CLEAN HARBORS, INC. Forward-Looking Statements In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements, which are generally identifiable by use of the words "believes," "expects," "intends," "anticipates," "plans to," "seeks," "should," "estimates," "projects," "may," "likely" or similar expressions. Such statements may include, but are not limited to, statements about future financial and operating results, the Company's plans, objectives, expectations and intentions and other statements that are not historical facts. Forward-looking statements are neither historical facts nor assurances of future performance. Such statements are based upon the beliefs and expectations ofClean Harbors' management as of this date only and are subject to certain risks and uncertainties that could cause actual results to differ materially, including, without limitation, the impact of our acquisition ofLJ Energy Services Intermediate Holding Corp. and its subsidiaries (collectively, "HydroChemPSC"), and those items identified as "Risk Factors," in this report under Item 1A and in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission ("SEC") onFebruary 24, 2021 , and in other documents we file from time to time with theSEC . Therefore, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements.Clean Harbors undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements other than through its filings with theSEC , which may be viewed in the "Investors" section of theClean Harbors website. Overview We areNorth America's leading provider of environmental and industrial services supporting our customers in finding environmentally responsible solutions to further their sustainability goals in today's world. Everywhere industry meets the environment, we strive to provide eco-friendly products and services that protect and restoreNorth America's natural environment. We believe we operate, in the aggregate, the largest number of hazardous waste incinerators, landfills and treatment, storage and disposal facilities ("TSDFs") inNorth America . We serve a diverse customer base, including Fortune 500 companies, across the 22
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chemical, energy, manufacturing and additional markets, as well as numerous government agencies. These customers rely on us to deliver a broad range of services including but not limited to end-to-end hazardous waste management, emergency response, industrial cleaning and maintenance and recycling services. We believe we are also the largest re-refiner and recycler of used oil inNorth America and the largest provider of parts washer and related environmental services to commercial, industrial and automotive customers inNorth America . During the first quarter of 2021, we reorganized our Safety-Kleen business. The collection services for waste oil, used oil filters, antifreeze and related items and bulk blended oil sales operations were combined with the Safety-Kleen Oil business to form the Safety-Kleen Sustainability Solutions business. Under this structure, Safety-Kleen Sustainability Solutions encompasses both sides of the spread we manage in our re-refinery business, and we expect this change to drive additional growth in our sustainable lubricant products and related services. Concurrently with this change, we consolidated the Safety-Kleen Environmental branches' core offerings, including containerized waste, parts washer and vacuum services, into the legacyClean Harbors Environmental Services sales and service operations. We expect this change to foster enhanced cross-selling opportunities within the environmental businesses and increase market presence with small quantity generators of hazardous waste. In restructuring the operations of the Company in this manner, the information that the chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance was changed to conform to the new operating structure of the business. As a result, we reevaluated the identification of our operating segments and concluded that, starting in the first quarter of 2021, Environmental Services and Safety-Kleen Sustainability Solutions are our operating segments and reportable segments, with the operations not managed through the operating segments described above continuing to be reported as Corporate Items. The amounts presented for the three and nine months endedSeptember 30, 2020 have been recast to reflect the impact of such changes. Performance of our segments is evaluated on several factors of which the primary financial measure is Adjusted EBITDA. Beginning in the first quarter of 2021, we revised our calculation of reported Adjusted EBITDA to add back stock-based compensation, a non-cash item, to other charges which are added back to net income determined in accordance with generally accepted accounting principles ("GAAP"). See the "Adjusted EBITDA" section below for additional details regarding this change and our consideration of this metric. Prior period amounts have been recast to conform to this presentation. The following is a discussion of how management evaluates its segments in regards to other factors including key performance indicators that management uses to assess the segments' results, as well as certain macroeconomic trends and influences that impact each reportable segment: •Environmental Services - Environmental Services segment results are predicated upon the demand by our customers for waste services, waste volumes generated by such services and project work for which waste handling and/or disposal is required. Environmental Services results are also impacted by the demand for planned and unplanned industrial related cleaning and maintenance services at customer sites, environmental cleanup services on a scheduled or emergency basis, including response to national events such as major chemical spills, natural disasters, or other events where immediate and specialized services are required. As a result of the Coronavirus ("COVID-19") pandemic, the business saw increased demand for response services relative to contagion disinfection, decontamination and disposal in 2020 and into 2021. With the addition of the Safety-Kleen core service offerings, including containerized waste disposal, parts washer and vacuum services, the Environmental Services results are further driven by the volumes of waste collected from these customers, the overall number of parts washers placed at customer sites and the demand for and frequency of other offered services. In managing the business and evaluating performance, management tracks the volumes and mix of waste handled and disposed of or recycled, generally through our owned facilities, the utilization rates of our incinerators, equipment and workforce, including billable hours, and number of parts washer services performed, among other key metrics. Levels of activity and ultimate performance associated with this segment can be impacted by several factors including overallU.S. GDP,U.S. industrial production, economic conditions in the automotive, chemical, manufacturing and other industrial markets, weather conditions, efficiency of our operations, utilization at our facilities, technology, changing regulations, competition, the mix and market pricing of our services and the management of our related operating costs. •Safety-Kleen Sustainability Solutions - Safety-Kleen Sustainability Solutions segment results are impacted by our customers' demand for high-quality, environmentally responsible recycled oil products and their demand for our related service offerings and products. Safety-Kleen Sustainability Solutions offers high quality recycled base and blended oil products to end users including fleet customers, distributors and manufacturers of oil products. Segment results are impacted by overall demand as well as product mix as it relates to these oil products. Segment results are also 23
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predicated on the demand for the Safety-Kleen Sustainability Solutions other product and service offerings including collection services for used oil, used oil filters and other automotive fluids. These fluid collections are used as feedstock in our oil re-refining to make our base and blended oil products and our recycled automotive related fluid products or are integrated into theClean Harbors' recycling and disposal network. In operating the business and evaluating performance, management tracks the volumes and relative percentages of base and blended oil sales along with various pricing metrics associated with the commodity driven margin. Management also tracks the volumes and pricing of used oil and automotive fluid collections. Levels of activity and ultimate performance associated with this segment can be impacted by economic conditions in the automotive services and manufacturing markets, efficiency of our operations, technology, weather conditions, changing regulations, competition and the management of our related operating costs. Costs incurred in connection with the collection of used oil and other raw materials associated with the segment's oil related products can also be volatile. The overall market price of oil and regulations that change the possible usage of used oil, including theInternational Maritime Organization's 2020 regulation ("IMO 2020") and other regulations related to the burning of used motor oil as a fuel, both impact the premium the segment can charge for used oil collections. Highlights Total revenues for the three and nine months endedSeptember 30, 2021 were$951.5 million and$2,686.1 million , compared with$779.3 million and$2,347.9 million for the three and nine months endedSeptember 30, 2020 . Prior year operations were negatively affected by the impact of the COVID-19 pandemic. In the three and nine months endedSeptember 30, 2021 , our Environmental Services segment direct revenues increased 14.6% and 7.9% from the comparable periods in 2020. Current period results were predominately driven by higher demand throughout most of our portfolio of services and increased direct revenues at our incinerators due to strong pricing on these disposal services, partially offset by lower demand for our COVID-19 decontamination services. In the three and nine months endedSeptember 30, 2021 , our Safety-Kleen Sustainability Solutions segment direct revenues increased 59.9% and 48.0% respectively from the comparable periods in 2020 due to increased pricing and demand for base and blended oil. The fluctuation of the Canadian dollar positively impacted our consolidated revenues by$7.9 million and$30.0 million in the three and nine months endedSeptember 30, 2021 , respectively. In the three and nine months endedSeptember 30, 2021 , costs have increased in both the Environmental Services and Safety-Kleen Sustainability Solutions segments when comparing to the prior year given the increase in business levels, revenue mix, and inflationary pressures seen across several cost categories. Additionally, the current periods reflect lower benefits received from the Government Programs as described below under "Impact of Government Programs". Despite the increased costs seen in the current period, gross margins for the Environmental Services and Safety-Kleen Sustainability Solutions segments are relatively consistent with or improved from pre-pandemic levels. We reported income from operations for the three and nine months endedSeptember 30, 2021 of$104.8 million and$265.7 million compared with$83.9 million and$189.6 million in the three and nine months endedSeptember 30, 2020 , and net income for the three and nine months endedSeptember 30, 2021 of$65.4 million and$154.3 million compared with net income of$54.9 million and$95.5 million in the three and nine months endedSeptember 30, 2020 . Adjusted EBITDA, which is the primary financial measure by which our segments are evaluated, increased 10.3% to$185.1 million in the three months endedSeptember 30, 2021 from$167.8 million in the three months endedSeptember 30, 2020 and increased 16.3% to$502.3 million in the nine months endedSeptember 30, 2021 from$432.0 million in the nine months endedSeptember 30, 2020 . This improved performance was primarily driven by the mix of product sales and strong spread management as it relates to the pricing of base oil products and used motor oil collection services in the Safety-Kleen Sustainability Solutions segment, as well as strong demand and incineration pricing increases within our Environmental Services segment. Additional information, including a reconciliation of Adjusted EBITDA to net income, appears below under "Adjusted EBITDA." Net cash from operating activities for the nine months endedSeptember 30, 2021 was$368.2 million , an increase of$50.8 million from the comparable period in 2020. Adjusted free cash flow, which management uses to measure our financial strength and ability to generate cash, was$238.0 million in the nine months endedSeptember 30, 2021 , compared to$195.5 million in the comparable period of 2020. These increased levels of cash flows are the result of greater levels of operating income and improved working capital management in 2021. Additional information, including a reconciliation of adjusted free cash flow to net cash from operating activities, appears below under "Adjusted Free Cash Flow." Impact of COVID-19 During the third quarter of 2021, we continued to see incremental improvements in the demand for our products and services consistent with the lifting of travel and other government restrictions and the ongoing national and state vaccination efforts. Over the 24
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last year, our business has been slowly recovering after the sharp decline in the second quarter of 2020. As we exited the third quarter of 2021, both quarter-to-date and year-to-date direct revenues and Adjusted EBITDA were comparable or higher than pre-pandemic levels for each of our segments. In the first nine months of 2021, we recognized$48.1 million of revenues specifically related to COVID-19 disinfecting, decontamination and disposal related response services; however, demand for these services has decreased as the year has progressed. In the third quarter of 2021 we recognized revenues of$8.4 million for such work. Although we are uncertain as to the exact level of such services throughout the remainder of 2021 and into 2022, we expect to continue to see slowing demand for these COVID-19 response services. The potential impact of COVID-19 variants (e.g. the Delta variant) remains unknown at this time, however as circumstances continue to evolve impacts may be felt related to both our business recovery and future demand for our COVID-19 response services. Impact of Government Programs In 2020, the Governments ofCanada andthe United States announced theCanada Emergency Wage Subsidy ("CEWS") and the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), respectively, in response to the widespread economic impact of the COVID-19 pandemic (collectively referred to as "Government Programs"). Both Government Programs have been extended into 2021 and as such, management has continued to consider and analyze the Company's eligibility under such Government Programs. During 2021 the Company recognized certain employee wage subsidies under the CEWS and, to a lesser extent, employee retention credits under the CARES Act. We do not anticipate any future significant benefits from the Government Programs given the current status of our operations and the expiration of the benefits to which we were eligible. The table below summarizes the benefit of the Government Programs recorded in the statement of operations for the three and nine months endedSeptember 30, 2021 andSeptember 30, 2020 (in thousands): Three Months Ended Three Months Ended September 30, 2021 September 30, 2020 Safety-Kleen Safety-Kleen Environmental Sustainability Environmental Sustainability Services Solutions Corporate Items Total Services Solutions Corporate Items Total Cost of revenues $ 919 $ 59 $ -$ 978 $ 9,354 $ 929 $ 145$ 10,428 Selling, general and administrative expenses 138 26 4 168 1,883 290 668 2,841 Total $ 1,057 $ 85 $ 4$ 1,146 $ 11,237 $ 1,219 $ 813$ 13,269 Nine Months Ended Nine Months Ended September 30, 2021 September 30, 2020 Safety-Kleen Safety-Kleen Environmental Sustainability Environmental Sustainability Services Solutions Corporate Items Total Services Solutions Corporate Items Total Cost of revenues $ 8,055 $ 784 $ 80$ 8,919 $ 22,304 $ 1,840 $ 560$ 24,704 Selling, general and administrative expenses 1,917 571 347 2,835 8,626 1,221 2,117 11,964 Total $ 9,972 $ 1,355 $ 427$ 11,754 $ 30,930 $ 3,061 $ 2,677$ 36,668 Acquisition of HydroChemPSC OnOctober 8, 2021 , we completed our previously announced proposed acquisition of HydroChemPSC for$1.24 billion (the "HydroChemPSC Acquisition") in cash consideration. HydroChemPSC is a leadingU.S. provider of industrial cleaning, specialty maintenance and utility services. Refer to Note 4, "Business Combinations," to our unaudited consolidated financial statements included in this report for further information on this acquisition. HydroChemPSC serves customers across a broad range of markets and provides solutions to customers focused on cleaning, maintenance and environmental compliance of essential, mission critical equipment and infrastructure. HydroChemPSC has more than 4,500 employees, over 240 service locations acrossthe United States and has a fleet of specialized equipment and vehicles as well as technology which will enhance and add to the assets of the Environmental Services segment. 25
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We have incurred and expect to incur significant costs in connection with the HydroChemPSC Acquisition, including costs related to financing the HydroChemPSC Acquisition and ultimate integration of the business. As ofSeptember 30, 2021 ,$3.7 million of HydroChemPSC integration related costs have been recognized in our results. Successful integration of the HydroChemPSC business and operations into our business will be necessary to realize the anticipated benefits from combining HydroChemPSC withClean Harbors . We believe that the combined business will benefit from incremental waste volumes throughClean Harbors' network of facilities, greater customer relationships and cross selling opportunities and synergistic opportunities within customer service, corporate functions, transportation, branch network, asset rentals and vehicle maintenance. The success of the HydroChemPSC Acquisition will depend, in part, on the integration of the financial reporting systems and controls and the focused attention (time and resources) of bothClean Harbors' and HydroChemPSC's management teams to integrate the combined business and execute upon our growth and synergy strategies. Segment Performance The primary financial measure by which we evaluate the performance of our segments is Adjusted EBITDA, as described below under "Adjusted EBITDA". The following table sets forth certain financial information associated with our results of operations for the three and nine months endedSeptember 30, 2021 andSeptember 30, 2020 (in thousands, except percentages): Summary of Operations For the Three Months Ended For the Nine Months Ended September 30, September 30, $ % September 30, September 30, 2021 2020 Change Change 2021 2020 $ Change % Change Direct Revenues(1): Environmental Services$ 745,633 $ 650,560 $ 95,073 14.6%$ 2,124,332 $ 1,968,346 $ 155,986 7.9% Safety-Kleen Sustainability Solutions 205,787 128,712 77,075 59.9 561,536 379,343 182,193 48.0 Corporate Items 59 72 (13) N/M 217 218 (1) N/M Total 951,479 779,344 172,135 22.1 2,686,085 2,347,907 338,178 14.4 Cost of Revenues(2): Environmental Services 516,340 416,539 99,801 24.0 1,454,852 1,292,773 162,079 12.5 Safety-Kleen Sustainability Solutions 119,332 87,924 31,408 35.7 350,733 278,070 72,663 26.1 Corporate Items 3,560 7,166 (3,606) N/M 12,069 18,133 (6,064) N/M Total 639,232 511,629 127,603 24.9 1,817,654 1,588,976 228,678 14.4
Selling, General & Administrative Expenses: Environmental Services 62,822 54,019 8,803 16.3 186,714 173,472 13,242 7.6 Safety-Kleen Sustainability Solutions 15,645 11,175 4,470 40.0 45,047 39,025 6,022 15.4 Corporate Items 54,697 41,350 13,347 32.3 147,150 127,193 19,957 15.7 Total 133,164 106,544 26,620 25.0 378,911 339,690 39,221 11.5 Adjusted EBITDA: Environmental Services 166,471 180,002 (13,531) (7.5) 482,766 502,101 (19,335) (3.9) Safety-Kleen Sustainability Solutions 70,810 29,613 41,197 139.1 165,756 62,248 103,508 166.3 Corporate Items (52,197) (41,782) (10,415) (24.9) (146,216) (132,369) (13,847) (10.5) Total$ 185,084 $ 167,833 $ 17,251 10.3%$ 502,306 $ 431,980 $ 70,326 16.3%
_____________________
N/M = not meaningful
(1)Direct revenue is revenue allocated to the segment performing the provided
service.
(2)Cost of revenue is shown exclusive of items presented separately on the
consolidated statements of operations which consist of (i) accretion of
environmental liabilities and (ii) depreciation and amortization.
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Direct Revenues There are many factors which have impacted and continue to impact our revenues including, but not limited to: overall levels of industrial activity and economic growth inNorth America , existence or non-existence of large scale environmental waste and remediation projects, competitive industry pricing, miles driven and related lubricant demand, impacts of acquisitions and divestitures, the level of emergency response services, weather related events, base and blended oil pricing, market changes relative to the collection of used oil, our ability to manage the spread between oil product prices and prices for the collection of used oil, the number of parts washers placed at customer sites and foreign currency translation. In addition, customer efforts to minimize hazardous waste and changes in regulation can also impact our revenues. Environmental Services For the Three Months Ended For the Nine Months Ended September 30, 2021 over 2020 September 30, 2021 over 2020 (in thousands, except $ % $ % percentages) 2021 2020 Change Change 2021 2020
Change Change Direct revenues$ 745,633 $ 650,560 $ 95,073 14.6 %$ 2,124,332 $ 1,968,346 $ 155,986 7.9 % Environmental Services direct revenues for the three months endedSeptember 30, 2021 increased$95.1 million from the comparable period in 2020 driven primarily by higher demand throughout our portfolio of services, including industrial and base field services, and increased pricing of disposal services throughout our incinerator network. The revenue growth across these aspects of our business was partially offset on a comparative basis by lower demand for our COVID-19 decontamination services. Direct revenues related to our industrial services increased$26.4 million predominately due to increased demand for industrial cleanings as overall economic activity continued to improve and industrial cleaning services previously delayed due to the impacts of COVID-19 were executed upon. Direct revenues related to our field services, excluding COVID-19 decontamination services, increased$21.2 million as demand for these base field services increased. Direct revenues at our incinerators increased$18.4 million when comparing the three months endedSeptember 30, 2021 to the same period in 2020, predominately due to higher pricing, though utilization also contributed to the increase with incinerator utilization at 82% as compared to 80% in the same period in 2020. Direct revenues for the Safety-Kleen core service offerings increased$9.9 million from the comparable period in 2020 mainly due to higher demand and pricing for our containerized waste and vacuum services. Higher pricing at our landfill facilities increased direct revenues by$2.3 million . In the three months endedSeptember 30, 2021 , lower demand for our COVID-19 decontamination services resulted in a direct revenue decrease of$20.5 million , partially offsetting all of the increases noted above. The Canadian operations of the Environmental Services segment were positively impacted by$6.5 million due to foreign currency translation. Environmental Services direct revenues for the nine months endedSeptember 30, 2021 increased$156.0 million from the comparable period in 2020 driven primarily by returning demand for our services as compared to the same period in the prior year and higher value waste streams at our incinerator facilities, partially offset by lower demand for our COVID-19 decontamination services. Direct revenues related to our industrial services increased$45.6 million and base field services direct revenues increased by$20.4 million , excluding COVID-19 decontamination services, from the comparable period in the prior year due to the rebounding demand for our services noted above. Increased pricing at our incinerators drove an overall$27.4 million increase in direct revenues, while utilization remained relatively consistent at 83% thus illustrating the shift to higher value waste streams being processed at the incinerators. Direct revenues for the Safety-Kleen core service offerings increased$9.2 million from the comparable period in 2020 due to higher demand and improved pricing for our containerized waste and vacuum services. Direct revenues at our landfill facilities increased$4.7 million from the comparable period in 2020 due to higher value waste streams overcoming lower volumes. In the nine months endedSeptember 30, 2021 , direct revenues from COVID-19 decontamination services decreased by$40.8 million , partially offsetting the increases noted above, due to lower demand for such services. Also impacting the year over year change in direct revenues within this segment was the positive impact of foreign currency translation on our Canadian operations of$24.1 million . 27
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Safety-Kleen Sustainability Solutions
For the Three Months Ended For the Nine Months Ended
September 30, 2021 over 2020 September 30, 2021 over 2020
(in thousands, except $ % $ %
percentages) 2021 2020 Change Change 2021 2020 Change Change Direct revenues$ 205,787 $ 128,712 $ 77,075 59.9 %$ 561,536 $ 379,343 $ 182,193 48.0 % Safety-Kleen Sustainability Solutions direct revenues for the three months endedSeptember 30, 2021 increased$77.1 million from the comparable period in 2020. Increasing prices and increased volumes of product sold driven by higher demand resulted in a$75.8 million increase in revenues from base oil sales and a$13.6 million increase in revenues from blended oil sales. Revenues from used oil collection services decreased$14.1 million in the third quarter of 2021, when compared to the third quarter of 2020 due to pricing decreases, which was expected given the inverse correlation between movements in base oil pricing and the market prices for used oil collection services. The volume of the used oil collected increased from the prior year and rebounded to the level of gallons collected in pre-pandemic quarters. Foreign currency translation positively impacted the Canadian operations of Safety-Kleen Sustainability Solutions by$1.4 million . Safety-Kleen Sustainability Solutions direct revenues for the nine months endedSeptember 30, 2021 increased$182.2 million from the comparable period in 2020. Due to the pricing increases and rebounding demand described above relative to the third quarter of 2021, higher pricing and volumes drove a$167.5 million increase in revenues from base oil sales and a$25.8 million increase in revenues from blended oil sales for the nine months endedSeptember 30, 2021 when compared to the same period in 2020. Revenues from contract blending and packaging increased$12.0 million from the comparable period and revenues from recycled fuel oil and refinery byproducts increased$5.5 million due to pricing increases, more than offsetting volume decreases. As expected, in light of the oil market conditions noted above, revenues from used oil collection services decreased$21.0 million due to pricing decreases. Collection volumes for used oil increased during the nine months endedSeptember 30, 2021 when compared to the same period in 2020. Foreign currency translation positively impacted the Canadian operations of Safety-Kleen Sustainability Solutions by$5.9 million . Cost of Revenues We believe that our ability to manage operating costs is important to our ability to remain price competitive. In recent periods, we have seen inflationary pressures across several cost categories, but most notably related to internal and external labor, transportation, general supplies and energy related costs. We have continued to manage these increases through constant cost monitoring as well as our overall customer pricing strategies. We also continue to upgrade the quality and efficiency of our services through the development of new technology and continued modifications and expansion at our facilities, invest in new business opportunities and aggressively implement strategic sourcing and logistics solutions in the face of these inflationary pressures, while also continuing to optimize our management and operating structure in an effort to maintain and increase operating margins. Environmental Services For the Three Months Ended For the Nine Months Ended September 30, 2021 over 2020 September 30, 2021 over 2020 (in thousands, except % % percentages) 2021 2020 Change Change 2021 2020 Change Change
Cost of revenues$ 516,340 $ 416,539 $ 99,801 24.0 %$ 1,454,852 $ 1,292,773 $ 162,079 12.5 % As a % of Direct revenues 69.2 % 64.0 % 5.2 % 68.5 % 65.7 % 2.8 % Environmental Services cost of revenues for the three months endedSeptember 30, 2021 increased$99.8 million from the comparable period in 2020, primarily due to the increase in direct revenues. Cost of revenues as a percentage of direct revenues increased 5.2% from the comparable period in the prior year, in part due to an$8.4 million reduction in benefits recognized under the Government Programs in the third quarter of 2021 as compared to the same period of the prior year. After adjusting for this difference, cost as a percentage of revenues increased 4.0%, primarily due to the mix of services being performed, including lower COVID-19 decontamination services, as well as inflationary pressures across several cost categories. Overall, equipment and supply costs increased$41.1 million , labor and benefits related costs increased$30.9 million and transportation, disposal, vehicle and fuel related costs increased$20.8 million from the comparable period in 2020. Collectively, these costs as a percentage of direct revenue are consistent with pre-pandemic levels. Environmental Services cost of revenues for the nine months endedSeptember 30, 2021 increased$162.1 million from the comparable period in 2020, primarily due to an increase in direct revenues. Cost of revenues as a percentage of direct revenues increased 2.8% from the comparable period in the prior year. Excluding the$14.2 million year over year reduction in benefits 28
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recognized under the Government Programs, cost of revenues as a percentage of direct revenues increased 2.1%, also mainly due to the mix of services and inflationary pressures noted in the preceding paragraph. Overall, equipment and supply costs increased$60.7 million , labor and benefits related costs increased$46.4 million and transportation, disposal, vehicle and fuel related costs increased$36.3 million . Safety-Kleen Sustainability Solutions For the Three Months Ended For the Nine Months Ended September 30, 2021 over 2020 September 30, 2021 over 2020 (in thousands, except % % percentages) 2021 2020 Change Change 2021 2020 Change Change Cost of revenues$ 119,332 $ 87,924 $ 31,408 35.7 % $ 350,733$ 278,070 $ 72,663 26.1 % As a % of Direct revenues 58.0 % 68.3 % (10.3) % 62.5 % 73.3 % (10.8) % Safety-Kleen Sustainability Solutions cost of revenues for the three months endedSeptember 30, 2021 increased$31.4 million from the comparable period in 2020 as expected given the revenue growth experienced by the business. Significant cost increases were seen in costs of oil additives and other raw materials which increased$17.2 million , labor and benefits related costs which increased$6.8 million and transportation, vehicle and fuel costs which increased$6.2 million . Despite the increases in these costs, as a percentage of revenue, the business margins improved by 10.3%. This improvement was largely driven by demand and pricing of products and services outpacing relative cost of revenues as the business successfully managed its spread and capitalized on these favorable market conditions. Production efficiencies also led to this lower cost structure as our re-refineries, some of which were temporarily closed in the prior year's period, were all producing fur the full current quarter. Safety-Kleen Sustainability Solutions cost of revenues for the nine months endedSeptember 30, 2021 increased$72.7 million from the comparable period in 2020 due to the increase in direct revenues. Cost of revenue as a percentage of direct revenues improved by 10.8% for reasons consistent with those noted in the preceding paragraph. In total, costs of oil additives and other raw materials increased$40.5 million , transportation, vehicle and fuel costs increased$18.3 million and labor and benefits related costs increased$14.0 million . Selling, General and Administrative Expenses We strive to manage our selling, general and administrative ("SG&A") expenses commensurate with the overall performance of our segments and corresponding revenue levels. As our business grows, we would expect to incur additional costs throughout our business; however, our ability to properly align these costs with business performance is reflective of our strong management of the businesses and further promotes our ability to remain competitive in the marketplace. Environmental Services For the Three Months Ended For the Nine Months Ended September 30, 2021 over 2020 September 30, 2021 over 2020 (in thousands, except % % percentages) 2021 2020 Change Change 2021 2020 Change Change SG&A expenses$ 62,822 $ 54,019 $ 8,803 16.3 % $ 186,714$ 173,472 $ 13,242 7.6 % As a % of Direct revenues 8.4 % 8.3 % 0.1 % 8.8 % 8.8 % - % Environmental Services SG&A expenses for the three and nine months endedSeptember 30, 2021 increased$8.8 million and$13.2 million from the comparable periods in 2020 while remaining consistent as a percentage of direct revenues. For the three and nine months endedSeptember 30, 2021 , we recognized reduced benefits under the Government Programs when compared to the same periods in the prior year which contributed to the increase in our Environmental Services SG&A expenses by$1.7 million and$6.7 million , respectively. Environmental Services SG&A expenses as a percentage of revenue remained relatively consistent with the prior year even absent the benefits recognized under the Government Programs. 29
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Safety-Kleen Sustainability Solutions
For the Three Months Ended For the Nine Months Ended
September 30, 2021 over 2020 September 30, 2021 over 2020
(in thousands, except % %
percentages) 2021 2020 Change Change 2021 2020 Change Change
SG&A expenses $ 15,645 $ 11,175 $ 4,470 40.0 % $ 45,047 $ 39,025 $ 6,022 15.4 %
As a % of Direct
revenues 7.6 % 8.7 % (1.1) % 8.0 % 10.3 % (2.3) %
Safety-Kleen Sustainability Solutions SG&A expenses for the three and nine
months ended September 30, 2021 increased $4.5 million and $6.0 million from the
comparable periods in 2020 primarily attributable to the increases in direct
revenues. Safety-Kleen Sustainability Solutions SG&A expenses as a percentage of
revenues for the three months ended September 30, 2021 improved 1.1% . SG&A
expenses as a percentage of revenues for the nine months ended September 30,
2021 improved 2.3% when compared to the same period in the prior year. The most
significant driver in the full year improvement was a $1.8 million change in an
environmental liability estimate for a Superfund site recorded in the second
quarter of 2020 which did not recur in 2021.
Corporate Items
For the Three Months Ended For the Nine Months Ended
September 30, 2021 over 2020 September 30, 2021 over 2020
(in thousands, except % %
percentages) 2021 2020 Change Change 2021 2020 Change Change
SG&A expenses $ 54,697 $ 41,350 $ 13,347 32.3 % $ 147,150 $ 127,193 $ 19,957 15.7 %
As a % of Total Clean
Harbors' Direct revenues 5.7 % 5.3 % 0.4 % 5.5 % 5.4 % 0.1 %
We manage our Corporate SG&A expenses commensurate with the overall total
Company performance and direct revenue levels. Generally, as revenues increase,
we would expect some increase in these costs. Corporate Items SG&A expenses for
the three months ended September 30, 2021 increased $13.3 million from the
comparable period in 2020 and as a percentage of total Clean Harbors' direct
revenues, these costs remained relatively consistent. Certain Corporate Items
SG&A expense increases during the three months ended September 30, 2021 , as
compared to the same period in the prior year, which were unrelated to the
revenue growth included $5.9 million of increased professional fees primarily
related to the acquisition of HydroChemPSC and some strategic initiative
projects and increased cyber security information technology related costs of
$1.0 million . Partially offsetting these increases was a $3.3 million change in
an environmental remediation liability estimate for an inactive site recorded in
the third quarter of 2020.
Corporate Items SG&A expenses for the nine months ended September 30, 2021
increased $20.0 million from the comparable period in 2020 and as a percentage
of total Clean Harbors' direct revenues, remained relatively consistent. Similar
to the discussion above, we would expect some increase in these costs as total
Company revenues increase. Certain Corporate Items SG&A expense increases during
the nine months ended September 30, 2021 , as compared to the same period in the
prior year which were unrelated to the revenue growth include an $8.9 million
increase in professional fees related to the acquisition of HydroChemPSC and
some strategic initiative projects, as well as a $2.8 million increase of cyber
security information technology related costs. Partially offsetting these
increases were decreases in marketing expenses of $4.0 million and a $3.3
million change in an environmental remediation liability estimate for an
inactive site recorded in the third quarter of 2020.
Adjusted EBITDA
Management considers Adjusted EBITDA to be a measurement of performance which
provides useful information to both management and investors. Adjusted EBITDA
should not be considered an alternative to net income or other measurements
under GAAP. Adjusted EBITDA is not calculated identically by all companies and
therefore our measurements of Adjusted EBITDA, while defined consistently and in
accordance with our historical credit agreement, may not be comparable to
similarly titled measures reported by other companies.
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For the Three Months Ended For the Nine Months Ended
September 30, 2021 over 2020 September 30, 2021 over 2020
$ % $ %
(in thousands, except percentages) 2021 2020 Change Change 2021 2020 Change Change
Adjusted EBITDA:
Environmental Services $ 166,471 $ 180,002 $ (13,531) (7.5) % $ 482,766 $ 502,101 $ (19,335) (3.9) %
Safety-Kleen Sustainability
Solutions 70,810 29,613 41,197 139.1 165,756 62,248 103,508 166.3
Corporate Items (52,197) (41,782) (10,415) (24.9) (146,216) (132,369) (13,847) (10.5)
Total $ 185,084 $ 167,833 $ 17,251 10.3 % $ 502,306 $ 431,980 $ 70,326 16.3 %
We use Adjusted EBITDA to enhance our understanding of our operating
performance, which represents our views concerning our performance in the
ordinary, ongoing and customary course of our operations. We historically have
found it helpful, and believe that investors have found it helpful, to consider
an operating measure that excludes certain expenses relating to transactions not
reflective of our core operations.
The information about our operating performance provided by this financial
measure is used by our management for a variety of purposes. We regularly
communicate Adjusted EBITDA results to our lenders since our loan covenants are
based upon levels of Adjusted EBITDA achieved and to our board of directors and
we discuss our interpretation of such results with the board. We also compare
our Adjusted EBITDA performance against internal targets as a key factor in
determining cash and stock bonus compensation for executives and other
employees, largely because we believe that this measure is indicative of how the
fundamental business is performing and is being managed.
We also provide information relating to our Adjusted EBITDA so that analysts,
investors and other interested persons have the same data that we use to assess
our core operating performance. We believe that Adjusted EBITDA should be viewed
only as a supplement to the GAAP financial information. We also believe,
however, that providing this information in addition to, and together with, GAAP
financial information permits the users of our financial statements to obtain a
better understanding of our core operating performance and to evaluate the
efficacy of the methodology and information used by management to evaluate and
measure such performance on a standalone and a comparative basis.
The following is a reconciliation of net income to Adjusted EBITDA for the
following periods (in thousands, except percentages):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net income $ 65,443 $ 54,910 $ 154,254 $ 95,505
Accretion of environmental liabilities 2,799 2,822 8,625 8,149
Stock-based compensation 6,001 6,662 12,786 12,739
Depreciation and amortization 71,451 74,470 215,206 221,497
Other (income) expense, net (199) (2,268) 2,509 597
Loss on sale of businesses - 118 - 3,376
Interest expense, net of interest income 17,984 17,407 53,953 54,848
Provision for income taxes 21,605 13,712 54,973 35,269
Adjusted EBITDA $ 185,084 $ 167,833 $ 502,306 $ 431,980
As a % of Direct revenues 19.5 % 21.5 % 18.7 % 18.4 %
Beginning in the first quarter of 2021, we revised our calculation of reported
Adjusted EBITDA to add stock-based compensation, a non-cash item, to other
charges which are added back to GAAP net income for purposes of calculating
Adjusted EBITDA. We made this change in order to be more consistent with how
certain of our peer group companies report their non-GAAP results, to align with
how management will evaluate the operating performance of the Company and
performance metrics for certain incentive compensation awards issued in 2021,
and to be consistent with the definition of "Adjusted EBITDA" now used for
covenant compliance purposes in our outstanding financing agreements as amended
to date. The amount added back each period is expected to match the line item
for stock-based compensation as recorded on the Company's GAAP consolidated
statements of cash flows. In the future, when we report our results, all
relevant prior period Adjusted EBITDA amounts which do not already reflect this
change will be recast to provide comparative information.
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Depreciation and Amortization
For the Three Months Ended For the Nine Months Ended
September 30, 2021 over 2020 September 30, 2021 over 2020
(in thousands, except $ % $ %
percentages) 2021 2020 Change Change 2021 2020 Change Change
Depreciation of fixed
assets and amortization
of landfills and finance
leases $ 63,875 $ 64,913 $ (1,038) (1.6) % $ 192,277 $ 193,935 $ (1,658) (0.9) %
Permits and other
intangibles amortization 7,576 9,557 (1,981) (20.7) 22,929 27,562 (4,633) (16.8)
Total depreciation and
amortization $ 71,451 $ 74,470 $ (3,019) (4.1) % $ 215,206 $ 221,497 $ (6,291) (2.8) %
Depreciation and amortization for the three and nine months ended September 30,
2021 decreased from the comparable periods in 2020 primarily due to accelerating
a landfill permit amortization in 2020 and certain assets becoming fully
amortized.
Provision for Income Taxes
For the Three Months Ended For the Nine Months Ended
September 30, 2021 over 2020 September 30, 2021 over 2020
(in thousands, except $ % $ %
percentages) 2021 2020 Change Change 2021 2020 Change Change
Provision for income
taxes $ 21,605 $ 13,712 $ 7,893 57.6 % $ 54,973 $ 35,269 $ 19,704 55.9 %
Effective tax rate 24.8 % 20.0 % 4.8 % 26.3 % 27.0 % (0.7) %
The provision for income taxes for the three and nine months ended September 30,
2021 increased $7.9 million and $19.7 million , respectively, from the comparable
periods in 2020, due to an increase in income before provision for income taxes.
Our effective tax rates for the three months ended September 30, 2021 increased
by 4.8% when compared to the three months ended September 30, 2020 . The increase
in our effective tax rate is predominately due to recognizing lower previously
unbenefited tax losses in the three months ended September 30, 2021 as compared
to September 30, 2020 . In 2020, certain of our previously unprofitable Canadian
entities were profitable, predominantly due to the employee wage subsidies under
CEWS, and we were able to recognize these previously unbenefited tax losses.
These entities were profitable in 2021 as well, but to a lesser extent with
increased operational performance offset by the reduction in the employee wage
subsidies. Also impacting the increase in the rate was the release of $1.1
million of uncertain tax liabilities in the third quarter of 2020. Our effective
tax rate for the nine months ended September 30, 2021 was relatively consistent
to the comparable period in the prior year.
Liquidity and Capital Resources
Nine Months Ended
September 30,
(in thousands) 2021 2020
Net cash from operating activities
Net cash from operating activities Net cash from operating activities for the nine months endedSeptember 30, 2021 was$368.2 million , an increase of$50.8 million from the comparable period in 2020. The increase in operating cash flows from the comparable period of 2020 resulted from greater levels of operating income and improved working capital management in 2021 despite an increase in cash income taxes and US payroll taxes paid in the nine months endedSeptember 30, 2021 when compared to the nine months endedSeptember 30, 2020 . Cash income taxes paid, net of refunds, increased$34.0 million due to higher pre-tax income and a$7.7 million tax refund received in the third quarter of 2020 associated with prior year amended tax returns previously under audit. Additionally, under the CARES Act, starting in the second quarter of 2020, we deferred US payroll tax remittances. As ofSeptember 30, 2020 , we had deferred a total of$23.2 million . In the nine months endedSeptember 30, 2021 , we both remitted our normal 2021 US payroll taxes and remitted$16.5 million of the US payroll taxes we had previously deferred in 2020. The remaining payroll taxes deferred in 2020 under the CARES Act must be remitted no later thanDecember 2022 . 32
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Net cash used in investing activities Net cash used in investing activities for the nine months endedSeptember 30, 2021 was$169.3 million , an increase of$9.0 million from the comparable period in 2020. The increase in net cash used in investing activities as compared to the same prior year period was due to$14.0 million of incremental cash outflows for acquisitions with a reduction of$7.7 million in proceeds from the sale of businesses, partially offset by$12.8 million less of capital expenditures, net of disposals. Net cash used in financing activities Net cash used in financing activities for the nine months endedSeptember 30, 2021 was$71.8 million , as compared to$52.0 million in the comparable period in 2020. This increase of$19.8 million was primarily due to an increase in repurchases of common stock of$8.9 million during the first nine months of 2021. The change in uncashed checks due to the timing of payments made, higher finance lease principal payments and higher tax payments related to withholdings on vested stock also contributed to the increase in net cash used in financing activities. For additional information regarding our financing activities, see Note 11, "Financing Arrangements," to the accompanying unaudited consolidated financial statements. Adjusted Free Cash Flow Management considers adjusted free cash flow to be a measurement of liquidity which provides useful information to both management, creditors and investors about our financial strength and our ability to generate cash. Additionally, adjusted free cash flow is a metric on which a portion of management incentive compensation is based. We define adjusted free cash flow as net cash from operating activities, less additions to property, plant and equipment plus proceeds from sales or disposals of fixed assets. We exclude cash impacts of items derived from non-operating activities such as taxes paid in connection with divestitures and have also excluded cash paid in connection with the 2020 purchase of our corporate headquarters and certain capital improvements to the site as these expenditures are considered one-time in nature. Adjusted free cash flow should not be considered an alternative to net cash from operating activities or other measurements under GAAP. Adjusted free cash flow is not calculated identically by all companies, and therefore our measurements of adjusted free cash flow may not be comparable to similarly titled measures reported by other companies. The following is a reconciliation of net cash from operating activities to adjusted free cash flow for the following periods (in thousands): Nine Months Ended September 30, 2021 2020 Net cash from operating activities$ 368,226 $ 317,432 Additions to property, plant and equipment (146,654)
(150,357)
Purchase and capital improvements of corporate headquarters -
21,080
Proceeds from sale and disposal of fixed assets 16,424 7,307 Adjusted free cash flow$ 237,996 $ 195,462 Summary of Capital Resources including Financing Arrangements AtSeptember 30, 2021 , cash and cash equivalents and marketable securities totaled$711.5 million , compared to$571.0 million atDecember 31, 2020 . AtSeptember 30, 2021 , cash and cash equivalents held by our foreign subsidiaries totaled$141.3 million . The cash and cash equivalents and marketable securities balance for ourU.S. operations was$570.2 million atSeptember 30, 2021 , and ourU.S. operations had net operating cash flows of$360.6 million for the nine months endedSeptember 30, 2021 . Additionally, we have a$400.0 million revolving credit facility of which, as ofSeptember 30, 2021 , approximately$288.5 million was available to borrow and letters of credit under the credit facility in the amount of$111.5 million were outstanding. Based on the above and on our current plans, we believe that our operations have and will continue to have adequate financial resources to satisfy current liquidity needs. Financing arrangements are discussed in Note 11, "Financing Arrangements," to our unaudited consolidated financial statements included in this report. We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our primary ongoing cash requirements will be to fund operations, capital expenditures, interest payments and investments in line with our business strategy. We believe our future operating cash flows will be sufficient to meet our future operating and internal investing cash needs. Furthermore, our existing cash balance and the availability of borrowings under our revolving credit facility provide additional potential sources of liquidity should they be required. We continue to monitor our debt instruments and evaluate opportunities where it may be beneficial to refinance or reallocate the portfolio. 33
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OnOctober 8, 2021 , we entered into Incremental Facility Amendment No. 2 to our existing Term Loan Agreement. Incremental Facility Amendment No. 2 provided for a new class and series of Term Loans ("2028 Term Loans") in the aggregate principal amount of$1.0 billion . We funded the HydroChemPSC Acquisition with$983.0 million of net proceeds from the issuance of the 2028 Term Loans and$253.4 million of cash on hand. Refer to Note 11, "Financing Arrangements," to our unaudited consolidated financial statements included in this report for further information on the terms of the 2028 Term Loans. We anticipate that our future cash flows provided by operating activities will provide the necessary funds on a short and long-term basis to meet our operating cash requirements, including servicing the incremental 2028 Term Loans used to fund the HydroChemPSC Acquisition. As ofSeptember 30, 2021 , we were in compliance with the covenants of all our debt agreements, and we believe it is reasonably likely that we will continue to meet such covenants. Common Stock Repurchases Pursuant to Publicly Announced PlanThe Company's common stock repurchases are made pursuant to the previously authorized board approved plan to repurchase up to$600.0 million of the Company's common stock. During the three and nine months endedSeptember 30, 2021 , the Company repurchased and retired a total of approximately 33.4 thousand and 533.4 thousand shares of the Company's common stock, respectively, for total expenditures of approximately$3.0 million and$48.4 million , respectively. During the three and nine months endedSeptember 30, 2020 , the Company repurchased and retired a total of approximately 0.4 million and 0.7 million shares of the Company's common stock, respectively, for total expenditures of approximately$22.2 million and$39.5 million , respectively. ThroughSeptember 30, 2021 , the Company has repurchased and retired a total of approximately 7.6 million shares of its common stock for approximately$438.6 million under this program. As ofSeptember 30, 2021 , an additional$161.4 million remained available for repurchase of shares under this program. Environmental Liabilities September 30, December 31, (in thousands, except percentages) 2021 2020 Change % Change
Closure and post-closure liabilities
$ 5,102 5.8 % Remedial liabilities 110,816 114,813 (3,997) (3.5)
Total environmental liabilities
$ 1,105 0.5 % Total environmental liabilities as ofSeptember 30, 2021 were$203.8 million , an increase of$1.1 million compared toDecember 31, 2020 , primarily due to accretion of$8.6 million , new liabilities, including those assumed in acquisitions, of$2.4 million and changes in estimates recorded to the consolidated balance sheet of$1.9 million , partially offset by expenditures of$12.2 million . We anticipate our environmental liabilities, substantially all of which we assumed in connection with our acquisitions, will be payable over many years and that cash flow from operations will generally be sufficient to fund the payment of such liabilities when required. Events not anticipated (such as future changes in environmental laws and regulations) could require that such payments be made earlier or in greater amounts than currently anticipated, which could adversely affect our results of operations, cash flow and financial condition. Conversely, the development of new treatment technologies or other circumstances may arise in the future which may reduce amounts ultimately paid. Capital Expenditures Capital expenditures in the first nine months of 2021 were$146.7 million as compared to$150.4 million in the same period of 2020. This decrease was primarily due to the nonrecurring purchase of our corporate headquarters in January of 2020 offset by a return to more normalized spending habits in 2021 as compared to the prior year when we had reduced spending due to the uncertainties of COVID-19. We anticipate that 2021 capital spending, net of disposals, will be in the range of$190.0 million to$210.0 million . This projected amount is inclusive of the capital expenditures for both the legacyClean Harbors operations and the acquired HydroChemPSC operations. Unanticipated changes in environmental regulations could require us to make significant capital expenditures for our facilities and adversely affect our results of operations and cash flow. Permitting and planning for the new incinerator project at ourKimball, Nebraska facility continue with an estimated completion date in early 2025. We are endeavoring upon this project in response to continued increasing demand for disposal outlets of regulated waste materials, and we expect the new incinerator to have an annual practical capacity of approximately 70,000 tons. We currently anticipate approximately$180.0 million of total capital expenditures for this project, the highest concentration of which is expected in 2022 and 2023. We expect total 2021 capital spending will be approximately$6.0 million , which is included in the 2021 capital spending range noted above, and includes$2.7 million which we have spent as ofSeptember 30, 2021 . 34
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Critical Accounting Policies and Estimates Other than as described below, there were no material changes in the first nine months of 2021 to the information provided under the heading "Critical Accounting Policies and Estimates" included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .Goodwill .Goodwill is reviewed for impairment annually as ofDecember 31 or when events or changes in the business environment indicate the carrying value of a reporting unit may exceed its fair value. This review is performed by comparing the fair value of each reporting unit to its carrying value, including goodwill. If the fair value is less than the carrying amount, a loss is recorded for the excess of the carrying value over the fair value up to the carrying amount of goodwill. We conducted our annual impairment test of goodwill for all of our reporting units to which goodwill is allocated as ofDecember 31, 2020 and determined that no adjustment to the carrying value of goodwill for any reporting unit was then necessary. As a result of changes in our organizational structure and resulting change in our operating segments discussed above, we concluded that, for purposes of reviewing for potential goodwill impairment, we now have three reporting units. The Environmental Services operating segment has two reporting units consisting of (i) Environmental Sales and Service which includes the legacy Environmental Sales and Service reporting unit and certain operations previously included within Safety-Kleen Environmental Services including the core service offerings of containerized waste, parts washer and vacuum services and (ii) Environmental Facilities, unchanged from prior year. The Safety-Kleen Sustainability Solutions operating segment is a single reporting unit which includes the legacy Safety-Kleen Oil reporting unit and the remaining operations of the legacy Safety-Kleen Environmental Services reporting unit primarily consisting of collection services for waste oil, anti-freeze and used oil filters as well as the sale of bulk blended re-refined oil and other automotive related finished fluid products. The Company allocated goodwill to the newly identified reporting units using a relative fair value approach. In addition, the Company completed an assessment of any potential goodwill impairment for all reporting units immediately prior and subsequent to the reallocation and determined that no impairment existed.
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