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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | | | | |
(Mark One) |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended September 10, 2022 |
| 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 001-33987
HERITAGE-CRYSTAL CLEAN, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 26-0351454 |
State or other jurisdiction of | | (I.R.S. Employer |
Incorporation | | Identification No.) |
2000 Center Drive
Suite East C300
Hoffman Estates, IL 60192
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (847) 836-5670
Former Address:
2175 Point Boulevard. Suite 375
Elgin, IL 60123
| | | | | | | | | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each Class | | Trading Symbol | | Name of Exchange on which registered |
Common Stock, par value $0.01 per share | | HCCI | | NASDAQ |
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 x No o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | |
Large accelerated filer o | | | Accelerated filer x |
Non-accelerated filer o | (Do not check if a smaller reporting company) | | 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. o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
On October 18, 2022, there were outstanding 24,177,299 shares of Common Stock, $0.01 par value, of Heritage-Crystal Clean, Inc.
Table of Contents
PART I
ITEM 1. FINANCIAL STATEMENTS
Heritage-Crystal Clean, Inc.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts) | | | | | | | | | | | | | | |
| | September 10, 2022 | | January 1, 2022 |
| | (unaudited) | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 25,714 | | | $ | 56,269 | |
Accounts receivable - net | | 118,716 | | | 62,513 | |
Inventory - net | | 42,470 | | | 29,536 | |
Assets held for sale | | 1,125 | | | 1,125 | |
Other current assets | | 15,033 | | | 6,773 | |
Total current assets | | 203,058 | | | 156,216 | |
Property, plant and equipment - net | | 233,039 | | | 166,301 | |
Right of use assets | | 117,430 | | | 83,865 | |
Equipment at customers - net | | 26,010 | | | 24,146 | |
Software and intangible assets - net | | 43,352 | | | 45,949 | |
Goodwill | | 133,126 | | | 49,695 | |
Investments at fair value | | 3,000 | | | — | |
Other assets | | — | | | 692 | |
Total assets | | $ | 759,015 | | | $ | 526,864 | |
| | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 56,753 | | | $ | 36,179 | |
Current portion of lease liabilities | | 26,709 | | | 20,146 | |
Contract liabilities - net | | 2,637 | | | 2,094 | |
Accrued salaries, wages, and benefits | | 11,926 | | | 8,980 | |
Taxes payable | | 17,320 | | | 8,474 | |
Other current liabilities | | 13,154 | | | 9,476 | |
Revolving credit facility | | 99,324 | | | — | |
Total current liabilities | | 227,823 | | | 85,349 | |
Lease liabilities, net of current portion | | 93,952 | | | 65,041 | |
| | | | |
Other long term liabilities | | 828 | | | 473 | |
Contingent consideration | | — | | | 2,819 | |
Deferred income taxes | | 34,467 | | | 31,126 | |
Total liabilities | | $ | 357,070 | | | $ | 184,808 | |
| | | | |
STOCKHOLDERS' EQUITY: | | | | |
Common stock - 26,000,000 shares authorized at $0.01 par value, 23,595,968 and 23,473,931 shares issued and outstanding at September 10, 2022 and January 1, 2022, respectively | | $ | 236 | | | $ | 235 | |
Additional paid-in capital | | 207,704 | | | 204,920 | |
Retained earnings | | 194,253 | | | 137,067 | |
Accumulated other comprehensive loss | | (248) | | | (166) | |
Total stockholders' equity | | 401,945 | | | 342,056 | |
| | | | |
Total liabilities and stockholders' equity | | $ | 759,015 | | | $ | 526,864 | |
See accompanying notes to financial statements.
Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Income
(In Thousands, Except per Share Amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Third Quarter Ended, | | First Three Quarters Ended, |
| | | September 10, 2022 | | September 11, 2021 | | September 10, 2022 | | September 11, 2021 |
| | | | | | | | | |
Revenues | | | | | | | | |
| Service revenues | | $ | 90,084 | | | $ | 59,737 | | | $ | 234,575 | | | $ | 177,469 | |
| Product revenues | | 75,676 | | | 57,713 | | | 214,948 | | | 151,529 | |
| Rental income | | 6,459 | | | 5,725 | | | 18,710 | | | 16,836 | |
Total revenues | | $ | 172,219 | | | $ | 123,175 | | | $ | 468,233 | | | $ | 345,834 | |
| | | | | | | | | |
Operating expenses | | | | | | | | |
| Operating costs | | $ | 114,147 | | | $ | 79,486 | | | $ | 320,684 | | | $ | 234,584 | |
| Selling, general, and administrative expenses | | 17,086 | | | 13,294 | | | 45,846 | | | 38,522 | |
| Depreciation and amortization | | 8,262 | | | 5,767 | | | 21,546 | | | 15,168 | |
| Other (income) expense - net | | (329) | | | (230) | | | 462 | | | (669) | |
Operating income | | 33,053 | | | 24,858 | | | 79,695 | | | 58,229 | |
Interest expense – net | | 885 | | | 206 | | | 1,358 | | | 707 | |
Income before income taxes | | 32,168 | | | 24,652 | | | 78,337 | | | 57,522 | |
Provision for income taxes | | 8,967 | | | 6,144 | | | 21,151 | | | 14,697 | |
| | | | | | | | |
Net income | | $ | 23,201 | | | $ | 18,508 | | | $ | 57,186 | | | $ | 42,825 | |
| | | | | | | | |
Net income per share: basic | | $ | 0.98 | | | $ | 0.79 | | | $ | 2.43 | | | $ | 1.83 | |
Net income per share: diluted | | $ | 0.98 | | | $ | 0.79 | | | $ | 2.42 | | | $ | 1.82 | |
| | | | | | | | |
Number of weighted average shares outstanding: basic | | 23,592 | | | 23,431 | | | 23,519 | | | 23,403 | |
Number of weighted average shares outstanding: diluted | | 23,674 | | | 23,570 | | | 23,651 | | | 23,548 | |
See accompanying notes to financial statements.
Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Third Quarter Ended, | | First Three Quarters Ended, |
| | | September 10, 2022 | | September 11, 2021 | | September 10, 2022 | | September 11, 2021 |
| | | | | | | | | |
Net income | | $ | 23,201 | | | $ | 18,508 | | | $ | 57,186 | | | $ | 42,825 | |
| Other comprehensive loss: | | | | | | | | |
| Currency translation adjustments | | (7) | | | (143) | | | (82) | | | (143) | |
| Total other comprehensive loss: | | $ | (7) | | | $ | (143) | | | $ | (82) | | | $ | (143) | |
Comprehensive income | | $ | 23,194 | | | $ | 18,365 | | | $ | 57,104 | | | $ | 42,682 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
See accompanying notes to financial statements.
Heritage-Crystal Clean, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(In Thousands, Except Share Amounts)
For the Third Quarter Ended, September 10, 2022 and September 11, 2021
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended, |
September 10, 2022 |
| Shares | | Par Value Common | | Additional Paid–in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | | | Total Equity |
| | | | | | | | | | | | | | | |
Balance, June 18, 2022 | 23,494,045 | | | $ | 235 | | | $ | 206,296 | | | $ | 171,052 | | | $ | (241) | | | | | | | $ | 377,342 | |
Net income | — | | | — | | | — | | | 23,201 | | | — | | | | | | | 23,201 | |
Currency translation adjustment | — | | | — | | | — | | | — | | | (7) | | | | | | | (7) | |
Distribution | — | | | — | | | — | | | — | | | | | | | | | — | |
Issuance of common stock – ESPP | 101,923 | | | 1 | | | 145 | | | — | | | — | | | | | | | 146 | |
Share-based compensation | — | | | — | | | 1,263 | | | — | | | — | | | | | | | 1,263 | |
Share repurchases to satisfy tax withholding obligations | — | | | — | | | — | | | — | | | — | | | | | | | — | |
Balance at September 10, 2022 | 23,595,968 | | | $ | 236 | | | $ | 207,704 | | | $ | 194,253 | | | $ | (248) | | | | | | | $ | 401,945 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Third Quarter Ended, |
September 11, 2021 |
| Shares | | Par Value Common | | Additional Paid–in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | | | Total Equity |
| | | | | | | | | | | | | | | |
Balance, June 19, 2021 | 23,410,606 | | | $ | 234 | | | $ | 203,356 | | | $ | 100,436 | | | $ | — | | | | | | | $ | 304,026 | |
Net income | — | | | — | | | — | | | 18,508 | | | — | | | | | | | 18,508 | |
Currency translation adjustment | — | | | — | | | — | | | — | | | (143) | | | | | | | (143) | |
Distribution | — | | | — | | | — | | | — | | | | | | | | | — | |
Issuance of common stock – ESPP | 4,324 | | | — | | | 124 | | | — | | | — | | | | | | | 124 | |
Share-based compensation | 35,939 | | | — | | | 916 | | | — | | | — | | | | | | | 916 | |
Share repurchases to satisfy tax withholding obligations | — | | | — | | | (867) | | | — | | | — | | | | | | | (867) | |
Balance at September 11, 2021 | 23,450,869 | | | $ | 234 | | | $ | 203,529 | | | $ | 118,944 | | | $ | (143) | | | | | | | $ | 322,564 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
First Three Quarters Ended, |
September 10, 2022 |
| Shares | | Par Value Common | | Additional Paid–in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | | | Total Equity |
| | | | | | | | | | | | | | | |
Balance, January 1, 2022 | 23,473,931 | | | $ | 235 | | | $ | 204,920 | | | $ | 137,067 | | | $ | (166) | | | | | | | $ | 342,056 | |
Net income | — | | | — | | | — | | | 57,186 | | | — | | | | | | | 57,186 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Currency translation adjustment | — | | | — | | | — | | | — | | | (82) | | | | | | | (82) | |
Issuance of common stock – ESPP | 110,550 | | | 1 | | | 396 | | | — | | | — | | | | | | | 397 | |
Share-based compensation | 11,487 | | | — | | | 3,790 | | | — | | | — | | | | | | | 3,790 | |
Share repurchases to satisfy tax withholding obligations | — | | | — | | | (1,402) | | | — | | | — | | | | | | | (1,402) | |
Balance at September 10, 2022 | 23,595,968 | | | $ | 236 | | | $ | 207,704 | | | $ | 194,253 | | | $ | (248) | | | | | | | $ | 401,945 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
First Three Quarters Ended, |
September 11, 2021 |
| Shares | | Par Value Common | | Additional Paid–in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | | | | | Total Equity |
| | | | | | | | | | | | | | | |
Balance, January 2, 2021 | 23,340,700 | | | $ | 233 | | | $ | 201,148 | | | $ | 76,119 | | | $ | — | | | | | | | $ | 277,500 | |
Net income | — | | | — | | | — | | | 42,825 | | | — | | | | | | | 42,825 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Currency Translation Adjustment | — | | | — | | | — | | | — | | | (143) | | | | | | | (143) | |
Issuance of common stock – ESPP | 15,146 | | | — | | | 371 | | | — | | | — | | | | | | | 371 | |
Share-based compensation | 95,023 | | | 1 | | | 3,606 | | | — | | | — | | | | | | | 3,607 | |
Share repurchases to satisfy tax withholding obligations | — | | | — | | | (1,596) | | | — | | | — | | | | | | | (1,596) | |
Balance at September 11, 2021 | 23,450,869 | | | $ | 234 | | | $ | 203,529 | | | $ | 118,944 | | | $ | (143) | | | | | | | $ | 322,564 | |
| | | | | | | | | | | | | | | |
Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
| | | | | | | | | | | | | | |
| | First Three Quarters Ended, |
| | September 10, 2022 | | September 11, 2021 |
Cash flows from Operating Activities: | | | | |
Net income | | $ | 57,186 | | | $ | 42,825 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 21,546 | | | 15,168 | |
Provision for civil action settlement | | 1,100 | | | — | |
Uncollectible provision | | 1,115 | | | 1,069 | |
Share-based compensation | | 4,166 | | | 3,922 | |
Deferred taxes | | 2,292 | | | 6,068 | |
Other, net | | 1,063 | | | (165) | |
Changes in operating assets and liabilities: | | | | |
(Increase) in accounts receivable | | (31,013) | | | (12,883) | |
(Increase) in inventory | | (12,934) | | | (2,803) | |
(Increase) in other current assets | | (6,314) | | | (1,032) | |
Increase in accounts payable | | 15,084 | | | 2,254 | |
Increase in accrued liabilities | | 5,092 | | | 8,704 | |
| | | | |
Cash provided by operating activities | | $ | 58,383 | | | $ | 63,127 | |
| | | | |
Cash flows from Investing Activities: | | | | |
Capital expenditures | | $ | (24,156) | | | $ | (12,039) | |
Proceeds from sale of assets | | 177 | | | 1,612 | |
Investment in Retriev | | (3,000) | | | — | |
Business acquisitions, net of cash acquired | | (157,854) | | | (11,373) | |
Cash used in investing activities | | $ | (184,833) | | | $ | (21,800) | |
| | | | |
Cash flows from Financing Activities: | | | | |
Payment of Term Loan | | — | | | (30,000) | |
Net change in line of credit | | 100,000 | | | — | |
Debt issuance costs | | (100) | | | (822) | |
Repayment of principal on finance leases | | (3,000) | | | (1,582) | |
Share repurchases to satisfy tax withholding obligations | | (1,402) | | | (1,596) | |
Proceeds from the issuance of common stock | | 397 | | | 371 | |
| | | | |
| | | | |
Cash provided by (used in) financing activities | | $ | 95,895 | | | $ | (33,629) | |
Net (decrease) increase in cash and cash equivalents | | (30,555) | | | 7,698 | |
Cash and cash equivalents, beginning of period | | 56,269 | | | 67,575 | |
Cash and cash equivalents, end of period | | $ | 25,714 | | | $ | 75,273 | |
| | | | |
Supplemental disclosure of cash flow information: | | | | |
Income taxes paid | | $ | 11,796 | | | $ | 637 | |
Cash paid for interest | | 627 | | | 125 | |
Supplemental disclosure of non-cash information: | | | | |
Payables for construction in progress | | 2,865 | | | 719 | |
See accompanying notes to financial statements.
HERITAGE-CRYSTAL CLEAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 10, 2022
(1) ORGANIZATION AND NATURE OF OPERATIONS
Heritage-Crystal Clean, Inc., a Delaware corporation and its subsidiaries (collectively the “Company”), provide parts cleaning, used oil re-refining, hazardous and non-hazardous waste disposal, emergency and spill response, and industrial and field services to vehicle maintenance businesses, manufacturers and other industrial businesses, as well as utilities and governmental entities. The Company owns and operates a used oil re-refinery where it re-refines used oils and sells high quality base oil for use in the manufacture of finished lubricants as well as other re-refinery products. The Company also has multiple locations where it dehydrates used oil. The oil processed at these locations is primarily sold as recycled fuel oil. The Company also operates ten non-hazardous waste processing facilities, as well as five antifreeze recycling facilities at which it produces virgin-quality antifreeze. The Company's locations are in the United States and Ontario, Canada. The Company conducts its primary business operations through Heritage-Crystal Clean, LLC, its wholly owned subsidiary, and all intercompany balances have been eliminated in consolidation.
The Company has two reportable segments: "Environmental Services" and "Oil Business." The Environmental Services segment consists of the Company's parts cleaning, hazardous and non-hazardous waste disposal, wastewater vacuum, antifreeze recycling activities, emergency and spill response, and industrial and field services. The Oil Business segment consists of the Company's used oil collection, recycled fuel oil sales, used oil re-refining activities, and used oil filter removal and disposal services. No customer represented greater than 10% of consolidated revenues for any of the periods presented. There were no intersegment revenues. Both segments operate in the United States and, to an immaterial degree, in Ontario, Canada. As such, the Company is not disclosing operating results by geographic segment.
The Company’s fiscal year ends on the Saturday closest to December 31. The most recent fiscal year ended on January 1, 2022. Each of the Company's first three fiscal quarters consists of twelve weeks while the last fiscal quarter consists of sixteen or seventeen weeks.
In the Company's Environmental Services segment, product revenues include sales of solvent, machines, absorbent, accessories, and antifreeze; service revenues include servicing of parts cleaning machines, hazardous and non-hazardous waste removal services, wastewater vacuum services, emergency and spill response, and industrial and field services; rental income includes embedded lease income from certain of our parts cleaning contracts. In the Company's Oil Business segment, product revenues primarily consist of sales of re-refined base oil, re-refinery co-products and recycled fuel oil; service revenues include revenues from used oil collection activities, collecting and disposing of wastewater and removal and disposal of used oil filters. Due to the Company's integrated business model, it is impracticable to separately present costs of tangible products and costs of services.
COVID-19 Pandemic
We are closely monitoring the spread and impact of the COVID-19 pandemic and are continually assessing its potential effects on our business and our financial performance as well as the businesses of our customers and vendors. The Company cannot predict the duration or severity of the COVID-19 pandemic, and we cannot reasonably estimate the financial impact the COVID-19 outbreak will have on our results and significant estimates going forward.
The ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is highly uncertain and cannot be accurately predicted and is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, and any new information that may emerge concerning the COVID-19 outbreak and the actions to contain it or treat its impact. In fiscal 2021, the continued impact on our business as a result of COVID-19 pandemic resulted in additional lost work hours which negatively impacted our ability to service our customers on a timely basis, the effect of which is included in the fiscal 2021 financial operations in this filing. Although no material impact on our business occurred during the third quarter of 2022 or during the first three quarters of 2022, the continued impact on our business as a result of the COVID-19 pandemic could result in a material adverse effect on our business, results of operations, financial condition, prospects and the trading prices of our securities in the near-term and throughout 2022.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 2, "Summary of Significant Accounting Policies," in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2022. There have been no material changes in these policies or their application during the third quarter of fiscal 2022.
(3) BUSINESS COMBINATIONS
On August 3, 2022, Heritage-Crystal Clean, LLC, completed its acquisition of all of the issued and outstanding shares of the capital stock of Patriot Environmental Services, Inc. ("Patriot"), a leading provider of environmental services across the Western United States specializing in emergency response, industrial services, OSRO spill response and a wide variety of waste services. Total consideration for the acquisition was approximately $157.9 million in cash subject to various adjustments such as a working capital adjustment and seller indemnification obligations. To date, there have been no adjustments to the purchase price. Goodwill recognized from the acquisition of Patriot, represents the excess of the estimated purchase consideration transferred over the estimated fair value of the assets acquired and liabilities assumed. The Company has not yet completed the fair value valuation with a 3rd party specialist and therefore is still in the process of finalizing the purchase price allocation for the acquisition as of September 10, 2022. Furthermore, acquisition deferred taxes are not yet finalized as of September 10, 2022. Factors leading to goodwill being recognized are the Company’s expectation of synergies from combining operations of Patriot, and the Company as well as the value of intangible assets that are not separately recognized, such as the assembled workforce. Transaction costs incurred in conjunction with the acquisition of Patriot were approximately $0.9 million. The results of Patriot are consolidated into the Company’s Environmental Services segment from the date of acquisition.
On September 27, 2021, the Company completed the acquisition of Source Environmental, Inc., ("Source Environmental"), which increased the Company's penetration in the hazardous and non-hazardous waste business in several markets in the Western U.S. This transaction also provided the Company with the opportunity to internalize the performance of certain field service activities in the Western U.S. Total consideration for the acquisition was approximately $20.4 million. To date, there have been no adjustments to the purchase price. Factors leading to goodwill being recognized are the Company’s expectation of synergies from combining operations of Source Environmental, and the Company as well as the value of intangible assets that are not separately recognized, such as the assembled workforce. Transaction costs incurred in conjunction with the acquisition of Source Environmental were immaterial. The results of Source Environmental are consolidated into the Company’s Environmental Services segment from the date of acquisition.
On September 13, 2021, the Company completed the acquisition of Raider Environmental Services of Florida, Inc., ("Raider Environmental"), which expanded the Company's network of wastewater processing, oil collection and non-hazardous waste consolidation and solidification to better serve the Company's customers in Florida and throughout the Southern United States. Total consideration for the acquisition was approximately $13.7 million. To date, there have been no adjustments to the purchase price. This acquisition provided the Company another wastewater treatment facility as well as assets to help further the Company's initiative to increase its non-hazardous containerized waste processing capabilities. This also provided the Company with exposure to industry verticals in which it didn't previously participate. Factors leading to goodwill being recognized are the Company’s expectation of synergies from combining operations of Raider Environmental, and the Company as well as the value of intangible assets that are not separately recognized, such as the assembled workforce. Transaction costs incurred in conjunction with the acquisition of Raider Environmental were immaterial. The results of Raider Environmental are consolidated primarily into the Company’s Environmental Services segment and an immaterial amount in the Oil Business segment from the date of acquisition.
On August 24, 2021, Heritage-Crystal Clean completed the acquisition of certain assets of Bakersfield Transfer, Inc., and Cole’s Services, Inc., together known as ("Cole's Environmental"), which processed, stored, and disposed of hazardous waste within the state of California. The purchase price was $17.3 million subject to certain adjustments, including a contingent consideration provision. Goodwill recognized from the acquisition of Cole's Environmental, represents the excess of the estimated purchase consideration transferred over the estimated fair value of the assets acquired and liabilities assumed. To date, there have been no adjustments to the purchase price. Factors leading to goodwill being recognized are the Company’s expectation of synergies from combining operations of Cole's Environmental, and the Company as well as the value of intangible assets that are not separately recognized, such as the assembled workforce. The results of Cole's Environmental are consolidated primarily into the Company’s Environmental Services segment and an immaterial amount in the Oil Business segment from the date of acquisition.
The following table summarizes the estimated fair values of the assets acquired, net of cash acquired, related to each acquisition as of September 10, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 10, 2022 |
(thousands) | Source Environmental, Inc.(1) | | Raider Environmental Services of Florida, Inc.(1) | | Cole's Environmental(1) | | Patriot Environmental Services, Inc.(2) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | $ | 1,064 | | | $ | 488 | | | $ | — | | | $ | 26,305 | | | | | | | | | | | | | | | |
Inventory | — | | | — | | | 73 | | | — | | | | | | | | | | | | | | | |
Other current assets | 6 | | | 162 | | | — | | | 1,947 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Property, plant, & equipment | 174 | | | 4,404 | | | 2,455 | | | 57,932 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Intangible assets | 13,692 | | | 6,056 | | | 9,620 | | | — | | | | | | | | | | | | | | | |
Goodwill | 6,174 | | | 2,835 | | | 5,144 | | | 83,431 | | | | | | | | | | | | | | | |
Accounts payable and accruals | (677) | | | (218) | | | — | | | (11,761) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total purchase price, net of cash acquired | $ | 20,433 | | | $ | 13,727 | | | $ | 17,292 | | | $ | 157,854 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Less: contingent consideration | — | | | — | | | 4,464 | | | — | | | | | | | | | | | | | | | |
Less: placed in escrow | — | | | — | | | 100 | | | 2,780 | | | | | | | | | | | | | | | |
Net cash paid | $ | 20,433 | | | $ | 13,727 | | | $ | 12,728 | | | $ | 155,074 | | | | | | | | | | | | | | | |
(1) The above purchase price allocations are final as of September 10, 2022.
(2) The Company is still in the process of finalizing the purchase price allocation for the acquisition and therefore all balances are provisional.
Unaudited Pro Forma Financial Information
The pro forma financial information in the table below presents the combined results of the Company as if the Patriot acquisition had occurred on January 2, 2021. The pro forma information is shown for illustrative purposes only and is not necessarily indicative of future results of operations of the Company or results of operations of the Company that would have actually occurred had the transactions been in effect for the periods presented.
| | | | | | | | | | | | | | |
| | Third Quarter Ended, |
(thousands, except per share data) | | September 10, 2022 | | September 11, 2021 |
Total revenues | | $ | 179,832 | | | $ | 148,005 | |
Net income | | $ | 21,796 | | | $ | 20,744 | |
| | | | |
Net income per share: basic | | $ | 0.92 | | | $ | 0.89 | |
Net income per share: diluted | | $ | 0.92 | | | $ | 0.88 | |
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| | First Three Quarters Ended, |
(thousands, except per share data) | | September 10, 2022 | | September 11, 2021 |
Total revenues | | $ | 541,008 | | | $ | 418,878 | |
Net income | | $ | 56,409 | | | $ | 44,734 | |
| | | | |
Net income per share: basic | | $ | 2.40 | | | $ | 1.91 | |
Net income per share: diluted | | $ | 2.39 | | | $ | 1.90 | |
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The following sets forth certain adjustments made in the preparation of the unaudited pro forma financial statements. All pro forma adjustments are based on preliminary estimates and assumptions and are subject to revision upon finalization of the purchase accounting for the Acquisition:
•Reflects adjustments to selling, general, and administrative expenses to exclude transaction costs of $0.9 million incurred to execute the purchase that were expensed in the first three quarters of fiscal 2022. Additional adjustment of estimated cost savings of $3.6 million related to layoffs of personnel as a result of the acquisition.
•Pro forma adjustment related to estimated additional depreciation expense as a result of the $31.8 million of step up to fair value of the property, plant, and equipment with an average estimated useful life of 7 years.
•Pro forma adjustment related to estimated additional interest expense as a result of the draw on the line of credit in order to fund the acquisition.
(4) REVENUE
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when our performance obligations under the terms of a contract with our customers are satisfied. Recognition occurs when the Company transfers control by completing the specified services at the point in time the customer benefits from the services performed or once our products are delivered. The majority of revenue is recognized at a point in time, except for rental income which is recognized on an over time basis. The Company measures progress toward complete satisfaction of a performance obligation satisfied over time using a cost-based input method. This method of measuring progress provides a faithful depiction of the transfer of goods or services because the costs incurred are expected to be substantially proportionate to the Company’s satisfaction of the performance obligation. Revenue is measured as the amount of consideration we expect to receive in exchange for completing our performance obligations. Sales tax and other taxes we collect with revenue-producing activities are excluded from revenue. In the case of contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on the relative stand-alone selling prices of the various goods and/or services encompassed by the contract. We do not have any material significant payment terms as payment is generally due within 30 days after the performance obligation has been satisfactorily completed. The Company has elected the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. In applying the guidance in Topic 606, there were no judgments or estimates made that the Company deems significant.
Contract Balances — Contract assets primarily relate to the Company’s rights to consideration for work completed in relation to its services performed but not billed at the reporting date. Contract liabilities primarily consist of advance payments of performance obligations yet to be fully satisfied in the period reported. Our contract liabilities and contract assets are reported in a net position at the end of each reporting period.
We disaggregate our revenue from contracts with customers by major lines of business for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
The following table disaggregates our revenue by major lines: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended, |
| | September 10, 2022 | | September 11, 2021 |
Total Net Sales by Major Lines of Business (thousands) | | Environmental Services | | Oil Business | | Total | | Environmental Services | | Oil Business | | Total |
Parts Cleaning, Containerized Waste, & related products/services | | $ | 51,731 | | | $ | — | | | $ | 51,731 | | | $ | 40,232 | | | $ | — | | | $ | 40,232 | |
Wastewater Vacuum Services | | 21,169 | | | — | | | 21,169 | | | 15,131 | | | — | | | 15,131 | |
Field Services | | 19,822 | | | — | | | 19,822 | | | 5,063 | | | — | | | 5,063 | |
Antifreeze Business | | 7,036 | | | — | | | 7,036 | | | 5,730 | | | — | | | 5,730 | |
Environmental Services - Other | | 475 | | | — | | | 475 | | | 458 | | | — | | | 458 | |
Re-Refinery Product Sales | | — | | | 62,618 | | | 62,618 | | | — | | | 45,275 | | | 45,275 | |
Oil Collection Services & RFO | | — | | | 1,712 | | | 1,712 | | | — | | | 4,425 | | | 4,425 | |
Oil Filter Business | | — | | | 1,197 | | | 1,197 | | | — | | | 1,136 | | | 1,136 | |
Revenues from Contracts with Customers | | 100,233 | | | 65,527 | | | 165,760 | | | 66,614 | | | 50,836 | | | 117,450 | |
Rental income | | 6,445 | | | 14 | | | 6,459 | | | 5,725 | | | — | | | 5,725 | |
Total Revenues | | $ | 106,678 | | | $ | 65,541 | | | $ | 172,219 | | | $ | 72,339 | | | $ | 50,836 | | | $ | 123,175 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | First Three Quarters Ended, |
| | September 10, 2022 | | September 11, 2021 |
Total Net Sales by Major Lines of Business (thousands) | | Environmental Services | | Oil Business | | Total | | Environmental Services | | Oil Business | | Total |
Parts cleaning, containerized waste, & related products/services | | $ | 148,908 | | | $ | — | | | $ | 148,908 | | | $ | 119,805 | | | $ | — | | | $ | 119,805 | |
Wastewater Vacuum Services | | 59,710 | | | — | | | 59,710 | | | 43,671 | | | — | | | 43,671 | |
Field Services | | 32,651 | | | — | | | 32,651 | | | 13,908 | | | — | | | 13,908 | |
Antifreeze Business | | 21,810 | | | — | | | 21,810 | | | 19,003 | | | — | | | 19,003 | |
Environmental Services - Other | | 1,456 | | | — | | | 1,456 | | | 1,306 | | | — | | | 1,306 | |
Re-refinery Product Sales | | — | | | 165,955 | | | 165,955 | | | — | | | 114,158 | | | 114,158 | |
Oil Collection Services & RFO | | — | | | 15,278 | | | 15,278 | | | — | | | 13,594 | | | 13,594 | |
Oil Filter Business | | — | | | 3,755 | | | 3,755 | | | — | | | 3,553 | | | 3,553 | |
Revenues from Contracts with Customers | | 264,535 | | | 184,988 | | | 449,523 | | | 197,693 | | | 131,305 | | | 328,998 | |
Rental income | | 18,673 | | | 37 | | | 18,710 | | | 16,818 | | | 18 | | | 16,836 | |
Total Revenues | | $ | 283,208 | | | $ | 185,025 | | | $ | 468,233 | | | $ | 214,511 | | | $ | 131,323 | | | $ | 345,834 | |
The following table provides information about contract assets and contract liabilities from contracts with customers: | | | | | | | | | | | | | | | | | |
(thousands) | | September 10, 2022 | | January 1, 2022 |
Contract assets | | $ | 84 | | | $ | 268 | |
Contract liabilities | | 2,721 | | | 2,362 | |
Contract liabilities - net | | $ | 2,637 | | | $ | 2,094 | |
During the fiscal quarter ended September 10, 2022, the Company recognized no revenue that was included in the contract liabilities balance as of January 1, 2022. During the first three quarters ended September 10, 2022, the Company recognized $2.4 million of revenue that was included in the contract liabilities balance as of January 1, 2022. The Company has no assets recognized from costs to obtain or fulfill a contract with a customer. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
(5) ACCOUNTS RECEIVABLE
Accounts Receivable — Net, includes amounts billed to and currently due from customers. The amounts due are stated at their net estimated realizable value. The allowance for uncollectible accounts is our best estimate of the amount of probable lifetime-expected credit losses in existing accounts receivable and is determined based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole. The Company does not have any off-balance-sheet credit exposure related to its customers.
Accounts receivable for the third quarter ended September 10, 2022, and the fiscal year ended January 1, 2022 consisted of the following:
| | | | | | | | | | | | | | |
(thousands) | | September 10, 2022 | | January 1, 2022 |
Trade | | $ | 115,278 | | | $ | 59,132 | |
Less: allowance for uncollectible accounts | | 5,169 | | | 2,928 | |
Trade - net | | 110,109 | | | 56,204 | |
Related parties | | 7,817 | | | 5,410 | |
Other | | 790 | | | 899 | |
Total accounts receivable - net | | $ | 118,716 | | | $ | 62,513 | |
The following table provides the changes in the Company’s allowance for uncollectible accounts for the first three quarters ended September 10, 2022, and the fiscal year ended January 1, 2022:
| | | | | | | | | | | | | | |
| | | | |
(thousands) | | September 10, 2022 | | January 1, 2022 |
Balance at beginning of period | | $ | 2,928 | | | $ | 2,502 | |
Provision for uncollectible accounts | | 1,115 | | | 1,930 | |
Additions through acquisitions | | 1,586 | | | — | |
Accounts written off, net of recoveries | | (460) | | | (1,504) | |
Balance at end of period | | $ | 5,169 | | | $ | 2,928 | |
(6) INVENTORY
The carrying value of inventory consisted of the following:
| | | | | | | | | | | | | | |
(thousands) | | September 10, 2022 | | January 1, 2022 |
Solvents and solutions | | $ | 11,600 | | | $ | 7,704 | |
Used oil and processed oil | | 17,109 | | | 9,361 | |
Machines | | 5,415 | | | 4,995 | |
Drums and supplies | | 6,322 | | | 5,731 | |
Other | | 2,464 | | | 2,246 | |
Total inventory | | 42,910 | | | 30,037 | |
Less: machine refurbishing reserve | | 440 | | | 501 | |
Total inventory - net | | $ | 42,470 | | | $ | 29,536 | |
| | | | |
Inventory consists primarily of used oil, processed oil, solvents and solutions, new and refurbished parts cleaning machines, drums and supplies, and other items. Inventories are valued at the lower of first-in, first-out (FIFO) cost or net realizable value, net of any reserves for excess, obsolete, or unsalable inventory. The Company monitors its inventory levels at each of its locations and evaluates inventories for excess or slow-moving items. If circumstances indicate the cost of inventories exceed their recoverable value, inventories are reduced to net realizable value. The Company had no inventory write downs during the third quarter of fiscal 2022 or 2021.
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is measured as a residual amount as of the acquisition date, which in most cases results in measuring goodwill as an excess of the purchase consideration transferred plus the fair value of any noncontrolling interest in the acquiree over the fair value of the net assets acquired, including any contingent consideration. The Company tests goodwill for impairment annually in the fourth quarter and in interim periods if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company's determination of fair value requires certain assumptions and estimates, such as margin expectations, market conditions, growth expectations, expected changes in working capital, etc., regarding expected future profitability and expected future cash flows. The Company reports and tests goodwill for impairment only in its Environmental Services reporting unit as the Oil Business segment has no recorded goodwill.
The following table shows changes to our goodwill balances by segment from January 1, 2022 to September 10, 2022: | | | | | | | | | | | | | | | | | | |
(thousands) | | | | Environmental Services | | Total |
| | | | | | |
Goodwill at January 1, 2022 | | | | | | |
Gross carrying amount | | | | $ | 49,695 | | | $ | 49,695 | |
Accumulated impairment loss | | | | — | | | — | |
Net book value at January 1, 2022 | | | | $ | 49,695 | | | $ | 49,695 | |
Acquisitions | | | | 83,431 | | | 83,431 | |
Goodwill at September 10, 2022 | | | | | | |
Gross carrying amount | | | | 133,126 | | | $ | 133,126 | |
Accumulated impairment loss | | | | — | | | — | |
Net book value at September 10, 2022 | | | | $ | 133,126 | | | $ | 133,126 | |
The following is a summary of software and other intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 10, 2022 | | January 1, 2022 |
(thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer & supplier relationships | | $ | 47,168 | | | $ | 23,888 | | | $ | 23,280 | | | $ | 47,167 | | | $ | 20,725 | | | $ | 26,442 | |
Permits | | 13,590 | | | 1,425 | | | 12,165 | | | 13,590 | | | 879 | | | 12,711 | |
Software | | 13,411 | | | 7,057 | | | 6,354 | | | 11,721 | | | 6,399 | | | 5,322 | |
Non-compete agreements | | 4,427 | | | 3,580 | | | 847 | | | 4,048 | | | 3,340 | | | 708 | |
Patents, formulae, and licenses | | 1,769 | | | 951 | | | 818 | | | 1,769 | | | 906 | | | 863 | |
Other* | | 606 | | | 718 | | | (112) | | | 996 | | | 1,093 | | | (97) | |
Total software and intangible assets | | $ | 80,971 | | | $ | 37,619 | | | $ | 43,352 | | | $ | 79,291 | | | $ | 33,342 | | | $ | 45,949 | |
*Other intangibles include an above market lease acquired in September 2021 that had a fair value of ($0.7) million upon acquisition and is being accreted over the remaining useful life of the lease.
Amortization expense was $1.5 million for the third quarter ended September 10, 2022, and $1.1 million for the third quarter ended September 11, 2021. Amortization expense was $4.3 million for the first three quarters ended September 10, 2022, and $3.4 million for the first three quarters ended September 11, 2021.
The weighted average useful lives of software and other intangibles are as follows: | | | | | | | | |
| | Weighted Average Useful Life (years) |
Permits | | 16 |
Patents, formulae, & licenses | | 15 |
Customer and supplier relationships | | 12 |
Software | | 9 |
Non-compete agreements | | 5 |
Other | | 7 |
The estimated amortization expense for the remainder of fiscal 2022 and each of the five succeeding fiscal years is as follows: | | | | | | | | |
(millions) | | |
Fiscal Year | | Amortization Expense |
2022 | | $1.9 |
2023 | | 5.7 |
2024 | | 4.1 |
2025 | | 3.1 |
2026 | | 2.5 |
2027 | | 2.5 |
The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, the finalization of the fair value of intangible assets that have been acquired from business combinations, disposal of intangible assets, accelerated amortization of intangible assets, and other events.
(8) ACCOUNTS PAYABLE
Accounts payable consisted of the following:
| | | | | | | | | | | | | | |
(thousands) | | September 10, 2022 | | January 1, 2022 |
Accounts payable | | $ | 56,065 | | | $ | 35,613 | |
Accounts payable - related parties | | 688 | | | 566 | |
Total accounts payable | | $ | 56,753 | | | $ | 36,179 | |
(9) DEBT AND FINANCING ARRANGEMENTS
Bank Credit Facility
On March 18, 2021, Heritage-Crystal Clean, LLC, (the “Company”), entered into an Amended and Restated Credit Agreement (the "Agreement"), by and among the Company, its parent, Heritage-Crystal Clean, Inc., and the Company’s subsidiaries identified therein and Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., and Wells Fargo Bank, National Association. The Agreement replaced the Company's previous Credit Agreement dated as of February 21, 2017. During the first quarter of 2021 the Company paid down its previous term loan, in full, of $30.0 million. The Agreement provided for borrowings of up to $100.0 million, in the form of a revolving facility, of which $15 million can be used in the form of a Swing Line loan. The Agreement also provided for up to an additional $50.0 million of borrowings using an accordion feature upon approval of the lenders. On August 3, 2022, the Company entered into an Amendment (Amendment No. 1 to the Agreement "the Amendment") which increased the amount of borrowing under the revolving credit line to $150.0 million. The Company then utilized the credit line to finance $115.0 million of the acquisition of Patriot Environmental Services Inc. (see Note 3). The Amendment also provides for up to an additional $50.0 million of borrowings under an accordion feature upon approval of the lenders.
Loans made under the Agreement, as amended, may be Base Rate Loans or Secured Overnight Financing Rate ("SOFR") Loans, at the election of the Borrower subject to certain exceptions. Base Rate Loans have an interest rate equal to (i) the higher of (a) the federal funds rate plus 0.5%, (b) the SOFR plus a margin of 1%, or (c) Bank of America's prime rate, plus a margin of 1.00%. SOFR rate loans have an interest rate equal to (i) the SOFR rate plus (ii) a variable margin of between 1.50% and 2.25% depending on the Company's total leverage ratio. Amounts borrowed under the Agreement are secured by a security interest in substantially all of the Company's tangible and intangible assets. The Company incurred $0.8 million of debt issuance costs related to the amended credit agreement in the first three quarters ended 2021. The Company incurred an additional $0.1 million of debt issuance costs related to the amendment of the credit agreement and drawdown.
The Company's weighted average interest rate for all debt for the first three quarters ended September 10, 2022 was 2.7%.
The Credit Agreement contains customary terms and provisions (including representations, covenants, and conditions) for transactions of this type. Certain covenants, among other things, restrict the Company's and its subsidiaries' ability to incur indebtedness, grant liens, make investments and sell assets. The Credit Agreement also contains customary events of default, covenants and representations and warranties. Financial covenants include:
•An interest coverage ratio (based on interest expense and EBITDA) of at least 3.5 to 1.0;
•A total leverage ratio no greater than 3.0 to 1.0, provided that in the event of a permitted acquisition having an aggregate consideration equal to $10.0 million or more, at the Borrower’s election, the foregoing 3.00 to 1.00 shall be deemed to be 3.50 to 1.00 for the fiscal quarter in which such permitted acquisition occurs and the three immediately following fiscal quarters and will thereafter revert to 3.00 to 1.00.
The Credit Agreement places certain limitations on acquisitions and the payment of dividends.
Debt at September 10, 2022 and January 1, 2022 consisted of the following:
| | | | | | | | | | | | | | |
(thousands) | | September 10, 2022 | | January 1, 2022 |
Principal amount (revolving loan) | | $ | 100,000 | | | $ | — | |
Less: unamortized debt issuance costs | | 676 | | | — | |
Revolving loan, net of debt issuance costs | | $ | 99,324 | | | $ | — | |
For the third quarter ended September 10, 2022, the Company recorded interest expense of $0.9 million with respect to our credit line and related amortization of debt issuance costs. For the third quarter ended September 11, 2021, the Company recorded interest expense of $0.2 million with respect to our credit line, and related amortization of debt issuance costs.
As of September 10, 2022 and January 1, 2022, the Company was in compliance with all covenants under its Credit Agreement. As of September 10, 2022 and January 1, 2022, the Company, had $6.0 million and $5.6 million, of standby letters of credit issued, respectively, and $44.0 million and $94.4 million was available for borrowing under the bank credit facility, respectively.
(10) SEGMENT INFORMATION
The Company has two reportable segments: "Environmental Services" and "Oil Business." The Environmental Services segment consists primarily of the Company's parts cleaning, hazardous and non-hazardous waste disposal, wastewater vacuum, antifreeze recycling, emergency and spill response, and industrial and field services. The Oil Business segment consists primarily of the Company's used oil collection, used oil re-refining activities, and the dehydration of used oil to be sold as recycled fuel oil.
No single customer in either segment accounted for more than 10.0% of consolidated revenues in any of the periods presented. There were no intersegment revenues. Both the Environmental Services and Oil Business segments operate in the United States and, to an immaterial degree, in Ontario, Canada. As such, the Company is not disclosing operating results by geographic segment.
Segment results for the third quarters ended September 10, 2022 and September 11, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended, |
September 10, 2022 |
(thousands) | | Environmental Services | | Oil Business | | Corporate and Eliminations | | Consolidated |
| | | | | | | | | |
Revenues | | | | | | | | |
| Service revenues | | $ | 87,530 | | | $ | 2,554 | | | $ | — | | | $ | 90,084 | |
| Product revenues | | 12,703 | | | 62,973 | | | — | | | 75,676 | |
| Rental income | | 6,445 | | | 14 | | | — | | | 6,459 | |
Total revenues | | $ | 106,678 | | | $ | 65,541 | | | $ | — | | | $ | 172,219 | |
Operating expenses | | | | | | | | |
| Operating costs | | 77,559 | | 36,588 | | — | | | 114,147 | |
| Operating depreciation and amortization | | 4,367 | | 2,338 | | — | | | 6,705 | |
Profit before corporate selling, general, and administrative expenses | | $ | 24,752 | | | $ | 26,615 | | | $ | — | | | $ | 51,367 | |
Selling, general, and administrative expenses | | | | | | 17,086 | | 17,086 |
Depreciation and amortization from SG&A | | | | | | 1,557 | | 1,557 |
Total selling, general, and administrative expenses | | | | | | $ | 18,643 | | | $ | 18,643 | |
Other (income) - net | | | | | | (329) | | | (329) |
Operating income | | | | | | | | 33,053 |
Interest expense – net | | | | | | 885 | | 885 |
Income before income taxes | | | | | | | | $ | 32,168 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended, |
September 11, 2021 |
(thousands) | | Environmental Services | | Oil Business | | Corporate and Eliminations | | Consolidated |
| | | | | | | | | |
Revenues | | | | | | | | |
| Service revenues | | $ | 56,887 | | | $ | 2,850 | | | $ | — | | | $ | 59,737 | |
| Product revenues | | 9,727 | | | 47,986 | | | — | | | 57,713 | |
| Rental income | | 5,725 | | | — | | | — | | | 5,725 | |
Total revenues | | $ | 72,339 | | | $ | 50,836 | | | $ | — | | | $ | 123,175 | |
Operating expenses | | | | | | | | |
| Operating costs | | 52,598 | | 26,888 | | — | | | 79,486 |
| Operating depreciation and amortization | | 2,482 | | 2,175 | | — | | | 4,657 |
Profit before corporate selling, general, and administrative expenses | | $ | 17,259 | | | $ | 21,773 | | | $ | — | | | $ | 39,032 | |
Selling, general, and administrative expenses | | | | | | 13,294 | | 13,294 |
Depreciation and amortization from SG&A | | | | | | 1,110 | | 1,110 |
Total selling, general, and administrative expenses | | | | | | $ | 14,404 | | | $ | 14,404 | |
Other (income) - net | | | | | | (230) | | | (230) |
Operating income | | | | | | | | 24,858 |
Interest expense – net | | | | | | 206 | | 206 |
Income before income taxes | | | | | | | | $ | 24,652 | |
Segment results for the first three quarters ended September 10, 2022, and September 11, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
First Three Quarters Ended, |
September 10, 2022 |
(thousands) | | Environmental Services | | Oil Business | | Corporate and Eliminations | | Consolidated |
| | | | | | | | | |
Revenues | | | | | | | | |
| Service revenues | | $ | 226,809 | | | $ | 7,766 | | | $ | — | | | $ | 234,575 | |
| Product revenues | | 37,726 | | | 177,222 | | | — | | | 214,948 | |
| Rental income | | 18,673 | | | 37 | | | — | | | 18,710 | |
Total revenues | | $ | 283,208 | | | $ | 185,025 | | | $ | — | | | $ | 468,233 | |
Operating expenses | | | | | | | | |
| Operating costs | | 214,091 | | 106,593 | | — | | | 320,684 |
| Operating depreciation and amortization | | 10,448 | | 6,547 | | — | | | 16,995 | |
Profit before corporate selling, general, and administrative expenses | | $ | 58,669 | | | $ | 71,885 | | | $ | — | | | $ | 130,554 | |
Selling, general, and administrative expenses | | | | | | 45,846 | | 45,846 |
Depreciation and amortization from SG&A | | | | | | 4,551 | | 4,551 |
Total selling, general, and administrative expenses | | | | | | $ | 50,397 | | | $ | 50,397 | |
Other expense - net | | | | | | 462 | | | 462 |
Operating income | | | | | | | | 79,695 |
Interest expense – net | | | | | | 1,358 | | 1,358 |
Income before income taxes | | | | | | | | $ | 78,337 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
First Three Quarters Ended, |
September 11, 2021 |
(thousands) | | Environmental Services | | Oil Business | | Corporate and Eliminations | | Consolidated |
| | | | | | | | | |
Revenues | | | | | | | | |
| Service revenues | | $ | 166,593 | | | $ | 10,876 | | | | | $ | 177,469 | |
| Product revenues | | 31,100 | | | 120,429 | | | — | | | 151,529 | |
| Rental income | | 16,818 | | | 18 | | | | | 16,836 | |
Total revenues | | $ | 214,511 | | | $ | 131,323 | | | $ | — | | | $ | 345,834 | |
Operating expenses | | | | | | | | |
| Operating costs | | 155,596 | | 78,988 | | — | | | 234,584 |
| Operating depreciation and amortization | | 6,490 | | 5,233 | | | | 11,723 |
Profit before corporate selling, general, and administrative expenses | | $ | 52,425 | | | $ | 47,102 | | | $ | — | | | $ | 99,527 | |
Selling, general, and administrative expenses | | | | | | 38,522 | | 38,522 |
Depreciation and amortization from SG&A | | | | | | 3,445 | | 3,445 |
Total selling, general, and administrative expenses | | | | | | $ | 41,967 | | | $ | 41,967 | |
Other (income) - net | | | | | | (669) | | (669) |
Operating income | | | | | | | | 58,229 |
Interest expense – net | | | | | | 707 | | 707 |
Income before income taxes | | | | | | | | $ | 57,522 | |
| | | | | | | | | |
Total assets by segment as of September 10, 2022 and January 1, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | |
(thousands) | | September 10, 2022 | | January 1, 2022 |
Total Assets: | | | | |
| Environmental Services | | $ | 499,864 | | | $ | 281,333 | |
| Oil Business | | 197,922 | | | 171,188 | |
| Unallocated Corporate Assets | | 61,229 | | | 74,343 | |
Total | | $ | 759,015 | | | $ | 526,864 | |
Segment assets for the Environmental Services and Oil Business segments consist of property, plant, and equipment, right-of-use assets, intangible assets, accounts receivable, goodwill, and inventories. Assets for the corporate unallocated amounts consist of property, plant, and equipment used at the corporate headquarters as well as cash and net deferred tax assets.
(11) COMMITMENTS AND CONTINGENCIES
LEASES
Lessee
The Company leases buildings and property, railcars, machinery and equipment, and various types of vehicles and trailers for use in our operations. Each arrangement is evaluated individually to determine if the arrangement is or contains a lease at inception. The Company has lease agreements with lease and non-lease components and we have elected to not separate lease and non-lease components for all classes of underlying assets. In addition, our lease agreements do not contain any material residual guarantees or restrictive covenants.
Leases may include variable lease payments for common area maintenance, real estate taxes, and truck lease mileage. Variable lease payments are not included in the initial measurement of the right-of-use assets or lease liabilities, and are recorded as lease expense in the period incurred. Options to extend or terminate a lease are included in the lease term when it is reasonably certain that we will exercise that option. We have elected not to record leases with an initial term of 12 months or less on the balance sheet and instead recognize those lease payments on a straight-line basis over the lease term. Leases with initial terms in excess of 12 months are recorded as either operating or financing leases in our Consolidated Balance Sheet.
Right-of-use assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Our leased right-of-use assets are measured at the initial measurement of the lease liability, adjusted for any lease payments made prior to the lease commencement date, less any lease incentives received and other initial direct costs incurred. Our lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments.
Our leases have remaining terms ranging from less than one month to approximately 12 years and may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term. Our finance leases include a fleet of mobile equipment.
Lessor
The Company is a lessor of portions of buildings and property, railcars, and equipment such as embedded leases of parts cleaning machines. Each of the Company’s leases is classified as an operating lease, and the vast majority are short-term leases. Variable lease payments include real and personal property taxes, which are based on the lessee’s pro rata portion of such amounts, and excess mileage charges which are computed as the actual miles traveled in a calendar year minus the maximum average mileage allowance as specified per the contract. Options to extend the lease beyond the original terms range from day-to-day renewals to increments of five-year extensions. Options to terminate the lease range from immediate termination upon return of the asset to various written notification periods following a minimum lease term. Options for a lessee to purchase the underlying asset are not contractually specified but may be negotiated on a case-by-case basis. Significant judgments made in determining whether a contract contains a lease include assessments as to whether or not the contract conveys the right to direct the use of an identified asset. Significant judgments made in allocating consideration between lease and non-lease components include techniques applied in estimating the relative stand-alone selling prices of the lease and non-lease components of the contract in cases where a stand-alone selling price is not directly observable. No leased assets are covered by residual value guarantees. The Company manages the risk associated with the residual value of leased assets through such means as performing periodic maintenance and upkeep activities and the inclusion of contractual terms that hold the lessee responsible for damage incurred to leased assets. The Company has made an accounting policy election to exclude from the consideration in the contract, and from variable payments not included in the consideration in the contract, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific lease revenue-producing transaction and collected by the lessor from a lessee.
The Company recognizes rental income on a straight-line basis for that portion of the consideration allocated to the embedded lease component of certain of our parts cleaning contracts. We also recognize rental income on certain subleases of railcars and portions of buildings and property.
Rental income was as follows:
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| | Third Quarter Ended, |
| | September 10, 2022 | | September 11, 2021 |
(thousands) | | Environmental Services | | Oil Business | | Total | | Environmental Services | | Oil Business | | Total |
Parts Cleaning | | $ | 6,421 | | | $ | — | | | $ | 6,421 | | | $ | 5,701 | | | $ | — | | | $ | 5,701 | |
| | | | | | | | | | | | |
Property | | 24 | | | 14 | | | 38 | | | 24 | | | — | | | 24 | |
Total rental income | | $ | 6,445 | | | $ | 14 | | | $ | 6,459 | | | $ | 5,725 | | | $ | — | | | $ | 5,725 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | First Three Quarters Ended, |
| | September 10, 2022 | | September 11, 2021 |
(thousands) | | Environmental Services | | Oil Business | | Total | | Environmental Services | | Oil Business | | Total |
Parts Cleaning | | $ | 18,593 | | | $ | — | | | $ | 18,593 | | | $ | 16,744 | | | $ | — | | | $ | 16,744 | |
| | | | | | | | | | | | |
Property | | 80 | | | 37 | | | 117 | | | 74 | | | 18 | | | 92 | |
Total rental income | | $ | 18,673 | | | $ | 37 | | | $ | 18,710 | | | $ | 16,818 | | | $ | 18 | | | $ | 16,836 | |
Purchase Obligations
The Company may enter into purchase obligations with certain vendors. They represent expected payments to third party service providers and other commitments entered into during the normal course of our business. These purchase obligations are generally cancellable with or without notice, without penalty, although certain vendor agreements provide for cancellation fees or penalties depending on the terms of the contract.
The Company has purchase obligations in the form of open purchase orders of $21.1 million as of September 10, 2022, and $16.5 million as of January 1, 2022, primarily for used oil, solvent, machine purchases, disposal and transportation expenses, and capital expenditures.
Litigation and Claims
The Company may be subject to investigations, claims or lawsuits as a result of operating its business, including matters governed by environmental laws and regulations. The Company may also be subject to tax audits in a variety of jurisdictions. When claims are asserted, the Company evaluates the likelihood that a loss will occur and records a liability for those instances when the likelihood is deemed probable and the exposure is reasonably estimable. The Company carries insurance at levels it believes are adequate to cover loss contingencies based on historical claims activity. When the potential loss exposure is limited to the insurance deductible and the likelihood of loss is determined to be probable, the Company accrues for the amount of the required deductible, unless a lower amount of exposure is estimated. As of September 10, 2022 and January 1, 2022, the Company had accrued $4.3 million and $3.2 million related to loss contingencies and other contingent liabilities, respectively.
(12) INCOME TAXES
Tax expense for the third fiscal quarter of 2022 was $9.0 million. The Company's effective tax rate for the third quarter of fiscal 2022 was 27.8% compared to 25.1% in the third quarter of fiscal 2021. Tax expense for the first three quarters of 2022 was $21.2 million. The Company’s effective tax rate for the first three quarters of fiscal 2022 was 27.0% compared to 25.6% in the first three quarters of 2021. The rate increases are principally attributable to the increased impact of certain nondeductible, nonrecurring expenses.
The Company establishes reserves when it is more likely than not that the Company will not realize the full tax benefit of a position. The Company had a reserve of $2.2 million for uncertain tax positions as of September 10, 2022. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.
As of September 10, 2022, the Company believes it is more likely than not that a benefit from foreign net operating loss carryforwards will not be realized. The Company provided a valuation allowance against those foreign net operating loss carryforwards of $0.6 million.
The Inflation Reduction Act of 2022 (the “Act”) was signed into U.S. law on August 16, 2022. The Act includes various tax provisions, including an excise tax on stock repurchases, expanded tax credits for clean energy incentives, and a corporate
alternative minimum tax that generally applies to U.S. corporations with average adjusted financial statement income over a three year period in excess of $1 billion. The Company does not expect the Act to materially impact its financial statements.
(13) SHARE-BASED COMPENSATION
Restricted Stock Compensation/Awards
Annually, the Company grants restricted shares to its Board of Directors. The shares become fully vested one year from their grant date. The fair value of each restricted stock grant is based on the closing price of the Company's common stock on the date of grant. The Company amortizes the expense over the service period, which is the fiscal year in which the award is granted. In addition, the Company may grant restricted shares to certain members of management based on their services and contingent upon continued service with the Company. The restricted shares vest over a period of approximately three years from the grant date. The fair value of each restricted stock grant is based on the closing price of the Company's common stock on the date of grant.
The following table shows a summary of restricted share grants and expense resulting from the awards:
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| | | | | | Compensation Expense |
(thousands, except share amounts) | | First Three Quarters Ended, | | Unrecognized Expense as of, |
Recipient of Grant | | Grant Date | | Restricted Shares | | September 10, 2022 | | September 11, 2021 | | September 10, 2022 | | September 11, 2021 |
Special Incentive Grant | | April, 2018 | | 350,000 | | 380 | | 1,123 | | | — | | | 798 | |
Members of Management | | May, 2019 | | 23,560 | | — | | | 36 | | | — | | | — | |
Members of Management | | February, 2020 | | 41,138 | | 60 | | 75 | | | 27 | | | 114 | |
Chief Executive Officer | | February, 2021 | | 500,000 | | 1,520 | | | 1,619 | | | 2,360 | | | 4,698 | |
Members of Management | | February, 2021 | | 35,898 | | 155 | | 114 | | | 293 | | | 517 | |
Board of Directors | | April, 2021 | | 11,487 | | — | | | 227 | | | — | | | 105 | |
Members of Management | | February, 2022 | | 75,355 | | 362 | | — | | | 1,185 | | | — | |
Board of Directors | | April, 2022 | | 18,064 | | 350 | | | — | | | 165 | | | — | |
On January 8, 2021, the Company and Mr. Brian Recatto entered into an amended Executive Employment Agreement (the “Amended Agreement”) which was effective on February 1, 2021. Pursuant to the Amended Agreement, the Company replaced in its entirety section 4.3 of the First Amendment to the Executive Employment Agreement relating to equity compensation that was effective February 1, 2017. As of February 1, 2021, Mr. Recatto received a one-time award of 500,000 shares of restricted stock, subject to the achievement of performance criteria established by the Compensation Committee of the Board of Directors pursuant to the Company's 2019 Incentive Plan.
The award date for such Performance-Based Restricted Stock was on February 1, 2021. Such award was granted pursuant to and governed by the terms of the 2019 Incentive Plan and an award agreement in a form provided by the Company. The Performance-Based Restricted Stock one-time award of 500,000 shares received on February 1, 2021, shall vest on January 31, 2025 if Mr. Recatto is employed by the Company on that date, in an amount determined by applying the applicable percentages from the chart below, with the common stock price increases to be determined based on the increase in the price of the Company’s common stock (if any) from the closing price of the common stock as reported by Nasdaq on the amended agreement commencement date ($21.77) and the common stock price on the potential vesting date (determined by using the average closing price of a share of the Company's common stock for the 90-day period ending on the vesting date). If the stock price does not increase by $5.00, then no shares shall vest.
During the third quarter of fiscal 2022, the Company recorded approximately $1.1 million of compensation expense related to this award. In the future, the Company expects to recognize compensation expense of approximately $2.8 million over the remaining requisite service period, which ends January 31, 2025. The fair value of this restricted stock award as of the grant date was estimated using a Monte Carlo simulation model. Key assumptions used in the Monte Carlo simulation to estimate the grant date fair value of this award are a risk-free rate of 0.29%, expected dividend yield of zero, and an expected volatility assumption of 53.07%.
| | | | | | | | |
Vesting Table |
Increase in Stock Price From the Amended Agreement Commencement Date to the Vesting Date | | Total Percentage of Restricted Stock Shares to Be Vested |
Less than $5 per share increase | | —% |
$5 per share increase | | 25% (vest in 125,000 shares) |
$10 per share increase | | 50% (vest in 250,000 shares) |
$15 per share increase | | 75% (vest in 375,000 shares) |
$20 or more per share increase | | 100% (vest in 500,000 shares) |
Provision for possible accelerated vesting of award
If the average closing price of the Company's common stock increases by the marginal levels set forth in the above vesting table for any consecutive 180 day period between February 1, 2021 and January 31, 2025, Mr. Recatto shall become vested in 50% of the corresponding total percentage of restricted shares earned on the last day of the 180 day period.
In addition, on each of December 31, 2021, December 31, 2022, and December 31, 2023, to the extent Mr. Recatto remains employed by the Company under the Amended Agreement on such date, Mr. Recatto shall receive a grant of restricted stock as of such date valued at Five Hundred Thousand Dollars ($500,000), with the number of shares of restricted stock constituting such grant determined by applying the average closing price for a share of the Company’s common stock for the 90-day period ending on such date. Such awards of Time-Based Restricted Stock shall be granted pursuant to and governed by the terms of the 2019 Incentive Plan and an award agreement in a form provided by the Company. The Time-Based Restricted Stock shall vest only if Mr. Recatto remains employed by the Company under the Amended Agreement through December 31, 2023; provided, that, upon a Change of Control of the Company (as such term is defined in the Amended Agreement), all shares of the Time-Based Restricted Stock awarded up through the date of closing of the Change in Control shall become vested, and no further award of Time-Based Restricted Stock shall be awarded. During the third quarter of fiscal 2022, the Company recorded approximately $0.3 million of compensation expense related to this award.
The following table summarizes the restricted stock activity for the third quarter ended September 10, 2022: | | | | | | | | | | | | | | |
Restricted Stock (Nonvested Shares) | | Number of Shares | | Weighted Average Grant-Date Fair Value Per Share |
Nonvested shares outstanding at January 1, 2022 | | 723,983 | | | $ | 21.83 | |
Granted | | 93,419 | | | 27.67 | |
Vested | | (107,772) | | | 23.05 | |
Forfeited | | (128,297) | | | 22.35 | |
Nonvested shares outstanding at September 10, 2022 | | 581,333 | | | $ | 23.28 | |
Employee Stock Purchase Plan
As of September 10, 2022, the Company had reserved 46,080 shares of common stock available for purchase under the Employee Stock Purchase Plan. In the third quarter of fiscal 2022, employees purchased 5,638 shares of the Company’s common stock with a weighted average fair market value of $27.14 per share.
(14) EARNINGS PER SHARE
The following table reconciles the number of shares outstanding for the third quarter of fiscal 2022 and 2021, respectively, to the number of weighted average basic shares outstanding and the number of weighted average diluted shares outstanding for the purposes of calculating basic and diluted earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended, | | First Three Quarters Ended, |
(thousands, except per share amounts) | | September 10, 2022 | | September 11, 2021 | | September 10, 2022 | | September 11, 2021 |
Net income | | $ | 23,201 | | | $ | 18,508 | | | $ | 57,186 | | | $ | 42,825 | |
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
Weighted average basic shares outstanding | | 23,592 | | | 23,431 | | | 23,519 | | | 23,403 | |
Dilutive shares for share–based compensation plans | | 82 | | | 139 | | | 132 | | | 145 | |
Weighted average diluted shares outstanding | | 23,674 | | | 23,570 | | | 23,651 | | | 23,548 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net income per share: basic | | $ | 0.98 | | | $ | 0.79 | | | $ | 2.43 | | | $ | 1.83 | |
Net income per share: diluted | | $ | 0.98 | | | $ | 0.79 | | | $ | 2.42 | | | $ | 1.82 | |
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(15) FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The following tables summarize assets measured at fair value on a recurring basis (in millions) as of September 10, 2022:
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| | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Fair Value Measurements |
Equity Securities (1) | | $— | | $— | | $3.0 | | $3.0 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Represents a $3.0 million investment the Company made in its privately held battery recycling partner, HBR Retriev Holdco, LLC ("Retriev"). Retriev is a Limited Liability Company that is controlled by the Heritage Group, an affiliate of the Company. |
(16) OTHER (INCOME) EXPENSE - NET
Other (income) expense - net was $(0.3) million of income for the third quarter of fiscal 2022, compared to a net $(0.2) million of income in the third quarter of 2021. Other (income) expense - net was $0.5 million of expense for the first three quarters of fiscal 2022, compared to $(0.7) million of income for the first three quarters of fiscal 2021. The 2022 other expense includes approximately $1.1 million of net loss on disposal of assets.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Disclosure Regarding Forward-Looking Statements
You should read the following discussion in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K filed with the SEC on March 2, 2022. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "aim," "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "project," "should," "will be," "will continue," "will likely result," "would" and other words and terms of similar meaning in conjunction with a discussion of future or estimated operating or financial performance. You should read statements that contain these words carefully, because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other “forward-looking” information. Forward-looking statements speak only as of the date of this quarterly report. Factors that could cause such differences include those described in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for fiscal 2021 filed with the SEC on March 2, 2022. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this quarterly report, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this quarterly report or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. Certain tabular information may not foot due to rounding. Our fiscal year ends on the Saturday closest to December 31. Interim results are presented for the twelve weeks ("third quarter" or "quarter") ended September 10, 2022 and September 11, 2021, respectively. "Fiscal 2021" represents the 52-week period ended January 1, 2022 and "Fiscal 2022" represents the 52-week period beginning January 2, 2022, and ending on December 31, 2022.
Overview
We provide parts cleaning, used oil re-refining, hazardous and non-hazardous waste disposal, emergency and spill response, and industrial and field services, and we own and operate a used oil re-refinery where we re-refine used lubricating oils into high quality lubricant base oil and other products. We have the second largest used oil re-refining capacity in North America. Our services help our customers manage their used chemicals and liquid and solid wastes, while also helping to minimize their regulatory burdens. We operate from a network of 91 branch and 14 industrial services facilities providing services to customers in 48 states and parts of Canada. We conduct business through two principal operating segments: Environmental Services and Oil Business.
Our Environmental Services segment revenues are generated primarily from providing parts cleaning, hazardous and non-hazardous waste disposal, wastewater vacuum, antifreeze recycling, emergency and spill response, and industrial and field services. Revenues from this segment accounted for approximately 61.9% of our total Company revenues for the third quarter of fiscal 2022. In the Environmental Services segment, we define and measure same-branch revenues for a given period as the subset of all our branches that have been open and operating throughout and between the periods being compared, and we refer to these as established branches. We calculate average revenues per working day by dividing our revenues by the number of non-holiday weekdays in the applicable fiscal year or fiscal quarter.
Our Oil Business segment consists primarily of our used oil collection and used oil re-refining activities, along with our recycled fuel oil ("RFO") sales which together accounted for approximately 38.1% of our total Company revenues in the third quarter of fiscal 2022.
We have established prices for our services primarily based on the perceived value of those services in the marketplace. Our customer agreements typically provide for annual renewal and price increases. With respect to our oil product sales, some prices are set through contracts or purchase orders with customers, which may be based on the market prices of an underlying commodity or market indicator.
Our operating costs include the costs of obtaining the materials we use in our products and services, such as used oil collected from customers or purchased from third party collectors, solvent, and other chemicals. The used solvent that we retrieve from customers in our product reuse program is accounted for as a reduction in our net cost of solvent under operating costs, whether placed in inventory or sold to a purchaser for reuse. Changes in the price of crude oil can impact operating costs indirectly as it may impact the price we pay for solvent or used oil, although we attempt to offset volatility in the oil markets by managing the spread between the costs we incur to obtain our materials and the prices we charge for our products and services.
Operating costs also include transportation of solvents and waste, payments to third parties to recycle or dispose of the waste materials that we collect, costs associated with operating our re-refinery, recycling centers, non-hazardous waste processing facilities and hubs, as well as labor, equipment and supply costs associated with the performance of emergency and spill response and industrial and field services, as well as our branch system including personnel costs (including commissions), facility rent, truck leases, fuel, and maintenance. Our operating costs as a percentage of revenues generally increase in relation to the number of new branch or industrial services facility openings. As new branches or industrial services facilities achieve service density and scale efficiencies, our operating costs as a percentage of revenues generally decrease.
We use profit before corporate selling, general, and administrative expenses ("SG&A") as a key measure of segment profitability. We define profit before corporate SG&A expense as revenue less operating costs and depreciation and amortization from operations.
Our selling, general, and administrative expenses include the costs of performing centralized business functions, including sales management at or above the regional level, business management and marketing, billing, receivables management, accounting and finance, internal audit, logistics management beyond the branch level, environmental health and safety, human resources, and legal.
We operate a used oil re-refinery located in Indianapolis, Indiana, through which we recycle used oil into high quality lubricant base oil and other products. We supply the base oil to firms that produce and market finished lubricants. Our re-refinery has an annual nameplate capacity of approximately 75 million gallons of used oil feedstock (depending on the quality of the feedstock), allowing it to produce approximately 50 million gallons of lubricating base oil per year when operating at full capacity.
Critical Accounting Policies
Critical accounting policies are those that are both important to the accurate portrayal of a company’s financial condition and results and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
In order to prepare financial statements that conform to accounting principles generally accepted in the United States, commonly referred to as GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.
There were no material changes during the third quarter of fiscal 2022 to the information provided under the heading "Critical Accounting Policies" included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.
Impact of the COVID-19 Pandemic on Our Business
We continue to monitor the spread and impact of the COVID-19 pandemic and are continually assessing its potential effects on our business and our financial performance as well as the businesses of our customers and vendors. The Company cannot predict the duration or severity of the COVID-19 pandemic, and we cannot reasonably estimate the financial impact the COVID-19 outbreak will have on our results and significant estimates going forward.
The ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is highly uncertain and cannot be accurately predicted and is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, and any new information that may emerge concerning the COVID-19 outbreak and the actions to contain it or treat its impact. In fiscal 2021, the continued impact on our business as a result of COVID-19 pandemic resulted in additional lost work hours which negatively impacted our ability to service our customers on a timely basis, the effect of which is included in the fiscal 2021 financial operations in this filing. Although no material impact on our business occurred during the third quarter of 2022 or during the first three quarters of 2022, the continued impact on our business as a result of the COVID-19 pandemic could result in a material adverse effect on our business, results of operations, financial condition, prospects and the trading prices of our securities in the near-term and throughout 2022.
RESULTS OF OPERATIONS
General
The following table sets forth certain operating data as a percentage of revenues for the periods indicated:
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| | Third Quarter Ended, | | First Three Quarters Ended, |
(thousands) | | September 10, 2022 | | September 11, 2021 | | September 10, 2022 | | September 11, 2021 |
| | | | | | | | | | | | |
Revenues | | | | | | | | | | | | |
Service revenues | | $ | 90,084 | | 52.3 | % | | $ | 59,737 | | 48.5 | % | | $ | 234,575 | | 50.1 | % | | $ | 177,469 | | 51.3 | % |
Product revenues | | 75,676 | | 43.9 | % | | 57,713 | | 46.9 | % | | 214,948 | | 45.9 | % | | 151,529 | | 43.8 | % |
Rental income | | 6,459 | | 3.8 | % | | 5,725 | | 4.6 | % | | 18,710 | | 4.0 | % | | 16,836 | | 4.9 | % |
Total revenues | | $ | 172,219 | | 100.0 | % | | $ | 123,175 | | 100.0 | % | | $ | 468,233 | | 100.0 | % | | $ | 345,834 | | 100.0 | % |
Operating expenses | | | | | | | | | | | | |
Operating costs | | $ | 114,147 | | 66.3 | % | | $ | 79,486 | | 64.5 | % | | $ | 320,684 | | 68.5 | % | | $ | 234,584 | | 67.8 | % |
Selling, general, and administrative expenses | | 17,086 | | 9.9 | % | | 13,294 | | 10.8 | % | | 45,846 | | 9.8 | % | | 38,522 | | 11.1 | % |
Depreciation and amortization | | 8,262 | | 4.8 | % | | 5,767 | | 4.7 | % | | 21,546 | | 4.6 | % | | 15,168 | | 4.4 | % |
Other expense (income) - net | | (329) | | (0.2) | % | | (230) | | (0.2) | % | | 462 | | 0.1 | % | | (669) | | (0.2) | % |
Operating income | 33,053 | | 19.2 | % | | 24,858 | | 20.2 | % | | 79,695 | | 17.0 | % | | 58,229 | | 16.8 | % |
Interest expense – net | 885 | | 0.5 | % | | 206 | | 0.2 | % | | 1,358 | | 0.3 | % | | 707 | | 0.2 | % |
Income before income taxes | 32,168 | | 18.7 | % | | 24,652 | | 20.0 | % | | 78,337 | | 16.7 | % | | 57,522 | | 16.6 | % |
Provision for income taxes | 8,967 | | 5.2 | % | | 6,144 | | 5.0 | % | | 21,151 | | 4.5 | % | | 14,697 | | 4.2 | % |
Net income | $ | 23,201 | | 13.5 | % | | $ | 18,508 | | 15.0 | % | | $ | 57,186 | | 12.2 | % | | $ | 42,825 | | 12.4 | % |
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Revenues
Revenue for the third quarter of 2022 was $172.2 million compared to $123.2 million for the same quarter of 2021, an increase of $49.0 million, or 39.8%. The $49.0 million increase in revenue was mainly driven by higher base oil selling prices, increased demand and higher selling prices for our environmental services products and services as well as by revenue from acquisitions made during the fourth quarter of 2021 and third quarter of 2022. For the first three quarters of fiscal 2022, revenues increased $122.4 million, or 35.4%, from $345.8 million in the first three quarters of fiscal 2021 to $468.2 million in the first three quarters of 2022 mainly driven by the above mentioned factors.
Operating costs
Operating costs increased $34.7 million, or 43.6%, during the third quarter of 2022 compared to the third quarter of fiscal 2021 mainly due to higher used oil feedstock costs as well as higher disposal costs and transportation related expenses. Operating costs increased $86.1 million, or 36.7%, in the first three quarters of fiscal 2022 compared to the first three quarters of fiscal 2021 mainly due to the above mentioned factors.
We expect that in the future our operating costs in both the Environmental Services and Oil Business segments may increase or decrease depending on our product and service volumes and changes in commodity pricing, along with other factors.
Selling, general, and administrative expenses
Selling, general, and administrative expenses, excluding depreciation and amortization, increased $3.8 million, or 28.5%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022 mainly due to higher salaries and benefits as well as the settlement of various legal issues. Selling, general, and administrative expenses increased $7.3 million, or 19.0%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022 due to the above mentioned factors.
Other (income) expense - net
Other (income) expense - net was $(0.3) million of income for the third quarter of fiscal 2022, compared to a net $(0.2) million of income in the third quarter of 2021. Other (income) expense - net was $0.5 million of expense for the first three quarters of fiscal 2022, compared to a net $(0.7) million of income for the first three quarters of fiscal 2021. The 2022 other expense includes approximately $1.1 million of net loss on disposal of assets.
Interest expense - net
Interest expense - net for the third quarter of fiscal 2022 and fiscal 2021 was $0.9 million and $0.2 million, respectively. Interest expense - net for the first three quarters of fiscal 2022 and 2021 was $1.4 million and $0.7 million respectively.
Provision for income taxes
The Company's effective income tax rate for the third quarter of fiscal 2022 was 27.8% compared to 25.1% in the third quarter of fiscal 2021. The Company’s effective tax rate for the first three quarters of fiscal 2022 was 27.0% compared to 25.6% in the first three quarters of 2021. The rate increases are principally attributable to the increased impact of certain nondeductible, nonrecurring expenses.
Segment Information
The following table presents revenues by reportable segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Third Quarter Ended, | | Change |
(thousands) | | September 10, 2022 | | September 11, 2021 | | $ | | % |
Revenues: | | | | | | | | |
| Environmental Services | | $ | 106,678 | | | $ | 72,339 | | | $ | 34,339 | | | 47.5 | % |
| Oil Business | | 65,541 | | | 50,836 | | | 14,705 | | | 28.9 | % |
| Total | | $ | 172,219 | | | $ | 123,175 | | | $ | 49,044 | | | 39.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | First Three Quarters Ended, | | Change |
(thousands) | | September 10, 2022 | | September 11, 2021 | | $ | | % |
Revenues: | | | | | | | | |
Environmental Services | | $ | 283,208 | | | $ | 214,511 | | | $ | 68,697 | | | 32.0 | % |
Oil Business | | 185,025 | | | 131,323 | | | 53,702 | | | 40.9 | % |
Total | | $ | 468,233 | | | $ | 345,834 | | | $ | 122,399 | | | 35.4 | % |
| | | | | | | | | | |
In the third quarter of fiscal 2022, Environmental Services revenue was $106.7 million compared to $72.3 million during the third quarter of fiscal 2021. The 47.5% increase in revenue was mainly due to the continued increase in demand and higher prices for our services compared to the prior year quarter as well as revenue from companies acquired during the fourth quarter of 2021 and third quarter of 2022. We experienced revenue increases across all service lines in the segment when compared to the third quarter of 2021. For the first three quarters of fiscal 2022, Environmental Services revenue was $283.2 million, compared to $214.5 million during the first three quarters of fiscal 2021. The 32.0% increase in revenue was mainly due to the above mentioned factors.
During the third quarter of fiscal 2022, Oil Business revenue of $65.5 million represents an increase of $14.7 million, or 28.9%, compared to $50.8 million in the third quarter of fiscal 2021. An increase in base oil prices was the main driver of the increase in revenue compared to the prior year quarter. For the first three quarters of fiscal 2022, Oil Business revenues were $185.0 million, compared to $131.3 million during the first three quarters of fiscal 2021. The increase in revenue was driven primarily by the above mentioned factors.
Segment Profit Before Corporate Selling, General and Administrative Expenses ("SG&A")
The following table presents profit by reportable segment before corporate SG&A expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Third Quarter Ended, | | Change |
(thousands) | | September 10, 2022 | | September 11, 2021 | | $ | | % |
Profit before corporate SG&A* | | | | | | | | |
| Environmental Services | | $ | 24,752 | | | $ | 17,259 | | | $ | 7,493 | | | 43.4% |
| Oil Business | | 26,615 | | | 21,773 | | | 4,842 | | | 22.2% |
| Total | | $ | 51,367 | | | $ | 39,032 | | | $ | 12,335 | | | 31.6% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | First Three Quarters Ended, | | Change |
(thousands) | | September 10, 2022 | | September 11, 2021 | | $ | | % |
Profit before corporate SG&A* | | | | | | | | |
| Environmental Services | | $ | 58,669 | | | $ | 52,425 | | | $ | 6,244 | | | 11.9% |
| Oil Business | | 71,885 | | | 47,102 | | | 24,783 | | | 52.6% |
| Total | | $ | 130,554 | | | $ | 99,527 | | | $ | 31,027 | | | 31.2% |
| | | | | | | | | | |
*Includes depreciation and amortization related to operating activity but not depreciation and amortization related to corporate selling, general, and administrative activity. For further discussion see Note 11 in our consolidated financial statements included elsewhere in this document.
Environmental Services profit before corporate SG&A expense increased $7.5 million, or 43.4%, in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021. The improvement in profitability was mainly driven by higher dollar increase in revenue compared to the increase in operating expenses, partially offset by higher transportation costs caused by extraordinary high inflation as well as an increase in equipment rental costs. Our operating margin percentage for third quarter of 2022 was 23.2% compared to 23.9% in the third quarter of 2021. The decrease in operating margin was mainly driven by higher transportation costs caused by extraordinary high inflation as well as an increase in equipment rental costs.
Environmental Services profit before corporate SG&A expense increased $6.2 million, or 11.9%, in the first three quarters of fiscal 2022 compared to the first three quarters of fiscal 2021. The improvement in profitability was mainly driven by higher dollar increase in revenue compared to the increase in operating expenses, partially offset by disposal, transportation, and container costs caused by extraordinary high inflation. Operating margin for first three quarters of 2022 was 17.0% compared to 24.4% in the first three quarters of 2021. The decrease in operating margin was mainly driven by higher disposal, transportation, and container costs caused by extraordinary high inflation.
Oil Business profit before corporate SG&A expense increased $4.8 million, or 22.2% in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021. Our Oil Business segment operating margin percentage decreased to 40.6% in the third quarter of 2022 compared to 42.8% in the third quarter of fiscal 2021. The lower operating margin compared to the third quarter of 2021 was mainly due to an increase in transportation related expenses, increased downtime at the re-refinery and other inflationary pressures across the segment which offset an improvement in the spread between the netback (sales price net of freight impact) on our base oil sales and the price paid/charged to our customers for the removal of their used oil.
Oil Business profit before corporate SG&A expense increased $24.8 million in the first three quarters of fiscal 2022 compared to the first three quarters of fiscal 2021. The improvement in profitability during the first three quarters of fiscal 2022 compared to the first three quarters of fiscal 2021 was primarily due to the increase in the spread between the netback (sales price net of freight impact) on our base oil sales and the price paid/charged to our customers for the removal of their used oil.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash and Cash Equivalents
As of September 10, 2022 and January 1, 2022, cash and cash equivalents were $25.7 million and $56.3 million, respectively. Our primary sources of liquidity are cash flows from operations and funds available to borrow under our revolving bank credit facility.
Debt and Financing Arrangements
On March 18, 2021, Heritage-Crystal Clean, LLC, (the “Company”), entered into an Amended and Restated Credit Agreement (the "Agreement"), by and among the Company, its parent, Heritage-Crystal Clean, Inc., and the Company’s subsidiaries identified therein and Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., and Wells Fargo Bank, National Association. The Agreement replaced the Company's previous Credit Agreement dated as of February 21, 2017. During the first quarter of fiscal 2021 the Company paid down its previous term loan, in full, of $30.0 million. The Agreement provided for borrowings of up to $100.0 million, in the form of a revolving facility, of which $15 million can be used in the form of a Swing Line loan. The Agreement also provided for up to an additional $50.0 million of borrowings using an accordion feature upon approval of the lenders. On August 3, 2022, the Company entered into an Amendment (Amendment No. 1 to the Agreement "the Amendment") which increased the amount of borrowing under the revolving credit line to $150.0 million. The Company then utilized the credit line to finance $115.0 million of the acquisition of Patriot Environmental Inc. (see Note 3). The Amendment now provides for borrowings of up to $150.0 million, in the form of a revolving facility. The Amendment also provides for up to an additional $50.0 million of borrowings under an accordion feature upon approval of the lenders.
Loans made under the Agreement, as amended, may be Base Rate Loans or Secured Overnight Financing Rate ("SOFR") Rate Loans, at the election of the Borrower subject to certain exceptions. Base Rate Loans have an interest rate equal to (i) the higher of (a) the federal funds rate plus 0.5%, (b) the SOFR plus a margin of 1%, or (c) Bank of America's prime rate, plus a margin of 1.00%. SOFR rate loans have an interest rate equal to (i) the SOFR rate plus (ii) a variable margin of between 1.50% and 2.25% depending on the Company's total leverage ratio. Amounts borrowed under the Agreement are secured by a security interest in substantially all of the Company's tangible and intangible assets. The Company incurred $0.8 million of debt issuance costs related to the amended credit agreement. The Company incurred an additional $0.1 million of debt issuance costs related to the amendment of the credit agreement and drawdown.
The Company's weighted average interest rate for all debt for the first three quarters ended September 10, 2022 was 2.7%.
The Credit Agreement contains customary terms and provisions (including representations, covenants, and conditions) for transactions of this type. Certain covenants, among other things, restrict the Company's and its subsidiaries' ability to incur indebtedness, grant liens, make investments and sell assets. The Credit Agreement also contains customary events of default, covenants and representations and warranties. Financial covenants include:
•An interest coverage ratio (based on interest expense and EBITDA) of at least 3.5 to 1.0;
•A total leverage ratio no greater than 3.0 to 1.0, provided that in the event of a permitted acquisition having an aggregate consideration equal to $10.0 million or more, at the Borrower’s election, the foregoing 3.00 to 1.00 shall be deemed to be 3.50 to 1.00 for the fiscal quarter in which such permitted acquisition occurs and the three immediately following fiscal quarters and will thereafter revert to 3.00 to 1.00.
The Credit Agreement places certain limitations on acquisitions and the payment of dividends.
As of September 10, 2022 and January 1, 2022, the Company, had $6.0 million and $5.6 million, of standby letters of credit issued, respectively, and $44.0 million and $94.4 million was available for borrowing under the revolving credit line, respectively.
We believe that our existing cash, cash equivalents, available borrowings, and other sources of financings will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. We cannot
assure you that this will be the case or that our assumptions regarding revenues and expenses underlying this belief will be accurate. If, in the future, we require more liquidity than is available to us under our credit facility, we may need to raise additional funds through debt or equity offerings. Adequate funds may not be available when needed or may not be available on terms favorable to us. If additional funds are raised by issuing equity securities, dilution to existing stockholders may result. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
Summary of Cash Flow Activity
| | | | | | | | | | | | | | |
| | First Three Quarters Ended, |
(thousands) | | September 10, 2022 | | September 11, 2021 |
Net cash provided by (used in): | | | | |
Operating activities | | $ | 58,383 | | | $ | 63,127 | |
Investing activities | | (184,833) | | | (21,800) | |
Financing activities | | 95,895 | | | (33,629) | |
Net increase (decrease) in cash and cash equivalents | | $ | (30,555) | | | $ | 7,698 | |
The most significant items affecting the comparison of our operating activities for the first three quarters of fiscal 2022 and the first three quarters of fiscal 2021 are summarized below:
Net Cash Provided by Operating Activities —
•Earnings — Our increase in net income during the first three quarters of 2022 favorably impacted our net cash provided by operating activities by $14.3 million compared to the first three quarters of 2021.
•Accounts Receivable — The increase in accounts receivable had an unfavorable impact on cash provided by operating activities of $18.1 million compared to the increase in accounts receivable during in the first three quarters of fiscal 2021.
•Accounts Payable — The increase in accounts payable had a favorable impact on cash provided by operating activities of $12.8 million in the first three quarters of fiscal 2022.
Net Cash Used in Investing Activities —
•Capital expenditures — We made capital expenditures as follows: | | | | | | | | | | | | | | |
| | First Three Quarters Ended, |
(millions) | | September 10, 2022 | | September 11, 2021 |
Re-refinery capital improvements | | $ | 6.4 | | | $ | 2.4 | |
Trucks and trailers | | 3.7 | | 5.9 |
Parts cleaning machines | | 4.8 | | 3.1 |
Branch replacements and facility improvements | | 4.8 | | — | |
IT projects | | 0.8 | | 0.3 |
Various other projects | | 3.7 | | 0.3 |
Total | | $ | 24.2 | | | $ | 12.0 | |
Investments
•During the first three quarters of 2022, the Company invested $157.9 million in the acquisition of Patriot Environmental Services, Inc. which closed on August 3, 2022.
•During the first three quarters of 2022, the Company invested $3.0 million in its battery recycling partner, HBR Retriev Holdco, LLC ("Retriev"). Retriev is a Limited Liability Company that is controlled by the Heritage Group, an affiliate of the Company.
Net Cash Used in Financing Activities
•During the first three quarters of fiscal 2022, the Company utilized a net $100.0 million borrowing in its revolving line of credit.
•During the first three quarters of fiscal 2021 the Company paid down its previous term loan, in full, of $30.0 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risks primarily through borrowings under our revolving line of credit. Interest on this facility is based upon variable interest rates. Our weighted average borrowings under our revolving line of credit during the first three quarters of fiscal 2022 was $17.4 million, and the annual effective interest rate for revolving line of credit for the first three quarters of fiscal 2022 was 2.7%. We currently do not hedge against interest rate risk. Based on the foregoing, a hypothetical 1% increase or decrease in interest rates would have resulted in a change of $0.2 million to our interest expense in the first three quarters of fiscal 2022.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding financial disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the third quarter ended September 10, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
Environmental Matters
On January 19, 2022, a civil enforcement action was filed in the United States District Court for the Northern District of Illinois, Civil Action No. 1:22-cv-00303: United States of America, Louisiana Department of Environmental Quality, and the State of Indiana vs. Heritage-Crystal Clean, LLC (the “Action”). The Action alleged that the Company’s spent solvent recycling programs violate sections 3008(a) and (g) of the Resource Conservation and Recovery Act (“RCRA”), 42 U.S.C. § 6928(a) and (g), and Indiana Code Section 13-30-4-1, including that the Company’s used 106 solvent program is not exempt under RCRA, and that some of the waste received by the Company under its non-hazardous 142 solvent program included hazardous waste. The Action further alleged that the Company’s storage and handling of used oil at its Shreveport, Louisiana location was not in full compliance with Louisiana environmental laws. During the fourth quarter of 2022, the Company reached a tentative agreement in furtherance of a consent decree with members of the U.S. Department of Justice, U.S. Environmental Protection Agency, Louisiana Department of Environmental Quality, and Indiana Department of Environmental Management to resolve the Action. Based on the terms of the tentative agreement, the Company has accrued approximately $1.1 million in expenses to related to this Action.
ITEM 1A. RISK FACTORS
Reference is made to the factors set forth under the caption “Disclosure Regarding Forward-Looking Statements” in Part I, Item 2 of this quarterly report on Form 10-Q and other risk factors described in our annual report on Form 10-K for fiscal 2021 filed with the SEC on March 2, 2022, which are incorporated herein by reference. There have not been any material changes to the risk factors previously disclosed in our annual report on Form 10-K for fiscal 2021, except as set forth below.
We may not be able to realize the anticipated benefits from our Acquisition of Patriot Environmental Services, Inc. (Patriot)
We may not be able to realize the anticipated benefits from our Acquisition of Patriot. Achieving those benefits depends on the timely, efficient and successful execution of a number of events, including integrating Patriot’s businesses into our company. Factors that could affect our ability to achieve these benefits include:
•The failure of Patriot’s businesses to perform in accordance with our expectations;
•Difficulties in integrating and managing personnel, financial reporting and other systems used by Patriot’s businesses into our company;
•Any future goodwill impairment charges that we may incur with respect to the assets of Patriot;
•Failure to achieve anticipated synergies between our business units and the business units of Patriot;
•The loss of Patriot’s customers or our customers; and
•The loss of any of the key employees of Patriot or our company.
If Patriot’s businesses do not operate as we anticipate, it could materially harm our business, financial condition and results of operations. As part of the Acquisition, we assumed all of Patriot’s liabilities. We may learn additional information about Patriot’s business that adversely affects us, such as unknown or contingent liabilities, issues relating to internal controls over financial reporting and issues relating to compliance with the Sarbanes-Oxley Act or other applicable laws. As a result, there can be no assurance that the Acquisition will be successful or will not, in fact, harm our business. Among other things, if Patriot’s liabilities are greater than projected, or if there are obligations of Patriot of which we are not aware at the time of completion of the Acquisition, our business could be materially adversely affected.
The successful integration of Patriot’s businesses into our company will present significant challenges.
We anticipate that the integration of Patriot will place significant demands on our administrative, operational and financial resources, and we cannot assure you that we will be able to successfully integrate Patriot’s businesses into our company. Our failure to successfully integrate Patriot with our company, and to manage the challenges presented by the integration process successfully, may prevent us from achieving the anticipated benefits of the acquisition and could have a material adverse effect on our business.
We have incurred indebtedness in connection with our Acquisition of Patriot, which could harm our operating flexibility and competitive position.
We initially drew approximately $115 million of indebtedness to finance the Acquisition pursuant to our Credit Agreement and as of September 10, 2022, we had $100 million of indebtedness outstanding under our Credit Agreement as a result of the acquisition of Patriot. The terms of this indebtedness contain limitations on the amount of additional indebtedness that we and
our subsidiaries may incur and places other restrictions on the operation of our business. The indebtedness requires interest and principal payments. Our level of debt as a result of the Acquisition and the limitations imposed on us by our Credit Agreement could adversely affect our operating flexibility and put us at a competitive disadvantage. Our debt level may adversely affect our future performance, because, among other things:
•We may be placed at a competitive disadvantage relative to our competitors, some of which may have lower debt service obligations and greater financial resources than we do;
•Our ability to complete future acquisitions may be limited;
•We will have to use a portion of our cash flow for debt service rather than for operations;
•We may not be able to obtain further debt financing beyond our current credit agreement;
•We may not be able to take advantage of future business opportunities;
•The indebtedness bears interest at variable interest rates, making us vulnerable to increases in interest rates; and
•We may be more vulnerable to adverse economic conditions.
Our ability to make scheduled payments of principal, to pay interest on, or to refinance our indebtedness and to satisfy our finance lease obligations will depend upon our future operating performance, which may be affected by factors beyond our control. In addition, there can be no assurance that future borrowings or equity financing will be available to us on favorable terms or at all for the payment or refinancing of our indebtedness. If we are unable to service our indebtedness, our business, financial condition and results of operations would be materially adversely affected.
ITEM 6. EXHIBITS
| | | | | |
| |
2.1 | |
10.1 | Amendment No.1 to Credit Agreement (the "Amendment"), by and among the Heritage-Crystal Clean, Inc., Heritage-Crystal Clean, LLC and the subsidiaries identified therein and Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., and Wells Fargo Bank, National Association** |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS* | XBRL Instance Document |
101.SCH* | XBRL Taxonomy Extension Schema Document |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
+ Schedules, annexes and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementary to the SEC a copy of any omitted schedule, annex or exhibit upon request.
* In accordance with Regulation S-T, the XBRL-related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall be deemed to be "furnished" and not "filed."
** Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplementally a copy of any omitted schedule or exhibit upon request by the Securities and Exchange Commission.
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.
HERITAGE-CRYSTAL CLEAN, INC.
| | | | | | | | | | | |
Date: | October 19, 2022 | By: | /s/ Mark DeVita |
| | | |
| | | Mark DeVita |
| | | Chief Financial Officer |