CLEAN HARBORS INC - Quarter Report: 2023 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||||
| FOR THE QUARTERLY PERIOD ENDED | MARCH 31, 2023 | |||||||||||||
| OR | ||||||||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||||
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-34223
_______________________
CLEAN HARBORS, INC.
(Exact name of registrant as specified in its charter)
| Massachusetts | 04-2997780 | |||||||||||||||||||||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | |||||||||||||||||||||||||
| 42 Longwater Drive | Norwell | MA | 02061-9149 | |||||||||||||||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||||||||||||||||||||
Registrant’s Telephone Number, Including area code: (781) 792-5000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.01 par value | CLH | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at April 28, 2023 was 54,104,121.
CLEAN HARBORS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| Page No. | |||||
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
| March 31, 2023 | December 31, 2022 | ||||||||||
| ASSETS | (unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 304,307 | $ | 492,603 | |||||||
| Short-term marketable securities | 71,818 | 62,033 | |||||||||
Accounts receivable, net of allowances aggregating $43,850 and $45,253, respectively | 963,659 | 964,603 | |||||||||
| Unbilled accounts receivable | 137,507 | 107,010 | |||||||||
| Inventories and supplies | 322,386 | 324,994 | |||||||||
| Prepaid expenses and other current assets | 103,370 | 82,518 | |||||||||
| Total current assets | 1,903,047 | 2,033,761 | |||||||||
| Property, plant and equipment, net | 2,027,513 | 1,980,302 | |||||||||
| Other assets: | |||||||||||
| Operating lease right-of-use assets | 167,144 | 166,181 | |||||||||
| Goodwill | 1,287,416 | 1,246,878 | |||||||||
| Permits and other intangibles, net | 636,523 | 620,782 | |||||||||
| Other | 62,365 | 81,803 | |||||||||
| Total other assets | 2,153,448 | 2,115,644 | |||||||||
| Total assets | $ | 6,084,008 | $ | 6,129,707 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | 10,000 | $ | 10,000 | |||||||
| Accounts payable | 427,480 | 446,629 | |||||||||
| Deferred revenue | 101,336 | 94,094 | |||||||||
| Accrued expenses and other current liabilities | 313,916 | 396,716 | |||||||||
| Current portion of closure, post-closure and remedial liabilities | 22,780 | 23,123 | |||||||||
| Current portion of operating lease liabilities | 51,325 | 49,532 | |||||||||
| Total current liabilities | 926,837 | 1,020,094 | |||||||||
| Other liabilities: | |||||||||||
Closure and post-closure liabilities, less current portion of $12,239 and $13,205, respectively | 109,372 | 105,596 | |||||||||
Remedial liabilities, less current portion of $10,541 and $9,918, respectively | 103,800 | 106,372 | |||||||||
| Long-term debt, less current portion | 2,409,654 | 2,414,828 | |||||||||
| Operating lease liabilities, less current portion | 118,074 | 119,259 | |||||||||
| Deferred tax liabilities | 344,333 | 350,389 | |||||||||
| Other long-term liabilities | 91,894 | 90,847 | |||||||||
| Total other liabilities | 3,177,127 | 3,187,291 | |||||||||
| Commitments and contingent liabilities (See Note 15) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $0.01 par value: | |||||||||||
Authorized 80,000,000 shares; issued and outstanding 54,092,240 and 54,064,797 shares, respectively | 541 | 541 | |||||||||
| Additional paid-in capital | 503,907 | 504,240 | |||||||||
| Accumulated other comprehensive loss | (181,527) | (167,181) | |||||||||
| Accumulated earnings | 1,657,123 | 1,584,722 | |||||||||
| Total stockholders’ equity | 1,980,044 | 1,922,322 | |||||||||
| Total liabilities and stockholders’ equity | $ | 6,084,008 | $ | 6,129,707 | |||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1
CLEAN HARBORS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| Three Months Ended | ||||||||||||||
| March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||
| Service revenues | $ | 1,053,233 | $ | 942,061 | ||||||||||
| Product revenues | 254,154 | 227,048 | ||||||||||||
| Total revenues | 1,307,387 | 1,169,109 | ||||||||||||
| Cost of revenues: (exclusive of items shown separately below) | ||||||||||||||
| Service revenues | 751,595 | 693,424 | ||||||||||||
| Product revenues | 179,919 | 149,965 | ||||||||||||
| Total cost of revenues | 931,514 | 843,389 | ||||||||||||
| Selling, general and administrative expenses | 166,753 | 151,173 | ||||||||||||
| Accretion of environmental liabilities | 3,407 | 3,156 | ||||||||||||
| Depreciation and amortization | 84,758 | 84,298 | ||||||||||||
| Income from operations | 120,955 | 87,093 | ||||||||||||
| Other income, net | 116 | 704 | ||||||||||||
| Loss on early extinguishment of debt | (2,362) | — | ||||||||||||
Interest expense, net of interest income of $2,955 and $493, respectively | (20,632) | (25,017) | ||||||||||||
| Income before provision for income taxes | 98,077 | 62,780 | ||||||||||||
| Provision for income taxes | 25,676 | 17,466 | ||||||||||||
| Net income | $ | 72,401 | $ | 45,314 | ||||||||||
| Earnings per share: | ||||||||||||||
| Basic | $ | 1.34 | $ | 0.83 | ||||||||||
| Diluted | $ | 1.33 | $ | 0.83 | ||||||||||
| Shares used to compute earnings per share - Basic | 54,076 | 54,408 | ||||||||||||
| Shares used to compute earnings per share - Diluted | 54,404 | 54,672 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
CLEAN HARBORS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Three Months Ended | ||||||||||||||
| March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Net income | $ | 72,401 | $ | 45,314 | ||||||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||||
| Unrealized gain (loss) on available-for-sale securities | 174 | (528) | ||||||||||||
| Unrealized (loss) gain on fair value of interest rate hedges | (4,829) | 24,681 | ||||||||||||
| Reclassification adjustment for interest rate hedge amounts realized in net income | (4,124) | 3,194 | ||||||||||||
| Reclassification adjustment for settlement of interest rate hedges | (5,905) | — | ||||||||||||
| Unfunded pension liability | — | (10) | ||||||||||||
| Foreign currency translation adjustments | 338 | 6,512 | ||||||||||||
| Other comprehensive (loss) income, net of tax | (14,346) | 33,849 | ||||||||||||
| Comprehensive income | $ | 58,055 | $ | 79,163 | ||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
CLEAN HARBORS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from (used in) operating activities: | |||||||||||
| Net income | $ | 72,401 | $ | 45,314 | |||||||
| Adjustments to reconcile net income to net cash from (used in) operating activities: | |||||||||||
| Depreciation and amortization | 84,758 | 84,298 | |||||||||
| Allowance for doubtful accounts | 1,398 | 3,619 | |||||||||
| Amortization of deferred financing costs and debt discount | 1,354 | 1,561 | |||||||||
| Accretion of environmental liabilities | 3,407 | 3,156 | |||||||||
| Changes in environmental liability estimates | 683 | 312 | |||||||||
| Deferred income taxes | (363) | 2,226 | |||||||||
| Other income, net | (116) | (704) | |||||||||
| Stock-based compensation | 6,018 | 5,712 | |||||||||
| Loss on early extinguishment of debt | 2,362 | — | |||||||||
| Environmental expenditures | (8,348) | (3,615) | |||||||||
| Changes in assets and liabilities, net of acquisitions: | |||||||||||
| Accounts receivable and unbilled accounts receivable | (5,030) | (138,690) | |||||||||
| Inventories and supplies | 2,758 | (13,610) | |||||||||
| Other current and non-current assets | (17,328) | (32,924) | |||||||||
| Accounts payable | (21,801) | 43,001 | |||||||||
| Other current and long-term liabilities | (94,145) | (38,285) | |||||||||
| Net cash from (used in) operating activities | 28,008 | (38,629) | |||||||||
| Cash flows used in investing activities: | |||||||||||
| Additions to property, plant and equipment | (81,686) | (70,308) | |||||||||
| Proceeds from sale and disposal of fixed assets | 1,855 | 1,320 | |||||||||
| Acquisitions, net of cash acquired | (108,533) | 5,000 | |||||||||
| Additions to intangible assets including costs to obtain or renew permits | (333) | (321) | |||||||||
| Purchases of available-for-sale securities | (39,037) | (5,002) | |||||||||
| Proceeds from sale of available-for-sale securities | 29,800 | 10,450 | |||||||||
| Net cash used in investing activities | (197,934) | (58,861) | |||||||||
| Cash flows used in financing activities: | |||||||||||
| Change in uncashed checks | 164 | (2,295) | |||||||||
| Tax payments related to withholdings on vested restricted stock | (3,351) | (1,831) | |||||||||
| Repurchases of common stock | (3,000) | (3,694) | |||||||||
| Deferred financing costs paid | (6,094) | (291) | |||||||||
| Payments on finance leases | (3,689) | (3,585) | |||||||||
| Principal payments on debt | (616,475) | (4,384) | |||||||||
| Proceeds from issuance of debt | 500,000 | — | |||||||||
| Borrowing from revolving credit facility | 114,000 | — | |||||||||
| Net cash used in financing activities | (18,445) | (16,080) | |||||||||
| Effect of exchange rate change on cash | 75 | 579 | |||||||||
| Decrease in cash and cash equivalents | (188,296) | (112,991) | |||||||||
| Cash and cash equivalents, beginning of period | 492,603 | 452,575 | |||||||||
| Cash and cash equivalents, end of period | $ | 304,307 | $ | 339,584 | |||||||
| Supplemental information: | |||||||||||
| Cash payments for interest and income taxes: | |||||||||||
| Interest paid | $ | 34,878 | $ | 33,697 | |||||||
| Income taxes paid, net of refunds | 37,141 | 3,121 | |||||||||
| Non-cash investing activities: | |||||||||||
| Property, plant and equipment accrued | 27,533 | 11,397 | |||||||||
| Remedial liability assumed in acquisition of property, plant and equipment | — | 13,073 | |||||||||
| ROU assets obtained in exchange for operating lease liabilities | 10,203 | 7,342 | |||||||||
| ROU assets obtained in exchange for finance lease liabilities | 5,153 | 4,679 | |||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
CLEAN HARBORS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| Common Stock | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||||||||||
| Number of Shares | $0.01 Par Value | Additional Paid-in Capital | Accumulated Earnings | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Balance at January 1, 2023 | 54,065 | $ | 541 | $ | 504,240 | $ | (167,181) | $ | 1,584,722 | $ | 1,922,322 | ||||||||||||||||||||||||
| Net income | — | — | — | — | 72,401 | 72,401 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (14,346) | — | (14,346) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 6,018 | — | — | 6,018 | |||||||||||||||||||||||||||||
| Issuance of common stock for restricted share vesting, net of employee tax withholdings | 49 | — | (3,351) | — | — | (3,351) | |||||||||||||||||||||||||||||
| Repurchases of common stock | (22) | — | (3,000) | — | — | (3,000) | |||||||||||||||||||||||||||||
| Balance at March 31, 2023 | 54,092 | $ | 541 | $ | 503,907 | $ | (181,527) | $ | 1,657,123 | $ | 1,980,044 | ||||||||||||||||||||||||
| Common Stock | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||||||||||
| Number of Shares | $0.01 Par Value | Additional Paid-in Capital | Accumulated Earnings | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | 54,419 | $ | 544 | $ | 536,377 | $ | (196,012) | $ | 1,172,978 | $ | 1,513,887 | ||||||||||||||||||||||||
| Net income | — | — | — | — | 45,314 | 45,314 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 33,849 | — | 33,849 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 5,712 | — | — | 5,712 | |||||||||||||||||||||||||||||
| Issuance of common stock for restricted share vesting, net of employee tax withholdings | 36 | — | (1,831) | — | — | (1,831) | |||||||||||||||||||||||||||||
| Repurchases of common stock | (41) | — | (3,694) | — | — | (3,694) | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 54,414 | $ | 544 | $ | 536,564 | $ | (162,163) | $ | 1,218,292 | $ | 1,593,237 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying consolidated interim financial statements are unaudited and include the accounts of Clean Harbors, Inc. and its subsidiaries (collectively, “Clean Harbors” or the “Company”) and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in the opinion of management, include all adjustments which are of a normal recurring nature and are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Management has made estimates and assumptions affecting the amounts reported in the Company's consolidated interim financial statements and accompanying footnotes; actual results could differ from those estimates and judgments. The results for interim periods are not necessarily indicative of results for the entire year or any other interim periods. The financial statements presented herein should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
(2) SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 2, "Significant Accounting Policies," in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes in these policies or their application except for the change described below.
Segment Reporting and Goodwill
Pursuant to the previous succession announcement, effective March 31, 2023, Michael L. Battles and Eric W. Gerstenberg, former Chief Financial Officer and Chief Operating Officer of the Company, respectively, were appointed co-CEOs. As a result, the Company’s new Chief Operating Decision Maker (“CODM”) is a committee comprised of both co-CEOs, who, going forward, will manage the business, make operating decisions and assess performance. The Company does not expect that the new CODM structure will change how the Company is managed and as such will continue to report as two operating segments; (i) the Environmental Services segment and (ii) the Safety-Kleen Sustainability Solutions segment and assess the recoverability of goodwill under three reporting units; (i) Environmental Sales and Service, (ii) Environmental Facilities and (iii) Safety-Kleen Sustainability Solutions.
(3) REVENUES
The Company generates revenues through the following operating segments: Environmental Services and Safety-Kleen Sustainability Solutions. The Company's Environmental Services operating segment generally has four sources of revenue and the Safety-Kleen Sustainability Solutions operating segment has two sources of revenue. The Company disaggregates third-party revenues by geographic location and source of revenue as management believes these categories depict how revenue and cash flows are affected by economic factors. The Company's significant sources of revenue include:
Technical Services—Technical Services contribute to the revenues of the Environmental Services operating segment. Revenues for these services are generated from fees charged for waste material management and disposal services including onsite environmental management services, large remediation projects, collection and transportation, packaging, recycling, treatment and disposal of waste. Revenue is primarily generated by short-term projects, most of which are governed by master service agreements that are long-term in nature. These master service agreements are typically entered into with the Company's larger customers and outline the pricing and legal frameworks for such arrangements. Services are provided based on purchase orders or agreements with the customer and include prices based upon units of volume of waste, material and personnel costs as well as transportation and other fees. Collection and transportation revenues are recognized over time, as the customer receives and consumes the benefits of the services as they are being performed and the Company has a right to payment for performance completed to date. The Company uses the input method to recognize revenue over time, based on time and materials incurred as a basis for measuring the satisfaction of the performance obligation. Revenues for treatment and disposal of waste are recognized upon completion of treatment, final disposition in a landfill or incinerator, or when the waste is shipped to a third-party for processing and disposal. The Company periodically enters into bundled arrangements for the collection and transportation and disposal of waste. For such arrangements, transportation and disposal are considered distinct performance obligations and the Company allocates revenue to each based on the relative standalone selling price (i.e., the estimated price that a customer would pay for the services on a standalone basis). Revenues and the related costs from waste that is not yet completely processed and disposed of are deferred. The deferred revenues and costs are recognized when the services are completed. The period between collection and transportation and the final processing and disposal ranges depending on the location of the customer, but generally is measured in days.
6
Industrial Services and Other—Industrial Services contribute to the revenues of the Environmental Services operating segment. These revenues are primarily generated from industrial and specialty services provided to refineries, mines, upgraders, chemical plants, pulp and paper mills, manufacturing facilities, power generation facilities and other industrial customers throughout North America. Services include in-plant cleaning and maintenance services, plant outage and turnaround services, specialty cleaning services including chemical cleaning, pigging and high and ultra-high pressure water cleaning, leak detection and repair, daylighting, production services and upstream energy services. Services are provided based on purchase orders or agreements with the customer and include prices based upon daily, hourly or job rates for equipment, materials and personnel. The Company recognizes revenue for these services over time, as the customer receives and consumes the benefits of the services as they are being performed and the Company has a right to payment for performance completed to date. The Company uses the input method to recognize revenue over time, based on time and materials incurred.
Field and Emergency Response Services—Field and Emergency Response Services contribute to the revenues of the Environmental Services operating segment. Field Services revenues are generated from cleanup services at customer sites, including those managed by municipalities and utility providers, or other locations on a scheduled or emergency response basis. Services include confined space entry for tank cleaning, site decontamination, remediation, railcar cleaning, manhole/vault clean outs, product recovery and transfer and vacuum services. Additional services include filtration and water treatment services. Response services for environmental emergencies of any scale range from man-made disasters such as oil spills to natural disasters like hurricanes. Emergency response services also include spill cleanup on land and water, as well as contagion disinfection, decontamination and disposal services. Field and emergency response services are provided based on purchase orders or agreements with customers and include prices generally based upon daily, hourly or job rates for equipment, materials and personnel. The Company recognizes revenue for these services over time, as the customer receives and consumes the benefits of the services as they are being performed and the Company has a right to payment for performance completed to date. The Company uses the input method to recognize revenue over time, based on time and materials incurred. The duration of such services can be over a number of hours, several days or even months for larger scale projects.
Safety-Kleen Environmental Services—Safety-Kleen Environmental Services revenues contribute both to the Environmental Services operating segment and the Safety-Kleen Sustainability Solutions operating segment depending upon the nature of such revenues and operating responsibilities relative to executing the revenue contracts. Revenues from providing containerized waste handling and disposal services, parts washer services and vacuum services, referred to collectively as the Safety-Kleen branches' core service offerings, contribute to the revenues of the Environmental Services operating segment. In addition, sales of packaged blended oil products and other complementary product sales contribute to the revenues of the Environmental Services operating segment. Revenues generated from waste oil, anti-freeze and oil filter collection services, sales of bulk blended oil products and sales of bulk automotive fluids contribute to the Safety-Kleen Sustainability Solutions operating segment.
Generally, the revenue from services is recognized over time, as the customer receives and consumes the benefits of the services as they are being performed and the Company has a right to payment for performance completed to date. The duration of such services can be over a number of hours or several days. The Company uses the input method to recognize revenue over time, based on time and materials incurred. Product revenue is recognized upon the transfer of control whereby control transfers when the products are delivered to the customer. Containerized waste services consist of profiling, collecting, transporting and recycling or disposing of a wide variety of waste. Related collection and transportation revenues are recognized over time, as the customer receives and consumes the benefits of the services as they are being performed and the Company has a right to payment for performance completed to date. Parts washer services include customer use of the Company's parts washer equipment, cleaning and maintenance of the parts washer equipment and removal and replacement of used cleaning fluids. Parts washer services are considered a single performance obligation due to the highly integrated and interdependent nature of the arrangement. Revenue from parts washer services is recognized over the service interval as the customer receives the benefit of the services.
Safety-Kleen Oil—Safety-Kleen Oil related sales contribute to the revenues of the Safety-Kleen Sustainability Solutions segment. These revenues are generated from sales of high-quality base and blended lubricating oils to third-party distributors, government agencies, fleets, railroads and industrial customers. The business also sells recycled fuel oil to asphalt plants, industrial plants and pulp and paper companies. The used oil is also processed into vacuum gas oil which can be further re-refined into lubricant base oils or sold directly into the marine diesel oil fuel market. Revenue for oil products is recognized at a point in time, upon the transfer of control. Control transfers when the products are delivered to the customer.
7
The following tables present the Company's third-party revenue disaggregated by source of revenue and geography (in thousands):
| For the Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||
| Environmental Services | Safety-Kleen Sustainability Solutions | Corporate | Total | |||||||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||||
| United States | $ | 958,584 | $ | 221,771 | $ | 107 | $ | 1,180,462 | ||||||||||||||||||
| Canada | 102,398 | 24,527 | — | 126,925 | ||||||||||||||||||||||
| Total third-party revenues | $ | 1,060,982 | $ | 246,298 | $ | 107 | $ | 1,307,387 | ||||||||||||||||||
| Sources of Revenue | ||||||||||||||||||||||||||
| Technical Services | $ | 366,509 | $ | — | $ | — | $ | 366,509 | ||||||||||||||||||
Industrial Services and Other | 336,379 | — | 107 | 336,486 | ||||||||||||||||||||||
| Field and Emergency Response Services | 148,086 | — | — | 148,086 | ||||||||||||||||||||||
| Safety-Kleen Environmental Services | 210,008 | 49,559 | — | 259,567 | ||||||||||||||||||||||
| Safety-Kleen Oil | — | 196,739 | — | 196,739 | ||||||||||||||||||||||
| Total third-party revenues | $ | 1,060,982 | $ | 246,298 | $ | 107 | $ | 1,307,387 | ||||||||||||||||||
| For the Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||
| Environmental Services | Safety-Kleen Sustainability Solutions | Corporate | Total | |||||||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||||
| United States | $ | 834,678 | $ | 202,530 | $ | 72 | $ | 1,037,280 | ||||||||||||||||||
| Canada | 106,120 | 25,709 | — | 131,829 | ||||||||||||||||||||||
| Total third-party revenues | $ | 940,798 | $ | 228,239 | $ | 72 | $ | 1,169,109 | ||||||||||||||||||
| Sources of Revenue | ||||||||||||||||||||||||||
| Technical Services | $ | 323,656 | $ | — | $ | — | $ | 323,656 | ||||||||||||||||||
| Industrial Services and Other | 308,838 | — | 72 | 308,910 | ||||||||||||||||||||||
| Field and Emergency Response Services | 132,359 | — | — | 132,359 | ||||||||||||||||||||||
| Safety-Kleen Environmental Services | 175,945 | 44,388 | — | 220,333 | ||||||||||||||||||||||
| Safety-Kleen Oil | — | 183,851 | — | 183,851 | ||||||||||||||||||||||
| Total third-party revenues | $ | 940,798 | $ | 228,239 | $ | 72 | $ | 1,169,109 | ||||||||||||||||||
Contract Balances
| (in thousands) | March 31, 2023 | December 31, 2022 | ||||||||||||
| Receivables | $ | 963,659 | $ | 964,603 | ||||||||||
| Contract assets (unbilled receivables) | 137,507 | 107,010 | ||||||||||||
| Contract liabilities (deferred revenue) | 101,336 | 94,094 | ||||||||||||
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and customer advances and deposits or deferred revenue (contract liabilities) on the consolidated balance sheet. Generally, billing occurs subsequent to revenue recognition, as a right to payment is not just subject to passage of time, resulting in contract assets. Contract assets are generally classified as current. The Company sometimes receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. The contract liability balances at the beginning of each period presented were generally fully recognized in the subsequent three-month period.
8
(4) BUSINESS COMBINATIONS
2023 Acquisition
On March 31, 2023, the Company acquired Thompson Industrial Services, LLC ("Thompson Industrial") for an all-cash purchase price of $111.9 million, net of cash acquired and subject to the final settlement of working capital. The operations of Thompson Industrial expand the Environmental Services segment's industrial service operations in the southeastern region of the United States.
The preliminary allocation of the purchase price is provisional and was based on estimates of the fair value of assets acquired and liabilities assumed as of March 31, 2023. The Company continues to obtain information to complete the valuation of these balances and the associated income tax accounting. Measurement period adjustments will reflect new information obtained about facts and circumstances that existed as of the acquisition date. The following table summarizes the preliminary determination and recognition of assets acquired and liabilities assumed (in thousands):
At March 31, 2023 | |||||
| Accounts receivable | $ | 25,793 | |||
| Inventories and supplies | 233 | ||||
| Prepaid expenses and other current assets | 1,150 | ||||
| Property, plant and equipment | 28,030 | ||||
| Permits and other intangibles | 28,100 | ||||
| Operating lease right-of-use assets | 4,716 | ||||
| Other non-current assets | 36 | ||||
| Current liabilities | (11,514) | ||||
| Current portion of operating lease liabilities | (1,653) | ||||
| Operating lease liabilities, less current portion | (3,063) | ||||
| Total identifiable net assets | 71,828 | ||||
| Goodwill | 40,092 | ||||
| Total purchase price | $ | 111,920 | |||
Permits and other intangible assets acquired include customer relationships, trademarks/tradenames and non-compete agreements and are anticipated to have estimated useful lives of between and 15 years with a weighted average useful life of approximately 13 years. The excess of the total purchase price, which includes the aggregate cash consideration paid in excess of the fair value of the tangible and intangible assets acquired and liabilities assumed, was recorded as goodwill. The goodwill recognized is attributable to the expected operating synergies, assembled workforce and growth potential that the Company expects to realize from the acquisition. Goodwill generated from the acquisition is deductible for tax purposes.
The operations included in the Company's financial statements for the period ended March 31, 2023, and pro forma revenue and earnings amounts on a combined basis as if this acquisition had been completed on January 1, 2022 are immaterial to the consolidated financial statements of the Company.
2022 Acquisitions
On June 17, 2022, the Company acquired a privately-owned company for an all-cash purchase price of approximately $78.9 million, net of cash acquired. The operations of the newly acquired company expand the Safety-Kleen Sustainability Solutions segment's waste oil collection capabilities and re-refining business throughout the southeastern region of the United States, including the addition of a re-refinery in Georgia.
The preliminary allocation of the purchase price is provisional and was based on estimates of the fair value of assets acquired and liabilities assumed as of June 17, 2022. The Company continues to obtain information to complete the valuation of these balances and the associated income tax accounting. Measurement period adjustments will reflect new information obtained
9
about facts and circumstances that existed as of the acquisition date. The following table summarizes the preliminary determination and recognition of assets acquired and liabilities assumed (in thousands):
| At Acquisition Date As Reported December 31, 2022 | Measurement Period Adjustments | At Acquisition Date As Reported March 31, 2023 | |||||||||||||||
| Accounts receivable | $ | 1,111 | $ | (6) | $ | 1,105 | |||||||||||
| Inventories and supplies | 5,816 | (71) | 5,745 | ||||||||||||||
| Prepaid expenses and other current assets | 144 | — | 144 | ||||||||||||||
| Property, plant and equipment | 19,605 | 2,626 | 22,231 | ||||||||||||||
| Permits and other intangibles | 23,500 | — | 23,500 | ||||||||||||||
| Operating lease right-of-use assets | 585 | — | 585 | ||||||||||||||
| Other non-current assets | 13 | — | 13 | ||||||||||||||
| Current liabilities | (3,271) | — | (3,271) | ||||||||||||||
| Current portion of operating lease liabilities | (186) | — | (186) | ||||||||||||||
| Operating lease liabilities, less current portion | (399) | — | (399) | ||||||||||||||
| Other long-term liabilities | (55) | (2,626) | (2,681) | ||||||||||||||
| Total identifiable net assets | 46,863 | (77) | 46,786 | ||||||||||||||
| Goodwill | 32,015 | 77 | 32,092 | ||||||||||||||
| Total purchase price | $ | 78,878 | $ | — | $ | 78,878 | |||||||||||
Permits and other intangible assets acquired include supplier relationships, permits, customer relationships and trademarks/tradenames and are anticipated to have estimated useful lives of between and 20 years with a weighted average useful life of approximately 18 years. The excess of the total purchase price, which includes the aggregate cash consideration paid in excess of the fair value of the tangible and intangible assets acquired, was recorded as goodwill. The goodwill recognized is attributable to the expected operating synergies, assembled workforce and growth potential that the Company expects to realize from the acquisition. Goodwill generated from the acquisition is deductible for tax purposes.
On December 9, 2022, the Company acquired a privately-owned business for $12.6 million cash consideration. The acquired company expands the Safety-Kleen Sustainability Solutions segment's oil collection operations in the southeastern region of the United States. In connection with this acquisition, goodwill of $2.8 million was recognized. The results of operations for the acquired business were not material in 2022.
(5) INVENTORIES AND SUPPLIES
Inventories and supplies consisted of the following (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Oil and oil related products | $ | 139,225 | $ | 151,519 | |||||||
| Supplies | 153,172 | 143,743 | |||||||||
| Solvent and solutions | 12,489 | 11,994 | |||||||||
| Other | 17,500 | 17,738 | |||||||||
| Total inventories and supplies | $ | 322,386 | $ | 324,994 | |||||||
Supplies inventories consist primarily of critical spare parts to support the Company's incinerator and re-refinery operations and other general supplies used in our normal day-to-day operations. Other inventories consist primarily of parts washer components, cleaning fluids, absorbents and automotive fluids, such as windshield washer fluid and antifreeze.
10
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Land | $ | 172,270 | $ | 172,579 | |||||||
| Asset retirement costs (non-landfill) | 26,455 | 22,001 | |||||||||
| Landfill assets | 237,526 | 232,872 | |||||||||
Buildings and improvements (1) | 612,530 | 591,397 | |||||||||
Vehicles (2) | 1,136,777 | 1,112,188 | |||||||||
Equipment (3) | 2,262,144 | 2,195,064 | |||||||||
| Construction in progress | 135,756 | 140,328 | |||||||||
| 4,583,458 | 4,466,429 | ||||||||||
| Less - accumulated depreciation and amortization | 2,555,945 | 2,486,127 | |||||||||
| Total property, plant and equipment, net | $ | 2,027,513 | $ | 1,980,302 | |||||||
________________
(1) Balances inclusive of gross right-of-use ("ROU") assets classified as finance leases of $8.0 million in both periods.
(2) Balances inclusive of gross ROU assets classified as finance leases of $111.9 million and $106.7 million, respectively.
(3) Balances inclusive of gross ROU assets classified as finance leases of $9.2 million in both periods.
Depreciation expense, inclusive of landfill and finance lease amortization, was $72.0 million and $72.1 million for the three months ended March 31, 2023 and March 31, 2022, respectively. The Company recorded $1.2 million and $0.4 million of capitalized interest during the three months ended March 31, 2023 and March 31, 2022, respectively, mainly attributable to the construction of a new incinerator in Kimball, Nebraska.
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in goodwill by segment for the three months ended March 31, 2023 were as follows (in thousands):
| Environmental Services | Safety-Kleen Sustainability Solutions | Totals | |||||||||||||||
| Balance at January 1, 2023 | $ | 1,071,846 | $ | 175,032 | $ | 1,246,878 | |||||||||||
| Increase from current period acquisition | 40,092 | — | 40,092 | ||||||||||||||
| Measurement period adjustments from prior period acquisitions | — | 396 | 396 | ||||||||||||||
| Foreign currency translation | 36 | 14 | 50 | ||||||||||||||
| Balance at March 31, 2023 | $ | 1,111,974 | $ | 175,442 | $ | 1,287,416 | |||||||||||
The Company assesses goodwill on an annual basis as of December 31 or at an interim date when events or changes in the business environment (“triggering events”) would more likely than not reduce the fair value of a reporting unit below its carrying value. During the period ended March 31, 2023, no such triggering events were identified.
As of March 31, 2023 and December 31, 2022, the Company's intangible assets consisted of the following (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||
| Permits | $ | 188,736 | $ | 111,080 | $ | 77,656 | $ | 188,373 | $ | 109,036 | $ | 79,337 | |||||||||||||||||||||||
Customer and supplier relationships | 603,734 | 236,976 | 366,758 | 583,709 | 229,368 | 354,341 | |||||||||||||||||||||||||||||
Other intangible assets | 99,906 | 27,926 | 71,980 | 89,388 | 24,818 | 64,570 | |||||||||||||||||||||||||||||
Total amortizable permits and other intangible assets | 892,376 | 375,982 | 516,394 | 861,470 | 363,222 | 498,248 | |||||||||||||||||||||||||||||
Trademarks and trade names | 120,129 | — | 120,129 | 122,534 | — | 122,534 | |||||||||||||||||||||||||||||
Total permits and other intangible assets | $ | 1,012,505 | $ | 375,982 | $ | 636,523 | $ | 984,004 | $ | 363,222 | $ | 620,782 | |||||||||||||||||||||||
Amortization expense of permits, customer and supplier relationships and other intangible assets was $12.7 million and $12.2 million in the three months ended March 31, 2023 and March 31, 2022, respectively.
11
The expected amortization of the net carrying amount of finite-lived intangible assets at March 31, 2023 was as follows (in thousands):
| Years Ending December 31, | Expected Amortization | ||||
| 2023 (nine months) | $ | 36,778 | |||
| 2024 | 45,626 | ||||
| 2025 | 42,433 | ||||
| 2026 | 40,545 | ||||
| 2027 | 38,469 | ||||
| Thereafter | 312,543 | ||||
| $ | 516,394 | ||||
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Accrued insurance | $ | 94,436 | $ | 92,909 | |||||||
| Accrued interest | 15,202 | 20,033 | |||||||||
| Accrued compensation and benefits | 59,499 | 123,226 | |||||||||
| Accrued income, real estate, sales and other taxes | 50,255 | 61,442 | |||||||||
| Accrued other | 94,524 | 99,106 | |||||||||
| $ | 313,916 | $ | 396,716 | ||||||||
(9) CLOSURE AND POST-CLOSURE LIABILITIES
The changes to closure and post-closure liabilities (also referred to as “asset retirement obligations”) from January 1, 2023 through March 31, 2023 were as follows (in thousands):
| Landfill Retirement Liability | Non-Landfill Retirement Liability | Total | |||||||||||||||
| Balance at January 1, 2023 | $ | 62,251 | $ | 56,550 | $ | 118,801 | |||||||||||
| Measurement period adjustments from prior period acquisitions | — | 3,015 | 3,015 | ||||||||||||||
| New asset retirement obligations | 641 | — | 641 | ||||||||||||||
| Accretion | 1,286 | 1,056 | 2,342 | ||||||||||||||
| Changes in estimates recorded to consolidated statement of operations | — | 24 | 24 | ||||||||||||||
| Changes in estimates recorded to consolidated balance sheet | — | 1,437 | 1,437 | ||||||||||||||
| Expenditures | (3,187) | (1,472) | (4,659) | ||||||||||||||
| Currency translation and other | 7 | 3 | 10 | ||||||||||||||
| Balance at March 31, 2023 | $ | 60,998 | $ | 60,613 | $ | 121,611 | |||||||||||
During the three months ended March 31, 2023, the Company's non-commercial landfill at the Deer Park, Texas incineration facility reached its permitted capacity, as expected. The Company has commenced closure activities; however, there have been no changes to the liabilities related to this location. In the three months ended March 31, 2023, there were no significant benefits or charges resulting from changes in estimates for closure and post-closure liabilities.
12
(10) REMEDIAL LIABILITIES
The changes to remedial liabilities from January 1, 2023 through March 31, 2023 were as follows (in thousands):
| Remedial Liabilities for Landfill Sites | Remedial Liabilities for Inactive Sites | Remedial Liabilities (Including Superfund) for Non-Landfill Operations | Total | ||||||||||||||||||||
| Balance at January 1, 2023 | $ | 1,824 | $ | 59,749 | $ | 54,717 | $ | 116,290 | |||||||||||||||
| Accretion | 22 | 645 | 398 | 1,065 | |||||||||||||||||||
| Changes in estimates recorded to consolidated statement of operations | 4 | 374 | 281 | 659 | |||||||||||||||||||
| Expenditures | (13) | (861) | (2,815) | (3,689) | |||||||||||||||||||
| Currency translation and other | — | 1 | 15 | 16 | |||||||||||||||||||
| Balance at March 31, 2023 | $ | 1,837 | $ | 59,908 | $ | 52,596 | $ | 114,341 | |||||||||||||||
In the three months ended March 31, 2023, there were no significant benefits or charges resulting from changes in estimates for remedial liabilities.
(11) FINANCING ARRANGEMENTS
Long-term Debt
The following table is a summary of the Company’s long-term debt (in thousands):
| Current Portion of Long-Term Debt: | March 31, 2023 | December 31, 2022 | |||||||||
| Secured senior term loans | $ | 10,000 | $ | 10,000 | |||||||
| Long-Term Debt: | |||||||||||
| Secured senior term loans due June 30, 2024 ("2024 Term Loans") | $ | — | $ | 613,975 | |||||||
| Secured senior term loans due October 8, 2028 ("2028 Term Loans") | 977,500 | 980,000 | |||||||||
Unsecured senior notes, at 4.875%, due July 15, 2027 ("2027 Notes") | 545,000 | 545,000 | |||||||||
Unsecured senior notes, at 5.125%, due July 15, 2029 ("2029 Notes") | 300,000 | 300,000 | |||||||||
Unsecured senior notes, at 6.375%, due February 1, 2031 ("2031 Notes") | 500,000 | — | |||||||||
| Revolving credit facility | 114,000 | — | |||||||||
| Long-term debt, at par | $ | 2,436,500 | $ | 2,438,975 | |||||||
| Unamortized debt issuance costs and discount, net | (26,846) | (24,147) | |||||||||
| Long-term debt, at carrying value | $ | 2,409,654 | $ | 2,414,828 | |||||||
Financing Activities
The Company's significant financing arrangements are described in Note 11, "Financing Arrangements," in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 and there have been no material changes to the arrangements described therein. As previously disclosed, on January 24, 2023, the Company completed a private placement of $500.0 million aggregate principal amount of unsecured senior notes which mature on February 1, 2031 (collectively referred to with the 2027 and 2029 Notes as the "Notes"). The proceeds from the 2031 Notes, along with a $114.0 million borrowing on the Company's revolving credit facility and available cash were used to repay the $614.0 million outstanding principal amount of the 2024 Term Loans. In connection with the repayment, the Company recognized a loss on early extinguishment of debt of $2.4 million in the first quarter of 2023.
As of March 31, 2023 and December 31, 2022, the estimated fair value of the Company’s outstanding long-term debt, including the current portion, was $2.4 billion in both periods. The Company’s estimates of fair value of its long-term debt, including the current portion, are based on quoted market prices or other available market data which are considered Level 2 measures according to the fair value hierarchy. Level 2 utilizes quoted market prices in markets that are not active, broker or dealer quotation or alternative pricing sources with reasonable levels of price transparency for similar assets and liabilities.
The Company maintains a $400.0 million revolving credit facility. As discussed above, during the three months ended March 31, 2023, the Company borrowed $114.0 million of which the full amount is still outstanding as of March 31, 2023. As of March 31, 2023, the Company had $153.9 million available to borrow under the revolving credit facility and outstanding letters of
13
credit were $132.1 million. At December 31, 2022, the revolving credit facility had no outstanding loan balance. Subject to certain conditions, this credit facility will expire in October 2025.
On April 28, 2023, the Company entered into an amendment to the credit agreement for the revolving credit facility. As amended, the terms of the agreement are substantially the same as prior to the amendment except for certain updates required to transition the agreement to include a defined LIBOR successor rate. Under the amended agreement, borrowings under the revolving credit facility which, on or after April 28, 2023, are either newly drawn or converted or continued from outstanding borrowings will bear interest at a rate, at the Company’s option, of either (i) “Term SOFR” (as defined in the amended agreement) plus an applicable margin ranging from 1.50% to 1.75% per annum based primarily on the level of the Company’s average liquidity for the most recent 30 day period or (ii) Bank of America's base rate plus an applicable margin ranging from 0.50% to 0.75% per annum based primarily on such average liquidity. The amended agreement also continues to provide (i) for an unused line fee payable to the lenders, calculated on the then unused portion of the lenders’ $400.0 million maximum commitments, ranging from 0.25% to 0.375% per annum of the unused commitment, and (ii) for outstanding letters of credit, a fee payable to the lenders equal to the then applicable margin for Term SOFR borrowings described above, and to the issuing banks a standard fronting fee and customary fees and charges in connection with all amendments, extensions, draws and other actions with respect to letters of credit. The Company does not expect these changes to be material to future financial results. The amended agreement is included herein as Exhibit 4.34.1 and Exhibit 4.34.2 in Item 6. "Exhibits" to this Quarterly Report on Form 10-Q.
Cash Flow Hedges
The Company's strategy to hedge against fluctuations in variable interest rates involves entering into interest rate derivative agreements.
The Company effectively fixed the interest rate on $350.0 million principal of the outstanding 2024 Term Loans by entering into interest rate swap agreements in 2018 with a notional amount of $350.0 million ("2018 Swaps"). On January 24, 2023, concurrently with the repayment of the 2024 Term Loans, the Company received a settlement payment of $8.3 million from the counterparties. As a result of the settlement, the Company also reclassified the amounts previously deferred in accumulated other comprehensive loss and recognized a settlement gain of $8.3 million in interest expense during the three months ended March 31, 2023.
In 2022, the Company entered into interest rate swap agreements with a notional amount of $600.0 million ("2022 Swaps") to effectively fix the interest rate on $600.0 million principal of the outstanding 2028 Term Loans. Under the terms of the 2022 Swaps' agreements, the Company receives interest based upon the variable rates on the 2028 Term Loans and pays a fixed amount of interest. The fixed rate on these instruments is 0.931% through June 30, 2023 which, together with the 2.00% interest rate margin for Eurodollar borrowings on the 2028 Term Loans, results in an effective annual interest rate of approximately 2.931%. The fixed rate on these instruments increases to 1.9645% from July 1, 2023 through September 30, 2027 to both mirror the current 2028 Term Loans variable interest payments and the successor rate upon the eventual sunsetting of the LIBOR rate.
At the inception of these instruments, the Company designated both the 2018 Swaps and the 2022 Swaps (collectively referred to as the “Swaps”) as cash flow hedges. As of March 31, 2023, the Company recorded a derivative asset with a fair value of $39.7 million comprised only of the 2022 Swaps as the 2018 Swaps were settled during the period, as noted above. The balance of the derivative asset as of December 31, 2022 was $60.6 million, which included both of the Swaps.
No ineffectiveness has been identified on the Swaps and, therefore the change in fair value is recorded in stockholders' equity as a component of accumulated other comprehensive loss. Amounts are reclassified from accumulated other comprehensive loss into interest expense on the consolidated statement of operations in the same period or periods during which the hedged transactions affect earnings.
14
(12) EARNINGS PER SHARE
The following are computations of basic and diluted earnings per share (in thousands, except per share amounts):
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Numerator for basic and diluted earnings per share: | |||||||||||
| Net income | $ | 72,401 | $ | 45,314 | |||||||
| Denominator: | |||||||||||
| Weighted-average basic shares outstanding | 54,076 | 54,408 | |||||||||
| Dilutive effect of outstanding stock awards | 328 | 264 | |||||||||
| Dilutive shares outstanding | 54,404 | 54,672 | |||||||||
| Basic earnings per share: | $ | 1.34 | $ | 0.83 | |||||||
| Diluted earnings per share: | $ | 1.33 | $ | 0.83 | |||||||
For the three months ended March 31, 2023 and 2022, all then outstanding performance awards and restricted stock awards were included in the calculation of diluted earnings per share except for 115,813 and 153,985, respectively, of performance stock awards for which the performance criteria were not attained at the reporting dates and 2,132 and 19,500, respectively, of restricted stock awards which were excluded as their inclusion would have an antidilutive effect.
(13) ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in accumulated other comprehensive loss by component and related tax impacts for the three months ended March 31, 2023 were as follows (in thousands):
| Foreign Currency Translation Adjustments | Unrealized Loss on Available-For-Sale Securities | Unrealized Gain on Fair Value of Interest Rate Hedges | Unrealized Loss on Unfunded Pension Liability | Total | |||||||||||||||||||||||||
| Balance at January 1, 2023 | $ | (209,339) | $ | (563) | $ | 43,058 | $ | (337) | $ | (167,181) | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 338 | 220 | (6,801) | — | (6,243) | ||||||||||||||||||||||||
| Amounts reclassified out of accumulated other comprehensive loss | — | — | (14,126) | — | (14,126) | ||||||||||||||||||||||||
| Tax (provision) benefit | — | (46) | 6,069 | — | 6,023 | ||||||||||||||||||||||||
| Other comprehensive income (loss) | 338 | 174 | (14,858) | — | (14,346) | ||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | (209,001) | $ | (389) | $ | 28,200 | $ | (337) | $ | (181,527) | |||||||||||||||||||
The amount realized in the consolidated statement of operations during the three months ended March 31, 2023 which was reclassified out of accumulated other comprehensive loss was as follows (in thousands):
| Other Comprehensive (Loss) Income Component | For the Three Months Ended March 31, 2023 | Location | ||||||||||||
Unrealized Gain on Fair Value of Interest Rate Hedges (1) | $ | 14,126 | Interest expense, net of interest income | |||||||||||
(1) Balance inclusive of $8.3 million gain realized in connection with the settlement of the 2018 Swaps. For more information on this transaction, see Note 11, "Financing Arrangements."
(14) STOCK-BASED COMPENSATION
Total stock-based compensation cost charged to selling, general and administrative expenses for the three months ended March 31, 2023 and March 31, 2022 was $6.0 million and $5.7 million, respectively. The total income tax benefit recognized in the
15
consolidated statements of operations from stock-based compensation expense for the three months ended March 31, 2023 and March 31, 2022 was $1.0 million and $1.1 million, respectively.
Restricted Stock Awards
The following table summarizes information about restricted stock awards for the three months ended March 31, 2023:
| Restricted Stock | Number of Shares | Weighted Average Grant-Date Fair Value | |||||||||
| Balance at January 1, 2023 | 427,142 | $ | 84.64 | ||||||||
| Granted | 112,449 | 130.50 | |||||||||
| Vested | (16,335) | 83.21 | |||||||||
| Forfeited | (9,610) | 102.97 | |||||||||
| Balance at March 31, 2023 | 513,646 | $ | 94.39 | ||||||||
As of March 31, 2023, there was $35.4 million of total unrecognized compensation cost arising from restricted stock awards. This cost is expected to be recognized over a weighted average period of 3.3 years. The total fair value of restricted stock vested during the three months ended March 31, 2023 and March 31, 2022 was $2.1 million and $1.7 million, respectively.
Performance Stock Awards
Performance stock awards are subject to performance criteria established by the Compensation Committee of the Company's Board of Directors prior to or at the date of grant. The vesting of the performance stock awards is based on achieving targets currently based on revenue, Adjusted EBITDA Margin, Return on Invested Capital and Total Recordable Incident Rate. In addition, performance stock awards include continued service conditions.
The following table summarizes information about performance stock awards for the three months ended March 31, 2023:
| Performance Stock | Number of Shares | Weighted Average Grant-Date Fair Value | |||||||||
| Balance at January 1, 2023 | 213,679 | $ | 91.62 | ||||||||
| Granted | 117,982 | 130.60 | |||||||||
| Vested | (58,636) | 92.49 | |||||||||
| Forfeited | (4,237) | 111.34 | |||||||||
| Balance at March 31, 2023 | 268,788 | $ | 108.23 | ||||||||
As of March 31, 2023, there was $6.8 million of total unrecognized compensation cost arising from unvested performance stock awards deemed probable of vesting. The total fair value of performance awards vested during the three months ended March 31, 2023 and March 31, 2022 was $7.8 million and $3.8 million, respectively.
(15) COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are subject to legal proceedings and claims arising in the ordinary course of business. Actions filed against the Company arise from commercial and employment-related claims including alleged class actions related to sales practices and wage and hour claims. The plaintiffs in these actions may be seeking damages or injunctive relief or both. These actions are in various jurisdictions and stages of proceedings, and some are covered in part by insurance. In addition, the Company’s waste management services operations are regulated by federal, state, provincial and local laws enacted to regulate discharge of materials into the environment, remediation of contaminated soil and groundwater or otherwise protect the environment. This ongoing regulation results in the Company frequently becoming a party to legal or administrative proceedings involving all levels of government authorities and other interested parties. The issues involved in such proceedings generally relate to alleged violations of existing permits and licenses or alleged responsibility under federal or state Superfund laws to remediate contamination at properties owned either by the Company or by other parties (“third-party sites”) to which either the Company or the prior owners of certain of the Company’s facilities shipped waste.
At March 31, 2023 and December 31, 2022, the Company had recorded reserves of $33.3 million and $37.1 million, respectively, for actual or probable liabilities related to the legal and administrative proceedings in which the Company was then
16
involved, the principal of which are described below. As of March 31, 2023 and December 31, 2022, the $33.3 million and $37.1 million, respectively, of reserves consisted of (i) $23.1 million and $24.1 million, respectively, related to pending legal or administrative proceedings, including Superfund liabilities, which were included in remedial liabilities on the consolidated balance sheets, and (ii) $10.2 million and $13.0 million, respectively, primarily related to federal, state and provincial enforcement actions, which were included in accrued expenses on the consolidated balance sheets.
In management's opinion, it is not reasonably possible that the potential liability beyond what has been recorded, if any, that may result from these actions, either individually or collectively, will have a material effect on the Company's financial position, results of operations or cash flows. The Company periodically adjusts the aggregate amount of these reserves when actual or probable liabilities are paid or otherwise discharged, new claims arise, or additional relevant information about existing or probable claims becomes available.
Legal or Administrative Proceedings
As of March 31, 2023, the principal legal and administrative proceedings in which the Company was involved, or which had been terminated during 2022, relate to Safety-Kleen product liability cases and Superfund proceedings.
Safety-Kleen Product Liability Cases: Safety-Kleen, Inc. ("Safety-Kleen"), which is a legal entity acquired by the Company in 2012, has been named as a defendant in certain product liability cases that are currently pending in various courts and jurisdictions throughout the United States. As of March 31, 2023, there were approximately 69 proceedings (excluding cases which have been settled but not formally dismissed) wherein persons claim personal injury resulting from the use of Safety-Kleen's parts cleaning equipment or cleaning products. These proceedings typically involve allegations that the solvent used in Safety-Kleen's parts cleaning equipment contains contaminants and/or that Safety-Kleen's recycling process does not effectively remove the contaminants that become entrained in the solvent during their use. In addition, certain claimants assert that Safety-Kleen failed to warn adequately the product user of potential risks, including a historic failure to warn that solvent contains trace amounts of toxic or hazardous substances such as benzene.
The Company maintains insurance that it believes will provide coverage for these product liability claims (over amounts accrued for self-insured retentions and deductibles in certain limited cases), except for punitive damages to the extent not insurable under state law or excluded from insurance coverage. The Company also believes that these claims lack merit and has historically vigorously defended, and intends to continue to vigorously defend itself and the safety of its products against all of these claims. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of March 31, 2023. From January 1, 2023 to March 31, 2023, ten product liability claims were settled or dismissed. Due to the nature of these claims and the related insurance, the Company did not incur any expense as insurance provided coverage in full for all such claims. Safety-Kleen may be named in similar, additional lawsuits in the future, including claims for which insurance coverage may not be available.
Superfund Proceedings: The Company has been notified that either the Company (which, since December 28, 2012, has included Safety-Kleen) or the prior owners of certain of the Company's facilities for which the Company may have certain indemnification obligations have been identified as potentially responsible parties ("PRPs") or potential PRPs in connection with 131 sites which are subject to or are proposed to become subject to proceedings under federal or state Superfund laws. Of the 131 Superfund related sites, six involve facilities that are now owned or leased by the Company and 125 involve third-party sites to which either the Company or the prior owners of certain of the Company’s facilities shipped waste. Of the 125 third-party sites, 30 are now settled, 16 are currently requiring expenditures on remediation and 79 are not currently requiring expenditures on remediation.
In connection with each site, the Company has estimated the extent, if any, to which it may be subject, either directly or as a result of any indemnification obligations, for cleanup and remediation costs, related legal and consulting costs associated with PRP investigations, settlements and related legal and administrative proceedings. The amount of such actual and potential liability is inherently difficult to estimate because of, among other relevant factors, uncertainties as to the legal liability (if any) of the Company or the prior owners of certain of the Company's facilities to contribute a portion of the cleanup costs, the assumptions that must be made in calculating the estimated cost and timing of remediation, the identification of other PRPs and their respective capability and obligation to contribute to remediation efforts and the existence and legal standing of indemnification agreements (if any) with prior owners, which may either benefit the Company or subject the Company to potential indemnification obligations. The Company believes its potential monetary liability could exceed $1.0 million at three of the 131 Superfund related sites.
Of the 125 third-party sites at which the Company has been notified it is a PRP or potential PRP or may have indemnification obligations, the Company has indemnification agreements at a total of 17 sites. These agreements indemnify the Company (which now includes Safety-Kleen) with respect to any liability at the 17 sites for waste disposed prior to the Company's
17
(or Safety-Kleen's) acquisition of the former subsidiaries of Waste Management and McKesson which had shipped waste to those sites. Accordingly, the indemnifying parties are paying all costs of defending those subsidiaries in those 17 cases, including legal fees and settlement costs. However, there can be no guarantee that the Company's ultimate liabilities for those sites will not exceed the amount recorded or that indemnities applicable to any of these sites will be available to pay all or a portion of related costs. Except for those indemnification agreements discussed, the Company does not have an indemnity agreement with respect to any of the 125 third-party sites discussed above.
Federal, State and Provincial Enforcement Actions
From time to time, the Company pays fines or penalties in regulatory proceedings relating primarily to waste treatment, storage or disposal facilities. As of March 31, 2023 and December 31, 2022, there was one proceeding in both periods for which the Company believes it is possible that the sanctions could equal or exceed $1.0 million. The Company believes that the fines or other penalties in this or any of the other regulatory proceedings will, individually or in the aggregate, not have a material effect on its financial condition, results of operations or cash flows.
(16) SEGMENT REPORTING
Segment reporting is prepared on the same basis that the Company's chief operating decision maker, which is a committee comprised of the Company's co-Chief Executive Officers, manages the business, makes operating decisions and assesses performance. The Company is managed and reports as two operating segments; (i) the Environmental Services segment and (ii) the Safety-Kleen Sustainability Solutions segment.
Third-party revenue is revenue billed to outside customers by a particular segment. Direct revenues is revenue allocated to the segment providing the product or service. Intersegment revenues represent the sharing of third-party revenues among the segments based on products and services provided by each segment as if the products and services were sold directly to the third-party. The intersegment revenues are shown net. The operations not managed through the Company’s operating segments described above are recorded as “Corporate Items.”
The following table reconciles third-party revenues to direct revenues for the three months ended March 31, 2023 and 2022 (in thousands):
| For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||||||||||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||||||||||||||||||||||||||
| Third-Party Revenues | Intersegment Revenues (Expenses), net | Direct Revenues | Third-Party Revenues | Intersegment Revenues (Expenses), net | Direct Revenues | ||||||||||||||||||||||||||||||
| Environmental Services | $ | 1,060,982 | $ | 9,759 | $ | 1,070,741 | $ | 940,798 | $ | 6,647 | $ | 947,445 | |||||||||||||||||||||||
| Safety-Kleen Sustainability Solutions | 246,298 | (9,759) | 236,539 | 228,239 | (6,647) | 221,592 | |||||||||||||||||||||||||||||
| Corporate Items | 107 | — | 107 | 72 | — | 72 | |||||||||||||||||||||||||||||
| Total | $ | 1,307,387 | $ | — | $ | 1,307,387 | $ | 1,169,109 | $ | — | $ | 1,169,109 | |||||||||||||||||||||||
The primary financial measure by which the Company evaluates the performance of its segments is Adjusted EBITDA, which consists of net income plus accretion of environmental liabilities, stock-based compensation, depreciation and amortization, net interest expense, loss on early extinguishment of debt and provision for income taxes and excludes other gains, losses and non-cash charges not deemed representative of fundamental segment results and other income, net. Transactions between the segments are accounted for at the Company’s best estimate based on similar transactions with outside customers.
18
The following table presents Adjusted EBITDA information used by management by reported segment (in thousands):
| For the Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Adjusted EBITDA: | |||||||||||
| Environmental Services | $ | 228,345 | $ | 183,602 | |||||||
| Safety-Kleen Sustainability Solutions | 41,463 | 51,877 | |||||||||
| Corporate Items | (54,670) | (55,220) | |||||||||
| Total | 215,138 | 180,259 | |||||||||
| Reconciliation to Consolidated Statements of Operations: | |||||||||||
| Accretion of environmental liabilities | 3,407 | 3,156 | |||||||||
| Stock-based compensation | 6,018 | 5,712 | |||||||||
| Depreciation and amortization | 84,758 | 84,298 | |||||||||
| Income from operations | 120,955 | 87,093 | |||||||||
| Other income, net | (116) | (704) | |||||||||
| Loss on early extinguishment of debt | 2,362 | — | |||||||||
| Interest expense, net of interest income | 20,632 | 25,017 | |||||||||
| Income before provision for income taxes | $ | 98,077 | $ | 62,780 | |||||||
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 of Clean Harbors' management as of this date only and are subject to certain risks and uncertainties that could cause actual results to differ materially, including, without limitation, those items identified as "Risk Factors,” in this report under Item 1A and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 1, 2023, and in other documents we file from time to time with the SEC. 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 the SEC, which may be viewed in the "Investors" section of the Clean Harbors website.
Overview
We are North 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 restore North 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") in North America. We serve over 300,000 customers, including the majority of Fortune 500 companies, across various markets including chemical and manufacturing, 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 in North America and the largest provider of parts cleaning and related environmental services to commercial, industrial and automotive customers in North America.
Performance of our segments is evaluated on several factors of which the primary financial measure is Adjusted EBITDA, as reconciled to our net income and described more fully below. The following is a discussion of how management evaluates its segments in regards to other factors including key performance indicators that management uses to assess the segments’ results, as well as certain macroeconomic trends and influences that impact each reportable segment:
•Environmental Services - Environmental Services segment results are predicated upon the demand by our customers for our wide variety of services, waste volumes managed by delivering such services and project work for which responsible 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 large scale events such as major chemical spills, natural disasters, or other instances where immediate and specialized services are required. The Environmental Services segment results include the Safety-Kleen branches' core environmental service offerings of containerized waste disposal, parts washer and vacuum services. These results are 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 incinerators, TSDFs and landfills, the utilization rates of our incinerators, equipment and workforce, including billable hours, and the number of parts washer services performed, and pricing realized by our business and peer companies as well as 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 chemical, manufacturing and automotive markets including efforts and economic incentives to reshore operations to the U.S., available capacity at waste disposal outlets, weather conditions, efficiency of our operations, technology, changing regulations, competition, market pricing of our services, costs incurred to deliver our services and the management of our related operating costs.
•Safety-Kleen Sustainability Solutions - Safety-Kleen Sustainability Solutions segment results are impacted by our customers' demand for high-quality, environmentally responsible recycled oil products and their demand for our related service and product offerings. Safety-Kleen Sustainability Solutions offers high quality recycled base and blended oil
20
products, including our KLEEN+ brand of Group II+ base oils, to end users including fleet customers, distributors and manufacturers of oil products. Segment results are impacted by overall demand, market pricing and the mix of our oil products sales. Segment results are also predicated on the demand for 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 produce 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 between product pricing and the overall costs associated with the collection of used oil. 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 and can be impacted by global events and their relative impact on commodity products and pricing. 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, impact the premium the segment can charge for used oil collections.
Highlights
Total direct revenues for the three months ended March 31, 2023 were $1,307.4 million, compared with $1,169.1 million for the three months ended March 31, 2022. Our Environmental Services segment direct revenues increased $123.3 million or 13.0% from the comparable period in 2022 driven by continued demand for our services as well as pricing initiatives designed to recover increased operating costs. In the three months ended March 31, 2023, our Safety-Kleen Sustainability Solutions segment direct revenues increased $14.9 million or 6.7% from the comparable period in 2022, predominately due to revenues from recently acquired businesses and higher volumes of base oil products sold. Foreign currency translation of our Canadian operations negatively impacted our consolidated direct revenues by $10.0 million in the three months ended March 31, 2023.
Income from operations for the three months ended March 31, 2023 was $121.0 million, compared with $87.1 million in the three months ended March 31, 2022. Net income for the three months ended March 31, 2023 was $72.4 million, compared with net income of $45.3 million in the three months ended March 31, 2022. The increases in these earnings measures were 38.9% and 59.8%, respectively.
Adjusted EBITDA, which is the primary financial measure by which we evaluate our segments, increased 19.3% to $215.1 million in the three months ended March 31, 2023 from $180.3 million in the three months ended March 31, 2022. This improved performance was driven by the increased revenue levels and focused pricing initiatives in the Environmental Services segment. Cost control initiatives across the entire Company, which were aided by the ability to leverage our fixed costs structure particularly relative to general and administrative costs also contributed to this increase in consolidated Adjusted EBITDA and Adjusted EBITDA margin. Additional information regarding Adjusted EBITDA, which is a non-GAAP measure, including a reconciliation of Adjusted EBITDA to net income, appears below under "Adjusted EBITDA."
Net cash from operating activities for the three months ended March 31, 2023 was $28.0 million, as compared to net cash used in operating activities of $38.6 million in the comparable period of 2022. Adjusted free cash flow, which management uses to measure our financial strength and ability to generate cash, was an outflow of $51.8 million in the three months ended March 31, 2023 as compared to an outflow of $107.6 million in the comparable period of 2022. This change is due to increases in net cash from operating activities, partially offset by incremental spend on property, plant and equipment net of proceeds from sale and disposal of fixed assets. Additional information regarding adjusted free cash flow, which is a non-GAAP measure, including a reconciliation of adjusted free cash flow to net cash from operating activities, appears below under "Adjusted Free Cash Flow."
21
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 months ended March 31, 2023 and March 31, 2022 (in thousands, except percentages):
| Summary of Operations | |||||||||||||||||||||||
| For the Three Months Ended | |||||||||||||||||||||||
| March 31, 2023 | March 31, 2022 | Change | % Change | ||||||||||||||||||||
Direct Revenues (1): | |||||||||||||||||||||||
| Environmental Services | $ | 1,070,741 | $ | 947,445 | $ | 123,296 | 13.0% | ||||||||||||||||
| Safety-Kleen Sustainability Solutions | 236,539 | 221,592 | 14,947 | 6.7 | |||||||||||||||||||
| Corporate Items | 107 | 72 | 35 | N/M | |||||||||||||||||||
| Total | 1,307,387 | 1,169,109 | 138,278 | 11.8 | |||||||||||||||||||
Cost of Revenues (2): | |||||||||||||||||||||||
| Environmental Services | 753,360 | 685,336 | 68,024 | 9.9 | |||||||||||||||||||
| Safety-Kleen Sustainability Solutions | 175,857 | 152,017 | 23,840 | 15.7 | |||||||||||||||||||
| Corporate Items | 2,297 | 6,036 | (3,739) | N/M | |||||||||||||||||||
| Total | 931,514 | 843,389 | 88,125 | 10.4 | |||||||||||||||||||
| Selling, General & Administrative Expenses: | |||||||||||||||||||||||
| Environmental Services | 89,036 | 78,507 | 10,529 | 13.4 | |||||||||||||||||||
| Safety-Kleen Sustainability Solutions | 19,219 | 17,698 | 1,521 | 8.6 | |||||||||||||||||||
| Corporate Items | 58,498 | 54,968 | 3,530 | 6.4 | |||||||||||||||||||
| Total | 166,753 | 151,173 | 15,580 | 10.3 | |||||||||||||||||||
| Adjusted EBITDA: | |||||||||||||||||||||||
| Environmental Services | 228,345 | 183,602 | 44,743 | 24.4 | |||||||||||||||||||
| Safety-Kleen Sustainability Solutions | 41,463 | 51,877 | (10,414) | (20.1) | |||||||||||||||||||
| Corporate Items | (54,670) | (55,220) | 550 | 1.0 | |||||||||||||||||||
| Total | $ | 215,138 | $ | 180,259 | $ | 34,879 | 19.3% | ||||||||||||||||
| Adjusted EBITDA as a % of Direct Revenues: | |||||||||||||||||||||||
| Environmental Services | 21.3 | % | 19.4 | % | 1.9 | % | |||||||||||||||||
| Safety-Kleen Sustainability Solutions | 17.5 | % | 23.4 | % | (5.9) | % | |||||||||||||||||
| Corporate Items | N/M | N/M | N/M | ||||||||||||||||||||
| Total | 16.5 | % | 15.4 | % | 1.1 | % | |||||||||||||||||
N/M = not meaningful
(1)Direct revenues are revenues allocated to the segment performing the provided service.
(2)Cost of revenues are shown exclusive of items presented separately on the consolidated statements of operations which consist of (i) accretion of environmental liabilities and (ii) depreciation and amortization.
22
Direct Revenues
There are many factors which have impacted and continue to impact our revenues including, but not limited to: overall levels of industrial activity and economic growth in North 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, captive incinerator closures, government infrastructure investment, 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 impact our revenues.
Environmental Services
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, | 2023 over 2022 | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % Change | ||||||||||||||||||||||
| Direct revenues | $ | 1,070,741 | $ | 947,445 | $ | 123,296 | 13.0 | % | ||||||||||||||||||
Environmental Services direct revenues for the three months ended March 31, 2023 increased $123.3 million from the comparable period in 2022 due to organic growth across our service offerings. Technical services revenue increased $42.9 million with contributions across our portfolio of waste disposal facilities driven by higher value waste streams and broad based pricing initiatives, including fuel and other surcharges. These increases more than offset unplanned outages at some of our incinerator and landfill facilities. Utilization at our incinerators for the three months ended March 31, 2023 was 80% as compared to 85% in the prior year due to unplanned outages for required maintenance and significant weather events. Landfill volumes also decreased in the first three months of 2023 as compared to the first three months of 2022 predominantly due to flooding at our landfill site in California; however, pricing of these services more than offset the lower volumes. Direct revenues for the Safety-Kleen core service offerings increased $34.1 million from the comparable period in 2022 due to greater demand and improved pricing for our containerized waste, vacuum and parts washer services. Industrial Services revenues increased $27.5 million and Field Services revenues increased $15.7 million from the comparable period in 2022. The Canadian operations of the Environmental Services segment were negatively impacted by $7.6 million due to foreign currency translation.
Safety-Kleen Sustainability Solutions
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, | 2023 over 2022 | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % Change | ||||||||||||||||||||||
| Direct revenues | $ | 236,539 | $ | 221,592 | $ | 14,947 | 6.7 | % | ||||||||||||||||||
In the three months ended March 31, 2023, Safety-Kleen Sustainability Solutions direct revenue increased $14.9 million from the comparable period in 2022. This increase was largely driven by $12.2 million of incremental revenues from operations acquired in the second half of 2022. In addition, base oil product revenues increased $11.0 million due to incremental volumes sold during the period. These increases were partially offset by a $5.4 million decrease in blended oil sales as higher pricing of our blended products could not offset lower volumes sold. Revenue from the collection of used motor oil also decreased $1.4 million despite a higher volume of used oil collected. This decrease in direct revenue from the collection of used motor oil is in line with expectations given the inverse correlation between movements in base oil pricing and the market prices associated with our used oil collection services. The Canadian operations of the Safety-Kleen Sustainability Solutions segment were negatively impacted by $2.4 million in the three months ended March 31, 2023 due to foreign currency translation.
Cost of Revenues
We believe that management of operating costs is vital to our ability to remain price competitive. We continue to experience the current macroeconomic inflationary pressures across several cost categories, but most notably related to internal and external labor, transportation, general supplies and energy related costs. We aim to manage these increases through constant cost monitoring as well as our overall customer pricing strategies designed to offset the negative inflationary impacts on our margins.
We 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
23
logistics solutions in the face of these inflationary pressures, while also continuing to optimize our management and operating structure in an effort to manage our operating margins.
Environmental Services
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, | 2023 over 2022 | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % Change | ||||||||||||||||||||||
| Cost of revenues | $ | 753,360 | $ | 685,336 | $ | 68,024 | 9.9 | % | ||||||||||||||||||
| As a % of Direct revenues | 70.4 | % | 72.3 | % | (1.9) | % | ||||||||||||||||||||
Environmental Services cost of revenues for the three months ended March 31, 2023 increased $68.0 million from the comparable period in 2022, however as a percentage of revenue these costs decreased 1.9%. Overall, labor and benefit related costs increased $42.5 million, equipment and supply costs increased $18.5 million and external transportation, vehicle and fuel related costs increased $6.5 million. These increases in costs are commensurate with the overall revenue growth in the segment.
Safety-Kleen Sustainability Solutions
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, | 2023 over 2022 | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % Change | ||||||||||||||||||||||
| Cost of revenues | $ | 175,857 | $ | 152,017 | $ | 23,840 | 15.7 | % | ||||||||||||||||||
| As a % of Direct revenues | 74.3 | % | 68.6 | % | 5.7 | % | ||||||||||||||||||||
Safety-Kleen Sustainability Solutions cost of revenues for the three months ended March 31, 2023 increased $23.8 million from the comparable period in 2022 and as a percentage of revenues, these costs increased by 5.7%. The cost of used oil as the primary raw material in our recycled base and blended oil products was higher in the first quarter of 2023, as compared to the prior year, driving a cost increase, both in total and as a percentage of revenue. We expect these costs to decrease in the second quarter of 2023 in response to our efforts to manage the spread between the pricing of base oil products and our used oil collection services. Additionally, the increase in costs from the comparable period in 2022 was driven by the operations acquired in the second half of 2022.
In total, the increase in cost of revenues was driven by external transportation, vehicle and fuel costs which increased $8.9 million, costs of raw materials which increased $7.0 million, more than half of which was due to increased costs to obtain used oil through our used oil collection services, and labor and benefit related costs which increased $5.7 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 our ability to properly align these costs with business performance is reflective of our strong management of the businesses and further promotes our ability to remain competitive in the marketplace.
Environmental Services
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, | 2023 over 2022 | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % Change | ||||||||||||||||||||||
| SG&A expenses | $ | 89,036 | $ | 78,507 | $ | 10,529 | 13.4 | % | ||||||||||||||||||
| As a % of Direct revenues | 8.3 | % | 8.3 | % | — | % | ||||||||||||||||||||
Environmental Services SG&A expenses for the three months ended March 31, 2023 increased $10.5 million from the comparable period in 2022, however as a percentage of revenues, these costs remained consistent as a result of cost control initiatives. The overall cost increase was due to higher labor and benefits related costs of $10.4 million in the three months ended March 31, 2023, predominately due to investments in our employees and higher incentive compensation resulting from revenue growth and profitability.
24
Safety-Kleen Sustainability Solutions
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, | 2023 over 2022 | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % Change | ||||||||||||||||||||||
| SG&A expenses | $ | 19,219 | $ | 17,698 | $ | 1,521 | 8.6 | % | ||||||||||||||||||
| As a % of Direct revenues | 8.1 | % | 8.0 | % | 0.1 | % | ||||||||||||||||||||
Safety-Kleen Sustainability Solutions SG&A expenses for the three months ended March 31, 2023 increased $1.5 million from the comparable period in 2022, however as a percentage of revenues these costs remained relatively consistent. The overall cost increase was primarily due to a $1.4 million increase in labor and benefit costs as we expanded our sales team for the segment in mid-2022.
Corporate Items
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, | 2023 over 2022 | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % Change | ||||||||||||||||||||||
| SG&A expenses | $ | 58,498 | $ | 54,968 | $ | 3,530 | 6.4 | % | ||||||||||||||||||
| As a % of Total Company Direct revenues | 4.5 | % | 4.7 | % | (0.2) | % | ||||||||||||||||||||
We manage our Corporate SG&A expenses commensurate with the overall total Company performance and direct revenue levels. Generally, as revenues increase, we would expect some increase in these costs. Corporate SG&A expenses for the three months ended March 31, 2023 improved as a percentage of total Clean Harbors' direct revenues when compared to the same period in the prior year which has also contributed to Clean Harbors' overall profitability. The SG&A expenses for the three months ended March 31, 2022 include a benefit of $3.0 million related to the breakup fee received from Vertex Energy, Inc. for the termination of the proposed asset acquisition.
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 existing credit agreement, may not be comparable to similarly titled measures reported by other companies.
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, | 2023 over 2022 | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % Change | ||||||||||||||||||||||
| Adjusted EBITDA: | ||||||||||||||||||||||||||
| Environmental Services | $ | 228,345 | $ | 183,602 | $ | 44,743 | 24.4 | % | ||||||||||||||||||
| Safety-Kleen Sustainability Solutions | 41,463 | 51,877 | (10,414) | (20.1) | ||||||||||||||||||||||
| Corporate Items | (54,670) | (55,220) | 550 | 1.0 | ||||||||||||||||||||||
| Total | $ | 215,138 | $ | 180,259 | $ | 34,879 | 19.3 | % | ||||||||||||||||||
We use Adjusted EBITDA to enhance our understanding of our operating performance, which represents our views concerning our performance in the ordinary, ongoing and customary course of our operations. We historically have found it helpful, and believe that investors have found it helpful, to consider an operating measure that excludes certain expenses relating to transactions not reflective of our core operations.
The information about our operating performance provided by Adjusted EBITDA 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 equity 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.
25
We 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. Adjusted EBITDA should be viewed only as a supplement to the GAAP financial information. We believe, however, that providing this information in addition to, and together with, GAAP financial information provides a better understanding of our core operating performance and how management evaluates and measures our performance.
The following is a reconciliation of net income to Adjusted EBITDA for the following periods (in thousands, except percentages):
| For the Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net income | $ | 72,401 | $ | 45,314 | |||||||
| Accretion of environmental liabilities | 3,407 | 3,156 | |||||||||
| Stock-based compensation | 6,018 | 5,712 | |||||||||
| Depreciation and amortization | 84,758 | 84,298 | |||||||||
| Other income, net | (116) | (704) | |||||||||
| Loss on early extinguishment of debt | 2,362 | — | |||||||||
| Interest expense, net of interest income | 20,632 | 25,017 | |||||||||
| Provision for income taxes | 25,676 | 17,466 | |||||||||
| Adjusted EBITDA | $ | 215,138 | $ | 180,259 | |||||||
| As a % of Direct revenues | 16.5 | % | 15.4 | % | |||||||
Depreciation and Amortization
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, | 2023 over 2022 | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % Change | ||||||||||||||||||||||
| Depreciation of fixed assets and amortization of landfills and finance leases | $ | 72,032 | $ | 72,058 | $ | (26) | — | % | ||||||||||||||||||
| Permits and other intangibles amortization | 12,726 | 12,240 | 486 | 4.0 | ||||||||||||||||||||||
| Total depreciation and amortization | $ | 84,758 | $ | 84,298 | $ | 460 | 0.5 | % | ||||||||||||||||||
Depreciation and amortization for the three months ended March 31, 2023 remained relatively consistent with the comparable period in 2022.
Loss on Early Extinguishment of Debt
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, | 2023 over 2022 | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % Change | ||||||||||||||||||||||
| Loss on early extinguishment of debt | $ | (2,362) | $ | — | $ | (2,362) | 100.0 | % | ||||||||||||||||||
During the three months ended March 31, 2023, we recorded a $2.4 million loss on early extinguishment of debt in connection with the repayment of the remaining $614.0 million principal amount of the 2024 Term Loans. For additional information regarding this repayment, see Note 11, "Financing Arrangements," to the accompanying financial statements.
Interest Expense, Net of Interest Income
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, | 2023 over 2022 | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % Change | ||||||||||||||||||||||
| Interest expense, net of interest income | $ | (20,632) | $ | (25,017) | $ | 4,385 | (17.5) | % | ||||||||||||||||||
Interest expense, net of interest income for the three months ended March 31, 2023 decreased $4.4 million from the comparable period in 2022 due to the $8.3 million benefit recognized from settling interest rate swaps in connection with repaying certain of our variable rate debt in January 2023. Absent this benefit, interest expense, net of interest income, increased $3.9 million due to higher interest rates on our portfolio of debt obligations. For additional information regarding the financing events during the
26
first quarter of 2023 and our current portfolio of debt, see Note 11, "Financing Arrangements," to the accompanying financial statements.
Provision for Income Taxes
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, | 2023 over 2022 | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % Change | ||||||||||||||||||||||
| Provision for income taxes | $ | 25,676 | $ | 17,466 | $ | 8,210 | 47.0 | % | ||||||||||||||||||
| Effective tax rate | 26.2 | % | 27.8 | % | (1.6) | % | ||||||||||||||||||||
For the three months ended March 31, 2023, the provision for income taxes increased $8.2 million from the comparable period in 2022 due to an increase in income before provision for income taxes. Our effective tax rate for the three months ended March 31, 2023 decreased 1.6% when compared to the three months ended March 31, 2022.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our primary ongoing cash requirements will be to fund operations, capital expenditures, interest payments and investments in line with our business strategy. We believe our future operating cash flows will be sufficient to meet our future operating and internal investing cash needs. We monitor our actual needs and forecasted cash flows, our liquidity and our capital resources, enabling us to plan our present needs and fund items that may arise during the year as a result of changing business conditions or opportunities. Furthermore, our existing cash balance and the availability of additional borrowings under our revolving credit facility provide additional potential sources of liquidity should they be required.
Summary of Cash Flow Activity
| Three Months Ended | ||||||||||||||
| March 31, | ||||||||||||||
| (in thousands) | 2023 | 2022 | ||||||||||||
| Net cash from (used in) operating activities | $ | 28,008 | $ | (38,629) | ||||||||||
| Net cash used in investing activities | (197,934) | (58,861) | ||||||||||||
| Net cash used in financing activities | (18,445) | (16,080) | ||||||||||||
Net cash from (used in) operating activities
Net cash from operating activities for the three months ended March 31, 2023 was $28.0 million as compared to net cash used in operating activities of $38.6 million in the comparable period of 2022. This $66.6 million increase in operating cash flows was attributable to increased income from operations and improved working capital balances, partially offset by an increase in income taxes paid.
Net cash used in investing activities
Net cash used in investing activities for the three months ended March 31, 2023 was $197.9 million, an increase of $139.1 million from the comparable period in 2022 primarily driven by a $113.5 million increase in cash used for acquisitions. During the three months ended March 31, 2023, the Company paid $108.5 million to acquire Thompson Industrial Services, LLC ("Thompson Industrial"), while in the three months ended March 31, 2022, the Company had received a working capital adjustment of $5.0 million related to the acquisition of HydroChemPSC. The remaining change in net cash used in investing activities was due to a $14.7 million increase in cash paid related to the timing of investment transactions within our wholly owned captive insurance company and a $10.8 million increase in additions to property, plant and equipment, net of proceeds from the sale and disposal of fixed assets.
Net cash used in financing activities
Net cash used in financing activities for the three months ended March 31, 2023 increased $2.4 million from $16.1 million in 2022 to $18.4 million in 2023. During the three months ended March 31, 2023, the Company repaid $614.0 million of senior term loans with the proceeds from issuing $500.0 million of unsecured senior notes and borrowing $114.0 million under the revolving credit facility. The overall increase in net cash used in financing activities is due to the incremental deferred financing costs paid for these transactions of $5.8 million partially offset by a $2.5 million cash inflow caused by the change in the level of uncashed checks.
27
Adjusted Free Cash Flow
Management considers adjusted free cash flow to be a measure of liquidity which provides useful information to management, creditors and investors about our financial strength and 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 excluding cash impacts of items derived from non-operating activities, less additions to property, plant and equipment plus proceeds from sales or disposals of fixed assets. 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 from net cash from (used in) operating activities to adjusted free cash flow for the following periods (in thousands):
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net cash from (used in) operating activities | $ | 28,008 | $ | (38,629) | |||||||
| Additions to property, plant and equipment | (81,686) | (70,308) | |||||||||
| Proceeds from sale and disposal of fixed assets | 1,855 | 1,320 | |||||||||
| Adjusted free cash flow | $ | (51,823) | $ | (107,617) | |||||||
Summary of Capital Resources
At March 31, 2023, cash and cash equivalents and marketable securities totaled $376.1 million, compared to $554.6 million at December 31, 2022. This reduction was primarily attributable to the payment of $108.5 million on March 31, 2023 for the acquisition of Thompson Industrial. At March 31, 2023, cash and cash equivalents held by our Canadian subsidiaries totaled $26.1 million. The cash and cash equivalents and marketable securities balance for our U.S. operations was $350.0 million at March 31, 2023. Our U.S. operations had net operating cash inflows of $25.9 million for the three months ended March 31, 2023.
We also maintain a $400.0 million revolving credit facility of which, during the three months ended March 31, 2023, $114.0 million was borrowed, the proceeds of which were used to repay a portion of the secured senior term loans (see discussion in "Net cash used in financing activities" above). As of March 31, 2023, the $114.0 million remained outstanding, with letters of credit of $132.1 million also outstanding and an additional $153.9 million available to borrow under the facility.
Material Capital Requirements
Capital Expenditures
Capital expenditures during the first three months of 2023 were $81.7 million as compared to $70.3 million during the first three months of 2022. We anticipate that 2023 capital spending, net of disposals, will be in the range of $400.0 million to $420.0 million, including $90.0 million of capital spending for our new incinerator construction in Kimball, Nebraska.
We anticipate that the capital spending will be funded by cash from our operations. Unanticipated changes in environmental regulations could require us to make significant capital expenditures for our facilities and adversely affect our results of operations and cash flow.
During the first three months of 2023, capital spending on the construction of our new incinerator at our Kimball, Nebraska facility was approximately $13.0 million. The current capital expenditure estimate for this project is approximately $180.0 million and we anticipate the project to be complete in early 2025. As of March 31, 2023, a total of $65.1 million has been spent on the project.
Financing Arrangements
In January 2023, we issued $500.0 million principal amount of 6.375% unsecured senior notes due 2031. The net proceeds of the issuance, along with a $114.0 million borrowing under our existing revolving credit facility and cash on hand, were used to repay the aggregate principal balance of our 2024 Term Loans.
As of March 31, 2023, our financing arrangements include (i) $545.0 million of 4.875% senior unsecured notes due 2027, (ii) $987.5 million of senior secured term loans due 2028, (iii) $300.0 million of 5.125% senior unsecured notes due 2029 and (iv) $500.0 million of 6.375% senior unsecured notes due 2031. We also maintain our $400.0 million revolving credit facility. As of
28
March 31, 2023, under the revolving credit facility, we had an outstanding loan balance of $114.0 million, $153.9 million available to borrow and outstanding letters of credit of $132.1 million.
The material terms of these arrangements are discussed further in Note 11, “Financing Arrangements,” to the accompanying financial statements.
As of March 31, 2023, we were in compliance with the covenants of all of our debt agreements, and we believe we will continue to meet such covenants.
Common Stock Repurchases Pursuant to Publicly Announced Plan
The 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 months ended March 31, 2023 and March 31, 2022, the Company repurchased and retired a total of approximately 22.3 thousand and 41.1 thousand shares of the Company's common stock, respectively, for total expenditures of approximately $3.0 million and $3.7 million, respectively.
Through March 31, 2023, the Company has repurchased and retired a total of approximately 8.2 million shares of its common stock for approximately $497.7 million under this program. As of March 31, 2023, an additional $102.3 million remained available for repurchase of shares under this program.
Environmental Liabilities
| (in thousands, except percentages) | March 31, 2023 | December 31, 2022 | Change | % Change | ||||||||||||||||||||||
| Closure and post-closure liabilities | $ | 121,611 | $ | 118,801 | $ | 2,810 | 2.4 | % | ||||||||||||||||||
| Remedial liabilities | 114,341 | 116,290 | (1,949) | (1.7) | ||||||||||||||||||||||
| Total environmental liabilities | $ | 235,952 | $ | 235,091 | $ | 861 | 0.4 | % | ||||||||||||||||||
Total environmental liabilities as of March 31, 2023 were $236.0 million, relatively consistent with the balance as of December 31, 2022. During the three months ended March 31, 2023, changes in estimates for the environmental liabilities, including those related to liabilities assumed in prior period acquisitions, of $5.1 million and accretion of $3.4 million, were partially offset by expenditures of $8.3 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 payments to satisfy our environmental liabilities 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.
Letters of Credit
We obtain standby letters of credit as security for financial assurances we have been required to provide to regulatory bodies for our hazardous waste facilities and which would be called only in the event that we fail to satisfy closure, post-closure and other obligations under the permits issued by those regulatory bodies for such licensed facilities. As of March 31, 2023, there were $132.1 million outstanding letters of credit. See Note 11, "Financing Arrangements," to the accompanying financial statements.
Critical Accounting Policies and Estimates
Other than as described below, there were no material changes in the first three months of 2023 to the information provided under the heading “Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Goodwill and Other Long-Lived Assets. Pursuant to the previous succession announcement, effective March 31, 2023, Michael L. Battles and Eric W. Gerstenberg, were appointed co-CEOs and as a result, the Company’s new Chief Operating Decision Maker (“CODM”) is a committee comprised of both co-CEOs, who, going forward, will manage the business, make operating decisions and assess performance. The Company does not expect that the new CODM structure will change how the Company is managed and as such will continue to report as two operating segments; (i) the Environmental Services segment and (ii) the Safety-Kleen Sustainability Solutions segment and assess the recoverability of goodwill under three reporting units; (i) Environmental Sales and Service, (ii) Environmental Facilities and (iii) Safety-Kleen Sustainability Solutions.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in the first three months of 2023 to the information provided under Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of our Co-Chief Executive Officers and Chief Financial Officer, as of the end of the period covered by this Quarterly Report on Form 10-Q, our Co-Chief Executive Officers and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined under Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of March 31, 2023 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our Co-Chief Executive Officers and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
30
CLEAN HARBORS, INC. AND SUBSIDIARIES
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 15, “Commitments and Contingencies,” to the unaudited consolidated financial statements included in Item 1 of this report, which description is incorporated herein by reference.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors from the information provided in Item 1A. in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Common Stock Repurchase Program
The following table provides information with respect to the shares of common stock repurchased by us for the periods indicated.
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) (3) | |||||||||||||||||||
| January 1, 2023 through January 31, 2023 | 99 | $ | 114.12 | — | $ | 105,265 | |||||||||||||||||
| February 1, 2023 through February 28, 2023 | 4,528 | 130.59 | — | 105,265 | |||||||||||||||||||
| March 1, 2023 through March 31, 2023 | 42,901 | 133.06 | 22,250 | 102,265 | |||||||||||||||||||
| Total | 47,528 | $ | 132.78 | 22,250 | |||||||||||||||||||
________________
(1) Includes 25,278 shares withheld by us from employees to satisfy employee tax obligations upon vesting of restricted stock granted to our employees under the Company's equity incentive plans.
(2) The average price paid per share of common stock repurchased under the stock repurchase program includes the commissions paid to brokers.
(3) Our board of directors has authorized the repurchase of up to $600.0 million of our common stock. We have funded and intend to fund the repurchases through available cash resources. The stock repurchase program authorizes us to purchase our common stock on the open market or in privately negotiated transactions periodically in a manner that complies with applicable U.S. securities laws. The number of shares purchased and the timing of the purchases has depended and will depend on several factors, including share price, cash required for business plans, trading volume and other conditions. We maintain a repurchase plan in accordance with Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended. During the three months ended March 31, 2023, no shares were repurchased under the Rule 10b5-1 plan. Future repurchases may be made as open market or privately negotiated transactions as described above. We have no obligation to repurchase stock under this program and may suspend or terminate the repurchase program at any time.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable
ITEM 5. OTHER INFORMATION
None
31
ITEM 6. EXHIBITS
| Item No. | Description | Location | ||||||||||||
| 31.1 | Filed herewith | |||||||||||||
| 31.2 | Filed herewith | |||||||||||||
| 31.3 | Filed herewith | |||||||||||||
| 32 | Filed herewith | |||||||||||||
| 4.34.1 | Filed herewith | |||||||||||||
| 4.34.2 | Filed herewith | |||||||||||||
| 101 | Interactive Data Files Pursuant to Rule 405 of Regulation S-T: Financial statements from the quarterly report on Form 10-Q of Clean Harbors, Inc. for the quarterly period ended March 31, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Cash Flows, (v) Unaudited Consolidated Statements of Stockholders’ Equity and (vi) Notes to Unaudited Consolidated Financial Statements. | * | ||||||||||||
| 104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023, formatted in iXBRL and contained in Exhibit 101. | |||||||||||||
_______________________
* Interactive data files are furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
32
CLEAN HARBORS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CLEAN HARBORS, INC. | |||||||||||
| Registrant | |||||||||||
| By: | /s/ MICHAEL L. BATTLES | ||||||||||
| Michael L. Battles | |||||||||||
| Co-Chief Executive Officer and Co-President | |||||||||||
| Date: | May 3, 2023 | ||||||||||
| By: | /s/ ERIC W. GERSTENBERG | ||||||||||
| Eric W. Gerstenberg | |||||||||||
| Co-Chief Executive Officer and Co-President | |||||||||||
| Date: | May 3, 2023 | ||||||||||
| By: | /s/ ERIC J. DUGAS | ||||||||||
| Eric J. Dugas | |||||||||||
| Executive Vice President and Chief Financial Officer | |||||||||||
| Date: | May 3, 2023 | ||||||||||
33