# CLEAN HARBORS INC (CLH) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CLEAN HARBORS INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/822818/000082281822000008/clh-20211231.htm
Accession: 0000822818-22-000008
Filing date: 2022-02-23
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CLH/
All MD&A years: /company/CLH/mda/
Next year: /company/CLH/mda/fy2022/ (FY 2022)

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 a diverse customer base, including Fortune 500 companies, across the chemical, energy, manufacturing and additional markets, as well as numerous government agencies. These customers rely on us to deliver a broad range of services including but not limited to end-to-end hazardous waste management, emergency response, industrial cleaning and maintenance and recycling services. We are also the largest re-refiner and recycler of used oil in North America and the largest provider of parts cleaning and related environmental services to commercial, industrial and automotive customers in North America.

During the first quarter of 2021, we reorganized our Safety-Kleen business. The collection services for waste oil, used oil filters, antifreeze and related items as well as bulk blended oil sales operations were combined with the Safety-Kleen Oil business to form the Safety-Kleen Sustainability Solutions business. Under this structure, Safety-Kleen Sustainability Solutions operations focus on the life-cycle of oil, from the used oil collection services through the ultimate sale and delivery of base and blended oils so that we can more directly manage both sides of the spread in our re-refinery business. We expect this change to drive additional growth in our sustainable lubricant products and related services.

Concurrently with this change, we consolidated Safety-Kleen branch core offerings, including containerized waste, parts washer and vacuum services, into the legacy Clean Harbors Environmental Services sales and service operations. We expect this change to foster enhanced cross-selling opportunities within the environmental businesses and increase market presence with small quantity generators of hazardous waste.

In restructuring the operations of the Company in this manner, the information that the chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed to conform to this new operating structure of the business and we reevaluated the identification of our operating segments. In accordance with ASC 280, Segment Reporting, Environmental Services and Safety-Kleen Sustainability Solutions are the Company's operating segments and reportable segments starting in the first quarter of 2021, with the operations not managed through these operating segments described above continuing to be recorded as Corporate Items. Segment financial information has been retrospectively adjusted to reflect these changes for all periods presented herein.

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. Beginning in the first quarter of 2021, we revised our calculation of reported Adjusted EBITDA to add back stock-based compensation, a non-cash item, to other charges which are added back to net income determined in accordance with generally accepted accounting principles ("GAAP"). See Adjusted EBITDA section below for additional details regarding this change and our considerations of this metric. All prior period amounts have been recast to conform to this presentation.

The following is a discussion of how management evaluates its segments including key performance indicators that management uses to assess the segments’ results, as well as certain macroeconomic trends and influences that impact each reportable segment:

•Environmental Services - Environmental Services segment results are predicated upon the demand by our customers for waste services, waste volumes generated by such services and project work for which waste handling and/or disposal is required. Environmental Services results are also impacted by the demand for planned and unplanned industrial related cleaning and maintenance services at customer sites, environmental cleanup services on a scheduled or emergency basis, including response to national events such as major chemical spills, natural disasters, or other events where immediate and specialized services are required. As a result of the Coronavirus ("COVID-19") pandemic, the business has seen increased demand for response services relative to contagion disinfection, decontamination and disposal. With the addition of the Safety-Kleen branches' core service offerings, including containerized waste disposal, parts washer and vacuum services, the Environmental Services results are further driven by the volumes of waste collected from these customers, the overall number of parts washers placed at customer sites and the demand for and frequency of other offered services. In managing the business and evaluating performance, management tracks the volumes and mix of waste handled and disposed of or recycled, generally through our incinerators, treatment, storage and disposal facilities ("TSDFs") and landfills,

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the utilization rates of our incinerators, equipment and workforce, including billable hours, and number of parts washer services performed, among other key metrics. Levels of activity and ultimate performance associated with this segment can be impacted by several factors including overall U.S. GDP, U.S. industrial production, economic conditions in the automotive and manufacturing markets, weather conditions, efficiency of our operations, technology, changing regulations, competition, market pricing of our services, costs incurred to deliver our services and the management of our related operating costs.

•Safety-Kleen Sustainability Solutions - Safety-Kleen Sustainability Solutions segment results are impacted by our customers' demand for high-quality, environmentally responsible recycled oil products and their demand for our related service offerings and products. Safety-Kleen Sustainability Solutions offers high quality recycled base and blended oil products to end users including fleet customers, distributors and manufacturers of oil products. Segment results are impacted by overall demand as well as product mix as it relates to these oil products. Segment results are also predicated on the demand for Safety-Kleen Sustainability Solutions' other product and service offerings including collection services for used oil, used oil filters and other automotive fluids. These fluid collections are used as feedstock in our oil re-refining to make our base and blended oil products and our recycled automotive related fluid products or are integrated into the Clean Harbors' recycling and disposal network. In operating the business and evaluating performance, management tracks the volumes and relative percentages of base and blended oil sales along with various pricing metrics associated with the commodity driven margin. Management also tracks the volumes and pricing of used oil and automotive fluid collections. Levels of activity and ultimate performance associated with this segment can be impacted by economic conditions in the automotive services and manufacturing markets, efficiency of our operations, technology, weather conditions, changing regulations, competition and the management of our related operating costs. Costs incurred in connection with the collection of used oil and other raw materials associated with the segment’s oil related products can also be volatile. The overall market price of oil and regulations that change the possible usage of used oil, including the International Maritime Organization's 2020 regulation ("IMO 2020") and other regulations related to the burning of used motor oil as a fuel, impact the premium the segment can charge for used oil collections.

Highlights

Total direct revenues for 2021 increased 21.0% to $3.8 billion, compared with $3.1 billion in 2020. Our Environmental Services segment direct revenues increased $396.6 million in 2021 compared with 2020. Our acquisition of HydroChemPSC on October 8, 2021, contributed $166.1 million to the direct revenues of the Environmental Services segment. In 2021 we also saw a rebounding demand across our portfolio of services within the Environmental Services segment as well as favorable pricing and mix of waste processed at our incinerator facilities which drove the remaining revenue increase in the Environmental Services segment. Direct revenues recorded by Safety-Kleen Sustainability Solutions increased $264.9 million in 2021 compared to 2020 due to increased prices and higher volumes sold of our base and blended oil products. Prior year operations across both segments, were negatively affected by the impact of the COVID-19 pandemic. Foreign currency translation of our Canadian operations positively impacted our consolidated direct revenues by $34.7 million in 2021 as compared to 2020.

In 2021, costs have increased in both the Environmental Services and Safety-Kleen Sustainability Solutions segments when comparing to the prior year given the increase in business levels, revenue mix, as well as inflationary and supply chain pressures seen across several cost categories. Additionally, the current period reflects lower benefits received from the Government Programs as described below under "Impact of Government Programs". Despite the increased costs seen in 2021, annual gross margins for the Environmental Services and Safety-Kleen Sustainability Solutions segments are relatively consistent with or improved from pre-pandemic levels.

Income from operations in 2021 was $347.9 million, compared with $251.3 million in 2020. We reported net income in 2021 and 2020 of $203.2 million and $134.8 million, respectively. Adjusted EBITDA, which is the primary financial measure by which we evaluate our segments, increased 17.9% to $676.6 million in 2021 from $573.8 million in 2020. 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 2021 was $546.0 million, an increase of $115.4 million from 2020. Adjusted free cash flow, which management uses to measure our financial strength and ability to generate cash, was $326.3 million in 2021, which represented a $61.3 million increase over 2020. This improved performance was primarily driven by greater levels of operating income partially offset by an increase in capital expenditures, net of disposals. 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."

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Acquisition of HydroChemPSC

On October 8, 2021, we acquired HydroChemPSC, a leading U.S. provider of industrial cleaning, specialty maintenance and utility services, for a cash purchase price of approximately $1.23 billion. The acquisition was financed with net proceeds from the Company's issuance of $1.0 billion of senior secured term loans, also occurring on October 8, 2021, with the remaining being funded through existing cash. Refer to Note 4, "Business Combinations" and Note 11, "Financing Arrangements," to our consolidated financial statements included in Item 8 of this report for further information on this acquisition and the related issuance of the senior secured term loans.

The HydroChemPSC business serves customers across a broad range of markets and provides solutions to customers focused on cleaning, maintenance and environmental compliance of essential, mission critical equipment and infrastructure. The acquired operations, including more than 4,500 employees, over 240 service locations and a fleet of specialized vehicles and equipment, expand the Company's existing presence within the industrial services market and enhance the Company's Environmental Services Segment.

The Company's consolidated results of operations for the year ended December 31, 2021 include $166.1 million of revenue and $166.4 million of expense from the HydroChemPSC acquisition, including $12.3 million of incremental depreciation and amortization and related severance and integration costs of $6.0 million since the acquisition. In 2021, we also incurred costs related to issuing the $1.0 billion of senior secured term loans necessary to fund the acquisition and our future financial results will be impacted by the increased interest and principal payments on the new senior secured term loans and amortization of related discount and deferred financing costs.

Successful integration of the HydroChemPSC business and operations into our business will be necessary to realize the anticipated synergies and benefits from combining HydroChemPSC with Clean Harbors. As of December 31, 2021, the integration is being executed according to our plan with no material issues impeding the process. We are on target to exit 2022 with $40.0 million net synergies on an annual basis. Continued focus by our management team will be necessary as we continue with the integration plans into 2022.

We believe that HydroChemPSC was a strategic acquisition for Clean Harbors. The acquisition immediately expands our market share of industrial services, increased capabilities and technologies available to us and added to our results of operations for the year ended December 31, 2021. Beyond expanding the size and scale of our operations, HydroChemPSC is an established leader in industrial services, with proprietary technology and a manufacturing center dedicated to fabricating tools aimed at reducing costs and increasing efficiency and safety. We expect that the combined company will benefit from (i) enhanced technologies aimed at increasing safety, (ii) incremental waste volumes through Clean Harbors' network of waste disposal facilities, (iii) long-established customer relationships that bring opportunities for cross-selling of Clean Harbors' suite of services and (iv) synergistic opportunities within customer service, corporate functions, transportation, real estate, asset rentals and vehicle maintenance.

Impact of Government Programs

In 2020, the governments of Canada and the United States enacted the Canada Emergency Wage Subsidy ("CEWS") and the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), respectively (collectively referred to as "Government Programs"), in response to the widespread economic impact of the COVID-19 pandemic. Both Government Programs were extended into 2021 and as such, management continued to consider and analyze the Company's eligibility under such Government Programs. The table below summarizes the benefit of these Government Programs recorded in the statement of operations for the years ended December 31, 2021 and December 31, 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","For the year ended December 31, 2021","","For the year ended December 31, 2020"],["","Environmental Services","","Safety-Kleen Sustainability Solutions","","Corporate Items","","Total","","Environmental Services","","Safety-Kleen Sustainability Solutions","","Corporate Items","","Total"],["Cost of revenues","$","8,263","","","$","810","","","$","80","","","$","9,153","","","$","26,192","","","$","2,300","","","$","611","","","$","29,103"],["Selling, general and administrative expenses","1,950","","","583","","","348","","","2,881","","","9,411","","","1,399","","","2,370","","","13,180"],["Total","$","10,213","","","$","1,393","","","$","428","","","$","12,034","","","$","35,603","","","$","3,699","","","$","2,981","","","$","42,283"]]
[[/GREPCENT_TABLE]]

In addition to the credits and subsidies outlined above, which do not require any repayment to be made by the Company, the CARES Act also allowed for the deferral of payment related to certain payroll taxes during 2020. In total, we deferred the remittance of the employer portion of federal payroll tax withholdings of $35.4 million during the year ended December 31, 2020. We remitted half of the deferred payroll tax withholding in the third quarter of 2021 and the remaining half is subject to repayment by the end of 2022.

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Segment Performance

The primary financial measure by which we evaluate the performance of our segments is Adjusted EBITDA. The following table sets forth certain financial information associated with our results of operations for the years ended December 31, 2021, 2020 and 2019 (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","Summary of Operations"],["","For the years ended December 31,","","2021 over 2020","","2020 over 2019"],["","2021","","2020","","2019","","Change","","% Change","","Change","","% Change"],["Direct Revenues(1):"],["Environmental Services","$","3,032,454","","$","2,635,901","","$","2,795,994","","$","396,553","","15.0%","","$","(160,093)","","(5.7)%"],["Safety-Kleen Sustainability Solutions","772,813","","507,906","","615,060","","264,907","","52.2","","(107,154)","","(17.4)"],["Corporate Items","299","","290","","1,136","","9","","N/M","","(846)","","N/M"],["Total","3,805,566","","3,144,097","","3,412,190","","661,469","","21.0","","(268,093)","","(7.9)"],["Cost of Revenues(2):"],["Environmental Services","2,106,790","","1,739,115","","1,934,556","","367,675","","21.1","","(195,441)","","(10.1)"],["Safety-Kleen Sustainability Solutions","484,662","","374,872","","430,746","","109,790","","29.3","","(55,874)","","(13.0)"],["Corporate Items","18,385","","23,764","","22,517","","(5,379)","","N/M","","1,247","","N/M"],["Total","2,609,837","","2,137,751","","2,387,819","","472,086","","22.1","","(250,068)","","(10.5)"],["Selling, General and Administrative Expenses:"],["Environmental Services","265,946","","230,868","","261,025","","35,078","","15.2","","(30,157)","","(11.6)"],["Safety-Kleen Sustainability Solutions","60,797","","49,820","","56,065","","10,977","","22.0","","(6,245)","","(11.1)"],["Corporate Items","211,219","","170,356","","166,964","","40,863","","24.0","","3,392","","2.0"],["Total","537,962","","451,044","","484,054","","86,918","","19.3","","(33,010)","","(6.8)"],["Adjusted EBITDA:"],["Environmental Services","659,718","","665,918","","600,413","","(6,200)","","(0.9)","","65,505","","10.9"],["Safety-Kleen Sustainability Solutions","227,354","","83,214","","128,249","","144,140","","173.2","","(45,035)","","(35.1)"],["Corporate Items","(210,466)","","(175,328)","","(170,529)","","(35,138)","","(20.0)","","(4,799)","","(2.8)"],["Total","$","676,606","","$","573,804","","$","558,133","","$","102,802","","17.9%","","$","15,671","","2.8%"],["Adjusted EBITDA as a % of Direct Revenues:"],["Environmental Services","21.8","%","","25.3","%","","21.5","%","","(3.5)","%","","","","3.8","%"],["Safety-Kleen Sustainability Solutions","29.4","%","","16.4","%","","20.9","%","","13.0","%","","","","(4.5)","%"],["Corporate Items","N/M","","N/M","","N/M","","N/M","","","","N/M"],["Total","17.8","%","","18.3","%","","16.4","%","","(0.5)","%","","","","1.9","%"]]
[[/GREPCENT_TABLE]]

___________________________________

N/M = not meaningful

(1)Direct revenue is revenue allocated to the segment performing the provided service.

(2)Cost of revenue is shown exclusive of items presented separately on the consolidated statements of operations, which consist of (i) accretion of environmental liabilities and (ii) depreciation and amortization.

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, weather related events, base and blended oil pricing, market changes relative to the collection of used oil, our ability to manage the spread between oil product prices and prices for the collection of used oil, the number of parts washers placed at customer sites and foreign currency translation. In addition, customer efforts to minimize hazardous waste and changes in regulation can also impact our revenues.

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Environmental Services

[[GREPCENT_TABLE]]
[["","For the years ended December 31,","","2021 over 2020","","2020 over 2019"],["(in thousands, except percentages)","2021","","2020","","2019","","Change","","% Change","","Change","","% Change"],["Direct revenues","$","3,032,454","","","$","2,635,901","","","$","2,795,994","","","$","396,553","","","15.0","%","","$","(160,093)","","","(5.7)","%"]]
[[/GREPCENT_TABLE]]

Environmental Services direct revenues for the year ended December 31, 2021 increased $396.6 million from the comparable period in 2020. As noted in the Acquisition of HydroChemPSC section above, the Environmental Services segment benefitted from $166.1 million of direct revenues contributed by the HydroChemPSC operations since the acquisition on October 8, 2021. Excluding the HydroChemPSC revenues, Environmental Services revenues increased by $230.5 million or 8.7%, driven primarily by higher demand throughout our portfolio of services, including technical, industrial and base field services, and higher value waste streams at our incinerator and landfill facilities. The revenue growth across these aspects of the Environmental Services segment was partially offset by lower demand for our COVID-19 decontamination services in 2021, which decreased $65.0 million.

Direct revenues for our technical services increased $146.9 million primarily due to revenues for waste disposal services at our incinerators, TSDFs and recycle centers. Pricing and mix drove the increase in our incinerator facilities with utilization slightly increasing from 84% to 85%. Revenues related to our legacy industrial services increased $70.9 million predominately due to increased demand for industrial cleanings as overall economic activity continued to improve and industrial cleaning services previously delayed due to the impacts of COVID-19 were executed upon. Revenues related to base field services, excluding HydroChemPSC and COVID-19 decontamination services, increased $42.0 million, as demand for these services increased. Safety-Kleen core service offering revenues increased $16.7 million from the comparable period in 2020 due to higher demand and improved pricing for our containerized waste and vacuum services partially offset by lower revenues for parts washer services. The Canadian operations of the Environmental Services segment were positively impacted by $27.6 million due to foreign currency translation.

Environmental Services direct revenues for the year ended December 31, 2020 decreased $160.1 million from the comparable period in 2019 driven primarily by lower demand throughout our portfolio of services partially offset by direct revenues from our COVID-19 decontamination services. Lower economic activity throughout the COVID-19 pandemic reduced the demand for industrial and technical related services as customers postponed and/or reduced the levels of industrial turnarounds, environmental remediation projects and other waste disposal services. In addition, revenues for Safety-Kleen core service offerings decreased $61.0 million from the same period in 2019 due to lower demand for the containerized waste, parts washer and vacuum services.

In the year ended December 31, 2020, the Company generated $120.4 million of revenues from COVID-19 related emergency response decontamination services, which partially offset the revenue decreases noted above. Higher value waste streams being disposed of in our incinerator facilities did offset some of the decreases in technical services noted above. Utilization at our incinerator facilities remained relatively consistent with the prior year at 84%. Also impacting the year over year change in revenues within this segment was the negative impact of foreign currency translation on our Canadian operations of $3.5 million.

Safety-Kleen Sustainability Solutions

[[GREPCENT_TABLE]]
[["","For the years ended December 31,","","2021 over 2020","","2020 over 2019"],["(in thousands, except percentages)","2021","","2020","","2019","","Change","","% Change","","Change","","% Change"],["Direct revenues","$","772,813","","","$","507,906","","","$","615,060","","","$","264,907","","","52.2","%","","$","(107,154)","","","(17.4)","%"]]
[[/GREPCENT_TABLE]]

Safety-Kleen Sustainability Solutions direct revenues for the year ended December 31, 2021 increased $264.9 million from the comparable period in 2020 predominately due to higher pricing and volume of base and blended oil product sales, partially offset by a reduction in direct revenues from used motor oil collections. Base oil sale direct revenues increased $232.3 million while blended oil direct revenues increased $42.8 million from the prior year. Revenues from contract blending and packaging increased $15.9 million, mainly due to increased demand, and revenues from recycled fuel oil and refinery byproducts increased $12.3 million due to pricing increases. Revenues from used motor oil collection services decreased $30.0 million due to lower service fees charged for these services despite an increase in collection volumes from the prior year. The pricing decrease on our used motor oil collection services is in line with expectations given the inverse correlation between movements in base oil pricing and the market prices for used oil collection services. The impact of foreign currency translation was a $7.1 million benefit to our Safety-Kleen Sustainability Solutions' Canadian operations in 2021.

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Safety-Kleen Sustainability Solutions direct revenues for the year ended December 31, 2020 decreased $107.2 million from the comparable period in 2019. Customer shut downs and overall lower automotive travel in response to the COVID-19 pandemic reduced the demand for oil related products sold and collection services provided by the business in 2020. Base oil direct revenues decreased $69.2 million from the comparable period in 2019 due to lower volumes, and to a lesser extent lower prices. Lower volumes also drove a $34.8 million decrease in blended oil direct revenues in 2020. Recycled fuel oil and refinery byproducts revenue decreased $36.4 million, driven by lower volumes and pricing. Partially offsetting these decreases was a $41.1 million increase in direct revenue from used motor oil collections due to increases in fees charged for these services despite lower collection volumes. The impact of foreign currency translation on our Safety-Kleen Sustainability Solutions' Canadian operations was minimal.

Cost of Revenues

We believe that our ability to manage operating costs is important to our ability to remain price competitive. In recent periods, we have seen inflationary pressures across several cost categories, but most notably related to internal and external labor, transportation, general supplies and energy related costs. We have continued to manage these increases through constant cost monitoring as well as our overall customer pricing strategies. We also continue to upgrade the quality and efficiency of our services through the development of new technology and continued modifications and expansion at our facilities, invest in new business opportunities and aggressively implement strategic sourcing and logistics solutions in the face of these inflationary pressures, while also continuing to optimize our management and operating structure in an effort to maintain and increase operating margins.

Environmental Services

[[GREPCENT_TABLE]]
[["","For the years ended December 31,","","2021 over 2020","","2020 over 2019"],["(in thousands, except percentages)","2021","","2020","","2019","","Change","","% Change","","Change","","% Change"],["Cost of revenues","$","2,106,790","","","$1,739,115","","$1,934,556","","$","367,675","","","21.1","%","","$","(195,441)","","(10.1)","%"],["As a % of Direct revenues","69.5","%","","66.0","%","","69.2","%","","3.5","%","","","","(3.2)","%"]]
[[/GREPCENT_TABLE]]

Environmental Services cost of revenues for the year ended December 31, 2021 increased $367.7 million from the comparable period in 2020; however, excluding the incremental costs from the operations of the HydroChemPSC acquisition and the $17.9 million reduction in benefits recognized under Government Programs in 2021 as compared to 2020, these costs increased $220.5 million or 12.7%. Costs as a percentage of revenues, excluding the impacts of HydroChemPSC and the Government Programs, increased 2.3% primarily due to the mix of services being performed, including lower COVID-19 decontamination services, as well as inflationary pressures across several cost categories including incentive compensation. More specifically, excluding HydroChemPSC and the Government Programs, equipment and supply costs increased $80.5 million, labor and benefits related costs, including incentive compensation, increased $74.8 million and transportation, vehicle and fuel related costs increased $54.7 million.

Environmental Services cost of revenues for the year ended December 31, 2020 decreased $195.4 million from the comparable period in 2019. The overall reduction in costs was comprised of a $78.6 million decrease in labor and benefits related costs, including travel costs, a $59.6 million decrease in external transportation, vehicle and fuel costs and a $52.2 million decrease in equipment and supply costs. These decreases were mainly attributable to lower direct revenues and successful cost control initiatives, as well as a $26.2 million benefit from the employee retention credits and subsidies recorded in 2020 under the Government Programs which is reflected in the reduction to labor and benefit related costs above. Absent the benefit of these Government Programs, cost of revenues as a percentage of direct revenues improved 2.2% primarily due to a favorable mix of revenues and certain cost reduction strategies which provided better leverage of our employee and asset bases and drove lower external transportation, equipment rental and subcontractor spending.

Safety-Kleen Sustainability Solutions

[[GREPCENT_TABLE]]
[["","For the years ended December 31,","","2021 over 2020","","2020 over 2019"],["(in thousands, except percentages)","2021","","2020","","2019","","Change","","% Change","","Change","","% Change"],["Cost of revenues","$","484,662","","","$","374,872","","","$","430,746","","","$","109,790","","","29.3","%","","$","(55,874)","","","(13.0)","%"],["As a % of Direct revenues","62.7","%","","73.8","%","","70.0","%","","(11.1)","%","","","","3.8","%"]]
[[/GREPCENT_TABLE]]

Safety-Kleen Sustainability Solutions cost of revenues for the year ended December 31, 2021 increased $109.8 million from the comparable period in 2020 predominately due to the revenue growth experienced by the business. As a percentage of revenues these costs decreased 11.1%. This margin improvement was largely driven by the increased pricing of our products which outpaced the relative cost of revenues as the business successfully managed its spread and capitalized on these favorable

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market conditions. Production efficiencies also led to this lower cost structure as our re-refineries had greater utilization and output in 2021 as compared to 2020 when certain of the re-refineries were temporarily shuttered for a portion of the year. Overall, significant increases were noted in the cost of oil additives and other raw materials, including the costs associated with used motor oil collected, which increased $64.9 million, transportation, vehicle and fuel costs which increased $25.4 million and labor and benefits related costs which increased $21.9 million.

Safety-Kleen Sustainability Solutions cost of revenues for the year ended December 31, 2020 decreased $55.9 million from the comparable period in 2019. The overall reduction in costs was comprised of a $29.0 million decrease in costs of oil additives and other raw materials, a $13.0 million decrease in transportation, disposal and fuel costs and a $9.1 million decrease in labor and benefits related costs, including travel costs. These decreases were mainly attributable to lower direct revenues and cost reduction strategies, as well as a $2.3 million benefit related to employee retention credits and subsidies recorded in 2020 under the Government Programs which is reflected in the decrease in labor and benefits related costs above. Absent the benefit of the Government Programs, costs of revenues as a percentage of direct revenues increased 4.3%. This increase resulted from certain labor and benefits related costs and operating costs which were not reduced proportionate to the overall lower business activity, including the costs incurred while temporarily shuttering certain re-refineries. These costs were partially offset by reductions in transportation costs and other cost reduction strategies.

Selling, General and Administrative Expenses

We strive to manage our selling, general and administrative ("SG&A") expenses commensurate with the overall performance of our segments and corresponding revenue levels. We believe that our ability to properly align these costs with business performance is reflective of our strong management of the businesses and further promotes our ability to remain competitive in the marketplace.

Environmental Services

[[GREPCENT_TABLE]]
[["","For the years ended December 31,","","2021 over 2020","","2020 over 2019"],["(in thousands, except percentages)","2021","","2020","","2019","","Change","","% Change","","Change","","% Change"],["SG&A expenses","$","265,946","","","$","230,868","","","$","261,025","","","$","35,078","","","15.2","%","","$","(30,157)","","","(11.6)","%"],["As a % of Direct revenues","8.8","%","","8.8","%","","9.3","%","","\u2014","%","","","","(0.5)","%"]]
[[/GREPCENT_TABLE]]

Environmental Services SG&A expenses for the year ended December 31, 2021 increased $35.1 million from the comparable period in 2020. However, excluding the incremental costs from the operations of HydroChemPSC, these costs increased $21.2 million, or 9.2%, primarily due to a $7.5 million reduction in benefits recognized under the Government Programs when compared to the prior year, as well as the overall growth in the business, with the most significant increase in labor and benefits related costs. Excluding HydroChemPSC and the reduction in the benefits from the Government Programs in both periods, SG&A expenses as a percentage of revenues were relatively consistent at 8.9% in 2021 as compared to 9.1% in 2020.

Environmental Services SG&A expenses for the year ended December 31, 2020 decreased $30.2 million from the comparable period in 2019 primarily due to lower direct revenues and therefore lower related costs, such as travel and other selling related costs, as well as a benefit of $9.4 million in labor and benefits related costs associated with the employee retention credits and subsidies recorded in 2020 under the Government Programs. Partially offsetting these year over year reductions was a $5.5 million favorable resolution of a litigation matter and recovery of certain trade receivables of $5.4 million, both of which were recorded in the first quarter of 2019 and favorably impacted the SG&A expenses for the year ended December 31, 2019. Absent the impacts from the Government Programs in 2020 and litigation and receivable matters in 2019, Environmental Services SG&A expenses as a percentage of direct revenues remained relatively consistent with the comparable period in 2019.

Safety-Kleen Sustainability Solutions

[[GREPCENT_TABLE]]
[["","For the years ended December 31,","","2021 over 2020","","2020 over 2019"],["(in thousands, except percentages)","2021","","2020","","2019","","Change","","% Change","","Change","","% Change"],["SG&A expenses","$","60,797","","","$","49,820","","","$","56,065","","","$","10,977","","","22.0","%","","$","(6,245)","","","(11.1)","%"],["As a % of Direct revenues","7.9","%","","9.8","%","","9.1","%","","(1.9)","%","","","","0.7","%"]]
[[/GREPCENT_TABLE]]

Safety-Kleen Sustainability Solutions SG&A expenses for the year ended December 31, 2021 increased $11.0 million from the comparable period in 2020 primarily due to the overall growth in the business, with the most significant increase in labor and benefits related costs. Safety-Kleen Sustainability Solutions SG&A expenses as a percentage of revenue improved

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1.9% most notably due to a $1.8 million environmental liability charge for a Superfund site recorded in the second quarter of 2020 which did not recur in 2021.

Safety-Kleen Sustainability Solutions SG&A expenses for the year ended December 31, 2020 decreased $6.2 million from the comparable period in 2019. These decreases were primarily attributable to lower direct revenues and therefore lower sales related costs, as well as a reduction in labor and benefit related costs of $1.4 million for the year ended December 31, 2020 attributable to employee retention credits and subsidies under the Government Programs. Absent the benefit of the Government Programs, Safety-Kleen Sustainability Solutions 2020 SG&A expenses as a percentage of direct revenues remained relatively consistent with the prior year despite a $1.8 million environmental liability charge for a Superfund site recorded in the second quarter of 2020.

Corporate Items

[[GREPCENT_TABLE]]
[["","For the years ended December 31,","","2021 over 2020","","2020 over 2019"],["(in thousands, except percentages)","2021","","2020","","2019","","Change","","% Change","","Change","","% Change"],["SG&A expenses","$","211,219","","","$","170,356","","","$","166,964","","","$","40,863","","","24.0","%","","$","3,392","","","2.0","%"],["As a % of Total Company Direct revenues","5.6","%","","5.4","%","","4.9","%","","0.2","%","","","","0.5","%"]]
[[/GREPCENT_TABLE]]

We manage our Corporate SG&A expenses commensurate with the overall total Company performance and direct revenue levels. Corporate Items SG&A expenses for the year ended December 31, 2021 increased by $40.9 million when compared to 2020. As a percentage of revenue, these costs remained relatively consistent. Overall cost increases include a $20.4 million increase in labor and benefits related expenses, including incentive compensation, a $15.0 million increase in professional fees related to the acquisition of HydroChemPSC and some strategic initiative projects, an increase in severance costs of $3.2 million and a $2.7 million increase of cyber security information technology related costs. Partially offsetting these increases was a $3.3 million charge related to an environmental remediation liability for an inactive site recorded in 2020 which did not recur in 2021 and a $3.1 million decrease in marketing expenses.

Corporate Items SG&A expenses for the year ended December 31, 2020 increased by $3.4 million when compared to 2019 primarily due to increased marketing expenses of $3.8 million to expand brand awareness, increased investment in our technology infrastructure of $3.8 million and a $3.3 million charge related to an environmental remedial liability for an inactive site. These costs were partially offset by a $4.1 million decrease in travel and real estate related expenses and a $2.4 million reduction in labor costs for the employee retention credit and subsidies recorded under the Government Programs.

Adjusted EBITDA

Management considers Adjusted EBITDA to be a measurement of performance which provides useful information to both management and investors. Adjusted EBITDA should not be considered an alternative to net income or other measurements under GAAP. Adjusted EBITDA is not calculated identically by all companies, and therefore our measurements of Adjusted EBITDA, while defined consistently and in accordance with our existing credit agreement, may not be comparable to similarly titled measures reported by other companies.

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.

We also provide information relating to our Adjusted EBITDA so that analysts, investors and other interested persons have the same data that we use to assess our core operating performance. We believe that Adjusted EBITDA should be viewed only as a supplement to the GAAP financial information. We also believe, however, that providing this information in addition to, and together with, GAAP financial information provides a better understanding of our core operating performance and how management evaluates and measures our performance.

Beginning in the first quarter of 2021, we revised our calculation of reported Adjusted EBITDA to add stock-based compensation, a non-cash item, to other charges which are added back to GAAP net income for purposes of calculating

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Adjusted EBITDA. We made this change in order to be more consistent with how certain of our peer group companies report their non-GAAP results, to align with how management evaluates the operating performance of the Company and performance metrics for certain incentive compensation awards issued in 2021 and beyond and to be consistent with the definition of “Adjusted EBITDA” used for covenant compliance purposes in our outstanding financing agreements as amended to date. The amount added back each period matches the line item for stock-based compensation as recorded on the Company's GAAP consolidated statements of cash flows. We have recast the prior period Adjusted EBITDA amounts below to provide comparative information.

The following is a reconciliation of net income to Adjusted EBITDA for the following years (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","For the years ended December 31,"],["","2021","","2020","","2019"],["Net income","$","203,247","","","$","134,837","","","$","97,740"],["Accretion of environmental liabilities","11,745","","","11,051","","","10,136"],["Stock-based compensation","18,839","","","18,502","","","17,816"],["Depreciation and amortization","298,135","","","292,915","","","300,725"],["Other expense (income), net","515","","","290","","","(2,897)"],["Loss on early extinguishment of debt","\u2014","","","\u2014","","","6,131"],["Loss (gain) on sale of businesses","\u2014","","","3,376","","","(687)"],["Interest expense, net of interest income","77,657","","","73,120","","","78,670"],["Provision for income taxes","66,468","","","39,713","","","50,499"],["Adjusted EBITDA","$","676,606","","","$","573,804","","","$","558,133"],["As a % of Direct revenues","17.8","%","","18.3","%","","16.4","%"]]
[[/GREPCENT_TABLE]]

Depreciation and Amortization

[[GREPCENT_TABLE]]
[["","For the years ended December 31,","","2021 over 2020","","2020 over 2019"],["(in thousands, except percentages)","2021","","2020","","2019","","Change","","% Change","","Change","","% Change"],["Depreciation of fixed assets and amortization of landfills and finance leases","$","263,387","","","$","257,131","","","$","265,531","","","$","6,256","","","2.4","%","","$","(8,400)","","","(3.2)","%"],["Permits and other intangibles amortization","34,748","","","35,784","","","35,194","","","(1,036)","","","(2.9)","","","590","","","1.7"],["Total depreciation and amortization","$","298,135","","","$","292,915","","","$","300,725","","","$","5,220","","","1.8","%","","$","(7,810)","","","(2.6)","%"]]
[[/GREPCENT_TABLE]]

Depreciation and amortization for the year ended December 31, 2021 increased from the comparable period in 2020 due to the incremental depreciation and amortization of $12.3 million associated with the tangible and intangible assets associated with the acquisition of HydroChemPSC. This increase was partially offset by decreases from the prior year related to accelerating a landfill permit amortization in 2020 and certain assets becoming fully amortized. We expect 2022 depreciation and amortization expense will increase to between $330.0 million and $340.0 million driven by the incremental depreciation and amortization from the HydroChemPSC assets acquired.

Depreciation and amortization for the year ended December 31, 2020 decreased from the comparable period in 2019 due to certain assets becoming fully depreciated, slightly offset by an increase in amortization of finance lease right-of-use assets.

Other (Expense) Income, net

[[GREPCENT_TABLE]]
[["","For the years ended December 31,","","2021 over 2020","","2020 over 2019"],["(in thousands, except percentages)","2021","","2020","","2019","","Change","","% Change","","Change","","% Change"],["Other (expense) income, net","$","(515)","","","$","(290)","","","$","2,897","","","$","(225)","","","77.6","%","","$","(3,187)","","","(110.0)","%"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2021, other (expense) income remained relatively consistent with the prior year. For the year ended December 31, 2020, other (expense) income, net decreased $3.2 million from 2019 to 2020 primarily due to insurance proceeds received in 2019 which did not recur in 2020.

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Provision for Income Taxes

[[GREPCENT_TABLE]]
[["","For the years ended December 31,","","2021 over 2020","","2020 over 2019"],["(in thousands, except percentages)","2021","","2020","","2019","","Change","","% Change","","Change","","% Change"],["Provision for income taxes","$","66,468","","","$","39,713","","","$","50,499","","","$","26,755","","","67.4","%","","$","(10,786)","","","(21.4)%"],["Effective tax rate","24.6","%","","22.8","%","","34.1","%","","1.8","%","","","","(11.3)","%"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2021, the provision for income taxes increased $26.8 million from the comparable period in 2020, largely due to the increase in pre-tax earnings. The effective tax rate for 2021 was 24.6% as compared to 22.8% in the prior year.

For the year ended December 31, 2020, provision for income taxes decreased $10.8 million from the comparable period in 2019, despite an increase in income before provision for income taxes, largely due to the release of a valuation allowance on certain companies in Canada and amended federal and state returns filed. The effective tax rate for 2020 was 22.8% as compared to 34.1% in 2019.

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

[[GREPCENT_TABLE]]
[["","For the years ended December 31,"],["(in thousands)","2021","","2020","","2019"],["Net cash from operating activities","$","545,997","","","$","430,597","","","$","413,192"],["Net cash used in investing activities","(1,507,602)","","","(199,460)","","","(217,856)"],["Net cash from (used in) financing activities","898,249","","","(88,946)","","","(53,425)"]]
[[/GREPCENT_TABLE]]

Net cash from operating activities

Net cash from operating activities for the year ended December 31, 2021 was $546.0 million, an increase of $115.4 million compared to the year ended December 31, 2020. The increase in operating cash flows was most notably impacted by the increase in operating income in 2021 when compared to 2020 and improved working capital management in 2021 offsetting higher cash taxes and payroll taxes paid in 2021.

Cash income taxes paid, net of refunds, increased $12.1 million due to a $7.7 million tax refund received in 2020 associated with prior year amended returns previously under audit and higher pre-tax net income in 2021. Additionally, starting in the second quarter of 2020, we deferred certain US payroll tax remittances under the CARES Act. For the year ended December 31, 2020, we had deferred a total of $35.4 million. In 2021, we both remitted our normal 2021 US payroll taxes and half of the US payroll taxes we had previously deferred in 2020. In addition, HydroChemPSC had also elected this payroll deferral in 2020 and upon acquisition, we recognized $11.4 million of accrued 2020 payroll taxes and we repaid half prior to the end of 2021. The remaining payroll taxes deferred in 2020 under the CARES Act by both Clean Harbors and HydroChemPSC must be remitted in 2022.

Net cash from operating activities for the year ended December 31, 2020 was $430.6 million, an increase of $17.4 million compared to the year ended December 31, 2019. The increase was most directly attributable to greater levels of operating income and deferring the payment of certain employer payroll taxes amounting to $35.4 million as allowed for under the CARES Act, partially offset by $26.1 million increase in income taxes paid net of refunds.

Net cash used in investing activities

Net cash used in investing activities for the year ended December 31, 2021 was $1,507.6 million, an increase of $1,308.1 million compared to the year ended December 31, 2020. This increase was due to the acquisition of HydroChemPSC for $1.23 billion in 2021. Absent this significant investing cash outflow in 2021, the increase in net cash used in investing was $77.7

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million most notably due to a $45.6 million increase in additions to property, plant and equipment and a $21.2 million increase in net purchases of marketable securities.

Net cash used in investing activities for the year ended December 31, 2020 was $199.5 million, a decrease of $18.4 million compared to the year ended December 31, 2019 most notably due to the decreases in cash paid for acquisitions and additions to property, plant and equipment. These overall cash decreases were partially offset by an increase in net purchases of marketable securities. Cash paid for additions to property, plant and equipment in 2020 included the $21.1 million purchase and capital improvements of our corporate headquarters.

Net cash from (used in) financing activities

Net cash from financing activities for the year ended December 31, 2021 was $898.2 million as compared to net cash used in financing activities of $88.9 million for the year ended December 31, 2020. The primary driver of this change was the $995.0 million of cash received from the issuance of debt, net of discount. This cash inflow was partially offset by related higher deferred financing costs paid in 2021. In addition, cash paid for repurchases of common stock in 2021 decreased $20.4 million.

Net cash used in financing activities for the year ended December 31, 2020 was $88.9 million, an increase of $35.5 million compared to the year ended December 31, 2019. The increase was primarily driven by a $53.4 million increase in cash paid to repurchase common stock, partially offset by a $9.1 million change related to uncashed checks and a $7.9 million reduction in deferred financing costs paid.

Adjusted Free Cash Flow

Management considers adjusted free cash flow to be a measure of liquidity which provides useful information to both management, creditors and investors about our financial strength and our ability to generate cash. Additionally, adjusted free cash flow is a metric on which a portion of management incentive compensation is based. We define adjusted free cash flow as net cash from operating activities excluding cash impacts of items derived from non-operating activities, such as taxes paid in connection with divestitures, 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 operating activities to adjusted free cash flow for the following periods (in thousands):

[[GREPCENT_TABLE]]
[["","For the years ended December 31,"],["","2021","","2020","","2019"],["Net cash from operating activities","$","545,997","","","$","430,597","","","$","413,192"],["Additions to property, plant and equipment","(241,856)","","","(196,256)","","","(216,324)"],["Purchase and capital improvements of corporate headquarters","\u2014","","","21,080","","","\u2014"],["Proceeds from sale and disposal of fixed assets","22,156","","","9,623","","","11,655"],["Adjusted free cash flow","$","326,297","","","$","265,044","","","$","208,523"]]
[[/GREPCENT_TABLE]]

Summary of Capital Resources

At December 31, 2021, cash and cash equivalents and marketable securities totaled $534.3 million, compared to $571.0 million at December 31, 2020. At December 31, 2021, cash and cash equivalents held by our Canadian subsidiaries totaled $52.1 million. At December 31, 2021, the cash and cash equivalents and marketable securities balance for our U.S. operations was $482.2 million, and our U.S. operations had net operating cash flows of $456.3 million for the year ended December 31, 2021.

We also maintain a $400.0 million revolving credit facility, of which approximately $261.4 million was available to borrow at December 31, 2021.

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Material Capital Requirements

Capital Expenditures

In 2021, our capital expenditures, net of disposals, were $219.7 million, including $19.0 million spent in December 2021 for the purchase of a previously leased HydroChemPSC facility in Deer Park, Texas. We anticipate that 2022 capital spending, net of disposals, will be in the range of $310.0 million to $330.0 million and 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.

In 2021, we began the permitting and planning for a new incinerator at our Kimball, Nebraska facility, which we intend to construct with an estimated completion date in early 2025. We are endeavoring upon this project in response to continued increasing demand for disposal outlets for regulated waste materials and we expect the new incinerator to have an annual practical capacity of approximately 70,000 tons. The current capital expenditure estimate for this project is approximately $180.0 million, of which approximately $7.2 million was spent in 2021. We expect 2022 capital spending for the new incinerator will be between $40.0 million and $45.0 million, which is included in the range noted above. The highest concentration of spending is expected in 2022 and 2023. As noted above, we expect to fund the new incinerator with funds from operations.

Financing Arrangements

As of December 31, 2021, our financing arrangements include (i) $719.6 million of senior secured term loans due 2024, (ii) $545.0 million of 4.875% senior unsecured notes due 2027, (iii) $1.0 billion of senior secured term loans due 2028 and (iv) $300.0 million of 5.125% senior unsecured notes due 2029. We also maintain our $400.0 million revolving credit facility, of which nothing was owed as of December 31, 2021.

The material terms of these arrangements are discussed further in Note 11, “Financing Arrangements,” to our consolidated financial statements included in Item 8 of this report. In 2022, we expect to pay $17.5 million in principal payments on the senior secured term loans and approximately $90 million in interest payments on the entire portfolio of financing arrangements noted above, taking into account the interest rate swaps that were executed in early 2022. These payments will be funded through cash flows generated from the operations of the business. We expect that future payments of interest will continue to be funded through cash flows from operations and any principle payments will either be funded through operations or through available financing alternatives. We continue to monitor our debt instruments and evaluate opportunities where it may be beneficial to refinance or reallocate the portfolio.

As of December 31, 2021, we were in compliance with the covenants of all of our debt agreements, and we believe we will continue to meet such covenants.

Environmental Liabilities

[[GREPCENT_TABLE]]
[["","As of December 31,","","2021 over 2020"],["(in thousands)","2021","","2020","","Change","","% Change"],["Closure and post-closure liabilities","$","99,103","","","$","87,926","","","$","11,177","","","12.7","%"],["Remedial liabilities","111,873","","","114,813","","","(2,940)","","","(2.6)","%"],["Total environmental liabilities","$","210,976","","","$","202,739","","","$","8,237","","","4.1","%"]]
[[/GREPCENT_TABLE]]

Total environmental liabilities as of December 31, 2021 were $211.0 million, an increase of $8.2 million compared to December 31, 2020. This increase was primarily due to annual accretion of $11.7 million, new liabilities, including those assumed in our acquisitions, and changes in environmental liability estimates recorded to the consolidated balance sheet of $8.8 million, and changes in environmental liability estimates resulting in charges to the consolidated statement of operations of $3.0 million, partially offset by expenditures of $15.5 million made during 2021.

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. We have included a schedule of our expected payments as of December 31, 2021, in Note 9, “Closure and Post-closure Liabilities" and Note 10, "Remedial Liabilities,” to our consolidated financial statements included in Item 8 of this report.

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

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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 December 31, 2021, there were $138.6 million outstanding letters of credit. See Note 11, "Financing Arrangements," to our consolidated financial statements included in Item 8 of this report for further discussion of our standby letters of credit and other financing arrangements.

Critical Accounting Estimates

Our consolidated financial statements are based on the application of GAAP, which requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses and related disclosures of contingent liabilities. These estimates and judgements cannot be determined with certainty. Actual results could differ from those estimates, and any such differences may be material to our consolidated financial statements. We believe the estimates set forth below may involve a higher degree of judgment and complexity in their application than our other accounting estimates and represent the critical accounting estimates used in the preparation of our consolidated financial statements. Our accounting policies related to these estimates are discussed in Note 2, "Significant Accounting Policies," to our consolidated financial statements included in Item 8 of this report.

We believe our judgments related to these accounting estimates are appropriate. However, if different assumptions or conditions were to prevail, the results could be materially different from the amounts recorded. Our management reviews critical accounting estimates with the Audit Committee of our Board of Directors on an ongoing basis and as needed prior to the release of our annual financial statements.

Landfill Accounting. We amortize landfill improvements and certain landfill-related permits over their estimated useful lives. The units-of-consumption method is used to amortize land, landfill cell construction, asset retirement costs and remaining landfill cells and sites. We also utilize the units-of-consumption method to record closure and post-closure obligations for landfill cells and sites. Under the units-of-consumption method, we include future estimated construction and asset retirement costs, as well as costs incurred to date, in the amortization base of the landfill assets. Additionally, where appropriate, as discussed below, we include probable expansion airspace yet to be permitted in the calculation of the total remaining useful life of the landfill. If we determine that expansion capacity should no longer be considered in calculating the recoverability of a landfill asset, we may be required to recognize an asset impairment or incur significantly higher amortization expense. If at any time we decide to abandon the expansion effort, the capitalized costs related to the expansion effort are expensed immediately.

Landfill Assets. Landfill assets include the costs of landfill site acquisition, permits and cell construction incurred to date. These amounts are amortized under the units-of-consumption method such that the asset is completely amortized when the landfill ceases accepting waste. Changes in the determination of when the landfill will cease accepting waste, either through a business decision by management, determination that expansion capacity should no longer be considered probable or changes in estimates on annual airspace consumption, will impact the amortization expense of the landfill assets.

Landfill Capacity. Landfill capacity, which is the basis for the amortization of landfill assets and for the accrual of final closure and post-closure obligations, represents total permitted airspace plus unpermitted airspace that management believes is probable of ultimately being permitted based on established criteria. As of December 31, 2021, there were no unpermitted expansions included in management's landfill calculation. If actual expansion airspace is significantly different from management's estimate of expansion airspace, the amortization rates used for the units-of-consumption method would change, therefore impacting our profitability. If we determine that there is less actual expansion airspace at a landfill, this would increase amortization expense recorded and decrease profitability, while if we determine a landfill has more actual expansion airspace, amortization expense would decrease and profitability would increase.

Landfill Final Closure and Post-Closure Liabilities. The balance of landfill final closure and post-closure liabilities at December 31, 2021 and 2020 was $53.4 million and $48.4 million, respectively. We have material financial commitments for the costs associated with requirements of the EPA and the comparable regulatory agency in Canada for landfill final closure and post-closure activities. In the United States, the landfill final closure and post-closure requirements are established under the standards of the EPA, and are implemented and applied on a state-by-state basis. We develop estimates for the cost of these activities based on our evaluation of site-specific facts and circumstances, such as the existence of structures and other landfill improvements that would need to be dismantled, the amount of groundwater monitoring and leachate management expected to be performed and the length of the post-closure period as determined by the applicable regulatory agency. Included in our cost estimates are our interpretation of current regulatory requirements and proposed regulatory changes. These cost estimates may

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change in the future due to various circumstances including, but not limited to, permit modifications, changes in legislation or regulations, technological changes and results of environmental studies. We perform zero-based reviews of these estimated liabilities based upon a planned schedule, typically every five years or sooner if the occurrence of a significant event is likely to change the timing or amount of the currently estimated expenditures. We consider a significant event to be a new regulation or an amendment to an existing regulation, a new permit or modification to an existing permit or a change in the market price of a significant cost item. Our cost estimates are calculated using internal sources as well as input from third-party experts. These costs are measured at estimated fair value using present value techniques, and therefore changes in the estimated timing of closure and post-closure activities would affect the liability, the value of the related asset and our results of operations.

Final closure costs are the costs incurred after the site ceases to accept waste, but before the landfill is certified as closed by the applicable state or provincial regulatory agency. These costs generally include the costs required to cap the final cell of the landfill (if not included in cell closure), dismantle certain structures for landfills and other landfill improvements and regulation-mandated groundwater monitoring and leachate management. Post-closure costs involve the maintenance and monitoring of a landfill site that has been certified closed by the applicable regulatory agency. These costs generally include groundwater monitoring and leachate management. Regulatory post-closure periods are generally 30 years after landfill closure. Final closure and post-closure obligations are accrued on a units-of-consumption basis, such that the present value of the final closure and post-closure obligations are fully accrued at the date the landfill discontinues accepting waste. Changes in the determination of when the landfill will cease accepting waste, either through a business decision by management, determination that expansion capacity should no longer be considered probable or changes in estimates on annual airspace consumption, will accelerate accrual of these costs.

Non-Landfill Closure and Post-Closure Liabilities. The balance of our non-landfill closure and post-closure liabilities at December 31, 2021 and 2020 was $45.7 million and $39.5 million, respectively. We base estimates for non-landfill closure and post-closure liabilities on our interpretations of existing permit and regulatory requirements for closure and post-closure maintenance and monitoring. Our cost estimates are calculated using internal sources as well as input from third-party experts. We estimate when future operations will cease and inflate the current cost of closing the non-landfill facility using the appropriate inflation rate and then discounting the future value to arrive at an estimated present value of closure and post-closure costs. The estimates for non-landfill closure and post-closure liabilities are inherently uncertain due to the possibility that permit and regulatory requirements will change in the future, impacting the estimation of total costs and the timing of the expenditures. We review non-landfill closure and post-closure liabilities for changes to key assumptions that would impact the amount of the recorded liabilities. Changes that would prompt us to revise a liability estimate include changes in legal requirements that impact our expected closure plan or scope of work, in the market price of a significant cost item, in estimates as to when future operations may cease or in the expected timing of the cost expenditures. Changes in estimates for non-landfill closure and post-closure events immediately impact the required liability and the value of the corresponding asset. If a change is made to a fully-amortized asset, the adjustment is charged immediately to expense. When a change in estimate relates to an asset that has not been fully amortized, the adjustment to the asset is recognized in income prospectively as a component of amortization. Historically, material changes to non-landfill closure and post-closure estimates have been infrequent. See Note 9, "Closure and Post-Closure Liabilities," to our consolidated financial statements included in Item 8 of this report for the changes to these Landfill and Non-Landfill Closure and Post-Closure liabilities during the years ended December 31, 2021 and 2020.

Remedial Liabilities. The balance of our remedial liabilities at December 31, 2021 and 2020 was $111.9 million and $114.8 million, respectively. Remedial liabilities are obligations to investigate, alleviate and/or eliminate the effects of a release (or threat of a release) of hazardous substances into the environment and may also include corrective action under RCRA or the corresponding Canadian regulations. Our remediation obligations can be further characterized as legal, Superfund, long-term maintenance and one-time projects. Legal liabilities are typically comprised of litigation matters that involve potential liability for certain aspects of environmental cleanup and can include third-party claims for property damage or bodily injury allegedly arising from or caused by exposure to hazardous substances originating from our activities or operations or, in certain cases, from the actions or inactions of other persons or companies. Superfund liabilities are typically claims alleging that we are a potentially responsible party ("PRP") and/or are potentially liable for environmental response, removal, remediation and cleanup costs at/or from either a facility we own or a site owned by a third-party. As described in Note 17, "Commitments and Contingencies," to our consolidated financial statements included in Item 8 of this report, Superfund liabilities also include certain liabilities payable to government entities for which we are potentially liable to reimburse the sellers in connection with our 2002 acquisition of substantially all of the assets of the Chemical Services Division (the "CSD assets") of Safety-Kleen Corp. Long-term maintenance liabilities include the costs of groundwater monitoring, treatment system operations, permit fees and facility maintenance for inactive operations. One-time projects liabilities include the costs necessary to comply with regulatory requirements for the removal or treatment of contaminated materials.

Amounts recorded related to the costs required to remediate a location are determined by internal engineers and operational personnel and incorporate input from external third parties. The estimates consider such factors as the nature and extent of environmental contamination (if any); the terms of applicable permits and agreements with regulatory authorities as to

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cleanup procedures and whether modifications to such permits and agreements will likely need to be negotiated; the cost of performing anticipated cleanup activities based upon current technology; and in the case of Superfund and other sites where other parties will also be responsible for a portion of the cleanup costs, the likely allocation of such costs and the ability of such other parties to pay their share. Each quarter, our management discusses if any events have occurred or milestones have been met that would warrant the creation of a new remedial liability or the revision of an existing remedial liability. Such events or milestones include identification and verification as a PRP, receipt of a unilateral administrative order under Superfund or requirement for RCRA interim corrective measures, completion of the feasibility study under Superfund or the corrective measures study under RCRA, new or modifications to existing permits, changes in property use or a change in the market price of a significant cost item. Remedial liabilities are inherently difficult to estimate and there is a risk that the actual quantities of contaminants could differ from the results of the site investigation, which could materially impact the amount of our liability. It is also possible that chosen methods of remedial solutions will not be successful and funds will be required for alternative solutions.

Remedial liabilities are discounted when the timing of the payments is estimable and the amounts are determinable, with the exception of remedial liabilities assumed as part of an acquisition that are measured at fair value at the acquisition date.

We establish reserves for estimated environmental liabilities based on acceptable technologies when we determine the liability is appropriate. Introductions of new technologies are subject to successful demonstration of the effectiveness of the alternative technology and regulatory approval. We routinely review and evaluate the sites for which we have established estimated environmental liabilities reserves to determine if there should be changes in the established reserves. The changes in estimates are reflected as adjustments in the ordinary course of business in the period when we determine that an adjustment is appropriate as new information becomes available. Upon demonstration of the effectiveness of the alternative technology and applicable regulatory approval, we update our estimated cost of remediating the affected sites. See Note 10, "Remedial Liabilities," to our consolidated financial statements included in Item 8 of this report for the changes to the remedial liabilities during the years ended December 31, 2021 and 2020. The changes in our estimates have not been material.

Acquisitions. In accordance with the acquisition method of accounting, the purchase price paid for an acquisition is allocated to the assets and liabilities acquired based upon their estimated fair values as of the acquisition date, with the excess of the purchase price over the net assets acquired recorded as goodwill. Intangible assets acquired in a business combination may consist of patents, trademarks and tradenames, developed technology, customer relationships and other intangibles. The fair value for acquired customer relationship intangibles is determined as of the acquisition date based on estimates and judgments regarding expectations for the future after-tax cash flows arising from the follow-on revenue from customer relationships that existed on the acquisition date over their estimated lives, including the probability of expected future revenue from these customers, less a contributory assets charge, all of which is discounted to present value. The fair value of the trademark and tradename intangible assets as well as the developed technology intangible assets are determined utilizing the relief from royalty method which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the tradename or technology and discounted to present value using an appropriate discount rate. Tangible assets acquired in a business combination include real estate and personal property. When determining the fair value of tangible personal property acquired, we must estimate the cost to replace the asset with a new asset taking into consideration such factors as age, condition and the economic useful life of the asset. Valuations are performed by management or third-party valuation specialists under management's supervision, where appropriate.

We applied these approaches to the valuation of the intangible and tangible assets acquired in the acquisition of HydroChemPSC with the assistance of a third-party valuation specialist. In this transaction, the most significant personal property acquired was the equipment used in the performance of the revenue generating operations. We estimated costs to replace these assets considering the factors noted above. The most significant intangible assets acquired were the customer relationship asset and the developed technology asset. Specific to these intangibles, the critical accounting estimates used in determining the fair value of the intangible assets were the estimates of market participant future cash flows driven by estimated revenue growth, operational performance including company specific synergies, estimated customer attrition, assumed obsolescence rates and royalty rates. In addition, the net cash flows were discounted using an appropriate discount rate that requires judgment by management. In total, the estimated preliminary fair value of the tangible and intangible assets associated with the acquisition of HydroChemPSC are $313.5 million and $289.0 million, respectively. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.

These judgments and estimates are subject to uncertainty as future cash flows may differ from those assumed in the valuation of these intangible assets. Due to the nature of valuing a business combination, any significant differences between the estimates made in determining the fair value of the tangible and intangible assets discussed above and the actual future cash flow of the acquired businesses may result in future impairments of the underlying assets. See Goodwill and Other Long Lived Assets section below.

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Goodwill and Other Long Lived Assets. We have a significant amount of goodwill associated with previous acquisitions, including approximately $683.5 million from the acquisition of HydroChemPSC in the fourth quarter of 2021. We conducted our annual impairment test of goodwill as of December 31, 2021 in which we assessed our Environmental Sales and Services, Environmental Facilities and Safety-Kleen Sustainability Solutions reporting units. We compared the fair value of the reporting units to their respective carrying values and determined that no adjustments to the carrying value of goodwill were necessary. In all cases, the estimated fair value of each reporting unit significantly exceeded its carrying value. We measure fair value for all of our reporting units using an income approach (a discounted cash flow analysis) which incorporates several estimates and assumptions with varying degrees of uncertainty, including estimated revenue growth and operational performance. Such assumptions are subject to variability from year to year and are directly impacted by, among other things, macroeconomic conditions. The discounted cash flow analyses include estimated cash flows for a discrete period and for a terminal period thereafter. We corroborate our estimates of fair values by also considering other factors such as the fair value of comparable companies to businesses contained in our reporting units, as well as performing a reconciliation of the total estimated fair value of all reporting units to our market capitalization.

Indefinite-lived intangible assets are not amortized but are reviewed for impairment annually as of December 31, or when events or changes in the business environment indicate that the carrying value may be impaired. This review is performed by comparing the fair value of an indefinite lived intangible asset to its carrying value. We measure fair value for our indefinite lived intangible assets using an income approach (a discounted cash flow analysis) which incorporates several estimates and assumptions with varying degrees of uncertainty, including estimates of future cash flows associated with the intangible assets. If the fair value is less than the carrying value, the impairment loss is measured as the excess of the carrying value of the asset over its fair value. The estimated fair values of our indefinite-lived intangibles exceeded their carrying values at December 31, 2021.

Our long-lived assets are carried on our financial statements based on their cost less accumulated depreciation or amortization. Long-lived assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be entirely recoverable. When such factors and circumstances exist, our management compares the estimated undiscounted future cash flows associated with the related asset or group of assets to the respective carrying amounts. The cash flows used in this analysis include assumptions and estimates with varying degrees of uncertainty, including estimated revenue growth and operational performance. An impairment loss, if any, would be measured as the excess of the carrying amount over the fair value of the asset and recorded in the period in which the determination is made. Any resulting impairment losses recorded by us would have an adverse impact on our results of operations.

Our future cash flow assumptions and conclusions with respect to goodwill and asset impairments could be impacted by changes arising from (i) a sustained period of economic and industrial slowdowns (ii) continued reduced demand for base and blended oil products and an inability to price our oil related products and services to maintain profitability, (iii) inability to scale our operations and implement cost reduction efforts in light of reduced demand or (iv) a significant decline in our share price for a sustained period of time. These factors, among others, could significantly impact the impairment analysis and may result in future goodwill or asset impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations.

Legal Matters. As described in Note 17, "Commitments and Contingencies," to our consolidated financial statements included in Item 8 of this report, we are subject to legal proceedings which relate to our past acquisitions or which have arisen in the ordinary course of business. We accrue for liabilities associated with these matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of then currently available facts with respect to each matter. When no amount within a range of estimates is more likely, the minimum is accrued. As of December 31, 2021, we had reserves of $36.1 million consisting of (i) $24.1 million related to pending legal or administrative proceedings, including Superfund liabilities, which were included in remedial liabilities on the consolidated balance sheets and (ii) $12.0 million primarily related to legal claims as well as federal, state and provincial enforcement actions, which were included in accrued expenses on the consolidated balance sheets. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution. In management's opinion, it is not reasonably possible that the potential liability in excess of what is recorded, if any, that may result from these actions, either individually or collectively, will have a material effect on our financial position, results of operations or cash flows.

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