CLEAN HARBORS INC quarterly report, Q3 FY2014

Clean Harbors, Inc. — Q3 2014 Form 10-Q Summary

Business context and reporting period

Unaudited quarterly report for the quarter and nine months ended September 30, 2014. Clean Harbors provides environmental, industrial, waste management, oil re-refining and recycling, lodging, and oil and gas field services. Operations were reported across six segments: Technical Services, Industrial and Field Services, Oil Re-refining and Recycling, SK Environmental Services, Lodging Services, and Oil and Gas Field Services.

Financial performance and key metrics

Metric	Q3 2014	Q3 2013	9M 2014	9M 2013
Total revenue	$851.5 million	$907.5 million	$2.557 billion	$2.630 billion
Operating income (loss)	$(42.7) million	$73.6 million	$54.3 million	$161.7 million
Net income (loss)	$(93.3) million	$35.4 million	$(55.7) million	$68.8 million
Diluted EPS	$(1.55)	$0.58	$(0.92)	$1.13
Adjusted EBITDA	$153.4 million	$146.0 million	$391.1 million	$380.8 million
Cash flow from operations	Not separately provided	Not separately provided	$196.0 million	$280.1 million

Approximate consolidated margins were: Q3 gross margin 29.7% versus 28.7% prior year, operating margin (5.0%) versus 8.1%, net margin (11.0%) versus 3.9%, and Adjusted EBITDA margin 18.0% versus 16.1%. For the nine-month period, gross margin was approximately 28.4% versus 27.9%, operating margin 2.1% versus 6.1%, and Adjusted EBITDA margin 15.3% versus 14.5%.

Q3 revenue declined 6.2%; nine-month revenue declined 2.8%. Foreign currency translation reduced revenue by approximately 2% in both comparable periods.
Q3 and nine-month Adjusted EBITDA increased 5.1% and 2.7%, respectively, despite lower revenue.
Cost of revenues declined 7.5% in Q3 and 3.5% for the nine-month period. Selling, general and administrative expense declined 12.9% and 8.5%, respectively.
The company recorded a $123.4 million goodwill impairment charge in the Oil Re-refining and Recycling reporting unit, primarily due to lower market prices for base and blended oil products.
Interest expense was $19.5 million in Q3 and $58.4 million for the nine-month period. Income tax expense was $31.7 million and $55.7 million, respectively.

Liquidity, cash flow, debt, and capital allocation

Cash and cash equivalents were $258.0 million at September 30, 2014, compared with $310.1 million at December 31, 2013.
Nine-month operating cash flow of $196.0 million funded most of $190.7 million of investing outflows, including $198.9 million of capital expenditures, $6.2 million for an acquisition, and $5.4 million for permits and intangible assets.
Net financing cash outflow was $53.1 million, including $48.3 million of share repurchases and $5.0 million of debt repayment.
Long-term obligations totaled $1.395 billion, consisting of $800.0 million of 5.25% notes due 2020 and $595.0 million of 5.125% notes due 2021. The revolving credit facility had no borrowings; $262.1 million was available and letters of credit outstanding were $110.4 million.
Management stated that the company was in compliance with debt covenants and believed available cash, operating cash flow, and revolver capacity were adequate to meet liquidity needs.
The company authorized up to $150 million of common-stock repurchases. Through September 30, it had repurchased approximately 923,000 shares for $53.8 million, with $96.2 million remaining under the authorization.

Material changes versus the prior comparable period

Technical Services direct revenue increased 2.5% in Q3 and 4.4% year to date, while its Adjusted EBITDA increased 10.2% and 12.1%.
Industrial and Field Services direct revenue declined 7.4% in Q3 and 5.9% year to date, primarily due to lower oil sands activity, plant-turnaround cyclicality, and foreign currency effects.
Oil Re-refining and Recycling direct revenue increased modestly, aided by the Evergreen acquisition, but lower oil-product pricing contributed to the goodwill impairment.
Lodging Services direct revenue declined 34.0% in Q3 and 12.9% year to date due to lower camp and catering utilization and lower camp manufacturing revenue.
Oil and Gas Field Services direct revenue declined 35.3% in Q3 and 21.6% year to date due to lower activity, project delays, pricing pressure, and foreign currency effects. Its year-to-date Adjusted EBITDA declined 47.2%.
Corporate selling, general and administrative expense declined $11.1 million in Q3 and $25.4 million year to date, reflecting cost savings, lower variable compensation, and lower acquisition-related costs.
Total environmental liabilities declined to $213.0 million from $219.6 million at December 31, 2013, primarily due to expenditures and changes in estimates, partially offset by accretion.

Guidance, outlook, risks, contingencies, and unusual items

Management expected 2014 capital spending of approximately $250 million, including the El Dorado incinerator project. No revenue or earnings guidance was provided in the filing.
Management expects operating cash flow to fund operating requirements, capital expenditures, environmental liabilities, and potential acquisitions, but notes that environmental-law changes could accelerate or increase required spending.
Goodwill impairment testing uses significant assumptions regarding future cash flows, growth, and discount rates. Additional impairment charges remain possible if reporting units underperform expectations; the Oil and Gas Field Services reporting unit was exposed to pricing pressure and lower activity.
The company had $42.1 million of reserves for legal and administrative proceedings and stated that potential liabilities could be approximately $3.2 million higher. Environmental and Superfund matters remain subject to uncertain timing, liability allocation, indemnification, and remediation costs.
The company was involved in proceedings involving 126 Superfund sites. Potential additional liability for the Devil’s Swamp cleanup was not estimable because a final remedy had not been selected.
Approximately 58 product-liability proceedings involving Safety-Kleen were outstanding; insurance was expected to provide coverage, but ultimate aggregate liability was not determinable.
An income tax audit settlement and a discrete deferred-tax adjustment increased tax expense. Excluding the impairment charge, the effective tax rate was 55.6% for Q3 and 47.3% for the nine-month period, versus 34.7% and 34.5% in the prior-year periods.
Forward-looking statements are subject to oil and gas market conditions, commodity prices, foreign exchange, competitive pricing, environmental regulation, litigation, acquisitions, and operating performance.

Most important facts for investors to verify

Whether the decline in Oil and Gas Field Services activity and profitability stabilizes or continues.
Oil-product pricing, Evergreen integration performance, and the risk of additional impairment in Oil Re-refining and Recycling or other reporting units.
Progress against the approximately $250 million 2014 capital-spending plan and the effect on free cash flow.
Cash generation relative to approximately $1.395 billion of senior notes, required interest payments, environmental liabilities, and share repurchases.
Developments in Superfund, remediation, product-liability, employment, and other legal proceedings, including the currently unestimable Devil’s Swamp exposure.
Whether Adjusted EBITDA growth converts into sustainable GAAP earnings and improved operating cash flow; Adjusted EBITDA is a non-GAAP measure and may not be comparable with other companies’ measures.