UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period endedSeptember 10, 2016June 17, 2017
 OR
oTRANSITION 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


logoa09.jpg

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.)

2175 Point Boulevard
Suite 375
Elgin, IL 60123
(Address of principal executive offices)  (Zip Code)

Registrant’s telephone number, including area code: (847) 836-5670

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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, or a non-accelerated filer.filer, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer”filer,” "smaller reporting company," and “smaller reporting“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 companyo
Emerging growth company   o
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 o No x

On October 17, 2016July 24, 2017, there were outstanding 22,410,47022,614,700 shares of Common Stock, $0.01 par value, of Heritage-Crystal Clean, Inc.





Table of Contents

 
  




  
 
  
ITEM 1A. RISK FACTORS3130
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS32
3332
  
3433



PART I

ITEM 1. FINANCIAL STATEMENTS

Heritage-Crystal Clean, Inc.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
 September 10,
2016
 January 2,
2016
 June 17,
2017
 December 31,
2016
 (unaudited)   (unaudited)  
ASSETS        
Current Assets:        
Cash and cash equivalents $29,767
 $23,608
 $25,242
 $36,610
Accounts receivable - net 47,370
 41,592
 44,343
 47,533
Inventory - net 20,723
 24,774
 18,862
 18,558
Other current assets 6,563
 4,810
 6,448
 6,094
Total Current Assets 104,423
 94,784
 94,895
 108,795
Property, plant and equipment - net 131,400
 131,365
 129,540
 131,175
Equipment at customers - net 23,277
 23,172
 23,117
 23,033
Software and intangible assets - net 20,786
 22,202
 18,344
 19,821
Goodwill 31,510
 30,325
 31,573
 31,483
Total Assets $311,396
 $301,848
 $297,469
 $314,307
        
LIABILITIES AND STOCKHOLDERS' EQUITY    
    
Current Liabilities:    
    
Accounts payable $31,612
 $25,129
 $28,861
 $30,984
Current maturities of long-term debt 6,659
 6,700
 
 6,936
Accrued salaries, wages, and benefits 4,875
 4,330
 5,177
 6,312
Taxes payable 7,209
 6,735
 7,474
 6,729
Other current liabilities 3,965
 3,617
 2,237
 3,245
Total Current Liabilities 54,320
 46,511
 43,749
 54,206
Long term debt, less current maturities 59,917
 62,778
Long-term debt, less current maturities 28,582
 56,518
Deferred income taxes 3,699
 2,726
 10,821
 5,314
Total Liabilities $117,936
 $112,015
 $83,152
 $116,038
        
STOCKHOLDERS' EQUITY:    
    
Common stock - 26,000,000 shares authorized at $0.01 par value, 22,272,941 and 22,213,364 shares issued and outstanding at September 10, 2016 and January 2, 2016, respectively $223
 $222
Common stock - 26,000,000 shares authorized at $0.01 par value, 22,604,189 and 22,300,007 shares issued and outstanding at June 17, 2017 and December 31, 2016, respectively $226
 $223
Additional paid-in capital 183,788
 182,558
 188,642
 185,099
Retained earnings 8,784
 6,385
 24,934
 12,227
Total Heritage-Crystal Clean, Inc. Stockholders' Equity 192,795
 189,165
 213,802
 197,549
Noncontrolling interest 665
 668
 515
 720
Total Equity $193,460
 $189,833
 $214,317
 $198,269
Total Liabilities and Stockholders' Equity $311,396
 $301,848
 $297,469
 $314,307
 
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, Second Quarter Ended, First Half Ended,
 September 10,
2016
 September 12,
2015
 September 10,
2016
 September 12,
2015
 June 17,
2017
 June 18,
2016
 June 17,
2017
 June 18,
2016
                
RevenuesRevenues        Revenues        
Product revenues $27,182
 $32,888
 $75,582
 $99,509
Product revenues $31,832
 $24,695
 $58,812
 $48,399
Service revenues 54,690
 49,797
 165,295
 150,154
Service revenues 54,550
 55,857
 108,023
 110,606
Total revenuesTotal revenues $81,872
 $82,685
 $240,877
 $249,663
Total revenues $86,382
 $80,552
 $166,835
 $159,005
                
Operating expensesOperating expenses        Operating expenses        
Operating costs $61,695
 $63,499
 $187,654
 $197,576
Operating costs $63,270
 $61,711
 $124,560
 $125,959
Selling, general, and administrative expenses 10,726
 9,872
 34,455
 31,553
Selling, general, and administrative expenses 10,575
 11,521
 22,916
 23,729
Depreciation and amortization 4,196
 4,419
 12,442
 13,050
Depreciation and amortization 4,184
 4,118
 8,316
 8,246
Other expense (income) - net 1,439
 99
 1,238
 (153)Other (income) - net (3,027) (142) (8,033) (201)
Operating incomeOperating income 3,816
 4,796
 5,088
 7,637
Operating income 11,380
 3,344
 19,076
 1,272
Interest expense – netInterest expense – net 463
 404
 1,432
 1,366
Interest expense – net 412
 451
 499
 969
Income before income taxesIncome before income taxes 3,353
 4,392
 3,656
 6,271
Income before income taxes 10,968
 2,893
 18,577
 303
Provision for income taxesProvision for income taxes 942
 1,637
 1,140
 2,418
Provision for income taxes 3,982
 1,062
 6,774
 197
Net incomeNet income 2,411
 2,755
 2,516
 3,853
Net income 6,986
 1,831
 11,803
 106
Income attributable to noncontrolling interestIncome attributable to noncontrolling interest 76
 46
 117
 115
Income attributable to noncontrolling interest 52
 
 105
 42
Net income attributable to Heritage-Crystal Clean, Inc. common stockholdersNet income attributable to Heritage-Crystal Clean, Inc. common stockholders $2,335
 $2,709
 $2,399
 $3,738
Net income attributable to Heritage-Crystal Clean, Inc. common stockholders $6,934
 $1,831
 $11,698
 $64
                 
Net income per share: basicNet income per share: basic $0.10
 $0.12
 $0.11
 $0.17
Net income per share: basic $0.31
 $0.08
 $0.52
 $
Net income per share: dilutedNet income per share: diluted $0.10
 $0.12
 $0.11
 $0.17
Net income per share: diluted $0.30
 $0.08
 $0.51
 $
                 
Number of weighted average shares outstanding: basicNumber of weighted average shares outstanding: basic 22,267
 22,153
 22,246
 22,136
Number of weighted average shares outstanding: basic 22,506
 22,246
 22,430
 22,236
Number of weighted average shares outstanding: dilutedNumber of weighted average shares outstanding: diluted 22,550
 22,438
 22,417
 22,405
Number of weighted average shares outstanding: diluted 22,832
 22,419
 22,729
 22,392

 
See accompanying notes to financial statements.




Heritage-Crystal Clean, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(In Thousands, Except Share Amounts)
(Unaudited)


Shares 
Par
Value
Common
 
Additional Paidin
Capital
 Retained Earnings Total Heritage-Crystal Clean, Inc. Stockholders' Equity Noncontrolling Interest Total EquityShares 
Par
Value
Common
 
Additional Paidin
Capital
 Retained Earnings Total Heritage-Crystal Clean, Inc. Stockholders' Equity Noncontrolling Interest Total Equity
                          
Balance at January 2, 201622,213,364
 $222
 $182,558
 $6,385
 $189,165
 $668
 $189,833
Balance at December 31, 201622,300,007
 $223
 $185,099
 $12,227
 $197,549
 $720
 $198,269
Adjustment adopting ASU 2016-09
 
 
 1,009
 1,009
 
 1,009
Net income
 
 
 2,399
 2,399
 117
 2,516

 
 
 11,698
 11,698
 105
 11,803
Distribution
 
 
 
 
 (120) (120)
 
 
 
 
 (310) (310)
Issuance of common stock – ESPP32,036
 1
 324
 
 325
 
 325
14,367
 
 197
 
 197
 
 197
Exercise of stock options2,202
 
 16
 
 16
   16
216,253
 2
 2,355
 
 2,357
 
 2,357
Share-based compensation25,339
 
 890
 
 890
 
 890
73,562
 1
 991
 
 992
 
 992
Balance at September 10, 201622,272,941
 $223
 $183,788
 $8,784
 $192,795
 $665
 $193,460
Balance at June 17, 201722,604,189
 $226
 $188,642
 $24,934
 $213,802
 $515
 $214,317
 

 
See accompanying notes to financial statements.




Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

 For the First Three Quarters Ended, For the First Half Ended,
 September 10,
2016
 September 12,
2015
 June 17,
2017
 June 18,
2016
Cash flows from Operating Activities:        
Net income $2,516
 $3,853
 $11,803
 $106
Adjustments to reconcile net income to net cash provided by operating activities: 

  
 

  
Depreciation and amortization 12,442
 13,050
 8,316
 8,246
Non-cash inventory impairment 1,651
 6,846
 
 1,651
Bad debt provision 714
 1,081
 (6) 361
Share-based compensation 890
 815
 992
 746
Deferred taxes 973
 2,250
 6,506
 117
Amortization of deferred gain on lease conversion (201) (245) 
 (189)
Other, net 383
 914
 991
 324
Changes in operating assets and liabilities:  
  
  
  
(Increase) decrease in accounts receivable (6,131) 3,031
Decrease (increase) in inventory 2,428
 (3,163)
(Increase) decrease in other current assets (1,753) 3,403
Increase (decrease) increase in accounts payable 8,890
 (11,106)
Increase (decrease) in accrued expenses 1,197
 (3,704)
Decrease (increase) in accounts receivable 3,184
 (1,895)
(Increase) decrease in inventory (304) 1,598
(Increase) in other current assets (356) (1,768)
(Decrease) increase in accounts payable (1,771) 2,620
(Decrease) increase in accrued expenses (1,443) 2,474
Cash provided by operating activities $23,999
 $17,025
 $27,912
 $14,391
        
Cash flows from Investing Activities:  
  
  
  
Capital expenditures $(12,594) $(12,526) $(6,333) $(8,671)
Business acquisitions, net of cash acquired (2,400) 
 
 (2,400)
Proceeds from the sale of property, plant, and equipment $304
 $106
 54
 
Cash used in investing activities $(14,690) $(12,420) $(6,279) $(11,071)
        
Cash flows from Financing Activities:  
  
  
  
Payments on term loan $(3,371) $(5,303)
Payments of notes payable 
 (241)
Payments of contingent consideration 
 (95)
Payments on Term loan $(64,195) $(1,704)
Proceeds from new Term Loan 30,000
 
Proceeds under revolving credit facility 4,000
 
Payments of revolving credit facility (4,000) 
Proceeds from the exercise of stock options 2,357
 
Proceeds from the issuance of common stock 341
 345
 197
 222
Payments of debt issuance costs (1,050) 
Distributions to noncontrolling interest (120) (410) (310) (121)
Cash used in financing activities $(3,150) $(5,704)
Net increase (decrease) in cash and cash equivalents 6,159
 (1,099)
Cash (used in) provided by financing activities $(33,001) $(1,603)
Net (decrease) increase in cash and cash equivalents (11,368) 1,717
Cash and cash equivalents, beginning of period 23,608
 21,555
 36,610
 23,608
Cash and cash equivalents, end of period $29,767
 $20,456
 $25,242
 $25,325
        
Supplemental disclosure of cash flow information:  
  
  
  
Income taxes paid $315
 $263
 $208
 $242
Cash paid for interest, net of capitalized interest of $100 and $439, respectively 1,473
 1,161
Cash paid for interest 733
 956
Supplemental disclosure of non-cash information:  
  
  
  
Payables for construction in progress $287
 $1,026
 $514
 $284

See accompanying notes to financial statements.


HERITAGE-CRYSTAL CLEAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

September 10, 2016June 17, 2017

(1)    ORGANIZATION AND NATURE OF OPERATIONS

Heritage-Crystal Clean, Inc., a Delaware corporation and its subsidiaries (collectively the “Company”), providesprovide parts cleaning, and hazardous and non-hazardous containerized waste, used oil collection, vacuum, antifreeze recycling and field services primarily to small and mid-sized customers in both the manufacturingindustrial and vehicle maintenance sectors.customers. The Company's service programs include parts cleaning, containerized waste management, used oil collection, vacuum truck services, waste antifreeze collection and recycling, and field services.  The Company also owns and operates a used oil re-refinery through whichwhere it recyclesre-refines used oil intooils and sells high quality base oil for lubricants as well as other re-refinery byproducts.products.  The Company also has multiple locations where it dehydrates used oil. The oil to beprocessed at these locations is sold as recycled fuel oil. The company also operates multiple wastewater treatment plants and 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’s fiscal year ends on the Saturday closest to December 31. The most recent fiscal year ended on January 2,December 31, 2016.  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, antifreeze,absorbent, accessories, and accessories; andantifreeze; service revenues include drum waste removal services, servicing of parts cleaning machines, drum waste removal services, vacuum truck services, field services, and other services.  In the Company's Oil Business segment, product revenues include sales of re-refined base oil, byproducts, recycled fuel oil, used oil, and used oil; andother products; service revenues include revenues from collecting used oil collecting and recycling of oil filters andcollection activities, collecting and disposing of waste water.water 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.




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 2,December 31, 2016. There have been no material changes in these policies or their application.

Recently Issued Accounting Pronouncements
AccountingStandardIssuance DateDescriptionOur Effective DateEffect on the Financial Statements
ASU 2014-09 “Revenue from Contracts with Customers (Topic 606),” ASU 2014-15 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” ASU 2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10 “ Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” and ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”

May 2014 and subsequent

These standards not yetoutline a single comprehensive model for entities to use in accounting for revenue using a five-step process that supersedes virtually all existing revenue guidance. The underlying principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities have the option of using either a full retrospective approach or a modified retrospective approach to adopt the guidance. Early adoption is permitted.

December 31, 2017
The Company is continuing to evaluate the effect that this accounting standard will have on our consolidated financial position and results of operations. To date, certain personnel have attended technical training concerning this new revenue recognition standard. The Company is working to identify each of the different types of contracts with customers and the various performance obligations associated with each type of contract. The Company is also assessing the changes that will be necessary to our information systems to enable us to capture the information necessary to recognize revenue in accordance with the new standard and comply with the additional disclosure requirements. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective approach), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective approach). The Company will adopt the standard in the first quarter of fiscal 2018 and currently anticipates applying the modified retrospective approach.

ASU 2016-02
Leases
(Topic 842)
February 2016This update was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Early application of the amendments in this update is permitted for all entities.January 4, 2019
The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations.







Recently issued accounting standards adopted
Standard Issuance Date Description Our Effective Date Effect on the Financial Statements
ASU 2016-09 Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting.  
(Topic 718)
 March 2016 This update addresses the simplification of accounting for employee share-based payment transactions as it pertains to income taxes, the classification of awards as equity or liabilities, accounting for forfeitures, statutory tax withholding requirements, and certain classifications on the statement of cash flows. Early adoption is permitted. January 1, 2017 The
ASU 2016-09 simplified the treatment for employee share-based compensation by allowing an entity to recognize excess tax benefits in the current period whether or not current taxes payable are reduced. Prior to 2017 the Company is currently evaluating the effect that implementation of this update will have on its consolidated financialcould not recognize windfall tax benefits associated with employee share-based compensation because it was in an NOL position and resultscurrent taxes payable would not be reduced by the excess tax benefits. As a result of operations.ASU 2016-09 the Company recognized excess tax benefits of $2.5 million from share-based compensation from prior years, resulting in cumulative-effect increases to retained earnings and deferred tax assets of approximately $1.0 million.

ASU 2016-02
Leases
(Topic 842)
2015-11, Simplifying the Measurement of Inventory. (Topic 330)
 February 2016July 2015 This update was issued to increase transparencyrequires the measurement of inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Early application of the amendments in this update is permitted for all entities.transportation. January 4, 20191, 2017 
The Company is currently evaluatingadoption of ASU 2015-11 at the effect that implementationstart of this update will have on itsfiscal 2017 resulted in no impact to our consolidated financial position and results of operations.

statements.
ASU 2014-15 Presentation of Financial Statements - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
(Subtopic 205-40)
 August 2014 This update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Early adoption is permitted. December 31, 2016 The adoption of ASU 2014-15 is not expected2015-03 in fiscal 2016 resulted in no impact to have an impact on the Company’sour consolidated financial statements.
ASU 2014-09 Revenue from Contracts with Customers, and
ASU 2015-14 Revenue from Contracts with Customers: Deferral of the Effective Date (Topic 606)
May 2014The underlying principle of this update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. Early adoption is not permitted.December 31, 2017
This update could impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations upon adoption.
2015-03



Recently issued accounting standards adopted
StandardIssuance DateDescriptionEffective DateEffect on the Financial Statements
2015-03
Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, and 2015-15 Interest—Imputation of Interest (Subtopic 835-30)
 April 2015 These updates require debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt, and allows for the presentation of debt issuance costs as an asset regardless of whether or not there is an outstanding balance on the line-of-credit arrangement. January 3, 2016 The adoption of ASU 2015-03 resulted in the reclassification of $1.4 million of unamortized debt issuance costs from "Other current assets" to "Term loan, less current maturities" as of January 2, 2016.


2015-16 Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments (Topic 805)September 2015This update simplifies the accounting for measurement-period adjustments in a business combination by requiring the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined. The acquirer is also required to record in the reporting period in which the adjustments are determined the effect on earnings of changes in depreciation, amortization, and other items resulting from the change to the provisional amounts.January 3, 2016The Company early adopted the amendments of this ASU No. 2015-16 in fiscal 2015 and it did not have an impact on our consolidated financial condition and results of operations.

(3)    BUSINESS COMBINATIONS

On December 2, 2016, the Company purchased the assets of Recycle Engine Coolant, Inc. ("REC"). The purchase price for the acquisition was $0.7 million, including $0.1 million placed into escrow. The Company purchased the assets of REC in order to expand its antifreeze recycling capabilities.

On March 24, 2016, the Company purchased the assets of Phoenix Environmental Services, Inc. and Pipeline Video and Cleaning North Corporation (together "Phoenix Environmental"). The purchase price for the acquisition was $2.7 million, including $0.3 million placed into escrow and including contingent consideration of up to $0.3 million based on subsequent business performance.

escrow. The Company is continuingpurchased the assets of Phoenix Environmental in order to evaluateexpand its service coverage area into the purchase price allocations. Preliminary purchase price allocations are tentative and subject to revision asPacific Northwest. During the measurement period, the Company finalizes appraisals and other analyses. Measurement period adjustments reflect new information obtained about facts and circumstances that existed as of the acquisition date. Final determination of the fair values may result in furthermade adjustments to the values presented. The Company believes thatprovisional amounts reported as the preliminary allocations provide a reasonable basis for estimating theestimated fair values of assets acquired based onas part of the information available. The Phoenix Environmental purchase price allocation is preliminarybusiness combination. Compared to the provisional value reported as of December 31, 2016, the fair values presented in the table below reflect a decrease to accounts receivable of $12 thousand, a decrease to property, plant, & equipment of $77 thousand, and an increase to goodwill of $89 thousand. Factors leading to goodwill being recognized are the Company's expectations of synergies from integrating Phoenix Environmental into the Company as well as the Company is still in the processvalue of obtaining information to finalize the purchase price, net cash paid, and estimated fair values of theintangible assets presented below. The Company expects to finalize the purchase price allocation no later than one year from the purchase date.that are not separately recognized, such as assembled workforce.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, net of cash acquired, related to theeach acquisition:
(Thousands) 
Phoenix Environmental Services 
   
Accounts receivable $361
Inventory 27
Property, plant, & equipment 374
Equipment at customers 55
Intangible assets 710
Goodwill(a)
 1,173
Total purchase price 2,700
Less: contingent consideration (300)
Net cash paid $2,400
______________
(a)Goodwill recognized from the acquisition of Phoenix Environmental represents the excess of the fair value of the net assets acquired over the purchase price, and is based upon the Company's expectations of synergies from combining the operations of Phoenix Environmental and the Company, and the value of intangible assets that are not separately recognized, such as the assembled workforce. All of the goodwill was assigned to the Environmental Services reporting unit. All goodwill is expected to be deductible for income tax purposes.

Unaudited Pro Forma Financial Information

The pro forma financial information in the table below presents the combined results of the Company as if the Phoenix Environmental acquisition that occurred in fiscal 2016 had occurred January 3, 2015. 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 period presented.


  Third Quarter Ended, Third Quarter Ended
(In thousands, except per share data) September 10, 2016 September 12, 2015
Total revenues $81,872
 $83,600
Net income 2,335
 2,892
Income per share    
     Basic $0.10
 $0.13
     Diluted 0.10
 0.13
  First Three Quarters Ended, First Three Quarters Ended,
(In thousands, except per share data) September 10, 2016 September 12, 2015
Total revenues $241,602
 $252,121
Net income 2,357
 4,107
Income per share    
     Basic $0.11
 $0.19
     Diluted 0.11
 0.18
(Thousands) 
Phoenix Environmental REC
    
Accounts receivable$260
 $80
Inventory27
 56
Property, plant, & equipment398
 457
Equipment at customers38
 
Intangible assets700
 132
Goodwill1,245
 
Total purchase price, net of cash acquired$2,668
 $725



(4)    ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

(Thousands) September 10,
2016
 January 2,
2016
 June 17,
2017
 December 31,
2016
Trade $42,597
 $38,379
 $44,682
 $42,332
Less: allowance for doubtful accounts 2,394
 2,207
 1,843
 2,176
Trade - net 40,203
 36,172
 42,839
 40,156
Related parties 1,378
 1,250
 814
 1,324
Other 5,789
 4,170
 690
 6,053
Total accounts receivable - net $47,370
 $41,592
 $44,343
 $47,533

The following table provides the changes in the Company’s allowance for doubtful accounts for the three quartersfirst half ended September 10, 2016June 17, 2017 and the fiscal year ended January 2,December 31, 2016:
 For the First Three Quarters Ended, For the Fiscal Year Ended, For the First Half Ended, For the Fiscal Year Ended,
(Thousands) September 10,
2016
 January 2,
2016
 June 17,
2017
 December 31,
2016
Balance at beginning of period $2,207
 $3,927
 $2,176
 $2,207
Balance acquired from FCC Environmental, including measurement period adjustments 
 2,701
Provision for bad debts 714
 1,009
 (6) 687
Accounts written off, net of recoveries (527) (5,430) (327) (718)
Balance at end of period $2,394
 $2,207
 $1,843
 $2,176




(5)    INVENTORY

The carrying value of inventory consisted of the following:
(Thousands) September 10,
2016
 January 2,
2016
 June 17,
2017
 December 31,
2016
Used oil and processed oil $7,254
 $9,045
 $5,815
 $5,493
Solvents and solutions 4,543
 6,285
 5,692
 5,014
Drums and supplies 3,562
 3,790
Machines 3,127
 3,827
 2,517
 2,576
Drums and supplies 4,417
 4,226
Other 1,630
 1,681
 1,639
 1,899
Total inventory 20,971
 25,064
 19,225
 18,772
Less: machine refurbishing reserve 248
 290
 363
 214
Total inventory - net $20,723
 $24,774
 $18,862
 $18,558
 
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 market, net of any reserves for excess, obsolete, or unsalable inventory. The Company continuallyroutinely 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 thirdsecond quarter of 2016,2017, compared to a write down of $2.4$0.2 million in the thirdsecond quarter of 2015. Total2016. There were no inventory write-downs for the first three quartershalf of fiscal 20162017 and the first three quarters of fiscal 2015 were $1.7 million and $6.8 million, respectively. Write-downs in 2015 andof inventory write-downs the first half of fiscal 2016 pertain to used oil and processed oil inventory as well as solvents and solutions inventory.2016.


(6)   PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following:
 (Thousands) September 10,
2016
 January 2,
2016
Machinery, vehicles, and equipment (a)
 $77,775
 $75,129
Buildings and storage tanks 69,723
 69,317
Land 10,368
 9,295
Leasehold improvements (a)
 4,758
 4,523
Construction in progress 7,076
 4,474
Assets held for sale 178
 189
Total property, plant and equipment 169,878
 162,927
Less: accumulated depreciation (38,478) (31,562)
Property, plant and equipment - net $131,400
 $131,365
     
 (Thousands) September 10,
2016
 January 2,
2016
Equipment at customers (a)
 $62,380
 $59,216
Less: accumulated depreciation (39,103) (36,044)
Equipment at customers - net $23,277
 $23,172
_______________
(a) Numbers include preliminary fair values of assets acquired in the acquisition described in Note 3 that may be adjusted as additional information becomes known.


 (Thousands) June 17,
2017
 December 31,
2016
Machinery, vehicles, and equipment $79,018
 $78,592
Buildings and storage tanks 69,136
 69,977
Land 10,366
 10,363
Leasehold improvements 4,946
 4,876
Construction in progress 11,914
 8,646
Assets held for sale 61
 177
Total property, plant and equipment 175,441
 172,631
Less: accumulated depreciation (45,901) (41,456)
Property, plant and equipment - net $129,540
 $131,175
     
 (Thousands) June 17,
2017
 December 31,
2016
Equipment at customers $65,663
 $63,502
Less: accumulated depreciation (42,546) (40,469)
Equipment at customers - net $23,117
 $23,033

Depreciation expense for the thirdboth second quarters ended September 10,June 17, 2017 and June 18, 2016 and September 12, 2015 was $3.4 million and $3.7 million, respectively.million. Depreciation expense for the first three quartershalf ended September 10, 2016June 17, 2017, and the first three quartershalf ended September 12, 2015June 18, 2016 was $10.2$6.8 million and $11.1$6.7 million, respectively.



(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 tests goodwill for impairment at each of its two reporting units, Environmental Services and Oil Business, and the Company does not aggregate reporting units for purposes of impairment testing.


The following table shows changes to our goodwill balances by segment from January 2,December 31, 2016, to September 10, 2016:June 17, 2017:
(Thousands) 
 Oil Business Environmental Services Total
       
Balance at January 2, 2016 $
 $30,325
 $30,325
Phoenix Environmental acquisition 
 1,173
 1,173
Adjustments 
 12
 12
Balance at September 10, 2016 $
 $31,510
 $31,510
(Thousands) 
 Oil Business Environmental Services Total
       
Goodwill at January 2, 2016      
     Gross carrying amount $3,952
 $30,325
 $34,277
     Accumulated impairment loss (3,952) 
 (3,952)
Net book value at January 2, 2016 $
 $30,325
 $30,325
Acquisitions 
 1,158
 1,158
Goodwill at December 31, 2016      
     Gross carrying amount 3,952
 31,483
 35,435
     Accumulated impairment loss (3,952) 
 (3,952)
Net book value at December 31, 2016 $
 $31,483
 $31,483
Measurement period adjustments 
 90
 
Goodwill at June 17, 2017      
     Gross carrying amount 3,952
 31,573
 35,525
     Accumulated impairment loss (3,952) 
 (3,952)
Net book value at June 17, 2017 $
 $31,573
 $31,573

Following is a summary of software and other intangible assets:
 September 10, 2016 January 2, 2016 June 17, 2017 December 31, 2016
(Thousands)
 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount
Customer & supplier relationships $22,930
 $5,927
 $17,003
 $22,202
 $4,369
 $17,833
 $23,050
 $7,763
 $15,287
 $23,045
 $6,682
 $16,363
Software 4,573
 3,557
 1,016
 4,455
 3,382
 1,073
 4,604
 3,768
 836
 4,573
 3,655
 918
Non-compete agreements 2,939
 2,043
 896
 2,930
 1,713
 1,217
 2,937
 2,381
 556
 2,934
 2,180
 754
Patents, formulae, and licenses 1,769
 556
 1,213
 1,769
 510
 1,259
 1,769
 607
 1,162
 1,769
 576
 1,193
Other 1,348
 690
 658
 1,354
 534
 820
 1,348
 845
 503
 1,348
 755
 593
Total software and intangible assets $33,559
 $12,773
 $20,786
 $32,710
 $10,508
 $22,202
 $33,708
 $15,364
 $18,344
 $33,669
 $13,848
 $19,821

Amortization expense was $0.70.8 million for the thirdsecond quarter ended September 10, 2016June 17, 2017 and $0.7 million for thirdsecond quarter ended September 12, 2015June 18, 2016. Amortization expense was $2.3$1.5 million for the first three quartershalf ended September 10, 2016June 17, 2017 and $1.9$1.5 million for the first three quartershalf ended September 12, 2015.June 18, 2016. The weighted average useful lives of software; customer & supplier relationships; patents, formulae, and licenses; non-compete agreements, and other intangibles were 9 years, 1110 years, 15 years, 5 years, and 6 years, respectively.



The expected amortization expense for the remainder of fiscal 20162017 and for fiscal years 2017, 2018, 2019, 2020, and 20202021 is $1.0$1.7 million, $3.2 million, $2.9$3.0 million, $2.6 million, $2.5 million, and $2.5$2.4 million, respectively. The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, disposal of intangible assets, accelerated amortization of intangible assets, and other events.



(8)   DEBT AND FINANCING ARRANGEMENTS

Bank Credit Facility

On October 16, 2014,February 21, 2017, the Company amended its Amended and Restatedentered into a new Credit Agreement ("Credit Agreement", or "Credit Facility"). replacing the prior Credit Agreement ("Prior Credit Agreement") dated as of June 29, 2015. The Credit Agreement as amended, allowsprovides for borrowings of up to $140.0$95.0 million, in borrowings. As subject to the satisfaction of September 10, 2016certain terms and January 2, 2016, the Company's total borrowings were $67.5 million and $70.9 million, respectively, under the term loan which hasconditions, comprised of a maturity date of February 5, 2018. The remaining portion of the Credit Facility is a revolving loan which expires on February 5, 2018. There were no amounts outstanding under the revolver at September 10, 2016 and January 2, 2016. Unamortized debt issuance costs were $0.9 million and $1.4 million as of September 10, 2016 and January 2, 2016, respectively.

During the third quarter of fiscal 2016, the Company recorded interest of $0.5 million on the term loan and capitalized less than $0.1 million for various capital projects. During the first three quarters of fiscal 2016, the Company recorded interest of $1.5 million on the term loan of which less than $0.1$30.0 million was capitalized for various capital projects. During the third quarter and up to $65.0 million of fiscal 2015, the Company recorded interest of $0.4 million on the term loan and capitalized $0.1 million for various capital projects. During the first three quarters of fiscal 2015, the Company recorded interest of $1.4 million on the term loan and capitalized $0.4 million for various capital projects.

As of September 10, 2016 and January 2, 2016, the Company was in compliance with all covenantsborrowings under the Credit Agreement. As of September 10, 2016 and January 2, 2016, the Company had $3.0 million and $4.4 million of standby letters of credit issued, respectively, and $8.6 million and $34.5 million was available for borrowing under the Credit Facility.revolving loan portion. The actual amount of borrowings available under the revolving loan portion of the Credit Agreement is limited by the Company's total leverage ratio. The amount available to draw at any point in time would be further reduced by any standby letters of credit issued.

Loans made under the New Credit Agreement may be Base Rate Loans or LIBOR Rate Loans, at the election of the Company 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 London Interbank Offering Rate (“LIBOR”) plus 1%, or (c) Bank of America's prime rate, plus (ii) a variable margin of between 0.75% and 1.75% depending on the Company's total leverage ratio, calculated on a consolidated basis. LIBOR rate loans have an interest rate equal to (i) the LIBOR rate plus (ii) a variable margin of between 1.75% and 2.75% depending on the Company's total leverage ratio. Amounts borrowed under the New Credit Agreement are secured by a security interest in substantially all of the Company's tangible and intangible assets. In June 2017, the Company entered into a First Amendment to the Credit Agreement that expands the Company's ability to make dispositions without bank group approval.

As of the Effective date of February 21, 2017, the effective interest rate on the term loan was 3.28% and the effective rate on the revolving loan was 3.28%.
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 3.25 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; and

A capital expenditures covenant limiting capital expenditures to $100.0 million plus, if the capital expenditures permitted have been fully utilized, an additional amount for the remaining term of the Credit Agreement equal to 35% of EBITDA for the thirteen “four-week” periods most recently ended immediately prior to the full utilization of such $100.0 million basket

The Credit Agreement places certain limitations on acquisitions and the payment of dividends.
During the first half of fiscal 2017, the Company paid and capitalized $1.1 million of debt issuance costs pertaining to the New Credit Agreement and charged $0.2 million of unamortized debt issuance costs pertaining to the Prior Credit Agreement to selling, general, and administrative expenses.

Debt at June 17, 2017 and December 31, 2016 consisted of the following:


(thousands) June 17, 2017 December 31, 2016
Principal amount $30,000
 $64,195
Less: unamortized debt issuance costs 1,418
 741
Debt less unamortized debt issuance costs $28,582
 $63,454


During the second quarter of fiscal 2017, the Company recorded interest of $0.4 million on the term loan. During the first half of fiscal 2017, the Company recorded interest of $0.9 million on the term loan.

During the second quarter of fiscal 2016, the Company recorded interest of $0.5 million on the Prior Credit Agreement term loans and capitalized less than $0.1 million for various capital projects. During the first half of fiscal 2016, the Company recorded interest of $1.0 million on the term loan, of which less than $0.1 million was capitalized for various capital projects. The Company's weighted average interest rate for all debt as of September 10,June 17, 2017 and June 18, 2016 and September 12, 2015 was 3.2% and 3.1%, respectively.3.8%.

As of June 17, 2017 and December 31, 2016, the Company was in compliance with all covenants under both credit agreements. As of June 17, 2017 and December 31, 2016, the Company had $2.4 million and $3.0 million of standby letters of credit issued, respectively, and $62.6 million and $27.6 million was available for borrowing under the revolving credit facility, respectively. We believe that the carrying value of our new debt balance at June 17, 2017 approximates fair value.



(9)   SEGMENT INFORMATION

The Company reports in two segments: "Environmental Services" and "Oil Business." The Environmental Services segment consists of the Company's parts cleaning, containerized waste management, vacuum truck service, antifreeze recycling activities, 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.
        
Operating segment results for the third quarters and first threesecond quarters ended September 10, 2016June 17, 2017, and September 12, 2015June 18, 2016 were as follows:


Third Quarter Ended,
September 10, 2016
Second Quarter Ended,Second Quarter Ended,
June 17, 2017June 17, 2017
(Thousands) 

Environmental
Services
 Oil Business Corporate and
Eliminations
 Consolidated(Thousands) 

Environmental
Services
 Oil Business Corporate and
Eliminations
 Consolidated
                
RevenuesRevenues        Revenues        
Product revenues $4,691
 $22,491
 $
 $27,182
Product revenues $5,868
 $25,964
 $
 $31,832
Service revenues 46,591
 8,099
 
 54,690
Service revenues 49,225
 5,325
 
 54,550
Total revenuesTotal revenues $51,282
 $30,590
 $
 $81,872
Total revenues $55,093
 $31,289
 $
 $86,382
Operating expensesOperating expenses        Operating expenses        
Operating costs 34,456 27,239 
 61,695
Operating costs 36,601 26,669 
 63,270
Operating depreciation and amortization 1,742
 1,618
 
 3,360
Operating depreciation and amortization 1,801
 1,535
 
 3,336
Profit before corporate selling, general, and administrative expensesProfit before corporate selling, general, and administrative expenses $15,084
 $1,733
 $
 $16,817
Profit before corporate selling, general, and administrative expenses $16,691
 $3,085
 $
 $19,776
Selling, general, and administrative expensesSelling, general, and administrative expenses     10,726 10,726
Selling, general, and administrative expenses     10,575 10,575
Depreciation and amortization from SG&ADepreciation and amortization from SG&A     836 836
Depreciation and amortization from SG&A     848 848
Total selling, general, and administrative expensesTotal selling, general, and administrative expenses     $11,562
 $11,562
Total selling, general, and administrative expenses     $11,423
 $11,423
Other expense - net     1,439 1,439
Other (income) - netOther (income) - net     (3,027) (3,027)
Operating incomeOperating income       3,816
Operating income       11,380
Interest expense – netInterest expense – net     463 463
Interest expense – net     412 412
Income before income taxesIncome before income taxes       $3,353
Income before income taxes       $10,968

Second Quarter Ended,
June 18, 2016
 (Thousands) 

Environmental
Services
 Oil Business Corporate and
Eliminations
 Consolidated
          
Revenues        
 Product revenues $5,106
 $19,589
 $
 $24,695
 Service revenues 47,331
 8,526
 
 55,857
Total revenues $52,437
 $28,115
 $
 $80,552
Operating expenses        
 Operating costs 35,631
 26,080
 
 61,711
 Operating depreciation and amortization 1,710
 1,591
 
 3,301
Profit before corporate selling, general, and administrative expenses $15,096
 $444
 $
 $15,540
Selling, general, and administrative expenses     11,521
 11,521
Depreciation and amortization from SG&A     817
 817
Total selling, general, and administrative expenses     $12,338
 $12,338
Other (income) - net     (142)
 (142)
Operating income       3,344
Interest expense – net     451
 451
Income before income taxes       $2,893




Third Quarter Ended,
September 12, 2015
First Half Ended,First Half Ended,
June 17, 2017June 17, 2017
(Thousands) 

Environmental
Services
 Oil Business Corporate and
Eliminations
 Consolidated(Thousands) 

Environmental
Services
 Oil Business Corporate and
Eliminations
 Consolidated
                
RevenuesRevenues        Revenues        
Product revenues $4,923
 $27,965
 $
 $32,888
Product revenues $11,592
 $47,220
 $
 $58,812
Service revenues 47,199
 2,598
 
 49,797
Service revenues 96,716
 11,307
 
 108,023
Total revenuesTotal revenues $52,122
 $30,563
 $
 $82,685
Total revenues $108,308
 $58,527
 $
 $166,835
Operating expensesOperating expenses        Operating expenses        
Operating costs 35,532
 27,967
 
 63,499
Operating costs 73,121
 51,439
 
 124,560
Operating depreciation and amortization 1,647
 1,949
 
 3,596
Operating depreciation and amortization 3,547
 3,070
 
 6,617
Profit before corporate selling, general, and administrative expensesProfit before corporate selling, general, and administrative expenses $14,943
 $647
 $
 $15,590
Profit before corporate selling, general, and administrative expenses $31,640
 $4,018
 $
 $35,658
Selling, general, and administrative expensesSelling, general, and administrative expenses     9,872
 9,872
Selling, general, and administrative expenses     22,916
 22,916
Depreciation and amortization from SG&ADepreciation and amortization from SG&A     823 823
Depreciation and amortization from SG&A     1,699 1,699
Total selling, general, and administrative expensesTotal selling, general, and administrative expenses     $10,695
 $10,695
Total selling, general, and administrative expenses     $24,615
 $24,615
Other expense - net     99
 99
Other (income) - netOther (income) - net     (8,033)
 (8,033)
Operating incomeOperating income       4,796
Operating income       19,076
Interest expense – netInterest expense – net     404
 404
Interest expense – net     499
 499
Income before income taxesIncome before income taxes       $4,392
Income before income taxes       $18,577

First Three Quarters Ended,
September 10, 2016
First Half Ended,First Half Ended,
June 18, 2016June 18, 2016
(Thousands) 

Environmental
Services
 Oil Business 
Corporate and
Eliminations
 Consolidated(Thousands) 

Environmental
Services
 Oil Business Corporate and
Eliminations
 Consolidated
                
RevenuesRevenues        Revenues        
Product revenues $14,826
 $60,756
 $
 $75,582
Product revenues $10,135
 $38,264
 $
 $48,399
Service revenues 141,254
 24,041
 $
 165,295
Service revenues 94,663
 15,943
 
 110,606
Total revenuesTotal revenues $156,080
 $84,797
 $
 $240,877
Total revenues $104,798
 $54,207
 $
 $159,005
Operating expensesOperating expenses        Operating expenses        
Operating costs 106,892
 80,762
 
 187,654
Operating costs 72,436
 53,523
 
 125,959
Operating depreciation and amortization 5,166
 4,789
 
 9,955
Operating depreciation and amortization 3,424
 3,171
 
 6,595
Profit (loss) before corporate selling, general, and administrative expensesProfit (loss) before corporate selling, general, and administrative expenses $44,022
 $(754) $
 $43,268
Profit (loss) before corporate selling, general, and administrative expenses $28,938
 $(2,487) $
 $26,451
Selling, general, and administrative expensesSelling, general, and administrative expenses     34,455
 34,455
Selling, general, and administrative expenses     23,729
 23,729
Depreciation and amortization from SG&ADepreciation and amortization from SG&A     2,487
 2,487
Depreciation and amortization from SG&A     1,651
 1,651
Total selling, general, and administrative expensesTotal selling, general, and administrative expenses     $36,942
 $36,942
Total selling, general, and administrative expenses     $25,380
 $25,380
Other expense - net     1,238
 1,238
Other (income) - netOther (income) - net     (201)
 (201)
Operating incomeOperating income       5,088
Operating income       1,272
Interest expense – netInterest expense – net     1,432
 1,432
Interest expense – net     969
 969
Income before income taxesIncome before income taxes       $3,656
Income before income taxes       $303



First Three Quarters Ended,
September 12, 2015
 (Thousands) 
Environmental
Services
 Oil Business Corporate and
Eliminations
 Consolidated
          
Revenues        
 Product revenues $15,634
 $83,875
 $
 $99,509
 Service revenues 142,344
 7,810
 
 150,154
Total revenues $157,978
 $91,685
 $
 $249,663
Operating expenses        
 Operating costs 109,836
 87,740
 
 197,576
 Operating depreciation and amortization 5,045
 5,653
 
 10,698
Profit (loss) before corporate selling, general, and administrative expenses $43,097
 $(1,708) $
 $41,389
Selling, general, and administrative expenses     31,553
 31,553
Depreciation and amortization from SG&A     2,352
 2,352
Total selling, general, and administrative expenses     $33,905
 $33,905
Other (income) - net     (153)
 (153)
Operating income       7,637
Interest expense – net     1,366
 1,366
Income before income taxes       $6,271

Total assets by segment as of September 10, 2016June 17, 2017 and January 2,December 31, 2016 were as follows:


(Thousands)(Thousands) September 10, 2016 January 2, 2016(Thousands) June 17, 2017 December 31, 2016
Total Assets:Total Assets:    Total Assets:    
Environmental Services $130,384
 $133,718
Environmental Services $130,944
 $129,506
Oil Business 137,377
 132,556
Oil Business 128,596
 135,323
Unallocated Corporate Assets 43,635
 35,574
Unallocated Corporate Assets 37,929
 49,478
 Total $311,396
 $301,848
 Total $297,469
 $314,307

Segment assets for the Environmental Services and Oil Business segments consist of property, plant, and equipment, 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.



(10)    COMMITMENTS AND CONTINGENCIES

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 cancelable 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 $7.8$16.7 million as of September 10, 2016June 17, 2017, and $9.8$9.7 million as of January 2,December 31, 2016, primarily for used oil, solvent, machine purchases, disposal and transportation expenses, and capital expenditures.

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, 2016June 17, 2017 and January 2,December 31, 2016, the Company had accrued $5.4$5.6 million and $6.0$5.5 million related to loss contingencies and other contingent liabilities, respectively.

(11)    INCOME TAXES
 
The Company deducted for federal income tax purposes accelerated "bonus" depreciation on the majority of its capital expenditures for assets placed in service in fiscal 2011 through fiscal 2015. Therefore, the Company recorded a noncurrent deferred tax liability to reflect difference between the book basis and the tax basis of those assets. In addition, as a result of the federal bonus depreciation, the Company recorded a Net Operating Loss ("NOL") of $44.7 million, in fiscal 2011, which will begin to expire in 2031. The NOL as of September 10, 2016June 17, 2017 was $51.9$32.9 million, and the remaining deferred tax asset related to the Company’s state and federal NOL was a tax effected balance of $20.0$12.5 million.

TheASU 2016-09 simplified the treatment for employee share-based compensation by allowing an entity to recognize excess tax benefits in the current period whether or not current taxes payable are reduced. Prior to 2017 the Company recognizescould not recognize windfall tax benefits associated with employee share-based compensation because it was in an NOL position and current taxes payable would not be reduced by the exerciseexcess tax benefits. As a result of stock options directlyASU 2016-09 the Company recognized excess tax benefits of $2.5 million from share-based compensation from prior years, resulting in cumulative-effect increases to stockholders' equity only when realized. Consequently,retained earnings and deferred tax assets are not recognized for NOLs resulting from windfall tax benefits. At September 10, 2016, deferred tax assets do not include $2.5 millionof excess tax benefits from share-based compensation.approximately $1.0 million.

The Company's effective tax rate for the second quarter of fiscal third2017 was 36.3% compared to 36.7% in the second quarter of fiscal 2016 was 28.1% compared to 37.3% in the third quarter of fiscal 2015. The Company'sCompany’s effective tax rate for the first three quartershalf of fiscal 20162017 was 31.2%36.5% compared to 38.6%65.0% in the first three quartershalf of fiscal 2015. The rate difference is principally attributable to the differing treatment for financial reporting and income tax reporting for certain income and expenditures items.2016. The rate decrease attributableis primarily attributed to expenditures reported netthe previous year’s first half effect of anticipated reimbursement from an unrelated third party for financial reporting purposes, but deductedcertain state income taxes which are computed on a gross basis fortax base that reflects substantial modifications to federal taxable income, and that had created comparatively high tax purposes, is partially offset by expenditures which are expensed for financial reporting purposes but not deductible forexpense due to relatively low year-to-date pre-tax income tax purposes.in the first half of 2016.

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 $2.52.4 million for uncertain tax positions as of September 10, 2016June 17, 2017 and January 2,December 31, 2016. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.



(12)    SHARE-BASED COMPENSATION

The aggregate number of shares of common stock which may be issued under the Company’s 2008 Omnibus Plan ("Plan") is 1,902,077 plus any common stock that becomes available for issuance pursuant to the reusage provision of the Plan.  As of September 10, 2016June 17, 2017, the number of shares available for issuance under the Plan was 553,970725,361 shares.

Stock Option Awards

A summary of stock option activity under this Plan is as follows:
Outstanding Stock Options
Number of
Options
Outstanding
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
(in years)
 
Aggregate
Intrinsic Value as of Date Listed
(in thousands)
Number of
Options
Outstanding
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
(in years)
 
Aggregate
Intrinsic Value as of Date Listed
(in thousands)
Options outstanding at January 2, 2016534,428
 $10.97
 2.34 $224
Options outstanding at December 31, 2016514,287
 $11.00
 1.33
 $2,414
Exercised(2,202) 12.35
  (216,253) 10.90
 
 
Options outstanding at September 10, 2016532,226
 $10.98
 1.64 $942
Options outstanding at June 17, 2017298,034
 $11.08
 0.85
 $1,004
 
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. On May 8, 2015,In addition, the Company granted 22,638may grant restricted shares for service in fiscal 2015, which vested in the second quarter of fiscal 2016. On May 5, 2016, the Company granted 28,674 restricted shares to the Board of Directors for service in fiscal 2016. As of September 10, 2016, there was less than $0.1 million of unrecognized expense associated with these grants, which will be recorded throughout the remainder fiscal 2016. Expense related to the Board of Directors' restricted stock in both the first three quarters of fiscal 2016, and the first three quarters of fiscal 2015 was $0.2 million.

In February 2014, the Company granted certain members of management 132,107 restricted shares based on the Company's performance in fiscal 2013. These restricted shares are subject to a graded vesting schedule over a three year period which started January 1, 2015. There was approximately $0.2 million and $0.5 million in unrecognized compensation expense remaining related to these awards as of September 10, 2016 and January 2, 2016, respectively. In both the first three quarters of fiscal 2016, and the first three quarters of fiscal 2015, compensation expense related to these awards was $0.4 million.

In February 2015, the Company granted certain members of management 38,372 restricted shares based on their services in fiscal 2014 and contingent upon continued service. The restricted shares vest over a three year period which started January 1, 2016. There was approximately $0.1 million and $0.2 million in unrecognized compensation expense remaining related to these awards as of September 10, 2016 and January 2, 2016, respectively. In both the first three quarters of fiscal 2016, and the first three quarters of fiscal 2015, compensation expense related to these awards was approximately $0.1 million.

In January 2016, the Company granted certain members of management 43,208 restricted shares based on their services in fiscal 2015 and contingent upon the employees' continued employmentservice with the Company. The restricted shares vest over a period of approximately three years beginningfrom 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 shares grants and expense resulting from the awards:
      Compensation Expense    
(thousands except for shares total) First Half Ended, Unrecognized Expense as of
Recipient of Grant Grant Date Restricted Shares June 17, 2017 June 18, 2016 June 17, 2017 December 31, 2016
Board of Directors April, 2017 28,674
 $113
 $132
 $134
 $
Members of Management February, 2015 38,732
 51
 57
 59
 170
Members of Management January, 2016 43,208
 48
 55
 160
 258
Members of Management February, 2017 146,564
 200
 264
 1,183
 2,028
Chief Executive Officer February, 2017 500,000
 455
 
 3,080
 


In February 2017, as part of Mr. Recatto's employment agreement, the Company granted a restricted stock award of 500,000 shares of common stock, which vests through January 2021 in an amount based on the vesting table below, with the grantcommon stock price increase 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 employment commencement date in January 2016($15.00) and the common stock price on the potential vesting date (determined by using the weighted average closing price of a share of the Company's common stock for the 90-day period ending withon the final vesting in January 2019. There was approximately $0.2 million and $0.3 million in unrecognized compensation expense remaining related to these awards as of September 10, 2016 and January 2, 2016, respectively. Indate). If the stock price does not increase by $5, then no shares shall vest. During the first three quartershalf of fiscal 2016 and2017, the first three quartersCompany recorded approximately $0.5 million of fiscal 2015, approximately $0.1 million and $0.2 million was recorded as compensation expense related to these awards, respectively.this award. In the future, the Company expects to recognize compensation expense of approximately $3.1 million over the remaining requisite service period, which ends January 31, 2021. 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 1.70%, expected dividend yield of zero, and an expected volatility assumption of 41.73%.




Vesting Table
Increase in Stock Price From the Employment Commencement Date to the Vesting DateTotal percentage of Restricted Stock
Less than $5 per share increase—%
$5 per share increase25%
$10 per share increase50%
$15 per share increase75%
$20 or more per share increase100%


Provision for possible accelerated vesting of award




If the weighted average closing price of the Company's common stock increases by the marginal levels set forth in the above vesting table for 180 consecutive days during any period between the award date and final vesting date, 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.


The following table summarizes the restricted stock activity for the period ended September 10, 2016June 17, 2017:
Restricted Stock (Nonvested Shares) Number of Shares Weighted Average Grant-Date Fair Value Per Share Number of Shares Weighted Average Grant-Date Fair Value Per Share
Nonvested shares outstanding at January 2, 2016 91,529
 $14.47
Nonvested shares outstanding at December 31, 2016 136,171
 $12.42
Granted 71,882
 9.92
 659,842
 15.11
Vested (25,882) 12.59
 (96,636) 13.16
Nonvested shares outstanding at September 10, 2016 137,529
 $12.44
Nonvested shares outstanding at June 17, 2017 699,377
 $14.51

Employee Stock Purchase Plan

As of September 10, 2016June 17, 2017, the Company had reserved 63,948161,812 shares of common stock available for purchase under the Employee Stock Purchase Plan of 2008.  In the first three quartershalf of fiscal 20162017, employees purchased 32,03614,367 shares of the Company’s common stock with a weighted average fair market value of $10.65$14.44 per share.




(13) EARNINGS PER SHARE

The following table reconciles the number of shares outstanding for the third quarterssecond quarters and the first half ended of fiscal 20162017 and 20152016, 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, Second Quarter Ended, First Half Ended,
(Thousands) September 10, 2016 September 12, 2015 September 10, 2016 September 12, 2015 June 17, 2017 June 18, 2016 June 17, 2017 June 18, 2016
Net income $2,411
 $2,755
 $2,516
 $3,853
 $6,986
 $1,831
 $11,803
 $106
Less: Income attributable to noncontrolling interest 76
 46
 117
 115
 52
 
 105
 42
Net income attributable to Heritage-Crystal Clean, Inc. available to common stockholders $2,335
 $2,709
 $2,399
 $3,738
 $6,934
 $1,831
 $11,698
 $64
                
Weighted average basic shares outstanding 22,267
 22,153
 22,246
 22,136
 22,506
 22,246
 22,430
 22,236
Dilutive shares from share–based compensation plans 283
 285
 171
 269
 326
 173
 299
 156
Weighted average diluted shares outstanding 22,550
 22,438
 22,417
 22,405
 22,832
 22,419
 22,729
 22,392
                
Net income per share: basic $0.10
 $0.12
 $0.11
 $0.17
 $0.31
 $0.08
 $0.52
 $
Net income per share: diluted $0.10
 $0.12
 $0.11
 $0.17
 $0.30
 $0.08
 $0.51
 $


(14) OTHER EXPENSE (INCOME)

Other expense (income) for the thirdfirst half of fiscal 2017 includes a gain of $5.1 million received in the first quarter of fiscal 2016 includes expenses pertaining2017 as a result of having received a partial award for a claim made in arbitration and a gain of $3.6 million received during the second quarter of fiscal 2017 from a settlement agreement, both of which were related to a fineour acquisition of FCC Environmental, LLC and restitution to be paid by International Petroleum Corp. of Delaware in 2014.


(15) SUBSEQUENT EVENTS

On June 28, 2017, the Company entered into a Transition Agreement (“IPC”Agreement”). The net with its former Chief Operating Officer. Pursuant to the terms of the Agreement, the Company has eliminated the position of Chief Operating Officer and will incur a severance charge to other expenseof approximately $1.2 million in the third quarter of fiscal 2016 pertaining to this matter was approximately $1.6 million.2017.





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 16, 20163, 2017. 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 20152016 filed with the SEC on March 16, 20163, 2017. 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 ("thirdsecond quarter" or "quarter") and thirty-sixtwenty-four weeks ("first three quarters"(first "half") ended September 10, 2016June 17, 2017 and September 12, 2015June 18, 2016, respectively. "Fiscal 2015" represents the 52-week period ended January 2, 2016 and "Fiscal 2016" represents the 52-week period ended December 31, 2016.2016 and "Fiscal 2017" represents the 52-week period ending December 30, 2017.

Overview

We provide parts cleaning, containerized waste management, used oil collection, vacuum truck services, antifreeze recycling, and field services primarily to small and wemedium sized industrial customers as well as vehicle maintenance customers. We own and operate a used oil re-refinery.re-refinery, several wastewater treatment plants and multiple antifreeze recycling facilities. We believe we are the second largest provider of industrial and hazardous waste services to small and mid-sized customers in both the vehicle maintenance and manufacturing services sector in North America, and 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 83 branch facilities providing services to customers in 45 states and parts of Canada. We conduct business through two operating segments: Environmental Services and Oil Business.

Our Environmental Services segment revenues are generated primarily from providing parts cleaning services, containerized waste management, vacuum truck services, antifreeze recycling, and field services. Revenues from this segment accounted for approximately 65% of our total company revenues for the three quartersfirst half of fiscal 20162017. 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 of our used oil collection, used oil re-refining activities, and recycled fuel oil ("RFO") sales which accounted for approximately 35% of our total company revenues in the first three quartershalf of fiscal 2016.2017.

Our operating costs include the costs of 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 pay for 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, and the costs of operating our re-refinery, recycling centers, hubs, and branch system including personnel costs (including commissions), facility rent, truck leases, fuel, and maintenance. Our operating costs as a percentage of sales


generally increase in relation to the number of new branch openings. As new branches achieve route density and scale efficiencies, our operating costs as a percentage of sales 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 SG&A expense as revenuesrevenue less operating costs and depreciation and amortization from operations.
We operate a used oil re-refinery located in Indianapolis, Indiana, through which we recycle used oil into high quality lubricant base oil and byproducts. We supply the base oil to firms that produce and market finished lubricants. Our used oil re-refinery currently has an input capacity of approximately 75 million gallons of used oil feedstock per year when operating at full capacity.
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, billing, receivables management, accounting and finance, information technology, environmental health and safety, and legal.
On March 24, 2016,
We operate a used oil re-refinery located in Indianapolis, Indiana, through which we purchasedrecycle used oil into high quality lubricant base oil and other products. We supply the assetsbase oil to firms that produce and market finished lubricants. Our re-refinery has an annual nameplate capacity of Phoenix Environmental. Services, Inc. and Pipeline Video and Cleaning North Corporation (together "Phoenix Environmental"). The purchase price for the acquisition was $2.7approximately 75 million including $0.3gallons of used oil feedstock, allowing it to produce approximately 45 million placed into escrow, plus contingent considerationgallons of up to $0.3 million based on subsequent business performance.lubricating base oil per year when operating at full capacity.

For further discussion on these acquisitions, see Note 3 in our consolidated financial statements included elsewhere in this document.

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.

ThereWith the exception of the adoption of ASU 2016-09 described in Note 2 "Summary of Significant Accounting Policies," there were no material changes induring the first three quartershalf of fiscal 20162017 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 2,December 31, 2016.



RESULTS OF OPERATIONS

General

The following table sets forth certain operating data as a percentage of revenues for the periods indicated:
 For the Third Quarter Ended, For the First Three Quarters Ended, For the Second Quarter Ended, For the First Half Ended,
(Thousands) September 10,
2016
 September 12,
2015
 September 10,
2016
 September 12,
2015
 June 17,
2017
 June 18,
2016
 June 17,
2017
 June 18,
2016
  
Revenues  
Product revenues $27,18233.2% $32,88839.8% $75,58231.4% $99,50939.9% $31,83236.9% $24,69530.7% $58,81235.3% $48,39930.4%
Service revenues 54,69066.8% 49,79760.2% 165,29568.6% 150,15460.1% 54,55063.1% 55,85769.3% 108,02364.7% 110,60669.6%
Total Revenues $81,872100.0% $82,685100.0% $240,877100.0% $249,663100.0% $86,382100.0% $80,552100.0% $166,835100.0% $159,005100.0%
Operating expenses -  
Operating costs $61,69575.4% $63,49976.8% $187,65477.9% $197,57679.1% $63,27073.2% $61,71176.6% $124,56074.7% $125,95979.2%
Selling, general and administrative expenses 10,72613.1% 9,87211.9% 34,45514.3% 31,55312.6% 10,57512.2% 11,52114.3% 22,91613.7% 23,72914.9%
Depreciation and amortization 4,1965.1% 4,4195.3% 12,4425.2% 13,0505.2% 4,1844.8% 4,1185.1% 8,3165.0% 8,2465.2%
Other expense (income) - net 1,4391.8% 990.1% 1,2380.5% (153)(0.1)%
Other (income) - net (3,027)(3.5)% (142)(0.2)% (8,033)(4.8)% (201)(0.1)%
Operating income 3,8164.7% 4,7965.8% 5,0882.1% 7,6373.1% 11,38013.2% 3,3444.2% 19,07611.4% 1,2720.8%
Interest expense – net 4630.6% 4040.5% 1,4320.6% 1,3660.5% 4120.5% 4510.6% 4990.3% 9690.6%
Income before income taxes 3,3534.1% 4,3925.3% 3,6561.5% 6,2712.5% 10,96812.7% 2,8933.6% 18,57711.1% 3030.2%
Provision for income taxes 9421.2% 1,6372.0% 1,1400.5% 2,4181.0% 3,9824.6% 1,0621.3% 6,7744.1% 1970.1%
Net income 2,4112.9% 2,7553.3% 2,5161.0% 3,8531.5% 6,9868.1% 1,8312.3% 11,8037.1% 1060.1%
Income attributable to noncontrolling interest 760.1% 460.1% 117—% 115—% 520.1% —% 1050.1% 42—%
Net income attributable to Heritage-Crystal Clean, Inc. common stockholders $2,3352.9% $2,7093.3% $2,3991.0% $3,7381.5% $6,9348.0% $1,8312.3% $11,6987.0% $64—%

Revenues

For the second quarter of fiscal third2017, revenues increased $5.8 million, or 7.2%, from $80.6 million in the second quarter of fiscal 2016, revenues decreased to $0.8 million, or 1.0%, from $82.786.4 million in the thirdsecond quarter of fiscal 2015 to $81.9 million in the third quarter of fiscal 20162017. For the three quartersfirst half of fiscal 2016,2017, revenues decreased $8.8increased $7.8 million, or 3.5%4.9%, from $249.7 million in the three quarters of fiscal 2015 to $240.9$159.0 million in the first three quartershalf of fiscal 2016.2016 to $166.8 million in the first half of fiscal 2017. The declinesincrease in revenues inwas mainly driven by higher Oil Business segment revenues year over year due to higher pricing for our base oil products, partially offset by lower used oil pick-up charges. Our Environmental Services segment revenues were mainlyup due to the downturnvolume growth in our containerized waste, aqueous parts cleaning, and antifreeze business, as well as an increase in activity at customers directly involved in, and related to, the energy sector, as well as lower energy surcharge revenues. The declines in revenues in our Oil Business segment were mainly due to lower selling prices for our base oil and RFO products, partially offset by higher base oil volume sales and higher used oil collection charges.sector.

Operating expenses

Operating costs

Operating costs decreasedincreased $1.81.6 million, or 2.8%2.5%, from the thirdsecond quarter of fiscal 2015 to the third quarter of fiscal 2016, and $9.9 to the second quarter of fiscal 2017. The largest portion of this increase was due to an increase in the amount paid to vendors for used oil delivered directly to our re-refinery. Operating costs decreased $1.4 million, or 5.0%1.1%, from the three quartersfirst half of fiscal 20152016 to the three quartersfirst half of fiscal 2016.2017. The decrease in operating costs for the first half of 2017 compared to the first half of 2016 was primarily a result of lower costs for oil-based inventory due to decreasesimproved route truck productivity, the absence of inventory write-downs such as we incurred in crudethe first half of fiscal 2016, and lower net solvent and disposal costs, partially offset by higher prices paid for used oil prices year over year. Additionally, lower crude oil prices resulted in lower solvent costs indelivered directly to our Environmental Services segment. re-refinery, and higher labor expenses.

We expect that in the future our operating costs in the Environmental Services business will continue to increase as ourservice volume increases, however, a decrease in crude oil prices could partially offset this cost increase because a decrease in crude oil price could cause a decline in the price we pay for parts cleaning solvent and diesel fuel. In the Oil Business we expectsegment, our operating costs will alsocould increase or decrease in the future if our throughput capacity increases at our re-refinery. We also expect that a changedepending on changes in the price for crude oil which could directly impact our used oil collection costs and processing costs at our re-refinery either favorably or unfavorably.re-refinery.
        




Selling, general, and administrative expenses

Selling, general, and administrative expenses increaseddecreased $0.9 million, or 8.7%8.2%, from the thirdsecond quarter of fiscal 20152016 to the thirdsecond quarter of fiscal 20162017. Selling, general, and administrative expenses increased $2.9decreased $0.8 million, or 9.2%3.4%, from the first three quartershalf of fiscal 20152016 to the first three quartershalf of fiscal 2016.2017. The increasesdecrease in expense was mainly driven by increasedlower legal fees, partially offset by lower outsourcing costs pertaining to information technology. Legal fees were $2.1 millionhigher incentive compensation and $5.5 million in the third quarter of 2016 and the first three quarters of 2016, respectively, compared to $0.1 million and $1.1 million in the third quarter of 2015 and the first three quarters of 2015, respectively. The higher legal expenses in fiscal 2016 pertain primarily to arbitration proceedings and environmental matters described in Part II, Item 1 "Legal Proceedings."share-based compensation expense.

Other expense (income) - net

Other expense (income) - net was $1.4$3.0 million of expense for the thirdsecond quarter of fiscal 20162017 compared to approximately $0.1 million of expenseother (income) - net for the thirdsecond quarter of fiscal 2015.2016. Other expenseincome for the second quarter of fiscal 2017 was mainly driven by a gain of $3.6 million generated as a result of a settlement agreement related to our acquisition of FCC Environmental in 2014. Other (income) - net was $1.2$8.0 million of expense for the first three quartershalf of fiscal 20162017 compared to approximately $0.2 million of incomeother (income) - net for the first three quartershalf of fiscal 2015. Other expense for2016. The first half of fiscal 2017 includes a gain of $5.1 million received in the thirdfirst quarter of fiscal 2016 includes expenses pertaining2017 as a result of having received a partial award for a claim made in arbitration and a gain of $3.6 million received during the second quarter of fiscal 2017 from a settlement agreement, both of which were related to the Company's portionour acquisition of a fineFCC Environmental, LLC and restitution to be paid by International Petroleum Corp. of Delaware (“IPC”). The net charge to other expense in the third quarter of fiscal 2016 pertaining to this matter was approximately $1.6 million. Additional information regarding this matter can be found in Part II, Item 1 “Legal Proceedings".2014.

Interest expense - net

InterestNet interest expense for the thirdsecond quarter of fiscal 20162017 was $0.50.4 million compared to interest expense of $0.4$0.5 million in the thirdsecond quarter of fiscal 2015. In both the first three quarters of fiscal 2016 and the first three quarters of fiscal 2015, interest expense was $1.4 million.2016. In the first three quartershalf of fiscal 20162017 we capitalized less than $0.1recorded interest expense of $0.9 million as a result of our Term Loan, partially offset by $0.4 million of interest income we received as part of our award from the arbitration related to our acquisition of FCC Environmental in interest compared to2014. Interest expense was $1.0 million for the first three quartershalf of 2015 when we capitalized $0.4 million in interest.2016.

Provision for income taxes

OurThe Company's effective tax rate for the first three quarterssecond quarter of fiscal 20162017 was 31.2%36.3% compared to 38.6%36.7% in the second quarter of fiscal 2016. The Company’s effective rate for the first half of fiscal 2017 was 36.5% compared to 65.0% in the first three quartershalf of fiscal 2015. The rate difference is principally attributable to the differing treatment for financial reporting and income tax reporting for certain income and expenditures items.2016. The rate decrease attributableis primarily attributed to expenditures reported netthe previous year’s first half effect of anticipated reimbursement from an unrelated third party for financial reporting purposes, but deductedcertain state income taxes which are computed on a gross basis fortax base that reflects substantial modifications to federal taxable income, and that had created comparatively high tax purposes, is partially offset by expenditures which are expensed for financial reporting purposes but not deductible forexpense due to relatively low year-to-date pre-tax income tax purposes.

in the first half of 2016.

Segment Information

The following table presents revenues by operating segment:
 For the Third Quarter Ended, Change For the Second Quarter Ended, Change
(Thousands)(Thousands)        (Thousands)        
September 10, 2016 September 12, 2015 $ % June 17, 2017 June 18, 2016 $ %
   
Revenues:Revenues:        Revenues:        
Environmental Services $51,282
 $52,122
 $(840) (1.6)%Environmental Services $55,093
 $52,437
 $2,656
 5.1%
Oil Business 30,590
 30,563
 27
 0.1 %Oil Business 31,289
 28,115
 3,174
 11.3%
 Total $81,872
 $82,685
 $(813) (1.0)% Total $86,382
 $80,552
 $5,830
 7.2%

 For the First Three Quarters Ended, Change For the First Half Ended, Change
(Thousands)(Thousands)        (Thousands)        
September 10, 2016 September 12, 2015 $ % June 17, 2017 June 18, 2016 $ %
   
Revenues:Revenues:        Revenues:        
Environmental Services $156,080
 $157,978
 $(1,898) (1.2)%Environmental Services $108,308
 $104,798
 $3,510
 3.3%
Oil Business 84,797
 91,685
 (6,888) (7.5)%Oil Business 58,527
 54,207
 4,320
 8.0%
 Total $240,877
 $249,663
 $(8,786) (3.5)% Total $166,835
 $159,005
 $7,830
 4.9%





In the thirdsecond quarter of fiscal 2016,2017, Environmental Services revenues decreasedincreased by approximately $0.82.7 million, or 1.6%5.1%, from $52.1$52.4 million in the thirdsecond quarter of fiscal 20152016 to $51.3$55.1 million in the second quarter of fiscal 2017. In the first half of fiscal 2017, Environmental Services revenues increased by $3.5 million, or 3.3%, from $104.8 million in the first half of fiscal third2016 to $108.3 million in the first half of fiscal 2017. The increase in revenue was mainly due to growth in our aqueous parts cleaning, containerized waste and antifreeze lines of business, as well overall activity increases with customers directly involved in and related to the energy sector.

In the second quarter of fiscal 2017, Oil Business revenues were up $3.2 million, or 11.3%, compared to the second quarter of fiscal 2016. In the first three quartershalf of fiscal 2016, Environmental Services2017, Oil Business revenues decreased $1.9increased $4.3 million, or 1.2%8.0%, from $158.0 million incompared to the first three quarters of fiscal 2015 to $156.1 million in the first three quartershalf of fiscal 2016. The declineincrease in revenue was mainly due to a downturn in activity of customers directly involved in, or related to, the energy sector, the loss of certain customers, and lower energy surcharge revenue.

At the end of the third quarter of fiscal 2016, the Environmental Services segment was operating in 83 branch locations compared with 83 at the end of the third quarter of fiscal 2015.  There were 82 branches that were in operation throughout both the third quarters of fiscal 2016 and fiscal 2015.

In the third quarter of fiscal 2016, Oil Business revenues were flat compared to the third quarter of fiscal 2015. In the first three quarters of fiscal 2016, Oil Business revenues decreased $6.9 million compared to the first three quarters of fiscal 2015. The revenue decrease was mainly due to lower selling pricesdriven by higher pricing for our base oil and RFO products, which was partially offset by higher base oil sales volume. The decline in revenue was further offset by increased revenue fromlower used oil collection charges and stop feesfees. During the first half of $4.6fiscal 2017, we sold approximately 19.3 million ingallons of base oil compared to 20.2 million gallons during the thirdfirst half fiscal 2016. During the second quarter of fiscal 2016 compared to the third quarter of fiscal 2015, and an approximate increase of $12.9 million in the first three quarters of fiscal 2016 compared to the first three quarters of 2015. During the third quarter of fiscal 2016,2017, we produced base oil at a rate of 92%93.9% of the nameplate capacity of our re-refinery which was a slightly lower rate compared to the two prior quarters in fiscal 2016. The decreased production rate was mainly due to a planned, extended shutdown96.3% during the fiscal third quarter.

During the third quarter of fiscal 2016, the average spot market price for the type of lubricating base oil we produce declined over 11% compared to the third quarter of fiscal 2015. However, the average spot market price during the third quarter was up approximately 10% compared to the second quarter of fiscal of 2016.


Segment Profit (Loss) Before Corporate Selling, General and Administrative Expenses ("SG&A")

The following table presents profit by operating segment before corporate SG&A expense:
 For the Third Quarter Ended, Change For the Second Quarter Ended, Change
                
(Thousands)(Thousands) September 10, 2016 September 12, 2015 $ %(Thousands) June 17, 2017 June 18, 2016 $ %
   
Profit (loss) before corporate SG&A*        
Profit before corporate SG&A*Profit before corporate SG&A*        
Environmental Services $15,084
 $14,943
 $141
 0.9%Environmental Services $16,691
 $15,096
 $1,595
 10.6%
Oil Business 1,733
 647
 1,086
 167.9%Oil Business 3,085
 444
 2,641
 594.8%
 Total $16,817
 $15,590
 $1,227
 7.9%Total $19,776
 $15,540
 $4,236
 27.3%

 For the First Three Quarters Ended, Change  For the First Half Ended, Change
        
(Thousands)(Thousands)        
(Thousands) September 10, 2016 September 12, 2015 $ % June 17, 2017 June 18, 2016 $ %
   
Profit (loss) before corporate SG&A*Profit (loss) before corporate SG&A*        Profit (loss) before corporate SG&A*        
Environmental Services $44,022
 $43,097
 $925
 2.1%Environmental Services $31,640
 $28,938
 $2,702
 9.3%
Oil Business (754) (1,708) 954
 55.9%Oil Business 4,018
 (2,487) 6,505
 %
 Total $43,268
 $41,389
 $1,879
 4.5%Total $35,658
 $26,451
 $9,207
 34.8%

*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 9 in our consolidated financial statements included elsewhere in this document.

Environmental Services profit before corporate SG&A expense increased $1.6 million, or 0.9%10.6%, in the second quarter of fiscal third2017 compared to the second quarter of fiscal 2016 compared to the third quarter of fiscal 2015. This increase was mainly due to lower disposal costs, partially offset by lower revenues, in the fiscal third quarter 2016, compared to the fiscal third quarter of 2015. Environmental Services profit before corporate SG&A expense increased 2.1%$2.7 million, or 9.3%, in the first three quartershalf of fiscal 20162017 compared to the first three quartershalf of fiscal 2015 mainly2016 primarily due to $2.7 million inhigher revenue, lower disposal charges,costs, lower worker's compensation, and the absence of inventory write-downs, partially offset by a $1.9 million decrease in revenue.



The recovery of used solvent from customers participating in our product reuse program for parts cleaning is not accounted for as revenues, but rather as a reduction in our net cost of solvent under operating costs. As a result of falling solvent prices, sales of reuse solvent provided a negative impact on profit before corporate SG&A expense during the first three quarters of fiscal 2016 of $0.3 million, compared to a negative impact of $1.3 millionhigher service labor in the first three quartershalf of fiscal 2015. Sales of reuse solvent did not provide a material impact during2017 compared to the third quarterfirst half of fiscal 2016 or in the third quarter of fiscal 2015.2016.

Oil Business income before corporate SG&A expense increased $1.12.6 million, in the thirdsecond quarter of fiscal 20162017, from income of $0.6 million incompared to the thirdsecond quarter of fiscal 2015, to income of $1.7 million in the third quarter of fiscal 2016. This improvement wasOil Business income before corporate SG&A expense increased $6.5 million in the first half of fiscal 2017, compared to the first half of fiscal 2016. These improvements were primarily driven by the increase in usedthe selling price for base oil , as well as improved productivity from our oil collection related charges of $4.6 million inroutes during the third quarterfirst half of fiscal 20162017 compared to the third quarterfirst half of fiscal 2015.

Oil Business loss before corporate SG&A expense was $0.8 million in the first three quarters of fiscal 2016, compared to a loss of $1.7 million in the first three quarters of fiscal 2015. Oil Business margins improved due to higher used oil collection-related revenues,2016. These improvements were partially offset by lower sales volume of base oil and Recycled Fuel Oil ("RFO") pricing.RFO products as well as lower pricing for our used oil collection service during the first half of fiscal 2017 compared to the first half of fiscal 2016.




FINANCIAL CONDITION
 
Liquidity and Capital Resources

Cash and Cash Equivalents

As of September 10, 2016June 17, 2017 and January 2,December 31, 2016, cash and cash equivalents were $29.825.2 million and $23.636.6 million, respectively.  Our primary sources of liquidity are cash flows from operations and funds available to borrow under our term loan and revolving bank credit facility. InDuring the future,first half of 2017, the Company will haveused approximately $34.2 million of cash to pay down debt as part of entering into a cash outlay of $3.5 million in conjunction with the settlement described in Part II, Item 1 “Legal Proceedings.” new Credit Agreement.

Debt and Financing Arrangements    

On October 16, 2014, in connection with our acquisition of FCC Environmental, we amended our Amended and RestatedFebruary 21, 2017, the Company entered into a new Credit Agreement ("Credit Agreement", or "Credit Facility") to allowreplacing the prior Credit Agreement ("Prior Credit Agreement") dated as of June 29, 2015. The Credit Agreement provides for borrowings of up to $140.0$95.0 million, in borrowings. As subject to the satisfaction of September 10, 2016certain terms and January 2, 2016, our total borrowings were $67.5conditions, comprised of a term loan of $30.0 million and $70.9up to $65.0 million respectively,of borrowings under the termrevolving loan portion of our Credit Facility which has a maturity date of February 5, 2018.portion. The remainingactual amount available under the revolving loan portion of the Credit FacilityAgreement is a revolving loan which expires on February 5, 2018. There were no amounts outstandinglimited by the Company's total leverage ratio. The amount available to draw at any point in time would be further reduced by any standby letters of credit issued.

Loans made under the revolverCredit Agreement may be Base Rate Loans or LIBOR Rate Loans, at September 10, 2016the election of the Company 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 London Interbank Offering Rate (“LIBOR”) plus 1%, or (c) Bank of America's prime rate, plus (ii) a variable margin of between 0.75% and January 2, 2016.1.75% depending on the Company's total leverage ratio, calculated on a consolidated basis. LIBOR rate loans have an interest rate equal to (i) the LIBOR rate plus (ii) a variable margin of between 1.75% and 2.75% depending on the Company's total leverage ratio. Amounts borrowed under the Credit Agreement are secured by a security interest in substantially all of the Company's tangible and intangible assets. In June 2017, the Company entered into a First Amendment to the Credit Agreement that expands the Company's ability to make dispositions without bank group approval.

DuringAs of the third quarter of fiscal 2016, we recorded interest of $0.5 million on the term loan and capitalized less than $0.1 million of recorded interest for various capital projects. During the first three quarters of fiscal 2016, we recorded interest of $1.5 million on the term loan, of which less than $0.1 million was capitalized for various capital projects. During the third quarter of fiscal 2015, we recorded interest of $0.4 million on the term loan and capitalized $0.1 million for various capital projects. During the first three quarters of fiscal 2015, we recorded interest of $1.4 million on the term loan and capitalized $0.4 million for various capital projects.

Certain covenantsEffective date of the Credit Agreement February 21, 2017, the effective interest rate on the Term A loan was 3.28% and the effective rate on the revolving loan was 3.28%.
The Agreement contains customary terms and provisions (including representations, covenants, and conditions) for transactions of this type. Certain covenants, among other things, restrict ourthe Company's and its Subsidiaries' ability to incur indebtedness, grant liens, make investments and sell assets. The Credit Agreement as amended, 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; and
A capital expenditures covenant limiting certain capital expenditures to $15.0 million annually

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 3.25 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;

A capital expenditures covenant limiting capital expenditures to $100.0 million plus, if the capital expenditures permitted have been fully utilized, an additional amount for the remaining term of the Agreement equal to 35% of EBITDA for the thirteen “four-week” periods most recently ended immediately prior to the full utilization of such $100.0 million basket

As of September 10,June 17, 2017 and December 31, 2016, and January 2, 2016, we werethe Company was in compliance with all covenants under theboth Credit Agreement.Agreements. As of September 10,June 17, 2017 and December 31, 2016, and January 2, 2016, wethe Company had $3.0$2.4 million and $4.4$3.0 million of standby letters of credit issued, respectively, and $8.6$62.6 million and $34.5$27.6 million was available for borrowing under the bank Credit Facility, respectively. The actual amount available under the revolving loan portion of the Credit Agreement is limited by ourthe Company's total leverage ratio.

OurThe Company's weighted average interest rate for all debt outstanding as of September 10,June 17, 2017 and June 18, 2016 was 3.8% and September 12, 2015 was 3.2% and 3.1%, respectively. As of June 17, 2017, the Company had $30.0 million outstanding under the term loan, and no amount outstanding under the revolving credit facility.



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,credit facility, we may need to raise additional funds including 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
 For the First Three Quarters Ended, For the First Half Ended,
(Thousands) September 10,
2016
 September 12,
2015
 June 17,
2017
 June 18,
2016
Net cash provided by (used in):        
Operating activities $23,999
 $17,025
 $27,912
 $14,391
Investing activities (14,690) (12,420) (6,279) (11,071)
Financing activities (3,150) (5,704) (33,001) (1,603)
Net increase (decrease) in cash and cash equivalents $6,159
 $(1,099)
Net (decrease) increase in cash and cash equivalents $(11,368) $1,717

The most significant items affecting the comparison of our operating activities for the first three quarterssecond quarter of fiscal 20162017 and the first three quarterssecond quarter of fiscal 20152016 are summarized below:

Net Cash Provided by Operating Activities

Earnings increase — Our increase in net income for the first half of fiscal 2017 favorably impacted our net cash provided by operating activities by $11.7 million compared to the first half fiscal 2016. Net income was favorably impacted, on a pre-tax basis, by a payment of $5.5 million resulting from an arbitration award and a $3.6 million gain from a settlement, both related to our acquisition of FCC Environmental in 2014.

Accounts Payable — The increasedecrease in accounts payable favorablyunfavorably affected cash flows from operationsoperating activities by $20.0$4.4 million in the first three quartershalf of fiscal 20162017 compared to the first three quartershalf of fiscal 2015.2016. The increasedecrease in accounts payable in the first three quartershalf of fiscal 20162017 was mainly driven by highercash outlays of our legal fees and amounts payable in conjunction with the settlement described in Part II, Item 1 "Legal Proceedings." In the first three quarters of fiscal 2015, accounts payable decreased significantly due to the lower unit cost of raw materials such as used oil and solvent.payables.

Accrued expenses — In the first three quartershalf of fiscal 2016,2017, the decrease in accrued expenses increased $4.9unfavorably affected cash flows from operating activities by $3.9 million compared to the first three quartershalf of fiscal 20152016 driven mainly by higher legal fee accruals year over year. In the first three quarters of fiscal 2015, accrued expenses decreased due to reductions in accruedcash outlays for incentive compensation and severance and lower accrued wages and benefits.payments.

Accounts Receivable — The increasedecrease in accounts receivable had a negativefavorable impact on cash provided by operating activities of $9.2$5.1 million in the first three quartershalf of fiscal 20162017 compared to the first three quartershalf of fiscal 20152016 primarily due to a net increase in the selling pricereceipt of oil products and used oil collection services during the first three quarters of fiscal 2016 compared$4.3 million related to a net decrease insettlement agreement with the selling pricesellers of oil products during the first three quarters of fiscal 2015. FCC Environmental.

 Net Cash Used in Investing Activities
    
Capital expenditures — We used $12.66.3 million and $12.58.7 million for capital expenditures during the first three quartershalf of fiscal 20162017 and the first half of fiscal 2015,2016, respectively.  During the first three quartershalf of fiscal 2016,2017, we spent $6.3$2.6 million for capital improvements to the re-refinery, compared to $4.2$4.8 million on capital improvements at the re-refinery in the first three quartershalf of fiscal 2015.2016. Additionally, in the first three quartershalf of fiscal 2016,2017, we spent approximately $3.2$2.2 million of the capital expenditures were for purchases of parts cleaning machines compared to $3.8$2.0 million in the first three quartershalf of fiscal 2015.2016.  The remaining $3.1$1.5 million of capital expenditures in the first three quartershalf of fiscal 20162017 was for other items including leasehold improvements and intangible assets compared to approximately $4.4$1.9 million spent in the first three quartershalf of fiscal 2015.2016 for other items.





Net Cash Used in Investing Activities
Proceeds from New Credit Agreement — We received $30 million of proceeds from our new Term Loan.

AcquisitionsRepayment of our Old Credit Agreement — — In the first three quartersWe made $64.2 million of fiscal 2016, we used $2.4 million for the purchaserepayments of the assets of Phoenix Environmental.our prior Term Loan.




ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate risks primarily through borrowings under our bank Credit Facility.  Interest on this facility is based upon variable interest rates.  Our weighted average borrowings under our Credit Facility during the third quarterfirst half of fiscal 20162017 were $70.1$41.1 million,, and the annual effective interest rate for the Credit Facility for the third quarterfirst half of fiscal 20162017 was 3.2%3.8%. 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 $0.7$0.4 million to our interest expense in the third quarterfirst half of fiscal 2017.2016.


   
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.

There was no change in the Company's internal controls over financial reporting that occurred during the thirdfirst half of fiscal quarter of 20162017 that has materially affected or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

PART II
ITEM 1.  LEGAL PROCEEDINGS

    

On July 1, 2015, we received a grand jury subpoena fromIn October 2016, the U.S. Department of Justice ("DOJ"), along with the U.S.United States Environmental Protection Agency ("EPA"), requesting(USEPA) issued a Notice of Intent to file an administrative complaint against the Company for certain materialsalleged violations of the Emergency Planning and Community Right to Know Act and regulations under the Clean Water Act (involving Spill Prevention, Control and Countermeasure plans). We have responded to the Notice and have provided USEPA with information in accordance with their request.  We continue to have discussions with the USEPA regarding the issues included in the Notice.  As of the end of the second quarter of fiscal 2017, no liability for potential penalties or fines has been recorded related to this situation.

In March 2017 the Delaware Department of Natural Resources and Environmental Control (DNREC) issued a Cease and Desist Order (Order) related to the transportationcompany's activities to clean up and disposalshutdown our facility located in Wilmington, DE which we acquired as part of wastewater by International Petroleum Corp. of Delaware ("IPC"), a company acquired along with theour acquisition of FCC Environmental LLC (FCCE), and International Petroleum Corporation.  The Order required the due diligence documents providedCompany to us in connection with our acquisition of IPC. Earlier this year we received indirect communication that the City of Wilmington, Delaware was also seeking to recover amountssubmit analytical and shipping documentation related to municipal services allegedly incurred prior to our acquisition of IPC. The portion of the IPC operation that was the subject of the investigation was not operating at the time of our acquisition of IPC.

In October 2016 we reached a settlement, subject to final documentation, with the DOJ, EPA and the City of Wilmington, Delaware to settle the above referenced investigation. As part of the settlement IPC will plead guilty to two criminal counts related to activity which occurred prior to our acquisition of IPC and pay a fine of $1.3 million. The two counts include conspiracy to violate the Clean Water Act, 33 U.S.C. § 1319(c)(2) and violation of the Resource Conservation and Recovery Act, 42 U.S.C. § 6928(d)(5). The settlement also includes payment of an additional $2.2 million by IPC to the City of Wilmington, Delaware for restitution related to underpayment of sewer fees which occurred prior to our acquisition of IPC. Our acquisition of the IPC business is governed by a Stock Purchase Agreement which obligates the Seller to indemnify us for certain costs that may arise in connection with the above matter. Approximately $1.6 million was charged to other expense (income) - net in our 2016 fiscal third quarter results pertaining to this matter.

We are involved in an arbitration with the sellers of FCCE and IPC in order to enforce our rights under the Stock Purchase Agreement. The arbitration includes the matter described aboveclean-up activities as well as other routine post-closing items related to our acquisition of FCCEsubmit to DNREC a plan on how the remaining material at the facility was to be sampled, tested, removed and IPC. It isdisposed.  We have responded to the Company's positionOrder and have provided DNREC with information in accordance with their request.  We continue to have discussions with DNREC regarding the issues included in the arbitration that the sellersOrder.  As of IPC are obligated to indemnify us for the full amount of the fine and restitution. We expect the arbitration process to be completed by the end of the second quarter of fiscal 2016.


ITEM 1A.  RISK FACTORS


Investing in our common stock involves a high degree of risk. You should carefully consider the following factors, as well as other information contained2017, no liability for potential penalties or incorporated by reference infines has been recorded related to this report, before deciding to invest in shares of our common stock. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of those risks actually occurs, our business, financial condition and results of operations would suffer. In that event, the trading price of our common stock could decline, and you may lose all or part of your investment. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. situation.Risks facing our business have not changed substantively from those discussed in our Annual Report on Form 10-K for the year ended January 2, 2016, except those set forth below.

Our operations are subject to numerous environmental, transportation, and other laws and regulations and, to the extent we are found to be in violation of any such laws and regulations, we may be subject to involuntary shutdowns and/or significant financial penalties.

Our operations are subject to extensive federal, state, and local laws and regulations relating to the protection of the environment which, among other things:
l
regulate the collection, sale, transportation, handling, processing, and disposal of the hazardous and non-hazardous wastes that we collect from our customers;
l
regulate the treatment and processing of waste material that we collect from our customers and the discharge of treated material;
l
impose liability on persons involved in generating, handling, processing, transporting, or disposing hazardous materials; and
l
impose joint and several liability for the remediation and clean-up of environmental contamination

We are also subject to various transportation rules and regulations enforced by the DOT, Federal Railroad Administration (FRA), the Federal Motor Carrier Safety Administration, and the Department of Homeland Security. The breadth and complexity of these laws and regulations affecting our business make consistent compliance extremely difficult and often result in increased operating and compliance costs. Even with these programs, we and other companies in the industry are routinely faced with legal and administrative proceedings which can result in civil and criminal penalties (including the loss of certain licenses and permits that are required for our business), interruption of business operations, fines or other sanctions, and require expenditures for remedial work at our and third-party facilities. Under current law, we may be held liable for damage caused by conditions that existed before we acquired the assets or operations involved or if we arrange for the transportation, disposal, or treatment of hazardous substances that cause environmental contamination. We may also be held liable for the mishandling of waste streams resulting from the misrepresentations by a customer as to the nature of such waste streams. We may be subject to monetary fines, civil or criminal penalties, remediation, clean-up or stop orders, injunctions, orders to cease or suspend certain practices, or denial of permits we require to operate our facilities.

We are also required to obtain and maintain permits, licenses, and approvals to conduct our operations in compliance with such laws and regulations. If we are unable to maintain our currently held permits, licenses, and approvals, we may not be able to continue certain of our operations. If we are unable to obtain additional permits, licenses, and approvals which may be required as we expand our operations, we may not be able to grow our business.



We have in the past been subject to penalties and fines for noncompliance with environmental regulations and could be subject to penalties and fines in the future. For example, as described in “Legal Proceedings,” on July 1, 2015, we received a grand jury subpoena from the U.S. Department of Justice ("DOJ"), along with the U.S. Environmental Protection Agency ("EPA"), requesting certain materials related to the transportation and disposal of wastewater by International Petroleum Corp. of Delaware ("IPC"), a company acquired along with the acquisition of FCC Environmental, LLC (FCCE), and the due diligence documents provided to us in connection with our acquisition of IPC. In 2016 we received indirect communication that the City of Wilmington, Delaware was also seeking to recover amounts related to municipal services allegedly incurred prior to our acquisition of IPC. The portion of the IPC operation that was the subject of the investigation was not operating at the time of our acquisition of IPC. In October 2016 we reached a settlement, subject to final documentation, with the DOJ, EPA and the City of Wilmington, Delaware to settle the above referenced investigation. As part of the settlement IPC will plead guilty to two criminal counts related to activity which occurred prior to our acquisition of IPC and pay a fine of $1.3 million. The two counts include conspiracy to violate the Clean Water Act, 33 U.S.C. § 1319(c)(2) and violation of the Resource Conservation and Recovery Act, 42 U.S.C. § 6928(d)(5). The settlement also includes payment of an additional $2.2 million by IPC to the City of Wilmington, Delaware for restitution related to underpayment of sewer fees which occurred prior to our acquisition of IPC. The consequences from this investigation could have a material effect on our business, financial condition, and results of operations, including the potential loss of permits, licenses, and approvals to conduct our business and the potential inability to obtain additional permits, licenses, and approvals which may be required as we expand our operations.

In addition, the operation of our used oil re-refinery exposes us to risks related to the potential loss of permits, contamination of feedstock, adverse environmental impact of a spill or other release, the risk of explosion or fire or other hazards, the risk of injury to our employees or others, as well as the negative publicity due to public concerns regarding our operation. The occurrence of any of these events could result in reduced production rates, loss of inventory, operational inefficiencies, clean-up costs, or other items that might negatively affect the operating results of the Company. While these risks are in some respects similar to risks that we have experienced in our traditional service businesses, the magnitude of exposure may be greater due to the nature of the used oil re-refining industry and the greater volumes, temperatures, and pressures involved. While we may maintain some insurance that covers portions of these exposures, in many cases the risks are uninsurable or we will not choose to procure insurance at levels that will cover all potential exposure.

CERCLA and similar state laws impose strict liability on current or former owners and operators of facilities that release hazardous substances into the environment, as well as on the businesses that generate those substances or transport them to the facilities. As a potentially responsible party, or PRP, we may be liable under CERCLA for substantial investigation and cleanup costs even if we operate our business properly and comply with applicable federal and state laws and regulations. Liability under CERCLA may be joint and several, which means that if we were found to be a business with responsibility for a particular CERCLA site, we could be required to pay the entire cost of the investigation and cleanup, even though we were not the party responsible for the release of the hazardous substance and even though other companies might also be liable. Even if we were able to identify who the other responsible parties might be, we may not be able to compel them to contribute to the remediation costs, or they might be insolvent or unable to contribute due to lack of financial resources. Our facilities and the facilities of our customers and third party contractors may have generated, used, handled and/or disposed of hazardous substances and other regulated wastes. Environmental liabilities could exist, including cleanup obligations at these facilities or at off-site locations where materials from our operations were disposed of, which could result in future expenditures that cannot


be currently quantified and which could materially reduce our profits. It is also possible that government officials responsible for enforcing environmental laws may view an environmental liability as more significant than we then currently estimate, or that we will fail to identify or fully appreciate an existing liability before we become legally responsible to address it.

Our pollution liability insurance excludes certain liabilities under CERCLA. Thus, if we were to incur liability under CERCLA that was not covered by our insurance, and if we could not identify other parties responsible under the law whom we are able to compel to contribute to the liabilities, the cost to us could be substantial and could impair our profitability, reduce our liquidity, and have a material adverse effect on our business. Although our customer service agreements typically provide that the customer is responsible for ensuring that only appropriate materials are disposed of, we could be exposed to third party claims if customers dispose of improper waste, and we might not be successful in recovering our damages from those customers. In addition, new services or products offered by us could expose us to further environmental liabilities for which we have no historical experience and cannot estimate our potential exposure to liabilities.

In addition, there currently exists a high level of public concern over hazardous waste operations, including with respect to the siting and operation of transfer, processing, storage, and disposal facilities. For example, under the DOT’s Compliance, Safety, Accountability (CSA) initiative, a compliance and enforcement initiative designed to monitor commercial motor vehicle safety, the fleets and drivers in our network are evaluated and ranked based on certain safety-related standards. A poor fleet ranking or a reduction in eligible drivers could impact our ability to service our customers and could cause our customers to use a competitor with higher fleet rankings than ours, which could have a material adverse effect on our business, financial condition and results of operations.

Part of our business strategy is to increase our re-refining capacity through the operation of our facility and by adding new branch operations. Each of these efforts requires us to undergo an intensive regulatory approval process that could be time consuming and impact the success of our business strategy. Zoning, permit, and licensing applications and proceedings, as well as regulatory enforcement proceedings, are all matters open to public scrutiny and comment. Accordingly, from time to time we have been, and may in the future be, subject to public opposition and publicity which may damage our reputation and delay or limit the expansion and development of our operating properties or impair our ability to renew existing permits which could prevent us from implementing our growth strategy and have a material adverse effect on our business, financial condition or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


In August 2016, in connection with the vesting of restricted stock awards held by retiring employees, the Company purchased from these employees a total of 543 shares of its common stock for a purchase price of $13.01 per share for the sole purposes of satisfying the minimum tax withholding obligations of the employees upon the vesting of a portion of certain restricted stock award grants to them by the Company. No shares were repurchased in the open market.

The following table shows the Company's stock repurchase activity during the three months ended September 10, 2016:

Period 
Total Number of Shares Purchased(a)
 Average Price Paid per Share Total Number of Shares Purchased as part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs
August 2016 543
 $13.01
 
 
(a) Shares withheld for income tax liabilities upon equity award vestings




ITEM 6.  EXHIBITS

10.1First Amendment to the Credit Agreement
31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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
*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."



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 20, 2016July 26, 2017By:/s/ Mark DeVita
    
   Mark DeVita
   Chief Financial Officer


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