NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 9, 2017
(1) ORGANIZATION AND NATURE OF OPERATIONS
Heritage-Crystal Clean, Inc., a Delaware corporation and its subsidiaries (collectively the “Company”), provide parts cleaning, hazardous and non-hazardous containerized waste, used oil collection, vacuum, antifreeze recycling and field services primarily to small and mid-sized industrial and vehicle maintenance customers. The Company owns and operates a used oil re-refinery where it re-refines used oils and sells high quality base oil for 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 sold as recycled fuel oil. The company also operates multiple wastewater treatment plants and antifreeze recycling facilities at which it produces virgin-quality antifreeze. The Company's locations are in the United States and Ontario, Canada. The Company conducts its primary business operations through Heritage-Crystal Clean, LLC, its wholly owned subsidiary, and all intercompany balances have been eliminated in consolidation.
The Company’s fiscal year ends on the Saturday closest to December 31. The most recent fiscal year ended on
December 31, 2016
. Each of the Company's first three fiscal quarters consists of twelve weeks while the last fiscal quarter consists of sixteen or seventeen weeks.
In the Company's Environmental Services segment, product revenues include sales of solvent, machines, absorbent, accessories, and antifreeze; service revenues include servicing of parts cleaning machines, drum waste removal services, vacuum truck services, field services, and other services. In the Company's Oil Business segment, product revenues include sales of re-refined base oil, recycled fuel oil, used oil, and other products; service revenues include revenues from used oil collection activities, collecting and disposing of waste water and removal and disposal of used oil filters. Due to the Company's integrated business model, it is impracticable to separately present costs of tangible products and costs of services.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 2, "Summary of Significant Accounting Policies," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There have been no material changes in these policies or their application.
Recently Issued Accounting Pronouncements
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Standard
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Issuance Date
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Description
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Our Effective Date
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Effect on the Financial Statements
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ASU 2014-09 “Revenue from Contracts with Customers (Topic 606),” ASU 2014-15 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” ASU 2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10 “ Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” and ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”
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May 2014 and subsequent
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These standards outline a single comprehensive model for entities to use in accounting for revenue using a five-step process that supersedes virtually all existing revenue guidance. The underlying principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities have the option of using either a full retrospective approach or a modified retrospective approach to adopt the guidance. Early adoption is permitted.
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December 31, 2017
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The Company is continuing to evaluate the effect that this accounting standard will have on our consolidated financial position and results of operations. To date, certain personnel have attended technical training concerning this new revenue recognition standard. The Company has identified the portfolios of contracts with customers and the various performance obligations associated with each portfolio of contracts. The Company has also concluded that the timing of revenue recognition will change for certain of our portfolios of contracts upon adoption of ASC 606 as compared to our current revenue recognition. The Company is also assessing the changes that will be necessary to our information systems to enable us to capture the information necessary to recognize revenue in accordance with the new standard and comply with the additional disclosure requirements. The Company will adopt the standard in the first quarter of fiscal 2018 with the modified retrospective approach, with the cumulative effect of initially applying the guidance recognized at the date of initial application.
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ASU 2016-02
Leases
(Topic 842)
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February 2016
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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.
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January 4, 2019
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The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations. The Company anticipates that implementation of this standard will result in an increase to assets and an increase to liabilities.
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Recently issued accounting standards adopted
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Standard
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Issuance Date
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Description
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Effective Date
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Effect on the Financial Statements
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ASU 2016-09 Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
(Topic 718)
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March 2016
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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.
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January 1, 2017
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ASU 2016-09 simplified the treatment for employee share-based compensation by allowing an entity to recognize excess tax benefits in the current period whether or not current taxes payable are reduced. Prior to 2017 the Company could not recognize windfall tax benefits associated with employee share-based compensation because it was in an NOL position and current taxes payable would not be reduced by the excess tax benefits. As a result of ASU 2016-09 the Company recognized excess tax benefits of $2.5 million from share-based compensation from prior years, resulting in cumulative-effect increases to retained earnings and deferred tax assets of approximately $1.0 million.
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ASU 2015-11, Simplifying the Measurement of Inventory. (Topic 330)
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July 2015
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This update requires the measurement of inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.
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January 1, 2017
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The adoption of ASU 2015-11 at the start of fiscal 2017 resulted in no impact to our consolidated financial statements.
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ASU 2014-15 Presentation of Financial Statements - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
(Subtopic 205-40)
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August 2014
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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.
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December 31, 2016
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The adoption of ASU 2014-15 in fiscal 2016 resulted in no impact to our consolidated financial statements.
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2015-03
Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, and 2015-15 Interest—Imputation of Interest (Subtopic 835-30)
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April 2015
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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.
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January 3, 2016
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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.
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2015-16 Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments (Topic 805)
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September 2015
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This update simplifies the accounting for measurement-period adjustments in a business combination by requiring the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined. The acquirer is also required to record in the reporting period in which the adjustments are determined the effect on earnings of changes in depreciation, amortization, and other items resulting from the change to the provisional amounts.
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January 3, 2016
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The Company early adopted the amendments of this ASU No. 2015-16 in fiscal 2015 and it did not have an impact on our consolidated financial condition and results of operations.
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(3) BUSINESS COMBINATIONS
On December 2, 2016, the Company purchased the assets of Recycle Engine Coolant, Inc. ("REC"). The purchase price for the acquisition was
$0.7 million
, including
$0.1 million
placed into escrow. The Company purchased the assets of REC in order to expand its antifreeze recycling capabilities.
On March 24, 2016, the Company purchased the assets of Phoenix Environmental Services, Inc. and Pipeline Video and Cleaning North Corporation (together "Phoenix Environmental"). The purchase price for the acquisition was
$2.7 million
, including
$0.3 million
placed into escrow. The Company purchased the assets of Phoenix Environmental in order to expand its service coverage area into the Pacific Northwest. During the measurement period, the Company made adjustments to the provisional amounts reported as the estimated fair values of assets acquired as part of the Phoenix Environmental business combination. Compared to the provisional value reported as of December 31, 2016, the fair values presented in the table below reflect a decrease to accounts receivable of
$12 thousand
, a decrease to property, plant, & equipment of
$77 thousand
, and an increase to goodwill of
$89 thousand
. Factors leading to goodwill being recognized are the Company's expectations of synergies from integrating Phoenix Environmental into the Company as well as the value of intangible assets that are not separately recognized, such as assembled workforce.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, net of cash acquired, related to each acquisition:
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(Thousands)
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Phoenix Environmental
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REC
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Accounts receivable
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$
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260
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$
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80
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Inventory
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27
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56
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Property, plant, & equipment
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398
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457
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Equipment at customers
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38
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—
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Intangible assets
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700
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132
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Goodwill
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1,245
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—
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Total purchase price, net of cash acquired
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$
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2,668
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$
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725
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(4) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
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(Thousands)
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September 9,
2017
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December 31,
2016
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Trade
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$
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44,907
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$
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42,332
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Less: allowance for doubtful accounts
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1,719
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2,176
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Trade - net
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43,188
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40,156
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Related parties
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1,213
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1,324
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Other
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1,480
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6,053
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Total accounts receivable - net
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$
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45,881
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$
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47,533
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The following table provides the changes in the Company’s allowance for doubtful accounts for the
first three quarters
ended
September 9, 2017
, and the fiscal year ended
December 31, 2016
:
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For the First Three Quarters Ended,
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For the Fiscal Year Ended,
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(Thousands)
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September 9,
2017
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December 31,
2016
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Balance at beginning of period
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$
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2,176
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$
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2,207
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Provision for bad debts
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105
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687
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Accounts written off, net of recoveries
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(562
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)
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(718
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Balance at end of period
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$
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1,719
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$
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2,176
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(5) INVENTORY
The carrying value of inventory consisted of the following:
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(Thousands)
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September 9,
2017
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December 31,
2016
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Used oil and processed oil
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$
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6,765
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$
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5,493
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Solvents and solutions
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5,663
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5,014
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Drums and supplies
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4,071
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3,790
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Machines
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3,163
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2,576
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Other
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1,762
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1,899
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Total inventory
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21,424
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18,772
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Less: machine refurbishing reserve
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(490
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)
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(214
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)
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Total inventory - net
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$
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20,934
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$
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18,558
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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 routinely monitors its inventory levels at each of its locations and evaluates inventories for excess or slow-moving items. If circumstances indicate the cost of inventories exceed their recoverable value, inventories are reduced to net realizable value. The Company had
no
inventory write downs during the third quarters of fiscal 2017 and fiscal 2016. There were
no
inventory write-downs in the first three quarters of fiscal 2017 compared to
$1.7 million
of inventory write-downs in the first three quarters of fiscal 2016.
(6)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
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(Thousands)
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September 9,
2017
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December 31,
2016
|
Machinery, vehicles, and equipment
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$
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79,221
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$
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78,592
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Buildings and storage tanks
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68,938
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69,977
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Land
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9,563
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10,363
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Leasehold improvements
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4,997
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4,876
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Construction in progress
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13,343
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8,646
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Assets held for sale
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60
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|
|
177
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Total property, plant and equipment
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176,122
|
|
|
172,631
|
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Less: accumulated depreciation
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(47,999
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)
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(41,456
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)
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Property, plant and equipment - net
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$
|
128,123
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$
|
131,175
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(Thousands)
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September 9,
2017
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December 31,
2016
|
Equipment at customers
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$
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66,634
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$
|
63,502
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Less: accumulated depreciation
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(43,582
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)
|
|
(40,469
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)
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Equipment at customers - net
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$
|
23,052
|
|
|
$
|
23,033
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Depreciation expense for both third quarters ended September 9, 2017 and September 10, 2016 was
$3.4 million
. Depreciation expense for the first three quarters ended September 9, 2017, and September 10, 2016 was
$10.2 million
.
(7)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is measured as a residual amount as of the acquisition date, which in most cases results in measuring goodwill as an excess of the purchase consideration transferred plus the fair value of any noncontrolling interest in the acquiree over the fair value of the net assets acquired, including any contingent consideration. The Company tests goodwill for impairment annually in the fourth quarter and in interim periods if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company's determination of fair value requires certain assumptions and estimates, such as margin expectations, market conditions, growth expectations, expected changes in working capital, etc., regarding expected future profitability and expected future cash flows. The Company 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 December 31, 2016, to September 9, 2017:
|
|
|
|
|
|
|
|
|
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|
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(Thousands)
|
|
Oil Business
|
|
Environmental Services
|
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Total
|
|
|
|
|
|
|
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Goodwill at January 2, 2016
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
3,952
|
|
|
$
|
30,325
|
|
|
$
|
34,277
|
|
Accumulated impairment loss
|
|
(3,952
|
)
|
|
—
|
|
|
(3,952
|
)
|
Net book value at January 2, 2016
|
|
$
|
—
|
|
|
$
|
30,325
|
|
|
$
|
30,325
|
|
Acquisitions
|
|
—
|
|
|
1,158
|
|
|
1,158
|
|
Goodwill at December 31, 2016
|
|
|
|
|
|
|
Gross carrying amount
|
|
3,952
|
|
|
31,483
|
|
|
35,435
|
|
Accumulated impairment loss
|
|
(3,952
|
)
|
|
—
|
|
|
(3,952
|
)
|
Net book value at December 31, 2016
|
|
$
|
—
|
|
|
$
|
31,483
|
|
|
$
|
31,483
|
|
Measurement period adjustments
|
|
—
|
|
|
97
|
|
|
97
|
|
Goodwill at September 9, 2017
|
|
|
|
|
|
|
Gross carrying amount
|
|
3,952
|
|
|
31,580
|
|
|
35,532
|
|
Accumulated impairment loss
|
|
(3,952
|
)
|
|
—
|
|
|
(3,952
|
)
|
Net book value at September 9, 2017
|
|
$
|
—
|
|
|
$
|
31,580
|
|
|
$
|
31,580
|
|
The following is a summary of software and other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 9, 2017
|
|
December 31, 2016
|
(Thousands)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Customer & supplier relationships
|
|
$
|
23,069
|
|
|
$
|
8,310
|
|
|
$
|
14,759
|
|
|
$
|
23,045
|
|
|
$
|
6,682
|
|
|
$
|
16,363
|
|
Software
|
|
4,604
|
|
|
3,822
|
|
|
782
|
|
|
4,573
|
|
|
3,655
|
|
|
918
|
|
Non-compete agreements
|
|
2,950
|
|
|
2,489
|
|
|
461
|
|
|
2,934
|
|
|
2,180
|
|
|
754
|
|
Patents, formulae, and licenses
|
|
1,769
|
|
|
622
|
|
|
1,147
|
|
|
1,769
|
|
|
576
|
|
|
1,193
|
|
Other
|
|
1,348
|
|
|
890
|
|
|
458
|
|
|
1,348
|
|
|
755
|
|
|
593
|
|
Total software and intangible assets
|
|
$
|
33,740
|
|
|
$
|
16,133
|
|
|
$
|
17,607
|
|
|
$
|
33,669
|
|
|
$
|
13,848
|
|
|
$
|
19,821
|
|
Amortization expense was
$0.8 million
for the third quarter ended
September 9, 2017
, and
$0.7 million
for third quarter ended
September 10, 2016
. Amortization expense was
$2.3 million
for both the first three quarters ended September 9, 2017, and the first three quarters ended September 10, 2016. The weighted average useful lives of software; customer & supplier relationships; patents, formulae, and licenses; non-compete agreements, and other intangibles were
9
years,
10
years,
15
years,
5
years, and
6
years, respectively.
The expected amortization expense for the remainder of fiscal 2017 and for fiscal years 2018, 2019, 2020, and 2021 is
$1.0 million
,
$3.0 million
,
$2.6 million
,
$2.5 million
, and
$2.4 million
, respectively. 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 February 21, 2017, the Company entered into a new Credit Agreement ("Credit Agreement") replacing the prior Credit Agreement ("Prior Credit Agreement") dated as of June 29, 2015. The Credit Agreement provides for borrowings of up to
$95.0 million
, subject to the satisfaction of certain terms and conditions, comprised of a term loan of
$30.0 million
and up to
$65.0 million
of borrowings under the revolving loan portion. The actual amount of borrowings available under the revolving loan portion of the Credit Agreement is limited by the Company's total leverage ratio. The amount available to draw at any point in time would be further reduced by any standby letters of credit issued.
Loans made under the New Credit Agreement may be Base Rate Loans or LIBOR Rate Loans, at the election of the Company subject to certain exceptions. Base Rate Loans have an interest rate equal to (i) the higher of (a) the federal funds rate plus
0.5%
, (b) the London Interbank Offering Rate (“LIBOR”) plus
1%
, or (c) Bank of America's prime rate, plus (ii) a variable margin of between
0.75%
and
1.75%
depending on the Company's total leverage ratio, calculated on a consolidated basis. LIBOR rate loans have an interest rate equal to (i) the LIBOR rate plus (ii) a variable margin of between
1.75%
and
2.75%
depending on the Company's total leverage ratio. Amounts borrowed under the New Credit Agreement are secured by a security interest in substantially all of the Company's tangible and intangible assets. In June 2017, the Company entered into a First Amendment to the Credit Agreement that expands the Company's ability to make dispositions without bank group approval.
As of the Effective date of
February 21, 2017
, the effective interest rate on the term loan was
3.28%
and the effective rate on the revolving loan was
3.28%
.
The Credit Agreement contains customary terms and provisions (including representations, covenants, and conditions) for transactions of this type. Certain covenants, among other things, restrict the Company's and its subsidiaries' ability to incur indebtedness, grant liens, make investments and sell assets. The Credit Agreement also contains customary events of default, covenants and representations and warranties. Financial covenants include:
|
|
•
|
An interest coverage ratio (based on interest expense and EBITDA) of at least
3.5
to
1.0
;
|
|
|
•
|
A total leverage ratio no greater than
3.0
to
1.0
, provided that in the event of a permitted acquisition having an aggregate consideration equal to
$10.0 million
or more, at the Borrower’s election, the foregoing
3.00
to
1.00
shall be deemed to be
3.25
to
1.00
for the fiscal quarter in which such permitted acquisition occurs and the three immediately following fiscal quarters and will thereafter revert to
3.00
to
1.00
; and
|
|
|
•
|
A capital expenditures covenant limiting capital expenditures to
$100.0 million
plus, if the capital expenditures permitted have been fully utilized, an additional amount for the remaining term of the Credit Agreement equal to
35%
of EBITDA for the thirteen “four-week” periods most recently ended immediately prior to the full utilization of such
$100.0 million
basket
|
The Credit Agreement places certain limitations on acquisitions and the payment of dividends.
During the first three quarters of fiscal 2017, the Company paid and capitalized
$1.1 million
of debt issuance costs pertaining to the New Credit Agreement and charged
$0.2 million
of unamortized debt issuance costs pertaining to the Prior Credit Agreement to selling, general, and administrative expenses.
Debt at September 9, 2017 and December 31, 2016 consisted of the following:
|
|
|
|
|
|
|
|
|
|
(thousands)
|
|
September 9, 2017
|
|
December 31, 2016
|
Principal amount
|
|
$
|
30,000
|
|
|
$
|
64,195
|
|
Less: unamortized debt issuance costs
|
|
1,349
|
|
|
741
|
|
Debt less unamortized debt issuance costs
|
|
$
|
28,651
|
|
|
$
|
63,454
|
|
During the third quarter of fiscal
2017
, the Company recorded interest of
$0.3 million
on the term loan. During the first three quarters of fiscal 2017, the Company recorded interest of
$1.2 million
on the term loan.
During the third quarter of fiscal 2016, the Company recorded interest of
$0.5 million
on the Prior Credit Agreement term loans and capitalized less than
$0.1 million
for various capital projects. During the first 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. The Company's weighted average interest rate for all debt as of
September 9, 2017
and
September 10, 2016
was
3.6%
and
3.2%
, respectively.
As of
September 9, 2017
and
December 31, 2016
, the Company was in compliance with all covenants under both credit agreements. As of
September 9, 2017
and
December 31, 2016
, the Company had
$0.9 million
and
$3.0 million
of standby letters of credit issued, respectively, and
$64.1 million
and
$27.6 million
was available for borrowing under the revolving credit facility, respectively. We believe that the carrying value of our new debt balance at September 9, 2017 approximates fair value.
(9)
SEGMENT INFORMATION
The Company reports in
two
segments: "Environmental Services" and "Oil Business." The Environmental Services segment consists of the Company's parts cleaning, containerized waste management, vacuum truck service, antifreeze recycling activities, and field services. The Oil Business segment consists primarily of the Company's used oil collection, used oil re-refining activities, and the dehydration of used oil to be sold as recycled fuel oil.
No single customer in either segment accounted for more than
10.0%
of consolidated revenues in any of the periods presented. There were no intersegment revenues.
Operating segment results for the third quarters ended
September 9, 2017
, and
September 10, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended,
|
September 9, 2017
|
|
(Thousands)
|
|
Environmental
Services
|
|
Oil Business
|
|
Corporate and
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
5,623
|
|
|
$
|
23,660
|
|
|
$
|
—
|
|
|
$
|
29,283
|
|
|
Service revenues
|
|
49,419
|
|
|
4,629
|
|
|
—
|
|
|
54,048
|
|
Total revenues
|
|
$
|
55,042
|
|
|
$
|
28,289
|
|
|
$
|
—
|
|
|
$
|
83,331
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
38,298
|
|
25,351
|
|
—
|
|
|
63,649
|
|
|
Operating depreciation and amortization
|
|
1,794
|
|
|
1,555
|
|
|
—
|
|
|
3,349
|
|
Profit before corporate selling, general, and administrative expenses
|
|
$
|
14,950
|
|
|
$
|
1,383
|
|
|
$
|
—
|
|
|
$
|
16,333
|
|
Selling, general, and administrative expenses
|
|
|
|
|
|
10,955
|
|
10,955
|
|
Depreciation and amortization from SG&A
|
|
|
|
|
|
837
|
|
837
|
|
Total selling, general, and administrative expenses
|
|
|
|
|
|
$
|
11,792
|
|
|
$
|
11,792
|
|
Other (income) - net
|
|
|
|
|
|
(3,078)
|
|
(3,078)
|
|
Operating income
|
|
|
|
|
|
|
|
7,619
|
|
Interest expense – net
|
|
|
|
|
|
276
|
|
276
|
|
Income before income taxes
|
|
|
|
|
|
|
|
$
|
7,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Three Quarters Ended,
|
September 9, 2017
|
|
(Thousands)
|
|
Environmental
Services
|
|
Oil Business
|
|
Corporate and
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
17,215
|
|
|
$
|
70,880
|
|
|
$
|
—
|
|
|
$
|
88,095
|
|
|
Service revenues
|
|
146,135
|
|
|
15,936
|
|
|
—
|
|
|
162,071
|
|
Total revenues
|
|
$
|
163,350
|
|
|
$
|
86,816
|
|
|
$
|
—
|
|
|
$
|
250,166
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
111,419
|
|
|
76,791
|
|
|
—
|
|
|
188,210
|
|
|
Operating depreciation and amortization
|
|
5,341
|
|
|
4,624
|
|
|
—
|
|
|
9,965
|
|
Profit before corporate selling, general, and administrative expenses
|
|
$
|
46,590
|
|
|
$
|
5,401
|
|
|
$
|
—
|
|
|
$
|
51,991
|
|
Selling, general, and administrative expenses
|
|
|
|
|
|
33,871
|
|
|
33,871
|
|
Depreciation and amortization from SG&A
|
|
|
|
|
|
2,536
|
|
2,536
|
|
Total selling, general, and administrative expenses
|
|
|
|
|
|
$
|
36,407
|
|
|
$
|
36,407
|
|
Other (income) - net
|
|
|
|
|
|
(11,112)
|
|
|
(11,112)
|
|
Operating income
|
|
|
|
|
|
|
|
26,696
|
|
Interest expense – net
|
|
|
|
|
|
775
|
|
|
775
|
|
Income before income taxes
|
|
|
|
|
|
|
|
$
|
25,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Three quarters Ended,
|
September 10, 2016
|
|
(Thousands)
|
|
Environmental
Services
|
|
Oil Business
|
|
Corporate and
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
14,826
|
|
|
$
|
60,756
|
|
|
$
|
—
|
|
|
$
|
75,582
|
|
|
Service revenues
|
|
141,254
|
|
|
24,041
|
|
|
—
|
|
|
165,295
|
|
Total revenues
|
|
$
|
156,080
|
|
|
$
|
84,797
|
|
|
$
|
—
|
|
|
$
|
240,877
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
106,892
|
|
|
80,762
|
|
|
—
|
|
|
187,654
|
|
|
Operating depreciation and amortization
|
|
5,166
|
|
|
4,789
|
|
|
—
|
|
|
9,955
|
|
Profit (loss) before corporate selling, general, and administrative expenses
|
|
$
|
44,022
|
|
|
$
|
(754
|
)
|
|
$
|
—
|
|
|
$
|
43,268
|
|
Selling, general, and administrative expenses
|
|
|
|
|
|
|
34,455
|
|
|
34,455
|
|
Depreciation and amortization from SG&A
|
|
|
|
|
|
2,487
|
|
|
2,487
|
|
Total selling, general, and administrative expenses
|
|
|
|
|
|
$
|
36,942
|
|
|
$
|
36,942
|
|
Other expense - net
|
|
|
|
|
|
1,238
|
|
|
1,238
|
|
Operating income
|
|
|
|
|
|
|
|
5,088
|
|
Interest expense – net
|
|
|
|
|
|
1,432
|
|
|
1,432
|
|
Income before income taxes
|
|
|
|
|
|
|
|
$
|
3,656
|
|
Total assets by segment as of
September 9, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
September 9, 2017
|
|
December 31, 2016
|
Total Assets:
|
|
|
|
|
|
Environmental Services
|
|
$
|
129,665
|
|
|
$
|
129,506
|
|
|
Oil Business
|
|
131,619
|
|
|
135,323
|
|
|
Unallocated Corporate Assets
|
|
46,177
|
|
|
49,478
|
|
|
|
Total
|
|
$
|
307,461
|
|
|
$
|
314,307
|
|
Segment assets for the Environmental Services and Oil Business 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
$17.4 million
as of
September 9, 2017
, and
$9.7 million
as of December 31, 2016, primarily for used oil, solvent, machine purchases, disposal and transportation expenses, and capital expenditures.
The Company may be subject to investigations, claims or lawsuits as a result of operating its business, including matters governed by environmental laws and regulations. The Company may also be subject to tax audits in a variety of jurisdictions. When claims are asserted, the Company evaluates the likelihood that a loss will occur and records a liability for those instances when the likelihood is deemed probable and the exposure is reasonably estimable. The Company carries insurance at levels it believes are adequate to cover loss contingencies based on historical claims activity. When the potential loss exposure is limited to the insurance deductible and the likelihood of loss is determined to be probable, the Company accrues for the amount of the required deductible, unless a lower amount of exposure is estimated. As of
September 9, 2017
and
December 31, 2016
, the Company had accrued
$5.8 million
and
$5.5 million
related to loss contingencies and other contingent liabilities, respectively.
(11) INCOME TAXES
The Company deducted for federal income tax purposes accelerated "bonus" depreciation on the majority of its capital expenditures for assets placed in service in fiscal 2011 through fiscal 2015. Therefore, the Company recorded a noncurrent deferred tax liability to reflect difference between the book basis and the tax basis of those assets. In addition, as a result of the federal bonus depreciation, the Company recorded a Net Operating Loss ("NOL") of
$44.7 million
in fiscal 2011, which will begin to expire in 2031. The NOL as of September 9, 2017 was
$24.1 million
, and the remaining deferred tax asset related to the Company’s state and federal NOL was a tax effected balance of
$9.3 million
.
ASU 2016-09 simplified the treatment for employee share-based compensation by allowing an entity to recognize excess tax benefits in the current period whether or not current taxes payable are reduced. Prior to 2017 the Company could not recognize windfall tax benefits associated with employee share-based compensation because it was in an NOL position and current taxes payable would not be reduced by the excess tax benefits. As a result of ASU 2016-09 the Company recognized excess tax benefits of
$2.5 million
from share-based compensation from prior years, resulting in cumulative-effect increases to retained earnings and deferred tax assets of approximately
$1.0 million
.
The Company's effective tax rate for the third quarter of fiscal
2017
was
35.2%
compared to
28.1%
in the third quarter of fiscal
2016
. The Company’s effective rate for the first three quarters of fiscal 2017 was
36.1%
compared to
31.2%
in the first three quarters of fiscal 2016. The rate difference is principally attributable to the differing treatment for financial reporting and income tax reporting for certain income and expenditures items. The rate increase is attributable to the previous year’s expenditures reported net of anticipated reimbursement from an unrelated third party for financial reporting purposes but deducted on a gross basis for income tax purposes, which is partially offset by expenditures which are expensed for financial reporting purposes but not deductible for income tax purposes.
The Company establishes reserves when it is more likely than not that the Company will not realize the full tax benefit of a position. The Company had a reserve of
$2.4 million
for uncertain tax positions as of
September 9, 2017
and
December 31, 2016
. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.
(12) SHARE-BASED COMPENSATION
The aggregate number of shares of common stock which may be issued under the Company’s
2008 Omnibus Plan
("Plan") is
1,902,077
plus any common stock that becomes available for issuance pursuant to the reusage provision of the Plan. As of
September 9, 2017
, the number of shares available for issuance under the Plan was
737,639
shares.
Stock Option Awards
A summary of stock option activity under this Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Stock Options
|
Number of
Options
Outstanding
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value as of Date Listed
(in thousands)
|
Options outstanding at December 31, 2016
|
514,287
|
|
|
$
|
11.00
|
|
|
1.33
|
|
|
$
|
2,414
|
|
Exercised
|
(487,764
|
)
|
|
11.17
|
|
|
—
|
|
|
—
|
|
Options outstanding at September 9, 2017
|
26,523
|
|
|
$
|
8.04
|
|
|
1.37
|
|
|
$
|
331
|
|
Restricted Stock Compensation/Awards
Annually, the Company grants restricted shares to its Board of Directors. The shares become fully vested
one
year from their grant date. The fair value of each restricted stock grant is based on the closing price of the Company's common stock on the date of grant. The Company amortizes the expense over the service period, which is the fiscal year in which the award is granted. In addition, the Company may grant restricted shares to certain members of management based on their services and contingent upon continued service with the Company. The restricted shares vest over a period of approximately
three
years from the grant date. The fair value of each restricted stock grant is based on the closing price of the Company's common stock on the date of grant.
The following table shows a summary of restricted shares grants and expense resulting from the awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation Expense
|
|
|
|
|
(thousands except for shares total)
|
|
First three quarters Ended,
|
|
Unrecognized Expense as of
|
Recipient of Grant
|
|
Grant Date
|
|
Restricted Shares
|
|
September 9, 2017
|
|
September 10, 2016
|
|
September 9, 2017
|
|
December 31, 2016
|
Board of Directors
|
|
April, 2017
|
|
14,980
|
|
|
$
|
168
|
|
|
$
|
197
|
|
|
$
|
73
|
|
|
$
|
—
|
|
Members of Management
|
|
February, 2015
|
|
38,732
|
|
|
76
|
|
|
83
|
|
|
34
|
|
|
110
|
|
Members of Management
|
|
January, 2016
|
|
43,208
|
|
|
72
|
|
|
82
|
|
|
136
|
|
|
208
|
|
Members of Management
|
|
February, 2017
|
|
146,564
|
|
|
307
|
|
|
161
|
|
|
1,075
|
|
|
1,382
|
|
Chief Executive Officer
|
|
February, 2017
|
|
500,000
|
|
|
737
|
|
|
—
|
|
|
2,798
|
|
|
—
|
|
In February 2017, as part of Mr. Recatto's employment agreement, the Company granted a restricted stock award of
500,000
shares of common stock, which vests through January 2021 in an amount based on the vesting table below, with the common stock price increase to be determined based on the increase in the price of the Company’s common stock (if any) from the closing price of the common stock as reported by Nasdaq on the employment commencement date (
$15.00
) and the common stock price on the potential vesting date (determined by using the weighted average closing price of a share of the Company's common stock for the 90-day period ending on the vesting date). If the stock price does not increase by
$5.00
, then
no
shares shall vest. During the first three quarters of fiscal 2017, the Company recorded approximately
$0.7 million
of compensation expense related to this award. In the future, the Company expects to recognize compensation expense of approximately
$2.8 million
over the remaining requisite service period, which ends January 31, 2021. The fair value of this restricted stock award as of the grant date was estimated using a Monte Carlo simulation model. Key assumptions used in the Monte Carlo simulation to estimate the grant date
fair value of this award are a risk-free rate of
1.70%
, expected dividend yield of
zero
, and an expected volatility assumption of
41.73%
.