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, 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 23, 2022 , 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 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 . Performance of our segments is evaluated on several factors of which the primary financial measure is Adjusted EBITDA, as reconciled to our net income and described more fully below. 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 customer demand 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 and 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, including our contagion disinfection, decontamination and disposal services. With the addition of the Safety-Kleen core service offerings, (e.g. containerized waste disposal, parts washer and vacuum services), the Environmental Services results are further impacted 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 incinerators, TSDFs and landfills, 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, manufacturing and other industrial markets, weather conditions, efficiency of our operations, technology, changing regulations, competition, market pricing of our services, costs incurred to deliver 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 20 -------------------------------------------------------------------------------- Table of Contents impacted by overall demand as well as product mix as it relates to these oil products. Segment results are also 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, the management of our related operating costs and the availability of raw materials including used oil and additives. 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 months endedMarch 31, 2022 were$1,169.1 million , compared with$808.1 million for the three months endedMarch 31, 2021 . Our Environmental Services segment direct revenues increased$292.8 million or 44.7% from the comparable period in 2021. Our acquisition of HydroChemPSC onOctober 8, 2021 contributed to increases in both our industrial services and field and emergency response service offerings within the Environmental Services segment with core organic growth also contributing to the overall increase. In the three months endedMarch 31, 2022 , our Safety-Kleen Sustainability Solutions segment direct revenues increased$68.1 million or 44.4% from the comparable period in 2021 predominately due to higher pricing of our base and blended oil products. In the three months endedMarch 31, 2022 , 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. We reported income from operations for the three months endedMarch 31, 2022 of$87.1 million , compared with$50.9 million in the three months endedMarch 31, 2021 , and net income for the three months endedMarch 31, 2022 of$45.3 million , compared with net income of$21.7 million in the three months endedMarch 31, 2021 . The increases in these earnings measures were 71.3% and 108.5% respectively. Adjusted EBITDA, which is the primary financial measure by which our segments are evaluated, increased 39.2% to$180.3 million in the three months endedMarch 31, 2022 from$129.5 million in the three months endedMarch 31, 2021 . This improved performance was primarily driven by the increased revenue levels noted above, 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. Additional information, including a reconciliation of Adjusted EBITDA to net income, appears below under "Adjusted EBITDA." Net cash used in operating activities for the three months endedMarch 31, 2022 was$38.6 million , as compared to net cash from operating activities of$103.0 million in the comparable period of 2021. Adjusted free cash flow, which management uses to measure our financial strength and ability to generate cash, was an outflow of$107.6 million in the three months endedMarch 31, 2022 as compared to positive adjusted free cash flow of$62.3 million in the comparable period of 2021. These expected decreases in our cash flows were the result of an increase in working capital, comparatively higher incentive compensation and interest payments and higher levels of cash spending on the acquisition of property, plant and equipment, partially offset by higher operating income. Additional information, including a reconciliation of adjusted free cash flow to net cash (used in) from operating activities, appears below under "Adjusted Free Cash Flow." 21
--------------------------------------------------------------------------------
Table of Contents
Segment Performance
The primary financial measure by which we evaluate the performance of our segments is Adjusted EBITDA, as described below under "Adjusted EBITDA". The following table sets forth certain financial information associated with our results of operations for the three months endedMarch 31, 2022 andMarch 31, 2021 (in thousands, except percentages): Summary of Operations For the Three Months Ended March 31, 2022 March 31, 2021 Change % Change Direct Revenues(1): Environmental Services$ 947,445 $ 654,602 $ 292,843 44.7% Safety-Kleen Sustainability Solutions 221,592 153,467 68,125 44.4 Corporate Items 72 79 (7) N/M Total 1,169,109 808,148 360,961 44.7 Cost of Revenues(2): Environmental Services 685,336 451,255 234,081 51.9 Safety-Kleen Sustainability Solutions 152,017 108,376 43,641 40.3 Corporate Items 6,036 905 5,131 N/M Total 843,389 560,536 282,853 50.5 Selling, General & Administrative Expenses: Environmental Services 78,507 63,093 15,414
24.4
Safety-Kleen Sustainability Solutions 17,698 13,459 4,239 31.5 Corporate Items 54,968 45,089 9,879 21.9 Total 151,173 121,641 29,532 24.3 Adjusted EBITDA: Environmental Services 183,602 140,254 43,348 30.9 Safety-Kleen Sustainability Solutions 51,877 31,632 20,245 64.0 Corporate Items (55,220) (42,435) (12,785) (30.1) Total$ 180,259 $ 129,451 $ 50,808 39.2% Adjusted EBITDA as a % of Direct Revenues: Environmental Services 19.4 % 21.4 % (2.0) % Safety-Kleen Sustainability Solutions 23.4 % 20.6 % 2.8 % Corporate Items N/M N/M N/M Total 15.4 % 16.0 % (0.6) % _____________________ 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. 22
--------------------------------------------------------------------------------
Table of Contents
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 March 31, 2022 over 2021 (in thousands, except percentages) 2022 2021 Change % Change Direct revenues$ 947,445 $ 654,602 $ 292,843 44.7 % Environmental Services direct revenues for the three months endedMarch 31, 2022 increased$292.8 million from the comparable period in 2021 driven primarily from the incremental business from the HydroChemPSC operations within industrial service and field and emergency response service revenues coupled with organic growth across many service offerings. Direct revenues of our industrial service offerings increased$184.4 million of which approximately$155.8 million was generated by HydroChemPSC while the remainder was primarily due to increased demand for our core industrial services. Technical services revenues increased$63.8 million largely due to higher throughput at our facilities and increased pricing for our disposal services. Utilization at our incinerators increased to 85% in the first quarter of 2022 largely driven by fewer down days as compared utilization of 80% in the first quarter of 2021 when our incinerators were impacted by significant weather events. We also saw an increase in landfill volumes in the first quarter of 2022 as compared to the first quarter of 2021. Field and emergency response services revenues increased approximately$27.3 million despite a$19.5 million decrease in COVID-19 decontamination service revenues. This overall increase was both related to contributions from the HydroChemPSC business as well as organic growth in the legacy field services operations. Direct revenues for the Safety-Kleen core service offerings increased$16.9 million from the comparable period in 2021 due to improved pricing and greater demand for our containerized waste and vacuum services.
Safety-Kleen Sustainability Solutions
For the Three Months Ended
March 31, 2022 over 2021
(in thousands, except percentages) 2022 2021 Change % Change
Direct revenues $ 221,592 $ 153,467 $ 68,125 44.4 %
Safety-Kleen Sustainability Solutions direct revenues for the three months
ended March 31, 2022 increased $68.1 million from the comparable period in 2021
predominately due to higher pricing of our base and blended oil products. Base
oil sales revenues increased approximately $50.4 million , almost all of which
was due to pricing as the volume sold was relatively flat to the comparable
period in 2021. Revenues from our blended oil products increased $11.0 million
due to pricing increases more than offsetting slightly lower volumes sold.
Cost of Revenues
We believe that our ability to manage operating costs is important to our
ability to remain price competitive. We continue to experience the current
macroeconomic inflationary pressures across several cost categories, but most
notably related to internal and external labor, transportation, general supplies
and energy related costs. We continue to manage these increases through constant
cost monitoring as well as our overall customer pricing strategies designed to
offset the negative inflationary impacts on our margins. 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 manage our operating margins.
23--------------------------------------------------------------------------------
Table of Contents
Environmental Services
For the Three Months Ended
March 31, 2022 over 2021
(in thousands, except percentages) 2022 2021 Change % Change
Cost of revenues $ 685,336 $ 451,255 $ 234,081 51.9 %
As a % of Direct revenues 72.3 % 68.9 % 3.4 %
Environmental Services cost of revenues for the three months ended March 31,
2022 increased $234.1 million from the comparable period in 2021, primarily due
to the increase in direct revenues noted above, including additional costs from
the HydroChemPSC operations. Cost of revenues as a percentage of direct revenues
increased 3.4% from the comparable period in the prior year mainly due to the
mix of services, including lower COVID-19 decontamination services and the
growth of our industrial services offerings which typically operate at margins
lower than our waste disposal focused offerings. Inflationary pressures across
several cost categories including labor, transportation, equipment and supply
costs have also contributed to the increase of these costs as a percentage of
revenues. Overall, labor and benefit related costs increased $110.1 million ,
equipment and supply costs increased $67.4 million and external transportation,
vehicle and fuel related costs increased $40.4 million .
Safety-Kleen Sustainability Solutions
For the Three Months Ended
March 31, 2022 over 2021
(in thousands, except percentages) 2022 2021 Change % Change
Cost of revenues $ 152,017 $ 108,376 $ 43,641 40.3 %
As a % of Direct revenues 68.6 % 70.6 % (2.0) %
Safety-Kleen Sustainability Solutions cost of revenues for the three months
ended March 31, 2022 increased $43.6 million from the comparable period in 2021.
The cost of oil additives and other raw materials increased $31.7 million ,
nearly half of which was due to increased costs to obtain used oil through our
used oil collection services. The increase in base oil pricing in the first
quarter of 2022 as compared to the same period in 2021 has created a correlated
increase in the cost we now pay for used oil feedstock. Other costs that
contributed to the overall increase include the cost of external transportation,
vehicle and fuel costs which increased $4.5 million and labor and benefit
related costs which increased $2.5 million .
As a percentage of revenues, Safety-Kleen Sustainability Solutions costs of
revenues improved by 2.0% in the three months ended March 31, 2022 as compared
to the comparable period in 2021. This margin improvement was largely driven by
the increased pricing of our products which outpaced the relative cost of
revenues as the business continued to capitalize on the favorable market
conditions and manage the spread between the pricing of products and the related
costs to obtain the feedstock.
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. We believe 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
March 31, 2022 over 2021
(in thousands, except percentages) 2022 2021 Change % Change
SG&A expenses $ 78,507 $ 63,093 $ 15,414 24.4 %
As a % of Direct revenues 8.3 % 9.6 % (1.3) %
Environmental Services SG&A expenses for the three months ended March 31, 2022
increased $15.4 million from the comparable period in 2021, most predominately
due to an $11.0 million increase in labor and benefit related costs. The
increased costs from the HydroChemPSC business operations drove a significant
portion of the increase. As a percentage of revenue, however, the Environmental
Services SG&A improved by 1.3%.
24--------------------------------------------------------------------------------
Table of Contents
Safety-Kleen Sustainability Solutions
For the Three Months Ended
March 31, 2022 over 2021
(in thousands, except percentages) 2022 2021 Change % Change
SG&A expenses $ 17,698 $ 13,459 $ 4,239 31.5 %
As a % of Direct revenues 8.0 % 8.8 % (0.8) %
Safety-Kleen Sustainability Solutions SG&A expenses for the three months ended
March 31, 2022 increased $4.2 million from the comparable periods in 2021
primarily attributable to the increases in direct revenues noted above. As a
percentage of revenues, these costs remained relatively consistent in the three
months ended March 31, 2022 when compared to the same period in the prior year.
Overall, $3.4 million of the increase was specifically associated with labor and
benefit related costs.
Corporate Items
For the Three Months Ended
March 31, 2022 over 2021
(in thousands, except percentages) 2022 2021 Change % Change
SG&A expenses $ 54,968 $ 45,089 $ 9,879 21.9 %
As a % of Total Clean Harbors' Direct revenues 4.7 % 5.6 % (0.9) %
We manage our Corporate Items 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 March 31, 2022 increased $9.9 million from the comparable
period in 2021, however decreased as a percentage of total Clean Harbors' direct
revenues. Overall, cost increases included a $6.2 million increase in labor and
benefits related costs, including higher human resources related expenses,
incentive compensation and stock based compensation costs. The higher stock
based compensation costs are primarily driven by the timing of grants in 2022 as
well as overall achievement of performance based awards. These increases were
partially offset by the $3.0 million breakup fee received related to the
termination of the proposed asset acquisition from Vertex Energy, Inc. The
remaining net increase is spread across various cost categories.
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 existing credit agreement, may not be comparable to
similarly titled measures reported by other companies.
For the Three Months Ended
March 31, 2022 over 2021
(in thousands, except percentages) 2022 2021 Change % Change
Adjusted EBITDA:
Environmental Services $ 183,602 $ 140,254 $ 43,348 30.9 %
Safety-Kleen Sustainability Solutions 51,877 31,632 20,245 64.0
Corporate Items (55,220) (42,435) (12,785) (30.1)
Total $ 180,259 $ 129,451 $ 50,808 39.2 %
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
25
--------------------------------------------------------------------------------
Table of Contents
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
March 31,
2022 2021
Net income $ 45,314 $ 21,736
Accretion of environmental liabilities 3,156 2,953
Stock-based compensation 5,712 3,480
Depreciation and amortization 84,298 72,163
Other (income) expense, net (704) 1,228
Interest expense, net of interest income 25,017 17,918
Provision for income taxes 17,466 9,973
Adjusted EBITDA $ 180,259 $ 129,451
As a % of Direct revenues 15.4 % 16.0 %
Depreciation and Amortization
For the Three Months Ended
March 31, 2022 over 2021
(in thousands, except percentages) 2022 2021 Change % Change
Depreciation of fixed assets and amortization of
landfills and finance leases $ 72,058 $ 64,574 $ 7,484 11.6 %
Permits and other intangibles amortization 12,240 7,589 4,651 61.3
Total depreciation and amortization $ 84,298 $ 72,163 $ 12,135 16.8 %
Depreciation and amortization for the three months ended
Provision for Income Taxes
For the Three Months Ended
March 31, 2022 over 2021
%
(in thousands, except percentages) 2022 2021 Change Change
Provision for income taxes $ 17,466 $ 9,973 $ 7,493 75.1 %
Effective tax rate 27.8 % 31.5 % (3.7) %
The provision for income taxes for the three months ended March 31, 2022
increased $7.5 million from the comparable period in 2021, due to an increase in
income before provision for income taxes. Our effective tax rate for the three
months ended March 31, 2022 decreased 3.7% when compared to the three months
ended March 31, 2021 . The decrease in our effective tax rate is largely due a
decrease in unbenefited losses in certain of our Canadian entities.
In recent periods, certain Canadian entities which have historically generated
net operating losses and for which we have recognized valuation allowances, have
been operating at a profit. This recent profitability is due to operational
improvements, tax strategies and government subsidies. As of March 31, 2022 , we
do not yet believe that sufficient positive evidence exists to support
26
--------------------------------------------------------------------------------
Table of Contents
that this return to profitability will continue for a sustained period. We will
continue to evaluate this on an ongoing basis to determine when, if at all, to
release some or all of the associated remaining valuation allowances.
Liquidity and Capital Resources
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. We monitor our actual needs and forecasted cash flows, our liquidity and our capital resources, enabling us to plan our present needs and fund items that may arise during the year as a result of changing business conditions or opportunities. Furthermore, our existing cash balance and the availability of additional borrowings under our revolving credit facility provide additional potential sources of liquidity should they be required.
© Edgar Online, source
