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

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 2023
 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _________________to _________________

Commission File Number 001-33987

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HERITAGE-CRYSTAL CLEAN, INC.
(Exact name of registrant as specified in its charter)
Delaware 26-0351454
State or other jurisdiction of (I.R.S. Employer
Incorporation Identification No.)

2000 Center Drive
Suite East C300
Hoffman Estates, IL 60192
(Address of principal executive offices and zip code)  

Registrant’s telephone number, including area code: (847) 836-5670
Securities registered pursuant to Section 12(b) of the Act:
Title of each ClassTrading SymbolName of Exchange on which registered
Common Stock, par value $0.01 per shareHCCINASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” "smaller
1


reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company   ☐
Emerging growth company   ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x

On MayAugust 8, 2023, there were outstanding 24,349,95524,370,405 shares of Common Stock, $0.01 par value, of Heritage-Crystal Clean, Inc.



2


Table of Contents
 

3


PART I

    ITEM 1. FINANCIAL STATEMENTS
Heritage-Crystal Clean, Inc.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
March 31,
2023
December 31,
2022
June 30,
2023
December 31,
2022
(unaudited)(unaudited)
ASSETSASSETSASSETS
Current assets:Current assets:Current assets:
Cash and cash equivalentsCash and cash equivalents$35,338 $22,053 Cash and cash equivalents$33,100 $22,053 
Accounts receivable - netAccounts receivable - net113,069 114,408 Accounts receivable - net104,704 114,408 
Inventory - netInventory - net47,294 40,727 Inventory - net47,024 40,727 
Assets held for saleAssets held for sale— 1,125 Assets held for sale— 1,125 
Other current assetsOther current assets10,840 12,989 Other current assets14,652 12,989 
Total current assetsTotal current assets206,541 191,302 Total current assets199,480 191,302 
Property, plant and equipment - netProperty, plant and equipment - net225,581 222,942 Property, plant and equipment - net232,318 222,942 
Right of use assetsRight of use assets124,857 123,742 Right of use assets126,290 123,742 
Equipment at customers - netEquipment at customers - net26,827 26,465 Equipment at customers - net30,157 26,465 
Software and intangible assets - netSoftware and intangible assets - net99,747 102,335 Software and intangible assets - net97,091 102,335 
GoodwillGoodwill112,236 112,236 Goodwill112,236 112,236 
Other assetsOther assets15,219 15,219 Other assets15,219 15,219 
Total assetsTotal assets$811,008 $794,241 Total assets$812,791 $794,241 
LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:Current liabilities:Current liabilities:
Accounts payableAccounts payable$54,535 $55,087 Accounts payable$52,602 $55,087 
Current portion of lease liabilitiesCurrent portion of lease liabilities28,298 27,277 Current portion of lease liabilities28,490 27,277 
Contract liabilities - netContract liabilities - net3,213 2,525 Contract liabilities - net3,259 2,525 
Accrued salaries, wages, and benefitsAccrued salaries, wages, and benefits9,104 12,443 Accrued salaries, wages, and benefits9,339 12,443 
Taxes payableTaxes payable7,200 6,037 Taxes payable3,211 6,037 
Other current liabilitiesOther current liabilities10,755 12,382 Other current liabilities10,553 12,382 
Current portion of long term debt5,000 — 
Total current liabilitiesTotal current liabilities118,105 115,751 Total current liabilities107,454 115,751 
Lease liabilities, net of current portion Lease liabilities, net of current portion101,571 100,738 Lease liabilities, net of current portion103,426 100,738 
Other long term liabilitiesOther long term liabilities642 986 Other long term liabilities770 986 
Long-term debt, net of current portion84,431 89,383 
Long-term debt - netLong-term debt - net84,479 89,383 
Deferred income taxesDeferred income taxes60,298 57,155 Deferred income taxes60,765 57,155 
Total liabilitiesTotal liabilities$365,047 $364,013 Total liabilities$356,894 $364,013 
STOCKHOLDERS' EQUITY:STOCKHOLDERS' EQUITY:STOCKHOLDERS' EQUITY:
Common stock - 26,000,000 shares authorized at $0.01 par value, 23,664,515 and 23,593,163 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively$237 $236 
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, respectivelyCommon 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 capitalAdditional paid-in capital207,673 208,533 Additional paid-in capital208,913 208,533 
Retained earningsRetained earnings238,415 221,826 Retained earnings247,057 221,826 
Accumulated other comprehensive lossAccumulated other comprehensive loss(364)(367)Accumulated other comprehensive loss(310)(367)
Total stockholders' equityTotal stockholders' equity445,961 430,228 Total stockholders' equity455,897 430,228 
Total liabilities and stockholders' equityTotal liabilities and stockholders' equity$811,008 $794,241 Total liabilities and stockholders' equity$812,791 $794,241 
 See accompanying notes to financial statements.
4


Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Income
(In Thousands, Except per Share Amounts)
(Unaudited)
First Quarter Ended, Second Quarter Ended,First Half Ended,
March 31, 2023
(90 days)
March 26, 2022
(84 days)
June 30, 2023
(91 days)
June 18, 2022
(84 days)
June 30, 2023
(181 days)
June 18, 2022
(168 days)
RevenuesRevenuesRevenues
Service revenues$119,452 $68,916 Service revenues$121,342 $75,584 $240,794 $144,500 
Product revenues66,340 64,473 Product revenues62,141 74,789 128,481 139,262 
Rental income7,691 5,977 Rental income8,683 6,274 16,372 12,251 
Total revenuesTotal revenues$193,483 $139,366 Total revenues$192,166 $156,647 $385,647 $296,013 
Operating expensesOperating expensesOperating expenses
Operating costs$140,062 $101,783 Operating costs$146,387 $104,755 $286,448 $206,538 
Selling, general, and administrative expenses17,700 13,735 Selling, general, and administrative expenses20,361 15,024 38,061 28,759 
Depreciation and amortization12,168 6,507 Depreciation and amortization11,802 6,777 23,969 13,285 
Other (income) - net(469)(210)Other (income) expense - net(265)1,001 (734)791 
Operating incomeOperating income24,022 17,551 Operating income13,881 29,090 37,903 46,640 
Interest expense – netInterest expense – net1,814 223 Interest expense – net1,929 250 3,743 473 
Income before income taxesIncome before income taxes22,208 17,328 Income before income taxes11,952 28,840 34,160 46,167 
Provision for income taxesProvision for income taxes5,619 4,450 Provision for income taxes3,310 7,733 8,929 12,182 
Net incomeNet income$16,589 $12,878 Net income$8,642 $21,107 $25,231 $33,985 
Net income per share: basicNet income per share: basic$0.70 $0.55 Net income per share: basic$0.36 $0.90 $1.07 $1.45 
Net income per share: dilutedNet income per share: diluted$0.70 $0.54 Net income per share: diluted$0.36 $0.89 $1.06 $1.44 
Number of weighted average shares outstanding: basicNumber of weighted average shares outstanding: basic23,649 23,476 Number of weighted average shares outstanding: basic23,681 23,489 23,665 23,482 
Number of weighted average shares outstanding: dilutedNumber of weighted average shares outstanding: diluted23,863 23,636 Number of weighted average shares outstanding: diluted23,931 23,644 23,898 23,640 

 
See accompanying notes to financial statements.
5




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

First Quarter Ended, Second Quarter Ended,First Half Ended,
March 31, 2023
(90 days)
March 26, 2022
(84 days)
June 30, 2023
(91 days)
June 18, 2022
(84 days)
June 30, 2023
(181 days)
June 18, 2022
(168 days)
Net incomeNet income$16,589 $12,878 Net income$8,642 $21,107 $25,231 $33,985 
Other comprehensive income:Other comprehensive income:
Currency translation adjustments46 Currency translation adjustments54 (121)57 (75)
Total other comprehensive income:$$46 Total other comprehensive income (loss):$54 $(121)$57 $(75)
Comprehensive incomeComprehensive income$16,592 $12,924 Comprehensive income$8,696 $20,986 $25,288 $33,910 

See accompanying notes to financial statements.
6


Heritage-Crystal Clean, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(In Thousands, Except Share Amounts)
For the FirstSecond Quarter Ended March 31,June 30, 2023 and March 26,June 18, 2022
(Unaudited)


First Quarter Ended,
March 31, 2023
Second Quarter Ended,Second Quarter Ended,
June 30, 2023June 30, 2023
SharesPar
Value
Common
Additional Paidin
Capital
Retained EarningsAccumulated Other Comprehensive LossTotal EquitySharesPar
Value
Common
Additional Paidin
Capital
Retained EarningsAccumulated Other Comprehensive LossTotal Equity
Balance, December 31, 202223,593,163 $236 $208,533 $221,826 $(367)$430,228 
Balance, March 31, 2023Balance, March 31, 202323,664,515 $237 $207,673 $238,415 $(364)$445,961 
Net incomeNet income— — — 16,589 — 16,589 Net income— — — 8,642 — 8,642 
Currency translation adjustmentCurrency translation adjustment— — — — Currency translation adjustment— — — — 54 54 
Issuance of common stock – ESPPIssuance of common stock – ESPP4,775 — 148 — — 148 Issuance of common stock – ESPP5,070 — 170 — — 170 
Share-based compensationShare-based compensation66,577 1,127 — — 1,128 Share-based compensation18,064 — 1,070 — — 1,070 
Share repurchases to satisfy tax withholding obligations— — (2,135)— — (2,135)
Balance at March 31, 202323,664,515 $237 $207,673 $238,415 $(364)$445,961 
Balance at June 30, 2023Balance at June 30, 202323,687,649 $237 $208,913 $247,057 $(310)$455,897 
First Quarter Ended,
March 26, 2022
Second Quarter Ended,Second Quarter Ended,
June 18, 2022June 18, 2022
SharesPar
Value
Common
Additional Paidin
Capital
Retained EarningsAccumulated Other Comprehensive LossTotal EquitySharesPar
Value
Common
Additional Paidin
Capital
Retained EarningsAccumulated Other Comprehensive LossTotal Equity
Balance at January 1, 202223,473,931 $235 $204,920 $137,067 $(166)$342,056 
Balance, March 26, 2022Balance, March 26, 202223,477,764 $235 $206,390 $149,945 $(120)$356,450 
Net incomeNet income— — — 12,878 — 12,878 Net income— — — 21,107 — 21,107 
Currency translation adjustmentCurrency translation adjustment— — — — 46 46 Currency translation adjustment— — — — (121)(121)
Issuance of common stock – ESPPIssuance of common stock – ESPP3,833 — 117 — — 117 Issuance of common stock – ESPP4,794 — 134 — — 134 
Share-based compensationShare-based compensation— — 1,353 — — 1,353 Share-based compensation11,487 — 1,174 — — 1,174 
Share repurchases to satisfy tax withholding obligationsShare repurchases to satisfy tax withholding obligations— — (1,402)— — (1,402)
Balance at June 18, 2022Balance at June 18, 202223,494,045 $235 $206,296 $171,052 $(241)$377,342 
Balance at March 26, 202223,477,764 $235 $206,390 $149,945 $(120)$356,450 


7


8


First Half Ended,
June 30, 2023
SharesPar Value CommonAdditional Paid–in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Equity
Balance, December 31, 202223,593,163 $236 $208,533 $221,826 $(367)$430,228 
Net income— — — 25,231 — 25,231 
Currency translation adjustment— — — — 57 57 
Issuance of common stock – ESPP9,845 — 318 — — 318 
Share-based compensation84,641 2,197 — — 2,198 
Share repurchases to satisfy tax withholding obligations— — (2,135)— — (2,135)
Balance at June 30, 202323,687,649 $237 $208,913 $247,057 $(310)$455,897 
First Half Ended,
June 18, 2022
SharesPar Value CommonAdditional Paid–in CapitalRetained EarningsAccumulated Other Comprehensive IncomeTotal Equity
Balance, January 1, 202223,473,931 $235 $204,920 $137,067 $(166)$342,056 
Net income— — — 33,985 — 33,985 
Currency translation adjustment— — — — (75)(75)
Issuance of common stock – ESPP8,627 — 251 — — 251 
Share-based compensation11,487 — 2,527 — — 2,527 
Share repurchases to satisfy tax withholding obligations— — (1,402)— — (1,402)
Balance at June 18, 202223,494,045 $235 $206,296 $171,052 $(241)$377,342 



79


Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
First Quarter Ended, First Half Ended,
March 31, 2023
(90 days)
March 26, 2022
(84 days)
June 30, 2023
(181 days)
June 18, 2022
(168 days)
Cash flows from Operating Activities:Cash flows from Operating Activities: Cash flows from Operating Activities: 
Net incomeNet income$16,589 $12,878 Net income$25,231 $33,985 
Adjustments to reconcile net income to net cash provided by operating activities:Adjustments to reconcile net income to net cash provided by operating activities:Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortizationDepreciation and amortization12,168 6,507 Depreciation and amortization23,969 13,285 
Provision for civil action settlementProvision for civil action settlement— 750 
Uncollectible provisionUncollectible provision(358)147 Uncollectible provision1,270 453 
Share-based compensationShare-based compensation1,258 1,493 Share-based compensation2,455 2,785 
Deferred taxesDeferred taxes3,143 399 Deferred taxes3,610 944 
Other, netOther, net(106)84 Other, net(10)1,099 
Changes in operating assets and liabilities:Changes in operating assets and liabilities:Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable Decrease (increase) in accounts receivable1,697 (7,681) Decrease (increase) in accounts receivable8,434 (18,207)
(Increase) in inventory (Increase) in inventory(6,568)(659) (Increase) in inventory(6,297)(6,685)
Decrease in other current assets3,274 819 
Decrease (increase) in other current assets Decrease (increase) in other current assets(538)2,345 
(Decrease) increase in accounts payable (Decrease) increase in accounts payable(2,141)6,210  (Decrease) increase in accounts payable(3,462)8,091 
(Decrease) increase in accrued liabilities (Decrease) increase in accrued liabilities(3,297)4,393  (Decrease) increase in accrued liabilities(7,823)323 
Cash provided by operating activitiesCash provided by operating activities$25,659 $24,590 Cash provided by operating activities$46,839 $39,168 
Cash flows from Investing Activities:Cash flows from Investing Activities:  Cash flows from Investing Activities:  
Capital expendituresCapital expenditures$(9,946)$(9,146)Capital expenditures$(26,899)$(15,936)
Proceeds from sale of assetsProceeds from sale of assets1,292 Proceeds from sale of assets1,578 96 
Investment in RetrievInvestment in Retriev— (3,000)
Cash used in investing activitiesCash used in investing activities$(8,654)$(9,145)Cash used in investing activities$(25,321)$(18,840)
Cash flows from Financing Activities:Cash flows from Financing Activities:  Cash flows from Financing Activities:  
Repayments under line of creditRepayments under line of credit(5,000)— 
Repayment of principal on finance leasesRepayment of principal on finance leases(1,733)(765)Repayment of principal on finance leases(3,654)(1,686)
Share repurchases to satisfy tax withholding obligationsShare repurchases to satisfy tax withholding obligations(2,135)— Share repurchases to satisfy tax withholding obligations(2,135)(1,402)
Proceeds from the issuance of common stockProceeds from the issuance of common stock148 117 Proceeds from the issuance of common stock318 251 
Cash used in financing activitiesCash used in financing activities$(3,720)$(648)Cash used in financing activities$(10,471)$(2,837)
Net increase in cash and cash equivalentsNet increase in cash and cash equivalents13,285 14,797 Net increase in cash and cash equivalents11,047 17,491 
Cash and cash equivalents, beginning of periodCash and cash equivalents, beginning of period22,053 56,269 Cash and cash equivalents, beginning of period22,053 56,269 
Cash and cash equivalents, end of periodCash and cash equivalents, end of period$35,338 $71,066 Cash and cash equivalents, end of period$33,100 $73,760 
Supplemental disclosure of cash flow information:Supplemental disclosure of cash flow information:  Supplemental disclosure of cash flow information:  
Income taxes paidIncome taxes paid$45 $18 Income taxes paid$9,683 $11,796 
Cash paid for interestCash paid for interest2,093 73 Cash paid for interest3,558 140 
Supplemental disclosure of non-cash information:Supplemental disclosure of non-cash information: Supplemental disclosure of non-cash information: 
Payables for construction in progressPayables for construction in progress1,714 1,112 Payables for construction in progress1,926 874 

See accompanying notes to financial statements.

810



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

March 31,June 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 waste disposal, emergency and spill response, and industrial and field services to vehicle maintenance businesses, manufacturers and other industrial businesses, as well as utilities and governmental entities. The Company owns and operates a used oil re-refinery where it re-refines used oils and sells high quality base oil for use in the manufacture of finished lubricants as well as other re-refinery products. The Company also has multiple locations where it dehydrates used oil. The oil processed at these locations is primarily sold as recycled fuel oil. The Company also operates twelve 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.

Effective January 1, 2023, the Company 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 parts 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, containerized hazardous and non-hazardous waste removal services, and wastewater vacuum services through the branch network. Rental income includes embedded lease income from certain parts cleaning contracts.
"Oil Business," which consists of the Company's used oil collection, recycled fuel oil sales, used oil re-refining activities, and used oil filter removal and disposal services. Product revenues primarily consist of sales of re-refined base oil, re-refinery co-products and recycled fuel oil; service revenues include revenues from used oil collection activities, collecting and disposing of wastewater and removal and disposal of used oil filters.
"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.

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. Our future fiscal years will begin on January 1 and end on December 31. Historically,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:

911


Reporting PeriodDate RangeNumber of Days
2023 second quarterApril 1, 2023 - June 30, 202391
2022 second quarterMarch 27, 2022 - June 18, 202284
2023 first quarterhalfJanuary 1, 2023 - March 31,June 30, 202390181
2022 first quarterhalfJanuary 2, 2022 - March 26,June 18, 202284168
2023 fiscal yearJanuary 1, 2023 - December 31, 2023365
2022 fiscal yearJanuary 2, 2022 - December 31, 2022364

As a result of the change in our financial reporting cycle, our 2023 second quarter and 2023 first quarterhalf had 67 and 13 more calendar days of activity, respectively, than our 2022 second quarter and 2022 first quarter.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.



1012


(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, 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 during the firstsecond quarter of fiscal 2023 except for the fiscal year change as further described in Note 1.


In the opinion of management, all adjustments and disclosures necessary for the fair presentation of these interim statements have been included
1113



(3)    BUSINESS COMBINATIONS

On August 3, 2022, Heritage-Crystal Clean, LLC, completed its acquisition of all of the capital stock of Patriot Environmental Services, Inc. ("Patriot"), a leading provider of environmental services across the Western United States specializing in emergency response, industrial services, OSRO spill response and a wide variety of waste services. Total consideration for the acquisition was approximately $156.9 million in cash subject to various adjustments such as a working capital adjustment and seller indemnification obligations. To date, there have been no adjustments to the purchase price. Goodwill recognized from the acquisition of Patriot, represents the excess of the estimated purchase consideration transferred over the estimated fair value of the assets acquired and liabilities assumed. The Company has not finalized the purchase price allocation for the acquisition as of March 31,June 30, 2023. The following balances of the purchase price allocation 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. Factors leading to goodwill being recognized are the Company’s expectation of synergies from combining operations of Patriot, and the Company as well as the value of intangible assets that are not separately recognized, such as the assembled workforce. Transaction costs incurred in conjunction with the acquisition of Patriot were approximately $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, net of cash acquired, related to Patriot at the acquisition date:


(thousands)
Patriot Environmental Services, Inc.(1)
Accounts receivable$25,381 
Other current assets2,034 
Property, plant, & equipment33,968 
Intangible assets62,200 
Goodwill62,541 
Accounts payable and accruals(12,929)
Deferred tax liabilities(16,313)
Total purchase price, net of cash acquired$156,882 
Less: contingent consideration— 
Less: placed in escrow2,780 
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
1214


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.
First Quarter Ended,
(thousands, except per share data)March 31, 2023
(90 days)
March 26, 2022
(84 days)
Total revenues$193,483 $169,446 
Net income$16,589 $11,587 
Net income per share: basic$0.70 $0.49 
Net income per share: diluted$0.70 $0.49 
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 
1315



(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:
First Quarter Ended,Second Quarter Ended,
March 31, 2023
(90 days)
March 26, 2022
(84 days)
June 30, 2023
(91 days)
June 18, 2022
(84 days)
Total Net Sales by Major Lines of Business (thousands)
Total Net Sales by Major Lines of Business (thousands)
Environmental ServicesOil BusinessIndustrial and Field ServicesTotalEnvironmental ServicesOil BusinessIndustrial and Field ServicesTotal
Total Net Sales by Major Lines of Business (thousands)
Environmental ServicesOil BusinessIndustrial and Field ServicesTotalEnvironmental ServicesOil BusinessIndustrial and Field ServicesTotal
Parts Cleaning, Containerized Waste, & related products/servicesParts Cleaning, Containerized Waste, & related products/services$56,658 $— $1,469 $58,127 $45,900 $— $1,049 $46,949 Parts Cleaning, Containerized Waste, & related products/services$57,885 $— $1,455 $59,340 $49,217 $— $1,103 $50,320 
Vacuum Services & Wastewater TreatmentVacuum Services & Wastewater Treatment20,344 — 6,426 26,770 13,533 — 3,767 17,300 Vacuum Services & Wastewater Treatment21,116 — 6,458 27,574 15,089 — 6,061 21,150 
Industrial & Field ServicesIndustrial & Field Services— — 37,747 37,747 — — 6,290 6,290 Industrial & Field Services— — 38,556 38,556 — — 6,539 6,539 
Antifreeze BusinessAntifreeze Business9,676 — — 9,676 7,654 — — 7,654 Antifreeze Business8,439 — — 8,439 7,118 — — 7,118 
Environmental Services - OtherEnvironmental Services - Other522 — — 522 495 — — 495 Environmental Services - Other453 — — 453 486 — — 486 
Re-refinery Product SalesRe-refinery Product Sales— 46,809 — 46,809 — 49,139 — 49,139 Re-refinery Product Sales— 41,820 — 41,820 — 54,198 — 54,198 
Oil Collection Services & RFOOil Collection Services & RFO— 4,738 — 4,738 — 4,313 — 4,313 Oil Collection Services & RFO— 6,002 — 6,002 — 9,253 — 9,253 
Oil Filter BusinessOil Filter Business— 1,403 — 1,403 — 1,249 — 1,249 Oil Filter Business— 1,299 — 1,299 — 1,309 — 1,309 
Revenues from Contracts with CustomersRevenues from Contracts with Customers87,200 52,950 45,642 185,792 67,582 54,701 11,106 133,389 Revenues from Contracts with Customers87,893 49,121 46,469 183,483 71,910 64,760 13,703 150,373 
Rental IncomeRental Income7,567 117 7,691 5,963 14 — 5,977 Rental Income8,072 11 600 8,683 6,265 — 6,274 
Total RevenuesTotal Revenues$94,767 $52,957 $45,759 $193,483 $73,545 $54,715 $11,106 $139,366 Total Revenues$95,965 $49,132 $47,069 $192,166 $78,175 $64,769 $13,703 $156,647 

1416


First Half Ended,
June 30, 2023
(181 days)
June 18, 2022
(168 days)
Total Net Sales by Major Lines of Business (thousands)
Environmental ServicesOil BusinessIndustrial and Field ServicesTotalEnvironmental ServicesOil BusinessIndustrial and Field ServicesTotal
Parts cleaning, containerized waste, & related products/services$114,543 $— $2,924 $117,467 $95,340 $— $1,836 $97,176 
Wastewater Vacuum Services41,460 — 12,883 54,343 28,397 — 10,144 38,541 
Field Services— — 76,304 76,304 — — 12,829 12,829 
Antifreeze Business18,115 — — 18,115 14,774 — — 14,774 
Environmental Services - Other975 — — 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 Customers175,093 102,071 92,111 369,275 139,492 119,461 24,809 283,762 
Rental income15,639 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)(thousands)March 31, 2023December 31, 2022(thousands)June 30, 2023December 31, 2022
Contract assetsContract assets$— $133 Contract assets$— $133 
Contract liabilitiesContract liabilities3,213 2,658 Contract liabilities3,259 2,658 
Contract liabilities - netContract liabilities - net$3,213 $2,525 Contract liabilities - net$3,259 $2,525 

During the fiscal quarter ended MarchJune 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 inof 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.

1517



(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 firstsecond quarter ended March 31,June 30, 2023, and the fiscal year ended December 31, 2022 consisted of the following:
(thousands)(thousands)March 31,
2023
December 31,
2022
(thousands)June 30,
2023
December 31,
2022
TradeTrade$106,802 $111,118 Trade$105,263 $111,118 
Less: allowance for uncollectible accountsLess: allowance for uncollectible accounts3,988 4,496 Less: allowance for uncollectible accounts5,527 4,496 
Trade - netTrade - net102,814 106,622 Trade - net99,736 106,622 
Related partiesRelated parties5,354 6,777 Related parties4,437 6,777 
OtherOther4,901 1,009 Other531 1,009 
Total accounts receivable - netTotal accounts receivable - net$113,069 $114,408 Total accounts receivable - net$104,704 $114,408 

The following table provides the changes in the Company’s allowance for uncollectible accounts for the first quarterhalf ended March 31,June 30, 2023, and the fiscal year ended December 31, 2022:
(thousands)(thousands)March 31,
2023
December 31,
2022
(thousands)June 30,
2023
December 31,
2022
Balance at beginning of periodBalance at beginning of period$4,496 $2,928 Balance at beginning of period$4,496 $2,928 
Provision for uncollectible accountsProvision for uncollectible accounts(358)2,269 Provision for uncollectible accounts1,270 2,269 
Accounts written off, net of recoveriesAccounts written off, net of recoveries(150)(701)Accounts written off, net of recoveries(239)(701)
Balance at end of periodBalance at end of period$3,988 $4,496 Balance at end of period$5,527 $4,496 
1618




(6)    INVENTORY

The carrying value of inventory consisted of the following:
(thousands) (thousands)March 31,
2023
December 31,
2022
(thousands)June 30,
2023
December 31,
2022
Solvents and solutionsSolvents and solutions$12,661 $10,792 Solvents and solutions$11,829 $10,792 
Used oil and processed oilUsed oil and processed oil19,105 14,904 Used oil and processed oil18,991 14,904 
MachinesMachines6,475 6,329 Machines7,206 6,329 
Drums and suppliesDrums and supplies6,787 6,476 Drums and supplies6,543 6,476 
OtherOther2,697 2,666 Other2,910 2,666 
Total inventoryTotal inventory47,725 41,167 Total inventory47,479 41,167 
Less: machine refurbishing reserveLess: machine refurbishing reserve431 440 Less: machine refurbishing reserve455 440 
Total inventory - netTotal inventory - net$47,294 $40,727 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 net realizable value, net of any reserves for excess, obsolete, or unsalable inventory. The Company monitors its inventory levels at each of its locations and evaluates inventories for excess or slow-moving items. If circumstances indicate the cost of inventories exceed their recoverable value, inventories are reduced to net realizable value. The Company had no inventory write downs during the second quarter and first quarterhalf of fiscal 2023 or 2022.


(7)    GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is measured as a residual amount as of the acquisition date, which in most cases results in measuring goodwill as an excess of the purchase consideration transferred plus the fair value of any noncontrolling interest in the acquiree over the fair value of the net assets acquired, including any contingent consideration. The Company tests goodwill for impairment annually in the fourth quarter and in interim periods if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company's determination of fair value requires certain assumptions and estimates, such as margin expectations, market conditions, growth expectations, expected changes in working capital, etc., regarding expected future profitability and expected future cash flows. The Company reports and tests goodwill for impairment only in its Environmental Services and 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 analyzed the relative fair values of each acquisition and assigned themgoodwill 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, 2022 to March 31,June 30, 2023:
(thousands)(thousands)Environmental ServicesIndustrial and Field ServicesTotal(thousands)Environmental ServicesIndustrial and Field ServicesTotal
Goodwill at December 31, 2022Goodwill at December 31, 2022Goodwill at December 31, 2022
Gross carrying amount Gross carrying amount$37,650 $74,586 $112,236  Gross carrying amount$37,650 $74,586 $112,236 
Accumulated impairment loss— — — 
Net book value at December 31, 2022Net book value at December 31, 2022$37,650 $74,586 $112,236 Net book value at December 31, 2022$37,650 $74,586 $112,236 
Acquisitions— — — 
Goodwill at March 31, 2023
Goodwill at June 30, 2023Goodwill at June 30, 2023
Gross carrying amount Gross carrying amount37,650 74,586 $112,236  Gross carrying amount37,650 74,586 $112,236 
Accumulated impairment loss— — — 
Net book value at March 31, 2023$37,650 $74,586 $112,236 
Net book value at June 30, 2023Net book value at June 30, 2023$37,650 $74,586 $112,236 


1719


The following is a summary of software and other intangible assets:
March 31, 2023December 31, 2022June 30, 2023December 31, 2022
(thousands)(thousands)Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount(thousands)Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Customer & supplier relationshipsCustomer & supplier relationships$62,268 $27,168 $35,100 $62,268 $25,762 $36,506 Customer & supplier relationships$62,268 $28,655 $33,613 $62,268 $25,762 $36,506 
PermitsPermits60,690 3,547 57,143 60,690 2,697 57,993 Permits60,690 4,577 56,113 60,690 2,697 57,993 
SoftwareSoftware13,806 7,642 6,164 13,643 7,378 6,265 Software10,090 3,992 6,098 13,643 7,378 6,265 
Non-compete agreementsNon-compete agreements4,421 3,739 682 4,421 3,665 756 Non-compete agreements4,413 3,799 614 4,421 3,665 756 
Patents, formulae, and licensesPatents, formulae, and licenses1,769 987 782 1,769 971 798 Patents, formulae, and licenses1,769 1,003 766 1,769 971 798 
Other*Other*597 721 (124)597 580 17 Other*601 714 (113)597 580 17 
Total software and intangible assetsTotal software and intangible assets$143,551 $43,804 $99,747 $143,388 $41,053 $102,335 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.

Amortization expense was $2.7$2.9 million for the firstsecond quarter ended March 31,June 30, 2023, and $1.4 million for the firstsecond quarter ended March 26,June 18, 2022. Amortization expense was $5.6 million for the first half ended June 30, 2023, and $2.8 million for the first half ended June 18, 2022.

The weighted average useful lives of software and other intangibles are as follows:
Weighted Average Useful Life (years)
Permits17
Patents, formulae, & licenses15
Customer and supplier relationships12
Software9
Non-compete agreements5
Other7

    The estimated amortization expense for the remainder of fiscal 2023 and each of the five succeeding fiscal years is as follows:
(millions)(millions)(millions)
Fiscal YearFiscal YearAmortization ExpenseFiscal YearAmortization Expense
20232023$7.52023$4.8
202420248.520248.5
202520257.420257.5
202620266.920267.0
202720276.820276.9
202820286.820286.8

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.

1820



(8)   ACCOUNTS PAYABLE

Accounts payable consisted of the following:
(thousands)(thousands)March 31,
2023
December 31,
2022
(thousands)June 30,
2023
December 31,
2022
Accounts payableAccounts payable$54,398 $54,935 Accounts payable$51,763 $54,935 
Accounts payable - related partiesAccounts payable - related parties137 152 Accounts payable - related parties839 152 
Total accounts payableTotal accounts payable$54,535 $55,087 Total accounts payable$52,602 $55,087 


(9)   DEBT AND FINANCING ARRANGEMENTS
Bank Credit Facility

On March 18, 2021, Heritage-Crystal Clean, LLC, (the “Company”), entered into an Amended and Restated Credit Agreement (the "Agreement"), by and among the Company, its parent, Heritage-Crystal Clean, Inc., and the Company’s subsidiaries identified therein and Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., and Wells Fargo Bank, National Association. The new Agreement provides for borrowings of up to $100.0 million, in the form of a revolving facility, of which $15 million can be used in the form of a Swing Line loan. The Agreement also provided for up to an additional $50.0 million of borrowings using an accordion feature upon approval of the lenders. On August 3, 2022, the Company entered into an Amendment (Amendment No. 1 to the Agreement "the Amendment") which increased the amount of borrowing under the revolving credit line to $150.0 million. The Company utilized the credit line to finance $115.0 million of the acquisition of Patriot Environmental Services Inc. (see Note 3). The Amendment also provides for up to an additional $50.0 million of borrowings under an accordion feature upon approval of the lenders.

Loans made under the Agreement, as amended, may be Base Rate Loans or Secured Overnight Financing Rate ("SOFR") Loans, at the election of the Borrower subject to certain exceptions. Base Rate Loans have an interest rate equal to (i) the higher of (a) the federal funds rate plus 0.5%, (b) the SOFR plus a margin of 1%, or (c) Bank of America's prime rate, plus a margin of 1.00%. SOFR rate loans have an interest rate equal to (i) the SOFR rate plus (ii) a variable margin of between 1.50% and 2.25% depending on the Company's total leverage ratio. Amounts borrowed under the Agreement are secured by a security interest in substantially all of the Company's tangible and intangible assets. In August 2022, the Company incurred an additional $0.1 million of debt issuance costs related to the amendment of the credit agreement and drawdown.

The Company's weighted average interest rate for all debt for the firstsecond quarter ended March 31,June 30, 2023 was 6.1%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 3.50 to 1.00 for the fiscal quarter in which such permitted acquisition occurs and the three immediately following fiscal quarters and will thereafter revert to 3.00 to 1.00.

The Credit Agreement places certain limitations on acquisitions and the payment of dividends.

19


Long-term debt at March 31,June 30, 2023 and December 31, 2022 consisted of the following:
(thousands)(thousands)March 31, 2023December 31, 2022(thousands)June 30, 2023December 31, 2022
Long-term debtLong-term debt$90,000 $90,000 Long-term debt$85,000 $90,000 
Less: unamortized debt issuance costsLess: unamortized debt issuance costs569 617 Less: unamortized debt issuance costs521 617 
Less: current portion5,000 — 
Long-term debt, net of current portion$84,431 $89,383 
Long-term debt - netLong-term debt - net$84,479 $89,383 
21



For the firstsecond quarter ended March 31,June 30, 2023, the Company recorded interest expense of $1.8$1.9 million with respect to our credit line and related amortization of debt issuance costs. For the second quarter ended June 18, 2022, the Company recorded interest expense of $0.3 million with respect to our term loan and credit line, and related amortization of debt issuance costs. For the first half of fiscal 2023, the Company recorded interest expense of $3.7 million with respect to our credit line and related amortization of debt issuance costs. For the first quarter ended March 26,half of fiscal 2022, the Company recorded interest expense of $0.2$0.5 million with respect to our term loan and credit line, and relatedin amortization of debt issuance costs.

As of March 31,June 30, 2023 and December 31, 2022, the Company was in compliance with all covenants under its Credit Agreement. As of March 31,June 30, 2023 and December 31, 2022, the Company had $5.3 million and $6.0 million of standby letters of credit issued respectively,for both periods, and $54.7$59.0 million and $54.0 million was available for borrowing under the bank credit facility, respectively.
2022


(10)   SEGMENT INFORMATION

Effective January 1, 2023, the Company 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," "Oil Business," and "Industrial and Field Services." The Environmental Services segment consists primarily of the Company's parts cleaning, containerized waste management, wastewater vacuum services, and antifreeze recycling 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. The Industrial and Field Services segment consists of the 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.

Segment results for the firstsecond quarter ended March 31,June 30, 2023 and March 26,June 18, 2022 were as follows:

First Quarter Ended,
March 31, 2023
(90 days)
Second Quarter Ended,Second Quarter Ended,
June 30, 2023
(91 days)
June 30, 2023
(91 days)
(thousands)(thousands)Environmental
Services
Oil BusinessIndustrial and Field ServicesCorporate and
Eliminations
Consolidated(thousands)Environmental
Services
Oil BusinessIndustrial and Field ServicesCorporate and
Eliminations
Consolidated
RevenuesRevenuesRevenues
Service revenues$71,000 $2,810 $45,642 $— $119,452 Service revenues$72,018 $2,855 $46,469 $— $121,342 
Product revenues16,200 50,140 — — 66,340 Product revenues15,875 46,266 — — 62,141 
Rental income7,567 117 — 7,691 Rental income8,072 11 600 — 8,683 
Total revenuesTotal revenues$94,767 $52,957 $45,759 $— $193,483 Total revenues$95,965 $49,132 $47,069 $— $192,166 
Operating expensesOperating expensesOperating expenses
Operating costs68,54136,29835,223— 140,062 Operating costs68,45940,78137,147— 146,387 
Operating depreciation and amortization3,5002,6053,078— 9,183 Operating depreciation and amortization3,6412,6752,398— 8,714 
Profit before corporate selling, general, and administrative expensesProfit before corporate selling, general, and administrative expenses$22,726 $14,054 $7,458 $— $44,238 Profit before corporate selling, general, and administrative expenses$23,865 $5,676 $7,524 $— $37,065 
Selling, general, and administrative expensesSelling, general, and administrative expenses17,70017,700Selling, general, and administrative expenses20,36120,361
Depreciation and amortization from SG&ADepreciation and amortization from SG&A2,9852,985Depreciation and amortization from SG&A3,0883,088
Total selling, general, and administrative expensesTotal selling, general, and administrative expenses$20,685 $20,685 Total selling, general, and administrative expenses$23,449 $23,449 
Other (income) - netOther (income) - net(469)(469)Other (income) - net(265)(265)
Operating incomeOperating income24,022Operating income13,881
Interest expense – netInterest expense – net1,8141,814Interest expense – net1,9291,929
Income before income taxesIncome before income taxes$22,208 Income before income taxes$11,952 









2123


First Quarter Ended,
March 26, 2022
(84 days)
Second Quarter Ended,Second Quarter Ended,
June 18, 2022
(84 days)
June 18, 2022
(84 days)
(thousands)(thousands)
Environmental
Services
Oil BusinessIndustrial and Field ServicesCorporate and
Eliminations
Consolidated(thousands)
Environmental
Services
Oil BusinessIndustrial and Field ServicesCorporate and
Eliminations
Consolidated
RevenuesRevenuesRevenues
Service revenues$55,202 $2,608 $11,106 $— $68,916 Service revenues$59,277 $2,604 $13,703 $— $75,584 
Product revenues12,380 52,093 — — 64,473 Product revenues12,633 62,156 — — 74,789 
Rental income5,963 14 — — 5,977 Rental income6,265 — — 6,274 
Total revenuesTotal revenues$73,545 $54,715 $11,106 $— $139,366 Total revenues$78,175 $64,769 $13,703 $— $156,647 
Operating expensesOperating expensesOperating expenses
Operating costs58,02534,1659,593— 101,783Operating costs56,81235,84112,102— 104,755
Operating depreciation and amortization2,4662,084422— 4,972Operating depreciation and amortization2,7692,125423— 5,317
Profit before corporate selling, general, and administrative expensesProfit before corporate selling, general, and administrative expenses$13,054 $18,466 $1,091 $— $32,611 Profit before corporate selling, general, and administrative expenses$18,594 $26,803 $1,178 $— $46,575 
Selling, general, and administrative expensesSelling, general, and administrative expenses13,73513,735Selling, general, and administrative expenses15,02415,024
Depreciation and amortization from SG&ADepreciation and amortization from SG&A1,5351,535Depreciation and amortization from SG&A1,4601,460
Total selling, general, and administrative expensesTotal selling, general, and administrative expenses$15,270 $15,270 Total selling, general, and administrative expenses$16,484 $16,484 
Other (income) - net(210)(210)
Other expense - netOther expense - net1,001 1,001
Operating incomeOperating income17,551Operating income29,090
Interest expense – netInterest expense – net223223Interest expense – net250250
Income before income taxesIncome before income taxes$17,328 Income before income taxes$28,840 
24


First Half Ended,
June 30, 2023
(181 days)
(thousands)Environmental
Services
Oil BusinessIndustrial and Field ServicesCorporate and
Eliminations
Consolidated
Revenues
Service revenues$143,018 $5,665 $92,111 $— $240,794 
Product revenues32,075 96,406 — — 128,481 
Rental income15,639 17 716 — 16,372 
Total revenues$190,732 $102,088 $92,827 $— $385,647 
Operating expenses
Operating costs136,99977,07972,370— 286,448
Operating depreciation and amortization7,1405,2805,476— 17,896
Profit before corporate selling, general, and administrative expenses$46,593 $19,729 $14,981 $— $81,303 
Selling, general, and administrative expenses38,06138,061
Depreciation and amortization from SG&A6,0736,073
Total selling, general, and administrative expenses$44,134 $44,134 
Other (income) - net(734)(734)
Operating income37,903
Interest expense – net3,7433,743
Income before income taxes$34,160 
25


First Half Ended,
June 18, 2022
(168 days)
(thousands)Environmental ServicesOil BusinessIndustrial and Field ServicesCorporate and EliminationsConsolidated
Revenues
Service revenues$114,479 $5,212 $24,809 $— $144,500 
Product revenues25,013 114,249 — — 139,262 
Rental income12,228 23 — — 12,251 
Total revenues$151,720 $119,484 $24,809 $— $296,013 
Operating expenses
Operating costs114,83770,00621,695— 206,538
Operating depreciation and amortization5,2364,209845— 10,290
Profit before corporate selling, general, and administrative expenses$31,647 $45,269 $2,269 $— $79,185 
Selling, general, and administrative expenses28,75928,759
Depreciation and amortization from SG&A2,9952,995
Total selling, general, and administrative expenses$31,754 $31,754 
Other expense - net791791
Operating income46,640
Interest expense – net473473
Income before income taxes$46,167 
Intersegment revenues for the first quarterhalf of fiscal 2023 and fiscal 2022 in the Industrial and& Field services segment were $2.5$5.2 million and $1.9$3.9 million, respectively. The Environmental Services segment and the Oil Business segment had no intersegment revenues for the firstsecond quarter of fiscal 2023 and fiscal 2022.

Total assets by segment as of March 31,June 30, 2023 and December 31, 2022 were as follows:
(thousands)(thousands)March 31, 2023December 31, 2022(thousands)June 30, 2023December 31, 2022
Total Assets:Total Assets:Total Assets:
Environmental Services$259,944 $253,906 Environmental Services$258,031 $253,906 
Oil Business184,045 190,862 Oil Business186,153 190,862 
Industrial and Field Services290,023 283,683 Industrial and Field Services290,210 283,683 
Unallocated Corporate Assets76,996 65,790 Unallocated Corporate Assets78,397 65,790 
TotalTotal$811,008 $794,241 Total$812,791 $794,241 

Segment assets for the Environmental Services, Oil Business, segments, and Industrial and& 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.

2226


(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:

2327


First Quarter Ended,Second Quarter Ended,
March 31, 2023
(90 days)
March 26, 2022
(84 days)
June 30, 2023
(91 days)
June 18, 2022
(84 days)
(thousands)(thousands)Environmental ServicesOil BusinessIndustrial and Field ServicesTotalEnvironmental ServicesOil BusinessIndustrial and Field ServicesTotal(thousands)Environmental ServicesOil BusinessIndustrial and Field ServicesTotalEnvironmental ServicesOil BusinessIndustrial and Field ServicesTotal
Parts CleaningParts Cleaning$7,550 $— $117 $7,667 $5,939 $— $— $5,939 Parts Cleaning$7,968 $— $600 $8,568 $6,233 $— $— $6,233 
PropertyProperty17 — 24 24 14 — 38 Property104 11 — 115 32 — 41 
Total rental incomeTotal rental income$7,567 $$117 $7,691 $5,963 $14 $— $5,977 Total rental income$8,072 $11 $600 $8,683 $6,265 $$— $6,274 
First Half Ended,
June 30, 2023
(181 days)
June 18, 2022
(168 days)
(thousands)Environmental ServicesOil BusinessIndustrial and Field ServicesTotalEnvironmental ServicesOil BusinessIndustrial and Field ServicesTotal
Parts Cleaning$15,518 $— $716 $16,234 $12,172 $— $— $12,172 
Property121 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 cancellable with or without notice, without penalty, although certain vendor agreements provide for cancellation fees or penalties depending on the terms of the contract.

The Company has purchase obligations in the form of open purchase orders of $18.1$21.3 million as of March 31,June 30, 2023, and $20.7 million as of December 31, 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 March 31,June 30, 2023 and December 31, 2022, the Company had accrued $3.2$3.1 million and $3.2 million related to loss contingencies and other contingent liabilities.
2428



(12)   INCOME TAXES

Income tax expense for the second fiscal quarter of 2023 was $3.3 million. The Company's effective income tax rate for the second quarter of fiscal 2023 was 27.7% compared to 27.0% in the second quarter of fiscal 2022. Tax expense for the first fiscal quarterhalf of 2023 was $5.6$8.9 million. The Company'sCompany’s effective income tax rate for the first quarterhalf of fiscal 2023 was 25.3%26.1% compared to 25.7%26.4% in the first quarterhalf of fiscal 2022. The rate decrease is principally attributable to the decreasedincreased impact of certain favorable adjustments to financial reporting income due to increaseddecreased levels of profitability as compared to the first quarterhalf of 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 $2.2 million for uncertain tax positions as of March 31,June 30, 2023. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.

As of March 31,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.


2529


(13)   SHARE-BASED COMPENSATION

 Restricted Stock Compensation/Awards

Annually, the Company grants restricted shares to its Board of Directors. The shares become fully vested one year from their grant date. The fair value of each restricted stock grant is based on the closing price of the Company's common stock on the date of grant. The Company amortizes the expense over the service period, which is the fiscal year in which the award is granted. In addition, the Company may grant restricted shares to certain members of management based on their services and contingent upon continued service with the Company. The restricted shares vest over a period of approximately three years from the grant date. The fair value of each restricted stock grant is based on the closing price of the Company's common stock on the date of grant.

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 share grants and expense resulting from the awards:
    
Compensation ExpenseCompensation Expense
(thousands, except share amounts)(thousands, except share amounts)First Quarter Ended,Unrecognized Expense as of,(thousands, except share amounts)First Half Ended,Unrecognized Expense as of,
Recipient of GrantRecipient of GrantGrant DateRestricted SharesMarch 31, 2023
(90 days)
March 26, 2022
(84 days)
March 31, 2023
(90 days)
March 26, 2022
(84 days)
Recipient of GrantGrant DateRestricted SharesJune 30, 2023
(181 days)
June 18, 2022
(168 days)
June 30, 2023
(181 days)
June 18, 2022
(168 days)
Special Incentive GrantSpecial Incentive GrantApril, 2018350,000$— $313 $— $67 Special Incentive GrantApril, 2018350,000$— $380 $— $— 
Members of ManagementMembers of ManagementFebruary, 202041,138— 20 — 67 Members of ManagementFebruary, 202041,138— 40 — 47 
Members of ManagementMembers of ManagementFebruary, 202135,898104 103 103 345 
Chief Executive OfficerChief Executive OfficerFebruary, 2021500,000290 613 1,547 3,268 Chief Executive OfficerFebruary, 2021500,000502 1,067 1,334 2,814 
Members of ManagementMembers of ManagementFebruary, 202135,8985352 162 396 Members of ManagementFebruary, 202275,355249245 735 1,303 
Members of ManagementMembers of ManagementFebruary, 202275,355125129 873 1,419 Members of ManagementFebruary, 202366,024310248 1,552 — 
Board of DirectorsBoard of DirectorsApril, 202218,064— 111 369 Board of DirectorsApril, 202217,082— 234 — 246 
Special Incentive GrantSpecial Incentive GrantNovember, 2022147,623259— 2,604 — Special Incentive GrantNovember, 2022147,623524— 2,339 — 
Members of ManagementFebruary, 202366,024155— 1,707 — 
Board of DirectorsBoard of DirectorsMay, 202314,274280— 200 — 

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.

On January 8, 2021, the Company and Mr. Brian Recatto entered into an amended Executive Employment Agreement (the “Amended Agreement”) which was effective on February 1, 2021. Pursuant to the Amended Agreement, the Company replaced in its entirety section 4.3 of the First Amendment to the Executive Employment Agreement relating to equity compensation that was effective February 1, 2017. As of February 1, 2021, Mr. Recatto received a one-time award of 500,000 shares of restricted stock, subject to the achievement of performance criteria established by the Compensation Committee of the Board of Directors pursuant to the Company's 2019 Incentive Plan.

The award date for such Performance-Based Restricted Stock was on February 1, 2021. Such award was granted pursuant to and governed by the terms of the 2019 Incentive Plan and an award agreement in a form provided by the Company. The Performance-Based Restricted Stock one-time award of 500,000 shares received on February 1, 2021, shall vest on January 31, 2025 if Mr. Recatto is employed by the Company on that date, in an amount determined by applying the applicable percentages from the chart below, with the common stock price increases to be determined based on the increase in the price of the Company’s common stock (if any) from the closing price of the common stock as reported by Nasdaq on the amended agreement commencement date ($21.77) and the common stock price on the potential vesting date (determined by using the
30


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 firstsecond quarter of fiscal 2023, the Company recorded approximately $0.3$0.2 million of compensation expense related to this award. In the future, the Company expects to recognize compensation expense of approximately $1.5$1.3 million over the
26


remaining requisite service period, which ends January 31, 2025. The fair value of this restricted stock award as of the grant date was estimated using a Monte Carlo simulation model. Key assumptions used in the Monte Carlo simulation to estimate the grant date fair value of this award are a risk-free rate of 0.29%, expected dividend yield of zero, and an expected volatility assumption of 53.07%.

Vesting Table
Increase in Stock Price From the Amended Agreement Commencement Date to the Vesting DateTotal Percentage of Restricted Stock
Shares to Be Vested
Less than $5 per share increase—%
$5 per share increase25% (vest in 125,000 shares)
$10 per share increase50% (vest in 250,000 shares)
$15 per share increase75% (vest in 375,000 shares)
$20 or more per share increase100% (vest in 500,000 shares)


Provision for possible accelerated vesting of award

If the average closing price of the Company's common stock increases by the marginal levels set forth in the above vesting table for any consecutive 180 day period between February 1, 2021 and January 31, 2025, Mr. Recatto shall become vested in 50% of the corresponding total percentage of restricted shares earned on the last day of the 180 day period.

In addition, on each of December 31, 2021, December 31, 2022, and December 31, 2023, to the extent Mr. Recatto remains employed by the Company under the Amended Agreement on such date, Mr. Recatto shall receive a grant of restricted stock as of such date valued at Five Hundred Thousand Dollars ($500,000), with the number of shares of restricted stock constituting such grant determined by applying the average closing price for a share of the Company’s common stock for the 90-day period ending on such date. Such awards of Time-Based Restricted Stock shall be granted pursuant to and governed by the terms of the 2019 Incentive Plan and an award agreement in a form provided by the Company. The Time-Based Restricted Stock shall vest only if Mr. Recatto remains employed by the Company under the Amended Agreement through December 31, 2023; provided, that, upon a Change of Control of the Company (as such term is defined in the Amended Agreement), all shares of the Time-Based Restricted Stock awarded up through the date of closing of the Change in Control shall become vested, and no further award of Time-Based Restricted Stock shall be awarded. During the firstsecond 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 firstsecond quarter ended March 31,June 30, 2023:
Restricted Stock (Nonvested Shares)Restricted Stock (Nonvested Shares)Number of SharesWeighted Average Grant-Date Fair Value Per ShareRestricted Stock (Nonvested Shares)Number of SharesWeighted Average Grant-Date Fair Value Per Share
Nonvested shares outstanding at December 31, 2022Nonvested shares outstanding at December 31, 2022728,693 $21.83 Nonvested shares outstanding at December 31, 2022728,693 $21.83 
GrantedGranted66,024 37.83 Granted80,298 37.08 
VestedVested(81,423)24.90 Vested(99,487)25.51 
ForfeitedForfeited(28,797)21.95 Forfeited(28,797)21.95 
Nonvested shares outstanding at March 31, 2023684,497 $25.69 
Nonvested shares outstanding at June 30, 2023Nonvested shares outstanding at June 30, 2023680,707 $25.79 

Employee Stock Purchase Plan

As of March 31,June 30, 2023, the Company had reserved 36,50831,438 shares of common stock available for purchase under the Employee Stock Purchase Plan. In the firstsecond quarter of fiscal 2023, employees purchased 4,7755,070 shares of the Company’s common stock with a weighted average fair market value of $32.70$35.24 per share.


2731



(14)  EARNINGS PER SHARE

The following table reconciles the number of shares outstanding for the firstsecond quarter of fiscal 2023 and 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:
First Quarter Ended, Second Quarter Ended,First Half Ended,
(thousands, except per share amounts) (thousands, except per share amounts)March 31, 2023
(90 days)
March 26, 2022
(84 days)
(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 incomeNet income$16,589 $12,878 Net income$8,642 $21,107 $25,231 $33,985 
Weighted average basic shares outstandingWeighted average basic shares outstanding23,649 23,476 Weighted average basic shares outstanding23,681 23,489 23,665 23,482 
Dilutive shares for share–based compensation plansDilutive shares for share–based compensation plans214 160 Dilutive shares for share–based compensation plans250 155 233 158 
Weighted average diluted shares outstandingWeighted average diluted shares outstanding23,863 23,636 Weighted average diluted shares outstanding23,931 23,644 23,898 23,640 
Net income per share: basicNet income per share: basic$0.70 $0.55 Net income per share: basic$0.36 $0.90 $1.07 $1.45 
Net income per share: dilutedNet income per share: diluted$0.70 $0.54 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 March 31,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
28
32


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.

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.

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 board of directors of the Company to cause or permit the Company to enter into an Alternative Acquisition Agreement with respect to a Superior Proposal, and Parent may terminate the Merger Agreement if the board of directors 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 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 $23,584,701), or Parent will be required to pay the Company a termination fee of $72,568,311 (the “Parent Termination Fee”).

The Merger is not subject to a financing condition. Parent has obtained (1) equity financing commitments from certain 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 transactions 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 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.
33


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 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 2022 filed with the SEC on March 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 December 31. Interim results for fiscal 2023 are presented for the first three months ("firstsecond quarter" or "quarter") ended March 31, 2023. Interim results for fiscal 2022 are presented for theJune 30, 2023 and twelve weeks  ("firstsecond quarter" or "quarter") March 26, 2022.ended June 18, 2022, respectively. "Fiscal 2022" represents the 52-week period ended December 31, 2022 and "Fiscal 2023" represents the twelve months ending on December 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:

Reporting PeriodDate RangeNumber of Days
2023 second quarterApril 1, 2023 - June 30, 202391
2022 second quarterMarch 27, 2022 - June 18, 202284
2023 first quarterhalfJanuary 1, 2023 - March 31,June 30, 202390181
2022 first quarterhalfJanuary 2, 2022 - March 26,June 18, 202284168
2023 fiscal yearJanuary 1, 2023 - December 31, 2023365
2022 fiscal yearJanuary 2, 2022 - December 31, 2022364

As a result of the change in our financial reporting cycle, our 2023 firstsecond quarter had 67 more calendar days than our 2022 firstsecond 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 firstsecond quarter of 2023 includes 45 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 6.3%7.8% in the firstsecond quarter of 2023 when compared to the firstsecond 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 services, antifreeze collection, recycling and product sales, industrial and field services, and emergency and spill response services, and we own and operate a used oil re-refinery where we re-refine used lubricating oils into high quality lubricant base oil and other products. We believe that we are the second largest provider of full-service parts cleaning, hazardous and non-hazardous waste services and used oil collection
34


services to customers in both the industrial and vehicle maintenance sectors in North America. We also believe that we are the second largest used oil re-refiner by capacity in North 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 105 branch and industrial service locations providing
29


services to customers in 48 states and parts of Canada. We conduct business through three principal operating segments: Environmental Services, Oil Business, and Industrial and Field Services.

Our Environmental Services segment revenues are generated primarily from providing parts cleaning, containerized waste management and wastewater vacuum services as well as selling remanufactured antifreeze products. Revenues from this segment accounted for approximately 49.0%49.9% of our total Company revenues for the firstsecond quarter of fiscal 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, along with our recycled fuel oil ("RFO") sales which together accounted for approximately 27.4%25.6% of our total Company revenues in the firstsecond quarter of fiscal 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 23.6%24.5% of our total Company revenues in the firstsecond 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 incur to obtain our materials and the prices we charge for our products and services. Operating costs also include transportation of solvents and waste, payments to third parties to recycle or dispose of the waste materials that we collect, 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 revenues 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 revenues generally decrease.

We use profit before corporate selling, general, and administrative expenses ("SG&A") as a key measure of segment profitability. We define profit before corporate SG&A expense as revenue less operating costs and depreciation and amortization from operations.

Our 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, 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 50 million gallons of lubricating base oil per year when operating at full capacity.

    
3035


Critical Accounting Policies

Critical accounting policies are those that are both important to the accurate portrayal of a company’s financial condition and results and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

In order to prepare financial statements that conform to accounting principles generally accepted in the United States, commonly referred to as GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

There were no material changes during the firstsecond quarter of fiscal 2023 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, 2022.2022 except for the fiscal year change as further described in Note 1.


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RESULTS OF OPERATIONS

General

The following table sets forth certain operating data as a percentage of revenues for the periods indicated:
For the First Quarter Ended,For the Second Quarter Ended,First Half Ended,
(thousands)(thousands)March 31, 2023
(90 days)
March 26, 2022
(84 days)
(thousands)June 30, 2023
(91 days)
June 18, 2022
(84 days)
June 30, 2023
(181 days)
June 18, 2022
(168 days)
RevenuesRevenuesRevenues
Service revenuesService revenues$119,452 61.7 %$68,916 49.4 %Service revenues$121,342 63.1 %$75,584 48.3 %$240,794 62.4 %$144,500 48.8 %
Product revenuesProduct revenues66,340 34.3 %64,473 46.3 %Product revenues62,141 32.3 %74,789 47.7 %128,481 33.3 %139,262 47.0 %
Rental incomeRental income7,691 4.0 %5,977 4.3 %Rental income8,683 4.5 %6,274 4.0 %16,372 4.2 %12,251 4.1 %
Total revenuesTotal revenues$193,483 100.0 %$139,366 100.0 %Total revenues$192,166 100.0 %$156,647 100.0 %$385,647 100.0 %$296,013 100.0 %
Operating expensesOperating expensesOperating expenses
Operating costsOperating costs$140,062 72.4 %$101,783 73.0 %Operating costs$146,387 76.2 %$104,755 66.9 %$286,448 74.3 %$206,538 69.8 %
Selling, general, and administrative expensesSelling, general, and administrative expenses*17,700 9.1 %13,735 9.9 %Selling, general, and administrative expenses*20,361 10.6 %15,024 9.6 %38,061 9.9 %28,759 9.7 %
Depreciation and amortizationDepreciation and amortization12,168 6.3 %6,507 4.7 %Depreciation and amortization11,802 6.1 %6,777 4.3 %23,969 6.2 %13,285 4.5 %
Other (income) - net(469)(0.2)%(210)(0.2)%
Other (income) expense - netOther (income) expense - net(265)(0.1)%1,001 0.6 %(734)(0.2)%791 0.3 %
Operating incomeOperating income24,022 12.4 %17,551 12.6 %Operating income13,881 7.2 %29,090 18.6 %37,903 9.8 %46,640 15.8 %
Interest expense – netInterest expense – net1,814 0.9 %223 0.2 %Interest expense – net1,929 1.0 %250 0.2 %3,743 1.0 %473 0.2 %
Income before income taxesIncome before income taxes22,208 11.5 %17,328 12.4 %Income before income taxes11,952 6.2 %28,840 18.4 %34,160 8.9 %46,167 15.6 %
Provision for income taxesProvision for income taxes5,619 2.9 %4,450 3.2 %Provision for income taxes3,310 1.7 %7,733 4.9 %8,929 2.3 %12,182 4.1 %
Net incomeNet income$16,589 8.6 %$12,878 9.2 %Net income$8,642 4.5 %$21,107 13.5 %$25,231 6.5 %$33,985 11.5 %
*Does not include depreciation and amortization related to corporate selling, general, and administrative activity.

Revenues

Revenue for the firstsecond quarter of 2023 was $193.5$192.2 million compared to $139.4$156.6 million for the same quarter of 2022, an increase of $54.1$35.5 million, or 38.8%22.7%. The $54.1$35.5 million increase in revenue was mainly driven by revenue from the Patriot acquisition made during the second half of 2022 as well as higher demand and increased prices for our products and services in our Environmental and Industrial & Field Segments.Segments partially offset by the decrease in base oil sales price. For the first half of fiscal 2023, revenues increased $89.6 million, or 30.3%, from $296.0 million in the first half of fiscal 2022 to $385.6 million in the first half of 2023 mainly driven by the above mentioned factors. The firstsecond quarter of 2023 includes 45 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 6.3%7.8% in the firstsecond quarter of 2023 when compared to the firstsecond 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.

Operating costs

Operating costs as a percentage of revenue decreasedincreased to 72.4%76.2% during the firstsecond quarter of 2023 compared to 73.0%66.9% in the firstsecond quarter of 2022. The decreaseincrease is mainly due to lowerthe decrease in base oil inventoryselling price that resulted in decreased oil revenues without an equal corresponding decrease in cost of goods sold, and loweralso due to higher labor and related benefits, disposal costs, as well as transportation related expenses partially offset by higher disposal and labor costs.as a result of the Patriot acquisition made during the second half of 2022. Operating costs increased $79.9 million, or 38.7%, in the first half of fiscal 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, Oil Business, and Industrial & Field Services segments may increase or decrease depending on our product and service volumes and changes in commodity pricing, along with other factors.


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Selling, general, and administrative expenses

Selling, general, and administrative expenses as a percentage of revenue decreasedincreased to 9.1%10.6% during the firstsecond quarter of 2023 compared to 9.9%9.6% in the firstsecond quarter of 2022. The decreaseincrease is mainly due to lower share-based compensation expense accrualhigher salaries and lower professional fees.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 $9.3 million, or 32.3%, from the first half of fiscal 2022 to the first half of fiscal 2023 mainly due to the above mentioned factors as well as due to the additional 5 working days in the first half of 2023 compared to the first half of 2022.

Interest expense - net

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Interest expense - net for the firstsecond quarter of fiscal 2023 and fiscal 2022 was $1.81.9 million and $0.20.3 million, respectively. The increase in interest expense is due to higher borrowings during the firstsecond quarter of 2023 compared to the firstsecond quarter of 2022. Interest expense - net for the first 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 firstsecond quarter of fiscal 2023 was 25.3%27.7% compared to 25.7%27.0% in the second quarter of fiscal 2022. The Company’s effective income tax rate for the first half of fiscal 2023 was 26.1% compared to 26.4% in the first quarterhalf of fiscal 2022. The rate decrease is principally attributable to the decreasedincreased impact of certain favorable adjustments to financial reporting income due to increaseddecreased levels of profitability as compared to the first quarterhalf 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:
First Quarter Ended,Change
(thousands)March 31, 2023
(90 days)
March 26, 2022
(84 days)
$%
Revenues:
Environmental Services$94,767 $73,545 $21,222 28.9 %
Oil Business52,957 54,715 (1,758)(3.2)%
Industrial and Field Services$45,759 $11,106 $34,653 312.0 %
Total$193,483 $139,366 $54,117 38.8 %
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 Business102,088 119,484 (17,396)(14.6)%
   Industrial & Field Services92,827 24,809 68,018 274.2 %
   Total$385,647 $296,013 $89,634 30.3 %
In the firstsecond quarter of fiscal 2023, Environmental Services revenue was $94.8$96.0 million compared to $73.5$78.2 million during the firstsecond quarter of fiscal 2022. The 28.9%22.8% increase in revenue was mainly due to the continued increase in demand and higher prices for our services compared to the prior year quarter. We experienced revenue increases across all service lines in the segment when compared to the firstsecond quarter of 2022. Additionally,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 45 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 6.3%7.8% in the firstsecond quarter of 2023 when compared to the firstsecond 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.

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During the firstsecond quarter of fiscal 2023, Oil Business revenue was $53.0$49.1 million compared to $54.7$64.8 million in the firstsecond quarter of fiscal 2022, a decrease of $1.8$15.6 million or 3.2%24.1%. A decrease in base oil sales volume due to lower demand wasand base oil sales price were the main driverdrivers of the decrease in revenue compared to the prior year quarter, partially offsetquarter. For the first half of fiscal 2023, Oil Business revenues were $102.1 million, compared to $119.5 million during the first half of fiscal 2022. The decrease in revenue was driven primarily by an increase in base oil sales price.the above mentioned factors. Additionally, the firstsecond quarter of 2023 includes 45 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 6.3%7.8% in the firstsecond quarter of 2023 when compared to the firstsecond quarter of 2022.2022 if sales volume and pricing 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 half of fiscal 2023 when compared to the first half fiscal 2022, if sales volume and pricing were unchanged year-over-year.

Industrial and& Field Services revenue was $45.8$47.1 million for the firstsecond quarter of fiscal 2023 compared to $11.1$13.7 million for the firstsecond quarter of fiscal 2022. The $34.7$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 demand and increased prices for our services. Industrial & Field Services revenues were $92.8 million, compared to $24.8 million during the first half of fiscal 2022. The increase in revenue was driven primarily by the above mentioned factors. Additionally, the firstsecond quarter of 2023 includes 45 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 6.3%7.8% in the firstsecond quarter of 2023 when compared to the firstsecond 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.

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

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The following table presents profit by reportable segment before corporate SG&A expense:
First Quarter Ended,ChangeSecond Quarter Ended,Change
(thousands)(thousands)March 31, 2023
(90 days)
March 26, 2022
(84 days)
$%(thousands)June 30, 2023
(91 days)
June 18, 2022
(84 days)
$%
Profit before corporate SG&A*Profit before corporate SG&A*Profit before corporate SG&A*
Environmental Services$22,726 $13,054 $9,672 74.1%Environmental Services$23,865 $18,594 $5,271 28.3%
Oil Business14,054 18,466 (4,412)(23.9)%Oil Business5,676 26,803 (21,127)(78.8)%
Industrial and Field Services$7,458 $1,091 $6,367 583.6%Industrial & Field Services$7,524 $1,178 $6,346 538.7%
Total$44,238 $32,611 $11,627 35.7%Total$37,065 $46,575 $(9,510)(20.4)%
First Half Ended,Change
(thousands)June 30, 2023
(181 days)
June 18, 2022
(168 days)
$%
Profit before corporate SG&A*
Environmental Services$46,593 $31,647 $14,946 47.2%
Oil Business19,729 45,269 (25,540)(56.4)%
Industrial & Field Services$14,981 $2,269 $12,712 560.2%
Total$81,303 $79,185 $2,118 2.7%
*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 10 in our consolidated financial statements included elsewhere in this document.

Environmental Services profit before corporate SG&A expense increased $9.75.3 million, or 74.1%28.3%, in the firstsecond quarter of fiscal 2023 compared to the firstsecond quarter of fiscal 2022. Operating margin for firstsecond quarter of 2023 was 24.0%24.9% compared to the recast margin of 17.7%23.8% in the firstsecond quarter of 2022. The increase in operating margin was mainly driven by increased pricingrevenues in comparison with the increased operating costs.increase in our labor and transportation expenses.

Environmental Services profit before corporate SG&A expense increased $14.9 million, or 47.2%, in the first half of fiscal 2023 compared to the first half of fiscal 2022. Operating margin for first half of fiscal 2023 was 24.4% compared to 20.9% in the first half of fiscal 2022. The increase in operating margin was mainly driven by increased revenues in comparison with the increase in our labor and transportation expenses.

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Oil Business profit before corporate SG&A expense decreased $4.4$21.1 million, or 23.9%78.8%, in the firstsecond quarter of fiscal 2023 compared to the firstsecond quarter of fiscal 2022. Oil Business segment operating margin decreased to 26.5%11.6% in the firstsecond quarter of 2023 compared to 33.8%41.4% in the firstsecond quarter of fiscal 2022. The lower operating margin compared to the firstsecond quarter of 2022 was mainly due to a decrease in revenue along with increasedincreased transportation expenses, labor costs transportation expenses, partially offset by lowerand 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 first 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 and& Field Services profit before corporate SG&A expense increased $6.4$6.3 million, or 583.6%538.7%, in the firstsecond quarter of fiscal 2023 compared to the firstsecond quarter of fiscal 2022. Operating margin for firstsecond quarter of 2023 was 16.3%16.1% compared to the recast margin of 9.8%8.6% in the firstsecond quarter of 2022. The first quarterincrease in operating margin is reflectivewas mainly driven by increased revenues in comparison with the increased in operating costs as a result of a permanent change wethe Patriot acquisition made during the quarter to reclassify certain labor and benefits cost in our Patriot businesssecond half of 2022.

Industrial & Field Services profit before corporate SG&A expense increased $12.7 million or 560.2% in the amountfirst half of $1.5 million from SG&A expensefiscal 2023 compared to the first half of fiscal 2022. Operating Expense. Without this change our operating margin for the first quarter would have been 19.5%.half of fiscal 2023 was 16.1% compared to the recast margin of 9.1% in the first half of fiscal 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.
3440


FINANCIAL CONDITION
Liquidity and Capital Resources

Cash and Cash Equivalents

As of March 31,June 30, 2023 and December 31, 2022, cash and cash equivalents were $35.3$33.1 million and $22.1 million, respectively. Our primary sources of liquidity are cash flows from operations and funds available to borrow under our revolving bank credit facility.
    
Debt and Financing Arrangements    

On March 18, 2021, Heritage-Crystal Clean, LLC, (the “Company”), entered into an Amended and Restated Credit Agreement (the "Agreement"), by and among the Company, its parent, Heritage-Crystal Clean, Inc., and the Company’s subsidiaries identified therein and Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., and Wells Fargo Bank, National Association. The new Agreement provides for borrowings of up to $100.0 million, in the form of a revolving facility, of which $15 million can be used in the form of a Swing Line loan. The Agreement also provided for up to an additional $50.0 million of borrowings using an accordion feature upon approval of the lenders. On August 3, 2022, the Company entered into an Amendment (Amendment No. 1 to the Agreement "the Amendment") which increased the amount of borrowing under the revolving credit line to $150.0 million. The Company utilized the credit line to finance $115.0 million of the acquisition of Patriot Environmental Services Inc. (see Note 3). The Amendment also provides for up to an additional $50.0 million of borrowings under an accordion feature upon approval of the lenders.

Loans made under the Agreement, as amended, may be Base Rate Loans or Secured Overnight Financing Rate ("SOFR") Loans, at the election of the Borrower subject to certain exceptions. Base Rate Loans have an interest rate equal to (i) the higher of (a) the federal funds rate plus 0.5%, (b) the SOFR plus a margin of 1%, or (c) Bank of America's prime rate, plus a margin of 1.00%. SOFR rate loans have an interest rate equal to (i) the SOFR rate plus (ii) a variable margin of between 1.50% and 2.25% depending on the Company's total leverage ratio. Amounts borrowed under the Agreement are secured by a security interest in substantially all of the Company's tangible and intangible assets. In August 2022, the Company incurred an additional $0.1 million of debt issuance costs related to the amendment of the credit agreement and drawdown.

The Company's weighted average interest rate for all debt for the firstsecond quarter ended March 31,June 30, 2023 was 6.1%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 3.50 to 1.00 for the fiscal quarter in which such permitted acquisition occurs and the three immediately following fiscal quarters and will thereafter revert to 3.00 to 1.00.

The Credit Agreement places certain limitations on acquisitions and the payment of dividends.

As of March 31,June 30, 2023 and December 31, 2022, the Company was in compliance with all covenants under its Credit Agreement. As of March 31,June 30, 2023 and December 31, 2022, the Company, had $5.3 million and $6.0 million of standby letters of credit issued, respectively, and $54.7$59.0 million and $54.0 million was available for borrowing under the bank credit facility, respectively.

We believe that our existing cash, cash equivalents, available borrowings, and other sources of financings will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. We cannot assure you that this will be the case or that our assumptions regarding revenues and expenses underlying this belief will be accurate. If, in the future, we require more liquidity than is available to us under our credit facility, we may need to raise additional funds through debt or equity offerings. Adequate funds may not be available when needed or may not be available on
35


terms favorable to us. If additional funds are raised by issuing equity securities, dilution to existing stockholders may result. If
41


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 Quarter Ended,First Half Ended,
(thousands)(thousands)March 31, 2023
(90 days)
March 26, 2022
(84 days)
(thousands)June 30, 2023
(181 days)
June 18, 2022
(168 days)
Net cash provided by (used in):Net cash provided by (used in):Net cash provided by (used in):
Operating activitiesOperating activities$25,659 $24,590 Operating activities$46,839 $39,168 
Investing activitiesInvesting activities(8,654)(9,145)Investing activities(25,321)(18,840)
Financing activitiesFinancing activities(3,720)(648)Financing activities(10,471)(2,837)
Net increase in cash and cash equivalentsNet increase in cash and cash equivalents$13,285 $14,797 Net increase in cash and cash equivalents$11,047 $17,491 

The most significant items affecting the comparison of our operating activities for the firstsecond quarter of fiscal 2023 and the firstsecond quarter of fiscal 2022 are summarized below:

Net Cash Provided by Operating Activities

Earnings — Our increasedecrease in net income during the first quarterhalf of 2023 favorablyunfavorably impacted our net cash provided by operating activities by $3.7$8.8 million compared to the first quarterhalf of 2022.

Accounts Receivable — The decrease in accounts receivable during the first half of 2023 had a favorable impact on cash provided by operating activities of $9.4$26.6 million compared to the increase in accounts receivable during the first quarterhalf of fiscal 2022. The favorable decrease in accounts receivable is as a result of lower base oil sales price and increased collection efforts.

Inventory — The increase in inventory had an unfavorable impact on cash provided by operating activities of $5.9 million compared to the increase in inventory during the first quarter of fiscal 2022. The increase in inventory was mainly due to higher volume.

Accounts Payable — The decrease in accounts payable had an unfavorable impact on cash provided by operating activities of $8.4$11.6 million in the first quarterhalf of fiscal 2023. The decrease in accounts payable was partially due to decreasesintentionally prepaying invoices in amounts payable.June 2023 due to a pending ERP system conversion that went live on July 1, 2023.

 Net Cash Used in Investing Activities

Capital expenditures — We made capital expenditures as follows:
First Quarter Ended,First Half Ended,
(millions)(millions)March 31, 2023
(90 days)
March 26, 2022
(84 days)
(millions)June 30, 2023
(181 days)
June 18, 2022
(168 days)
Facility purchases, construction, and improvementsFacility purchases, construction, and improvements$5.1 $— Facility purchases, construction, and improvements$15.1 $3.1 
Parts cleaning machinesParts cleaning machines6.12.9
Trucks and trailersTrucks and trailers3.42.9
Re-refinery capital improvementsRe-refinery capital improvements1.22.0Re-refinery capital improvements1.84.1
Trucks and trailers1.92.6
Parts cleaning machines1.61.4
IT and other corporate projectsIT and other corporate projects0.13.1IT and other corporate projects0.52.9
TotalTotal$9.9 $9.1 Total$26.9 $15.9 


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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate risks primarily through borrowings under our bank credit facility. Interest on this facility is based upon variable interest rates. Our weighted average borrowings under our bank credit facility during the firstsecond quarter of fiscal 2023 was $90.0$85.3 million, and the annual effective interest rate during the firstsecond quarter of fiscal 2023 was 6.1%6.6%. We currently do not hedge against interest rate risk. Based on the foregoing, a hypothetical 1.0% increase or decrease in interest rates would have resulted in a $0.9$0.2 million change to our interest expense in the firstsecond quarter of fiscal 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 have been no changes in the Company’s internal controls over financial reporting during the firstsecond quarter ended March 31,June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.








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PART II
ITEM 1. LEGAL PROCEEDINGS

There were no material developments during the firstsecond 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.

ITEM 1A. RISK FACTORS

Reference is made to the factors set forth under the caption “Disclosure Regarding Forward-Looking Statements” in Part I, Item 2 of this quarterly report on Form 10-Q and other risk factors described in our annual report on Form 10-K for fiscal 2022 filed with the SEC on March 1, 2023, which are incorporated herein by reference. There have not been any material changes to the risk factors previously disclosed in our annual report on Form 10-K for fiscal 2022, except as set forth below.

The Merger, the pendency of the Merger or our failure to consummate the Merger could have a material adverse effect on our business, results of operations, financial condition and the price of our common stock.

We have entered 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 Merger, 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 undertaken other than in connection with the Merger;

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, particularly 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
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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 the affirmative vote of the stockholders of the Company of 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.
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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 restrictions 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 company other than Parent. These provisions include a general prohibition on us soliciting any acquisition proposal or offer for a competing 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 our common stock.

We may be the target of securities class action and derivative lawsuits and other legal or regulatory proceedings, which could result in substantial costs and may delay or prevent the Merger 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 proposed Merger, then that injunction may delay or prevent the proposed Merger from being completed, which may exacerbate the other risks described herein and adversely affect our business, results of operation and financial condition.



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ITEM 6.  EXHIBITS
31.1
31.2
32.1
32.2
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."




3847



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:MayAugust 9, 2023By:/s/ Mark DeVita
  Mark DeVita
  Executive Vice President & Chief Financial Officer

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