Business Context and Reporting Period
Clean Harbors, Inc. 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 related services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $729.5 million | $893.4 million | $2.063 billion | $2.562 billion |
| Income from operations | $16.8 million | $94.0 million | $47.2 million | $162.0 million |
| Net income/(loss) | $(10.3) million | $40.2 million | $(27.2) million | $43.5 million |
| Basic diluted EPS | $(0.18) | $0.69 | $(0.47) | $0.74 |
| Adjusted EBITDA | $126.7 million | $165.6 million | $304.4 million | $407.0 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $178.8 million | $309.6 million |
Q3 operating margin was approximately 2.3%, compared with 10.5% in Q3 2015. Nine-month operating margin was approximately 2.3%, compared with 6.3% in the prior-year period. Net margin was approximately negative 1.4% for Q3 and negative 1.3% for nine months, versus positive margins of approximately 4.5% and 1.7%, respectively, in the comparable 2015 periods.
- Cash and cash equivalents were $257.9 million at September 30, 2016, up from $184.7 million at December 31, 2015.
- Current assets were $1.050 billion and current liabilities were $539.1 million.
- Gross long-term debt was $1.645 billion, consisting of $800 million of 5.25% notes due 2020 and $845 million of 5.125% notes due 2021. Revolver borrowings were zero.
- Approximately $201.4 million remained available under the $400 million revolving credit facility; outstanding letters of credit were $142.0 million.
- Capital expenditures were $175.3 million and acquisitions used $207.1 million during the first nine months. Net cash used in investing activities was $333.8 million.
- Net cash from financing activities was $222.8 million, principally reflecting the issuance of $250 million of additional 2021 Notes.
- Environmental liabilities totaled $191.6 million, including $62.6 million of closure and post-closure liabilities and $129.1 million of remedial liabilities.
Material Changes Versus the Prior Comparable Period
- Revenue declined 18.3% in Q3 and 19.5% for nine months. Management attributed the decline primarily to fewer emergency-response projects, weak energy markets, lower commodity pricing, reduced industrial activity and unfavorable Canadian currency translation.
- Adjusted EBITDA declined 23.5% in Q3 and 25.2% for nine months. Industrial and Field Services was the largest contributor to the decline because large 2015 emergency-response projects did not recur.
- Industrial and Field Services direct revenue fell 50.2% in Q3 and 47.8% for nine months. Oil and Gas Field Services direct revenue fell 48.5% and 44.8%, respectively.
- Technical Services direct revenue declined 5.8% in Q3 and 7.1% for nine months, reflecting lower waste volumes and project delays. Landfill waste volumes decreased 49% in Q3 and 36% for nine months.
- SK Environmental Services direct revenue increased 6.0% in Q3 and 5.0% for nine months, while Kleen Performance Products direct revenue increased 20.1% in Q3 but declined 1.5% for nine months.
- SG&A increased 19.2% in Q3 and 0.4% for nine months, despite cost-reduction initiatives, partly due to compensation, severance and acquisition-related costs.
- Operating results included a $34.0 million goodwill impairment charge for Lodging Services. The charge was non-cash and was not tax deductible.
- The Company sold its non-core Catalyst Services business on September 1, 2016, recognizing a pre-tax gain of $16.4 million, including $1.5 million of transaction-related costs.
- The Company acquired seven businesses for approximately $205.2 million in cash, primarily expanding oil re-refining, used-oil collection, blending and packaging capabilities.
- Common-stock repurchases were $16.3 million for the first nine months, compared with $69.8 million in the prior-year period. Approximately $106.0 million remained authorized for repurchases at September 30, 2016.
Guidance, Outlook, Risks and Unusual Items
Management expected 2016 capital spending of approximately $200 million, including approximately $50 million for construction of a new incinerator in El Dorado, Arkansas. Management stated that operating cash flow, cash balances and revolver availability should be sufficient to fund operations, capital expenditures, interest, environmental obligations and planned stock repurchases.
The Lodging Services outlook was materially reduced because of persistently low oil and gas prices, weak Western Canadian activity, regulatory delays affecting pipeline projects, historical results below forecast and the Fort McMurray forest fires. Management reduced projected average annual Lodging revenue for 2017 through 2020 by 18.2% and reduced estimated EBITDA margins from 29.7% to 19.1%, resulting in a full $34.0 million impairment of Lodging goodwill.
- Further weakness in oil and gas prices, Canadian energy activity, customer spending, pricing or rig counts could reduce revenue and margins and cause additional asset impairments.
- Goodwill and long-lived asset valuations depend on discounted cash-flow assumptions, including revenue growth, margins, discount rates and recovery timing. Management continued to monitor Oil and Gas Field Services and Industrial Services for impairment risk.
- Environmental liabilities may increase if regulations change or remediation is required sooner or at greater cost than estimated.
- The Company was involved in legal, environmental and Superfund proceedings. Recorded reserves for legal and administrative proceedings were $20.9 million, with potential additional exposure believed to be reasonably possible of up to $1.8 million, excluding matters for which exposure could not be estimated.
- The Company reported no material changes to previously disclosed risk factors and stated that it remained in compliance with its debt covenants.
- Subsequent to quarter-end, on November 1, 2016, the revolving credit facility was amended and its termination date was extended, subject to conditions, to November 1, 2021.
Investor Verification Checklist
- Verify the sustainability of operating cash flow after capital expenditures, acquisitions, interest and environmental expenditures.
- Assess debt repayment capacity, covenant headroom and the effect of the additional 2021 Notes on leverage and interest expense.
- Monitor recovery prospects in Western Canadian energy markets and the performance of Lodging Services and Oil and Gas Field Services.
- Review sensitivity of goodwill and long-lived asset valuations to revenue, margin, discount-rate and recovery assumptions.
- Evaluate whether acquisition-driven growth in SK Environmental Services and Kleen Performance Products offsets weakness in other segments.
- Track environmental, Superfund, product-liability and other legal contingencies, including unquantified potential exposure.
- Determine whether the $200 million capital-spending plan and ongoing repurchase authorization remain appropriate given lower earnings and cash generation.