Clean Harbors, Inc. — 2017 Q1 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, energy and industrial services across North America, including hazardous-waste management, industrial services, emergency response, recycling, used-oil re-refining and parts-cleaning services. This unaudited report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The company reports Technical Services, Industrial and Field Services, Safety-Kleen, and Oil, Gas and Lodging Services, plus Corporate Items.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $688.9 million | $636.1 million | 8.3% increase |
| Service revenue | $560.2 million | $530.2 million | 5.7% increase |
| Product revenue | $128.7 million | $105.9 million | 21.6% increase |
| Income from operations | $5.4 million | $(4.1) million | Improved by $9.5 million |
| Operating margin | 0.8% | (0.6)% | Improved |
| Net loss | $(21.4) million | $(20.9) million | Loss increased $0.5 million |
| diluted loss per share | $(0.37) | $(0.36) | Loss increased $0.01 |
| Adjusted EBITDA | $80.1 million | $67.3 million | 19.0% increase |
| Adjusted EBITDA margin | 11.6% | 10.6% | Improved |
| Net cash from operating activities | $57.1 million | $39.3 million | 45.4% increase |
| Adjusted free cash flow | $15.7 million | $(35.2) million | Improved by $50.9 million |
Cost of revenues was $496.6 million, or 72.1% of revenue, compared with 73.0% in the prior-year quarter. SG&A was $112.2 million, up 7.4%. Interest expense increased to $22.6 million from $19.0 million, and the company recorded a $2.7 million tax provision versus a $2.5 million tax benefit in the prior-year quarter. The effective tax rate was negative 14.5%, principally because tax benefits were not recognized for operating losses at certain Canadian entities.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $297.4 million at March 31, 2017, down from $307.0 million at December 31, 2016.
- Total assets were $3.65 billion and stockholders’ equity was $1.06 billion at quarter-end.
- Debt consisted of $800.0 million of 5.25% senior unsecured notes due 2020 and $845.0 million of 5.125% senior unsecured notes due 2021, for $1.645 billion principal outstanding and $1.634 billion carrying value.
- The $400.0 million revolving credit facility had no borrowings; approximately $194.0 million was available, with $126.0 million of outstanding letters of credit.
- Management stated that the company was in compliance with all debt covenants and believed operating cash flow, cash on hand and revolver availability were adequate for anticipated needs.
- Capital expenditures were $42.5 million in the quarter. Management expects 2017 capital spending, net of disposals, of approximately $160 million to $170 million.
Material changes versus the prior comparable period
- Safety-Kleen direct revenue increased 19.2% to $260.8 million and Adjusted EBITDA increased 30.7% to $52.4 million, supported by acquisitions, improved oil-product pricing, organic growth and the OilPlus closed-loop initiative.
- Technical Services direct revenue increased 6.5% to $271.0 million, primarily from higher incinerator waste volumes. The new El Dorado, Arkansas hazardous-waste incinerator began operations in the first quarter and added approximately 70,000 tons of annual network capacity; reported utilization declined to 79.2% from 86.6% because of the expanded capacity.
- Industrial and Field Services revenue increased 1.5% to $125.3 million. The prior-year period included $10.7 million of revenue from Catalyst Services, which was sold in September 2016.
- Oil, Gas and Lodging Services revenue fell 17.5% to $32.6 million and Adjusted EBITDA declined to a $0.2 million loss, reflecting lower exploration activity, reduced customer spending, weaker manufacturing revenue and pricing pressure.
- The company acquired an oil-products business for approximately $11.9 million in cash, net of cash acquired, and recorded preliminary goodwill of $4.9 million.
- Operating cash flow benefited from improved working-capital management, while investing cash use declined because prior-year spending included substantially higher construction costs for the El Dorado incinerator and higher acquisition spending.
- The company repurchased approximately 0.1 million shares for $6.8 million during the quarter. Approximately $93.3 million remained available under the $300 million authorization.
Outlook, commentary, risks and unusual items
- Management expects future operating cash flow to fund operations, capital expenditures, interest payments and planned stock repurchases, but notes that environmental regulations could require significant additional capital spending.
- Oil, Gas and Lodging Services remains exposed to crude-oil prices, rig counts, exploration and drilling activity, customer spending, pricing pressure and Canadian-dollar translation. Management continued to monitor the segment’s long-lived assets for impairment; no impairment was identified at March 31, 2017.
- Environmental liabilities totaled $187.0 million, including $60.4 million of closure and post-closure liabilities and $126.6 million of remedial liabilities. Management expects payments over many years but cautions that regulatory changes or unforeseen events could accelerate or increase required payments.
- Legal and administrative reserves were $21.9 million. The company believed potential liabilities could be up to $1.7 million higher, although ultimate outcomes remain uncertain.
- The company was involved in 129 Superfund sites, including 126 third-party sites. Potential liability is difficult to estimate, and additional liability at the Devil’s Swamp site could not yet be determined.
- Safety-Kleen was involved in approximately 58 product-liability proceedings. Insurance covered settled or dismissed claims during the quarter, but future claims may arise and coverage may not be available for all matters.
- The company adopted new stock-based compensation accounting guidance effective January 1, 2017, reducing beginning retained earnings by $0.5 million net of tax. It expects to adopt the new revenue-recognition standard in the first quarter of 2018; the adoption method and ultimate impact had not been finalized.
- Forward-looking statements are subject to risks including industrial and energy-market conditions, weather, seasonality, competition, pricing, acquisitions, regulatory changes, environmental obligations, foreign exchange and impairment risk.
Most important facts for investors to verify
- Whether the Safety-Kleen growth and improved pricing environment persist after the 2016 acquisitions and OilPlus implementation.
- Whether the new El Dorado incinerator reaches targeted utilization and improves Technical Services profitability without excessive start-up costs.
- Progress against the $160 million–$170 million 2017 capital-spending expectation and the company’s ability to maintain positive free cash flow.
- Debt maturity and refinancing exposure related to the $800 million of 2020 notes and $845 million of 2021 notes, including revolver availability and covenant compliance.
- Potential changes in environmental, Superfund, product-liability and regulatory obligations beyond recorded reserves.
- Whether continued weakness in oil and gas markets leads to further revenue declines or impairment charges in Oil, Gas and Lodging Services.
- The eventual effect and transition method selected for the 2018 revenue-recognition standard.