CLEAN HARBORS INC quarterly report, Q1 FY2023

Business Context and Reporting Period

Clean Harbors, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2023. The company provides environmental, industrial, hazardous-waste management, emergency-response, recycling, parts-cleaning and used-oil re-refining services across North America. It reports two operating segments: Environmental Services and Safety-Kleen Sustainability Solutions.

Effective March 31, 2023, Michael L. Battles and Eric W. Gerstenberg became co-CEOs. The company stated that the new leadership structure is not expected to change its operating segments or goodwill reporting units.

Key Financial Metrics

Metric	Q1 2023	Q1 2022	Change
Total revenue	$1.307 billion	$1.169 billion	Up 11.8%
Income from operations	$121.0 million	$87.1 million	Up 38.9%
Net income	$72.4 million	$45.3 million	Up 59.8%
Diluted EPS	$1.33	$0.83	Up 60.2%
Adjusted EBITDA	$215.1 million	$180.3 million	Up 19.3%
Adjusted EBITDA margin	16.5%	15.4%	Up 1.1 points
Net cash from operating activities	$28.0 million	$(38.6) million	Improved $66.6 million
Adjusted free cash flow	$(51.8) million	$(107.6) million	Improved $55.8 million

Calculated operating margin was approximately 9.3% in Q1 2023 versus 7.4% in Q1 2022; calculated net margin was approximately 5.5% versus 3.9%.

Environmental Services direct revenue increased 13.0% to $1.071 billion, and segment Adjusted EBITDA increased 24.4% to $228.3 million. The segment margin improved to 21.3% from 19.4%.
Safety-Kleen Sustainability Solutions direct revenue increased 6.7% to $236.5 million, but Adjusted EBITDA declined 20.1% to $41.5 million. The segment margin fell to 17.5% from 23.4%, primarily because of higher used-oil raw-material costs.
Service revenue was $1.053 billion and product revenue was $254.2 million. Foreign-currency translation reduced consolidated direct revenue by approximately $10.0 million.

Liquidity, Debt and Capital Resources

At March 31, 2023, cash and cash equivalents were $304.3 million and short-term marketable securities were $71.8 million, for total cash and marketable securities of $376.1 million.
Total debt at carrying value was $2.410 billion, including $114.0 million outstanding under the revolving credit facility. Debt principal consisted principally of $987.5 million of 2028 term loans, $545.0 million of 2027 notes, $300.0 million of 2029 notes and $500.0 million of 2031 notes. The approximate debt less cash and marketable securities was $2.034 billion.
In January 2023, the company issued $500.0 million of 6.375% senior notes due 2031 and borrowed $114.0 million under its revolver to help repay $614.0 million of 2024 term loans. The refinancing produced a $2.4 million early-extinguishment loss and included a $8.3 million interest-rate-swap settlement benefit recognized in interest expense.
The $400.0 million revolving facility had $153.9 million available to borrow and $132.1 million of outstanding letters of credit at quarter-end. The company reported compliance with its debt covenants.
Capital expenditures were $81.7 million in Q1. Management expects 2023 capital spending, net of disposals, of $400 million to $420 million, including approximately $90 million for the Kimball, Nebraska incinerator project. The project is expected to be completed in early 2025, with an estimated total cost of approximately $180 million.
The company repurchased approximately $3.0 million of common stock during the quarter. Approximately $102.3 million remained available under the $600 million repurchase authorization.

Material Changes Versus the Prior Comparable Period

Revenue growth reflected broad-based Environmental Services organic growth, pricing actions and surcharges, higher industrial and field-services demand, and increased Safety-Kleen base-oil volumes. The company also recognized revenue from businesses acquired in 2022.
Environmental Services incinerator utilization declined to 80% from 85% because of unplanned maintenance outages and significant weather events. Landfill volumes also declined because of flooding at a California landfill, although pricing more than offset the volume reduction.
Safety-Kleen profitability weakened as used-oil costs increased and blended-oil volumes declined, despite higher base-oil volumes and acquired operations. Management expects used-oil costs to decrease in the second quarter as it manages the spread between base-oil pricing and collection costs.
Operating cash flow improved substantially because of higher earnings and improved working capital. Investing cash flow declined to $(197.9) million, primarily because of the $108.5 million Thompson Industrial acquisition and higher capital spending.
On March 31, 2023, the company acquired Thompson Industrial Services for approximately $111.9 million in cash, including $40.1 million of preliminary goodwill. The acquisition expands Environmental Services industrial operations in the southeastern United States; its current-period and pro forma effects were described as immaterial.
Total environmental liabilities were $236.0 million at March 31, 2023, essentially unchanged from $235.1 million at December 31, 2022.

Outlook, Commentary, Risks and Unusual Items

Management believes future operating cash flow will be sufficient to fund operations, capital expenditures, interest payments and internal investing needs, with cash and revolver availability providing additional liquidity.
Management expects 2023 capital spending of $400 million to $420 million. The filing does not provide a consolidated revenue or earnings forecast.
Key operating sensitivities include industrial and GDP activity, waste volumes, project and emergency-response demand, incinerator and landfill capacity, weather, inflation in labor, transportation, supplies and energy, competition, environmental regulation, foreign exchange, oil-product pricing and the spread between used-oil collection costs and recycled-oil prices.
The company is subject to environmental regulation, remediation obligations, Superfund matters, product-liability cases and other legal proceedings. It had approximately $33.3 million of reserves for legal and administrative proceedings at March 31, 2023 and stated that reasonably possible additional exposure is not expected to be material, although outcomes are uncertain.
There were approximately 69 pending Safety-Kleen product-liability proceedings and 131 Superfund-related sites involving the company or predecessor entities. The filing states that insurance covers many product-liability claims, but coverage may not apply to all future claims or punitive damages.
The Deer Park, Texas non-commercial landfill reached permitted capacity during the quarter and closure activities commenced; management reported no related change in liabilities.
The company identified no goodwill impairment triggering events, reported effective disclosure controls, and reported no material changes to its previously disclosed risk factors.

Important Facts for Investors to Verify

Verify whether Environmental Services pricing, utilization and volume trends remain strong enough to offset outages, weather impacts and inflation.
Monitor Safety-Kleen’s used-oil collection costs, recycled-oil pricing, product mix and segment margin recovery.
Reconcile debt refinancing benefits, variable-rate exposure, swap accounting and future interest expense, particularly after the 2031 notes issuance and revolver borrowing.
Track cash conversion, capital expenditures, the $400 million to $420 million 2023 spending plan and funding for the Kimball incinerator.
Assess the integration and contribution of Thompson Industrial and the final purchase-price allocation, which remained provisional at quarter-end.
Review environmental liabilities, Superfund exposure, product-liability claims, letters of credit and potential effects of regulatory changes.
Consider that Adjusted EBITDA and adjusted free cash flow are non-GAAP measures and may not be comparable with similarly named measures reported by other companies.