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 over 300,000 customers, including the majority of Fortune 500 companies. This diverse customer base includes 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 are 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 KLEEN+ base oils and various blended oil products to end users including fleet customers, distributors and manufacturers of oil products. 22 -------------------------------------------------------------------------------- Table of Contents Segment results are 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 and six months endedJune 30, 2022 were$1,356.3 million and$2,525.4 million , compared with$926.5 million and$1,734.6 million for the three and six months endedJune 30, 2021 . Our Environmental Services segment direct revenues increased$366.6 million and$659.5 million or 50.6% and 47.8% from the comparable periods 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. The sales and operations of HydroChemPSC have been fully integrated into the Environmental Services segment and we estimate that for the three and six months endedJune 30, 2022 , total revenues from the HydroChemPSC business were approximately$207.9 million and$392.0 million , respectively. Core organic growth within the Environmental Services segment also contributed to the overall increases in direct revenues for the segment in 2022 as compared to the comparable periods in 2021. In the three and six months endedJune 30, 2022 , our Safety-Kleen Sustainability Solutions segment direct revenues increased$63.2 million and$131.3 million or 31.2% and 36.9% from the comparable periods in 2021 predominately due to higher pricing of our base and blended oil products. Foreign currency translation of our Canadian operations negatively impacted our consolidated direct revenues by$7.3 million in the three and six months endedJune 30, 2022 . In the three and six months endedJune 30, 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, inflationary pressures seen across several cost categories and supply chain constraints. Our business began seeing the impact of macroeconomic factors including inflationary pressures and supply chain constraints in 2021 and these factors continue to impact the business operations. Supply chain challenges for additives and other materials used in the oil re-refining process have delayed production, added costs and shifted the product mix within our Safety-Kleen Sustainability Solutions segment. Similarly within the Environmental Services segment, supply chain challenges have delayed fleet and equipment delivery, increasing rental and external transportation costs. Both segments have seen the impact of inflationary pressures, most notably in labor and the cost of certain supplies used in the operations of our businesses, including fuel related costs. In recent quarters, we have executed upon pricing strategies, including fuel surcharges, and cost control initiatives to mitigate, to the greatest extent possible, the impact of these inflationary pressures. As a result of these focused efforts, costs as a percentage of direct revenues for the three months endedJune 30, 2022 improved when compared to previous quarters also impacted by these inflationary pressures. We reported income from operations for the three and six months endedJune 30, 2022 of$211.2 million and$298.3 million , compared with$110.0 million and$160.9 million in the three and six months endedJune 30, 2021 , representing increases of$101.2 million and$137.4 million . Net income for the three and six months endedJune 30, 2022 was$148.2 million and$193.5 million , compared with net income of$67.1 million and$88.8 million in the three and six months endedJune 30, 2021 , representing increases of$81.1 million and$104.7 million . Adjusted EBITDA, which is the primary financial measure by which our segments are evaluated, increased 64.6% to$309.1 million in the three months endedJune 30, 2022 from$187.8 million in the three months endedJune 30, 2021 and increased 54.3% to$489.3 million in the six months endedJune 30, 2022 from$317.2 million in the six months endedJune 30, 2021 . This improved performance was driven by the increased revenue levels in both segments noted above, focused pricing initiatives in the Environmental Services segment's disposal network, 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 and cost control initiatives across the entire 23 -------------------------------------------------------------------------------- Table of Contents business. Additional information, including a reconciliation of Adjusted EBITDA to net income, appears below under "Adjusted EBITDA." Net cash from operating activities for the six months endedJune 30, 2022 was$132.0 million , as compared to net cash from operating activities of$265.4 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$13.0 million in the six months endedJune 30, 2022 as compared to positive adjusted free cash flow of$176.9 million in the comparable period of 2021. These expected decreases in our cash flows were the result of an increase in working capital arising from our significant growth in the business, comparatively higher incentive compensation and interest payments and higher levels of cash spending on the acquisition of property, plant and equipment, partially offset by higher operating income. Additional information, including a reconciliation of adjusted free cash flow to net cash from operating activities, appears below under "Adjusted Free Cash Flow." 24
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Segment Performance
The primary financial measure by which we evaluate the performance of our segments is Adjusted EBITDA, as described below under "Adjusted EBITDA". The following table sets forth certain financial information associated with our results of operations for the three and six months endedJune 30, 2022 andJune 30, 2021 (in thousands, except percentages): Summary of Operations For the Three Months Ended For the Six Months Ended % June 30, 2022 June 30, 2021 Change Change June 30, 2022 June 30, 2021 Change % Change Direct Revenues(1): Environmental Services$ 1,090,743 $ 724,097 $ 366,646 50.6%$ 2,038,188 $ 1,378,699 $ 659,489 47.8% Safety-Kleen Sustainability Solutions 265,490 202,282 63,208 31.2 487,082 355,749 131,333 36.9 Corporate Items 79 79 - N/M 151 158 (7) N/M Total 1,356,312 926,458 429,854 46.4 2,525,421 1,734,606 790,815 45.6 Cost of Revenues(2): Environmental Services 743,659 487,257 256,402 52.6 1,428,995 938,512 490,483 52.3 Safety-Kleen Sustainability Solutions 151,020 123,025 27,995 22.8 303,037 231,401 71,636 31.0 Corporate Items 3,790 7,604 (3,814) N/M 9,826 8,509 1,317 N/M Total 898,469 617,886 280,583 45.4 1,741,858 1,178,422 563,436 47.8 Selling, General & Administrative Expenses: Environmental Services 77,743 60,799 16,944 27.9 156,250 123,892 32,358 26.1 Safety-Kleen Sustainability Solutions 17,460 15,943 1,517 9.5 35,158 29,402 5,756 19.6 Corporate Items 60,405 47,364 13,041 27.5 115,373 92,453 22,920 24.8 Total 155,608 124,106 31,502 25.4 306,781 245,747 61,034 24.8 Adjusted EBITDA: Environmental Services 269,341 176,041 93,300 53.0 452,943 316,295 136,648 43.2 Safety-Kleen Sustainability Solutions 97,010 63,314 33,696 53.2 148,887 94,946 53,941 56.8 Corporate Items (57,281) (51,584) (5,697) (11.0) (112,501) (94,019) (18,482) (19.7) Total$ 309,070 $ 187,771 $ 121,299 64.6%$ 489,329 $ 317,222 $ 172,107 54.3% Adjusted EBITDA as a % of Direct Revenues: Environmental Services 24.7 % 24.3 % 0.4 % 22.2 % 22.9 % (0.7) % Safety-Kleen Sustainability Solutions 36.5 % 31.3 % 5.2 % 30.6 % 26.7 % 3.9 % Corporate Items N/M N/M N/M N/M N/M N/M Total 22.8 % 20.3 % 2.5 % 19.4 % 18.3 % 1.1 % _____________________ 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. 25
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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 Six Months Ended June 30, 2022 over 2021 June 30, 2022 over 2021 (in thousands, except % percentages) 2022 2021 Change Change 2022 2021 Change % Change Direct revenues$ 1,090,743 $ 724,097 $ 366,646 50.6 %$ 2,038,188 $ 1,378,699 $ 659,489 47.8 % Environmental Services direct revenues for the three months endedJune 30, 2022 increased$366.6 million from the comparable period in 2021 driven primarily by the incremental business from the HydroChemPSC operations within industrial service and field and emergency response service revenues coupled with organic growth across our other waste disposal service offerings. Direct revenues of our industrial service offerings increased$203.8 million , of which approximately$173.7 million was generated by HydroChemPSC, while the remainder was primarily due to increased demand and pricing for our core industrial services. Technical services revenues increased$91.6 million largely due to higher throughput at our facilities and higher value waste streams coupled with pricing initiatives across the business. Higher volumes at our incinerators drove an increase in utilization from 87% in the second quarter of 2021 to 90% in the second quarter of 2022. We also saw an increase in landfill volumes in the second quarter of 2022 as compared to the second quarter of 2021. Field and emergency response services revenues increased approximately$40.1 million despite a$6.3 million decrease in COVID-19 decontamination service revenues. This overall increase was both related to contributions from the HydroChemPSC business of$34.2 million as well as organic growth from the legacy field services operations. Direct revenues for the Safety-Kleen core service offerings increased$31.1 million from the comparable period in 2021 due to improved pricing and greater demand for our containerized waste and vacuum services. The Canadian operations of the Environmental Services segment were negatively impacted by$5.8 million due to foreign currency translation. Environmental Services direct revenues for the six months endedJune 30, 2022 increased$659.5 million from the comparable period in 2021. Consistent with the discussion above, a significant portion of this increase is due to the incremental business from the HydroChemPSC operations within industrial service and field and emergency response service revenues and organic growth across our service offerings. Direct revenues of our industrial service offerings increased$388.2 million of which approximately$329.8 million was generated by HydroChemPSC while the remainder was primarily due to increased demand and pricing for our core industrial services. Technical services revenues increased$155.4 million largely due to higher throughput at our facilities and higher value waste streams coupled with pricing initiatives. Utilization at our incinerators increased to 88% in the six months of 2022 largely driven by increased volume and fewer down days as compared to utilization of 83% in the six months endedJune 30, 2021 which was impacted by significant weather events in the first quarter of 2021. We also saw an increase in landfill volumes in the six months of 2022 as compared to the first six months of 2021. Field and emergency response services revenues increased approximately$67.4 million despite a$25.8 million decrease in COVID-19 decontamination service revenues. This overall increase was both related to contributions from the HydroChemPSC business of$62.2 million as well as organic growth from increased demand in the legacy field services operations. Direct revenues for the Safety-Kleen core service offerings increased$48.0 million from the comparable period in 2021 due to improved pricing and greater demand for our containerized waste and vacuum services. The Canadian operations of the Environmental Services segment were negatively impacted by$5.8 million due to foreign currency translation. 26
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Safety-Kleen Sustainability Solutions
For the Three Months Ended For the Six Months Ended
June 30, 2022 over 2021 June 30, 2022 over 2021
(in thousands, except %
percentages) 2022 2021 Change Change 2022 2021 Change % Change Direct revenues$ 265,490 $ 202,282 $ 63,208 31.2 %$ 487,082 $ 355,749 $ 131,333 36.9 % Safety-Kleen Sustainability Solutions direct revenues for the three and six months endedJune 30, 2022 increased$63.2 million and$131.3 million respectively from the comparable periods in 2021 predominately due to higher pricing of our base and blended oil products. For the three months endedJune 30, 2022 , base oil sales revenues increased$47.8 million and blended oil sales revenues increased$6.7 million from the comparable period in 2021 both due to pricing increases which more than offset lower volumes sold. Pricing increases also drove increases in base oil sales revenues of$98.2 million and blended oil sales revenue of$17.7 million for the six months endedJune 30, 2022 when compared with the six months endedJune 30, 2021 . The Canadian operations of the Safety-Kleen Sustainability Solutions segment were negatively impacted by$1.5 million in both the three and six months endedJune 30, 2022 due to foreign currency translation.
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.
Environmental Services
For the Three Months Ended For the Six Months Ended
June 30, 2022 over 2021 June 30, 2022 over 2021
(in thousands, except %
percentages) 2022 2021 Change Change 2022 2021 Change % Change
Cost of revenues $ 743,659 $ 487,257 $ 256,402 52.6 % $ 1,428,995 $ 938,512 $ 490,483 52.3 %
As a % of Direct revenues 68.2 % 67.3 % 0.9 % 70.1 % 68.1 % 2.0 %
Environmental Services cost of revenues for the three months ended June 30, 2022
increased $256.4 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 for
the three months ended June 30, 2022 remained relatively consistent with the
three months ended June 30, 2021 despite lower COVID-19 decontamination services
and higher industrial services which typically operate at a lower margin than
our waste disposal focused offerings. Overall, labor and benefit related costs
increased $124.8 million , equipment and supply costs increased $61.2 million and
external transportation, vehicle and fuel costs increased $51.1 million .
Environmental Services cost of revenues for the six months ended June 30, 2022
increased $490.5 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 2.0% 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 $234.9 million ,
equipment and supply costs increased $128.5 million and external transportation,
vehicle and fuel related costs increased $91.5 million .
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Safety-Kleen Sustainability Solutions
For the Three Months Ended For the Six Months Ended
June 30, 2022 over 2021 June 30, 2022 over 2021
(in thousands, except %
percentages) 2022 2021 Change Change 2022 2021 Change % Change
Cost of revenues $ 151,020 $ 123,025 $ 27,995 22.8 % $ 303,037 $ 231,401 $ 71,636 31.0 %
As a % of Direct revenues 56.9 % 60.8 % (3.9) % 62.2 % 65.0 % (2.8) %
Safety-Kleen Sustainability Solutions cost of revenues for the three months
ended June 30, 2022 increased $28.0 million from the comparable period in 2021.
The cost of raw materials used in production of our oil products increased $17.8
million , driven mainly by increased costs to obtain used oil through our used
oil collection services. The increase in base oil pricing in the second quarter
of 2022 as compared to the same period in 2021 has resulted in a correlating
increase in the cost we now pay for used oil feedstock. Increased external
transportation, vehicle and fuel costs of $5.1 million also contributed to the
overall increase in cost of revenues, with fuel being the largest component of
this increase.
Safety-Kleen Sustainability Solutions cost of revenues for the six months ended
June 30, 2022 increased $71.6 million from the comparable period in 2021. The
cost of raw materials used in production of our oil products increased $49.5
million , more than half of which was due to increased costs to obtain used oil
through our used oil collection services. As noted above, the increase in base
oil pricing has resulted in a correlating 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 $9.6
million and labor and benefit related costs which increased $2.8 million .
As a percentage of revenues, Safety-Kleen Sustainability Solutions costs of
revenues decreased by 3.9% and 2.8% in the three and six months ended June 30,
2022 as compared to the comparable periods in 2021. This margin improvement was
largely driven by the increased pricing of our products which outpaced the
increase in cost of revenues as the business continued to capitalize on the
favorable market conditions and efficient management of the spread between the
pricing of products and the rising costs to obtain oil feedstock, including
labor and fuel costs, in this inflationary environment.
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 For the Six Months Ended
June 30, 2022 over 2021 June 30, 2022 over 2021
(in thousands, except %
percentages) 2022 2021 Change Change 2022 2021 Change % Change
SG&A expenses $ 77,743 $ 60,799 $ 16,944 27.9 % $ 156,250 $ 123,892 $ 32,358 26.1 %
As a % of Direct
revenues 7.1 % 8.4 % (1.3) % 7.7 % 9.0 % (1.3) %
Environmental Services SG&A expenses for the three months ended June 30, 2022
increased $16.9 million from the comparable period in 2021, most predominately
due to a $12.9 million increase in labor and benefit related costs.
Environmental Services SG&A expenses for the six months ended June 30, 2022
increased $32.4 million from the comparable period in 2021, also due to
increased labor and benefit related costs of $23.9 million . Increased costs from
the HydroChemPSC business operations drove approximately $12.0 million and $24.2
million of the labor and benefit cost increases, respectively. As a percentage
of revenue, the Environmental Services SG&A improved by 1.3% in both the three
and six months ended June 30, 2022 , driven both by the HydroChemPSC business
operations which have lower SG&A expenses when compared to the business's
related revenues and overall improved leverage of SG&A in the legacy
Environmental Services business. The improved leverage of our SG&A spending
significantly contributed to the overall increase in profitability of the
segment.
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Safety-Kleen Sustainability Solutions
For the Three Months Ended For the Six Months Ended
June 30, 2022 over 2021 June 30, 2022 over 2021
(in thousands, except %
percentages) 2022 2021 Change Change 2022 2021 Change % Change
SG&A expenses $ 17,460 $ 15,943 $ 1,517 9.5 % $ 35,158 $ 29,402 $ 5,756 19.6 %
As a % of Direct
revenues 6.6 % 7.9 % (1.3) % 7.2 % 8.3 % (1.1) %
Safety-Kleen Sustainability Solutions SG&A expenses for the three and six months
ended June 30, 2022 increased $1.5 million and $5.8 million from the comparable
periods in 2021 primarily attributable labor and benefit cost increases of $1.2
million and $4.6 million , respectively. As a percentage of revenue, these costs
improved in both the three and six months ended June 30, 2022 when compared to
the same periods in the prior year.
Corporate Items
For the Three Months Ended For the Six Months Ended
June 30, 2022 over 2021 June 30, 2022 over 2021
(in thousands, except %
percentages) 2022 2021 Change Change 2022 2021 Change % Change
SG&A expenses $ 60,405 $ 47,364 $ 13,041 27.5 % $ 115,373 $ 92,453 $ 22,920 24.8 %
As a % of Total Clean
Harbors' Direct revenues 4.5 % 5.1 % (0.6) % 4.6 % 5.3 % (0.7) %
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 and six months ended June 30, 2022 increased from the comparable
periods in 2021, but decreased in both periods as a percentage of total Clean
Harbors' direct revenues which has also contributed to Clean Harbors' overall
profitability.
For the three months ended June 30, 2022 , the overall cost increase of $13.0
million included a $6.8 million increase in labor and benefits related costs,
including higher stock-based compensation costs and human resource related
costs. The higher stock-based compensation costs are primarily driven by the
timing of grants in 2022. Overall we expect the stock-based grants in the
current year to remain relatively consistent with the prior year. The remaining
net increase is spread across various cost categories.
For the six months ended June 30, 2022 , the overall increase of $22.9 million
included a $13.3 million increase in labor and benefits related costs, including
higher stock-based compensation costs, incentive costs and human resource
related costs. Similar to the discussion above, the increase in stock-based
compensation is mainly due to the timing of grants in 2022, though we expect the
overall grants for 2022 to be relatively consistent with 2021. Both bad debt
expense and information technology/cyber-security related technology costs
increased $4.0 million , respectively. 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.
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For the Three Months Ended For the Six Months Ended
June 30, 2022 over 2021 June 30, 2022 over 2021
%
(in thousands, except percentages) 2022 2021 Change Change 2022 2021 Change % Change
Adjusted EBITDA:
Environmental Services $ 269,341 $ 176,041 $ 93,300 53.0 % $ 452,943 $ 316,295 $ 136,648 43.2 %
Safety-Kleen Sustainability
Solutions 97,010 63,314 33,696 53.2 148,887 94,946 53,941 56.8
Corporate Items (57,281) (51,584) (5,697) (11.0) (112,501) (94,019) (18,482) (19.7)
Total $ 309,070 $ 187,771 $ 121,299 64.6 % $ 489,329 $ 317,222 $ 172,107 54.3 %
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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Net income $ 148,157 $ 67,075 $ 193,471 $ 88,811
Accretion of environmental liabilities 3,197 2,873 6,353 5,826
Stock-based compensation 6,835 3,305 12,547 6,785
Depreciation and amortization 87,868 71,592 172,166 143,755
Other (income) expense, net (1,265) 1,480 (1,969) 2,708
Gain on sale of business (8,864) - (8,864) -
Interest expense, net of interest income 26,256 18,051 51,273 35,969
Provision for income taxes 46,886 23,395 64,352 33,368
Adjusted EBITDA $ 309,070 $ 187,771 $ 489,329 $ 317,222
As a % of Direct revenues 22.8 % 20.3 % 19.4 % 18.3 %
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Depreciation and Amortization
For the Three Months Ended For the Six Months Ended
June 30, 2022 over 2021 June 30, 2022 over 2021
(in thousands, except %
percentages) 2022 2021 Change Change 2022 2021 Change % Change
Depreciation of fixed
assets and
amortization of
landfills and finance
leases $ 75,616 $ 63,828 $ 11,788 18.5 % $ 147,674 $ 128,402 $ 19,272 15.0 %
Permits and other
intangibles
amortization 12,252 7,764 4,488 57.8 24,492 15,353 9,139 59.5
Total depreciation and
amortization $ 87,868 $ 71,592 $ 16,276 22.7 % $ 172,166 $ 143,755 $ 28,411 19.8 %
Depreciation and amortization for the three and six months ended June 30, 2022
increased by $16.3 million and $28.4 million from the comparable periods in 2021
due to the depreciation and amortization of the HydroChemPSC tangible and
intangible assets which were acquired in in the fourth quarter of 2021.
Gain on Sale of Business
For the Three Months Ended For the Six Months Ended
June 30, 2022 over 2021 June 30, 2022 over 2021
% %
2022 2021 Change Change 2022 2021 Change Change
Gain on sale of business
8,864 100.0 % $ 8,864 $ - $ 8,864 100.0 %
During the three and six months ended June 30, 2022 , we recorded a $8.9 million
gain on the sale of a non-core line of business within our Environmental
Services segment. For additional information regarding this gain on sale of
business, see Note 5, "Disposition of Business," to the accompanying financial
statements.
Provision for Income Taxes
For the Three Months Ended For the Six Months Ended
June 30, 2022 over 2021 June 30, 2022 over 2021
(in thousands, except % %
percentages) 2022 2021 Change Change 2022 2021 Change Change
Provision for income
taxes $ 46,886 $ 23,395 $ 23,491 100.4 % $ 64,352 $ 33,368 $ 30,984 92.9 %
Effective tax rate 24.0 % 25.9 % (1.9) % 25.0 % 27.3 % (2.3) %
The provision for income taxes for the three and six months ended June 30, 2022
increased $23.5 million and $31.0 million from the comparable periods in 2021,
due to an increase in income before provision for income taxes. Our effective
tax rates for the three and six months ended June 30, 2022 decreased 1.9% and
2.3%, respectively, when compared to the three and six months ended June 30,
2021 . The decrease in our effective tax rate is largely due to the utilization
of previous 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 and associated utilization
of previous unbenefited losses is due to operational improvements and tax
strategies as well as government subsidies and the gain on sale of a line of
business. As of June 30, 2022 , we do not yet believe that sufficient positive
evidence exists to support 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.
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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.
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