Clean Harbors, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, industrial, hazardous-waste management, emergency-response, recycling and used-oil re-refining services across North America. The filing covers the unaudited quarter and six months ended June 30, 2022, with comparisons to the same 2021 periods. Operations are reported through Environmental Services and Safety-Kleen Sustainability Solutions.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $1,356.3 million | $926.5 million | $2,525.4 million | $1,734.6 million |
| Income from operations | $211.2 million | $110.0 million | $298.3 million | $160.9 million |
| Net income | $148.2 million | $67.1 million | $193.5 million | $88.8 million |
| Diluted EPS | $2.71 | $1.22 | $3.54 | $1.62 |
| Adjusted EBITDA | $309.1 million | $187.8 million | $489.3 million | $317.2 million |
| Adjusted EBITDA margin | 22.8% | 20.3% | 19.4% | 18.3% |
GAAP operating margin was approximately 15.6% in Q2 and 11.8% for the six-month period, compared with approximately 11.9% and 9.3%, respectively, in the prior-year periods. Net margin was approximately 10.9% in Q2 and 7.7% year to date, compared with 7.2% and 5.1% in 2021. The effective tax rate was 24.0% for Q2 and 25.0% for the six months, compared with 25.9% and 27.3% in 2021.
- Environmental Services: Direct revenue increased 50.6% in Q2 and 47.8% year to date, including approximately $207.9 million and $392.0 million, respectively, from HydroChemPSC. Q2 Adjusted EBITDA increased 53.0% to $269.3 million.
- Safety-Kleen Sustainability Solutions: Direct revenue increased 31.2% in Q2 and 36.9% year to date, primarily from higher base- and blended-oil pricing. Q2 Adjusted EBITDA increased 53.2% to $97.0 million.
- Incinerator utilization increased to 90% in Q2 from 87% and to 88% for the first six months from 83% in the comparable periods.
Cash flow, liquidity and capital structure
- Six-month operating cash flow was $132.0 million, down from $265.4 million, primarily because of working-capital investment associated with growth, higher incentive compensation and interest payments.
- Adjusted free cash flow was negative $13.0 million, compared with positive $176.9 million in 2021.
- Capital expenditures were $148.0 million, compared with $92.0 million. Management expects 2022 capital spending of approximately $320 million to $340 million, including $45 million to $50 million for the Kimball, Nebraska incinerator.
- Cash and cash equivalents were $344.6 million, and short-term marketable securities were $70.8 million, totaling $415.4 million at June 30, 2022.
- Debt at carrying value was approximately $2.53 billion, including $17.5 million current debt. Debt consisted principally of $715.9 million of 2024 term loans, $995.0 million of 2028 term loans, $545.0 million of 2027 notes and $300.0 million of 2029 notes.
- The $400.0 million revolving facility had no outstanding borrowings, $290.6 million available capacity and $109.4 million of letters of credit outstanding.
- The company repurchased approximately 0.4 million shares for $33.7 million during the first six months. Approximately $121.7 million remained authorized for repurchases at June 30, 2022.
Material changes versus the prior comparable period
- Revenue increased 46.4% in Q2 and 45.6% for the first six months, reflecting the HydroChemPSC acquisition, organic growth, higher service pricing and higher oil-product pricing.
- Adjusted EBITDA increased 64.6% in Q2 and 54.3% year to date. Margin expansion reflected pricing, cost controls, improved utilization and favorable oil-product spread management.
- Inflation, labor and fuel costs, transportation costs and supply-chain constraints increased operating costs. Additive shortages delayed some re-refining production and shifted product mix; fleet and equipment delays increased rental and external transportation costs.
- Operating cash flow declined substantially because receivables and unbilled receivables increased with business growth. Accounts receivable and unbilled receivables totaled $1.14 billion at June 30, 2022, compared with $887.7 million at year-end 2021.
- On June 17, 2022, the company acquired a southeastern U.S. waste-oil collection and re-refining business for approximately $73.8 million. The acquisition added a Georgia re-refinery and generated $29.4 million of preliminary goodwill.
- On June 30, 2022, the company sold a non-core business line for $19.5 million and recorded an $8.9 million gain.
Guidance, outlook, risks and unusual items
Management stated that operating cash flow is expected to fund future operating and internal investing needs, supplemented by cash on hand and revolver availability. The filing provides capital-spending guidance of $320 million to $340 million for 2022 but does not provide a specific revenue or earnings forecast.
- Key operating risks include inflation, supply-chain disruptions, labor and fuel costs, commodity-driven oil spreads, industrial demand, weather, competition, regulation and foreign-currency movements.
- Environmental liabilities totaled $226.7 million at June 30, 2022, including $103.0 million of closure and post-closure liabilities and $123.7 million of remedial liabilities. Management expects payments over many years but cautions that regulatory changes or unforeseen events could accelerate or increase expenditures.
- The company had reserves of $36.8 million for legal and administrative proceedings. It identified 131 Superfund-related sites and approximately 60 outstanding Safety-Kleen product-liability proceedings; management believes recorded reserves are adequate and that additional exposure is not reasonably expected to be material, although outcomes remain uncertain.
- The company had no goodwill impairment triggering events through June 30, 2022. The HydroChemPSC purchase-price allocation remained subject to measurement-period adjustments.
- Interest-rate swaps effectively fixed rates on $350.0 million of 2024 term loans and $600.0 million of 2028 term loans. The swaps had a $33.7 million asset fair value at June 30, 2022, compared with a $17.4 million liability at December 31, 2021.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting or risk factors from the 2021 Form 10-K.
Investor verification checklist
- Verify whether HydroChemPSC revenue and cost synergies continue to support growth and margins as acquisition comparisons annualize.
- Monitor working-capital conversion, receivables collection and whether adjusted free cash flow returns to positive levels.
- Compare actual 2022 capital expenditures with the $320 million to $340 million forecast and assess funding needs.
- Track inflation, labor, fuel, transportation and supply-chain effects on Environmental Services margins.
- Evaluate the sustainability of elevated oil-product pricing and the spread between product prices and used-oil feedstock costs.
- Review environmental, Superfund and product-liability developments against recorded reserves and the company’s materiality assessments.
- Assess leverage, scheduled 2024 term-loan maturities, variable-rate exposure and remaining revolver capacity.