Clean Harbors, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Clean Harbors provides environmental, hazardous-waste, industrial, emergency-response, recycling and used-oil re-refining services in North America. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Beginning in 2021, the Company reorganized its operating structure into Environmental Services and Safety-Kleen Sustainability Solutions. Prior-period segment information was recast. The Company completed its $1.24 billion HydroChemPSC acquisition on October 8, 2021, after the reporting period; therefore, HydroChemPSC is not included in the September 30, 2021 financial statements.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $951.5 million | $779.3 million | $2.686 billion | $2.348 billion |
| Income from operations | $104.8 million | $83.9 million | $265.7 million | $189.6 million |
| Net income | $65.4 million | $54.9 million | $154.3 million | $95.5 million |
| Diluted EPS | $1.20 | $0.99 | $2.81 | $1.71 |
| Adjusted EBITDA | $185.1 million | $167.8 million | $502.3 million | $432.0 million |
| Adjusted EBITDA margin | 19.5% | 21.5% | 18.7% | 18.4% |
| Net cash from operations | Not separately provided | Not separately provided | $368.2 million | $317.4 million |
| Adjusted free cash flow | Not separately provided | Not separately provided | $238.0 million | $195.5 million |
Calculated consolidated operating margins were approximately 11.0% in Q3 2021 versus 10.8% in Q3 2020, and approximately 9.9% for the first nine months of 2021 versus 8.1% in the prior-year period. Net margins were approximately 6.9% in Q3 2021 versus 7.0% in Q3 2020, and 5.7% for the first nine months of 2021 versus 4.1% in the prior-year period.
- Revenue mix: Q3 service revenue was $744.5 million and product revenue was $206.9 million. Product revenue more than doubled year over year, primarily reflecting stronger Safety-Kleen oil pricing and demand.
- Environmental Services: Direct revenue increased 14.6% in Q3 and 7.9% for the nine-month period. Adjusted EBITDA declined 7.5% in Q3 and 3.9% for the nine months, reflecting inflation, cost mix and lower COVID-19-related work.
- Safety-Kleen Sustainability Solutions: Direct revenue increased 59.9% in Q3 and 48.0% for the nine months. Adjusted EBITDA increased 139.1% in Q3 and 166.3% for the nine months, driven by stronger base-oil and blended-oil pricing, volumes and spread management.
- Cash generation: Operating cash flow increased $50.8 million year over year. Capital expenditures were $146.7 million, compared with $150.4 million in the prior-year period.
- Liquidity: Cash and cash equivalents were $646.7 million and short-term marketable securities were $64.8 million at September 30, 2021. Total cash and marketable securities were $711.5 million, compared with $571.0 million at December 31, 2020.
Balance sheet, debt and material changes
- Total assets were $4.354 billion at September 30, 2021, compared with $4.132 billion at December 31, 2020. Stockholders’ equity increased to $1.464 billion from $1.342 billion.
- Debt at September 30, 2021 had a carrying value of approximately $1.554 billion, including $1.546 billion of long-term debt and $7.5 million of current debt. The debt consisted principally of the 2024 Term Loans and unsecured notes due 2027 and 2029.
- The $400.0 million revolving credit facility had no borrowings, approximately $288.5 million available capacity and $111.5 million of outstanding letters of credit at September 30, 2021. Management stated that the Company was in compliance with its debt covenants.
- After quarter-end, the Company issued $1.0 billion of 2028 Term Loans, receiving $983.0 million of net proceeds, to fund the HydroChemPSC acquisition. The remainder of the purchase price was funded with approximately $253.4 million of cash on hand. This materially increased post-period leverage and interest obligations.
- The Company repurchased approximately 533,400 shares for $48.4 million during the first nine months and had $161.4 million remaining under its repurchase authorization at September 30, 2021.
- Environmental liabilities totaled $203.8 million, consisting of $93.0 million of closure and post-closure liabilities and $110.8 million of remedial liabilities, broadly consistent with year-end 2020.
Outlook, management commentary, risks and unusual items
- Management reported that direct revenue and Adjusted EBITDA exiting Q3 were comparable to or above pre-pandemic levels for both segments. However, COVID-19 response revenue declined as demand for disinfection, decontamination and disposal services slowed; such revenue was $48.1 million for the first nine months and $8.4 million in Q3.
- Management cited inflationary pressure in labor, transportation, supplies and energy costs. Government-program benefits declined to $11.8 million for the first nine months of 2021 from $36.7 million in the prior-year period, and no significant future benefits were expected.
- Management projected 2021 capital spending, net of disposals, of $190 million to $210 million, including HydroChemPSC operations. The Kimball, Nebraska incinerator project was expected to be completed in early 2025, with approximately $180 million of total expected capital expenditures and practical annual capacity of approximately 70,000 tons.
- The pending Vertex used-motor-oil business acquisition was expected to cost $140.0 million, subject to adjustments, and remained subject to regulatory and other closing conditions, with closing anticipated in 2022.
- Key risks include successful integration of HydroChemPSC, realization of expected synergies, increased debt service, unknown acquired liabilities, commodity and used-oil collection pricing, inflation, regulatory and permitting requirements, environmental liabilities, litigation, weather events, pandemics and supply-chain or workforce disruptions.
- The Company recorded $30.4 million of reserves for legal and administrative proceedings. It disclosed approximately 69 product-liability proceedings and involvement as a potentially responsible party or potential potentially responsible party at 131 Superfund-related sites. Management did not expect liabilities beyond recorded amounts to have a material effect, but ultimate outcomes remain uncertain.
- Adjusted EBITDA and adjusted free cash flow are non-GAAP measures. The Company changed its Adjusted EBITDA definition in 2021 to add back stock-based compensation and recast prior periods.
- Disclosure controls were effective as of September 30, 2021, and management reported no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Post-acquisition leverage, interest expense, covenant headroom and liquidity after the October 8, 2021 HydroChemPSC transaction and $1.0 billion incremental term loan.
- Whether HydroChemPSC integration costs, synergies and operating results meet management’s expectations in subsequent filings.
- Sustainability of Safety-Kleen’s unusually strong oil-product pricing and margins, including the spread between base-oil prices and used-oil collection costs.
- Environmental Services margin recovery amid inflation and the continued decline in COVID-19-related response revenue.
- Actual 2021 capital spending and the funding requirements for the Kimball incinerator project.
- Developments in environmental proceedings, Superfund matters, product-liability claims and the pending Vertex transaction.