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 expected completion and impact of our proposed acquisition of HydroChemPSC ("HPC"), and those items identified as "Risk Factors," in this report under Item 1A and in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission ("SEC") onFebruary 24, 2021 , and in other documents we file from time to time with theSEC . Therefore, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements.Clean Harbors undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements other than through its filings with theSEC , which may be viewed in the "Investors" section of theClean Harbors website. Overview We areNorth America's leading provider of environmental and industrial services supporting our customers in finding environmentally responsible solutions to further their sustainability goals in today's world. Everywhere industry meets the environment, we strive to provide eco-friendly products and services that protect and restoreNorth America's natural environment. We believe we operate, in the aggregate, the largest number of hazardous waste incinerators, landfills and treatment, storage and disposal facilities ("TSDFs") inNorth America . We serve a diverse customer base, including Fortune 500 companies, across the 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 also the largest re-refiner and recycler of used oil inNorth America and the largest provider of parts washer and related environmental services to commercial, industrial and automotive customers inNorth America . During the first quarter of 2021, we reorganized our Safety-Kleen business. The collection services for waste oil, used oil filters, antifreeze and related items and bulk blended oil sales operations were combined with the Safety-Kleen Oil business to form the Safety-Kleen Sustainability Solutions business. Under this structure, Safety-Kleen Sustainability Solutions encompasses both sides of the spread we manage in our re-refinery business, and we expect this change to drive additional growth in our sustainable lubricant products and related services. Concurrently with this change, we consolidated the Safety-Kleen Environmental branches' core offerings, including containerized waste, parts washer and vacuum services, into the legacyClean Harbors Environmental Services sales and service operations. We expect this change to foster enhanced cross-selling opportunities within the environmental businesses and increase market presence with small quantity generators of hazardous waste. In restructuring the operations of the Company in this manner, the information that the chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance was changed to conform to the new operating structure of the business. As a result, we reevaluated the identification of our operating segments and concluded that, starting in the first quarter of 2021, Environmental Services and Safety-Kleen Sustainability Solutions are our operating segments and reportable segments, with the operations not managed through the operating segments described above continuing to be reported as Corporate Items. The amounts presented for the three and six months endedJune 30, 2020 have been recast to reflect the impact of such changes. 21
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Performance of our segments is evaluated on several factors of which the primary
financial measure is Adjusted EBITDA. Beginning in the first quarter of 2021, we
revised our calculation of reported Adjusted EBITDA to add back stock-based
compensation, a non-cash item, to other charges which are added back to net
income determined in accordance with generally accepted accounting principles
("GAAP"). See the Adjusted EBITDA section below for additional details regarding
this change and our consideration of this metric. Prior period amounts have been
recast to conform to this presentation.
The following is a discussion of how management evaluates its segments in
regards to other factors including key performance indicators that management
uses to assess the segments' results, as well as certain macroeconomic trends
and influences that impact each reportable segment:
•Environmental Services - Environmental Services segment results are predicated
upon the demand by our customers for waste services, waste volumes generated by
such services and project work for which waste handling and/or disposal is
required. Environmental Services results are also impacted by the demand for
planned and unplanned industrial related cleaning and maintenance services at
customer sites, environmental cleanup services on a scheduled or emergency
basis, including response to national events such as major chemical spills,
natural disasters, or other events where immediate and specialized services are
required. As a result of the Coronavirus ("COVID-19") pandemic, the business saw
increased demand for response services relative to contagion disinfection,
decontamination and disposal in 2020 and into 2021. With the addition of the
Safety-Kleen core service offerings, including containerized waste disposal,
parts washer and vacuum services, the Environmental Services results are further
driven by the volumes of waste collected from these customers, the overall
number of parts washers placed at customer sites and the demand for and
frequency of other offered services. In managing the business and evaluating
performance, management tracks the volumes and mix of waste handled and disposed
of or recycled, generally through our owned facilities, the utilization rates of
our incinerators, equipment and workforce, including billable hours, and number
of parts washer services performed, among other key metrics. Levels of activity
and ultimate performance associated with this segment can be impacted by several
factors including overall U.S. GDP, U.S. industrial production, economic
conditions in the automotive, chemical, manufacturing and other industrial
markets, weather conditions, efficiency of our operations, technology, changing
regulations, competition, market pricing of our services and the management of
our related operating costs.
•Safety-Kleen Sustainability Solutions - Safety-Kleen Sustainability Solutions
segment results are impacted by our customers' demand for high-quality,
environmentally responsible recycled oil products and their demand for our
related service offerings and products. Safety-Kleen Sustainability Solutions
offers high quality recycled base and blended oil products to end users
including fleet customers, distributors and manufacturers of oil products.
Segment results are impacted by overall demand as well as product mix as it
relates to these oil products. Segment results are also 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 the Clean Harbors'
recycling and disposal network. In operating the business and evaluating
performance, management tracks the volumes and relative percentages of base and
blended oil sales along with various pricing metrics associated with the
commodity driven margin. Management also tracks the volumes and pricing of used
oil and automotive fluid collections. Levels of activity and ultimate
performance associated with this segment can be impacted by economic conditions
in the automotive services and manufacturing markets, efficiency of our
operations, technology, weather conditions, changing regulations, competition
and the management of our related operating costs. Costs incurred in connection
with the collection of used oil and other raw materials associated with the
segment's oil related products can also be volatile. The overall market price of
oil and regulations that change the possible usage of used oil, including the
International 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.
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Highlights
Total revenues for the three and six months endedJune 30, 2021 were$926.5 million and$1,734.6 million , compared with$710.0 million and$1,568.6 million for the three and six months endedJune 30, 2020 . Prior year operations were negatively affected by the impact of the COVID-19 pandemic. In the three and six months endedJune 30, 2021 , our Environmental Services segment direct revenues increased 18.2% and 4.6% from the comparable periods in 2020. Current period results were driven primarily by greater volumes of higher value waste streams at our incinerators and higher demand throughout most of our portfolio of services, most predominantly our industrial services operations, partially offset by lower demand for our COVID-19 decontamination services. In the three and six months endedJune 30, 2021 , our Safety-Kleen Sustainability Solutions segment direct revenues increased 107.8% and 41.9% from the comparable periods in 2020 due to increased pricing and increased demand for base and blended oil which increased volumes of products sold. The fluctuation of the Canadian dollar positively impacted our consolidated revenues by$16.2 million and$22.1 million in the three and six months endedJune 30, 2021 , respectively. In the three and six months endedJune 30, 2021 , costs have increased in both the Environmental Services and Safety-Kleen Sustainability Solutions segments when comparing to the prior year given the increase in business levels and revenue mix combined with lower benefits from the Government Programs. Despite the increased costs seen in the current period, gross margins for the Environmental Services and Safety-Kleen Sustainability Solutions segments have improved from pre-pandemic levels. We reported income from operations for the three and six months endedJune 30, 2021 of$110.0 million and$160.9 million compared with$60.2 million and$105.7 million in the three and six months endedJune 30, 2020 , and net income for the three and six months endedJune 30, 2021 of$67.1 million and$88.8 million compared with net income of$29.0 million and$40.6 million in the three and six months endedJune 30, 2020 . Adjusted EBITDA, which is the primary financial measure by which our segments are evaluated, increased 35.8% to$187.8 million in the three months endedJune 30, 2021 from$138.3 million in the three months endedJune 30, 2020 and increased 20.1% to$317.2 million in the six months endedJune 30, 2021 from$264.1 million in the six months endedJune 30, 2020 . This improved profitability was primarily driven by the mix of product sales and strong spread management in the Safety-Kleen Sustainability Solutions segment, as well as continued cost management. 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 six months endedJune 30, 2021 was$265.4 million , an increase of$91.9 million from the comparable period in 2020. Adjusted free cash flow, which management uses to measure our financial strength and ability to generate cash, was$176.9 million in the six months endedJune 30, 2021 , compared to$71.9 million in the comparable period of 2020. These increased levels of cash flows are the result of greater levels of operating income and improved working capital management in 2021. Additional information, including a reconciliation of adjusted free cash flow to net cash from operating activities, appears below under the heading "Adjusted Free Cash Flow." Impact of COVID-19 During the second quarter of 2021, we continued to see incremental improvements in the demand for our products and services consistent with the lifting of travel and other government restrictions and the ongoing national and state vaccination efforts. Over the last year, our business has been slowly recovering after the sharp decline in the second quarter of 2020. As we exited the second quarter of 2021, both quarter to date and year to date direct revenues and Adjusted EBITDA were comparable or higher than pre-pandemic levels for each of our segments. In the first six months of 2021, we recognized$39.7 million of direct revenues specifically related to COVID-19 disinfecting, decontamination and disposal related emergency response services. We began to see slower demand in the second quarter of 2021 when we recognized direct revenues of$11.5 million for such work. Although we are uncertain as to the exact level of such services throughout the remainder of 2021, we expect to continue to see slowing demand for these COVID-19 response services as vaccination levels continue to increase. The potential impact of COVID-19 variants (e.g. the Delta variant) remains unknown at this time, however could impact both our business recovery and the demand for our COVID-19 response services. Impact of Government Programs In 2020, the Governments ofCanada andthe United States announced theCanada Emergency Wage Subsidy ("CEWS") and the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), respectively, in response to the widespread economic impact of the COVID-19 pandemic (collectively referred to as "Government Programs"). Both Government Programs have been extended into 2021 and as such, management has continued to consider and analyze the Company's eligibility under such 23
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Government Programs. During 2021 the Company recognized certain employee wage subsidies under the CEWS and, to a lesser extent, employee retention credits under the CARES Act. We do not anticipate any future significant benefits from the Government Programs given the current status of our operations. The table below summarizes the benefit of the Government Programs recorded in the statement of operations for the three and six months endedJune 30, 2021 andJune 30, 2020 (in thousands): Three Months Ended Three Months Ended June 30, 2021 June 30, 2020 Safety-Kleen Safety-Kleen Environmental Sustainability Environmental Sustainability Services Solutions Corporate Items Total Services Solutions Corporate Items Total Cost of revenues $ 3,369 $ 256 $ 56$ 3,681 $ 12,950 $ 911 $ 415$ 14,276 Selling, general and administrative expenses 1,032 219 263 1,514 6,743 931 1,449 9,123 Total $ 4,401 $ 475 $ 319$ 5,195 $ 19,693 $ 1,842 $ 1,864$ 23,399 Six Months Ended Six Months Ended June 30, 2021 June 30, 2020 Safety-Kleen Safety-Kleen Environmental Sustainability Environmental Sustainability Services Solutions Corporate Items Total Services Solutions Corporate Items Total Cost of revenues $ 7,136 $ 725 $ 80$ 7,941 $ 12,950 $ 911 $ 415$ 14,276 Selling, general and administrative expenses 1,779 545 343 2,667 6,743 931 1,449 9,123 Total $ 8,915 $ 1,270 $ 423$ 10,608 $ 19,693 $ 1,842 $ 1,864$ 23,399 Proposed acquisition of HydroChemPSC OnAugust 3, 2021 , we signed a definitive agreement to acquire HydroChemPSC for$1.25 billion ("HPC Acquisition") in cash consideration subject to customary purchase price adjustments. HPC is a leadingU.S. provider of industrial cleaning, specialty maintenance and utility services. The HPC Acquisition is subject to approval by regulators, as well as other customary closing conditions, and is expected to close later this year. HPC serves customers across a broad range of markets and provides solutions to customers focused on cleaning, maintenance and environmental compliance of essential, mission critical equipment and infrastructure. HPC has more than 5,000 employees, over 240 service locations acrossthe United States and has a fleet of specialized equipment and vehicles as well as technology which will enhance and add to the assets of the Environmental Services segment. Given the size and complexity of the HPC Acquisition and the required regulatory approval, we cannot definitively state when the HPC Acquisition will be completed. We currently anticipate that the HPC Acquisition will be completed later in 2021, however, consummation will be subject to certain conditions, including, among others, expiration or termination of the applicable Hart-Scott-Rodino antitrust waiting periods. The terms and conditions of any authorization or consent that is granted, if any, may impose requirements, limitations or restrictions that may materially delay the completion of the HPC Acquisition. We expect to incur significant costs in connection with the HPC Acquisition, including costs related to financing the HPC Acquisition and ultimate integration of the business. We will be subject to capital debt market risks in connection with our plan to finance the portion of the purchase price above the amount of available cash which we plan to use. We have a financing commitment for term loan debt financing fromGoldman Sachs Bank USA . Upon completion of the HPC Acquisition, successful integration of the HPC business and operations into our business will be necessary to realize the anticipated benefits from combining HPC withClean Harbors . We believe that the combined business will benefit from incremental waste volumes throughClean Harbors' network of facilities, greater customer relationships and cross selling opportunities and synergistic opportunities within customer service, transportation, branch network, asset rentals and vehicle and tank refurbishment among others. The success of the HPC Acquisition will depend, in part, on integration of the financial reporting systems and controls and the focused attention (time and resources) of bothClean Harbors' and HPC's management teams. 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 six months endedJune 30, 2021 andJune 30, 2020 (in thousands, except percentages): Summary of Operations For the Three Months Ended For the Six Months Ended $ % June 30, 2021 June 30, 2020 Change Change June 30, 2021 June 30, 2020 $ Change % Change Direct Revenues(1): Environmental Services$ 724,097 $ 612,594 $ 111,503 18.2%$ 1,378,699 $ 1,317,786 $ 60,913 4.6% Safety-Kleen Sustainability Solutions 202,282 97,350 104,932 107.8 355,749 250,631 105,118 41.9 Corporate Items 79 56 23 N/M 158 146 12 N/M Total 926,458 710,000 216,458 30.5 1,734,606 1,568,563 166,043 10.6 Cost of Revenues(2): Environmental Services 487,257 385,113 102,144 26.5 938,512 876,234 62,278 7.1 Safety-Kleen Sustainability Solutions 123,025 76,318 46,707 61.2 231,401 190,146 41,255 21.7 Corporate Items 7,604 9,250 (1,646) N/M 8,509 10,967 (2,458) N/M Total 617,886 470,681 147,205 31.3 1,178,422 1,077,347 101,075 9.4 Selling, General & Administrative Expenses: Environmental Services 60,799 51,240 9,559 18.7 123,892 119,453 4,439 3.7 Safety-Kleen Sustainability Solutions 15,943 12,601 3,342 26.5 29,402 27,850 1,552 5.6 Corporate Items 47,364 39,998 7,366 18.4 92,453 85,843 6,610 7.7 Total 124,106 103,839 20,267 19.5 245,747 233,146 12,601 5.4 Adjusted EBITDA: Environmental Services 176,041 176,241 (200) (0.1) 316,295 322,099 (5,804) (1.8) Safety-Kleen Sustainability Solutions 63,314 8,431 54,883 651.0 94,946 32,635 62,311 190.9 Corporate Items (51,584) (46,406) (5,178) (11.2) (94,019) (90,587) (3,432) (3.8) Total$ 187,771 $ 138,266 $ 49,505 35.8%$ 317,222 $
264,147$ 53,075 20.1% _____________________ 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 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, 2021 over 2020 June 30, 2021 over 2020 (in thousands, except $ % $ % percentages) 2021 2020 Change Change 2021 2020
Change Change Direct revenues$ 724,097 $ 612,594 $ 111,503 18.2 %$ 1,378,699 $ 1,317,786 $ 60,913 4.6 % Environmental Services direct revenues for the three months endedJune 30, 2021 increased$111.5 million from the comparable period in 2020 driven primarily by higher demand throughout our portfolio of services and greater volumes of higher value waste streams at our incinerators and landfills, partially offset by lower demand for our COVID-19 decontamination services. Direct revenues related to our industrial services increased$49.6 million predominately due to increased demand for industrial cleanings as overall economic activity began to improve and industrial cleaning services previously delayed due to the impacts of COVID-19 were executed combined with a renewed sales strategy for the business. Demand for our base field services, excluding any COVID-19 decontamination services, increased approximately$18.2 million from the same period in 2020. Direct revenues for the Safety-Kleen core service offerings increased$14.0 million from the comparable period in 2020 due to improved pricing and higher demand for these containerized waste, vacuum and parts washer services. Direct revenues at our incinerators increased$12.8 million when comparing the three months endedJune 30, 2021 to the same period in 2020, resulting from greater volumes of higher value waste streams. Overall, incinerator utilization was 87% which was consistent with the same period in 2020 and illustrates the shifting of mix to higher value waste streams. Higher pricing and volumes at our landfill facilities increased direct revenues by$3.9 million . In the three months endedJune 30, 2021 , lower demand for our COVID-19 decontamination services resulted in a direct revenue decrease of$38.5 million , partially offsetting all of the increases noted above. The Canadian operations of the Environmental Services segment were positively impacted by$12.9 million due to foreign currency translation. Environmental Services direct revenues for the six months endedJune 30, 2021 increased$60.9 million from the comparable period in 2020 driven primarily by returning demand for our services, specifically in the three months endedJune 30, 2021 as compared to the same period in the prior year. Demand for industrial services increased direct revenues by$19.2 million from the comparable period in the prior year, as overall economic activity began to improve and industrial cleaning services delayed due to the impacts of COVID-19 were executed combined with a renewed sales strategy for the business. Utilization at the incinerators for the six months endedJune 30, 2021 was 83% as compared to 86% in the prior year. This lower utilization was generally the result of more down days due to significant weather events which occurred during the first quarter of 2021. Despite the lower utilization, greater volumes of higher value waste streams drove a$9.0 million increase in direct revenues at our incinerator facilities. Direct revenues at our landfill facilities increased$2.4 million from the comparable period in 2020 due to higher value waste streams overcoming lower volumes. In the six months endedJune 30, 2021 , direct revenues from COVID-19 decontamination services decreased by$20.3 million , partially offsetting the increases noted above, due to lower demand for such services, specifically in the second quarter of 2021. Also impacting the year over year change in direct revenues within this segment was the positive impact of foreign currency translation on our Canadian operations of$17.6 million . Safety-Kleen Sustainability Solutions For the Three Months Ended For the Six Months Ended June 30, 2021 over 2020 June 30, 2021 over 2020 (in thousands, except $ % $ % percentages) 2021 2020 Change Change 2021 2020
Change Change Direct revenues$ 202,282 $ 97,350 $ 104,932 107.8 %$ 355,749 $ 250,631 $ 105,118 41.9 % Safety-Kleen Sustainability Solutions direct revenues for the three months endedJune 30, 2021 increased$104.9 million from the comparable period in 2020. A number of price increases experienced throughout the quarter and increased demand and 26
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resulting volumes of product sold drove an$84.7 million increase in revenue from base oil sales and a$17.5 million increase revenue from blended oil sales. Revenues from contract blending and packaging increased$10.0 million in the three months endedJune 30, 2021 when compared to the three months endedJune 30, 2021 as well. Pricing increases in recycled fuel oil and refinery byproducts increased revenues by$4.4 million . Revenues from used oil collection services decreased$11.6 million in the second quarter of 2021, when compared to the second quarter of 2020 due to pricing decreases. The prices charged for used oil collection services are generally correlated with base oil pricing and therefore this pricing decrease was expected in light of the overall oil market conditions. The volume of the used oil collected increased from the prior year. Collection volumes for used oil have nearly rebounded to pre-pandemic levels. Foreign currency translation positively impacted the Canadian operations of Safety-Kleen Sustainability Solutions by$3.3 million . Safety-Kleen Sustainability Solutions direct revenues for the six months endedJune 30, 2021 increased$105.1 million from the comparable period in 2020. Due to the pricing increases and rebounding demand described above relative to the second quarter of 2021, higher pricing and volumes drove a$91.7 million increase in revenue from base oil sales and a$12.2 million increase in revenues from blended oil sales. Revenues from contract blending and packaging increased$11.5 million from the comparable period. As expected in light of the oil market conditions noted above, revenues from used oil collection services decreased$6.9 million due to pricing decreases. Collection volumes for used oil increased during the six months endedJune 30, 2021 when compared to the comparable period in 2020, and have nearly rebounded to pre-pandemic levels. Foreign currency translation positively impacted the Canadian operations of Safety-Kleen Sustainability Solutions by$4.5 million . 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 and expansion 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 Six Months Ended June 30, 2021 over 2020 June 30, 2021 over 2020 (in thousands, except $ % $ % percentages) 2021 2020 Change Change 2021 2020 Change Change
Cost of revenues
26.5 % $ 938,512 $ 876,234 $ 62,278 7.1 %
As a % of Direct revenues 67.3 % 62.9 % 4.4 % 68.1 % 66.5 % 1.6 %
Environmental Services cost of revenues for the three months endedJune 30, 2021 increased$102.1 million from the comparable period in 2020, primarily due to the increase in direct revenues. Cost of revenues as a percentage of direct revenues increased 4.4% from the comparable period in the prior year, in part due to a$9.6 million reduction in benefits recognized under the Government Programs in the second quarter of 2021 as compared to the same period of the prior year. After adjusting for this difference, cost as a percentage of revenues increased 2.8%, primarily due to the mix of services being performed, including lower COVID-19 decontamination services. Overall, labor and benefits related costs increased$37.5 million , equipment and supply costs increased$35.6 million and transportation, disposal, vehicle and fuel related costs increased$18.6 million from the comparable period in 2020. Environmental Services cost of revenues for the six months endedJune 30, 2021 increased$62.3 million from the comparable period in 2020, primarily due to an increase in direct revenues. Cost of revenues as a percentage of direct revenues increased 1.6% from the comparable period in the prior year. Excluding the$5.8 million year over year reduction in benefits recognized under the Government Programs, cost of revenues as a percentage of direct revenues increased 1.1%. Overall, equipment and supply costs increased$19.0 million , labor and benefits related costs increased$17.3 million and transportation, disposal, vehicle and fuel related costs increased$15.4 million . 27
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Safety-Kleen Sustainability Solutions
For the Three Months Ended For the Six Months Ended
June 30, 2021 over 2020 June 30, 2021 over 2020
(in thousands, except $ % $ %
percentages) 2021 2020 Change Change 2021 2020 Change Change
Cost of revenues $ 123,025 $ 76,318 $ 46,707 61.2 % $ 231,401 $ 190,146 $ 41,255 21.7 %
As a % of Direct
revenues 60.8 % 78.4 % (17.6) % 65.0 % 75.9 % (10.9) %
Safety-Kleen Sustainability Solutions cost of revenues for the three months
ended June 30, 2021 increased $46.7 million from the comparable period in 2020
due to the increase in direct revenues. Cost of revenue as a percentage of
direct revenues improved by 17.6% due to production volume efficiencies
generated by our re-refineries, some of which were temporarily closed in the
prior year due to impacts from COVID-19, lower relative spend on oil additives
due to the overall oil product mix and the continuation of the cost management
initiatives implemented in the latter half of 2020. In total, costs of oil
additives and other raw materials increased $25.4 million , transportation,
vehicle and fuel costs increased $11.2 million and labor and benefits related
costs increased $7.7 million .
Safety-Kleen Sustainability Solutions cost of revenues for the six months ended
June 30, 2021 increased $41.3 million from the comparable period in 2020 due to
the increase in direct revenues. Cost of revenue as a percentage of direct
revenues improved by 10.9% for reasons consistent with those noted in the
preceding paragraph. In total, costs of oil additives and other raw materials
increased $23.9 million , transportation, vehicle and fuel costs increased $12.1
million and labor and benefits related costs increased $5.3 million .
Selling, General and Administrative Expenses
We strive to manage our selling, general and administrative ("SG&A") expenses
commensurate with the overall performance of our segments and corresponding
revenue levels. 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 Six Months Ended
June 30, 2021 over 2020 June 30, 2021 over 2020
(in thousands, except $ % $ %
percentages) 2021 2020 Change Change 2021 2020 Change Change
SG&A expenses $ 60,799 $ 51,240 $ 9,559 18.7 % $ 123,892 $ 119,453 $ 4,439 3.7 %
As a % of Direct
revenues 8.4 % 8.4 % - % 9.0 % 9.1 % (0.1) %
Environmental Services SG&A expenses for the three and six months ended June 30,
2021 increased $9.6 million and $4.4 million from the comparable periods in 2020
while remaining consistent as a percentage of direct revenues. For the three and
six months ended June 30, 2020 , reduced benefits recognized under the Government
Programs of $5.7 million and $5.0 million drove the increases in SG&A expenses,
as compared to the relevant period in the prior year. Absent these benefits
recognized under Government Programs, Environmental Services SG&A expenses as a
percentage of revenue remained relatively consistent with the prior year.
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Safety-Kleen Sustainability Solutions
For the Three Months Ended For the Six Months Ended
June 30, 2021 over 2020 June 30, 2021 over 2020
(in thousands, except $ % $ %
percentages) 2021 2020 Change Change 2021 2020 Change Change
SG&A expenses $ 15,943 $ 12,601 $ 3,342 26.5 % $ 29,402 $ 27,850 $ 1,552 5.6 %
As a % of Direct
revenues 7.9 % 12.9 % (5.0) % 8.3 % 11.1 % (2.8) %
Safety-Kleen Sustainability Solutions SG&A expenses for the three and six months
ended June 30, 2021 increased $3.3 million and $1.6 million from the comparable
periods in 2020 primarily attributable to the increases in direct revenues.
Safety-Kleen Sustainability Solutions SG&A expenses as percentage of revenues
improved 5.0% and 2.8%, respectively, due in part, to a $1.8 million change in
an environmental liability estimate for a Superfund site recorded in the second
quarter of 2020 which did not recur in 2021. Absent this nonrecurring item, SG&A
expenses as a percentage of revenues improved 3.2% and 2.1%, respectively,
primarily due to the continuation of cost management initiatives implemented in
the latter half of 2020.
Corporate Items
For the Three Months Ended For the Six Months Ended
June 30, 2021 over 2020 June 30, 2021 over 2020
(in thousands, except $ % $ %
percentages) 2021 2020 Change Change 2021 2020 Change Change SG&A expenses$ 47,364 $ 39,998 $ 7,366 18.4 %$ 92,453 $ 85,843 $ 6,610 7.7 % Corporate Items SG&A expenses for the three months endedJune 30, 2021 increased$7.4 million from the comparable period in 2020. The most significant driver of this increase was$5.2 million of increased labor related costs due to increased variable compensation and$1.2 million of lower benefits recognized from the Government Programs in the three months endedJune 30, 2021 when compared to the three months endedJune 30, 2020 . In addition, information technology costs increased by$2.4 million and fees for mergers and acquisitions, integration and strategic initiatives increased by$2.3 million . Partially offsetting these increases were decreases in bad debt expense of$2.7 million and lower severance costs of$3.0 million . Corporate Items SG&A expenses for the six months endedJune 30, 2021 increased$6.6 million from the comparable period in 2021. The most significant driver of this increase was$8.4 million of increased labor related costs both due to increased variable compensation and lower benefits recognized from the Government Programs in the six months endedJune 30, 2021 when compared to the six months endedJune 30, 2020 . In addition, fees for mergers and acquisitions, integration and strategic initiatives increased by$3.0 million and information technology costs increased$1.8 million . Partially offsetting these increases were decreases in bad debt expense of$4.9 million and marketing expenses of$4.0 million . Adjusted EBITDA Management considers Adjusted EBITDA to be a measurement of performance which provides useful information to both management and investors. Adjusted EBITDA should not be considered an alternative to net income or other measurements under GAAP. Adjusted EBITDA is not calculated identically by all companies and therefore our measurements of Adjusted EBITDA, while defined consistently and in accordance with our historical credit agreement, may not be comparable to similarly titled measures reported by other companies. For the Three Months Ended For the Six Months Ended June 30, 2021 over 2020 June 30, 2021 over 2020 $ % $ % (in thousands, except percentages) 2021 2020 Change Change 2021 2020 Change Change Adjusted EBITDA: Environmental Services$ 176,041 $ 176,241 $ (200) (0.1) %$ 316,295 $ 322,099 $ (5,804) (1.8) % Safety-Kleen Sustainability Solutions 63,314 8,431 54,883 651.0 94,946 32,635 62,311 190.9 Corporate Items (51,584) (46,406) (5,178) (11.2) (94,019) (90,587) (3,432) (3.8) Total$ 187,771 $ 138,266 $ 49,505 35.8 %$ 317,222 $ 264,147 $ 53,075 20.1 %
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,
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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,
2021 2020 2021 2020
Net income $ 67,075 $ 29,023 $ 88,811 $ 40,595
Accretion of environmental liabilities 2,873 2,766 5,826 5,327
Stock-based compensation 3,305 2,786 6,785 6,077
Depreciation and amortization 71,592 72,494 143,755 147,027
Other expense, net 1,480 500 2,708 2,865
Loss on sale of businesses - 184 - 3,258
Interest expense, net of interest income 18,051 18,654 35,969 37,441
Provision for income taxes 23,395 11,859 33,368 21,557
Adjusted EBITDA $ 187,771 $ 138,266 $ 317,222 $ 264,147
As a % of Direct revenues 20.3 % 19.5 % 18.3 % 16.8 %
Beginning in the first quarter of 2021, we revised our calculation of reported
Adjusted EBITDA to add stock-based compensation, a non-cash item, to other
charges which are added back to GAAP net income for purposes of calculating
Adjusted EBITDA. We made this change in order to be more consistent with how
certain of our peer group companies report their non-GAAP results, to align with
how management will evaluate the operating performance of the Company and
performance metrics for certain incentive compensation awards to be issued in
2021, and to be consistent with the definition of "Adjusted EBITDA" now used for
covenant compliance purposes in our outstanding financing agreements as amended
to date. The amount added back each period is expected to match the line item
for stock-based compensation as recorded on the Company's GAAP consolidated
statements of cash flows. In the future, when we report our results, all
relevant prior period Adjusted EBITDA amounts will be recast to provide
comparative information.
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Depreciation and Amortization
For the Three Months Ended For the Six Months Ended
June 30, 2021 over 2020 June 30, 2021 over 2020
(in thousands, except $ % $ %
percentages) 2021 2020 Change Change 2021 2020 Change Change
Depreciation of fixed
assets and amortization
of landfills and finance
leases $ 63,828 $ 63,656 $ 172 0.3 % $ 128,402 $ 129,021 $ (619) (0.5) %
Permits and other
intangibles amortization 7,764 8,838 (1,074) (12.2) 15,353 18,006 (2,653) (14.7)
Total depreciation and
amortization $ 71,592 $ 72,494 $ (902) (1.2) % $ 143,755 $ 147,027 $ (3,272) (2.2) %
Depreciation and amortization for the three and six months ended June 30, 2021
decreased from the comparable periods in 2020 primarily due to certain assets
becoming fully amortized.
Provision for Income Taxes
For the Three Months Ended For the Six Months Ended
June 30, 2021 over 2020 June 30, 2021 over 2020
(in thousands, except $ % $ %
percentages) 2021 2020 Change Change 2021 2020 Change Change
Provision for income
taxes $ 23,395 $ 11,859 $ 11,536 97.3 % $ 33,368 $ 21,557 $ 11,811 54.8 %
Effective tax rate 25.9 % 29.0 % (3.1) % 27.3 % 34.7 % (7.4) %
The provision for income taxes for the three and six months ended June 30, 2021
increased $11.5 million and $11.8 million , respectively, from the comparable
periods in 2020, due to an increase in income before provision for income taxes.
Our effective tax rates for the three and six months ended June 30, 2021
decreased by 3.1% and 7.4%, respectively, from the comparable periods in 2020.
In recent years, we have incurred losses in certain Canadian operations and have
not recognized tax benefits related to those losses. In the first three months
of 2021, certain Canadian operations with valuation allowances generated losses
of approximately $5.9 million for which no tax benefit was recognized. Through
June 30, 2021 , these certain Canadian operations are profitable, primarily due
to the employee wage subsidies received in accordance with CEWS and increased
operational performance. As a result of the positive second quarter earnings
related to these certain Canadian operations and therefore the absence of
unbenefited tax losses relative to these Canadian operations, the Company posted
an overall lower effective rate of 25.9% for the three months. Additionally,
this reduction in unbenefited losses in the six months ended 2021 is also
driving the 7.4% improvement in the effective tax rate when compared to 2020.
Liquidity and Capital Resources
Six Months Ended
June 30,
(in thousands) 2021 2020
Net cash from operating activities $ 265,432 $ 173,486
Net cash used in investing activities (132,340) (141,685)
Net cash (used in) from financing activities (60,534) 47,017
Net cash from operating activities Net cash from operating activities for the six months endedJune 30, 2021 was$265.4 million , an increase of$91.9 million from the comparable period in 2020. The increase in operating cash flows from the comparable period of 2020 resulted from greater levels of operating income and improved working capital management in 2021 despite a$31.0 million increase in the amount of cash taxes paid in the six months endedJune 30, 2021 when compared to the six months endedJune 30, 2020 . This increase in cash taxes was primarily due to the deferral of federal tax payments from the second quarter of 2020 to the third quarter of 2020 as allowable under COVID relief guidance from the Internal Revenue Service in 2020. 31
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Net cash used in investing activities Net cash used in investing activities for the six months endedJune 30, 2021 was$132.3 million , a decrease of$9.3 million from the comparable period in 2020. The decrease in net cash used in investing activities was most notably due to a$33.7 million reduction in capital expenditure levels in 2021. Capital expenditures for the six months endedJune 30, 2020 included the$21.1 million nonrecurring purchase of our corporate headquarters. Offsetting this decrease in capital expenditures is an increase of$14.1 million in cash paid for acquisitions and a reduction of$7.8 million in proceeds from the sale of businesses. Net cash (used in) from financing activities Net cash used in financing activities for the six months endedJune 30, 2021 was$60.5 million , compared to net cash from financing activities of$47.0 million for the comparable period in 2020. This decrease of$107.6 million was mostly due to$75.0 million of net borrowings from our revolving credit facility during the first six months of 2020 and an increase in repurchases of common stock of$28.1 million during the first six months of 2021. For additional information regarding our financing activities, see Note 11, "Financing Arrangements," to the accompanying unaudited consolidated financial statements. Adjusted Free Cash Flow Management considers adjusted free cash flow to be a measurement of liquidity which provides useful information to both management, creditors and investors about our financial strength and our ability to generate cash. Additionally, adjusted free cash flow is a metric on which a portion of management incentive compensation is based. We define adjusted free cash flow as net cash from operating activities, less additions to property, plant and equipment plus proceeds from sales or disposals of fixed assets. We exclude cash impacts of items derived from non-operating activities such as taxes paid in connection with divestitures and have also excluded cash paid in connection with the purchase of our corporate headquarters and certain capital improvements to the site as these expenditures are considered one-time in nature. Adjusted free cash flow should not be considered an alternative to net cash from operating activities or other measurements under GAAP. Adjusted free cash flow is not calculated identically by all companies, and therefore our measurements of adjusted free cash flow may not be comparable to similarly titled measures reported by other companies. The following is a reconciliation of net cash from operating activities to adjusted free cash flow for the following periods (in thousands): Six Months Ended June 30, 2021 2020 Net cash from operating activities$ 265,432 $ 173,486 Additions to property, plant and equipment (91,988)
(125,721)
Purchase and capital improvements of corporate headquarters -
21,080
Proceeds from sale and disposal of fixed assets 3,479 3,101 Adjusted free cash flow$ 176,923 $ 71,946 Summary of Capital Resources including Financing Arrangements AtJune 30, 2021 , cash and cash equivalents and marketable securities totaled$666.3 million , compared to$571.0 million atDecember 31, 2020 . AtJune 30, 2021 , cash and cash equivalents held by our foreign subsidiaries totaled$135.5 million . The cash and cash equivalents and marketable securities balance for ourU.S. operations was$530.8 million atJune 30, 2021 , and ourU.S. operations had net operating cash flows of$268.0 million for the six months endedJune 30, 2021 . Additionally, we have a$400.0 million revolving credit facility of which, as ofJune 30, 2021 , approximately$287.3 million was available to borrow and letters of credit under the credit facility in the amount of$112.7 million were outstanding. Based on the above and on our current plans, we believe that our operations have and will continue to have adequate financial resources to satisfy current liquidity needs. Financing arrangements are discussed in Note 11, "Financing Arrangements," to our unaudited consolidated financial statements included in this report. We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our primary ongoing cash requirements will be to fund operations, capital expenditures, interest payments and investments in line with our business strategy. We believe our future operating cash flows will be sufficient to meet our future operating and internal investing cash needs. Furthermore, our existing cash balance and the availability of borrowings under our revolving credit facility provide additional potential sources of liquidity should they be required. We continue to monitor our debt instruments and evaluate opportunities where it may be beneficial to refinance or reallocate the portfolio. 32
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OnAugust 3, 2021 , we signed a definitive agreement to acquire HydroChemPSC, a leadingU.S. provider of industrial cleaning, specialty maintenance and utility services, for$1.25 billion . We expect to fund the HPC Acquisition with cash on hand and long-term debt and as such we contemporaneously entered into a commitment letter withGoldman Sachs Bank USA to borrow up to$1.0 billion of term loan debt to fund the HPC Acquisition. We anticipate that our future cash flows provided by operating activities will provide the necessary funds on a short and long term basis to meet our operating cash requirements, including servicing the incremental debt used to fund the HPC Acquisition. As ofJune 30, 2021 , we were in compliance with the covenants of all our debt agreements, and we believe it is reasonably likely that we will continue to meet such covenants. Common Stock Repurchases Pursuant to Publicly Announced PlanThe Company's common stock repurchases are made pursuant to the previously authorized board approved plan to repurchase up to$600.0 million of the Company's common stock. During the three and six months endedJune 30, 2021 the Company repurchased and retired a total of approximately 0.2 million and 0.5 million, respectively, of the Company's common stock for total expenditures of approximately$18.9 million and$45.4 million , respectively. During the three months endedJune 30, 2020 , the Company did not repurchase any shares of its common stock. During the six months endedJune 30, 2020 , the Company repurchased and retired a total of approximately 0.3 million of the Company's common stock for total costs of approximately$17.3 million . ThroughJune 30, 2021 , the Company has repurchased and retired a total of approximately 7.6 million shares of its common stock for approximately$435.6 million under this program. As ofJune 30, 2021 , an additional$164.4 million remained available for repurchase of shares under this program. Environmental Liabilities December 31, (in thousands, except percentages) June 30, 2021 2020 Change % Change
Closure and post-closure liabilities
$ 5,568 6.3 % Remedial liabilities 112,454 114,813 (2,359) (2.1)
Total environmental liabilities
$ 3,209 1.6 % Total environmental liabilities as ofJune 30, 2021 were$205.9 million , an increase of$3.2 million compared toDecember 31, 2020 , primarily due to accretion of$5.8 million , new liabilities, including those assumed in acquisitions, of$1.8 million and changes in estimates recorded to the consolidated balance sheet of$1.1 million , partially offset by expenditures of$6.6 million . We anticipate our environmental liabilities, substantially all of which we assumed in connection with our acquisitions, will be payable over many years and that cash flow from operations will generally be sufficient to fund the payment of such liabilities when required. Events not anticipated (such as future changes in environmental laws and regulations) could require that such payments be made earlier or in greater amounts than currently anticipated, which could adversely affect our results of operations, cash flow and financial condition. Conversely, the development of new treatment technologies or other circumstances may arise in the future which may reduce amounts ultimately paid. Capital Expenditures Capital expenditures in the first six months of 2021 were$92.0 million as compared to$125.7 million in the same period of 2020. This decrease was primarily due to the nonrecurring purchase of our corporate headquarters in January of 2020. We anticipate that 2021 capital spending, net of disposals, will be in the range of$190.0 million to$210.0 million . We are currently in the process of permitting a new incinerator at ourKimball, Nebraska facility, which we intend to construct with an estimated completion date in early 2025. We are endeavoring upon this project in response to continued increasing demand for disposal outlets of regulated waste materials and we expect the new incinerator to have an annual practical capacity of approximately 70,000 tons. 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 six months of 2021 to the information provided under the heading "Critical Accounting Policies and Estimates" included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 33
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Goodwill .Goodwill is reviewed for impairment annually as ofDecember 31 or when events or changes in the business environment indicate the carrying value of a reporting unit may exceed its fair value. This review is performed by comparing the fair value of each reporting unit to its carrying value, including goodwill. If the fair value is less than the carrying amount, a loss is recorded for the excess of the carrying value over the fair value up to the carrying amount of goodwill. We conducted our annual impairment test of goodwill for all of our reporting units to which goodwill is allocated as ofDecember 31, 2020 and determined that no adjustment to the carrying value of goodwill for any reporting unit was then necessary. As a result of changes in our organizational structure and resulting change in our operating segments discussed above, we concluded that, for purposes of reviewing for potential goodwill impairment, we now have three reporting units. The Environmental Services operating segment has two reporting units consisting of (i) Environmental Sales and Service which includes the legacy Environmental Sales and Service reporting unit and certain operations previously included within Safety-Kleen Environmental Services including the core service offerings of containerized waste, parts washer and vacuum services and (ii) Environmental Facilities, unchanged from prior year. The Safety-Kleen Sustainability Solutions operating segment is a single reporting unit which includes the legacy Safety-Kleen Oil reporting unit and the remaining operations of the legacy Safety-Kleen Environmental Services reporting unit primarily consisting of collection services for waste oil, anti-freeze and used oil filters as well as the sale of bulk blended re-refined oil and other automotive related finished fluid products. The Company allocated goodwill to the newly identified reporting units using a relative fair value approach. In addition, the Company completed an assessment of any potential goodwill impairment for all reporting units immediately prior and subsequent to the reallocation and determined that no impairment existed.
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