NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 10, 2016
(1) ORGANIZATION AND NATURE OF OPERATIONS
Heritage-Crystal Clean, Inc., a Delaware corporation and its subsidiaries (collectively the “Company”), provides parts cleaning and hazardous and non-hazardous waste services primarily to small and mid-sized customers in both the manufacturing and vehicle maintenance sectors. The Company's service programs include parts cleaning, containerized waste management, used oil collection, vacuum truck services, waste antifreeze collection and recycling, and field services. The Company also owns and operates a used oil re-refinery through which it recycles used oil into high quality base oil for lubricants as well as other re-refinery byproducts. The Company also has multiple locations where it dehydrates used oil to be sold as recycled fuel oil. The Company's locations are in the United States and Ontario, Canada. The Company conducts its primary business operations through Heritage-Crystal Clean, LLC, its wholly owned subsidiary, and all intercompany balances have been eliminated in consolidation.
The Company’s fiscal year ends on the Saturday closest to December 31. The most recent fiscal year ended on
January 2, 2016
. Each of the Company's first three fiscal quarters consists of twelve weeks while the last fiscal quarter consists of sixteen or seventeen weeks.
In the Company's Environmental Services segment, product revenues include sales of solvent, machines, antifreeze, and accessories; and service revenues include drum waste removal services, servicing of parts cleaning machines, vacuum truck services, field services, and other services. In the Company's Oil Business segment, product revenues include sales of re-refined base oil, byproducts, recycled fuel oil, and used oil; and service revenues include revenues from collecting used oil, collecting and recycling of oil filters and collecting and disposing of waste water. Due to the Company's integrated business model, it is impracticable to separately present costs of tangible products and costs of services.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 2, "Summary of Significant Accounting Policies," in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2016. There have been no material changes in these policies or their application.
Recently Issued Accounting Pronouncements
|
|
|
|
|
|
|
|
|
|
Accounting standards not yet adopted
|
Standard
|
|
Issuance Date
|
|
Description
|
|
Our Effective Date
|
|
Effect on the Financial Statements
|
ASU 2016-09 Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
(Topic 718)
|
|
March 2016
|
|
This update addresses the simplification of accounting for employee share-based payment transactions as it pertains to income taxes, the classification of awards as equity or liabilities, accounting for forfeitures, statutory tax withholding requirements, and certain classifications on the statement of cash flows. Early adoption is permitted.
|
|
January 1, 2017
|
|
The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations.
|
ASU 2016-02
Leases
(Topic 842)
|
|
February 2016
|
|
This update was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Early application of the amendments in this update is permitted for all entities.
|
|
January 4, 2019
|
|
The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations.
|
ASU 2014-15 Presentation of Financial Statements - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
(Subtopic 205-40)
|
|
August 2014
|
|
This update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Early adoption is permitted.
|
|
December 31, 2016
|
|
The adoption of ASU 2014-15 is not expected to have an impact on the Company’s consolidated financial statements.
|
ASU 2014-09 Revenue from Contracts with Customers, and
ASU 2015-14 Revenue from Contracts with Customers: Deferral of the Effective Date (Topic 606)
|
|
May 2014
|
|
The underlying principle of this update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. Early adoption is not permitted.
|
|
December 31, 2017
|
|
This update could impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations upon adoption.
|
|
|
|
|
|
|
|
|
|
|
Recently issued accounting standards adopted
|
Standard
|
|
Issuance Date
|
|
Description
|
|
Effective Date
|
|
Effect on the Financial Statements
|
2015-03
Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, and 2015-15 Interest—Imputation of Interest (Subtopic 835-30)
|
|
April 2015
|
|
These updates require debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt, and allows for the presentation of debt issuance costs as an asset regardless of whether or not there is an outstanding balance on the line-of-credit arrangement.
|
|
January 3, 2016
|
|
The adoption of ASU 2015-03 resulted in the reclassification of $1.4 million of unamortized debt issuance costs from "Other current assets" to "Term loan, less current maturities" as of January 2, 2016.
|
(3) BUSINESS COMBINATIONS
On March 24, 2016, the Company purchased the assets of Phoenix Environmental Services, Inc. and Pipeline Video and Cleaning North Corporation (together "Phoenix Environmental"). The purchase price for the acquisition was
$2.7 million
, including
$0.3 million
placed into escrow and including contingent consideration of up to
$0.3 million
based on subsequent business performance.
The Company is continuing to evaluate the purchase price allocations. Preliminary purchase price allocations are tentative and subject to revision as the Company finalizes appraisals and other analyses. Measurement period adjustments reflect new information obtained about facts and circumstances that existed as of the acquisition date. Final determination of the fair values may result in further adjustments to the values presented. The Company believes that the preliminary allocations provide a reasonable basis for estimating the fair values of assets acquired based on the information available. The Phoenix Environmental purchase price allocation is preliminary as the Company is still in the process of obtaining information to finalize the purchase price, net cash paid, and estimated fair values of the assets presented below. The Company expects to finalize the purchase price allocation no later than one year from the purchase date.
The following table summarizes the estimated fair values of the assets acquired related to the acquisition:
|
|
|
|
|
|
(Thousands)
|
|
Phoenix Environmental Services
|
|
|
|
Accounts receivable
|
|
$
|
361
|
|
Inventory
|
|
27
|
|
Property, plant, & equipment
|
|
374
|
|
Equipment at customers
|
|
55
|
|
Intangible assets
|
|
710
|
|
Goodwill
(a)
|
|
1,173
|
|
Total purchase price
|
|
2,700
|
|
Less: contingent consideration
|
|
(300
|
)
|
Net cash paid
|
|
$
|
2,400
|
|
______________
(a)
Goodwill recognized from the acquisition of Phoenix Environmental represents the excess of the fair value of the net assets acquired over the purchase price, and is based upon the Company's expectations of synergies from combining the operations of Phoenix Environmental and the Company, and the value of intangible assets that are not separately recognized, such as the assembled workforce. All of the goodwill was assigned to the Environmental Services reporting unit. All goodwill is expected to be deductible for income tax purposes.
Unaudited Pro Forma Financial Information
The pro forma financial information in the table below presents the combined results of the Company as if the Phoenix Environmental acquisition that occurred in fiscal 2016 had occurred January 3, 2015. The pro forma information is shown for illustrative purposes only and is not necessarily indicative of future results of operations of the Company or results of operations of the Company that would have actually occurred had the transactions been in effect for the period presented.
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended,
|
|
Third Quarter Ended
|
(In thousands, except per share data)
|
|
September 10, 2016
|
|
September 12, 2015
|
Total revenues
|
|
$
|
81,872
|
|
|
$
|
83,600
|
|
Net income
|
|
2,335
|
|
|
2,892
|
|
Income per share
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
0.13
|
|
Diluted
|
|
0.10
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Three Quarters Ended,
|
|
First Three Quarters Ended,
|
(In thousands, except per share data)
|
|
September 10, 2016
|
|
September 12, 2015
|
Total revenues
|
|
$
|
241,602
|
|
|
$
|
252,121
|
|
Net income
|
|
2,357
|
|
|
4,107
|
|
Income per share
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.19
|
|
Diluted
|
|
0.11
|
|
|
0.18
|
|
(4) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
September 10,
2016
|
|
January 2,
2016
|
Trade
|
|
$
|
42,597
|
|
|
$
|
38,379
|
|
Less: allowance for doubtful accounts
|
|
2,394
|
|
|
2,207
|
|
Trade - net
|
|
40,203
|
|
|
36,172
|
|
Related parties
|
|
1,378
|
|
|
1,250
|
|
Other
|
|
5,789
|
|
|
4,170
|
|
Total accounts receivable - net
|
|
$
|
47,370
|
|
|
$
|
41,592
|
|
The following table provides the changes in the Company’s allowance for doubtful accounts for the
three quarters
ended
September 10, 2016
and the fiscal year ended
January 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
For the First Three Quarters Ended,
|
|
For the Fiscal Year Ended,
|
(Thousands)
|
|
September 10,
2016
|
|
January 2,
2016
|
Balance at beginning of period
|
|
$
|
2,207
|
|
|
$
|
3,927
|
|
Balance acquired from FCC Environmental, including measurement period adjustments
|
|
—
|
|
|
2,701
|
|
Provision for bad debts
|
|
714
|
|
|
1,009
|
|
Accounts written off, net of recoveries
|
|
(527
|
)
|
|
(5,430
|
)
|
Balance at end of period
|
|
$
|
2,394
|
|
|
$
|
2,207
|
|
(5) INVENTORY
The carrying value of inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
September 10,
2016
|
|
January 2,
2016
|
Used oil and processed oil
|
|
$
|
7,254
|
|
|
$
|
9,045
|
|
Solvents and solutions
|
|
4,543
|
|
|
6,285
|
|
Machines
|
|
3,127
|
|
|
3,827
|
|
Drums and supplies
|
|
4,417
|
|
|
4,226
|
|
Other
|
|
1,630
|
|
|
1,681
|
|
Total inventory
|
|
20,971
|
|
|
25,064
|
|
Less: machine refurbishing reserve
|
|
248
|
|
|
290
|
|
Total inventory - net
|
|
$
|
20,723
|
|
|
$
|
24,774
|
|
Inventory consists primarily of used oil, processed oil, solvents and solutions, new and refurbished parts cleaning machines, drums and supplies, and other items. Inventories are valued at the lower of first-in, first-out (FIFO) cost or market, net of any reserves for excess, obsolete, or unsalable inventory. The Company continually monitors its inventory levels at each of its locations and evaluates inventories for excess or slow-moving items. If circumstances indicate the cost of inventories exceed their recoverable value, inventories are reduced to net realizable value. The Company had no inventory write downs during the third quarter of 2016, compared to a write down of
$2.4 million
in the third quarter of 2015. Total inventory write-downs for the first three quarters of fiscal 2016 and the first three quarters of fiscal 2015 were
$1.7 million
and
$6.8 million
, respectively. Write-downs in 2015 and the first half of fiscal 2016 pertain to used oil and processed oil inventory as well as solvents and solutions inventory.
(6)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
September 10,
2016
|
|
January 2,
2016
|
Machinery, vehicles, and equipment
(a)
|
|
$
|
77,775
|
|
|
$
|
75,129
|
|
Buildings and storage tanks
|
|
69,723
|
|
|
69,317
|
|
Land
|
|
10,368
|
|
|
9,295
|
|
Leasehold improvements
(a)
|
|
4,758
|
|
|
4,523
|
|
Construction in progress
|
|
7,076
|
|
|
4,474
|
|
Assets held for sale
|
|
178
|
|
|
189
|
|
Total property, plant and equipment
|
|
169,878
|
|
|
162,927
|
|
Less: accumulated depreciation
|
|
(38,478
|
)
|
|
(31,562
|
)
|
Property, plant and equipment - net
|
|
$
|
131,400
|
|
|
$
|
131,365
|
|
|
|
|
|
|
(Thousands)
|
|
September 10,
2016
|
|
January 2,
2016
|
Equipment at customers
(a)
|
|
$
|
62,380
|
|
|
$
|
59,216
|
|
Less: accumulated depreciation
|
|
(39,103
|
)
|
|
(36,044
|
)
|
Equipment at customers - net
|
|
$
|
23,277
|
|
|
$
|
23,172
|
|
_______________
(a)
Numbers include preliminary fair values of assets acquired in the acquisition described in Note 3 that may be adjusted as additional information becomes known.
Depreciation expense for the third quarters ended September 10, 2016 and September 12, 2015 was
$3.4 million
and
$3.7 million
, respectively. Depreciation expense for the first three quarters ended September 10, 2016 and the first three quarters ended September 12, 2015 was
$10.2 million
and
$11.1 million
, respectively.
(7)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is measured as a residual amount as of the acquisition date, which in most cases results in measuring goodwill as an excess of the purchase consideration transferred plus the fair value of any noncontrolling interest in the acquiree over the fair value of the net assets acquired, including any contingent consideration. The Company tests goodwill for impairment annually in the fourth quarter and in interim periods if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company's determination of fair value requires certain assumptions and estimates, such as margin expectations, market conditions, growth expectations, expected changes in working capital, etc., regarding expected future profitability and expected future cash flows. The Company tests goodwill for impairment at each of its
two
reporting units, Environmental Services and Oil Business, and the Company does not aggregate reporting units for purposes of impairment testing.
The following table shows changes to our goodwill balances by segment from January 2, 2016, to September 10, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Oil Business
|
|
Environmental Services
|
|
Total
|
|
|
|
|
|
|
|
Balance at January 2, 2016
|
|
$
|
—
|
|
|
$
|
30,325
|
|
|
$
|
30,325
|
|
Phoenix Environmental acquisition
|
|
—
|
|
|
1,173
|
|
|
1,173
|
|
Adjustments
|
|
—
|
|
|
12
|
|
|
12
|
|
Balance at September 10, 2016
|
|
$
|
—
|
|
|
$
|
31,510
|
|
|
$
|
31,510
|
|
Following is a summary of software and other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 10, 2016
|
|
January 2, 2016
|
(Thousands)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Customer & supplier relationships
|
|
$
|
22,930
|
|
|
$
|
5,927
|
|
|
$
|
17,003
|
|
|
$
|
22,202
|
|
|
$
|
4,369
|
|
|
$
|
17,833
|
|
Software
|
|
4,573
|
|
|
3,557
|
|
|
1,016
|
|
|
4,455
|
|
|
3,382
|
|
|
1,073
|
|
Non-compete agreements
|
|
2,939
|
|
|
2,043
|
|
|
896
|
|
|
2,930
|
|
|
1,713
|
|
|
1,217
|
|
Patents, formulae, and licenses
|
|
1,769
|
|
|
556
|
|
|
1,213
|
|
|
1,769
|
|
|
510
|
|
|
1,259
|
|
Other
|
|
1,348
|
|
|
690
|
|
|
658
|
|
|
1,354
|
|
|
534
|
|
|
820
|
|
Total software and intangible assets
|
|
$
|
33,559
|
|
|
$
|
12,773
|
|
|
$
|
20,786
|
|
|
$
|
32,710
|
|
|
$
|
10,508
|
|
|
$
|
22,202
|
|
Amortization expense was
$0.7 million
for the
third quarter
ended
September 10, 2016
and
$0.7 million
for
third quarter
ended
September 12, 2015
. Amortization expense was
$2.3 million
for the
first three quarters
ended
September 10, 2016
and
$1.9 million
for
first three quarters
ended
September 12, 2015
. The weighted average useful lives of software; customer & supplier relationships; patents, formulae, and licenses; non-compete agreements, and other intangibles were
9
years,
11
years,
15
years,
5
years, and
6
years, respectively.
The expected amortization expense for the remainder of fiscal 2016 and for fiscal years 2017, 2018, 2019, and 2020 is
$1.0 million
,
$3.2 million
,
$2.9 million
,
$2.6 million
, and
$2.5 million
, respectively. The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, disposal of intangible assets, accelerated amortization of intangible assets, and other events.
(8)
DEBT AND FINANCING ARRANGEMENTS
Bank Credit Facility
On October 16, 2014, the Company amended its Amended and Restated Credit Agreement ("Credit Agreement", or "Credit Facility"). The Credit Agreement, as amended, allows for up to
$140.0 million
in borrowings. As of
September 10, 2016
and
January 2, 2016
, the Company's total borrowings were
$67.5 million
and
$70.9 million
, respectively, under the term loan which has a maturity date of
February 5, 2018
. The remaining portion of the Credit Facility is a revolving loan which expires on
February 5, 2018
. There were
no
amounts outstanding under the revolver at
September 10, 2016
and
January 2, 2016
. Unamortized debt issuance costs were
$0.9 million
and
$1.4 million
as of September 10, 2016 and January 2, 2016, respectively.
During the third quarter of fiscal
2016
, the Company recorded interest of
$0.5 million
on the term loan and capitalized less than
$0.1 million
for various capital projects. During the first
three quarters
of fiscal 2016, the Company recorded interest of
$1.5 million
on the term loan, of which less than
$0.1 million
was capitalized for various capital projects. During the third quarter of fiscal 2015, the Company recorded interest of
$0.4 million
on the term loan and capitalized
$0.1 million
for various capital projects. During the first three quarters of fiscal 2015, the Company recorded interest of
$1.4 million
on the term loan and capitalized
$0.4 million
for various capital projects.
As of
September 10, 2016
and
January 2, 2016
, the Company was in compliance with all covenants under the Credit Agreement. As of
September 10, 2016
and
January 2, 2016
, the Company had
$3.0 million
and
$4.4 million
of standby letters of credit issued, respectively, and
$8.6 million
and
$34.5 million
was available for borrowing under the Credit Facility. The actual amount available under the revolving loan portion of the Credit Agreement is limited by the Company's total leverage ratio.
The Company's weighted average interest rate for all debt as of
September 10, 2016
and
September 12, 2015
was
3.2%
and
3.1%
, respectively.
(9)
SEGMENT INFORMATION
The Company reports in
two
segments: "Environmental Services" and "Oil Business." The Environmental Services segment consists of the Company's parts cleaning, containerized waste management, vacuum truck service, antifreeze recycling activities, and field services. The Oil Business segment consists of the Company's used oil collection, used oil re-refining activities, and the dehydration of used oil to be sold as recycled fuel oil.
No single customer in either segment accounted for more than
10.0%
of consolidated revenues in any of the periods presented. There were no intersegment revenues.
Operating segment results for the
third quarter
s and first three quarters ended
September 10, 2016
, and
September 12, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended,
|
September 10, 2016
|
|
(Thousands)
|
|
Environmental
Services
|
|
Oil Business
|
|
Corporate and
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
4,691
|
|
|
$
|
22,491
|
|
|
$
|
—
|
|
|
$
|
27,182
|
|
|
Service revenues
|
|
46,591
|
|
|
8,099
|
|
|
—
|
|
|
54,690
|
|
Total revenues
|
|
$
|
51,282
|
|
|
$
|
30,590
|
|
|
$
|
—
|
|
|
$
|
81,872
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
34,456
|
|
27,239
|
|
—
|
|
|
61,695
|
|
|
Operating depreciation and amortization
|
|
1,742
|
|
|
1,618
|
|
|
—
|
|
|
3,360
|
|
Profit before corporate selling, general, and administrative expenses
|
|
$
|
15,084
|
|
|
$
|
1,733
|
|
|
$
|
—
|
|
|
$
|
16,817
|
|
Selling, general, and administrative expenses
|
|
|
|
|
|
10,726
|
|
10,726
|
|
Depreciation and amortization from SG&A
|
|
|
|
|
|
836
|
|
836
|
|
Total selling, general, and administrative expenses
|
|
|
|
|
|
$
|
11,562
|
|
|
$
|
11,562
|
|
Other expense - net
|
|
|
|
|
|
1,439
|
|
1,439
|
|
Operating income
|
|
|
|
|
|
|
|
3,816
|
|
Interest expense – net
|
|
|
|
|
|
463
|
|
463
|
|
Income before income taxes
|
|
|
|
|
|
|
|
$
|
3,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended,
|
September 12, 2015
|
|
(Thousands)
|
|
Environmental
Services
|
|
Oil Business
|
|
Corporate and
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
4,923
|
|
|
$
|
27,965
|
|
|
$
|
—
|
|
|
$
|
32,888
|
|
|
Service revenues
|
|
47,199
|
|
|
2,598
|
|
|
—
|
|
|
49,797
|
|
Total revenues
|
|
$
|
52,122
|
|
|
$
|
30,563
|
|
|
$
|
—
|
|
|
$
|
82,685
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
35,532
|
|
|
27,967
|
|
|
—
|
|
|
63,499
|
|
|
Operating depreciation and amortization
|
|
1,647
|
|
|
1,949
|
|
|
—
|
|
|
3,596
|
|
Profit before corporate selling, general, and administrative expenses
|
|
$
|
14,943
|
|
|
$
|
647
|
|
|
$
|
—
|
|
|
$
|
15,590
|
|
Selling, general, and administrative expenses
|
|
|
|
|
|
9,872
|
|
|
9,872
|
|
Depreciation and amortization from SG&A
|
|
|
|
|
|
823
|
|
823
|
|
Total selling, general, and administrative expenses
|
|
|
|
|
|
$
|
10,695
|
|
|
$
|
10,695
|
|
Other expense - net
|
|
|
|
|
|
99
|
|
|
99
|
|
Operating income
|
|
|
|
|
|
|
|
4,796
|
|
Interest expense – net
|
|
|
|
|
|
404
|
|
|
404
|
|
Income before income taxes
|
|
|
|
|
|
|
|
$
|
4,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Three Quarters Ended,
|
September 10, 2016
|
|
(Thousands)
|
|
Environmental
Services
|
|
Oil Business
|
|
Corporate and
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
14,826
|
|
|
$
|
60,756
|
|
|
$
|
—
|
|
|
$
|
75,582
|
|
|
Service revenues
|
|
141,254
|
|
|
24,041
|
|
|
$
|
—
|
|
|
165,295
|
|
Total revenues
|
|
$
|
156,080
|
|
|
$
|
84,797
|
|
|
$
|
—
|
|
|
$
|
240,877
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
106,892
|
|
|
80,762
|
|
|
—
|
|
|
187,654
|
|
|
Operating depreciation and amortization
|
|
5,166
|
|
|
4,789
|
|
|
—
|
|
|
9,955
|
|
Profit (loss) before corporate selling, general, and administrative expenses
|
|
$
|
44,022
|
|
|
$
|
(754
|
)
|
|
$
|
—
|
|
|
$
|
43,268
|
|
Selling, general, and administrative expenses
|
|
|
|
|
|
34,455
|
|
|
34,455
|
|
Depreciation and amortization from SG&A
|
|
|
|
|
|
2,487
|
|
|
2,487
|
|
Total selling, general, and administrative expenses
|
|
|
|
|
|
$
|
36,942
|
|
|
$
|
36,942
|
|
Other expense - net
|
|
|
|
|
|
1,238
|
|
|
1,238
|
|
Operating income
|
|
|
|
|
|
|
|
5,088
|
|
Interest expense – net
|
|
|
|
|
|
1,432
|
|
|
1,432
|
|
Income before income taxes
|
|
|
|
|
|
|
|
$
|
3,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Three Quarters Ended,
|
September 12, 2015
|
|
(Thousands)
|
|
Environmental
Services
|
|
Oil Business
|
|
Corporate and
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
15,634
|
|
|
$
|
83,875
|
|
|
$
|
—
|
|
|
$
|
99,509
|
|
|
Service revenues
|
|
142,344
|
|
|
7,810
|
|
|
—
|
|
|
150,154
|
|
Total revenues
|
|
$
|
157,978
|
|
|
$
|
91,685
|
|
|
$
|
—
|
|
|
$
|
249,663
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
109,836
|
|
|
87,740
|
|
|
—
|
|
|
197,576
|
|
|
Operating depreciation and amortization
|
|
5,045
|
|
|
5,653
|
|
|
—
|
|
|
10,698
|
|
Profit (loss) before corporate selling, general, and administrative expenses
|
|
$
|
43,097
|
|
|
$
|
(1,708
|
)
|
|
$
|
—
|
|
|
$
|
41,389
|
|
Selling, general, and administrative expenses
|
|
|
|
|
|
31,553
|
|
|
31,553
|
|
Depreciation and amortization from SG&A
|
|
|
|
|
|
2,352
|
|
|
2,352
|
|
Total selling, general, and administrative expenses
|
|
|
|
|
|
$
|
33,905
|
|
|
$
|
33,905
|
|
Other (income) - net
|
|
|
|
|
|
(153)
|
|
|
(153)
|
|
Operating income
|
|
|
|
|
|
|
|
7,637
|
|
Interest expense – net
|
|
|
|
|
|
1,366
|
|
|
1,366
|
|
Income before income taxes
|
|
|
|
|
|
|
|
$
|
6,271
|
|
Total assets by segment as of
September 10, 2016
and
January 2, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
September 10, 2016
|
|
January 2, 2016
|
Total Assets:
|
|
|
|
|
|
Environmental Services
|
|
$
|
130,384
|
|
|
$
|
133,718
|
|
|
Oil Business
|
|
137,377
|
|
|
132,556
|
|
|
Unallocated Corporate Assets
|
|
43,635
|
|
|
35,574
|
|
|
|
Total
|
|
$
|
311,396
|
|
|
$
|
301,848
|
|
Segment assets for the Environmental Services and Oil Business segments consist of property, plant, and equipment, intangible assets, accounts receivable, goodwill, and inventories. Assets for the corporate unallocated amounts consist of property, plant, and equipment used at the corporate headquarters, as well as cash and net deferred tax assets.
(10) COMMITMENTS AND CONTINGENCIES
The Company may enter into purchase obligations with certain vendors. They represent expected payments to third party service providers and other commitments entered into during the normal course of our business. These purchase obligations are generally cancelable with or without notice, without penalty, although certain vendor agreements provide for cancellation fees or penalties depending on the terms of the contract.
The Company has purchase obligations in the form of open purchase orders of
$7.8 million
as of
September 10, 2016
, and
$9.8 million
as of January 2, 2016, primarily for used oil, solvent, machine purchases, disposal and transportation expenses, and capital expenditures.
The Company may be subject to investigations, claims or lawsuits as a result of operating its business, including matters governed by environmental laws and regulations. The Company may also be subject to tax audits in a variety of jurisdictions. When claims are asserted, the Company evaluates the likelihood that a loss will occur and records a liability for those instances when the likelihood is deemed probable and the exposure is reasonably estimable. The Company carries insurance at levels it believes are adequate to cover loss contingencies based on historical claims activity. When the potential loss exposure is limited to the insurance deductible and the likelihood of loss is determined to be probable, the Company accrues for the amount
of the required deductible, unless a lower amount of exposure is estimated. As of
September 10, 2016
and
January 2, 2016
, the Company had accrued
$5.4 million
and
$6.0 million
related to loss contingencies and other contingent liabilities, respectively.
(11) INCOME TAXES
The Company deducted for federal income tax purposes accelerated "bonus" depreciation on the majority of its capital expenditures for assets placed in service in fiscal 2011 through fiscal 2015. Therefore, the Company recorded a noncurrent deferred tax liability to reflect difference between the book basis and the tax basis of those assets. In addition, as a result of the federal bonus depreciation, the Company recorded a Net Operating Loss ("NOL") of
$44.7 million
, which will begin to expire in 2031. The NOL as of
September 10, 2016
was
$51.9 million
, and the remaining deferred tax asset related to the Company’s state and federal NOL was a tax effected balance of
$20.0 million
.
The Company recognizes windfall tax benefits associated with the exercise of stock options directly to stockholders' equity only when realized. Consequently, deferred tax assets are not recognized for NOLs resulting from windfall tax benefits. At
September 10, 2016
, deferred tax assets do not include
$2.5 million
of excess tax benefits from share-based compensation.
The Company's effective tax rate for the
third quarter
of fiscal
2016
was
28.1%
compared to
37.3%
in the
third quarter
of fiscal
2015
. The Company's effective tax rate for the first three quarters of fiscal 2016 was
31.2%
compared to
38.6%
in the first three quarters of fiscal 2015. The rate difference is principally attributable to the differing treatment for financial reporting and income tax reporting for certain income and expenditures items. The rate decrease attributable to expenditures reported net of anticipated reimbursement from an unrelated third party for financial reporting purposes, but deducted on a gross basis for income tax purposes, is partially offset by expenditures which are expensed for financial reporting purposes but not deductible for income tax purposes.
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
$2.5 million
for uncertain tax positions as of
September 10, 2016
and
January 2, 2016
. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.
(12) SHARE-BASED COMPENSATION
The aggregate number of shares of common stock which may be issued under the Company’s
2008 Omnibus Plan
("Plan") is
1,902,077
plus any common stock that becomes available for issuance pursuant to the reusage provision of the Plan. As of
September 10, 2016
, the number of shares available for issuance under the Plan was
553,970
shares.
Stock Option Awards
A summary of stock option activity under this Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Stock Options
|
Number of
Options
Outstanding
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value as of Date Listed
(in thousands)
|
Options outstanding at January 2, 2016
|
534,428
|
|
|
$
|
10.97
|
|
|
2.34
|
|
$
|
224
|
|
Exercised
|
(2,202
|
)
|
|
12.35
|
|
|
|
|
|
Options outstanding at September 10, 2016
|
532,226
|
|
|
$
|
10.98
|
|
|
1.64
|
|
$
|
942
|
|
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 stock on the date of grant. The Company amortizes the expense over the service period, which is the fiscal year in which the award is granted. On May 8, 2015, the Company granted
22,638
restricted shares for service in fiscal
2015
, which vested in the second quarter of fiscal 2016. On May 5, 2016, the Company granted
28,674
restricted shares to the Board of Directors for service in fiscal 2016. As of
September 10, 2016
, there was less than
$0.1 million
of unrecognized expense associated with these grants, which will be recorded throughout the remainder fiscal
2016
. Expense related to the Board of Directors' restricted stock in both the first
three quarters
of fiscal
2016
, and the first
three quarters
of fiscal
2015
was
$0.2 million
.
In February 2014, the Company granted certain members of management
132,107
restricted shares based on the Company's performance in fiscal 2013. These restricted shares are subject to a graded vesting schedule over a
three
year period which started January 1, 2015. There was approximately
$0.2 million
and
$0.5 million
in unrecognized compensation expense remaining related to these awards as of
September 10, 2016
and
January 2, 2016
, respectively. In both the first
three quarters
of fiscal
2016
, and the first
three quarters
of fiscal 2015, compensation expense related to these awards was
$0.4 million
.
In February 2015, the Company granted certain members of management
38,372
restricted shares based on their services in fiscal 2014 and contingent upon continued service. The restricted shares vest over a
three
year period which started January 1, 2016. There was approximately
$0.1 million
and
$0.2 million
in unrecognized compensation expense remaining related to these awards as of
September 10, 2016
and January 2, 2016, respectively. In both the first three quarters of fiscal 2016, and the first three quarters of fiscal 2015, compensation expense related to these awards was approximately
$0.1 million
.
In January 2016, the Company granted certain members of management
43,208
restricted shares based on their services in fiscal 2015 and contingent upon the employees' continued employment with the Company. The restricted shares vest over a period of approximately
three
years, beginning with the grant date in January 2016 and ending with the final vesting in January 2019. There was approximately
$0.2 million
and
$0.3 million
in unrecognized compensation expense remaining related to these awards as of
September 10, 2016
and January 2, 2016, respectively. In the first three quarters of fiscal 2016 and the first three quarters of fiscal 2015, approximately
$0.1 million
and
$0.2 million
was recorded as compensation expense related to these awards, respectively.
The following table summarizes the restricted stock activity for the period ended
September 10, 2016
:
|
|
|
|
|
|
|
|
|
Restricted Stock (Nonvested Shares)
|
|
Number of Shares
|
|
Weighted Average Grant-Date Fair Value Per Share
|
Nonvested shares outstanding at January 2, 2016
|
|
91,529
|
|
|
$
|
14.47
|
|
Granted
|
|
71,882
|
|
|
9.92
|
|
Vested
|
|
(25,882
|
)
|
|
12.59
|
|
Nonvested shares outstanding at September 10, 2016
|
|
137,529
|
|
|
$
|
12.44
|
|
Employee Stock Purchase Plan
As of
September 10, 2016
, the Company had reserved
63,948
shares of common stock available for purchase under the
Employee Stock Purchase Plan of 2008
. In the first
three quarters
of fiscal
2016
, employees purchased
32,036
shares of the Company’s common stock with a weighted average fair market value of
$10.65
per share.
(13) EARNINGS PER SHARE
The following table reconciles the number of shares outstanding for the
third quarter
s of fiscal
2016
and
2015
, respectively, to the number of weighted average basic shares outstanding and the number of weighted average diluted shares outstanding for the purposes of calculating basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended,
|
|
First Three Quarters Ended,
|
(Thousands)
|
|
September 10, 2016
|
|
September 12, 2015
|
|
September 10, 2016
|
|
September 12, 2015
|
Net income
|
|
$
|
2,411
|
|
|
$
|
2,755
|
|
|
$
|
2,516
|
|
|
$
|
3,853
|
|
Less: Income attributable to noncontrolling interest
|
|
76
|
|
|
46
|
|
|
117
|
|
|
115
|
|
Net income attributable to Heritage-Crystal Clean, Inc. available to common stockholders
|
|
$
|
2,335
|
|
|
$
|
2,709
|
|
|
$
|
2,399
|
|
|
$
|
3,738
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
22,267
|
|
|
22,153
|
|
|
22,246
|
|
|
22,136
|
|
Dilutive shares from share–based compensation plans
|
|
283
|
|
|
285
|
|
|
171
|
|
|
269
|
|
Weighted average diluted shares outstanding
|
|
22,550
|
|
|
22,438
|
|
|
22,417
|
|
|
22,405
|
|
|
|
|
|
|
|
|
|
|
Net income per share: basic
|
|
$
|
0.10
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.17
|
|
Net income per share: diluted
|
|
$
|
0.10
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.17
|
|
(14) OTHER EXPENSE (INCOME)
Other expense for the third quarter of fiscal 2016 includes expenses pertaining to a fine and restitution to be paid by International Petroleum Corp. of Delaware (“IPC”). The net charge to other expense in the third quarter of fiscal 2016 pertaining to this matter was approximately
$1.6 million
.