Business Context and Reporting Period
Clean Harbors, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2015. The company provides environmental, waste management, recycling, industrial, lodging, and oil and gas field services through six reportable segments. Results were materially affected by the downturn in oil-related industries, particularly in Western Canada, lower base-oil pricing, and foreign currency translation.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $732.5 million | $846.7 million | Down 13.5% |
| Income from operations | $7.3 million | $29.9 million | Down 75.6% |
| Operating margin | 1.0% | 3.5% | Down approximately 2.5 percentage points |
| Adjusted EBITDA | $78.3 million | $102.0 million | Down 23.2% |
| Adjusted EBITDA margin | 10.7% | 12.0% | Down approximately 1.3 percentage points |
| Net income (loss) | $(7.1) million | $9.0 million | Declined $16.0 million |
| Diluted EPS | $(0.12) | $0.15 | Declined $0.27 |
| Cash flow from operations | $84.8 million | $4.6 million | Improved $80.2 million |
| Capital expenditures | $52.9 million | $75.0 million | Down 29.4% |
Cash and cash equivalents were $233.7 million at March 31, 2015, compared with $246.9 million at December 31, 2014. Total assets were $3.55 billion and stockholders’ equity was $1.16 billion. Long-term obligations were $1.395 billion, consisting of $800.0 million of 5.25% senior unsecured notes due 2020 and $595.0 million of 5.125% senior unsecured notes due 2021.
The company had no borrowings under its revolving credit facility. Of the $400.0 million facility, $209.6 million was available at March 31, 2015, with $140.7 million of outstanding letters of credit. Management stated that the company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $114.2 million, primarily because of lower activity in Oil and Gas Field Services and Lodging Services, unfavorable foreign currency translation, and lower oil-related pricing and volumes.
- Oil and Gas Field Services direct revenue declined 46.6%, and segment Adjusted EBITDA declined 91.4% to $1.4 million.
- Lodging Services direct revenue declined 39.9%, while Adjusted EBITDA declined 61.0% to $6.9 million.
- Oil Re-refining and Recycling Adjusted EBITDA fell to a $4.5 million loss from $12.6 million of income, primarily reflecting inventory revaluation and weaker base- and blended-oil pricing.
- SK Environmental Services Adjusted EBITDA increased 19.4% to $27.2 million despite lower direct revenue, while Technical Services Adjusted EBITDA increased 2.0% to $63.4 million.
- Corporate Items Adjusted EBITDA improved by $19.5 million, primarily due to lower benefit-related, variable compensation, and severance-related costs.
- Net cash from operations increased substantially because of working-capital improvements, including lower inventory levels resulting from reduced used-oil costs.
- The company repurchased approximately 307,000 shares during the quarter and had repurchased approximately 2.3 million shares for $120.5 million under its program since inception. The authorized program was increased from $150 million to $300 million, with $179.5 million remaining available at March 31, 2015.
Outlook, Commentary, Risks, and Unusual Items
- Management targeted approximately $200 million of 2015 capital expenditures, excluding approximately $50 million expected for construction of the El Dorado incinerator. Planned sales of non-essential assets of approximately $25 million to $50 million would result in targeted net capital expenditures of approximately $200 million to $225 million.
- Management expected operating cash flow, existing cash, and available revolver capacity to fund operating needs, capital expenditures, interest payments, environmental liabilities, acquisitions, and share repurchases.
- The company acquired Thermo Fluids Inc. on April 11, 2015 for a preliminary cash purchase price of $85.0 million, subject to customary adjustments.
- On May 6, 2015, the company expanded its planned carve-out to include the entire Lodging Services segment, in addition to the previously contemplated drilling-related mobile assets and Oil and Gas Field Services segment. Timing could exceed 12 months, and completion is subject to market conditions, structure, costs, regulatory approvals, debt covenant compliance, securities filings, and board approval. No assurance was provided that the transaction will be completed.
- Oil and Gas Field Services goodwill of $31.3 million remained subject to impairment risk because of depressed Western Canadian oil and gas activity. No impairment was recorded as of March 31, 2015, but weaker-than-expected performance or market conditions could result in a future charge.
- Total closure, post-closure, and remedial environmental liabilities were $200.9 million. Management expects payment over many years, but regulatory changes or unforeseen events could accelerate or increase cash requirements.
- The company recorded $29.8 million of reserves for legal and administrative proceedings and believed reasonably possible additional liabilities could be as much as $2.5 million. The filing also describes Superfund, environmental, product-liability, and class-action matters.
- Foreign currency movements, oil and base-oil prices, oil sands and drilling activity, occupancy rates, competitive pricing, fuel prices, emergency response projects, and environmental regulation remain significant risks.
- Other income declined to $0.4 million from $4.2 million because gains on marketable securities recognized in the prior-year quarter did not recur.
Facts Investors Should Verify
- Whether oil and gas market weakness continues to pressure Oil and Gas Field Services and Lodging Services revenue, margins, and goodwill valuation.
- Progress, funding, regulatory approvals, and final structure of the proposed Lodging Services and Oil and Gas Field Services carve-out.
- Completion accounting and financing for the $85.0 million Thermo Fluids acquisition.
- Actual 2015 capital expenditures, El Dorado incinerator spending, asset-sale proceeds, and resulting free cash flow.
- Use of the remaining $179.5 million share-repurchase authorization and its effect on liquidity and leverage.
- Changes in environmental liabilities, Superfund obligations, legal reserves, and potential unrecorded contingencies.
- Potential impairment of the $31.3 million Oil and Gas Field Services goodwill balance.
- Cash availability by jurisdiction, including the $70.3 million held by foreign subsidiaries and the $209.6 million of revolver availability.