The filing covers the three and six months ended June 30, 2016, with comparisons to the same periods in 2015. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total revenue | $697.5 million | $936.2 million | $1,333.6 million | $1,668.7 million |
| Income from operations | $34.5 million | $60.8 million | $30.4 million | $68.1 million |
| Net income (loss) | $4.0 million | $10.4 million | $(16.9) million | $3.3 million |
| Diluted EPS | $0.07 | $0.18 | $(0.29) | $0.06 |
| Adjusted EBITDA | $110.4 million | $163.1 million | $177.8 million | $241.4 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $120.1 million | $193.8 million |
Approximate operating margins were 4.9% for the second quarter and 2.3% for the first six months, compared with 6.5% and 4.1%, respectively, in the prior-year periods. Adjusted EBITDA margins were approximately 15.8% and 13.3%, compared with 17.4% and 14.5%.
- Cash and cash equivalents were $352.9 million at June 30, 2016, up from $184.7 million at December 31, 2015. Foreign subsidiaries held $77.1 million; U.S. operations held $275.8 million.
- Operating cash flow was $120.1 million. Capital expenditures were $123.5 million, acquisitions used $59.0 million, and total investing cash outflow was $181.4 million.
- The company issued $250.0 million of additional 5.125% senior notes due 2021. Total debt at carrying value was $1.632 billion, consisting primarily of $800.0 million of 2020 Notes and $845.0 million of 2021 Notes.
- The $400.0 million revolving credit facility had no borrowings, approximately $190.0 million available capacity and $140.5 million of outstanding letters of credit.
- Management stated that the company was in compliance with debt covenants and believed available cash, operating cash flow and revolver capacity were sufficient for planned needs.
Material changes versus the prior comparable period
- Total revenue declined 25.5% in the second quarter and 20.1% for the six-month period. Management attributed the decline to fewer emergency-response projects, weak crude-oil markets, lower industrial activity, commodity-price reductions and the weaker Canadian dollar.
- Industrial and Field Services revenue fell 57.7% in the quarter and 46.4% year to date, primarily because large emergency-response projects generated $168.0 million and $169.4 million of revenue in the corresponding 2015 periods but did not recur in 2016.
- Oil and Gas Field Services revenue declined 46.8% in the quarter and 42.9% year to date as rig counts, exploration budgets and customer spending fell. The segment generated negative Adjusted EBITDA of $4.2 million in the quarter and $5.6 million year to date.
- Technical Services revenue declined 7.7% in the quarter and 7.8% year to date. Landfill waste volumes fell 21% and 28%, respectively, while incinerator utilization declined to 88.1% and 87.3% from 91.4% and 91.2%.
- SK Environmental Services revenue increased 1.5% in the quarter and 4.4% year to date, benefiting from acquisitions and organic growth. Its Adjusted EBITDA increased 9.8% and 18.0%, respectively.
- Kleen Performance Products Adjusted EBITDA declined 36.8% in the quarter but increased 28.3% year to date. Six-month results benefited from the absence of $21.7 million of high-priced used-oil inventory charges recorded in 2015.
- SG&A declined 11.1% in the quarter and 7.3% year to date, reflecting cost-reduction initiatives and lower variable compensation. Adjusted EBITDA nevertheless declined 32.3% and 26.4%, respectively.
- The prior-year second quarter included a $32.0 million goodwill impairment charge related to Oil and Gas Field Services; no goodwill impairment charge was recorded in 2016.
Guidance, outlook, commentary and risks
- Management expects 2016 capital spending of approximately $200 million, including approximately $50 million for construction of a new incinerator at El Dorado, Arkansas.
- Management expects future operating cash flow to fund operations, capital expenditures, interest, environmental liabilities and planned share repurchases, subject to business conditions.
- Management continues to monitor long-lived assets in the Oil and Gas Field Services, Lodging Services and Industrial Services businesses. Further deterioration in oil and gas markets could result in future goodwill or long-lived-asset impairments.
- Environmental liabilities totaled $189.5 million at June 30, 2016, including $59.2 million of closure and post-closure liabilities and $130.3 million of remedial liabilities. Changes in environmental laws or unexpected remediation requirements could accelerate or increase payments.
- The company had reserves of $21.1 million for legal and administrative proceedings and believed reasonably possible additional exposure could be approximately $1.8 million. It was involved in 129 Superfund or potential Superfund sites, although the ultimate exposure is inherently difficult to estimate.
- Product-liability claims, regulatory proceedings, foreign-currency movements, commodity prices, customer activity, competition and seasonality remain material operating risks. The filing reported no material changes to previously disclosed risk factors.
- During July 2016, the company completed two acquisitions for approximately $101.0 million, entered into agreements for three potential acquisitions totaling approximately $50.0 million, and agreed to sell a non-core Industrial and Field Services business for expected proceeds of approximately $50.0 million.
Investor verification checklist
- Verify the sustainability of revenue and margin recovery in Industrial and Field Services, Oil and Gas Field Services, Lodging Services and Technical Services.
- Reconcile Adjusted EBITDA to GAAP results and assess the effect of cost reductions, acquisitions and nonrecurring items.
- Review leverage, interest expense, debt maturities, revolver availability, letters of credit and covenant headroom after the 2021 Notes issuance.
- Track 2016 capital spending against the approximately $200 million expectation and evaluate resulting free cash flow.
- Assess potential impairment risk for Oil and Gas Field Services, Lodging Services and Industrial Services assets and goodwill.
- Review environmental, Superfund, product-liability and other legal exposures beyond recorded reserves.
- Confirm the purchase accounting, financing and integration effects of the 2016 and subsequent acquisitions and the proposed divestiture.