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 risks and uncertainties surrounding Coronavirus ("COVID-19") and the related impact on our business, 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 onFebruary 26, 2020 , 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. 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 21
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including but not limited to end-to-end hazardous waste management, emergency response, industrial cleaning and maintenance and recycling services. 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 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 the demand by our customers for waste services directly attributable to waste volumes generated by them and project work for which waste handling and/or disposal is required. In managing the business and evaluating performance, management tracks the volumes and mix of waste handled and disposed of through our owned incinerators and landfills, as well as utilization of such incinerators, labor and billable hours and equipment among other key metrics. Levels of activity and ultimate performance associated with this segment can be impacted by several factors including overallU.S. GDP andU.S. industrial production, weather conditions, efficiency of our operations, technology, changing regulations, competition, market pricing of our services and the management of our related operating costs. 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 recent COVID-19 pandemic, the business has also seen increased demand for response services relative to contagion disinfection, decontamination and disposal. •Safety-Kleen - Safety-Kleen segment results are impacted by an array of core service and product offerings that serve to attract small quantity waste producers as customers and integrate them into theClean Harbors waste network. Core service offerings include parts washer services, containerized waste services, vacuum services, used motor oil collection and contract blending and packaging services. Key performance indicators tracked by the Company relative to these services include the number of parts washer services performed and pricing and volume of used motor oil and waste collected. Results from these services are primarily driven by the overall number of parts washers placed at customer sites and volumes of waste and used motor oil collected, as well as the demand for and frequency of other offered services. These factors can be impacted by overall economic conditions in the marketplace, especially in the automotive and manufacturing related areas. The overall market price of oil and regulations that change the possible usage of used motor oil, including theInternational Maritime Organization's 2020 regulation, both impact the premium the segment can charge for used motor oil collections. In addition to its core service offerings, Safety-Kleen offers high quality recycled base and blended oil products to end users including fleet customers, distributors and manufacturers of oil products. Other product offerings include automotive related fluids and shop supplies. Relative to its oil related products, management tracks the Company's volumes and relative percentages of base and blended oil sales along with various pricing metrics associated with the commodity driven marketplace. The segment's results are significantly impacted by overall market pricing and product mix associated with base and blended oil products and, more specifically, the market prices of Group II base oils. 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. Our OilPlus® closed loop initiative, which results in the sale of our renewable oil products directly to our end customers, may also be impacted by changes in customer demand for high-quality, environmentally responsible recycled oil. Impact of COVID-19 Corporate Response In response to the COVID-19 pandemic, the Company has created a dedicated crisis response team to proactively monitor and respond to Company and customer operations, implement plans to execute on opportunities of COVID-19 related decontamination services and enhance health and safety measures for all our employees as well as customers to which we have provided these services. Health and safety is our #1 priority. Our commitment to ensuring the health and safety of our employees, particularly those performing COVID-19 decontamination services for our customers is a pillar of our overall corporate culture. During the pandemic, we have been able to successfully supply our employees with appropriate personal protective equipment ("PPE") for use in servicing our customers in the field and working at our operational and administrative facilities. To support the safety of all of our employees and operations, early precautionary measures were implemented including actively monitoring and reporting employee illness, acquiring and maintaining adequate levels of PPE inventory, suspending non-essential travel, limiting the number of employees 22
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attending meetings and reducing the number of people at our locations at any one time. In an effort to contain COVID-19, governments have enacted various measures, including orders to close non-essential businesses and personal and commercial travel restrictions. Operations at our facilities complied with government ordered shutdowns and reopening plans. The COVID-19 pandemic continues to be an evolving situation. We continue to monitor changes in the various locations in which we operate and adapting our protocols accordingly as well as on a proactive basis wherever possible. Impact on Our Financial Statements and Business Operations The COVID-19 pandemic has resulted in, and is likely to continue to result in economic disruption. The Company's financial results for the three and nine months endedSeptember 30, 2020 were significantly impacted by the COVID-19 pandemic. In the latter half ofMarch 2020 and throughout the second and third quarters, we were measurably impacted by an overall slowdown in economic activity which included closures at some of our customer sites and rising general uncertainty about future economic activity. In the third quarter, financial results, including direct revenues and EBITDA, improved for both segments when compared to the second quarter of 2020 as we began to see the increased return to operations at our customers. In our Environmental Services segment, continued lower activity levels and shutdowns of customers' operations decrease the level of our services that are required and the quantities of commercial and industrial waste disposed of throughout our network of facilities. Lower demand for oil and overall price declines in the global oil market, resulting from COVID-19 impacts, impacts the level of environmental services we provide to our customers in that market. We continue to see demand for disinfecting, decontamination and disposal related emergency response services specifically in response to COVID-19. The Company completed more than 9,000 projects responding specifically to the risk of COVID-19, amounting to nearly$90 million of direct revenues during the nine months endedSeptember 30, 2020 . Although uncertain as to the prevalence of such services for the remainder of the year, we do expect demand for these COVID-19 response services to continue. The increased level of emergency response work, however, did not overcome the overall levels of service work lost due to the impacts of the COVID-19 pandemic. We expect that the services provided by our Safety-Kleen segment will continue to be impacted by less automotive related travel and any ongoing customer shutdowns reducing demand for Safety-Kleen core services and products. We have observed declining demand in the primary sectors impacting this business including the overall automotive sector, as consumer activity lags historical levels acrossthe United States andCanada . Lower oil related demand and price declines in the global oil market, exacerbated by COVID-19 impacts, are also expected to reduce revenues generated by the business in 2020. In order to respond to the impact on the Safety-Kleen business and in particular the reduced availability of used motor oils which are utilized as feedstock in our re-refining processes and reduced demand for base and blended oil products, inApril 2020 , we temporarily shuttered nearly half of the total production capacity of our oil re-refineries. In response to more positive trends in oil demand, certain facilities were brought back online, increasing available production to approximately 90% of the total production capacity by the end of the third quarter of 2020. The Company considered the impact of COVID-19 on the assumptions and estimates used in the preparation of the financial statements and did not identify any significant changes in estimates. Specifically, management concluded that there had not been any triggering events requiring further assessment of asset impairments. Management also assessed the extent to which the current macroeconomic events brought about by COVID-19 and significant declines in oil demand may have impacted the valuation of expected credit losses on accounts receivable and certain inventory items or resulted in modifications to any significant contracts. Ultimately the results of these assessments did not have a material impact on the Company's results as ofSeptember 30, 2020 . In regards to liquidity and capital resources, as ofSeptember 30, 2020 , the Company had$532.3 million in cash and marketable securities and$249.1 million of borrowing availability under the revolving credit facility. Other than$7.5 million of annual payments on the Company's secured senior term loans, there are no debt maturities untilJune 2024 , when those term loans are due. To maintain a strong liquidity position through 2020 and beyond, the Company remains active in executing cost reduction initiatives, significantly reduced 2020 capital expenditures from originally forecasted amounts and continues to consider all aspects of eligible government programs. Impact of Government Programs OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law in response to the widespread economic impact of the COVID-19 pandemic. OnApril 11, 2020 , the Canadian federal government enacted the COVID-19 Emergency Response Act, No.2, which implemented theCanada Emergency Wage Subsidy ("CEWS"). Since the establishment of these programs, management has considered and analyzed the Company's eligibility under such government programs. Most significantly, the Company applied for certain employee retention credits under the CARES Act and the wage subsidy under the CEWS. Although the Company did implement certain cost reduction plans associated with labor in the second 23
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quarter, these government programs have allowed our workforce to remain stable during the temporary slowdown in activity. The table below summarizes the benefit of these government programs recorded in the statement of operations for the periods endedSeptember 30, 2020 (in thousands): Three Months Ended Nine Months Ended September 30, 2020 September 30, 2020 Environmental Environmental Services Safety-Kleen Corporate Items Total Services Safety-Kleen Corporate Items Total Cost of revenues $ 8,481$ 1,802 $ 145$ 10,428 $ 17,478 $ 6,666 $ 560$ 24,704 Selling, general and administrative expenses 1,488 685 668 2,841 5,755 4,092 2,117 11,964 Total $ 9,969$ 2,487 $ 813$ 13,269 $ 23,233 $ 10,758 $ 2,677$ 36,668 In addition to the credits and subsidies outlined above, which do not require any repayment to be made by the Company, the CARES Act also allows for the deferral of payment related to certain payroll taxes. In total, we deferred payroll tax payments of$23.2 million during the nine months endedSeptember 30, 2020 which are required to be paid in equal installments, in the fourth quarters of 2021 and 2022. Highlights Total revenues for the three and nine months endedSeptember 30, 2020 were$779.3 million and$2,347.9 million , compared with$891.7 million and$2,541.2 million for the three and nine months endedSeptember 30, 2019 . In the three and nine months endedSeptember 30, 2020 , our Environmental Services segment direct revenues decreased 10.0% and 4.1% from the comparable periods in 2019, primarily due to lower demand for our industrial and technical related services. Lower overall economic activity due to the COVID-19 pandemic has most notably reduced the demand for industrial turnaround, environmental remediation and waste disposal projects. This decrease was partially offset by increased emergency response decontamination services in the wake of the COVID-19 pandemic. In the three and nine months endedSeptember 30, 2020 , our Safety-Kleen segment direct revenues decreased 17.8% and 14.2% from the comparable periods in 2019, predominantly due to lower demand across the Safety-Kleen portfolio of products and core services also resulting from overall lower economic activity, customer shutdowns as well as lower oil demand and pricing driven by the COVID-19 pandemic. Increased revenues from used motor oil collections partially offset these decreases in the Safety-Kleen segment. The fluctuation of the Canadian dollar negatively impacted our consolidated revenues by$1.0 million and$5.2 million in the three and nine months endedSeptember 30, 2020 . We reported income from operations for the three and nine months endedSeptember 30, 2020 of$83.9 million and$189.6 million compared with$80.4 million and$177.1 million in the three and nine months endedSeptember 30, 2019 . We reported net income for the three and nine months endedSeptember 30, 2020 of$54.9 million and$95.5 million compared with net income of$36.4 million and$73.6 million in the three and nine months endedSeptember 30, 2019 . Adjusted EBITDA, which is the primary financial measure by which our segments are evaluated, increased 2.9% to$161.2 million in the three months endedSeptember 30, 2020 from$156.6 million in the three months endedSeptember 30, 2019 and increased 2.7% to$419.2 million in the nine months endedSeptember 30, 2020 from$408.1 million in the nine months endedSeptember 30, 2019 . Our relatively consistent levels of EBITDA in these periods, despite the notable decline in revenues can be attributed to incremental cost controls put in place by the Company, the improved mix of revenue generating services as well as benefits received from the government programs discussed above. Additional information, including a reconciliation of Adjusted EBITDA to net income, appears below under the heading "Adjusted EBITDA." Net cash from operating activities for the nine months endedSeptember 30, 2020 was$317.4 million , an increase of$32.8 million from the comparable period in 2019. Adjusted free cash flow, which management uses to measure our financial strength and ability to generate cash, was an inflow of$195.5 million in the nine months endedSeptember 30, 2020 , compared to an inflow of$119.1 million in the comparable period of 2019. These increased levels of adjusted cash flows are the result of lower capital expenditures, as well as the benefits received from the government programs discussed above. Additional information, including a reconciliation of adjusted free cash flow to net cash from operating activities, appears below under the heading "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. The following table sets forth certain financial information associated with our results of operations for the three and nine months endedSeptember 30, 2020 andSeptember 30, 2019 (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, $ 2020 2019 Change Change 2020 2019 Change % Change Direct Revenues(1): Environmental Services$ 527,970 $ 586,872 $ (58,902) (10.0)%$ 1,591,246 $ 1,658,970 $ (67,724) (4.1)% Safety-Kleen 251,640 306,145 (54,505) (17.8) 759,408 884,606 (125,198) (14.2) Corporate Items (266) (1,349) 1,083 N/M (2,747) (2,391) (356) N/M Total 779,344 891,668 (112,324) (12.6) 2,347,907 2,541,185 (193,278) (7.6) Cost of Revenues(2): Environmental Services 350,072 417,954 (67,882) (16.2) 1,084,450 1,203,367 (118,917) (9.9) Safety-Kleen 154,729 189,190 (34,461) (18.2) 489,358 558,609 (69,251) (12.4) Corporate Items 6,828 5,610 1,218 N/M 15,168 10,075 5,093 N/M Total 511,629 612,754 (101,125) (16.5) 1,588,976 1,772,051 (183,075) (10.3) Selling, General & Administrative Expenses: Environmental Services 37,044 47,260 (10,216) (21.6) 118,945 126,567 (7,622) (6.0) Safety-Kleen 28,150 35,629 (7,479) (21.0) 93,552 110,419 (16,867) (15.3) Corporate Items 41,350 39,412 1,938 4.9 127,193 124,047 3,146 2.5 Total 106,544 122,301 (15,757) (12.9) 339,690 361,033 (21,343) (5.9) Adjusted EBITDA: Environmental Services 140,854 121,658 19,196 15.8 387,851 329,036 58,815 17.9 Safety-Kleen 68,761 81,326 (12,565) (15.5) 176,498 215,578 (39,080) (18.1) Corporate Items (48,444) (46,371) (2,073) (4.5) (145,108) (136,513) (8,595) (6.3) Total$ 161,171 $ 156,613 $ 4,558 2.9%$ 419,241 $ 408,101 $ 11,140 2.7% _____________________ 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 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 a significant impact to our revenue resulting from COVID-19 as discussed in Impact of COVID-19 above. Other factors impacting our revenues include, but are not limited to: overall levels of industrial activity and 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, 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, 2020 over 2019 September 30, 2020 over 2019 (in thousands, except % percentages) 2020 2019 Change Change 2020 2019
Change % Change Direct revenues$ 527,970 $ 586,872 $ (58,902) (10.0) %$ 1,591,246 $ 1,658,970 $ (67,724) (4.1) % Environmental Services direct revenues for the three months endedSeptember 30, 2020 decreased$58.9 million from the comparable period in 2019, driven primarily by significantly lower demand for our industrial and technical related services, partially offset by direct revenues earned in connection with COVID-19 emergency response decontamination services. Lower economic activity throughout the COVID-19 pandemic reduced the demand for industrial and technical related services as customers postponed and/or reduced the levels of industrial turnarounds, environmental remediation projects and other waste disposal services. Direct revenues associated with disposal services at our incinerator and landfill facilities decreased$9.9 million and$1.7 million , respectively, when compared with the same quarter in the prior year, due to lower volumes of waste disposed of in our network of facilities. Incinerator utilization was 80%. A maintenance related turnaround at a key incinerator facility was pulled forward into the third quarter of 2020 increasing the number of down days and contributing to a 12% decrease in incinerator utilization when compared to the same period in the prior year. Decreased direct revenues from these lower volumes were partially offset by the processing of higher value waste streams through our network of facilities during the period. Direct revenues of$28.9 million from COVID-19 related emergency response decontamination services in the third quarter of 2020 partially offset these overall decreases in direct revenues. The impact of foreign currency translation on our Environmental Services Canadian operations was minimal. Environmental Services direct revenues for the nine months endedSeptember 30, 2020 decreased$67.7 million from the comparable period in 2019 driven primarily by significantly lower demand for our industrial and technical related services, partially offset by COVID-19 emergency response decontamination services. Lower economic activity throughout the COVID-19 pandemic reduced the demand for industrial and technical related services as customers postponed and/or reduced the levels of industrial turnarounds, environmental remediation projects and other waste disposal services. Direct revenues at our landfill facilities decreased$2.0 million when compared with the same period in the prior year due to lower volumes of waste streams. In the nine months endedSeptember 30, 2020 , the Company generated$88.9 million of direct revenues from COVID-19 related emergency response decontamination services, which partially offset these direct revenue decreases. Additionally, direct revenues at our incinerator facilities increased by$20.7 million when compared to the same period in 2019 due to higher value waste streams. Utilization at our incinerator facilities remained consistent with the prior year at 84%. Also impacting the year over year change in direct revenues within this segment was the negative impact of foreign currency translation on our Canadian operations of$4.2 million . Safety-Kleen For the Three Months Ended For the Nine Months Ended September 30, 2020 over 2019 September 30, 2020 over 2019 (in thousands, except % % percentages) 2020 2019 Change Change 2020 2019
Change Change Direct revenues$ 251,640 $ 306,145 $ (54,505) (17.8) %$ 759,408 $ 884,606 $ (125,198) (14.2) % Safety-Kleen direct revenues for the three months endedSeptember 30, 2020 decreased$54.5 million from the comparable period in 2019. Reduced demand for oil related products and our core services continued to drive lower levels of direct revenues within this segment. Base oil sales decreased$24.9 million from the comparable period in 2019 due to lower sales volume and lower pricing, while blended oil sales decreased approximately$15.4 million from the comparable period in 2019, principally due to lower sales volumes. Decreased demand for Safety-Kleen's core service offerings contributed to the decline in direct revenues as containerized waste and vacuum services decreased$15.4 million from the comparable period in 2019. Recycled fuel oil and refinery byproducts sales also decreased$11.4 million , driven by both lower sales volume and lower pricing, and parts washer service 26
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revenues decreased$6.3 million due to lower demand. Given the impact of COVID-19 on our customers, these decreases were expected. Partially offsetting these decreases was a$15.9 million increase in direct revenues from used motor oil collections due to pricing increases on these services despite lower volumes of oil collected in the current period. The impact of foreign currency translation on our Safety-Kleen Canadian operations was minimal. Safety-Kleen direct revenues for the nine months endedSeptember 30, 2020 decreased$125.2 million from the comparable period in 2019. Reduced demand for oil related products and core services resulting from lower automotive travel and customer shutdowns, arising from the COVID-19 pandemic, drove these lower direct revenue levels. Base oil sales decreased$52.8 million from the comparable period in 2019 due to lower volume and lower pricing, and blended oil sales decreased$33.5 million due to lower volumes. Decreased demand for Safety-Kleen's core service offerings contributed to the decline in direct revenues as containerized waste and vacuum services decreased$33.0 million from the comparable period in 2019. Recycled fuel oil and refinery byproducts decreased$29.5 million , driven by lower volumes and, to a lesser extent, lower pricing, and parts washer service revenues decreased by$15.0 million , from the comparable period in 2019, due to lower demand particularly in the last two fiscal quarters. Partially offsetting these decreases was a$31.2 million increase in direct revenue from used motor oil collections due to pricing increases on these services. The impact of foreign currency translation on our Safety-Kleen Canadian operations was minimal. Slow incremental improvements in the demand for the segment's core service offerings are expected to continue into the fourth quarter if national and state reopening plans continue to prove successful. Cost of Revenues We believe that our ability to manage operating costs is important to our ability to remain price competitive. We continue to upgrade the quality and efficiency of our services through the development of new technology and continued modifications at our facilities, invest in new business opportunities and aggressively implement strategic sourcing and logistics solutions as well as other cost reduction initiatives, while also continuing to optimize our management and operating structure in an effort to maintain and increase operating margins. Environmental Services For the Three Months Ended For the Nine Months Ended September 30, 2020 over 2019 September 30, 2020 over 2019 (in thousands, except % % percentages) 2020 2019 Change Change 2020 2019 Change Change Cost of revenues$ 350,072 $ 417,954 $ (67,882) (16.2) %$ 1,084,450 $ 1,203,367 $ (118,917) (9.9) % As a % of Direct revenues 66.3 % 71.2 % (4.9) % 68.2 % 72.5 % (4.3) % Environmental Services cost of revenues for the three months endedSeptember 30, 2020 decreased$67.9 million from the comparable period in 2019, including a$24.4 million decrease to labor and benefits related costs, including travel costs, a$23.1 million decrease to equipment and supply costs and an$18.8 million decrease in external transportation, disposal and fuel costs. These decreases were attributable to lower direct revenues and successful cost control initiatives, as well as an$8.5 million benefit from the employee retention credit and subsidies recorded in the third quarter of 2020 under the CARES Act and CEWS which helped defray certain labor and benefits costs and is reflected in the decrease to labor and benefits related costs identified above. Absent this benefit, cost of revenues as a percentage of direct revenues still improved 3.3% primarily due an operational focus on better leverage of our employee and asset bases resulting in lower third party transportation, subcontractor and equipment rental spending. Environmental Services cost of revenues for the nine months endedSeptember 30, 2020 decreased$118.9 million from the comparable period in 2019, including a$45.7 million decrease to labor and benefits related costs, including travel costs, a$36.9 million decrease to external transportation, disposal and fuel costs and a$34.9 million decrease to equipment and supply costs. These decreases were mainly attributable to lower direct revenues and successful cost control initiatives, as well as a$17.5 million benefit from the employee retention credits and subsidies recorded in 2020 under the CARES Act and CEWS which is reflected in the reduction to labor and benefits related costs above. Absent this benefit, cost of revenues as a percentage of direct revenues still improved 3.3% primarily due to an operational focus on better leverage of our employee and asset bases resulting in lower third party transportation, subcontractor and equipment rental spending. In the future, we expect continued benefits from our operational focus on better leverage of our employee and asset bases. 27
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Safety-Kleen
For the Three Months Ended For the Nine Months Ended
September 30, 2020 over 2019 September 30, 2020 over 2019
(in thousands, except % %
percentages) 2020 2019 Change Change 2020 2019 Change Change
Cost of revenues
(18.2) % $ 489,358 $ 558,609 $ (69,251) (12.4) %
As a % of Direct revenues 61.5 % 61.8 % (0.3) % 64.4 % 63.1 % 1.3 %
Safety-Kleen cost of revenues for the three months ended September 30, 2020
decreased $34.5 million from the comparable period in 2019, including a $13.9
million decrease in costs of oil additives and other raw materials, a $10.0
million decrease in labor and benefits related costs, including travel costs and
a $6.6 million decrease in transportation, disposal and fuel costs. These
decreases were mainly attributable to lower direct revenues, as well as a $1.8
million benefit related to the employee retention credits and subsidies recorded
in the third quarter of 2020 under the CARES Act and CEWS which is reflected in
the decrease in labor and benefits related costs above. Absent this benefit,
costs of revenues as a percentage of direct revenues were relatively consistent
with the prior year.
Safety-Kleen cost of revenues for the nine months ended September 30, 2020
decreased $69.3 million from the comparable period in 2019, including a $30.1
million decrease in costs of oil additives and other raw materials, an $18.1
million decrease in labor and benefits related costs, including travel costs and
a $15.6 million decrease in transportation, disposal and fuel costs. These
decreases were mainly attributable to lower direct revenues, as well as a $6.7
million benefit related to employee retention credits and subsidies recorded in
2020 under the CARES Act and CEWS which is reflected in the decrease in labor
and benefits related costs above. Absent this benefit, costs of revenues as a
percentage of direct revenues increased 2.2%. This increase resulted from
certain fixed costs which could not be reduced proportionate to the overall
lower business activity, partially offset by an operational focus on cost
reductions, specifically in transportation and subcontractor costs.
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 that 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, 2020 over 2019 September 30, 2020 over 2019
(in thousands, except % %
percentages) 2020 2019 Change Change 2020 2019 Change Change
SG&A expenses $ 37,044 $ 47,260 $ (10,216) (21.6) % $ 118,945 $ 126,567 $ (7,622) (6.0) %
As a % of Direct
revenues 7.0 % 8.1 % (1.1) % 7.5 % 7.6 % (0.1) %
Environmental Services SG&A expenses for the three months ended September 30,
2020 decreased $10.2 million from the comparable period in 2019. This decrease
in SG&A expenses was primarily attributable to lower direct revenues and
therefore lower sales related costs, such as travel and other selling related
costs, as well as a $1.5 million benefit related to the employee retention
credits and subsidies recorded in the third quarter of 2020 under the CARES Act
and CEWS which helped to defray labor and benefits related costs. Absent these
benefits, Environmental Services SG&A expenses as a percentage of direct
revenues remained relatively consistent with the comparable period in 2019.
Environmental Services SG&A expenses for the nine months ended September 30,
2020 decreased $7.6 million from the comparable period in 2019 primarily due to
lower direct revenues and therefore lower sales related costs, such as travel
and other selling related costs, as well as a $5.8 million benefit in labor and
benefits related costs related to the employee retention credits and subsidies
recorded in 2020 under the CARES Act and CEWS. Also contributing to the period
comparison are a $5.5 million favorable resolution of a litigation matter and
recovery of certain trade receivables of $5.4 million , both of which were
recorded in the first quarter of 2019, and favorably impacted the SG&A expenses
for the nine months ended September 30, 2019 . Absent these nonrecurring
transactions, Environmental Services SG&A expenses as a percentage of direct
revenues remained relatively consistent with the comparable period in 2019.
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Safety-Kleen
For the Three Months Ended For the Nine Months Ended
September 30, 2020 over 2019 September 30, 2020 over 2019
(in thousands, except % %
percentages) 2020 2019 Change Change 2020 2019 Change Change
SG&A expenses $ 28,150 $ 35,629 $ (7,479) (21.0) % $ 93,552 $ 110,419 $ (16,867) (15.3) %
As a % of Direct revenues 11.2 % 11.6 % (0.4) % 12.3 % 12.5 % (0.2) %
Safety-Kleen SG &A expenses for the three and nine months ended September 30,
2020 decreased $7.5 million and $16.9 million , respectively, from the comparable
periods in 2019. These decreases were primarily attributable to lower direct
revenues and therefore lower sales related costs, as well as a reduction in
labor and benefit related costs of $0.7 million and $4.1 million for the three
and nine months ended September 30, 2020 , respectively, attributable to employee
retention credits and subsidies under the CARES Act and CEWS. Absent these
benefits, Safety-Kleen SG &A expenses as a percentage of direct revenues for the
three and nine months ended September 30, 2020 were relatively consistent with
the comparable periods in the prior year.
Corporate Items
For the Three Months Ended For the Nine Months Ended
September 30, 2020 over 2019 September 30, 2020 over 2019
(in thousands, except % %
percentages) 2020 2019 Change Change 2020 2019 Change Change
SG&A expenses $ 41,350 $ 39,412 $ 1,938 4.9 % $ 127,193 $ 124,047 $ 3,146 2.5 %
Corporate Items SG&A expenses for the three months ended September 30, 2020
increased $1.9 million from the comparable period in 2019 due to a $3.3 million
change in an environmental remedial liability estimate for an inactive site
recorded in the third quarter of 2020 and a $1.6 million increase in stock-based
compensation. These increases were partially offset by an overall decrease of
$0.8 million in labor and benefits related costs, predominately driven by
employee retention credits and subsidies under the CARES Act and CEWS, and a
decrease in travel and real estate related expenses of $0.8 million and $0.4
million respectively, due to cost reduction initiatives. The remaining expense
reductions offsetting the noted increases were spread across various cost
components.
Corporate Items SG&A expenses for the nine months ended September 30, 2020
increased $3.1 million from the comparable period in 2019 primarily due to
increased marketing expenses of $3.9 million to expand brand awareness,
increased severance costs of $3.4 million and a $3.3 million change in an
environmental remedial liability estimate for an inactive site. These increases
were partially offset by a $2.1 million reduction in labor costs from employee
retention credits and subsidies recorded in 2020 under the CARES Act and CEWS, a
$1.9 million decrease in stock-based compensation and decreases in travel and
real estate related expenses of $1.4 million and $1.0 million , respectively. The
remaining expense reductions offsetting the noted increases were spread across
various cost components.
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 generally accepted accounting principles ("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.
For the Three Months Ended For the Nine Months Ended
September 30, 2020 over 2019 September 30, 2020 over 2019
(in thousands, except % %
percentages) 2020 2019 Change Change 2020 2019 Change Change
Adjusted EBITDA:
Environmental Services $ 140,854 $ 121,658 $ 19,196 15.8 % $ 387,851 $ 329,036 $ 58,815 17.9 %
Safety-Kleen 68,761 81,326 (12,565) (15.5) 176,498 215,578 (39,080) (18.1)
Corporate Items (48,444) (46,371) (2,073) (4.5) (145,108) (136,513) (8,595) (6.3)
Total $ 161,171 $ 156,613 $ 4,558 2.9 % $ 419,241 $ 408,101 $ 11,140 2.7 %
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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 with the board our interpretation of such results. 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,
2020 2019 2020 2019
Net income $ 54,910 $ 36,369 $ 95,505 $ 73,589
Accretion of environmental liabilities 2,822 2,490 8,149 7,624
Depreciation and amortization 74,470 73,756 221,497 223,328
Other (income) expense, net (2,268) 427 597 (1,992)
Loss on early extinguishment of debt - 6,119 - 6,119
Loss on sale of businesses 118 - 3,376 -
Interest expense, net of interest income 17,407 19,702 54,848 59,681
Provision for income taxes 13,712 17,750 35,269 39,752
Adjusted EBITDA $ 161,171 $ 156,613 $ 419,241 $ 408,101
As a % of Direct revenues 20.7 % 17.6 % 17.9 % 16.1 %
Depreciation and Amortization
For the Three Months Ended For the Nine Months Ended
September 30, 2020 over 2019 September 30, 2020 over 2019
(in thousands, except %
percentages) 2020 2019 Change Change 2020 2019 Change % Change
Depreciation of fixed
assets and amortization
of landfills and
finance leases $ 64,913 $ 65,335 $ (422) (0.6) % $ 193,935 $ 196,729 $ (2,794) (1.4) %
Permits and other
intangibles
amortization 9,557 8,421 1,136 13.5 % 27,562 26,599 963 3.6 %
Total depreciation and
amortization $ 74,470 $ 73,756 $ 714 1.0 % $ 221,497 $ 223,328 $ (1,831) (0.8) %
Depreciation and amortization for the three months ended September 30, 2020
increased due to the acceleration of amortization associated with a landfill
permit. Depreciation and amortization for the nine months ended September 30,
2020 decreased from the comparable periods in 2019 primarily due to certain
assets becoming fully depreciated.
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Provision for Income Taxes
For the Three Months Ended For the Nine Months Ended
September 30, 2020 over 2019 September 30, 2020 over 2019
(in thousands, except % %
percentages) 2020 2019 Change Change 2020 2019 Change Change
Provision for income
taxes $ 13,712 $ 17,750 $ (4,038) (22.7) % $ 35,269 $ 39,752 $ (4,483) (11.3) %
The provision for income taxes for the three and nine months ended September 30,
2020 decreased $4.0 million and $4.5 million , respectively, from the comparable
periods in 2019, despite an increase in income before provision for income
taxes. Our effective tax rate also decreased from 32.8% and 35.1%, respectively
for the three and nine months ended September 30, 2019 to 20.0% and 27.0%,
respectively for same periods in 2020.
In recent years, we have incurred losses in certain Canadian operations and have
not recognized any tax benefits on those losses. In the three and nine months
ended September 30, 2020 , these Canadian operations were profitable, and we were
able to recognize a portion of those unrecorded tax benefits. As a comparison,
for the nine months ended September 30, 2019 , our tax losses in Canada generated
$4.8 million of income tax benefits which we did not recognize in the income tax
provision, as compared to taxable income in Canada for the nine months ended
September 30, 2020 , which resulted in the recognition of $2.9 million in tax
benefits. Decreased taxable income in the remainder of our Canadian entities
further reduced our provision for income taxes which was partially offset by an
increase in taxable income in the United States . The provision for income taxes
and the effective tax rate were also impacted by the release of $1.1 million of
uncertain tax liabilities in the third quarter of 2020.
Liquidity and Capital Resources
Nine Months Ended
September 30,
(in thousands) 2020 2019
Net cash from operating activities
Net cash from operating activities Net cash from operating activities for the nine months endedSeptember 30, 2020 was$317.4 million , an increase of$32.8 million from the comparable period in 2019. The increase in operating cash flows from the comparable period of 2019 was most predominantly attributable to deferring the payment of certain payroll taxes amounting to approximately$23.2 million as allowed for under the CARES Act, the refund of$7.7 million associated with prior year amended tax returns previously under audit and the receipt of$10.5 million associated with the CEWS subsidy, partially offset by a$13.6 million increase in interest payments. Net cash used in investing activities Net cash used in investing activities for the nine months endedSeptember 30, 2020 was$160.3 million , a decrease of$26.8 million from the comparable period in 2019. Net cash used in investing activities decreased most notably due to decreases in cash paid for additions to property, plant and equipment and acquisitions, offset by an increase in cash paid for available-for-sale securities. As noted earlier, in response to the uncertainty surrounding COVID-19, we reduced our 2020 planned capital expenditure spending. Net cash used in financing activities Net cash used in financing activities for the nine months endedSeptember 30, 2020 was$52.0 million , compared to$44.1 million for the comparable period in 2019. This increase of$7.8 million was mostly due to an increase in repurchases of common stock of$23.2 million , partially offset by a decrease in deferred financing costs and premium paid related to the 2019 refinancing of long term debt. 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 31
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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 in the current period have also excluded cash paid in
connection with the 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,
2020 2019
Net cash from operating activities $ 317,432 $ 284,675
Additions to property, plant and equipment (150,357) (174,533)
Purchase and capital improvements of corporate headquarters 21,080
-
Proceeds from sale and disposal of fixed assets 7,307 8,948 Adjusted free cash flow$ 195,462 $ 119,090 Working Capital AtSeptember 30, 2020 , cash and cash equivalents and marketable securities totaled$532.3 million , compared to$414.4 million atDecember 31, 2019 . AtSeptember 30, 2020 , cash and cash equivalents held by our foreign subsidiaries totaled$113.8 million and were readily convertible into other currencies includingU.S. dollars. AtSeptember 30, 2020 , the cash and cash equivalents and marketable securities balance for ourU.S. operations was$418.6 million , and ourU.S. operations had net operating cash flows of$256.1 million for the nine months endedSeptember 30, 2020 . Additionally, we have a$400.0 million revolving credit facility of which approximately$249.1 million was available to borrow atSeptember 30, 2020 . 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. 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 as well as any cash needs relating to our stock repurchase program. 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. Financing Arrangements Financing arrangements are discussed in Note 11, "Financing Arrangements," to our unaudited consolidated financial statements included in this report. As discussed therein, the Company maintains a$400.0 million revolving credit facility, the expiration of which has been extended fromNovember 1, 2021 toOctober 28, 2025 through an amended and restated credit facility executed onOctober 28, 2020 . The Company had approximately$249.1 million available to borrow and outstanding letters of credit were$123.5 million atSeptember 30, 2020 . AtDecember 31, 2019 , approximately$229.2 million was available to borrow and outstanding letters of credit were$146.9 million . We continue to monitor our debt instruments and evaluate opportunities where it may be beneficial to refinance or reallocate the portfolio. As ofSeptember 30, 2020 , 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, 2020 , the Company repurchased and retired a total of approximately 0.4 million and 0.7 million shares, respectively, of the Company's common stock for total costs of approximately$22.2 million and$39.5 million , respectively. During the three and nine months endedSeptember 30, 2019 , the Company repurchased and retired a total of approximately 0.1 million and 0.2 million shares, respectively, of the Company's common stock for total costs of approximately$5.1 million and$16.4 million , respectively. 32
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ThroughSeptember 30, 2020 , the Company has repurchased and retired a total of approximately 6.6 million shares of its common stock for approximately$354.9 million under this program. As ofSeptember 30, 2020 , an additional$245.1 million remained available for repurchase of shares under this program. Environmental Liabilities September 30, December 31, (in thousands, except percentages) 2020 2019 Change % Change
Closure and post-closure liabilities
$ 8,565 11.3 % Remedial liabilities 115,567 114,173 1,394 1.2
Total environmental liabilities
$ 9,959 5.2 % Total environmental liabilities as ofSeptember 30, 2020 were$199.8 million , an increase of$10.0 million compared toDecember 31, 2019 . This increase was primarily due to accretion of$8.1 million , a$4.5 million increase in the closure and post-closure liabilities associated with one commercial landfill for which the Company has initiated closure plans and increases to remedial liabilities of$3.3 million and$1.8 million for an inactive site and Superfund site, respectively, resulting from receiving updated regulatory remediation requirements. These increases were partially offset by expenditures of$8.8 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. However, 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. Capital Expenditures Capital expenditures in the first nine months of 2020 were$150.4 million as compared to$174.5 million in the same period of 2019. The decrease was primarily due to planned reductions in spending in response to the uncertainty surrounding COVID-19 offset by the purchase of our corporate headquarters inJanuary 2020 . We anticipate that 2020 capital spending, net of disposals, will be in the range of$176.0 million to$196.0 million , inclusive of the$21.1 million already spent on the purchase and capital improvements of our corporate headquarters. However, 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. Critical Accounting Policies and Estimates Other than as described below, there were no material changes in the first nine months of 2020 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, 2019 .Goodwill and Other Long-Lived Assets.Goodwill is reviewed for impairment annually as ofDecember 31 or when events or changes in the business environment (triggering events) 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 determine our reporting units by identifying the components of each operating segment, and then in some circumstances aggregate components having similar economic characteristics based on quantitative and/or qualitative factors. As ofSeptember 30, 2020 andDecember 31, 2019 , we continue to have four reporting units, consisting of Environmental Sales and Service, Environmental Facilities, Safety-Kleen Oil and Safety-Kleen Environmental Services. We conducted our annual impairment test of goodwill for all of our reporting units to which goodwill was allocated as ofDecember 31, 2019 and determined that no adjustment to the carrying value of goodwill for any reporting unit was then necessary. In all cases the estimated fair value of each reporting unit significantly exceeded its carrying value. Our long-lived assets are carried on our financial statements based on their cost less accumulated depreciation or amortization. Long-lived assets with finite lives are reviewed for impairment whenever events or changes in circumstances ("triggering events") indicate that their carrying value may not be entirely recoverable. When such factors and circumstances exist, management compares the projected undiscounted future cash flows associated with the related asset or group of assets to the respective carrying amounts. The impairment loss, if any, would be measured as the excess of the carrying amount over the fair value of the asset and is recorded in the period in which the determination is made. 33
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During the three month periods endedMarch 31, 2020 ,June 30, 2020 andSeptember 30, 2020 , we considered the actual and expected future impacts of COVID-19 and the overall decline in oil demand and pricing, partially driven by the global response to COVID-19, and concluded that no triggering event had occurred. This conclusion was based on a qualitative analysis incorporating (i) the significant excess fair value that previously existed in each reporting unit, (ii) an assessment of the actual operations of the Company during the nine months endedSeptember 30, 2020 and (iii) an assessment of the current and long-term performance of the Company given expectations that the effects on the operations and cash flows of each reporting unit arising from these disruptions will be short lived. We will continue to evaluate our goodwill and other long-lived assets impacted by economic downturns. The market conditions which could lead to such future impairments are currently most prevalent for assets supporting our oil and gas field services and lodging services operations within the Environmental Sales & Services reporting unit and goodwill associated with our Safety-Kleen Oil reporting unit. Our assumptions with respect to future cash flows and conclusions with respect to asset impairments could be impacted by changes arising from (i) a further significant deterioration in market conditions arising from COVID-19, (ii) a sustained period of economic and industrial slowdowns resulting from social distancing guidelines and/or larger scale economic shutdowns, (iii) continued reduced demand for base and blended oil products and an inability to price our oil related products and services to maintain profitability, (iv) inability to scale our operations and implement cost reduction efforts in light of reduced demand or (v) a further decline in our share price for a sustained period of time. These factors, among others, could significantly impact the impairment analysis and may result in future goodwill or asset impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations.
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