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Recently Issued Accounting Standards Adopted
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(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 Class
Trading Symbol
Name
of Exchange on which registered
Common Stock, par value $0.01 per share
HCCI
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes x No o
1
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 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 o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
On October 14, 2019, there were outstanding 23,186,061 shares of Common Stock, $0.01 par value, of Heritage-Crystal Clean, Inc.
Common stock - 26,000,000 shares authorized at $0.01 par value, 23,185,567 shares and 23,058,584 shares issued and outstanding at September 7, 2019 and December 29, 2018, respectively
$
232
$
231
Additional
paid-in capital
199,216
197,533
Retained earnings
66,333
55,819
Total
Heritage-Crystal Clean, Inc. stockholders' equity
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 has two reportable segments: "Environmental Services" and "Oil Business." The Environmental Services segment consists of the Company's parts cleaning, containerized waste management, vacuum truck services, antifreeze recycling activities, and field services. The Oil Business segment 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. No customer represented greater than 10% of consolidated revenues for any of the periods presented. There were no intersegment revenues. Both 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.
The Company’s fiscal year ends on the Saturday closest to December 31. The most recent fiscal year ended on December 29, 2018. 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; rental income includes embedded lease income from certain of our parts cleaning contracts. In the Company's Oil Business segment, 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 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.
9
(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 29, 2018. There have been no material changes in these policies or their application during the first three quarters of fiscal 2019 with the exception of our accounting for leases. See footnote 12 — Commitments and Contingencies for more information.
Recently
Issued Accounting Pronouncements
Standard
Issuance Date
Description
Our Effective Date
Effect on the Financial Statements
ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”
June
2016
This update modifies the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to utilize a new forward-looking “expected loss” methodology that generally will result in the earlier recognition of allowance for losses.
The Company is evaluating
the impact this new standard would have on our consolidated financial statements.
Recently Issued Accounting Standards Adopted
Standard
Issuance Date
Description
Effective
Date
Effect on the Financial Statements
ASU 2016-02 Leases (Topic 842), and subsequent updates
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.
The Company adopted the new leasing standard ASC 842 "Leases" on December 30, 2018. ASU 2016-02 provides for a modified retrospective transition
approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption. The Company elected to apply ASU 2016-02 as of the beginning of the period of adoption (December 30, 2018) and will not restate comparative periods. The adoption resulted in the recognition
of $63.3 million of right of use assets and $63.3 million of lease liabilities. The Company recognized approximately $2.2 million of deferred rental income from certain embedded leases during the first quarter of 2019.
10
Effective
December 30, 2018, the Company adopted the requirements of Topic 842. The cumulative effects of the changes made to our Statement of Income and Balance Sheet are as follows:
On March 25, 2019, the Company completed the acquisition of certain assets of All Valley Disposal, Inc., an environmental services provider based in Fresno, California. Consideration for the acquisition paid at closing was $0.6 million. Contingent upon the achievement of certain business performance metrics, total consideration for the acquisition could reach a maximum of approximately $1.3 million. We are still in the process of completing our valuation, and accordingly our estimates and assumptions are subject to change within the measurement period. The
Company is continuing to examine facts and circumstances that existed at the acquisition date and how those affect the estimated fair value of working capital, and the allocation of the estimated purchase price to other tangible and intangible assets. The results of All Valley Disposal are consolidated into the Company’s Environmental Services segment.
On February 1, 2019, the Company purchased the assets of W.S. Supplies, Inc. ("WSS") pursuant to an Asset Purchase Agreement. The Company purchased the assets of WSS to expand the
Company’s Environmental Services segment in the mid-west. The purchase price was set at $0.5 million subject to certain adjustments, including a contingent consideration provision, and is preliminarily allocated based on our estimates and assumptions of the approximate fair values of assets acquired on the acquisition date. We are still in the process of completing our valuation, and accordingly our estimates and assumptions are subject to change within the measurement period. The Company is continuing to examine facts and circumstances that existed at the acquisition date and how those affect the estimated fair value of working capital, and the allocation of the estimated purchase price to other tangible and intangible assets. The results of WSS are consolidated into the
Company’s Environmental Services segment.
On January 11, 2019, the Company purchased the assets of the consumer division of GlyEco, Inc. ("GlyEco") pursuant to an Asset Purchase Agreement. The Company purchased the assets of GlyEco's consumer division to expand the Company’s antifreeze line of business while expanding geographically. The purchase price was set at $1.6 million subject to certain adjustments, including working capital adjustments, and is preliminarily allocated based on our estimates and assumptions
of the approximate fair values of assets acquired on the acquisition date. We are still in the process of completing our valuation, and accordingly our estimates and assumptions are subject to change within the measurement period. The Company is continuing to examine facts and circumstances that existed at the acquisition date and how those affect the estimated fair value of working capital, and the allocation of the estimated purchase price to other tangible and intangible assets. The results of GlyEco are consolidated into the Company’s Environmental Services segment.
On May 3, 2018, the
Company purchased the assets of Products Plus, Inc. and AO Holding Company-Kansas City, LLC (collectively "PPI") pursuant to an Asset Purchase Agreement. The Company purchased the assets of PPI to expand the Company’s market share in the collection, recycling, and sales of a full line of antifreeze products. The purchase price was set at $5.9 million subject to certain adjustments, including a working capital adjustment and a contingent consideration provision. During the measurement period, the Company finalized the purchase price allocation of the PPI business combination. Compared to the provisional values reported as of December
29, 2018, the fair values presented in the table below reflect increases to property, plant, & equipment of $0.2 million and other intangible assets of $1.5 million. Compared to the provisional values reported as of December 29, 2018, the finalized fair values presented in the table below reflect decreases to contingent consideration of $0.1 million and goodwill of $1.8 million. Contingent consideration to be paid subsequent to September 7, 2019 is contingent upon several business performance metrics over the three-year period starting with the acquisition date and ending May 3, 2021. The
range of the potential contingent consideration, which is to be paid out subsequent to September 7, 2019, is between zero and $1.5 million. Goodwill recognized from the acquisition of PPI represents the excess of the estimated purchase consideration transferred over the estimated fair value of the assets acquired. Factors leading to goodwill being recognized are the Company's expectations of synergies from combining operations of PPI and the Company as well as the value of intangible assets that are not separately recognized, such as assembled workforce. The results of PPI are consolidated into the
Company’s Environmental Services segment.
On June 11, 2018, the Company purchased the assets of Kurt Lanse d/b/a Hot Tank Supply Company ("HTSC") pursuant to an Asset Purchase Agreement. The Company purchased the assets of HTSC to expand the Company’s market share in California. The purchase price was set at $0.7 million subject to certain adjustments, including a working capital adjustment and a deferred and contingent consideration provision, and is allocated based on our estimates and assumptions of the approximate
fair values of assets acquired on the acquisition date. The Company estimates that contingent consideration to be paid subsequent to September 7, 2019 will be approximately $0.1 million. Goodwill recognized from the acquisition of HTSC represents the excess of the estimated purchase consideration transferred over the estimated fair value of the assets acquired. Factors leading to goodwill being recognized are the Company's expectations of synergies from combining operations of HTSC and the Company as well as the value of intangible assets that are not separately recognized, such as assembled workforce. The results of
HTSC are consolidated into the Company’s Environmental Services segment.
12
The following table summarizes the estimated fair values of the assets acquired, some of which are preliminary, related to each acquisition:
Pro forma financial information was not presented as results were immaterial to the Company's consolidated results for the first three quarters ended September 7, 2019.
13
(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 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.
Accounts
Receivable — Net, includes amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on analysis of customer credit worthiness and historical losses. Accounts receivable are written off once the Company determines the account to be uncollectible. The Company does not have any off-balance-sheet
credit exposure related to its customers.
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.
The following table disaggregates our revenue by major lines:
During
the quarter ended September 7, 2019, the Company recognized no revenue that was included in the contract liabilities balance as of December 29, 2018. During the first three quarters ended September 7, 2019, the Company recognized $0.3 million of revenue that was included in the contract liabilities balance as of December 29, 2018. As
a result of having adopted ASC 842 on December 30, 2018, the Company recognized within Contract liabilities - net approximately $2.2 million of deferred rental income. The Company has no assets recognized from costs to obtain or fulfill a contract with a customer. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
(5)
ACCOUNTS RECEIVABLE
Accounts receivable for the third quarter ended September 7, 2019, and the fiscal year ended December 29, 2018 consisted of the following:
The following table provides the changes in the Company’s allowance for doubtful accounts for the three quarters ended September 7, 2019, and the fiscal year ended
December 29, 2018:
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 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 first three quarters of fiscal 2019 or fiscal 2018.
(7) PROPERTY, PLANT, AND EQUIPMENT
Property,
plant, and equipment consisted of the following:
Depreciation expense for the third quarters ended September 7, 2019 and September 8, 2018 was $3.3
million and $3.1 million, respectively. Depreciation expense for the first three quarters ended September 7, 2019 and September 8, 2018 was $9.7 million and $8.9 million, respectively.
16
(8) 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.
Amortization
expense was $0.7 million for both third quarters ended September 7, 2019, and September 8, 2018. Amortization expense was $2.5 million for the first three quarters ended September 7, 2019, and $2.2 million for the first three quarters ended September 8, 2018.
The weighted average useful lives of software and other intangibles are as follows:
17
Weighted
average useful life (years)
Patents, formulae, & licenses
15
Customer and supplier relationships
11
Software
10
Non-compete agreements
5
Other
intangibles
7
The estimated amortization expense for the remainder of fiscal 2019 and each of the five succeeding fiscal years is as follows:
(millions)
Fiscal Year
Amortization
Expense
2019
$1.0
2020
3.1
2021
2.9
2022
2.7
2023
2.1
2024
0.6
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.
The Company's Credit Agreement as amended ("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 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 Credit Agreement are secured by a security interest in substantially all of the Company's tangible and intangible assets.
18
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 3.00 to 1.00, 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 total leverage ratio 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 thereafter will 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.
For the third quarter ended September 7, 2019, the Company recorded interest expense of $0.4
million, of which $0.3 million is with respect to our term loan, and $0.1 million relates to amortization of debt issuance costs. The Company recorded interest expense of $0.4 million for the third quarter ended September 8, 2018 which related primarily to our term loan. During the first three quarters of fiscal 2019, the Company recorded interest expense of $1.2 million which related primarily to our term loan. In the first three quarters of fiscal 2018 the Company
recorded interest expense of $1.0 million.
As of September 7, 2019 and December 29, 2018, the Company was in compliance with all covenants under its
Credit Agreement. As of September 7, 2019 and December 29, 2018, the Company had $1.1 million and $1.3 million of standby letters of credit issued, respectively, and $62.5 million and $63.7 million was available for borrowing under the bank credit facility, respectively. We believe that the carrying value of our debt balance at September 7, 2019 approximates fair value.
Scheduled Maturities of Debt
(thousands)
Fiscal
Year:
Term Loan
2019
$
—
2020
—
2021
—
2022
30,000
2023
—
Aggregate
Maturities
$
30,000
19
(11) SEGMENT INFORMATION
The Company has two
reportable segments: "Environmental Services" and "Oil Business." The Environmental Services segment consists primarily 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. Both the Environmental Services and Oil Business segment
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.
Segment assets for the Environmental Services and Oil Business 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.
22
(12) COMMITMENTS AND CONTINGENCIES
LEASES
Lessee
The
Company leases buildings and property, railcars, machinery and equipment, and various types of vehicles 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. No leases are tied to a market index rate or CPI. 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 lease 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 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.
Cash
paid for amounts included in the measurement of lease liabilities:
Operating cash flows from financing leases
$
4
$
4
Operating
cash flows from operating leases
$
6,554
$
19,805
Financing cash flows from financing leases
$
13
$
13
Right-of-use
assets obtained in exchange for new finance lease liabilities
$
1,487
$
1,487
Right-of-use assets obtained in exchange for new operating lease liabilities
$
12,099
$
92,226
Weighted-average
remaining lease term (years)
Finance leases
6.90
Operating leases
4.80
Weighted-average
discount rate
Finance leases
3.4
%
Operating leases
5.7
%
Future
annual minimum lease payment commitments as of September 7, 2019 were as follows:
(thousands)
2019
$
7,770
2020
22,835
2021
18,681
2022
14,685
2023
10,840
2024
and thereafter
16,440
Total minimum lease payments
$
91,251
Less: imputed interest
11,703
Lease
liability
$
79,548
As disclosed in our 2018 Annual Report on Form 10-K, and under the previous lease accounting standard 840, future minimum lease payments due under noncancelable operating lease agreements as of December 29, 2018 were as follows:
24
(thousands)
2019
$
22,226
2020
16,095
2021
12,458
2022
9,247
2023
6,020
2024
and thereafter
5,786
Total minimum lease payments
$
71,832
Lessor
The Company is a lessor of portions of a building and property, railcars, 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. As of September 7, 2019, the
Company is party to a contract under which it leases railcars to the related party Calumet Specialty Products Partners, L.P. 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. Contained in Note 7, “Property, plant, and equipment,” are disclosures concerning the Company’s underlying assets under operating leases. 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 railcars and portions of a building and property.
Rental income for the third quarter and first three quarters ended September 7, 2019 was as follows:
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.
25
The
Company has purchase obligations in the form of open purchase orders of $28.0 million as of September 7, 2019, and $18.6 million as of December 29, 2018, 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 7, 2019 and December 29, 2018,
the Company had accrued $4.4 million and $4.2 million related to loss contingencies and other contingent liabilities, respectively.
(13) 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 the third quarter of 2019. Therefore, the
Company recorded a noncurrent deferred tax liability as to the difference between the book basis and the tax basis of those assets. As of the third quarter of fiscal 2019, the Company's remaining Federal Net Operating Loss ("NOL") was $14.6 million, which will begin to expire in 2031. The unexpired balance on the federal NOL generated in 2011 is $0.5 million as of September 7, 2019. The Company's remaining balance of Federal NOLs recorded during 2012 - 2015 was $14.1 million as of September 7, 2019. There are also state NOLs of varying amounts, dependent
on each state’s conformity with bonus depreciation. The remaining deferred tax asset related to the Company's state and federal NOL was a tax effected balance of $3.4 million.
The Company's effective tax rate for the third quarter of fiscal 2019 was 27.1% compared to 26.2% in the third quarter of fiscal 2018. The Company’s effective rate for the first three quarters of fiscal 2019 was 24.0% compared to 24.3%
in the first three quarters of fiscal 2018.
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 7, 2019. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.
26
(14) SHARE-BASED
COMPENSATION
On February 20, 2019, the Compensation Committee and the Board of Directors of the Company adopted the 2019 Incentive Award Plan (the “2019 Plan”), to replace the Company’s 2008 Omnibus Incentive Plan (“2008 Plan”), which expired in March 2018. The 2019 Plan was approved during the second quarter of 2019 and authorizes 1,500,000 shares to be available for award grants.
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 share grants and expense resulting from the awards:
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 2019, the Company recorded approximately $0.6 million of compensation expense related to this award. In the future, the Company expects to recognize compensation expense of approximately $0.7 million over the remaining requisite service period, which ends January 31, 2021. The fair value of this restricted stock award as of the grant date was estimated using a Monte Carlo simulation model. Key assumptions used
in the Monte Carlo simulation to estimate the grant date fair value of this award are a risk-free rate of 1.70%, expected dividend yield of zero, and an expected volatility assumption of 41.73%.
Vesting Table
Increase in Stock Price From the Employment Commencement Date to the Vesting Date
Total Percentage of Restricted
Stock
Shares to Be Vested
Less than $5 per share increase
—%
$5 per share increase
25%
$10 per share increase
50%
$15 per share increase
75%
$20
or more per share increase
100%
27
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 the award date and final vesting date, Mr. Recatto shall become vested in 50%
of the corresponding total percentage of restricted shares earned on the last day of the 180 day period.
Vestings
On June 10, 2019, the average closing price of the Company's common stock met the 50% marginal level and Mr. Recatto became fully vested in half of the 125,000 vested shares. On March 14, 2018, the average closing price of the Company's common stock met the 25%
marginal level and Mr. Recatto became fully vested in half of the 125,000 vested shares.
The following table summarizes the restricted stock activity for the first three quarters ended September 7, 2019:
As of September 7, 2019, the Company
had reserved 115,022 shares of common stock available for purchase under the Employee Stock Purchase Plan. In the first three quarters of fiscal 2019, employees purchased 14,240 shares of the Company’s common stock with a weighted average fair market value of $25.72 per share.
28
(15) EARNINGS PER SHARE
The
following table reconciles the number of shares outstanding for the third quarters and first three quarters of fiscal 2019 and 2018, 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:
Less:
income attributable to noncontrolling interest
86
74
278
213
Net income attributable
to Heritage-Crystal Clean, Inc. available to common stockholders
$
5,970
$
6,345
$
10,514
$
12,224
Weighted
average basic shares outstanding
23,185
23,048
23,146
23,013
Dilutive shares for share–based
compensation plans
236
356
238
286
Weighted average diluted shares outstanding
23,421
23,404
23,384
23,299
Net
income per share: basic
$
0.26
$
0.28
$
0.45
$
0.53
Net
income per share: diluted
$
0.25
$
0.27
$
0.45
$
0.52
(16)
OTHER EXPENSE - NET
Other expense - net was $2.5 million of expense for the first three quarters of fiscal 2019 primarily relating to $1.5 million of site closure costs for a facility in Wilmington, DE. Other expense of $1.0 million for the first three quarters of fiscal 2018 primarily consists of $0.7 million of site closure costs.
29
(17)
SUBSEQUENT EVENTS
On October 8, 2019, Heritage-Crystal Clean completed the acquisition of certain assets of California Environmental & Litho, Inc., which provided transportation and disposal services for hazardous and non-hazardous waste to printing, photographic, automotive and body shop businesses in the Bay Area, Central Valley & Northern California. The acquisition represents an expansion of HCC’s Environmental Services business in this geographic area while potentially providing new services and products for this market. No facilities were acquired in the transaction and all service employees and activity will be consolidated in existing branch territories. Total consideration for the acquisition was approximately $0.6 million.
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 6, 2019. 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 2018 filed with the SEC on
March 6, 2019. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this quarterly report, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this quarterly report or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. Certain tabular information may not foot due to rounding. Our fiscal year ends on the Saturday closest to December 31. Interim results are presented for the twelve weeks ("third quarter"
or "quarter") and thirty-six weeks (first three quarters) ended September 7, 2019 and September 8, 2018, respectively. "Fiscal 2018" represents the 52-week period ended December 29, 2018 and "Fiscal 2019" represents the 52-week period ending December 28, 2019.
Overview
We provide parts cleaning, containerized waste management, used oil collection, vacuum truck services, antifreeze recycling, and field services primarily to small and medium sized industrial customers as well as vehicle maintenance customers. We own and operate
a used oil re-refinery, several wastewater treatment plants and multiple antifreeze recycling facilities. We believe we are the second largest provider of industrial and hazardous waste services to small and mid-sized customers in both the vehicle maintenance and industrial services sector in North America, and we have the second largest used oil re-refining capacity in North America. Our services help our customers manage their used chemicals and liquid and solid wastes while also helping to minimize their regulatory burdens. We operate from a network of 91 branch facilities providing services to customers in 45 states and parts of Canada. We conduct business through two segments: Environmental Services and Oil Business.
Our Environmental Services segment revenues are generated primarily from providing parts cleaning services, containerized waste management, vacuum truck services,
antifreeze recycling, and field services. Revenues from this segment accounted for approximately 67% of our total Company revenues for the first three quarters of fiscal 2019. 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.
30
Our Oil Business segment consists primarily of our used oil collection,
used oil re-refining activities, and recycled fuel oil ("RFO") sales which together accounted for approximately 33% of our total Company revenues in the first three quarters of fiscal 2019.
Our operating costs include the costs of the materials we use in our products and services, such as used oil collected from customers or purchased from third party collectors, solvent, and other chemicals. The used solvent that we retrieve from customers in our product reuse program is accounted for as a reduction in our net cost of solvent under operating costs, whether placed in inventory or sold to a purchaser for reuse. Changes in the price of crude oil can impact operating costs indirectly as it may impact the price we pay for solvent or used oil, although we attempt to offset volatility in the oil markets by managing the spread between
the costs we pay for our materials and the prices we charge for our products and services. Operating costs also include transportation of solvents and waste, payments to third parties to recycle or dispose of the waste materials that we collect, and the costs of operating our re-refinery, recycling centers, waste water treatment facilities, hubs, and branch system including personnel costs (including commissions), facility rent, truck leases, fuel, and maintenance. Our operating costs as a percentage of sales generally increase in relation to the number of new branch openings. As new branches achieve route density and scale efficiencies, our operating costs as a percentage of sales generally decrease.
We use profit before corporate selling, general, and administrative expenses ("SG&A") as a key measure of segment profitability. We define profit before 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, procurement, real estate management, information technology, 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 47 million gallons of lubricating base oil per year when operating at full capacity.
Critical Accounting Policies
Critical accounting policies are those that are both important to the accurate portrayal of a company’s financial condition and results and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
In order to prepare financial statements that conform to accounting principles generally accepted in the United
States, commonly referred to as GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.
There were no material changes during the first three quarters of fiscal 2019 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 29, 2018 with the exception of the adoption of the new lease standard, ASC 842. See footnote 12 — Commitments and Contingencies for more information.
31
RESULTS
OF OPERATIONS
General
The following table sets forth certain operating data as a percentage of revenues for the periods indicated:
Net
income attributable to Heritage-Crystal Clean, Inc. common stockholders
$
5,970
5.7
%
$
6,345
6.4
%
$
10,514
3.4
%
$
12,224
4.3
%
Revenues
Revenue
for the third quarter of 2019 was $104.8 million compared to $99.7 million for the same quarter of 2018, an increase of $5.2 million, or 5.2%. The $5.2 million increase in revenue was driven by 9.0% revenue growth in the Environmental Services segment, partially offset by a 1.4% decline in revenue from our Oil Business segment. For the first three quarters of fiscal 2019, revenues increased $22.5 million, or 7.9%, from $283.1 million in the first three quarters of fiscal 2018 to $305.6 million in the first three quarters of 2019. The increase in revenue was driven mainly by growth in most of our Environmental Services segment product and service lines.
Operating costs
Operating
costs increased $4.1 million, or 5.4%, during the third quarter of 2019 compared to the third quarter of fiscal 2018. The increase was mainly due to higher labor cost and employee benefit cost compared to the year-ago quarter. Operating costs increased $20.8 million, or 9.4%, in the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018. The increase in operation costs was mainly driven by lower spreads in our Oil Business segment, along with higher labor cost and employee benefit cost in our Environmental Services segment.
We expect that in the future our operating costs in the Environmental Services business will continue to increase as our service volume increases; however, a decrease in crude oil prices could partially offset this cost increase because a decrease in price could cause a decline
in the price we pay for parts cleaning solvent and diesel fuel. Likewise, an increase in crude oil prices could cause an increase in the price we pay for parts cleaning solvent and diesel fuel. In the Oil Business segment, our operating costs could increase or decrease in the future depending on changes in the price for crude oil which could indirectly impact our used oil collection costs and processing costs at our re-refinery.
32
Selling, general, and administrative expenses
Selling, general, and administrative expenses increased $0.6 million,
or 5.6%, from the third quarter of fiscal 2018 to the third quarter of fiscal 2019 mainly driven by higher bad debt expense, salaries, and employee benefits, partially offset by lower legal fees. Selling, general, and administrative expenses increased $1.5 million, or 4.5%, from the first three quarters of fiscal 2018 to the first three quarters of fiscal 2019. The increase in expense was mainly driven by higher bad debt expense and incentive compensation, partially offset by lower legal fees year-over-year.
Other expense - net
Other expense - net was $1.0 million of expense for the third quarter of fiscal 2019 primarily relating to asset write-offs and other site closure costs associated with a facility in Wilmington, DE. Other expense was $0.3 million for the third quarter of 2018. Other
expense - net was $2.5 million of expense for the first three quarters of fiscal 2019 primarily relating to site closure costs and asset write-offs associated with a facility in Wilmington, DE. Other expense of $1.0 million for the first three quarters of fiscal 2018 primarily consists of $0.7 million of site closure costs.
Interest expense - net
Interest expense - net for the third quarter of fiscal 2019 and fiscal 2018 was $0.2 million, and $0.3 million, respectively. For the first three quarters of 2019 and 2018, interest expense was $0.6 million and $0.7 million, respectively.
Provision
for income taxes
The Company's effective tax rate for the third quarter of fiscal 2019 was 27.1% compared to 26.2% in the third quarter of fiscal 2018. The Company’s effective rate for the first three quarters of fiscal 2019 was 24.0% compared to 24.3% in the first three quarters of fiscal 2018.
Segment Information
The
following table presents revenues by reportable segment:
In
the third quarter of fiscal 2019, Environmental Services revenue increased by $5.7 million, or 9.0%, from $63.3 million in the third quarter of fiscal 2018 to $69.0 million in the third quarter of fiscal 2019. The 9.0% increase in revenue was driven by growth in most of our product and service lines with the antifreeze, vacuum, and containerized waste businesses being the primary contributors to the growth. Excluding the impact of a large field services project from our third quarter 2018 results, our organic revenue growth in the segment during the third quarter 2019 was 10.5%. Environmental Services revenue increased
33
$20.5
million, or 11.0%, compared to the first three quarters of 2018 to $205.7 million during the first three quarters of 2019 driven by growth in most of our product and services lines of business.
During the third quarter of fiscal 2019, Oil Business revenues were down $0.5 million, or 1.4%, to $35.8 million compared to $36.4 million in the third quarter of fiscal 2018. The decline in revenue was mainly due to a decrease in our selling price of base oil, partially offset by an increase in the volume of base oil gallons sold. During the third quarter of fiscal 2019, we produced 11.7 million gallons of base oil at a 108.3% rate of nameplate capacity compared to 11.2 million gallons at a 103.6% rate of nameplate capacity during the third quarter of fiscal of 2018. On a year-over-year basis,
Oil Business revenue increased $2.0 million, or 2.1%, due to higher base oil volume sold, partially offset by lower selling prices.
Segment Profit Before Corporate Selling, General and Administrative Expenses ("SG&A")
The following table presents profit by reportable segment before corporate SG&A expense:
*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 11 in our consolidated financial statements included elsewhere in this document.
Environmental Services profit before corporate SG&A expense increased $1.5 million, or 9.3%, in the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 driven mainly by higher revenues. Environmental Services profit before corporate SG&A expense increased $5.4 million, or 11.8%, in the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018. The higher operating margin compared to fiscal 2018 was mainly due to higher revenues, partially offset by higher
labor and higher employee benefit costs.
Oil Business profit before corporate SG&A expense decreased $0.6 million in the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018. Oil Business profit before corporate SG&A expense decreased $4.5 million in the first three quarters of fiscal 2019, compared to the first three quarters of fiscal 2018. The lower operating margins compared to fiscal 2018 were mainly due to a decrease in the spread between our selling price for base oil and our feedstock costs.
34
FINANCIAL
CONDITION
Liquidity and Capital Resources
Cash and Cash Equivalents
As of September 7, 2019 and December 29, 2018, cash and cash equivalents were $59.0 million and $43.6 million, respectively. Our primary sources of liquidity are cash flows from operations and funds available to borrow under our term loan and revolving bank credit facility.
Debt and Financing Arrangements
The
Company's Credit Agreement as amended ("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 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 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 Credit Agreement are secured by a security interest in substantially all of the Company's tangible and intangible assets.
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 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 3.00 to 1.00, 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 total leverage ratio 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 thereafter will revert to 3.00 to 1.00;
•
A capital expenditures covenant limiting capital expenditures to $100.0 million plus, if the capital expenditures permitted have been fully utilized, an additional amount for the remaining term of the Agreement equal to 35% of EBITDA for the thirteen “four-week” periods most
recently ended immediately prior to the full utilization of such $100.0 million basket.
As of September 7, 2019 and December 29, 2018, the Company was in compliance with all covenants under the Credit Agreement. As of September 7, 2019 and December 29, 2018, the Company had $1.1 million and $1.3 million of standby letters of credit issued, respectively, and $62.5 million and $63.7 million was available
for borrowing under the bank credit facility, respectively. The actual amount available under the revolving loan portion of the Credit Agreement is limited by the Company's total leverage ratio.
We believe that our existing cash, cash equivalents, available borrowings, and other sources of financings will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. We cannot assure you that this will be the case or that our assumptions regarding revenues and expenses underlying this belief will be accurate. If, in the future, we require more liquidity than is available to us under our credit facility, we may need to raise additional funds through debt or equity offerings. Adequate funds may not be available when needed or may not be available on terms favorable to us. If additional funds are raised by issuing equity securities, dilution to existing stockholders may result. If
35
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.
The
most significant items affecting the comparison of our operating activities for the first three quarters of fiscal 2019 and the first three quarters of fiscal 2018 are summarized below:
Net Cash Provided by Operating Activities —
•
Earnings — Our decrease in net income during the first three quarters of 2019 negatively impacted our net cash provided by operating activities by $1.6 million compared to the first three quarters of 2018.
•
Inventory
— In the first three quarters of fiscal 2019, the decrease in inventory favorably affected cash flows from operating activities by $13.0 million compared to the first three quarters fiscal 2018 driven mainly by lower carrying value of inventory.
•
Accounts Receivable — The increase in accounts receivable, driven mainly by higher revenue, had an unfavorable impact on cash provided by operating activities of $4.3 million in the first three quarters of fiscal 2019 compared to a $4.8 million unfavorable impact the first three quarters of fiscal 2018.
Net
Cash Used in Investing Activities —
•
Capital expenditures — We used $16.9 million and $12.9 million for capital expenditures during the first three quarters of fiscal 2019 and fiscal 2018, respectively. During the first three quarters of 2019, we purchased $5.8 million worth of vehicles, and spent $1.6 million on IT related projects in our Environmental Services segment, compared to $2.0 million spent on IT related projects during the first three quarters of fiscal 2018. Additionally, we spent approximately $3.4 million for purchases of parts cleaning machines compared to $3.5 million in the first three quarters of fiscal 2018. In our Oil Business segment, during the
first three quarters of fiscal 2019, we spent $3.7 million for capital improvements to the re-refinery, compared to $4.9 million on the re-refinery during the first three quarters of 2018. The remaining $2.4 million of capital expenditures in the first three quarters of fiscal 2019 was for various projects, compared to $2.5 million spent on other various projects in the first three quarters of fiscal 2018.
•
Business acquisitions, net of cash acquired — We used $2.6 million of cash outflows for acquisitions during the first three quarters of fiscal 2019. During the first three quarters of 2018, we used $4.8 million of cash outflows for the acquisitions. See footnote 3 —
Business Combinations for more information.
36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risks primarily through borrowings under our bank Credit Facility. Interest on this facility is based upon variable interest rates. Our weighted average borrowings under our Credit Facility during the first three quarters of fiscal 2019 was $30.0 million, and the annual effective interest rate for the Credit Facility for the third quarter of fiscal 2019 was 4.3%. We currently do not hedge
against interest rate risk. Based on the foregoing, a hypothetical 1% increase or decrease in interest rates would have resulted in a change of $0.3 million to our interest expense in the first three quarters of fiscal 2019.
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 control over financial reporting during the third quarter ended September 7, 2019 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
No change since the filing of our 10-Q on July 25th, 2019.
*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."
39
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.
