UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One) |
x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended | September 9, 2017 June 30, 2023 |
| OR |
o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _________________to _________________ |
Commission File Number001-33987
HERITAGE-CRYSTAL CLEAN, INC.
(Exact name of registrant as specified in its charter)
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| | | | | | | |
Delaware | | 26-0351454 |
State or other jurisdiction of | | (I.R.S. Employer |
Incorporation | | Identification No.) |
2175 Point Boulevard2000 Center Drive
Suite 375East C300
Elgin,Hoffman Estates, IL 6012360192
(Address of principal executive offices) (Zip Code)offices and zip code)
Registrant’s telephone number, including area code: (847) 836-5670 | | | | | | | | | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each Class | | Trading Symbol | | Name of Exchange on which registered |
Common Stock, par value $0.01 per share | | HCCI | | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically, 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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” "smaller
reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | | | Accelerated filer x |
Non-accelerated filer o | (Do not check if a smaller reporting company) | | Smaller reporting company o ☐ |
| | | 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 16, 2017,August 8, 2023, there were outstanding 22,879,83024,370,405 shares of Common Stock, $0.01 par value, of Heritage-Crystal Clean, Inc.
Table of Contents
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
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PART I
ITEM 1. FINANCIAL STATEMENTS
Heritage-Crystal Clean, Inc.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts) | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| | (unaudited) | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 33,100 | | | $ | 22,053 | |
Accounts receivable - net | | 104,704 | | | 114,408 | |
Inventory - net | | 47,024 | | | 40,727 | |
Assets held for sale | | — | | | 1,125 | |
Other current assets | | 14,652 | | | 12,989 | |
Total current assets | | 199,480 | | | 191,302 | |
Property, plant and equipment - net | | 232,318 | | | 222,942 | |
Right of use assets | | 126,290 | | | 123,742 | |
Equipment at customers - net | | 30,157 | | | 26,465 | |
Software and intangible assets - net | | 97,091 | | | 102,335 | |
Goodwill | | 112,236 | | | 112,236 | |
Other assets | | 15,219 | | | 15,219 | |
Total assets | | $ | 812,791 | | | $ | 794,241 | |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 52,602 | | | $ | 55,087 | |
Current portion of lease liabilities | | 28,490 | | | 27,277 | |
Contract liabilities - net | | 3,259 | | | 2,525 | |
Accrued salaries, wages, and benefits | | 9,339 | | | 12,443 | |
Taxes payable | | 3,211 | | | 6,037 | |
Other current liabilities | | 10,553 | | | 12,382 | |
| | | | |
Total current liabilities | | 107,454 | | | 115,751 | |
Lease liabilities, net of current portion | | 103,426 | | | 100,738 | |
Other long term liabilities | | 770 | | | 986 | |
Long-term debt - net | | 84,479 | | | 89,383 | |
Deferred income taxes | | 60,765 | | | 57,155 | |
Total liabilities | | $ | 356,894 | | | $ | 364,013 | |
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STOCKHOLDERS' EQUITY: | | | | |
Common stock - 36,000,000 shares authorized at $0.01 par value, 23,687,649 and 23,593,163 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | | $ | 237 | | | $ | 236 | |
Additional paid-in capital | | 208,913 | | | 208,533 | |
Retained earnings | | 247,057 | | | 221,826 | |
Accumulated other comprehensive loss | | (310) | | | (367) | |
Total stockholders' equity | | 455,897 | | | 430,228 | |
| | | | |
Total liabilities and stockholders' equity | | $ | 812,791 | | | $ | 794,241 | |
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| | September 9, 2017 | | December 31, 2016 |
| | (unaudited) | | |
ASSETS | | | | |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 33,452 |
| | $ | 36,610 |
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Accounts receivable - net | | 45,881 |
| | 47,533 |
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Inventory - net | | 20,934 |
| | 18,558 |
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Other current assets | | 6,832 |
| | 6,094 |
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Total Current Assets | | 107,099 |
| | 108,795 |
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Property, plant and equipment - net | | 128,123 |
| | 131,175 |
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Equipment at customers - net | | 23,052 |
| | 23,033 |
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Software and intangible assets - net | | 17,607 |
| | 19,821 |
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Goodwill | | 31,580 |
| | 31,483 |
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Total Assets | | $ | 307,461 |
| | $ | 314,307 |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
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Current Liabilities: | | | | |
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Accounts payable | | $ | 26,730 |
| | $ | 30,984 |
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Current maturities of long-term debt | | — |
| | 6,936 |
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Accrued salaries, wages, and benefits | | 5,693 |
| | 6,312 |
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Taxes payable | | 7,601 |
| | 6,729 |
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Other current liabilities | | 2,725 |
| | 3,245 |
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Total Current Liabilities | | 42,749 |
| | 54,206 |
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Long-term debt, less current maturities | | 28,651 |
| | 56,518 |
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Deferred income taxes | | 13,210 |
| | 5,314 |
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Total Liabilities | | $ | 84,610 |
| | $ | 116,038 |
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STOCKHOLDERS' EQUITY: | | | | |
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Common stock - 26,000,000 shares authorized at $0.01 par value, 22,879,830 and 22,300,007 shares issued and outstanding at September 9, 2017 and December 31, 2016, respectively | | $ | 229 |
| | $ | 223 |
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Additional paid-in capital | | 192,416 |
| | 185,099 |
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Retained earnings | | 29,638 |
| | 12,227 |
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Total Heritage-Crystal Clean, Inc. Stockholders' Equity | | 222,283 |
| | 197,549 |
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Noncontrolling interest | | 568 |
| | 720 |
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Total Equity | | $ | 222,851 |
| | $ | 198,269 |
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Total Liabilities and Stockholders' Equity | | $ | 307,461 |
| | $ | 314,307 |
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See accompanying notes to financial statements.
Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Income
(In Thousands, Except per Share Amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Second Quarter Ended, | | First Half Ended, |
| | | June 30, 2023 (91 days) | | June 18, 2022 (84 days) | | June 30, 2023 (181 days) | | June 18, 2022 (168 days) |
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Revenues | | | | | | | | |
| Service revenues | | $ | 121,342 | | | $ | 75,584 | | | $ | 240,794 | | | $ | 144,500 | |
| Product revenues | | 62,141 | | | 74,789 | | | 128,481 | | | 139,262 | |
| Rental income | | 8,683 | | | 6,274 | | | 16,372 | | | 12,251 | |
Total revenues | | $ | 192,166 | | | $ | 156,647 | | | $ | 385,647 | | | $ | 296,013 | |
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Operating expenses | | | | | | | | |
| Operating costs | | $ | 146,387 | | | $ | 104,755 | | | $ | 286,448 | | | $ | 206,538 | |
| Selling, general, and administrative expenses | | 20,361 | | | 15,024 | | | 38,061 | | | 28,759 | |
| Depreciation and amortization | | 11,802 | | | 6,777 | | | 23,969 | | | 13,285 | |
| Other (income) expense - net | | (265) | | | 1,001 | | | (734) | | | 791 | |
Operating income | | 13,881 | | | 29,090 | | | 37,903 | | | 46,640 | |
Interest expense – net | | 1,929 | | | 250 | | | 3,743 | | | 473 | |
Income before income taxes | | 11,952 | | | 28,840 | | | 34,160 | | | 46,167 | |
Provision for income taxes | | 3,310 | | | 7,733 | | | 8,929 | | | 12,182 | |
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Net income | | $ | 8,642 | | | $ | 21,107 | | | $ | 25,231 | | | $ | 33,985 | |
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Net income per share: basic | | $ | 0.36 | | | $ | 0.90 | | | $ | 1.07 | | | $ | 1.45 | |
Net income per share: diluted | | $ | 0.36 | | | $ | 0.89 | | | $ | 1.06 | | | $ | 1.44 | |
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Number of weighted average shares outstanding: basic | | 23,681 | | | 23,489 | | | 23,665 | | | 23,482 | |
Number of weighted average shares outstanding: diluted | | 23,931 | | | 23,644 | | | 23,898 | | | 23,640 | |
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| | | Third Quarter Ended, | | First Three Quarters Ended, |
| | | September 9, 2017 | | September 10, 2016 | | September 9, 2017 | | September 10, 2016 |
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Revenues | | | | | | | | |
| Product revenues | | $ | 29,283 |
| | $ | 27,182 |
| | $ | 88,095 |
| | $ | 75,582 |
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| Service revenues | | 54,048 |
| | 54,690 |
| | 162,071 |
| | 165,295 |
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Total revenues | | $ | 83,331 |
| | $ | 81,872 |
| | $ | 250,166 |
| | $ | 240,877 |
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Operating expenses | | | | | | | | |
| Operating costs | | $ | 63,649 |
| | $ | 61,695 |
| | $ | 188,210 |
| | $ | 187,654 |
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| Selling, general, and administrative expenses | | 10,955 |
| | 10,726 |
| | 33,871 |
| | 34,455 |
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| Depreciation and amortization | | 4,186 |
| | 4,196 |
| | 12,501 |
| | 12,442 |
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| Other (income) expense - net | | (3,078 | ) | | 1,439 |
| | (11,112 | ) | | 1,238 |
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Operating income | | 7,619 |
| | 3,816 |
| | 26,696 |
| | 5,088 |
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Interest expense – net | | 276 |
| | 463 |
| | 775 |
| | 1,432 |
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Income before income taxes | | 7,343 |
| | 3,353 |
| | 25,921 |
| | 3,656 |
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Provision for income taxes | | 2,586 |
| | 942 |
| | 9,361 |
| | 1,140 |
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Net income | | 4,757 |
| | 2,411 |
| | 16,560 |
| | 2,516 |
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Income attributable to noncontrolling interest | | 53 |
| | 76 |
| | 158 |
| | 117 |
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Net income attributable to Heritage-Crystal Clean, Inc. common stockholders | | $ | 4,704 |
| | $ | 2,335 |
| | $ | 16,402 |
| | $ | 2,399 |
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Net income per share: basic | | $ | 0.21 |
| | $ | 0.10 |
| | $ | 0.73 |
| | $ | 0.11 |
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Net income per share: diluted | | $ | 0.20 |
| | $ | 0.10 |
| | $ | 0.72 |
| | $ | 0.11 |
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Number of weighted average shares outstanding: basic | | 22,686 |
| | 22,267 |
| | 22,515 |
| | 22,246 |
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Number of weighted average shares outstanding: diluted | | 22,970 |
| | 22,550 |
| | 22,813 |
| | 22,417 |
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See accompanying notes to financial statements.
Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)
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| | | Second Quarter Ended, | | First Half Ended, |
| | | June 30, 2023 (91 days) | | June 18, 2022 (84 days) | | June 30, 2023 (181 days) | | June 18, 2022 (168 days) |
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Net income | | $ | 8,642 | | | $ | 21,107 | | | $ | 25,231 | | | $ | 33,985 | |
| Other comprehensive income: | | | | | | | | |
| Currency translation adjustments | | 54 | | | (121) | | | 57 | | | (75) | |
| Total other comprehensive income (loss): | | $ | 54 | | | $ | (121) | | | $ | 57 | | | $ | (75) | |
Comprehensive income | | $ | 8,696 | | | $ | 20,986 | | | $ | 25,288 | | | $ | 33,910 | |
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See accompanying notes to financial statements.
Heritage-Crystal Clean, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(In Thousands, Except Share Amounts)
For the Second Quarter Ended June 30, 2023 and June 18, 2022
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Second Quarter Ended, |
June 30, 2023 |
| Shares | | Par Value Common | | Additional Paid–in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | | | Total Equity |
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Balance, March 31, 2023 | 23,664,515 | | | $ | 237 | | | $ | 207,673 | | | $ | 238,415 | | | $ | (364) | | | | | | | $ | 445,961 | |
Net income | — | | | — | | | — | | | 8,642 | | | — | | | | | | | 8,642 | |
Currency translation adjustment | — | | | — | | | — | | | — | | | 54 | | | | | | | 54 | |
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Issuance of common stock – ESPP | 5,070 | | | — | | | 170 | | | — | | | — | | | | | | | 170 | |
Share-based compensation | 18,064 | | | — | | | 1,070 | | | — | | | — | | | | | | | 1,070 | |
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Balance at June 30, 2023 | 23,687,649 | | | $ | 237 | | | $ | 208,913 | | | $ | 247,057 | | | $ | (310) | | | | | | | $ | 455,897 | |
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Second Quarter Ended, |
June 18, 2022 |
| Shares | | Par Value Common | | Additional Paid–in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | | | Total Equity |
| | | | | | | | | | | | | | | |
Balance, March 26, 2022 | 23,477,764 | | | $ | 235 | | | $ | 206,390 | | | $ | 149,945 | | | $ | (120) | | | | | | | $ | 356,450 | |
Net income | — | | | — | | | — | | | 21,107 | | | — | | | | | | | 21,107 | |
Currency translation adjustment | — | | | — | | | — | | | — | | | (121) | | | | | | | (121) | |
| | | | | | | | | | | | | | | |
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Issuance of common stock – ESPP | 4,794 | | | — | | | 134 | | | — | | | — | | | | | | | 134 | |
Share-based compensation | 11,487 | | | — | | | 1,174 | | | — | | | — | | | | | | | 1,174 | |
Share repurchases to satisfy tax withholding obligations | — | | | — | | | (1,402) | | | — | | | — | | | | | | | (1,402) | |
Balance at June 18, 2022 | 23,494,045 | | | $ | 235 | | | $ | 206,296 | | | $ | 171,052 | | | $ | (241) | | | | | | | $ | 377,342 | |
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| Shares | | Par Value Common | | Additional Paid–in Capital | | Retained Earnings | | Total Heritage-Crystal Clean, Inc. Stockholders' Equity | | Noncontrolling Interest | | Total Equity |
| | | | | | | | | | | | | |
Balance at December 31, 2016 | 22,300,007 |
| | $ | 223 |
| | $ | 185,099 |
| | $ | 12,227 |
| | $ | 197,549 |
| | $ | 720 |
| | $ | 198,269 |
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Adjustment adopting ASU 2016-09 | — |
| | — |
| | — |
| | 1,009 |
| | 1,009 |
| | — |
| | 1,009 |
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Net income | — |
| | — |
| | — |
| | 16,402 |
| | 16,402 |
| | 158 |
| | 16,560 |
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Distribution | — |
| | — |
| | — |
| | — |
| | — |
| | (310 | ) | | (310 | ) |
Issuance of common stock – ESPP | 21,397 |
| | — |
| | 303 |
| | — |
| | 303 |
| | — |
| | 303 |
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Exercise of stock options | 484,531 |
| | 5 |
| | 5,407 |
| | — |
| | 5,412 |
| | — |
| | 5,412 |
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Share-based compensation | 73,895 |
| | 1 |
| | 1,607 |
| | — |
| | 1,608 |
| | — |
| | 1,608 |
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Balance at September 9, 2017 | 22,879,830 |
| | $ | 229 |
| | $ | 192,416 |
| | $ | 29,638 |
| | $ | 222,283 |
| | $ | 568 |
| | $ | 222,851 |
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First Half Ended, |
June 30, 2023 |
| Shares | | Par Value Common | | Additional Paid–in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | | | Total Equity |
| | | | | | | | | | | | | | | |
Balance, December 31, 2022 | 23,593,163 | | | $ | 236 | | | $ | 208,533 | | | $ | 221,826 | | | $ | (367) | | | | | | | $ | 430,228 | |
Net income | — | | | — | | | — | | | 25,231 | | | — | | | | | | | 25,231 | |
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Currency translation adjustment | — | | | — | | | — | | | — | | | 57 | | | | | | | 57 | |
Issuance of common stock – ESPP | 9,845 | | | — | | | 318 | | | — | | | — | | | | | | | 318 | |
Share-based compensation | 84,641 | | | 1 | | | 2,197 | | | — | | | — | | | | | | | 2,198 | |
Share repurchases to satisfy tax withholding obligations | — | | | — | | | (2,135) | | | — | | | — | | | | | | | (2,135) | |
Balance at June 30, 2023 | 23,687,649 | | | $ | 237 | | | $ | 208,913 | | | $ | 247,057 | | | $ | (310) | | | | | | | $ | 455,897 | |
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First Half Ended, |
June 18, 2022 |
| Shares | | Par Value Common | | Additional Paid–in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | | | | | Total Equity |
| | | | | | | | | | | | | | | |
Balance, January 1, 2022 | 23,473,931 | | | $ | 235 | | | $ | 204,920 | | | $ | 137,067 | | | $ | (166) | | | | | | | $ | 342,056 | |
Net income | — | | | — | | | — | | | 33,985 | | | — | | | | | | | 33,985 | |
| | | | | | | | | | | | | | | |
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Currency translation adjustment | — | | | — | | | — | | | — | | | (75) | | | | | | | (75) | |
Issuance of common stock – ESPP | 8,627 | | | — | | | 251 | | | — | | | — | | | | | | | 251 | |
Share-based compensation | 11,487 | | | — | | | 2,527 | | | — | | | — | | | | | | | 2,527 | |
Share repurchases to satisfy tax withholding obligations | — | | | — | | | (1,402) | | | — | | | — | | | | | | | (1,402) | |
Balance at June 18, 2022 | 23,494,045 | | | $ | 235 | | | $ | 206,296 | | | $ | 171,052 | | | $ | (241) | | | | | | | $ | 377,342 | |
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See accompanying notes to financial statements.
Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
| | | | | | | | | | | | | | |
| | First Half Ended, |
| | June 30, 2023 (181 days) | | June 18, 2022 (168 days) |
Cash flows from Operating Activities: | | | | |
Net income | | $ | 25,231 | | | $ | 33,985 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 23,969 | | | 13,285 | |
Provision for civil action settlement | | — | | | 750 | |
| | | | |
Uncollectible provision | | 1,270 | | | 453 | |
Share-based compensation | | 2,455 | | | 2,785 | |
Deferred taxes | | 3,610 | | | 944 | |
Other, net | | (10) | | | 1,099 | |
Changes in operating assets and liabilities: | | | | |
Decrease (increase) in accounts receivable | | 8,434 | | | (18,207) | |
(Increase) in inventory | | (6,297) | | | (6,685) | |
Decrease (increase) in other current assets | | (538) | | | 2,345 | |
(Decrease) increase in accounts payable | | (3,462) | | | 8,091 | |
(Decrease) increase in accrued liabilities | | (7,823) | | | 323 | |
| | | | |
Cash provided by operating activities | | $ | 46,839 | | | $ | 39,168 | |
| | | | |
Cash flows from Investing Activities: | | | | |
Capital expenditures | | $ | (26,899) | | | $ | (15,936) | |
Proceeds from sale of assets | | 1,578 | | | 96 | |
Investment in Retriev | | — | | | (3,000) | |
| | | | |
Cash used in investing activities | | $ | (25,321) | | | $ | (18,840) | |
| | | | |
Cash flows from Financing Activities: | | | | |
Repayments under line of credit | | (5,000) | | | — | |
| | | | |
Repayment of principal on finance leases | | (3,654) | | | (1,686) | |
Share repurchases to satisfy tax withholding obligations | | (2,135) | | | (1,402) | |
Proceeds from the issuance of common stock | | 318 | | | 251 | |
| | | | |
| | | | |
Cash used in financing activities | | $ | (10,471) | | | $ | (2,837) | |
Net increase in cash and cash equivalents | | 11,047 | | | 17,491 | |
Cash and cash equivalents, beginning of period | | 22,053 | | | 56,269 | |
Cash and cash equivalents, end of period | | $ | 33,100 | | | $ | 73,760 | |
| | | | |
Supplemental disclosure of cash flow information: | | | | |
Income taxes paid | | $ | 9,683 | | | $ | 11,796 | |
Cash paid for interest | | 3,558 | | | 140 | |
Supplemental disclosure of non-cash information: | | | | |
Payables for construction in progress | | 1,926 | | | 874 | |
|
| | | | | | | | |
| | For the First Three Quarters Ended, |
| | September 9, 2017 | | September 10, 2016 |
Cash flows from Operating Activities: | | | | |
Net income | | $ | 16,560 |
| | $ | 2,516 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
|
| | |
|
Depreciation and amortization | | 12,501 |
| | 12,442 |
|
Net (gain) on disposition of assets | | (2,506 | ) | | (158 | ) |
Non-cash inventory impairment | | — |
| | 1,651 |
|
Bad debt provision | | 105 |
| | 714 |
|
Share-based compensation | | 1,608 |
| | 890 |
|
Deferred taxes | | 8,904 |
| | 973 |
|
Amortization of deferred gain on lease conversion | | — |
| | (201 | ) |
Other, net | | 513 |
| | 541 |
|
Changes in operating assets and liabilities: | | |
| | |
|
Decrease (increase) in accounts receivable | | 1,534 |
| | (6,131 | ) |
(Increase) decrease in inventory | | (2,376 | ) | | 2,428 |
|
Increase in other current assets | | (739 | ) | | (1,753 | ) |
(Decrease) increase in accounts payable | | (3,749 | ) | | 8,890 |
|
(Decrease) increase in accrued expenses | | (336 | ) | | 1,197 |
|
Cash provided by operating activities | | $ | 32,019 |
| | $ | 23,999 |
|
| | | | |
Cash flows from Investing Activities: | | |
| | |
|
Capital expenditures | | $ | (9,465 | ) | | $ | (12,594 | ) |
Business acquisitions, net of cash acquired | | — |
| | (2,400 | ) |
Proceeds from the disposal of assets | | 4,129 |
| | 304 |
|
Cash used in investing activities | | $ | (5,336 | ) | | $ | (14,690 | ) |
| | | | |
Cash flows from Financing Activities: | | |
| | |
|
Payments on Term loan | | $ | (64,195 | ) | | $ | (3,371 | ) |
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 | | 5,412 |
| | — |
|
Proceeds from the issuance of common stock | | 303 |
| | 341 |
|
Payments of debt issuance costs | | (1,051 | ) | | — |
|
Distributions to noncontrolling interest | | (310 | ) | | (120 | ) |
Cash used in financing activities | | $ | (29,841 | ) | | $ | (3,150 | ) |
Net (decrease) increase in cash and cash equivalents | | (3,158 | ) | | 6,159 |
|
Cash and cash equivalents, beginning of period | | 36,610 |
| | 23,608 |
|
Cash and cash equivalents, end of period | | $ | 33,452 |
| | $ | 29,767 |
|
| | | | |
Supplemental disclosure of cash flow information: | | |
| | |
|
Income taxes paid | | $ | 208 |
| | $ | 315 |
|
Cash paid for interest | | 970 |
| | 1,473 |
|
Supplemental disclosure of non-cash information: | | |
| | |
|
Payables for construction in progress | | $ | 386 |
| | $ | 287 |
|
See accompanying notes to financial statements.
HERITAGE-CRYSTAL CLEAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 9, 2017June 30, 2023
(1) ORGANIZATION AND NATURE OF OPERATIONS
Heritage-Crystal Clean, Inc., a Delaware corporation and its subsidiaries (collectively the “Company”), provide parts cleaning, used oil re-refining, hazardous and non-hazardous containerized waste used oil collection, vacuum, antifreeze recyclingdisposal, emergency and spill response, and industrial and field services primarily to small and mid-sized industrial and vehicle maintenance customers.businesses, manufacturers and other industrial businesses, as well as utilities and governmental entities. The Company owns and operates a used oil re-refinery where it re-refines used oils and sells high quality base oil for use in the manufacture of finished lubricants as well as other re-refinery products. The Company also has multiple locations where it dehydrates used oil. The oil processed at these locations is primarily sold as recycled fuel oil. The companyCompany also operates multiple wastewater treatment plants andtwelve non-hazardous waste processing facilities, as well as five antifreeze recycling facilities at which it produces virgin-quality antifreeze. The Company's locations are in the United States and Ontario, Canada. The Company conducts its primary business operations through Heritage-Crystal Clean, LLC, its wholly owned subsidiary, and all intercompany balances have been eliminated in consolidation.
The Company’s fiscal year ends onEffective January 1, 2023, the Saturday closest to December 31. The most recent fiscal year ended on December 31, 2016. EachCompany revised its reportable segments as a result of the Patriot Environmental Services, Inc. acquisition. Previously we had two reportable segments: "Environmental Services," and "Oil Business." Under the revised segment presentation, the Company now has three reportable segments:
•"Environmental Services," which consists 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, productparts cleaning, containerized hazardous and non-hazardous waste collection and hazardous waste disposal, wastewater vacuum, and antifreeze recycling activities. Product revenues include sales of solvent, machines, absorbent, accessories, and antifreeze; service revenues include servicing of parts cleaning machines, drumcontainerized hazardous and non-hazardous waste removal services, and wastewater vacuum truck services field services, and other services. Inthrough the branch network. Rental income includes embedded lease income from certain parts cleaning contracts.
•"Oil Business," which consists of the Company's Oil Business segment, productused oil collection, recycled fuel oil sales, used oil re-refining activities, and used oil filter removal and disposal services. Product revenues includeprimarily consist of sales of re-refined base oil, re-refinery co-products and recycled fuel oil, used oil, and other products;oil; service revenues include revenues from used oil collection activities, collecting and disposing of waste waterwastewater and removal and disposal of used oil filters.
•"Industrial and Field Services," which consists of the Company's industrial and field services and non-hazardous waste processing and includes revenues related to industrial and field services, emergency and spill response as well as processing of non-hazardous waste.
Due to the Company's integrated business model, it is impracticable to separately present costs of tangible products and costs of services.
No customer represented greater than 10% of consolidated revenues for any of the periods presented. Intercompany revenues have been eliminated. All segments operate in the United States and, to an immaterial degree, in Ontario, Canada. As such, the Company is not disclosing operating results by geographic segment.
2)Beginning with our 2023 fiscal year, we changed our financial reporting cycle to a calendar year-end and end-of-month quarterly reporting cycle. Accordingly, our 2023 fiscal year began on January 1, 2023 (the day after the end of the 2022 fiscal year) and will end on December 31, 2023, and our 2023 quarters include the three month periods ending March 31, June 30, September 30, and December 31. Prior to 2023, our fiscal year was a 52 or 53 week fiscal year that ended on the Saturday nearest to December 31, and our quarterly reporting cycle included twelve week periods for the first, second, and third quarters and a sixteen week period (or in some cases a seventeen week period) for the fourth quarter. We have not restated, and do not plan to restate, historical results.
The table below shows the reporting periods as we refer to them in this report, their date ranges, and the number of days in each:
| | | | | | | | | | | | | | |
Reporting Period | | Date Range | | Number of Days |
2023 second quarter | | April 1, 2023 - June 30, 2023 | | 91 |
2022 second quarter | | March 27, 2022 - June 18, 2022 | | 84 |
2023 first half | | January 1, 2023 - June 30, 2023 | | 181 |
2022 first half | | January 2, 2022 - June 18, 2022 | | 168 |
2023 fiscal year | | January 1, 2023 - December 31, 2023 | | 365 |
2022 fiscal year | | January 2, 2022 - December 31, 2022 | | 364 |
As a result of the change in our financial reporting cycle, our 2023 second quarter and 2023 first half had 7 and 13 more calendar days of activity, respectively, than our 2022 second quarter and 2022 first half, respectively. While our 2023 full fiscal year will have one additional day of activity as compared to our 2022 full fiscal year, our 2023 fourth quarter will have 20 fewer days of activity than the corresponding period in our 2022 fiscal year.
(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 December 31, 2016.2022. You should read the condensed consolidated financial statements in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K filed with the SEC on March 1, 2023. There have been no material changes in these policies or their application.application during the second quarter of fiscal 2023 except for the fiscal year change as further described in Note 1.
Recently Issued Accounting PronouncementsIn the opinion of management, all adjustments and disclosures necessary for the fair presentation of these interim statements have been included
|
| | | | | | | | |
Standard | | Issuance Date | | Description | | Our Effective Date | | Effect 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 outline 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 has identified the portfolios of contracts with customers and the various performance obligations associated with each portfolio of contracts. The Company has also concluded that the timing of revenue recognition will change for certain of our portfolios of contracts upon adoption of ASC 606 as compared to our current revenue recognition. 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 Company will adopt the standard in the first quarter of fiscal 2018 with the modified retrospective approach, with the cumulative effect of initially applying the guidance recognized at the date of initial application.
|
ASU 2016-02
Leases
(Topic 842) | | February 2016 | | This 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. The Company anticipates that implementation of this standard will result in an increase to assets and an increase to liabilities.
|
|
| | | | | | | | |
Recently issued accounting standards adopted |
Standard | | Issuance Date | | Description | | 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 | | 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 could 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 excess tax benefits. As a result of 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 2015-11, Simplifying the Measurement of Inventory. (Topic 330) | | July 2015 | | This update requires 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 transportation. | | January 1, 2017 | | The adoption of ASU 2015-11 at the start of fiscal 2017 resulted in no impact to our consolidated financial 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 in fiscal 2016 resulted in no impact to our consolidated 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 2015 | | This 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, 2016 | | The 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,August 3, 2022, Heritage-Crystal Clean, LLC, completed its acquisition of all of the Company purchasedcapital stock of Patriot Environmental Services, Inc. ("Patriot"), a leading provider of environmental services across the assetsWestern United States specializing in emergency response, industrial services, OSRO spill response and a wide variety of Recycle Engine Coolant, Inc. ("REC"). The purchase pricewaste services. Total consideration for the acquisition was $0.7approximately $156.9 million including $0.1 million placed into escrow.in cash subject to various adjustments such as a working capital adjustment and seller indemnification obligations. To date, there have been no adjustments to the purchase price. Goodwill recognized from the acquisition of Patriot, represents the excess of the estimated purchase consideration transferred over the estimated fair value of the assets acquired and liabilities assumed. The Company purchasedhas not finalized 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 allocation for the acquisition was $2.7 million, including $0.3 million placed into escrow.as of June 30, 2023. The Company purchased the assets of Phoenix Environmental in order to expand its service coverage area into the Pacific Northwest. During the measurement period, the Company made adjustments to the provisional amounts reported as the estimated fair values of assets acquired as partfollowing balances of the Phoenix Environmental business combination. Comparedpurchase price allocation are subject to the provisional value reportedchange as a result of December 31, 2016, the fair values presented in the table below reflect a decrease toany working capital adjustments and seller indemnification obligations: other current assets, goodwill, and accounts receivable of $12 thousand, a decrease to property, plant, & equipment of $77 thousand,payable and an increase to goodwill of $89 thousand.accruals. Factors leading to goodwill being recognized are the Company's expectationsCompany’s expectation of synergies from integrating Phoenix Environmental intocombining operations of Patriot, and the Company as well as the value of intangible assets that are not separately recognized, such as the assembled workforce. Transaction costs incurred in conjunction with the acquisition of Patriot were approximately $1.2 million. The results of Patriot are consolidated into the Company’s Industrial and Field Services segment from the date of acquisition.
The following table summarizes the estimated fair values of the assets acquired, and liabilities assumed, net of cash acquired, related to each acquisition:Patriot at the acquisition date:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
(thousands) | | | | | | | Patriot Environmental Services, Inc.(1) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | | | | | | $ | 25,381 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Other current assets | | | | | | | 2,034 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Property, plant, & equipment | | | | | | | 33,968 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Intangible assets | | | | | | | 62,200 | | | | | | | | | | | | | | | |
Goodwill | | | | | | | 62,541 | | | | | | | | | | | | | | | |
Accounts payable and accruals | | | | | | | (12,929) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Deferred tax liabilities | | | | | | | (16,313) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total purchase price, net of cash acquired | | | | | | | $ | 156,882 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Less: placed in escrow | | | | | | | 2,780 | | | | | | | | | | | | | | | |
Net cash paid | | | | | | | $ | 154,102 | | | | | | | | | | | | | | | |
(1) The Company is still in the process of finalizing the purchase price allocation for the acquisition and therefore the following balances are subject to change as a result of any working capital adjustments and seller indemnification obligations: other current assets, goodwill, and accounts payable and accruals.
Unaudited Pro Forma Financial Information
The pro forma financial information in the table below presents the combined results of the Company as if the Patriot acquisition had occurred on January 1, 2022. The pro forma information is shown for illustrative purposes only and is not
|
| | | | | | | |
(Thousands) | Phoenix Environmental | | REC |
| | | |
Accounts receivable | $ | 260 |
| | $ | 80 |
|
Inventory | 27 |
| | 56 |
|
Property, plant, & equipment | 398 |
| | 457 |
|
Equipment at customers | 38 |
| | — |
|
Intangible assets | 700 |
| | 132 |
|
Goodwill | 1,245 |
| | — |
|
Total purchase price, net of cash acquired | $ | 2,668 |
| | $ | 725 |
|
necessarily indicative of future results of operations of the Company or results of operations of the Company that would have actually occurred had the transactions been in effect for the periods presented.
| | | | | | | | | | | | | | |
| | Second Quarter Ended, |
(thousands, except per share data) | | June 30, 2023 (91 days) | | June 18, 2022 (84 days) |
Total revenues | | $ | 192,166 | | | $ | 184,361 | |
Net income | | $ | 8,642 | | | $ | 21,065 | |
| | | | |
Net income per share: basic | | $ | 0.36 | | | $ | 0.90 | |
Net income per share: diluted | | $ | 0.36 | | | $ | 0.89 | |
| | | | |
| | | | | | | | | | | | | | |
| | First Half Ended, |
(thousands, except per share data) | | June 30, 2023 (181 days) | | June 18, 2022 (168 days) |
Total revenues | | $ | 385,647 | | | $ | 353,806 | |
Net income | | $ | 25,231 | | | $ | 32,652 | |
| | | | |
Net income per share: basic | | $ | 1.07 | | | $ | 1.39 | |
Net income per share: diluted | | $ | 1.06 | | | $ | 1.38 | |
| | | | |
(4) REVENUE
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when our performance obligations under the terms of a contract with our customers are satisfied. Recognition occurs when the Company transfers control by completing the specified services at the point in time the customer benefits from the services performed or once our products are delivered. The majority of revenue is recognized at a point in time, except for rental income which is recognized on an over time basis. The Company measures progress toward complete satisfaction of a performance obligation satisfied over time using a cost-based input method. This method of measuring progress provides a faithful depiction of the transfer of goods or services because the costs incurred are expected to be substantially proportionate to the Company’s satisfaction of the performance obligation. Revenue is measured as the amount of consideration we expect to receive in exchange for completing our performance obligations. Sales tax and other taxes we collect with revenue-producing activities are excluded from revenue. In the case of contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on the relative stand-alone selling prices of the various goods and/or services encompassed by the contract. We do not have any material significant payment terms as payment is generally due within 30 days after the performance obligation has been satisfactorily completed. The Company has elected the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. In applying the guidance in Topic 606, there were no judgments or estimates made that the Company deems significant.
Contract Balances — Contract assets primarily relate to the Company’s rights to consideration for work completed in relation to its services performed but not billed at the reporting date. Contract liabilities primarily consist of advance payments of performance obligations yet to be fully satisfied in the period reported. Our contract liabilities and contract assets are reported in a net position at the end of each reporting period.
We disaggregate our revenue from contracts with customers by major lines of business for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. As further described in Note 10, prior period segment results presented for comparative purposes below have been recast to reflect the newly reportable segments.
The following table disaggregates our revenue by major lines: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter Ended, |
| June 30, 2023 (91 days) | | June 18, 2022 (84 days) |
Total Net Sales by Major Lines of Business (thousands) | Environmental Services | | Oil Business | | Industrial and Field Services | | Total | | Environmental Services | | Oil Business | | Industrial and Field Services | | Total |
Parts Cleaning, Containerized Waste, & related products/services | $ | 57,885 | | | $ | — | | | $ | 1,455 | | | $ | 59,340 | | | $ | 49,217 | | | $ | — | | | $ | 1,103 | | | $ | 50,320 | |
Vacuum Services & Wastewater Treatment | 21,116 | | | — | | | 6,458 | | | 27,574 | | | 15,089 | | | — | | | 6,061 | | | 21,150 | |
Industrial & Field Services | — | | | — | | | 38,556 | | | 38,556 | | | — | | | — | | | 6,539 | | | 6,539 | |
Antifreeze Business | 8,439 | | | — | | | — | | | 8,439 | | | 7,118 | | | — | | | — | | | 7,118 | |
Environmental Services - Other | 453 | | | — | | | — | | | 453 | | | 486 | | | — | | | — | | | 486 | |
Re-refinery Product Sales | — | | | 41,820 | | | — | | | 41,820 | | | — | | | 54,198 | | | — | | | 54,198 | |
Oil Collection Services & RFO | — | | | 6,002 | | | — | | | 6,002 | | | — | | | 9,253 | | | — | | | 9,253 | |
Oil Filter Business | — | | | 1,299 | | | — | | | 1,299 | | | — | | | 1,309 | | | — | | | 1,309 | |
Revenues from Contracts with Customers | 87,893 | | | 49,121 | | | 46,469 | | | 183,483 | | | 71,910 | | | 64,760 | | | 13,703 | | | 150,373 | |
Rental Income | 8,072 | | | 11 | | | 600 | | | 8,683 | | | 6,265 | | | 9 | | | — | | | 6,274 | |
Total Revenues | $ | 95,965 | | | $ | 49,132 | | | $ | 47,069 | | | $ | 192,166 | | | $ | 78,175 | | | $ | 64,769 | | | $ | 13,703 | | | $ | 156,647 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | First Half Ended, |
| | June 30, 2023 (181 days) | | June 18, 2022 (168 days) |
Total Net Sales by Major Lines of Business (thousands) | | Environmental Services | | Oil Business | | Industrial and Field Services | | Total | | Environmental Services | | Oil Business | | Industrial and Field Services | | Total |
Parts cleaning, containerized waste, & related products/services | | $ | 114,543 | | | $ | — | | | $ | 2,924 | | | $ | 117,467 | | | $ | 95,340 | | | $ | — | | | $ | 1,836 | | | $ | 97,176 | |
Wastewater Vacuum Services | | 41,460 | | | — | | | 12,883 | | | 54,343 | | | 28,397 | | | — | | | 10,144 | | | 38,541 | |
Field Services | | — | | | — | | | 76,304 | | | 76,304 | | | — | | | — | | | 12,829 | | | 12,829 | |
Antifreeze Business | | 18,115 | | | — | | | — | | | 18,115 | | | 14,774 | | | — | | | — | | | 14,774 | |
Environmental Services - Other | | 975 | | | — | | | — | | | 975 | | | 981 | | | — | | | — | | | 981 | |
Re-refinery Product Sales | | — | | | 88,629 | | | — | | | 88,629 | | | — | | | 103,337 | | | — | | | 103,337 | |
Oil Collection Services & RFO | | — | | | 10,740 | | | — | | | 10,740 | | | — | | | 13,566 | | | — | | | 13,566 | |
Oil Filter Business | | — | | | 2,702 | | | — | | | 2,702 | | | — | | | 2,558 | | | — | | | 2,558 | |
Revenues from Contracts with Customers | | 175,093 | | | 102,071 | | | 92,111 | | | 369,275 | | | 139,492 | | | 119,461 | | | 24,809 | | | 283,762 | |
Rental income | | 15,639 | | | 17 | | | 716 | | | 16,372 | | | 12,228 | | | 23 | | | — | | | 12,251 | |
Total Revenues | | $ | 190,732 | | | $ | 102,088 | | | $ | 92,827 | | | $ | 385,647 | | | $ | 151,720 | | | $ | 119,484 | | | $ | 24,809 | | | $ | 296,013 | |
The following table provides information about contract assets and contract liabilities from contracts with customers: | | | | | | | | | | | | | | | | | |
(thousands) | | June 30, 2023 | | December 31, 2022 |
Contract assets | | $ | — | | | $ | 133 | |
Contract liabilities | | 3,259 | | | 2,658 | |
Contract liabilities - net | | $ | 3,259 | | | $ | 2,525 | |
During the fiscal quarter ended June 30, 2023, the Company recognized no revenue that was included in the contract liabilities balance as of December 31, 2022. During the first half ended June 30, 2023, the Company recognized $2.5 million of revenue that was included in the contract liabilities balance as of December 31, 2022. The Company has no assets recognized from costs to obtain or fulfill a contract with a customer. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
(5) ACCOUNTS RECEIVABLE
Accounts Receivable — Net, includes amounts billed to and currently due from customers. The amounts due are stated at their net estimated realizable value. The allowance for uncollectible accounts is our best estimate of the amount of probable lifetime-expected credit losses in existing accounts receivable and is determined based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole. The Company does not have any off-balance-sheet credit exposure related to its customers.
Accounts receivable for the second quarter ended June 30, 2023, and the fiscal year ended December 31, 2022 consisted of the following:
| | | | | | | | | | | | | | |
(thousands) | | June 30, 2023 | | December 31, 2022 |
Trade | | $ | 105,263 | | | $ | 111,118 | |
Less: allowance for uncollectible accounts | | 5,527 | | | 4,496 | |
Trade - net | | 99,736 | | | 106,622 | |
Related parties | | 4,437 | | | 6,777 | |
Other | | 531 | | | 1,009 | |
Total accounts receivable - net | | $ | 104,704 | | | $ | 114,408 | |
|
| | | | | | | | |
(Thousands) | | September 9, 2017 | | December 31, 2016 |
Trade | | $ | 44,907 |
| | $ | 42,332 |
|
Less: allowance for doubtful accounts | | 1,719 |
| | 2,176 |
|
Trade - net | | 43,188 |
| | 40,156 |
|
Related parties | | 1,213 |
| | 1,324 |
|
Other | | 1,480 |
| | 6,053 |
|
Total accounts receivable - net | | $ | 45,881 |
| | $ | 47,533 |
|
The following table provides the changes in the Company’s allowance for doubtfuluncollectible accounts for the first three quartershalf ended September 9, 2017,June 30, 2023, and the fiscal year ended December 31, 2016:2022:
| | | | | | | | | | | | | | |
| | | | |
(thousands) | | June 30, 2023 | | December 31, 2022 |
Balance at beginning of period | | $ | 4,496 | | | $ | 2,928 | |
Provision for uncollectible accounts | | 1,270 | | | 2,269 | |
Accounts written off, net of recoveries | | (239) | | | (701) | |
Balance at end of period | | $ | 5,527 | | | $ | 4,496 | |
|
| | | | | | | | |
| | For the First Three Quarters Ended, | | For the Fiscal Year Ended, |
(Thousands) | | September 9, 2017 | | December 31, 2016 |
Balance at beginning of period | | $ | 2,176 |
| | $ | 2,207 |
|
Provision for bad debts | | 105 |
| | 687 |
|
Accounts written off, net of recoveries | | (562 | ) | | (718 | ) |
Balance at end of period | | $ | 1,719 |
| | $ | 2,176 |
|
(5)(6) INVENTORY
The carrying value of inventory consisted of the following:
| | (Thousands) | | September 9, 2017 | | December 31, 2016 | |
(thousands) | | (thousands) | | June 30, 2023 | | December 31, 2022 |
Solvents and solutions | | Solvents and solutions | | $ | 11,829 | | | $ | 10,792 | |
Used oil and processed oil | | $ | 6,765 |
| | $ | 5,493 |
| Used oil and processed oil | | 18,991 | | | 14,904 | |
Solvents and solutions | | 5,663 |
| | 5,014 |
| |
Machines | | Machines | | 7,206 | | | 6,329 | |
Drums and supplies | | 4,071 |
| | 3,790 |
| Drums and supplies | | 6,543 | | | 6,476 | |
Machines | | 3,163 |
| | 2,576 |
| |
Other | | 1,762 |
| | 1,899 |
| Other | | 2,910 | | | 2,666 | |
Total inventory | | 21,424 |
| | 18,772 |
| Total inventory | | 47,479 | | | 41,167 | |
Less: machine refurbishing reserve | | (490 | ) | | (214 | ) | Less: machine refurbishing reserve | | 455 | | | 440 | |
Total inventory - net | | $ | 20,934 |
| | $ | 18,558 |
| Total inventory - net | | $ | 47,024 | | | $ | 40,727 | |
|
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 realizable value, net of any reserves for excess, obsolete, or unsalable inventory. The Company routinely monitors its inventory levels at each of its locations and evaluates inventories for excess or slow-moving items. If circumstances indicate the cost of inventories exceed their recoverable value, inventories are reduced to net realizable value. The Company had no inventory write downs during the third quarterssecond quarter and first half of fiscal 2017 and fiscal 2016. There were no inventory write-downs in the first three quarters of fiscal 2017 compared to $1.7 million of inventory write-downs in the first three quarters of fiscal 2016.2023 or 2022.
(6) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
|
| | | | | | | | |
(Thousands) | | September 9, 2017 | | December 31, 2016 |
Machinery, vehicles, and equipment | | $ | 79,221 |
| | $ | 78,592 |
|
Buildings and storage tanks | | 68,938 |
| | 69,977 |
|
Land | | 9,563 |
| | 10,363 |
|
Leasehold improvements | | 4,997 |
| | 4,876 |
|
Construction in progress | | 13,343 |
| | 8,646 |
|
Assets held for sale | | 60 |
| | 177 |
|
Total property, plant and equipment | | 176,122 |
| | 172,631 |
|
Less: accumulated depreciation | | (47,999 | ) | | (41,456 | ) |
Property, plant and equipment - net | | $ | 128,123 |
| | $ | 131,175 |
|
| | | | |
(Thousands) | | September 9, 2017 | | December 31, 2016 |
Equipment at customers | | $ | 66,634 |
| | $ | 63,502 |
|
Less: accumulated depreciation | | (43,582 | ) | | (40,469 | ) |
Equipment at customers - net | | $ | 23,052 |
| | $ | 23,033 |
|
Depreciation expense for both third quarters ended September 9, 2017 and September 10, 2016 was $3.4 million. Depreciation expense for the first three quarters ended September 9, 2017, and September 10, 2016 was $10.2 million.
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is measured as a residual amount as of the acquisition date, which in most cases results in measuring goodwill as an excess of the purchase consideration transferred plus the fair value of any noncontrolling interest in the acquiree over the fair value of the net assets acquired, including any contingent consideration. The Company tests goodwill for impairment annually in the fourth quarter and in interim periods if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company's determination of fair value requires certain assumptions and estimates, such as margin expectations, market conditions, growth expectations, expected changes in working capital, etc., regarding expected future profitability and expected future cash flows. The Company reports and tests goodwill for impairment at each ofonly in its two reporting units, Environmental Services and Oil Business,Industrial and Field Services reporting units. As further discussed in Note 10, December 31, 2022 numbers presented for comparative purposes below have been recast to reflect the newly reportable segments. The Company does not aggregate reporting units for purposesanalyzed the relative fair values of impairment testing.each acquisition and assigned goodwill to the respective segment that the results of each acquisition are consolidated into.
The following table shows changes to our goodwill balances by segment from December 31, 2016,2022 to September 9, 2017:June 30, 2023: | | | | | | | | | | | | | | | | | | | | | | | | |
(thousands) | | | | Environmental Services | | Industrial and Field Services | | Total |
| | | | | | | | |
Goodwill at December 31, 2022 | | | | | | | | |
Gross carrying amount | | | | $ | 37,650 | | | $ | 74,586 | | | $ | 112,236 | |
| | | | | | | | |
Net book value at December 31, 2022 | | | | $ | 37,650 | | | $ | 74,586 | | | $ | 112,236 | |
| | | | | | | | |
Goodwill at June 30, 2023 | | | | | | | | |
Gross carrying amount | | | | 37,650 | | | 74,586 | | | $ | 112,236 | |
| | | | | | | | |
Net book value at June 30, 2023 | | | | $ | 37,650 | | | $ | 74,586 | | | $ | 112,236 | |
|
| | | | | | | | | | | | |
(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 | | — |
| | 97 |
| | 97 |
|
Goodwill at September 9, 2017 | | | | | | |
Gross carrying amount | | 3,952 |
| | 31,580 |
| | 35,532 |
|
Accumulated impairment loss | | (3,952 | ) | | — |
| | (3,952 | ) |
Net book value at September 9, 2017 | | $ | — |
| | $ | 31,580 |
| | $ | 31,580 |
|
The following is a summary of software and other intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
(thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer & supplier relationships | | $ | 62,268 | | | $ | 28,655 | | | $ | 33,613 | | | $ | 62,268 | | | $ | 25,762 | | | $ | 36,506 | |
Permits | | 60,690 | | | 4,577 | | | 56,113 | | | 60,690 | | | 2,697 | | | 57,993 | |
Software | | 10,090 | | | 3,992 | | | 6,098 | | | 13,643 | | | 7,378 | | | 6,265 | |
Non-compete agreements | | 4,413 | | | 3,799 | | | 614 | | | 4,421 | | | 3,665 | | | 756 | |
Patents, formulae, and licenses | | 1,769 | | | 1,003 | | | 766 | | | 1,769 | | | 971 | | | 798 | |
Other* | | 601 | | | 714 | | | (113) | | | 597 | | | 580 | | | 17 | |
Total software and intangible assets | | $ | 139,831 | | | $ | 42,740 | | | $ | 97,091 | | | $ | 143,388 | | | $ | 41,053 | | | $ | 102,335 | |
*Other intangibles include an above market lease acquired in September 2021 that had a fair value of ($0.7) million upon acquisition and is being accreted over the remaining useful life of the lease. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 9, 2017 | | December 31, 2016 |
(Thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer & supplier relationships | | $ | 23,069 |
| | $ | 8,310 |
| | $ | 14,759 |
| | $ | 23,045 |
| | $ | 6,682 |
| | $ | 16,363 |
|
Software | | 4,604 |
| | 3,822 |
| | 782 |
| | 4,573 |
| | 3,655 |
| | 918 |
|
Non-compete agreements | | 2,950 |
| | 2,489 |
| | 461 |
| | 2,934 |
| | 2,180 |
| | 754 |
|
Patents, formulae, and licenses | | 1,769 |
| | 622 |
| | 1,147 |
| | 1,769 |
| | 576 |
| | 1,193 |
|
Other | | 1,348 |
| | 890 |
| | 458 |
| | 1,348 |
| | 755 |
| | 593 |
|
Total software and intangible assets | | $ | 33,740 |
| | $ | 16,133 |
| | $ | 17,607 |
| | $ | 33,669 |
| | $ | 13,848 |
| | $ | 19,821 |
|
Amortization expense was $0.8$2.9 million for the thirdsecond quarter ended September 9, 2017,June 30, 2023, and $0.7$1.4 million for thirdthe second quarter ended September 10, 2016.June 18, 2022. Amortization expense was $2.3$5.6 million for both the first three quartershalf ended September 9, 2017,June 30, 2023, and $2.8 million for the first three quartershalf ended September 10, 2016. June 18, 2022.
The weighted average useful lives of software; customer & supplier relationships; patents, formulae, and licenses; non-compete agreements,software and other intangibles were 9 years, 10 years, 15 years, 5 years, and 6 years, respectively.are as follows: | | | | | | | | |
| | Weighted Average Useful Life (years) |
Permits | | 17 |
Patents, formulae, & licenses | | 15 |
Customer and supplier relationships | | 12 |
Software | | 9 |
Non-compete agreements | | 5 |
Other | | 7 |
The expectedestimated amortization expense for the remainder of fiscal 20172023 and foreach of the five succeeding fiscal years 2018, 2019, 2020, and 2021 is $1.0 million, $3.0 million, $2.6 million, $2.5 million, and $2.4 million, respectively. as follows: | | | | | | | | |
(millions) | | |
Fiscal Year | | Amortization Expense |
2023 | | $4.8 |
2024 | | 8.5 |
2025 | | 7.5 |
2026 | | 7.0 |
2027 | | 6.9 |
2028 | | 6.8 |
The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, the finalization of the fair value of intangible assets that have been acquired from business combinations, disposal of intangible assets, accelerated amortization of intangible assets, and other events.
(8) ACCOUNTS PAYABLE
Accounts payable consisted of the following:
| | | | | | | | | | | | | | |
(thousands) | | June 30, 2023 | | December 31, 2022 |
Accounts payable | | $ | 51,763 | | | $ | 54,935 | |
Accounts payable - related parties | | 839 | | | 152 | |
Total accounts payable | | $ | 52,602 | | | $ | 55,087 | |
(9) DEBT AND FINANCING ARRANGEMENTS
Bank Credit Facility
On February 21, 2017,March 18, 2021, Heritage-Crystal Clean, LLC, (the “Company”), entered into an Amended and Restated Credit Agreement (the "Agreement"), by and among the Company, entered into aits parent, Heritage-Crystal Clean, Inc., and the Company’s subsidiaries identified therein and Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., and Wells Fargo Bank, National Association. The new Credit Agreement ("Credit Agreement") replacing the prior Credit Agreement ("Prior Credit Agreement") dated as of June 29, 2015. The Credit Agreement provides for borrowings of up to $95.0$100.0 million, subjectin the form of a revolving facility, of which $15 million can be used in the form of a Swing Line loan. The Agreement also provided for up to an additional $50.0 million of borrowings using an accordion feature upon approval of the lenders. On August 3, 2022, the Company entered into an Amendment (Amendment No. 1 to the satisfactionAgreement "the Amendment") which increased the amount of certain terms and conditions, comprisedborrowing under the revolving credit line to $150.0 million. The Company utilized the credit line to finance $115.0 million of a term loanthe acquisition of $30.0 million andPatriot Environmental Services Inc. (see Note 3). The Amendment also provides for up to $65.0an additional $50.0 million of borrowings under the revolving loan portion. The actual amount of borrowings available under the revolving loan portionan accordion feature upon approval 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.lenders.
Loans made under the New Credit Agreement, as amended, may be Base Rate Loans or LIBORSecured Overnight Financing Rate ("SOFR") Loans, at the election of the CompanyBorrower 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”)SOFR plus a margin of 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. LIBOR1.00%. SOFR rate loans have an interest rate equal to (i) the LIBORSOFR rate plus (ii) a variable margin of between 1.75%1.50% and 2.75%2.25% 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,August 2022, the Company entered into a First Amendmentincurred an additional $0.1 million of debt issuance costs related to the Credit Agreement that expands the Company's ability to make dispositions without bank group approval.
Asamendment of the Effective date of February 21, 2017, the effectivecredit agreement and drawdown.
The Company's weighted average interest rate onfor all debt for the term loansecond quarter ended June 30, 2023 was 3.28% and the effective rate on the revolving loan was 3.28%6.6%.
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 3.253.50 to 1.00 for the fiscal quarter in which such permitted acquisition occurs and the three immediately following fiscal quarters and will thereafter revert to 3.00 to 1.00; and1.00.
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 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 three quarters of fiscal 2017, the Company paid and capitalized $1.1 million of
Long-term 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
September 9, 2017June 30, 2023 and December 31,
20162022 consisted of the following:
| | | | | | | | | | | | | | |
(thousands) | | June 30, 2023 | | December 31, 2022 |
Long-term debt | | $ | 85,000 | | | $ | 90,000 | |
Less: unamortized debt issuance costs | | 521 | | | 617 | |
| | | | |
Long-term debt - net | | $ | 84,479 | | | $ | 89,383 | |
|
| | | | | | | | |
(thousands) | | September 9, 2017 | | December 31, 2016 |
Principal amount | | $ | 30,000 |
| | $ | 64,195 |
|
Less: unamortized debt issuance costs | | 1,349 |
| | 741 |
|
Debt less unamortized debt issuance costs | | $ | 28,651 |
| | $ | 63,454 |
|
DuringFor the thirdsecond quarter of fiscal 2017,ended June 30, 2023, the Company recorded interest expense of $0.3$1.9 million onwith respect to our credit line and related amortization of debt issuance costs. For the term loan. During the first three quarters of fiscal 2017,second quarter ended June 18, 2022, the Company recorded interest expense of $1.2$0.3 million onwith respect to our term loan and credit line, and related amortization of debt issuance costs. For the term loan.
During the third quarterfirst half of fiscal 2016,2023, the Company recorded interest expense of $0.5$3.7 million on the Prior Credit Agreement term loanswith respect to our credit line and capitalized less than $0.1 million for various capital projects. Duringrelated amortization of debt issuance costs. For the first three quartershalf of fiscal 2016,2022, the Company recorded interest$0.5 million in amortization of $1.5 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 9, 2017 and September 10, 2016 was 3.6% and 3.2%, respectively.issuance costs.
As of September 9, 2017June 30, 2023 and December 31, 2016,2022, the Company was in compliance with all covenants under both credit agreements.its Credit Agreement. As of September 9, 2017June 30, 2023 and December 31, 2016,2022, the Company had $0.9 million and $3.0$6.0 million of standby letters of credit issued respectively,for both periods, and $64.1$59.0 million and $27.6$54.0 million was available for borrowing under the revolvingbank credit facility, respectively. We believe that
(10) SEGMENT INFORMATION
Effective January 1, 2023, the carrying valueCompany revised its reportable segments as a result of our new debt balance at September 9, 2017 approximates fair value.
(9) SEGMENT INFORMATION
The Company reports inthe Patriot Environmental Services, Inc. acquisition. Previously we had two reportable segments: "Environmental Services"Services," and "Oil Business." Under the revised segment presentation, the Company now has three reportable segments: "Environmental Services," "Oil Business," and "Industrial and Field Services." The Environmental Services segment consists primarily of the Company's parts cleaning, containerized waste management, wastewater vacuum truck service,services, and antifreeze recycling activities, and field services.activities. 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 The Industrial and Field Services segment accounted for more than 10.0% of consolidated revenues in anyconsists of the periods presented. There were no intersegment revenues.Company's industrial and field services, emergency and spill response services, as well as the activities at our non-hazardous waste processing facilities. Prior period segment results presented for comparative purposes below have been recast to reflect the newly reportable segment as a separate segment.
Operating segmentSegment results for the third quarterssecond quarter ended September 9, 2017,June 30, 2023 and September 10, 2016June 18, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Second Quarter Ended, |
June 30, 2023 (91 days) |
(thousands) | | Environmental Services | | Oil Business | | Industrial and Field Services | | Corporate and Eliminations | | Consolidated |
| | | | | | | | | | | |
Revenues | | | | | | | | | | |
| Service revenues | | $ | 72,018 | | | $ | 2,855 | | | $ | 46,469 | | | $ | — | | | $ | 121,342 | |
| Product revenues | | 15,875 | | | 46,266 | | | — | | | — | | | 62,141 | |
| Rental income | | 8,072 | | | 11 | | | 600 | | | — | | | 8,683 | |
Total revenues | | $ | 95,965 | | | $ | 49,132 | | | $ | 47,069 | | | $ | — | | | $ | 192,166 | |
Operating expenses | | | | | | | | | | |
| Operating costs | | 68,459 | | 40,781 | | 37,147 | | — | | | 146,387 | |
| Operating depreciation and amortization | | 3,641 | | 2,675 | | 2,398 | | — | | | 8,714 | |
Profit before corporate selling, general, and administrative expenses | | $ | 23,865 | | | $ | 5,676 | | | $ | 7,524 | | | $ | — | | | $ | 37,065 | |
Selling, general, and administrative expenses | | | | | | | | 20,361 | | 20,361 |
Depreciation and amortization from SG&A | | | | | | | | 3,088 | | 3,088 |
Total selling, general, and administrative expenses | | | | | | | | $ | 23,449 | | | $ | 23,449 | |
Other (income) - net | | | | | | | | (265) | | | (265) |
Operating income | | | | | | | | | | 13,881 |
Interest expense – net | | | | | | | | 1,929 | | 1,929 |
Income before income taxes | | | | | | | | | | $ | 11,952 | |
|
| | | | | | | | | | | | | | | | | |
Third Quarter Ended, |
September 9, 2017 |
| (Thousands) | |
Environmental Services | | Oil Business | | Corporate and Eliminations | | Consolidated |
| | | | | | | | | |
Revenues | | | | | | | | |
| Product revenues | | $ | 5,623 |
|
| $ | 23,660 |
|
| $ | — |
|
| $ | 29,283 |
|
| Service revenues | | 49,419 |
|
| 4,629 |
|
| — |
|
| 54,048 |
|
Total revenues | | $ | 55,042 |
|
| $ | 28,289 |
|
| $ | — |
|
| $ | 83,331 |
|
Operating expenses | |
|
|
|
|
|
|
|
| Operating costs | | 38,298 |
| 25,351 |
| — |
|
| 63,649 |
|
| Operating depreciation and amortization | | 1,794 |
|
| 1,555 |
|
| — |
|
| 3,349 |
|
Profit before corporate selling, general, and administrative expenses | | $ | 14,950 |
|
| $ | 1,383 |
|
| $ | — |
|
| $ | 16,333 |
|
Selling, general, and administrative expenses | | | | |
| 10,955 |
| 10,955 |
|
Depreciation and amortization from SG&A | | | | |
| 837 |
| 837 |
|
Total selling, general, and administrative expenses | | | | |
| $ | 11,792 |
|
| $ | 11,792 |
|
Other (income) - net | | | | |
| (3,078) |
| (3,078) |
|
Operating income | | | | |
|
|
| 7,619 |
|
Interest expense – net | | | | |
| 276 |
| 276 |
|
Income before income taxes | | | | |
|
|
| $ | 7,343 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Second Quarter Ended, |
June 18, 2022 (84 days) |
(thousands) | | Environmental Services | | Oil Business | | Industrial and Field Services | | Corporate and Eliminations | | Consolidated |
| | | | | | | | | | | |
Revenues | | | | | | | | | | |
| Service revenues | | $ | 59,277 | | | $ | 2,604 | | | $ | 13,703 | | | $ | — | | | $ | 75,584 | |
| Product revenues | | 12,633 | | | 62,156 | | | — | | | — | | | 74,789 | |
| Rental income | | 6,265 | | | 9 | | | — | | | — | | | 6,274 | |
Total revenues | | $ | 78,175 | | | $ | 64,769 | | | $ | 13,703 | | | $ | — | | | $ | 156,647 | |
Operating expenses | | | | | | | | | | |
| Operating costs | | 56,812 | | 35,841 | | 12,102 | | — | | | 104,755 |
| Operating depreciation and amortization | | 2,769 | | 2,125 | | 423 | | — | | | 5,317 |
Profit before corporate selling, general, and administrative expenses | | $ | 18,594 | | | $ | 26,803 | | | $ | 1,178 | | | $ | — | | | $ | 46,575 | |
Selling, general, and administrative expenses | | | | | | | | 15,024 | | 15,024 |
Depreciation and amortization from SG&A | | | | | | | | 1,460 | | 1,460 |
Total selling, general, and administrative expenses | | | | | | | | $ | 16,484 | | | $ | 16,484 | |
Other expense - net | | | | | | | | 1,001 | | | 1,001 |
Operating income | | | | | | | | | | 29,090 |
Interest expense – net | | | | | | | | 250 | | 250 |
Income before income taxes | | | | | | | | | | $ | 28,840 | |
| | Third Quarter Ended, | |
September 10, 2016 | |
| (Thousands) | |
Environmental Services | | Oil Business | | Corporate and Eliminations | | Consolidated | |
First Half Ended, | | First Half Ended, |
June 30, 2023 (181 days) | | June 30, 2023 (181 days) |
(thousands) | | (thousands) | | Environmental Services | | Oil Business | | Industrial and Field Services | | Corporate and Eliminations | | Consolidated |
| | | | | | | | | | | | | | | | | | | |
Revenues | Revenues | | | | | | | | | Revenues | |
| | | Service revenues | | $ | 143,018 | | | $ | 5,665 | | | $ | 92,111 | | | $ | — | | | $ | 240,794 | |
| Product revenues | | $ | 4,691 |
| | $ | 22,491 |
| | $ | — |
| | $ | 27,182 |
| | Product revenues | | 32,075 | | | 96,406 | | | — | | | — | | | 128,481 | |
| Service revenues | | 46,591 |
| | 8,099 |
| | — |
| | 54,690 |
| | Rental income | | 15,639 | | | 17 | | | 716 | | | — | | | 16,372 | |
Total revenues | Total revenues | | $ | 51,282 |
| | $ | 30,590 |
| | $ | — |
| | $ | 81,872 |
| Total revenues | | $ | 190,732 | | | $ | 102,088 | | | $ | 92,827 | | | $ | — | | | $ | 385,647 | |
Operating expenses | Operating expenses | | | | | | | | | Operating expenses | |
| Operating costs | | 34,456 |
| | 27,239 |
| | — |
| | 61,695 |
| | Operating costs | | 136,999 | | 77,079 | | 72,370 | | — | | | 286,448 |
| Operating depreciation and amortization | | 1,742 |
| | 1,618 |
| | — |
| | 3,360 |
| | Operating depreciation and amortization | | 7,140 | | 5,280 | | 5,476 | | — | | | 17,896 |
Profit before corporate selling, general, and administrative expenses | Profit before corporate selling, general, and administrative expenses | | $ | 15,084 |
| | $ | 1,733 |
| | $ | — |
| | $ | 16,817 |
| Profit before corporate selling, general, and administrative expenses | | $ | 46,593 | | | $ | 19,729 | | | $ | 14,981 | | | $ | — | | | $ | 81,303 | |
Selling, general, and administrative expenses | Selling, general, and administrative expenses | | | | | | 10,726 |
| | 10,726 |
| Selling, general, and administrative expenses | | 38,061 | | 38,061 |
Depreciation and amortization from SG&A | Depreciation and amortization from SG&A | | | | | | 836 |
| | 836 |
| Depreciation and amortization from SG&A | | 6,073 | | 6,073 |
Total selling, general, and administrative expenses | Total selling, general, and administrative expenses | | | | | | $ | 11,562 |
| | $ | 11,562 |
| Total selling, general, and administrative expenses | | $ | 44,134 | | | $ | 44,134 | |
Other expense - net | | | | | | 1,439 |
| | 1,439 |
| |
Other (income) - net | | Other (income) - net | | (734) | | | (734) |
Operating income | Operating income | | | | | | | | 3,816 |
| Operating income | | | | 37,903 |
Interest expense – net | Interest expense – net | | | | | | 463 |
| | 463 |
| Interest expense – net | | 3,743 | | 3,743 |
Income before income taxes | Income before income taxes | | | | | | | | $ | 3,353 |
| Income before income taxes | | | | $ | 34,160 | |
|
| | First Three Quarters Ended, | |
September 9, 2017 | |
| (Thousands) | |
Environmental Services | | Oil Business | | Corporate and Eliminations | | Consolidated | |
First Half Ended, | | First Half Ended, |
June 18, 2022 (168 days) | | June 18, 2022 (168 days) |
(thousands) | | (thousands) | | Environmental Services | | Oil Business | | Industrial and Field Services | | Corporate and Eliminations | | Consolidated |
| | | | | | | | | | | | | | | | | | | |
Revenues | Revenues | | | | | | | | | Revenues | |
| | | Service revenues | | $ | 114,479 | | | $ | 5,212 | | | $ | 24,809 | | | $ | — | | | $ | 144,500 | |
| Product revenues | | $ | 17,215 |
|
| $ | 70,880 |
|
| $ | — |
|
| $ | 88,095 |
| | Product revenues | | 25,013 | | | 114,249 | | | — | | | — | | | 139,262 | |
| Service revenues | | 146,135 |
|
| 15,936 |
|
| — |
|
| 162,071 |
| | Rental income | | 12,228 | | | 23 | | | — | | | — | | | 12,251 | |
Total revenues | Total revenues | | $ | 163,350 |
|
| $ | 86,816 |
|
| $ | — |
|
| $ | 250,166 |
| Total revenues | | $ | 151,720 | | | $ | 119,484 | | | $ | 24,809 | | | $ | — | | | $ | 296,013 | |
Operating expenses | Operating expenses | |
|
|
|
|
|
|
| Operating expenses | |
| Operating costs | | 111,419 |
|
| 76,791 |
|
| — |
|
| 188,210 |
| | Operating costs | | 114,837 | | 70,006 | | 21,695 | | — | | | 206,538 |
| Operating depreciation and amortization | | 5,341 |
|
| 4,624 |
|
| — |
|
| 9,965 |
| | Operating depreciation and amortization | | 5,236 | | 4,209 | | 845 | | — | | | 10,290 |
Profit before corporate selling, general, and administrative expenses | Profit before corporate selling, general, and administrative expenses | | $ | 46,590 |
|
| $ | 5,401 |
|
| $ | — |
|
| $ | 51,991 |
| Profit before corporate selling, general, and administrative expenses | | $ | 31,647 | | | $ | 45,269 | | | $ | 2,269 | | | $ | — | | | $ | 79,185 | |
Selling, general, and administrative expenses | Selling, general, and administrative expenses | | | | |
| 33,871 |
|
| 33,871 |
| Selling, general, and administrative expenses | | 28,759 | | 28,759 |
Depreciation and amortization from SG&A | Depreciation and amortization from SG&A | | | | |
| 2,536 |
| 2,536 |
| Depreciation and amortization from SG&A | | 2,995 | | 2,995 |
Total selling, general, and administrative expenses | Total selling, general, and administrative expenses | | | | |
| $ | 36,407 |
|
| $ | 36,407 |
| Total selling, general, and administrative expenses | | $ | 31,754 | | | $ | 31,754 | |
Other (income) - net | | | | |
| (11,112) |
|
| (11,112) |
| |
Other expense - net | | Other expense - net | | 791 | | 791 |
Operating income | Operating income | | | | |
|
|
| 26,696 |
| Operating income | | | | 46,640 |
Interest expense – net | Interest expense – net | | | | |
| 775 |
|
| 775 |
| Interest expense – net | | 473 | | 473 |
Income before income taxes | Income before income taxes | | | | |
|
|
| $ | 25,921 |
| Income before income taxes | | | | $ | 46,167 | |
|
Intersegment revenues for the first half of fiscal 2023 and fiscal 2022 in the Industrial & Field services segment were $5.2 million and $3.9 million, respectively. The Environmental Services segment and the Oil Business segment had no intersegment revenues for the second quarter of fiscal 2023 and fiscal 2022.
|
| | | | | | | | | | | | | | | | | |
First Three quarters Ended, |
September 10, 2016 |
| (Thousands) | |
Environmental Services | | Oil Business | | Corporate and Eliminations | | Consolidated |
| | | | | | | | | |
Revenues | | | | | | | | |
| Product revenues | | $ | 14,826 |
|
| $ | 60,756 |
|
| $ | — |
|
| $ | 75,582 |
|
| Service revenues | | 141,254 |
|
| 24,041 |
|
| — |
|
| 165,295 |
|
Total revenues | | $ | 156,080 |
|
| $ | 84,797 |
|
| $ | — |
|
| $ | 240,877 |
|
Operating expenses | |
|
|
|
|
|
|
|
| Operating costs | | 106,892 |
|
| 80,762 |
|
| — |
|
| 187,654 |
|
| Operating depreciation and amortization | | 5,166 |
|
| 4,789 |
|
| — |
|
| 9,955 |
|
Profit (loss) before corporate selling, general, and administrative expenses | | $ | 44,022 |
|
| $ | (754 | ) |
| $ | — |
|
| $ | 43,268 |
|
Selling, general, and administrative expenses | |
|
|
|
|
| 34,455 |
|
| 34,455 |
|
Depreciation and amortization from SG&A | |
|
|
|
| 2,487 |
|
| 2,487 |
|
Total selling, general, and administrative expenses | |
|
|
|
| $ | 36,942 |
|
| $ | 36,942 |
|
Other expense - net | |
|
|
|
| 1,238 |
|
| 1,238 |
|
Operating income | |
|
|
|
|
|
| 5,088 |
|
Interest expense – net | |
|
|
|
| 1,432 |
|
| 1,432 |
|
Income before income taxes | |
|
|
|
|
|
| $ | 3,656 |
|
Total assets by segment as of September 9, 2017June 30, 2023 and December 31, 20162022 were as follows:
| | | | | | | | | | | | | | | | | | | | |
(thousands) | | June 30, 2023 | | December 31, 2022 |
Total Assets: | | | | |
| Environmental Services | | $ | 258,031 | | | $ | 253,906 | |
| Oil Business | | 186,153 | | | 190,862 | |
| Industrial and Field Services | | 290,210 | | | 283,683 | |
| Unallocated Corporate Assets | | 78,397 | | | 65,790 | |
Total | | $ | 812,791 | | | $ | 794,241 | |
|
| | | | | | | | | | |
(Thousands) | | September 9, 2017 | | December 31, 2016 |
Total Assets: | | | | |
| Environmental Services | | $ | 129,665 |
| | $ | 129,506 |
|
| Oil Business | | 131,619 |
| | 135,323 |
|
| Unallocated Corporate Assets | | 46,177 |
| | 49,478 |
|
| | Total | | $ | 307,461 |
| | $ | 314,307 |
|
Segment assets for the Environmental Services, and Oil Business, and Industrial & Field Services segments consist of property, plant, and equipment, right-of-use assets, intangible assets, accounts receivable, goodwill, and inventories. Assets for the corporate unallocated amounts consist of property, plant, and equipment used at the corporate headquarters as well as cash and net deferred tax assets.
(10)
(11) COMMITMENTS AND CONTINGENCIES
LEASES
Lessee
The Company leases buildings and property, railcars, machinery and equipment, and various types of vehicles and trailers for use in our operations. Each arrangement is evaluated individually to determine if the arrangement is or contains a lease at inception. The Company has lease agreements with lease and non-lease components and we have elected to not separate lease and non-lease components for all classes of underlying assets. In addition, our lease agreements do not contain any material residual guarantees or restrictive covenants.
Leases may include variable lease payments for common area maintenance, real estate taxes, and truck lease mileage. Variable lease payments are not included in the initial measurement of the right-of-use assets or lease liabilities, and are recorded as lease expense in the period incurred. Options to extend or terminate a lease are included in the lease term when it is reasonably certain that we will exercise that option. We have elected not to record leases with an initial term of 12 months or less on the balance sheet and instead recognize those lease payments on a straight-line basis over the lease term. Leases with initial terms in excess of 12 months are recorded as either operating or financing leases in our Consolidated Balance Sheet.
Right-of-use assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Our leased right-of-use assets are measured at the initial measurement of the lease liability, adjusted for any lease payments made prior to the lease commencement date, less any lease incentives received and other initial direct costs incurred. Our lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments.
Our leases have remaining terms ranging from less than one month to approximately 11 years and may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term. Our finance leases include a fleet of mobile equipment.
Lessor
The Company is a lessor of portions of buildings and property, and equipment such as embedded leases of parts cleaning machines. Each of the Company’s leases is classified as an operating lease, and the vast majority are short-term leases. Variable lease payments include real and personal property taxes, which are based on the lessee’s pro rata portion of such amounts, and excess mileage charges which are computed as the actual miles traveled in a calendar year minus the maximum average mileage allowance as specified per the contract. Options to extend the lease beyond the original terms range from day-to-day renewals to increments of five-year extensions. Options to terminate the lease range from immediate termination upon return of the asset to various written notification periods following a minimum lease term. Options for a lessee to purchase the underlying asset are not contractually specified but may be negotiated on a case-by-case basis. Significant judgments made in determining whether a contract contains a lease include assessments as to whether or not the contract conveys the right to direct the use of an identified asset. Significant judgments made in allocating consideration between lease and non-lease components include techniques applied in estimating the relative stand-alone selling prices of the lease and non-lease components of the contract in cases where a stand-alone selling price is not directly observable. No leased assets are covered by residual value guarantees. The Company manages the risk associated with the residual value of leased assets through such means as performing periodic maintenance and upkeep activities and the inclusion of contractual terms that hold the lessee responsible for damage incurred to leased assets. The Company has made an accounting policy election to exclude from the consideration in the contract, and from variable payments not included in the consideration in the contract, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific lease revenue-producing transaction and collected by the lessor from a lessee.
The Company recognizes rental income on a straight-line basis for that portion of the consideration allocated to the embedded lease component of certain of our parts cleaning contracts. We also recognize rental income on certain subleases of portions of buildings and property.
Rental income was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter Ended, |
| | June 30, 2023 (91 days) | | June 18, 2022 (84 days) |
(thousands) | | Environmental Services | | Oil Business | | Industrial and Field Services | | Total | | Environmental Services | | Oil Business | | Industrial and Field Services | | Total |
Parts Cleaning | | $ | 7,968 | | | $ | — | | | $ | 600 | | | $ | 8,568 | | | $ | 6,233 | | | $ | — | | | $ | — | | | $ | 6,233 | |
Property | | 104 | | | 11 | | | — | | | 115 | | | 32 | | | 9 | | | — | | | 41 | |
Total rental income | | $ | 8,072 | | | $ | 11 | | | $ | 600 | | | $ | 8,683 | | | $ | 6,265 | | | $ | 9 | | | $ | — | | | $ | 6,274 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | First Half Ended, |
| | June 30, 2023 (181 days) | | June 18, 2022 (168 days) |
(thousands) | | Environmental Services | | Oil Business | | Industrial and Field Services | | Total | | Environmental Services | | Oil Business | | Industrial and Field Services | | Total |
Parts Cleaning | | $ | 15,518 | | | $ | — | | | $ | 716 | | | $ | 16,234 | | | $ | 12,172 | | | $ | — | | | $ | — | | | $ | 12,172 | |
| | | | | | | | | | | | | | | | |
Property | | 121 | | | 17 | | | — | | | 138 | | | 56 | | | 23 | | | — | | | 79 | |
Total rental income | | $ | 15,639 | | | $ | 17 | | | $ | 716 | | | $ | 16,372 | | | $ | 12,228 | | | $ | 23 | | | $ | — | | | $ | 12,251 | |
Purchase Obligations
The Company may enter into purchase obligations with certain vendors. They represent expected payments to third party service providers and other commitments entered into during the normal course of our business. These purchase obligations are generally cancelablecancellable 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 $17.4$21.3 million as of September 9, 2017,June 30, 2023, and $9.7$20.7 million as of December 31, 2016,2022, primarily for used oil, solvent, machine purchases, disposal and transportation expenses, and capital expenditures.
Litigation and Claims
The Company may be subject to investigations, claims or lawsuits as a result of operating its business, including matters governed by environmental laws and regulations. The Company may also be subject to tax audits in a variety of jurisdictions. When claims are asserted, the Company evaluates the likelihood that a loss will occur and records a liability for those instances when the likelihood is deemed probable and the exposure is reasonably estimable. The Company carries insurance at levels it believes are adequate to cover loss contingencies based on historical claims activity. When the potential loss exposure is limited to the insurance deductible and the likelihood of loss is determined to be probable, the Company accrues for the amount of the required deductible, unless a lower amount of exposure is estimated. As of September 9, 2017June 30, 2023 and December 31, 2016,2022, the Company had accrued $5.8$3.1 million and $5.5$3.2 million related to loss contingencies and other contingent liabilities, respectively.liabilities.
(11)
(12) INCOME TAXES
The Company deductedIncome tax expense for federal income tax purposes accelerated "bonus" depreciation on the majoritysecond fiscal quarter 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 9, 20172023 was $24.1 million, and the remaining deferred tax asset related to the Company’s state and federal NOL was a tax effected balance of $9.3$3.3 million.
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 could 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 excess tax benefits. As a result of 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.
The Company's effective income tax rate for the thirdsecond quarter of fiscal 20172023 was 35.2%27.7% compared to 28.1%27.0% in the thirdsecond quarter of fiscal 2016.2022. Tax expense for the first half of 2023 was $8.9 million. The Company’s effective income tax rate for the first three quartershalf of fiscal 20172023 was 36.1%26.1% compared to 31.2%26.4% in the first three quartershalf of fiscal 2016.2022. The rate differencedecrease is principally attributable to the differing treatment forincreased impact of certain favorable adjustments to financial reporting and income tax reporting for certain income and expenditures items. The rate increase is attributabledue to decreased levels of profitability as compared to the previous year’s expenditures reported netfirst half of anticipated reimbursement from an unrelated third party for financial reporting purposes but deducted on a gross basis for income tax purposes, which is partially offset by expenditures which are expensed for financial reporting purposes but not deductible for income tax purposes.fiscal 2022.
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 $2.4$2.2 million for uncertain tax positions as of September 9, 2017 and December 31, 2016.June 30, 2023. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.
As of June 30, 2023, the Company believes it is more likely than not that a benefit from foreign net operating loss carryforwards will not be realized. The Company provided a valuation allowance against those foreign net operating loss carryforwards of $0.7 million.
(12)
(13) 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 9, 2017, the number of shares available for issuance under the Plan was 737,639 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) |
Options outstanding at December 31, 2016 | 514,287 |
| | $ | 11.00 |
| | 1.33 |
| | $ | 2,414 |
|
Exercised | (487,764 | ) | | 11.17 |
| | — |
| | — |
|
Options outstanding at September 9, 2017 | 26,523 |
| | $ | 8.04 |
| | 1.37 |
| | $ | 331 |
|
Restricted Stock Compensation/Awards
Annually, the Company grants restricted shares to its Board of Directors. The shares become fully vested one year from their grant date. The fair value of each restricted stock grant is based on the closing price of the Company's common stock on the date of grant. The Company amortizes the expense over the service period, which is the fiscal year in which the award is granted. In addition, the Company may grant restricted shares to certain members of management based on their services and contingent upon continued service with the Company. The restricted shares vest over a period of approximately three years from the grant date. The fair value of each restricted stock grant is based on the closing price of the Company's common stock on the date of grant.
On November 14, 2022, the Company granted 147,623 shares of restricted stock to certain members of Management as part of a Special Incentive Program. Up to 147,623 shares may vest on September 21, 2025. One-third of the shares vest in equal installments on each the first three anniversaries of September 21, 2022, subject to continuous employment or service with the Company through such date. Two-thirds of the shares are subject to the performance-based vesting terms based on the Company achieving certain Share Price Targets as set forth in the agreement during the three-year period beginning on September 21, 2022 (the “Performance Period”) and the Executive remaining employed by the Company through the Performance Period.
The following table shows a summary of restricted sharesshare grants and expense resulting from the awards:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Compensation Expense |
(thousands, except share amounts) | | First Half Ended, | | Unrecognized Expense as of, |
Recipient of Grant | | Grant Date | | Restricted Shares | | June 30, 2023 (181 days) | | June 18, 2022 (168 days) | | June 30, 2023 (181 days) | | June 18, 2022 (168 days) |
Special Incentive Grant | | April, 2018 | | 350,000 | | $ | — | | | $ | 380 | | | $ | — | | | $ | — | |
Members of Management | | February, 2020 | | 41,138 | | — | | | 40 | | | — | | | 47 | |
Members of Management | | February, 2021 | | 35,898 | | 104 | | | 103 | | | 103 | | | 345 | |
Chief Executive Officer | | February, 2021 | | 500,000 | | 502 | | | 1,067 | | | 1,334 | | | 2,814 | |
Members of Management | | February, 2022 | | 75,355 | | 249 | | 245 | | | 735 | | | 1,303 | |
Members of Management | | February, 2023 | | 66,024 | | 310 | | 248 | | | 1,552 | | | — | |
Board of Directors | | April, 2022 | | 17,082 | | — | | | 234 | | | — | | | 246 | |
Special Incentive Grant | | November, 2022 | | 147,623 | | 524 | | — | | | 2,339 | | | — | |
Board of Directors | | May, 2023 | | 14,274 | | 280 | | — | | | 200 | | | — | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Compensation Expense | | | | |
(thousands except for shares total) | | First three quarters Ended, | | Unrecognized Expense as of |
Recipient of Grant | | Grant Date | | Restricted Shares | | September 9, 2017 | | September 10, 2016 | | September 9, 2017 | | December 31, 2016 |
Board of Directors | | April, 2017 | | 14,980 |
| | $ | 168 |
| | $ | 197 |
| | $ | 73 |
| | $ | — |
|
Members of Management | | February, 2015 | | 38,732 |
| | 76 |
| | 83 |
| | 34 |
| | 110 |
|
Members of Management | | January, 2016 | | 43,208 |
| | 72 |
| | 82 |
| | 136 |
| | 208 |
|
Members of Management | | February, 2017 | | 146,564 |
| | 307 |
| | 161 |
| | 1,075 |
| | 1,382 |
|
Chief Executive Officer | | February, 2017 | | 500,000 |
| | 737 |
| | — |
| | 2,798 |
| | — |
|
At June 30, 2023, there was $6.3 million of unrecognized stock-based compensation expense which is expected to be recognized over a weighted-average remaining vesting period of 1.7 years.
In February 2017, as part of Mr. Recatto's employment agreement,On January 8, 2021, the Company grantedand Mr. Brian Recatto entered into an amended Executive Employment Agreement (the “Amended Agreement”) which was effective on February 1, 2021. Pursuant to the Amended Agreement, the Company replaced in its entirety section 4.3 of the First Amendment to the Executive Employment Agreement relating to equity compensation that was effective February 1, 2017. As of February 1, 2021, Mr. Recatto received a restricted stockone-time award of 500,000 shares of commonrestricted stock, which vests throughsubject to the achievement of performance criteria established by the Compensation Committee of the Board of Directors pursuant to the Company's 2019 Incentive Plan.
The award date for such Performance-Based Restricted Stock was on February 1, 2021. Such award was granted pursuant to and governed by the terms of the 2019 Incentive Plan and an award agreement in a form provided by the Company. The Performance-Based Restricted Stock one-time award of 500,000 shares received on February 1, 2021, shall vest on January 202131, 2025 if Mr. Recatto is employed by the Company on that date, in an amount based ondetermined by applying the vesting tableapplicable percentages from the chart below, with the common stock price increaseincreases 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 employmentamended agreement commencement date ($15.00)21.77) 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 on the vesting date). If the stock price does not increase by $5.00, then no shares shall vest.
During the first three quarterssecond quarter of fiscal 2017,2023, the Company recorded approximately $0.7$0.2 million of compensation expense related to this award. In the future, the Company expects to recognize compensation expense of approximately $2.8$1.3 million over the remaining requisite service period, which ends January 31, 2021.2025. The fair value of this restricted stock award as of the grant date was estimated using a Monte Carlo simulation model. Key assumptions used in the Monte Carlo simulation to estimate the grant date
fair value of this award are a risk-free rate of 1.70%0.29%, expected dividend yield of zero, and an expected volatility assumption of 41.73%53.07%.
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| | | | | | | |
Vesting Table |
Increase in Stock Price From the EmploymentAmended Agreement Commencement Date to the Vesting Date | | Total percentagePercentage of Restricted Stock Shares to Be Vested |
Less than $5 per share increase | | —% |
$5 per share increase | | 25% (vest in 125,000 shares) |
$10 per share increase | | 50% (vest in 250,000 shares) |
$15 per share increase | | 75% (vest in 375,000 shares) |
$20 or more per share increase | | 100% (vest in 500,000 shares) |
Provision for possible accelerated vesting of award
If the weighted average closing price of the Company's common stock increases by the marginal levels set forth in the above vesting table for any consecutive 180 consecutive days during anyday period between the award dateFebruary 1, 2021 and final vesting date,January 31, 2025, Mr. Recatto shall become vested in 50% of the corresponding total percentage of restricted shares earned on the last day of the 180 day period.
In addition, on each of December 31, 2021, December 31, 2022, and December 31, 2023, to the extent Mr. Recatto remains employed by the Company under the Amended Agreement on such date, Mr. Recatto shall receive a grant of restricted stock as of such date valued at Five Hundred Thousand Dollars ($500,000), with the number of shares of restricted stock constituting such grant determined by applying the average closing price for a share of the Company’s common stock for the 90-day period ending on such date. Such awards of Time-Based Restricted Stock shall be granted pursuant to and governed by the terms of the 2019 Incentive Plan and an award agreement in a form provided by the Company. The Time-Based Restricted Stock shall vest only if Mr. Recatto remains employed by the Company under the Amended Agreement through December 31, 2023; provided, that, upon a Change of Control of the Company (as such term is defined in the Amended Agreement), all shares of the Time-Based Restricted Stock awarded up through the date of closing of the Change in Control shall become vested, and no further award of Time-Based Restricted Stock shall be awarded. During the second quarter of fiscal 2023, the Company recorded approximately $0.1 million of compensation expense related to this award.
The following table summarizes the restricted stock activity for the periodsecond quarter ended September 9, 2017:June 30, 2023: | | | | | | | | | | | | | | |
Restricted Stock (Nonvested Shares) | | Number of Shares | | Weighted Average Grant-Date Fair Value Per Share |
Nonvested shares outstanding at December 31, 2022 | | 728,693 | | | $ | 21.83 | |
Granted | | 80,298 | | | 37.08 | |
Vested | | (99,487) | | | 25.51 | |
Forfeited | | (28,797) | | | 21.95 | |
Nonvested shares outstanding at June 30, 2023 | | 680,707 | | | $ | 25.79 | |
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| | | | | | | |
Restricted Stock (Nonvested Shares) | | Number of Shares | | Weighted Average Grant-Date Fair Value Per Share |
Nonvested shares outstanding at December 31, 2016 | | 136,171 |
| | $ | 12.42 |
|
Granted | | 659,842 |
| | 15.11 |
|
Vested | | (97,302 | ) | | 13.14 |
|
Forfeited | | (9,045 | ) | | $ | 14.50 |
|
Nonvested shares outstanding at September 9, 2017 | | 689,666 |
| | $ | 14.52 |
|
Employee Stock Purchase Plan
As of September 9, 2017,June 30, 2023, the Company had reserved 154,78231,438 shares of common stock available for purchase under the Employee Stock Purchase Plan of 2008.Plan. In the first three quarterssecond quarter of fiscal 2017,2023, employees purchased 21,3975,070 shares of the Company’s common stock with a weighted average fair market value of $14.92$35.24 per share.
(13)
(14) EARNINGS PER SHARE
The following table reconciles the number of shares outstanding for the third quarters and the first three quarterssecond quarter of fiscal 20172023 and 2016,2022, 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: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter Ended, | | First Half Ended, |
(thousands, except per share amounts) | | June 30, 2023 (91 days) | | June 18, 2022 (84 days) | | June 30, 2023 (181 days) | | June 18, 2022 (168 days) |
Net income | | $ | 8,642 | | | $ | 21,107 | | | $ | 25,231 | | | $ | 33,985 | |
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
Weighted average basic shares outstanding | | 23,681 | | | 23,489 | | | 23,665 | | | 23,482 | |
Dilutive shares for share–based compensation plans | | 250 | | | 155 | | | 233 | | | 158 | |
Weighted average diluted shares outstanding | | 23,931 | | | 23,644 | | | 23,898 | | | 23,640 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net income per share: basic | | $ | 0.36 | | | $ | 0.90 | | | $ | 1.07 | | | $ | 1.45 | |
Net income per share: diluted | | $ | 0.36 | | | $ | 0.89 | | | $ | 1.06 | | | $ | 1.44 | |
| | | | | | | | |
(15) FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The following tables summarize assets measured at fair value on a recurring basis (in millions) as of June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Fair Value Measurements |
Equity Securities (1) | | $— | | $— | | $15.2 | | $15.2 |
(1) Represents a $3.0 million investment the Company made in its privately held battery recycling partner, HBR Retriev Holdco, LLC, a company controlled by the Heritage Group, an affiliate of the Company.
(16) SUBSEQUENT EVENTS
On July 19, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with JFL-Tiger Acquisition Co., Inc., a Delaware corporation (“Parent”), and JFL-Tiger Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Parent (the “Merger,” and together with the transactions contemplated by the Merger Agreement, the “Transaction”).
Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock of the Company then outstanding will be converted into the right to receive $45.50 in cash, without interest (the “Per Share Merger Consideration”), less any applicable withholding taxes, other than any shares as to which dissenters’ rights have been perfected (and not withdrawn or lost) in accordance with applicable law (which will be cancelled and converted into the right to receive a payment determined in accordance with Section 262 of the Delaware General Corporation Law).
The Merger Agreement also provides that immediately prior to the Effective Time, by virtue of the Merger and without any action on the part of the holder thereof (1) each outstanding Company restricted stock award will become fully vested and the restrictions with respect thereto will lapse, and all Company restricted stock awards will be treated in the Merger in the same manner as the other shares of Company Common Stock, and (2) each award of Company restricted stock units (“RSU”) that is outstanding immediately prior to the Effective Time will automatically be cancelled and converted into the right to receive a cash payment in an amount, without interest thereon and subject to applicable withholding taxes, equal to the product of (x) the
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| | | | | | | | | | | | | | | | |
| | Third Quarter Ended, | | First Three Quarters Ended, |
(Thousands) | | September 9, 2017 | | September 10, 2016 | | September 9, 2017 | | September 10, 2016 |
Net income | | $ | 4,757 |
| | $ | 2,411 |
| | $ | 16,560 |
| | $ | 2,516 |
|
Less: Income attributable to noncontrolling interest | | 53 |
| | 76 |
| | 158 |
| | 117 |
|
Net income attributable to Heritage-Crystal Clean, Inc. available to common stockholders | | $ | 4,704 |
| | $ | 2,335 |
| | $ | 16,402 |
| | $ | 2,399 |
|
| | | | | | | | |
Weighted average basic shares outstanding | | 22,686 |
| | 22,267 |
| | 22,515 |
| | 22,246 |
|
Dilutive shares from share–based compensation plans | | 284 |
| | 283 |
| | 298 |
| | 171 |
|
Weighted average diluted shares outstanding | | 22,970 |
| | 22,550 |
| | 22,813 |
| | 22,417 |
|
| | | | | | | | |
Net income per share: basic | | $ | 0.21 |
| | $ | 0.10 |
| | $ | 0.73 |
| | $ | 0.11 |
|
Net income per share: diluted | | $ | 0.20 |
| | $ | 0.10 |
| | $ | 0.72 |
| | $ | 0.11 |
|
Per Share Merger Consideration and (y) the total number of shares of common stock of the Company subject to such award of RSUs as of immediately prior to the Effective Time.
The obligations of the parties to consummate the Merger are subject to the satisfaction or waiver of customary closing conditions set forth in the Merger Agreement, including, among other conditions, (1) the adoption of the Merger Agreement by the affirmative vote of the stockholders of the Company of not less than 75% of the issued and outstanding shares of common stock of the Company (the “Company Stockholder Approval”), (2) the expiration or termination of any waiting period applicable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (3) the absence of a “Company Material Adverse Effect” (as defined in the Merger Agreement) with respect to the Company.
(14) OTHER EXPENSE (INCOME)
Each of the Company, Parent and Merger Sub has made customary representations and warranties and covenants in the Merger Agreement, including covenants to use their respective reasonable best efforts to effect the Transaction, including securing regulatory approvals required by the Merger Agreement. In addition, the Company has agreed to other customary covenants, including, among others, covenants to conduct its business in the ordinary course during the interim period between the execution of the Merger Agreement and the closing of the Merger.
Other expense (income)
The Merger Agreement contains customary termination rights for each of Parent and the Company, including, among others, if (1) the Merger has not been consummated by February 29, 2024 (the “End Date”), (2) the requisite Company Stockholder Approval is not obtained, (3) there is any order or applicable law prohibiting or permanently enjoining the Transaction or (4) the other party breaches its covenants or representations and such breach is not cured within a specified period and would result in the failure of a closing condition in favor of the other party. In addition, the Company may terminate the Merger Agreement in order for the first three quartersboard of fiscal 2017 includesdirectors of the Company to cause or permit the Company to enter into an Alternative Acquisition Agreement with respect to a gainSuperior Proposal, and Parent may terminate the Merger Agreement if the board of $5.1 million receiveddirectors of the Company changes its recommendation in favor of the Transaction. The Merger Agreement further provides that, upon termination of the Merger Agreement under certain specified circumstances, the Company will be required to pay Parent a termination fee of $42,331,515 (except in the first quarter of fiscal 2017 ascase the Merger Agreement is terminated in connection with a result of having received a partial award for a claim made in arbitration and a gain of $3.6 million receivedSuperior Proposal during the second quarter of fiscal 2017 from a settlement agreement, both ofGo-Shop Period, and certain other limited circumstances, in which were relatedcase such termination fee will be $23,584,701), or Parent will be required to our acquisition of FCC Environmental, LLC and International Petroleum Corp. of Delaware in 2014. Additionally, during the third quarter of 2017,pay the Company recorded a gaintermination fee of $3.1 million$72,568,311 (the “Parent Termination Fee”).
The Merger is not subject to a financing condition. Parent has obtained (1) equity financing commitments from having soldcertain investment affiliates of J.F. Lehman & Company, LLC (“JFLCO”) and certain investment affiliates of HarbourVest Partners, and (2) debt financing commitments from certain third-party lenders, to fund the Company's facility locatedtransactions contemplated by the Merger Agreement. The Merger Agreement requires Parent to use its reasonable best efforts to obtain the financing on the terms and conditions described in Pompano Beach, Florida.the financing commitments. The Company is entitled to specific performance, subject to the terms and conditions of the Merger Agreement and the applicable equity commitments, to force Parent to close the transaction if all closing conditions are met.
In addition, an investment affiliate of JFLCO has also provided a limited guarantee in favor of the Company (the “Limited Guarantee”) with respect to certain obligations of Parent and Merger Sub under the Merger Agreement, including a guarantee of payment of the Parent Termination Fee and certain other reimbursement obligations that may be owed by Parent pursuant to the Merger Agreement.
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 3, 2017.1,2023. 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 20162022 filed with the SEC on March 3, 2017.1, 2023. 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 weeksthree months ("thirdsecond quarter" or "quarter") ended June 30, 2023 and thirty-sixtwelve weeks ("first three quarters"second quarter" or "quarter") ended September 9, 2017 and September 10, 2016,June 18, 2022, respectively. "Fiscal 2016"2022" represents the 52-week period ended December 31, 20162022 and "Fiscal 2017"2023" represents the 52-week periodtwelve months ending on December 30, 2017.31, 2023.
Overview
As further detailed in Note 1 to our Financial Statements, beginning with our 2023 fiscal year, we changed our financial reporting cycle to a calendar year-end and end-of-month quarterly reporting cycle. Accordingly, our 2023 fiscal year began on January 1, 2023 (the day after the end of the 2022 fiscal year) and will end on December 31, 2023.
The table below shows the reporting periods as we refer to them in this report, their date ranges, and the number of days in each:
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Reporting Period | | Date Range | | Number of Days |
2023 second quarter | | April 1, 2023 - June 30, 2023 | | 91 |
2022 second quarter | | March 27, 2022 - June 18, 2022 | | 84 |
2023 first half | | January 1, 2023 - June 30, 2023 | | 181 |
2022 first half | | January 2, 2022 - June 18, 2022 | | 168 |
2023 fiscal year | | January 1, 2023 - December 31, 2023 | | 365 |
2022 fiscal year | | January 2, 2022 - December 31, 2022 | | 364 |
As a result of the change in our financial reporting cycle, our 2023 second quarter had 7 more calendar days than our 2022 second quarter. While our 2023 full fiscal year will have one additional day of activity as compared to our 2022 full fiscal year, our 2023 fourth quarter will have 20 fewer calendar days than the corresponding period in our 2022 fiscal year. The second quarter of 2023 includes 5 additional working days as a result of our fiscal quarter change. We estimate that the additional working days resulted in an increase in revenues of 7.8% in the second quarter of 2023 when compared to the second quarter of 2022. The first half of fiscal 2023 includes 9 additional working days as a result of our fiscal quarter change. We estimate that the additional working days resulted in an increase of revenues of 7.0% in the first half of fiscal 2023 when compared to the first half of fiscal 2022.
We provide full service parts cleaning, hazardous and non-hazardous bulk and containerized waste management, used oil collection, re-refining and lubricating base oil product sales, wastewater vacuum truck services, antifreeze collection, recycling and product sales, industrial and field services, primarily to small and medium sized industrial customers as well as vehicle maintenance customers. Weemergency and spill response services, and we own and operate a used oil re-refinery several wastewater treatment plantswhere we re-refine used lubricating oils into high quality lubricant base oil and multiple antifreeze recycling facilities.other products. We believe that we are the second largest provider of industrialfull-service parts cleaning, hazardous and hazardousnon-hazardous waste services to small and mid-sizedused oil collection
services to customers in both the industrial and vehicle maintenance and manufacturing services sectorsectors in North America, andAmerica. We also believe that we haveare the second largest used oil re-refiningre-refiner by capacity in North America.America, and the second largest producer of remanufactured antifreeze in the United States. 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 83105 branch facilitiesand industrial service locations providing services to customers in 4548 states and parts of Canada. We conduct business through twothree principal operating segments: Environmental Services, Oil Business, and Oil Business.Industrial and Field Services.
Our Environmental Services segment revenues are generated primarily from providing parts cleaning, services, containerized waste management and wastewater vacuum truck services as well as selling remanufactured antifreeze recycling, and field services.products. Revenues from this segment accounted for approximately 65%49.9% of our total companyCompany revenues for the first three quarterssecond quarter of fiscal 2017.2023. In the Environmental Services segment, we define and measure same-branch revenues for a given period as the subset of all our branches that have been open and operating throughout and between the periods being compared, and we refer to these as established branches. We calculate average revenues per working day by dividing our revenues by the number of non-holiday weekdays in the applicable fiscal year or fiscal quarter.
Our Oil Business segment consists primarily of our used oil collection and used oil re-refining activities, andalong with our recycled fuel oil ("RFO") sales which together accounted for approximately 35%25.6% of our total companyCompany revenues in the first three quarterssecond quarter of fiscal 2017.2023.
Our Industrial and Field Services segment revenues are generated mainly from providing industrial and field services, emergency and spill response services and non-hazardous waste processing and disposal services. Revenue generated in this segment accounted for approximately 24.5% of our total Company revenues in the second quarter of fiscal 2023.
We have established prices for our services primarily based on the perceived value of those services in the marketplace. Our customer agreements typically provide for annual renewal and price increases. With respect to our oil product sales, some prices are set through contracts or purchase orders with customers, which may be based on the market prices of an underlying commodity or market indicator.
Our operating costs include the costs of obtaining the materials we use in our products and services, such as used oil collected from customers or purchased from third party collectors, solvent, and other chemicals. The used solvent that we retrieve from customers in our product reuse program is accounted for as a reduction in our net cost of solvent under operating costs, whether placed in inventory or sold to a purchaser for reuse. Changes in the price of crude oil can impact operating costs indirectly as it may impact the price we pay for solvent or used oil, although we attempt to offset volatility in the oil markets by managing the spread between the costs we pay forincur to obtain our materials and the prices we charge for our products and services. Operating costs also include transportation of solvents and waste, payments to third parties to recycle or dispose of the waste materials that we collect, and the costs of operating our re-refinery, recycling centers, non-hazardous waste processing facilities, hubs, and branch system including personnel costs (including commissions), facility rent, truck leases, fuel, and maintenance. Our operating costs as a percentage of salesrevenues 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 salesrevenues generally decrease.
We use profit before corporate selling, general, and administrative expenses ("SG&A") as a key measure of segment profitability. We define profit before corporate SG&A expense as revenue less operating costs and depreciation and amortization from operations.
Our corporate selling, general, and administrative expenses include the costs of performing centralized business functions, including sales management at or above the regional level, business management and marketing, billing, receivables management, accounting and finance, information technology,internal audit, logistics management beyond the branch level, environmental health and safety, human resources, and legal.
We operate a used oil re-refinery located in Indianapolis, Indiana, through which we recycle used oil into high quality lubricant base oil and other products. We supply the base oil to firms that produce and market finished lubricants. Our re-refinery has an annual nameplate capacity of approximately 75 million gallons of used oil feedstock, allowing it to produce approximately 4550 million gallons of lubricating base oil per year when operating at full capacity.
Critical Accounting Policies
Critical accounting policies are those that are both important to the accurate portrayal of a company’s financial condition and results and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
In order to prepare financial statements that conform to accounting principles generally accepted in the United States, commonly referred to as GAAP, we make estimates and assumptions that affect the amounts reported in our financial
statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.
With the exception of the adoption of ASU 2016-09 described in Note 2 "Summary of Significant Accounting Policies," thereThere were no material changes during the first three quarterssecond quarter of fiscal 20172023 to the information provided under the heading "Critical Accounting Policies" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2022 except for the fiscal year change as further described in Note 1.
RESULTS OF OPERATIONS
General
The following table sets forth certain operating data as a percentage of revenues for the periods indicated:
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| | For the Second Quarter Ended, | | First Half Ended, |
(thousands) | | June 30, 2023 (91 days) | | June 18, 2022 (84 days) | | June 30, 2023 (181 days) | | June 18, 2022 (168 days) |
| | | | | | | | | | | | |
Revenues | | | | | | | | | | | | |
Service revenues | | $ | 121,342 | | 63.1 | % | | $ | 75,584 | | 48.3 | % | | $ | 240,794 | | 62.4 | % | | $ | 144,500 | | 48.8 | % |
Product revenues | | 62,141 | | 32.3 | % | | 74,789 | | 47.7 | % | | 128,481 | | 33.3 | % | | 139,262 | | 47.0 | % |
Rental income | | 8,683 | | 4.5 | % | | 6,274 | | 4.0 | % | | 16,372 | | 4.2 | % | | 12,251 | | 4.1 | % |
Total revenues | | $ | 192,166 | | 100.0 | % | | $ | 156,647 | | 100.0 | % | | $ | 385,647 | | 100.0 | % | | $ | 296,013 | | 100.0 | % |
Operating expenses | | | | | | | | | | | | |
Operating costs | | $ | 146,387 | | 76.2 | % | | $ | 104,755 | | 66.9 | % | | $ | 286,448 | | 74.3 | % | | $ | 206,538 | | 69.8 | % |
Selling, general, and administrative expenses | * | 20,361 | | 10.6 | % | | 15,024 | | 9.6 | % | | 38,061 | | 9.9 | % | | 28,759 | | 9.7 | % |
Depreciation and amortization | | 11,802 | | 6.1 | % | | 6,777 | | 4.3 | % | | 23,969 | | 6.2 | % | | 13,285 | | 4.5 | % |
Other (income) expense - net | | (265) | | (0.1) | % | | 1,001 | | 0.6 | % | | (734) | | (0.2) | % | | 791 | | 0.3 | % |
Operating income | 13,881 | | 7.2 | % | | 29,090 | | 18.6 | % | | 37,903 | | 9.8 | % | | 46,640 | | 15.8 | % |
Interest expense – net | 1,929 | | 1.0 | % | | 250 | | 0.2 | % | | 3,743 | | 1.0 | % | | 473 | | 0.2 | % |
Income before income taxes | 11,952 | | 6.2 | % | | 28,840 | | 18.4 | % | | 34,160 | | 8.9 | % | | 46,167 | | 15.6 | % |
Provision for income taxes | 3,310 | | 1.7 | % | | 7,733 | | 4.9 | % | | 8,929 | | 2.3 | % | | 12,182 | | 4.1 | % |
Net income | $ | 8,642 | | 4.5 | % | | $ | 21,107 | | 13.5 | % | | $ | 25,231 | | 6.5 | % | | $ | 33,985 | | 11.5 | % |
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| | For the Third Quarter Ended, | | For the First Three Quarters Ended, |
(Thousands) | | September 9, 2017 | | September 10, 2016 | | September 9, 2017 | | September 10, 2016 |
| | | | | | | | | | | | |
Revenues | | | | | | | | | | | | |
Product revenues | | $29,283 | 35.1% | | $27,182 | 33.2% | | $88,095 | 35.2% | | $75,582 | 31.4% |
Service revenues | | 54,048 | 64.9% | | 54,690 | 66.8% | | 162,071 | 64.8% | | 165,295 | 68.6% |
Total Revenues | | $83,331 | 100.0% | | $81,872 | 100.0% | | $250,166 | 100.0% | | $240,877 | 100.0% |
Operating expenses | | | | | | | | | | | | |
Operating costs | | $63,649 | 76.4% | | $61,695 | 75.4% | | $188,210 | 75.2% | | $187,654 | 77.9% |
Selling, general and administrative expenses | | 10,955 | 13.1% | | 10,726 | 13.1% | | 33,871 | 13.5% | | 34,455 | 14.3% |
Depreciation and amortization | | 4,186 | 5.0% | | 4,196 | 5.1% | | 12,501 | 5.0% | | 12,442 | 5.2% |
Other (income) expense - net | | (3,078) | (3.7)% | | 1,439 | 1.8% | | (11,112) | (4.4)% | | 1,238 | 0.5% |
Operating income | | 7,619 | 9.1% | | 3,816 | 4.7% | | 26,696 | 10.7% | | 5,088 | 2.1% |
Interest expense – net | | 276 | 0.3% | | 463 | 0.6% | | 775 | 0.3% | | 1,432 | 0.6% |
Income before income taxes | | 7,343 | 8.8% | | 3,353 | 4.1% | | 25,921 | 10.4% | | 3,656 | 1.5% |
Provision for income taxes | | 2,586 | 3.1% | | 942 | 1.2% | | 9,361 | 3.7% | | 1,140 | 0.5% |
Net income | | 4,757 | 5.7% | | 2,411 | 2.9% | | 16,560 | 6.6% | | 2,516 | 1.0% |
Income attributable to noncontrolling interest | | 53 | 0.1% | | 76 | 0.1% | | 158 | 0.1% | | 117 | —% |
Net income attributable to Heritage-Crystal Clean, Inc. common stockholders | | $4,704 | 5.6% | | $2,335 | 2.9% | | $ | 16,402 |
| 6.6% | | $2,399 | 1.0% |
*Does not include depreciation and amortization related to corporate selling, general, and administrative activity.
Revenues
ForRevenue for the thirdsecond quarter of fiscal 2017, revenues increased $1.52023 was $192.2 million, or 1.8%, from $81.9 compared to $156.6 million in for the thirdsame quarter of fiscal 2016 to $83.32022, an increase of $35.5 million, or 22.7%. The $35.5 million increase in revenue was mainly driven by revenue from the third quarterPatriot acquisition made during the second half of fiscal 2017.2022 as well as higher demand and increased prices for our products and services in our Environmental and Industrial & Field Segments partially offset by the decrease in base oil sales price. For the first three quartershalf of fiscal 2017,2023, revenues increased $9.3$89.6 million, or 3.9%30.3%, from the first three quarters of fiscal 2016 to $250.2$296.0 million in the first three quartershalf of fiscal 2017.2022 to $385.6 million in the first half of 2023 mainly driven by the above mentioned factors. The second quarter of 2023 includes 5 additional working days as a result of our fiscal quarter change. We estimate that the additional working days resulted in an increase in revenues was mainly driven by higher Environmental Services segment revenues year over year due to volume growthof 7.8% in our containerized waste, aqueous parts cleaning, and antifreeze businesses, along with a year over year increase in revenues from our Oil Business segment mainly due to higher pricing for our base oil products, partially offset by lower used oil collection fees.
Operating expenses
Operating costs
Operating costs increased $2.0 million, or 3.2%, from the thirdsecond quarter of fiscal 20162023 when compared to the thirdsecond quarter of 2022. The first half of fiscal 2017. The largest portion2023 includes 9 additional working days as a result of this increase was due toour fiscal quarter change. We estimate that the additional working days resulted in an increase in labor as part of our growth initiatives, higher solvent costs and higher worker's compensation expense. Operating costs increased $0.6 million, or 0.3%, fromrevenues of 7.0% in the first three quartershalf of fiscal 2016 to the first three quarters of fiscal 2017. The slight increase in operating costs for the first three quarters of 20172023 when compared to the first three quartershalf of 2016 was primarilyfiscal 2022.
Operating costs
Operating costs as a percentage of revenue increased to 76.2% during the second quarter of 2023 compared to 66.9% in the second quarter of 2022. The increase is mainly due to the decrease in base oil selling price that resulted in decreased oil revenues without an equal corresponding decrease in cost of goods sold, and also due to higher prices paid for used oil delivered directly to our re-refinerylabor and higher laborrelated benefits, disposal costs, as well as transportation related expenses partially offset by improved route truck productivity,as a result of the absencePatriot acquisition made during the second half of inventory write-downs such as we incurred2022. Operating costs increased $79.9 million, or 38.7%, in the first three quartershalf of fiscal 2016, and lower disposal costs.2023 compared to the first half of fiscal 2022 mainly due to the above mentioned factors.
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 price could cause a decline in the price we pay for parts cleaning solvent and diesel fuel. In the Oil Business, segment, our
operating costs couldand Industrial & Field Services segments may increase or decrease in the future depending on our product and service volumes and changes in the price for crude oil which could directly impact our used oil collection costs and processing costs at our re-refinery.commodity pricing, along with other factors.
Selling, general, and administrative expenses
Selling, general, and administrative expenses as a percentage of revenue increased to 10.6% during the second quarter of 2023 compared to 9.6% in the second quarter of 2022. The increase is mainly due to higher salaries and benefits as well as higher depreciation and amortization costs as a result of the Patriot acquisition made during the second half of 2022. Selling, general, and administrative expenses increased $0.2 million, or 2.1%, from the third quarter of fiscal 2016 to the third quarter of fiscal 2017. Selling, general, and administrative expenses decreased $0.6$9.3 million, or 1.7%32.3%, from the first three quartershalf of fiscal 20162022 to the first three quartershalf of fiscal 2017. The decrease2023 mainly due to the above mentioned factors as well as due to the additional 5 working days in expense was mainly driven by lower legal fees, partially offset by higher incentive compensation and share-based compensation expense.the first half of 2023 compared to the first half of 2022.
OtherInterest expense (income) - net
OtherInterest expense (income) - net was income of $3.1 million for the thirdsecond quarter of fiscal 20172023 and fiscal 2022 was $1.9 million and $0.3 million, respectively. The increase in interest expense is due to higher borrowings during the second quarter of 2023 compared to the second quarter of 2022. Interest expense of $1.4 million- net for the thirdfirst half of fiscal 2023 and 2022 was $3.7 million and $0.5 million respectively. The increase in interest expense during the first half of 2023 is mainly due to the above mentioned factors.
Provision for income taxes
The Company's effective income tax rate for the second quarter of fiscal 2016. Other income for2023 was 27.7% compared to 27.0% in the thirdsecond quarter of fiscal 2017 was mainly driven by a gain of $3.1 million from having sold the Company's facility located in Pompano Beach, Florida.
Other expense (income) - net was2022. The Company’s effective income of $11.1 milliontax rate for the first three quartershalf of fiscal 20172023 was 26.1% compared to expense of $0.2 million for the first three quarters of fiscal 2016. The first three quarters of fiscal 2017 also included a gain of $5.1 million received26.4% in the first half of 2022. The rate decrease is principally attributable to the increased impact of certain favorable adjustments to financial reporting income due to decreased levels of profitability as compared to the first half of fiscal 2022.
Segment Information
As further described in Note 10, prior period segment results presented for comparative purposes below have been recast to reflect the newly reportable segment as a separate segment. The following table presents revenues by reportable segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Second Quarter Ended, | | Change |
(thousands) | | June 30, 2023 (91 days) | June 18, 2022 (84 days) | $ | | % |
Revenues: | | | | | | | | |
| Environmental Services | | $ | 95,965 | | | $ | 78,175 | | | $ | 17,790 | | | 22.8 | % |
| Oil Business | | $ | 49,132 | | | $ | 64,769 | | | $ | (15,637) | | | (24.1) | % |
| Industrial & Field Services | | $ | 47,069 | | | $ | 13,703 | | | $ | 33,366 | | | 243.5 | % |
| Total | | $ | 192,166 | | | $ | 156,647 | | | $ | 35,519 | | | 22.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | First Half Ended, | | Change |
(thousands) | | June 30, 2023 (181 days) | June 18, 2022 (168 days) | $ | | % |
Revenues: | | | | | | | | |
Environmental Services | | $ | 190,732 | | | $ | 151,720 | | | $ | 39,012 | | | 25.7 | % |
Oil Business | | 102,088 | | | 119,484 | | | (17,396) | | | (14.6) | % |
Industrial & Field Services | | 92,827 | | | 24,809 | | | 68,018 | | | 274.2 | % |
Total | | $ | 385,647 | | | $ | 296,013 | | | $ | 89,634 | | | 30.3 | % |
| | | | | | | | | | |
In the second quarter of fiscal 2017 as a result of having received a partial award for a claim made in arbitration and a gain of $3.62023, Environmental Services revenue was $96.0 million receivedcompared to $78.2 million during the second quarter of fiscal 2017 from a settlement agreement, both of which were related to our acquisition of FCC Environmental, LLC and International Petroleum Corp. of Delaware in 2014.
Interest expense - net
Net interest expense for the third quarter of fiscal 2017 was $0.3 million compared to interest expense of $0.5 million in the third quarter of fiscal 2016. In the first three quarters of fiscal 2017 we recorded interest expense of $1.2 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 and International Petroleum Corp. of Delaware in 2014. Net interest expense was $1.4 million for the first three quarters of 2016.
Provision for income taxes
2022. The Company's effective tax rate for the third quarter of fiscal 2017 was 35.2% compared to 28.1% in the third quarter of fiscal 2016. The Company’s effective rate for the first three quarters of fiscal 2017 was 36.1% compared to 31.2% in the first three quarters of fiscal 2016. The rate difference is principally attributable to the differing treatment for financial reporting and income tax reporting for certain income and expenditures items. The rate increase is attributable to the previous year’s expenditures reported net of anticipated reimbursement from an unrelated third party for financial reporting purposes but deducted on a gross basis for income tax purposes, which is partially offset by expenditures which are expensed for financial reporting purposes but not deductible for income tax purposes.
Segment Information
The following table presents revenues by operating segment:
|
| | | | | | | | | | | | | | | | | |
| | | | For the Third Quarter Ended, | | Change |
(Thousands) | | | | | | | | |
| September 9, 2017 | | September 10, 2016 | | $ | | % |
| | | |
Revenues: | | | | | | | | |
| Environmental Services | | $ | 55,042 |
| | $ | 51,282 |
| | $ | 3,760 |
| | 7.3 | % |
| Oil Business | | 28,289 |
| | 30,590 |
| | (2,301 | ) | | (7.5 | )% |
| | Total | | $ | 83,331 |
| | $ | 81,872 |
| | $ | 1,459 |
| | 1.8 | % |
|
| | | | | | | | | | | | | | | | | |
| | | | For the First Three Quarters Ended, | | Change |
(Thousands) | | | | | | | | |
| September 9, 2017 | | September 10, 2016 | | $ | | % |
| | | |
Revenues: | | | | | | | | |
| Environmental Services | | $ | 163,350 |
| | $ | 156,080 |
| | $ | 7,270 |
| | 4.7 | % |
| Oil Business | | 86,816 |
| | 84,797 |
| | 2,019 |
| | 2.4 | % |
| | Total | | $ | 250,166 |
| | $ | 240,877 |
| | $ | 9,289 |
| | 3.9 | % |
In the third quarter of fiscal 2017, Environmental Services revenues increased by $3.8 million, or 7.3%, from $51.3 million in the third quarter of fiscal 2016 to $55.0 million in the third quarter of fiscal 2017. In the first three quarters of fiscal 2017, Environmental Services revenues increased by $7.3 million, or 4.7%, from $156.1 million in the first three quarters of fiscal 2016 to $163.4 million in the first three quarters of fiscal 2017. The22.8% increase in revenue was mainly due to growththe continued increase in demand and higher prices for our aqueous parts cleaning, containerized waste and antifreezeservices compared to the prior year quarter. We experienced revenue increases across all service lines in the segment when compared to the second quarter of business.2022. For the first half of fiscal 2023, Environmental Services revenue was $190.7 million, compared to $151.7 million during the first half of fiscal 2022. The 25.7% increase in revenue was mainly due to the above mentioned factors. The second quarter of 2023 includes 5 additional working days as a result of our fiscal quarter change. We estimate that the additional working days resulted in an increase in revenues of 7.8% in the second quarter of 2023 when compared to the second quarter of 2022. We estimate that the additional working days resulted in an increase in revenues of 7.0% in the first half of fiscal 2023 when compared to the first half fiscal 2022.
During the thirdsecond quarter of fiscal 2017,2023, Oil Business revenue was $49.1 million compared to $64.8 million in the second quarter of fiscal 2022, a decrease of $15.6 million or 24.1%. A decrease in base oil sales volume due to lower demand and base oil sales price were the main drivers of the decrease in revenue compared to the prior year quarter. For the first half of fiscal 2023, Oil Business revenues were down $2.3$102.1 million, or 7.5%,compared to $119.5 million during the first half of fiscal 2022. The decrease in revenue was driven primarily by the above mentioned factors. Additionally, the second quarter of 2023 includes 5 additional working days as a result of our fiscal quarter change. We estimate that the additional working days would have resulted in an increase in revenues of 7.8% in the second quarter of 2023 when compared to the thirdsecond quarter of fiscal 2016. The third quarter revenue decrease was due to lower used oil collection charges2022 if sales volume and lower RFO sales volumes, partially offset by higher selling prices for our base oil products. Inpricing were unchanged year-over-year. We estimate that the additional working days would have resulted in an increase in revenues of 7.0% in the first three quartershalf of fiscal 2017, Oil Business revenues increased $2.0 million, or 2.4%,2023 when compared to the first three quartershalf fiscal 2022, if sales volume and pricing were unchanged year-over-year.
Industrial & Field Services revenue was $47.1 million for the second quarter of fiscal 2016.2023 compared to $13.7 million for the second quarter of fiscal 2022. The $33.4 million increase in revenue was mainly driven by revenue from the Patriot acquisition made during the second half of 2022 and, to a lesser extent, by higher pricingdemand and increased prices for our base oil products, partially offset by lower used oil collection fees. During the first three quarters of fiscal 2017, we sold approximately 28.2services. Industrial & Field Services revenues were $92.8 million, gallons of base oil compared to 29.2$24.8 million gallons during the first three quartershalf of fiscal 2016. During2022. The increase in revenue was driven primarily by the thirdabove mentioned factors. Additionally, the second quarter of fiscal 2017, we produced base oil at2023 includes 5 additional working days as a rate of 91.1% of the nameplate capacityresult of our re-refineryfiscal quarter change. We estimate that the additional working days resulted in an increase in revenues of 7.8% in the second quarter of 2023 when compared to 91.6% during the thirdsecond quarter of 2022. We estimate that the additional working days resulted in an increase in revenues of 7.0% in the first half of fiscal of 2016.2023 when compared to the first half fiscal 2022.
Segment Profit (Loss) Before Corporate Selling, General and Administrative Expenses ("SG&A")
The following table presents profit by operatingreportable segment before corporate SG&A expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Second Quarter Ended, | | Change |
(thousands) | | June 30, 2023 (91 days) | | June 18, 2022 (84 days) | | $ | | % |
Profit before corporate SG&A* | | | | | | | | |
| Environmental Services | | $ | 23,865 | | | $ | 18,594 | | | $ | 5,271 | | | 28.3% |
| Oil Business | | 5,676 | | | 26,803 | | | (21,127) | | | (78.8)% |
| Industrial & Field Services | | $ | 7,524 | | | $ | 1,178 | | | $ | 6,346 | | | 538.7% |
| Total | | $ | 37,065 | | | $ | 46,575 | | | $ | (9,510) | | | (20.4)% |
| | | | First Half Ended, | | Change |
(thousands) | | (thousands) | | June 30, 2023 (181 days) | | June 18, 2022 (168 days) | | $ | | % |
Profit before corporate SG&A* | | Profit before corporate SG&A* | | | | | | | | |
| | | Environmental Services | | $ | 46,593 | | | $ | 31,647 | | | $ | 14,946 | | | 47.2% |
| | | | | | | | | | | | | | | | | | | Oil Business | | 19,729 | | | 45,269 | | | (25,540) | | | (56.4)% |
| | For the Third Quarter Ended, | | Change | | Industrial & Field Services | | $ | 14,981 | | | $ | 2,269 | | | $ | 12,712 | | | 560.2% |
| | | | | | | | | | Total | | $ | 81,303 | | | $ | 79,185 | | | $ | 2,118 | | | 2.7% |
(Thousands) | | September 9, 2017 | | September 10, 2016 | | $ | | % | |
| | |
Profit before corporate SG&A* | | | | | | | | | |
| Environmental Services | | $ | 14,950 |
| | $ | 15,084 |
| | $ | (134 | ) | | (0.9 | )% | | | | | | | | |
| Oil Business | | $ | 1,383 |
| | 1,733 |
| | (350 | ) | | (20.2 | )% | |
| Total | | $ | 16,333 |
| | $ | 16,817 |
| | $ | (484 | ) | | (2.9 | )% | |
|
| | | | | | | | | | | | | | | | | |
| | | For the First Three Quarters Ended, | | Change |
(Thousands) | | | | | | | | |
| September 9, 2017 | | September 10, 2016 | | $ | | % |
| | | |
Profit (loss) before corporate SG&A* | | | | | | | | |
| Environmental Services | | $ | 46,590 |
| | $ | 44,022 |
| | $ | 2,568 |
| | 5.8 | % |
| Oil Business | | 5,401 |
| | (754 | ) | | 6,155 |
| | — | % |
| Total | | $ | 51,991 |
| | $ | 43,268 |
| | $ | 8,723 |
| | 20.2 | % |
*Includes depreciation and amortization related to operating activity but not depreciation and amortization related to corporate
selling, general, and administrative activity. For further discussion see Note 910 in our consolidated financial statements included elsewhere in this document.
Environmental Services profit before corporate SG&A expense decreased $0.1increased $5.3 million, or 0.9%28.3%, in the thirdsecond quarter of fiscal 2023 compared to the second quarter of fiscal 20172022. Operating margin for second quarter of 2023 was 24.9% compared to the thirdrecast margin of 23.8% in the second quarter of fiscal 2016 primarily due to higher2022. The increase in operating margin was mainly driven by increased revenues in comparison with the increase in our labor costs from the addition of sales and transportation expenses.
service resources along with higher solvent and workers' compensation expense, partly offset by lower disposal costs. Environmental Services profit before corporate SG&A expense increased $2.6$14.9 million, or 5.8%47.2%, in the first three quartershalf of fiscal 20172023 compared to the first three quartershalf of fiscal 2016 primarily due2022. Operating margin for first half of fiscal 2023 was 24.4% compared to higher revenue, lower disposal costs, and the absence of inventory write-downs, partially offset by higher service labor and solvent costs20.9% in the first three quartershalf of fiscal 2017 compared to2022. The increase in operating margin was mainly driven by increased revenues in comparison with the first three quarters of fiscal 2016.increase in our labor and transportation expenses.
Oil Business incomeprofit before corporate SG&A expense decreased $0.4$21.1 million, or 78.8%, in the thirdsecond quarter of fiscal 20172023 compared to the thirdsecond quarter of fiscal2016 2022. Oil Business segment operating margin decreased to 11.6% in the second quarter of 2023 compared to 41.4% in the second quarter of fiscal 2022. The lower operating margin compared to the second quarter of 2022 was mainly due to contingent liabilities for potential fines accrueda decrease in revenue along with increased transportation expenses, labor costs and higher cost of goods sold.
Oil Business profit before corporate SG&A expense decreased $25.5 million or 56.4% in the first half of fiscal 2023 compared to the first half of fiscal 2022. The factors which drove the decrease during the quarter, see "Legal Proceedings." Oil Business incomefirst half of fiscal 2023 compared to the first half of fiscal 2022 were mainly due to a decrease in revenue along with higher transportation expenses and labor costs.
Industrial & Field Services profit before corporate SG&A expense increased $6.2$6.3 million, or 538.7%, in the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022. Operating margin for second quarter of 2023 was 16.1% compared to the recast margin of 8.6% in the second quarter of 2022. The increase in operating margin was mainly driven by increased revenues in comparison with the increased in operating costs as a result of the Patriot acquisition made during the second half of 2022.
Industrial & Field Services profit before corporate SG&A expense increased $12.7 million or 560.2% in the first three quartershalf of fiscal 2017,2023 compared to the first three quartershalf of fiscal 2016. The improvement was primarily driven by the increase in the selling price2022. Operating margin for base oil, as well as improved productivity from our oil collection routes during the first three quartershalf of fiscal 20172023 was 16.1% compared to the recast margin of 9.1% in the first three quartershalf of fiscal 2016. These improvements were partially offset2022. The increase in operating margin was mainly driven by lower sales volumeincreased revenues in comparison with the increased in operating costs as a result of base oil and RFO products as well as lower pricing for our used oil collection servicethe Patriot acquisition made during the first three quarterssecond half of fiscal 2017 compared to the first three quarters of fiscal 2016.2022.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash and Cash Equivalents
As of September 9, 2017June 30, 2023 and December 31, 2016,2022, cash and cash equivalents were $33.5$33.1 million and $36.6$22.1 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. During the first three quarters of 2017, the Company used approximately $34.2 million of cash to pay down debt as part of entering into a new Credit Agreement.
Debt and Financing Arrangements
On February 21, 2017,March 18, 2021, Heritage-Crystal Clean, LLC, (the “Company”), entered into an Amended and Restated Credit Agreement (the "Agreement"), by and among the Company, entered into aits parent, Heritage-Crystal Clean, Inc., and the Company’s subsidiaries identified therein and Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., and Wells Fargo Bank, National Association. The new Credit Agreement ("Credit Agreement") replacing the prior Credit Agreement ("Prior Credit Agreement") dated as of June 29, 2015. The Credit Agreement provides for borrowings of up to $95.0$100.0 million, subjectin the form of a revolving facility, of which $15 million can be used in the form of a Swing Line loan. The Agreement also provided for up to an additional $50.0 million of borrowings using an accordion feature upon approval of the lenders. On August 3, 2022, the Company entered into an Amendment (Amendment No. 1 to the satisfactionAgreement "the Amendment") which increased the amount of certain terms and conditions, comprisedborrowing under the revolving credit line to $150.0 million. The Company utilized the credit line to finance $115.0 million of a term loanthe acquisition of $30.0 million andPatriot Environmental Services Inc. (see Note 3). The Amendment also provides for up to $65.0an additional $50.0 million of borrowings under the revolving loan portion. The actual amount available under the revolving loan portionan accordion feature upon approval 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.lenders.
Loans made under the Credit Agreement, as amended, may be Base Rate Loans or LIBORSecured Overnight Financing Rate ("SOFR") Loans, at the election of the CompanyBorrower 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”)SOFR plus a margin of 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. LIBOR1.00%. SOFR rate loans have an interest rate equal to (i) the LIBORSOFR rate plus (ii) a variable margin of between 1.75%1.50% and 2.75%2.25% 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,August 2022, the Company entered into a First Amendmentincurred an additional $0.1 million of debt issuance costs related to the Credit Agreement that expands the Company's ability to make dispositions without bank group approval.
Asamendment of the Effective date of the Credit Agreement February 21, 2017, the effectivecredit agreement and drawdown.
The Company's weighted average interest rate onfor all debt for the Term A loansecond quarter ended June 30, 2023 was 3.28% and the effective rate on the revolving loan was 3.28%6.6%.
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'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 3.253.50 to 1.00 for the fiscal quarter in which such permitted acquisition occurs and the three immediately following fiscal quarters and will thereafter revert to 3.00 to 1.00;1.00.
The Credit Agreement places certain limitations on acquisitions and the payment of dividends.
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 9, 2017June 30, 2023 and December 31, 2016,2022, the Company was in compliance with all covenants under bothits Credit Agreements.Agreement. As of September 9, 2017June 30, 2023 and December 31, 2016,2022, the Company, had $0.9 million and $3.0$6.0 million of standby letters of credit issued, respectively, and $64.1$59.0 million and $27.6$54.0 million was available for borrowing under the Credit Facility,bank credit facility, respectively. The actual amount available under the revolving loan portion of the Credit Agreement is limited by the Company's total leverage ratio.
The Company's weighted average interest rate for all debt as of September 9, 2017 and September 10, 2016 was 3.6% and 3.2%, respectively. As of September 9, 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, we may need to raise additional funds through debt or equity offerings. Adequate funds may not be available when needed or may not be available on terms favorable to us. If additional funds are raised by issuing equity securities, dilution to existing stockholders may result. If
we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
Summary of Cash Flow Activity
| | | | | | | | | | | | | | |
| | First Half Ended, |
(thousands) | | June 30, 2023 (181 days) | | June 18, 2022 (168 days) |
Net cash provided by (used in): | | | | |
Operating activities | | $ | 46,839 | | | $ | 39,168 | |
Investing activities | | (25,321) | | | (18,840) | |
Financing activities | | (10,471) | | | (2,837) | |
Net increase in cash and cash equivalents | | $ | 11,047 | | | $ | 17,491 | |
|
| | | | | | | | |
| | For the First Three Quarters Ended, |
(Thousands) | | September 9, 2017 | | September 10, 2016 |
Net cash provided by (used in): | | | | |
Operating activities | | $ | 32,019 |
| | $ | 23,999 |
|
Investing activities | | (5,336 | ) | | (14,690 | ) |
Financing activities | | (29,841 | ) | | (3,150 | ) |
Net (decrease) increase in cash and cash equivalents | | $ | (3,158 | ) | | $ | 6,159 |
|
The most significant items affecting the comparison of our operating activities for the thirdsecond quarter of fiscal 20172023 and the thirdsecond quarter of fiscal 20162022 are summarized below:
Net Cash Provided by Operating Activities —
•Earnings increase — Our increasedecrease in net income forduring the first three quartershalf of fiscal 2017 favorably2023 unfavorably impacted our net cash provided by operating activities by $14.0$8.8 million compared to the first three quarters fiscal 2016. Net income was favorably impacted, on a pre-tax basis, by a paymenthalf 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 2014.2022.
Accounts Payable — The decrease in accounts payable unfavorably affected cash flows from operating activities by $12.6 million in the first three quarters of fiscal 2017 compared to the first three quarters of fiscal 2016. The decrease in accounts payable in the first three quarters of fiscal 2017 was mainly driven by cash outlays of our legal fees payables.
Accrued expenses — In the first three quarters of fiscal 2017, the decrease in accrued expenses unfavorably affected cash flows from operating activities by $1.5 million compared to the first three quarters of fiscal 2016 driven mainly by higher cash outlays for incentive compensation and severance payments.
Accounts•Accounts Receivable — The decrease in accounts receivable during the first half of 2023 had a favorable impact on cash provided by operating activities of $7.7$26.6 million compared to the increase in accounts receivable during the first half of fiscal 2022. The favorable decrease in accounts receivable is as a result of lower base oil sales price and increased collection efforts.
•Accounts Payable — The decrease in accounts payable had an unfavorable impact on cash provided by operating activities of $11.6 million in the first three quartershalf of fiscal 2017 compared to the first three quarters of fiscal 2016 primarily2023. The decrease in accounts payable was partially due to receipt of $4.3 million relatedintentionally prepaying invoices in June 2023 due to a settlement agreement with the sellers of FCC Environmental.
pending ERP system conversion that went live on July 1, 2023.
Net Cash Used in Investing Activities —
•Capital expenditures — We used $9.5 million and $12.6 million formade capital expenditures during the first three quarters of fiscal 2017 and the first three quarters of fiscal 2016, respectively. During the first three quarters of fiscal 2017, we spent $4.0 million for capital improvements to the re-refinery, compared to $4.8 million on capital improvements at the re-refinery in the first three quarters of fiscal 2016. Additionally, in the first three quarters of fiscal 2017, we spent approximately $3.1 million for purchases of parts cleaning machines compared to $3.2 million in the first three quarters of fiscal 2016. The remaining $2.4 million of capital expenditures in the first three quarters of fiscal 2017 was for other items including leasehold improvements and intangible assets compared to approximately $3.1 million spent in the first three quarters of fiscal 2016 for other items.as follows: | | | | | | | | | | | | | | |
| | First Half Ended, |
(millions) | | June 30, 2023 (181 days) | | June 18, 2022 (168 days) |
Facility purchases, construction, and improvements | | $ | 15.1 | | | $ | 3.1 | |
Parts cleaning machines | | 6.1 | | 2.9 |
Trucks and trailers | | 3.4 | | 2.9 |
Re-refinery capital improvements | | 1.8 | | 4.1 |
IT and other corporate projects | | 0.5 | | 2.9 |
| | | | |
Total | | $ | 26.9 | | | $ | 15.9 | |
Proceeds from the disposal of assets — During the third quarter, the Company received $4.1 million of cash from having sold a facility located in Pompano Beach, Florida.
Net Cash Used in Investing Activities —
Proceeds from New Credit Agreement — We received $30.0 million of proceeds from our new Term Loan.
Repayment of our Old Credit Agreement — We made $64.2 million of repayments of 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.credit facility. Interest on this facility is based upon variable interest rates. Our weighted average borrowings under our Credit Facilitybank credit facility during the first three quarterssecond quarter of fiscal 2017 were $37.42023 was $85.3 million, and the annual effective interest rate forduring the Credit Facility for the first three quarterssecond quarter of fiscal 20172023 was 3.6%6.6%. We currently do not hedge against interest rate risk. Based on the foregoing, a hypothetical 1%1.0% increase or decrease in interest rates would have resulted in a $0.2 million change of $0.4 million to our interest expense in the first three quarterssecond quarter of fiscal 2017.2023.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding financial disclosures.
Changes in Internal Control Over Financial Reporting
There washave been no changechanges in the Company'sCompany’s internal controls over financial reporting that occurred during the first three quarters of fiscal 2017second quarter ended June 30, 2023 that hashave materially affected, or isare reasonably likely to materially affect, the Company'sCompany’s internal controlscontrol over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
There were no material developments during the second quarter of fiscal 2023 with respect to the legal proceedings previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
In October 2016,
ITEM 1A. RISK FACTORS
Reference is made to the United States Environmental Protection Agency (USEPA) issued a Noticefactors set forth under the caption “Disclosure Regarding Forward-Looking Statements” in Part I, Item 2 of Intentthis quarterly report on Form 10-Q and other risk factors described in our annual report on Form 10-K for fiscal 2022 filed with the SEC on March 1, 2023, which are incorporated herein by reference. There have not been any material changes to file an administrative complaint against the Companyrisk factors previously disclosed in our annual report on Form 10-K for certain alleged violationsfiscal 2022, except as set forth below.
The Merger, the pendency of the Emergency PlanningMerger or our failure to consummate the Merger could have a material adverse effect on our business, results of operations, financial condition and Community Right to Know Act and regulations under the Clean Water Act (involving Spill Prevention, Control and Countermeasure plans). price of our common stock.
We have respondedentered into the Merger Agreement pursuant to which we have agreed to merge with an affiliate of J.F. Lehman & Company (“Parent”). The completion of the Merger is subject to certain closing conditions, including approval of the Merger Agreement by our stockholders, receipt of regulatory approvals and such other conditions to completion as set forth in the Merger Agreement. There is no assurance that all of the various conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected timeframe, or at all. Our ongoing business may be materially adversely affected by the announcement or the pendency of the Merger, and we would be subject to a number of risks, including the following:
•we may experience negative publicity, which could have an adverse effect on our ongoing operations including, but not limited to, retaining and attracting employees and maintaining our relationships with existing customers and obtaining potential new customers;
•we will be required to pay certain significant costs relating to the NoticeMerger, regardless of if the Merger is consummated, such as for example legal, accounting, financial advisory, regulatory, printing and other professional services fees, which may relate to activities that we would not 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 a result of further communications regarding this matter, we have accrued an estimated liability of an immaterial amount during the third quarter.
In March 2017, the Delaware Department of Natural Resources and Environmental Control (DNREC) issued a Cease and Desist Order (Order) related to the company's activities to clean up and shutdown our facility located in Wilmington, DE which we acquired as part of our acquisition of FCC Environmental and International Petroleum Corporation. The Order required the Company to submit analytical and shipping documentation related to our clean-up activities as well as to submit to DNREC a plan on how the remaining material at the facility was to be sampled, tested, removed and disposed. We have responded to the Order and have provided DNREC with information in accordance with their request. We continue to have discussions with DNREC regarding the issues included in the Order. As a result of further communications regarding this matter, we have accrued an estimated liability of an immaterial amount during the third quarter.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In June 2017,undertaken other than in connection with the exerciseMerger;
•except during the go shop period contemplated by the Merger Agreement, we are unable to solicit other acquisition proposals during the pendency of the Merger;
•while the Merger Agreement is in effect, we are subject to restrictions on our business activities, including, among other things, restrictions on our ability to engage in certain kinds of material transactions, or incurring certain indebtedness, which could prevent us from pursuing strategic business opportunities, taking actions with respect to the business that we may consider advantageous and responding effectively and/or timely to competitive pressures and industry developments, and may as a result materially adversely affect our business, results of operations and financial condition;
•matters relating to the Merger require substantial commitments of time and resources by our management, which could result in the distraction of management from ongoing business operations and pursuing other opportunities that could have been beneficial to us; and
•we may commit significant time and resources to defending against litigation (from our stockholders or otherwise) related to the Merger.
If the Merger is not consummated, the risks described above may materialize or be worsened, and they may have a material adverse effect on our business, results of operations, financial condition and the price of our common stock, optionsparticularly to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed. If the Merger is not consummated, investor confidence could decline, stockholder litigation could be brought against us, our directors and/or officers, relationships with existing and prospective customers, service providers, investors, lenders and other business partners may be adversely impacted, we may be unable to attract or retain key personnel, our employees could be distracted and their productivity decline and profitability may be adversely impacted due to costs incurred in connection with the pending Merger. We may experience negative reactions from the financial markets, including negative impacts on our stock price, and it is uncertain when, if ever, the price of our shares would return to the prices at which our shares traded prior to the failure of the proposed Merger. If the Merger is not consummated, including as a result of our stockholders failing to approve the Merger, our stockholders will not receive any payment for their shares of our common stock in connection with the Merger. Instead, we will remain a public company, our common stock will continue to be listed and traded on The Nasdaq Stock Market and registered
under the Securities Exchange Act of 1934, as amended, and we will be required to continue to file periodic reports with the SEC.
Even if successfully completed, there are certain risks to our stockholders from the Merger, including:
•the amount of cash to be paid per share under the Merger Agreement is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or operating results or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;
•the fact that receipt of the all-cash per share consideration under the Merger Agreement is taxable to stockholders that are treated as U.S. holders for U.S. federal income tax purposes; and
•the fact that, if the Merger is completed, our stockholders will not participate in any future growth potential or benefit from any future increase in the value of the Company.
The proposed Merger is subject to approval of our stockholders as well as the satisfaction of other closing conditions, including government consents and approvals, some or all of which may not be satisfied or completed within the expected timeframe, or at all.
The proposed Merger may not be completed within the expected timeframe, or at all, as a result of various factors and conditions, some of which are beyond our control. Completion of the Merger is subject to a number of closing conditions, including, among others, (i) the adoption of the Merger Agreement by certain employees,the affirmative vote of the stockholders of the Company purchasedof not less than 75% of the issued and outstanding shares of Company common stock, (ii) the expiration or termination of any waiting period applicable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (iii) the absence of a “Company Material Adverse Effect” (as defined in the Merger Agreement) with respect to the Company. We can provide no assurance that all required consents and approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable), and, even if all required consents and approvals can be obtained and all closing conditions are satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such consents and approvals or the timing of the completion of the Merger. Many of the conditions to completion of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied (or waived, if applicable). Other developments beyond our control, including, but not limited to, changes in domestic or global economic, political or industry conditions may affect the timing or success of the Merger. Additionally, under circumstances specified in the Merger Agreement, we or Parent may terminate the Merger Agreement. Any adverse consequence of the pending Merger could be exacerbated by any delays in completion of the Merger or by the termination of the Merger Agreement.
The obligation of each party to the Merger Agreement to consummate the Merger is also subject to the accuracy of the representations and warranties of the other party (subject to customary materiality qualifications) and compliance in all material respects with the covenants and agreements contained in the Merger Agreement as of the closing of the Merger, including, with respect to us, covenants to conduct our business in the ordinary course and to not engage in certain kinds of material transactions prior to closing of the Merger. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, in connection with a change in the recommendation of our Board of Directors to enter into an agreement for a Superior Proposal (as defined in the Merger Agreement). As a result, we cannot assure you that the Merger will be completed, even if our stockholders approve the Merger, or that, if completed, it will be exactly on the terms set forth in the Merger Agreement or within the expected timeframe.
We will be subject to various uncertainties while the Merger is pending that may cause disruption and may make it more difficult to maintain relationships with our employees and third-party business partners.
Our efforts to complete the Merger could cause substantial disruptions in, and create uncertainty surrounding, our business, which may materially adversely affect our business, results of operations and financial condition. Uncertainty as to whether the Merger will be completed may affect our ability to recruit prospective employees or to retain and motivate existing employees. Employee retention may be particularly challenging while the Merger is pending because employees may experience uncertainty about their roles following the Merger. A substantial amount of our management’s and employees’ attention will be directed toward the completion of the Merger and thus be diverted from our day-to-day operations.
Uncertainty as to the future could adversely affect our business and our relationship with third parties. For example, certain of our customers may decide not to work with us anymore as a result of the proposed Merger, which could result in a permanent loss of such customers even if the Merger is not consummated. Changes to or termination of existing business relationships could adversely affect our revenue, earnings and financial condition, as well as the market price of our common stock. The adverse effects of the pendency of the Merger could be exacerbated by any delays in completion of the Merger or by the termination of the Merger Agreement.
While the Merger is pending and the Merger Agreement is in effect, we are subject to restrictions on our business activities.
While the Merger is pending and the Merger Agreement is in effect, we are generally required to conduct our business in the ordinary course. Pursuant to the terms of the Merger Agreement, we are restricted from taking certain specified actions without Parent’s prior consent, which is not to be unreasonably withheld, conditioned or delayed. These limitations including, among other things, certain restrictions on our ability to amend our organizational documents; acquire other businesses and assets; make certain investments; repurchase, reclassify or issue securities; make loans; pay dividends; incur indebtedness; enter into certain contracts; change accounting policies or procedures; settle certain litigation; change tax classifications and elections; or take certain actions relating to intellectual property of the Company. These restrictions could prevent us from pursuing strategic business opportunities and taking actions with respect to our business that we may consider advantageous and may, as a result, materially and adversely affect our business, results of operations and financial condition. Adverse effects arising from these employeesrestrictions during the pendency of the Merger could be exacerbated by any delays in consummation of the Merger or termination of the Merger Agreement.
The Merger Agreement limits our ability to pursue alternatives to the Merger and may discourage other companies from trying to acquire us for greater consideration than what Parent has agreed to pay.
The Merger Agreement contains provisions that make it more difficult for us to sell our business to a total of 1,073 shares of its common stockcompany other than Parent. These provisions include a general prohibition on us soliciting any acquisition proposal or offer for a purchasecompeting transaction following the conclusion of the “go-shop” period provided for in the Merger Agreement, which will conclude at 11:59 p.m. Eastern time on August 23, 2023. If we terminate the Merger Agreement in connection with our Board of Directors’ authorization for us to enter into a definitive agreement to consummate an alternative transaction contemplated by a superior proposal, we will be required to pay a termination fee of $23,584,701. We may also be required to pay the $23.6 million termination fee if we or Parent terminate the Merger Agreement under certain other circumstances specified in the Merger Agreement.
These provisions might discourage a third party that has an interest in acquiring all or a significant part of the Company from considering or proposing an acquisition, even if the party were prepared to pay consideration with a higher per share cash or market value than the cash value proposed to be received in the Merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.
In certain instances, the Merger Agreement requires us to pay a termination fee to Parent, which could affect the decisions of a third party considering making an alternative acquisition proposal.
In certain specified circumstances further described in the Merger Agreement, in connection with the termination of the Merger Agreement, we will be required to pay Parent a termination fee of $42.3 million, except in the case the Merger Agreement is terminated in connection with a Superior Proposal during the go-shop period, and certain other limited circumstances, in which case such termination fee will be $23.6 million (the “Company Termination Payment”), including if Parent terminates the Merger Agreement after the Company Board changes its recommendation to the stockholders or if the Company terminates the Merger Agreement to enter into an alternative acquisition agreement with respect to a Superior Proposal. This payment could affect the structure, pricing and terms proposed by a third party seeking to acquire or merge with us and could discourage a third party from making a competing acquisition proposal or inquiry, including a proposal that would be more favorable to our stockholders than the Merger. For these and other reasons, termination of the Merger Agreement could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the price of $16.00 per share forour common stock.
We may be the sole purposestarget of satisfyingsecurities class action and derivative lawsuits and other legal or regulatory proceedings, which could result in substantial costs and may delay or prevent the minimum tax withholding obligationsMerger from being completed.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger agreements. Even if such lawsuits or other legal or regulatory proceedings are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment in any such lawsuits or proceedings could result in monetary damages payable by the Company, which could have a negative impact on our liquidity, results of operations and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the employees. No shares were repurchased inproposed Merger, then that injunction may delay or prevent the open market.proposed Merger from being completed, which may exacerbate the other risks described herein and adversely affect our business, results of operation and financial condition.
The following table shows the Company's stock repurchase activity during the three months ended September 9, 2017:
|
| | | | | | | | | | | | | |
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 |
June 2017 | | 1,073 |
| | $ | 16.00 |
| | — |
| | — |
|
(a) Shares withheld for income tax liabilities upon stock option exercises
ITEM 6. EXHIBITS
| | | | | |
| |
10.131.1 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS*99.1 | |
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: | August 9, 2023 | By: | /s/ Mark DeVita |
| | | |
Date: | October 19, 2017 | By: | /s/ Mark DeVita |
| | | |
| | | Mark DeVita |
| | | Executive Vice President & Chief Financial Officer |