CLEAN HARBORS INC annual report, FY2022

Clean Harbors, Inc. — FY2022 Form 10-K Summary

Business context and reporting period

Clean Harbors provides environmental, hazardous-waste, industrial, emergency-response, parts-cleaning, used-oil collection and re-refining services across North America. Its two reportable segments are Environmental Services and Safety-Kleen Sustainability Solutions. The filing covers the fiscal year ended December 31, 2022, with comparisons to fiscal 2021 and 2020; it is not a quarterly filing.

Operations generated 87.0% of direct revenue in the United States and 13.0% in Canada. The Company served more than 300,000 customers and employed approximately 20,260 active employees, including temporary and part-time workers, at year-end.

Financial performance and key metrics

Metric	FY2022	FY2021	Change
Total revenue	$5.167 billion	$3.806 billion	+35.8%
Income from operations	$634.7 million	$347.9 million	+82.5%
Net income	$411.7 million	$203.2 million	+102.6%
Diluted EPS	$7.56	$3.71	+103.8%
Adjusted EBITDA	$1.022 billion	$676.6 million	+51.1%
Adjusted EBITDA margin	19.8%	17.8%	+2.0 percentage points
Net cash from operating activities	$626.2 million	$546.0 million	+14.7%
Adjusted free cash flow	$289.9 million	$326.3 million	-11.1%

Reported revenue increased primarily from organic growth, pricing actions and the full-year contribution of the 2021 HydroChemPSC acquisition. Based on reported revenue, income from operations was approximately 12.3% of revenue and net income was approximately 8.0%.

• Environmental Services: Direct revenue rose 37.6% to $4.172 billion and Adjusted EBITDA rose 44.5% to $953.1 million. Organic revenue growth was nearly 20%, supported by waste-disposal demand, higher throughput, pricing initiatives and HydroChemPSC.
• Safety-Kleen Sustainability Solutions: Direct revenue rose 28.7% to $994.4 million and Adjusted EBITDA rose 34.7% to $306.3 million, primarily from higher base-oil pricing and improved spread management.
• Cost pressures: Labor, transportation, fuel, energy, supplies, additives and other input costs increased amid inflation and supply-chain constraints. Pricing and cost-control initiatives helped offset these pressures.
• Operating metrics: Incinerator utilization was 86.2% versus 85% in 2021. Landfill volumes increased 29%. The Company collected approximately 232 million gallons of used oil and returned approximately 196 million gallons of re-refined oil, lubricants and byproducts to the market.

Cash flow, balance sheet, debt and liquidity

• Cash and cash equivalents were $492.6 million at December 31, 2022; short-term marketable securities were $62.0 million, for combined cash and marketable securities of $554.6 million.
• Capital expenditures, net of disposals, were $336.3 million. Additions to property, plant and equipment were $345.1 million, including continued construction of the Kimball, Nebraska hazardous-waste incinerator.
• Long-term debt at par totaled approximately $2.449 billion, consisting of $1.604 billion of senior secured term loans and $845.0 million of senior unsecured notes. Carrying value of long-term debt, including the current portion, was approximately $2.425 billion.
• The Company had a $400.0 million revolving credit facility, with no loan balance at December 31, 2022, approximately $288.6 million of availability and $111.4 million of outstanding letters of credit.
• Approximately $950.0 million of variable-rate debt was hedged at year-end, leaving $654.0 million exposed to interest-rate changes. Net interest expense increased to $107.7 million from $77.7 million.
• Total environmental liabilities were $235.1 million, comprising $118.8 million of closure and post-closure liabilities and $116.3 million of remedial liabilities, up from $211.0 million at year-end 2021.
• The Company repurchased approximately 0.5 million shares for $50.2 million during 2022. Approximately $105.3 million remained available under the $600.0 million repurchase authorization. No cash dividends have been paid or are expected in the foreseeable future.

Material changes versus the prior comparable period

• Revenue, operating income, net income, EPS and Adjusted EBITDA all increased substantially, with the strongest contribution from Environmental Services and the full-year integration of HydroChemPSC.
• Adjusted free cash flow declined despite higher operating cash flow because capital expenditures increased by $103.2 million and working capital requirements rose, particularly for accounts receivable, inventories and supplies.
• Investing cash outflows declined to $388.9 million from $1.508 billion because 2021 included the $1.23 billion HydroChemPSC acquisition. 2022 acquisition spending was $86.3 million.
• Financing activities shifted from a $898.2 million inflow in 2021, reflecting debt issuance, to a $187.3 million outflow in 2022. The Company repaid $100.0 million of 2024 Term Loans in November 2022.
• The Company acquired two businesses in 2022 for an aggregate purchase price of approximately $91.3 million, sold a non-core business line for $18.8 million and recorded an $8.9 million gain on the sale.
• The effective tax rate declined to 23.5% from 24.6%, partly because Canadian operating losses were substantially utilized. Management expects the effective tax rate to increase in 2023.
• Management succession is planned for March 31, 2023: Michael Battles and Eric Gerstenberg are expected to become Co-Chief Executive Officers, Alan McKim is expected to become Executive Chairman and Chief Technology Officer, and Eric Dugas is expected to become Chief Financial Officer.

Guidance, outlook, commentary, risks and unusual items

• Management expects 2023 capital spending, net of disposals, of approximately $400 million to $420 million, including approximately $90 million for the Kimball incinerator. The Kimball project is expected to be completed in early 2025, with an estimated total cost of approximately $180 million.
• In January 2023, the Company issued $500.0 million of 6.375% senior notes due 2031, borrowed $114.0 million under its revolving facility and used cash on hand to repay the remaining $614.0 million of 2024 Term Loans. Management expects approximately $110 million of interest payments and $10 million of principal payments on the 2028 Term Loans in 2023, based on stated assumptions.
• Management believes operating cash flow will fund operating needs, capital expenditures and environmental obligations, and that the Company remains in compliance with its debt covenants.
• Principal risks include hazardous-material releases, safety incidents, facility disruptions, cyber-security events, severe weather and natural disasters, labor availability, inflation, supply-chain constraints, economic cyclicality, commodity and used-oil pricing, foreign-currency exposure and competition.
• Environmental liabilities and regulatory requirements are material judgment areas. Changes in laws, permits, enforcement, remediation technologies, landfill capacity assumptions or cleanup costs could increase liabilities, capital requirements or operating expenses.
• The Company was involved in approximately 54 Safety-Kleen product-liability proceedings and had been identified as a potential responsible party or potential responsible party successor at 131 Superfund-related sites. Recorded legal and administrative reserves totaled $37.1 million; management did not believe reasonably possible additional liabilities would be material, although outcomes are uncertain.
• One non-commercial landfill was expected to reach permitted capacity in early 2023, and two commercial landfills were in closure. The Deer Park landfill was expected to reach permitted capacity in early 2023, with ash disposal to be transferred to another landfill.
• The independent auditor, Deloitte & Touche LLP, issued unqualified opinions on the financial statements and internal control over financial reporting. Remedial liabilities were identified as the critical audit matter.

Most important facts for investors to verify

• Whether the high 2022 growth rate and margin expansion persist after the HydroChemPSC acquisition comparison becomes less favorable.
• The sustainability of Safety-Kleen’s oil-product pricing spreads, feedstock costs, product volumes and supply-chain performance.
• Actual 2023 capital expenditures, cash conversion and progress, cost and timing of the Kimball incinerator project.
• Post-January 2023 debt balances, interest costs, variable-rate exposure, revolving-facility availability and covenant headroom.
• Changes in environmental, closure, remedial and self-insurance liabilities, including potential costs beyond recorded reserves.
• Permit renewals, landfill capacity, regulatory developments involving hazardous waste and PFAS, and any material enforcement or litigation developments.
• Execution of the planned CEO and CFO succession and its effect on strategy, capital allocation and operating performance.