HERITAGE-CRYSTAL CLEAN, INC 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. 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. 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. We undertake no obligation to update any of the forward-looking statements. Certain tabular information may not foot due to rounding. Our fiscal year ends on the Saturday closest toDecember 31 . "Fiscal 2019" represents the 52-week period endedDecember 28, 2019 ."Fiscal 2018" represents the 52-week period endedDecember 29, 2018 . "Fiscal 2017" represents the 52-week period endedDecember 30, 2017 .
Overview
We provide parts cleaning, containerized waste management, used oil collection, vacuum truck services, antifreeze recycling, and field services, and we own and operate a used oil re-refinery where we re-refine used lubricating oils into high quality lubricant base oil and other products. We are the second largest provider of industrial and hazardous waste services to small and mid-sized customers in both the vehicle maintenance and manufacturing industries, and we have the second largest used oil re-refining capacity inNorth 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 89 branch facilities providing services to customers in 45 states and parts ofCanada . We conduct business through two principal operating segments: Environmental Services and Oil Business. Our Environmental Services segment revenues are generated primarily from providing parts cleaning, containerized waste management, vacuum truck, antifreeze recycling services, and field services. Revenues from this segment accounted for 68% of our total company revenues for 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. Our Oil Business segment consists primarily of our used oil collection and used oil re-refining activities, which accounted for 32% of our fiscal 2019 total company revenues.
No single customer accounted for more than 10% of consolidated revenues in fiscal 2019, 2018, or 2017. There were no intersegment revenues during fiscal 2019.
We have established prices for our services primarily based on the perceived
value of those services in the marketplace. Our customer agreements typically
provide for annual renewal and price increases. With respect to our oil product
sales, some prices are set through contracts or purchase orders with customers,
which may be based on the market prices of an underlying commodity or market
indicator.
Our operating costs include the costs of 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 our cost to obtain used oil, although we attempt to offset volatility
in the oil markets by managing the spread between our costs to procure used oil
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, 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 SG&A
as revenue less operating costs and depreciation and amortization from
operations.
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Our selling, general, and administrative expenses include the costs of
performing centralized business functions, including sales management at or
above the regional level, business management, billing, receivables management,
accounting and finance, information technology, environmental health and safety,
and legal.
We operate a used oil re-refinery located in Indianapolis, Indiana , through
which we re-refine 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 both are 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 inthe 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. We have identified the following accounting policies as those that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations. Actual results in these areas could differ materially from management's estimates under different assumptions and conditions. Acquisitions We account for acquired businesses using the purchase method of accounting, which requires that the assets acquired, liabilities assumed, and contingent consideration be recorded as of the date of acquisition at their respective fair values. It further requires acquisition-related costs to be recognized separately from the acquisition and expensed as incurred and restructuring costs to be expensed in periods subsequent to the acquisition date.
Identifiable Intangible Assets
The fair value of intangible assets may be based on significant judgments made by management. We sometimes engage third party valuation appraisal firms to assist us in determining the fair values and useful lives of the assets acquired. Such valuations and useful life determinations require us to make significant estimates and assumptions. These estimates and assumptions are based on historical experience and information obtained from the management of the acquired companies, and also include, but are not limited to, future expected cash flows to be earned from the continued operation of the acquired business and discount rates applied in determining the present value of those cash flows. Unanticipated events and circumstances may occur that could affect the accuracy or validity of such assumptions, estimates, or actual results. These intangible assets are amortized on a straight-line basis over their estimated economic lives.
In fiscal 2017, the Company performed a qualitative assessment to determine
whether the two-step quantitative impairment test was necessary. The Oil
Business reporting unit had zero goodwill throughout fiscal 2017. Based on the
qualitative assessment, the Company concluded it is more likely than not that
the fair value of the Environmental Services reporting unit is greater than its
carrying amount including goodwill, and therefore the two-step quantitative test
was not necessary and no impairment was indicated.
In fiscal 2018, the Company performed a qualitative assessment to determine
whether the two-step quantitative impairment test was necessary. The Oil
Business reporting unit had zero goodwill throughout fiscal 2018. Based on the
qualitative assessment, the Company concluded it is more likely than not that
the fair value of the Environmental Services reporting unit is greater than its
carrying amount including goodwill, and therefore the two-step quantitative test
was not necessary and no impairment was indicated.
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In fiscal 2019, the Company performed a qualitative assessment to determine
whether the two-step quantitative impairment test was necessary. The Oil
Business reporting unit had zero goodwill throughout fiscal 2019. Based on the
qualitative assessment, the Company concluded it is more likely than not that
the fair value of the Environmental Services reporting unit is greater than its
carrying amount including goodwill, and therefore the two-step quantitative test
was not necessary and no impairment was indicated.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Consistent with industry practices, we require payment from most customers within 30 days of invoice date. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on analysis of customer creditworthiness, historical losses, and general economic trends and conditions. We perform periodic credit evaluations of our customers and typically do not require collateral. We have an estimation procedure, based on historical data and recent changes in the aging of these receivables that we use to record reserves throughout the year. In the last five years, our provisions for doubtful accounts have averaged 0.2% of sales. We do not have any off-balance sheet credit exposure related to our customers.
Inventory
Inventory consists primarily of used oil, processed oil, catalyst, new and used
solvents, new and used antifreeze products, new and refurbished parts cleaning
machines, drums, and other items. Inventories are valued at the lower of
first-in, first-out ("FIFO") cost and net realizable value, net of any reserves
for excess, obsolete, or unsalable inventory. We perform a physical inventory
count on a periodic basis and use the results of these counts to determine
inventory quantities. The quantities are used to help determine the value of our
inventory. We continually monitor our inventory levels at each of our
distribution locations and evaluate inventories for excess or slow-moving items.
In evaluating inventory for impairment, the Company considers factors that may
impact the valuation of inventory, including declines in net realizable value.
If circumstances indicate the cost basis of inventories exceed their net
realizable value, inventories are reduced to net realizable value. In fiscal
2019, we recorded no inventory impairment charges.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated undiscounted future cash flows expected to be
generated by the asset, an impairment charge is recognized as the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of would be separately presented in the balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell,
and would no longer be depreciated. We recorded no impairment charges of
long-lived assets in fiscal 2019.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
General
Fiscal Year Ended
The following table sets forth certain operating data as a percentage of revenues for the periods indicated:
For the Fiscal Years Ended,
(thousands) December 28, 2019 December 29, 2018
Revenues
Service revenues $ 250,491 56.4 % $ 250,262 61.0 %
Product revenues 171,273 38.5 % 159,921 39.0 %
Rental income 22,663 5.1 % - N/A
Total revenues $ 444,427 100.0 % $ 410,183 100.0 %
Operating expenses -
Operating costs $ 349,603 78.7 % $ 323,165 78.8 %
Selling, general, and administrative expenses 50,224 11.3 % 47,714 11.6 %
Depreciation and amortization 18,249 4.1 % 16,157 3.9 %
Other expense - net 13,490 3.0 % 1,606 0.4 %
Operating income 12,861 2.9 % 21,541 5.3 %
Interest expense - net 869 0.2 % 1,052 0.3 %
Income before income taxes $ 11,992 2.7 % $ 20,489 5.0 %
Provision for income taxes 3,243 0.7 % 5,451 1.3 %
Net income 8,749 2.0 % 15,038 3.7 %
Income attributable to noncontrolling interest 386 0.1 % 310 0.1 %
Income attributable to Heritage-Crystal Clean ,
Inc. common stockholders $ 8,363 1.9 % $ 14,728 3.6 %
Revenues
In 2019, we generated $444.4 million of revenue compared to prior year revenue
of $410.2 million , an increase of $34.2 million , or 8.3%, driven by strong
growth in our Environmental Services segment. In fiscal 2019, Environmental
Services revenues increased $31.4 million , or 11.6%, compared to fiscal 2018.
The increase in revenues was driven primarily by growth in our antifreeze
recycling, containerized waste, and vacuum services businesses, and to a lesser
extent in all of our other Environmental Services segment product and service
lines of business.
Revenue from our Oil Business increased $2.8 million , or 2.0%, compared to
fiscal 2018. The increase in revenue was primarily due to higher volumes of base
oil gallons sold, due in part to an increase of base lube gallons produced,
partially offset by lower base oil pricing. During fiscal 2019, the average
selling price for our base oil product decreased approximately 11% compared to
fiscal 2018.
Operating costs
Operating costs increased $26.4 million , or 8.2%, to $349.6 million in fiscal
2019 compared to $323.2 million in fiscal 2018. The increase in operating costs
was primarily a result of significantly higher labor and employee benefit costs,
disposal charges, and logistics related costs, partially offset with lower
re-refinery shutdown and maintenance costs compared to fiscal 2018. Higher labor
costs was the result of investments in new resources to support our revenue
growth and annual wage increases, while higher disposal costs were driven
primarily by higher volumes of waste material in our vacuum services,
containerized waste, and field services businesses.
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. Whether or not we have an increase in
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service volume, an increase in the price of crude oil could result in an
increase in operating costs in the Environmental Services segment since this
will likely result in 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 directly impact our used oil collection costs and processing costs at our
re-refinery.
Selling, general, and administrative expenses
Selling, general, and administrative expenses increased$2.5 million , or 5.0%, from fiscal 2018 to$50.2 million in fiscal 2019. The year-over-year increase in SG&A was mainly due to higher salaries and employee benefit related expenses, along with higher bad debt expense, partially offset by lower legal fees and share-based compensation. Overall, selling, general and administrative expenses as a percentage of revenues decreased slightly to 12.2% in fiscal 2019 from 12.4% in fiscal 2018.
Other expense (income) - net
Other expense (income) - net of$13.5 million for fiscal 2019 primarily consists of an$11.0 million charge taken in the fourth quarter of fiscal 2019 as a result of the settlement of a class action lawsuit to resolve claims made against us in litigation pertaining to fuel surcharges (see "Legal Proceedings"). In addition, approximately$2.7 million of expense was related primarily to costs and asset write-offs associated with site closure. Other expense - net of$1.6 million for fiscal 2018 primarily consists of$1.0 million of site closure costs. Interest expense - net Interest expense - net of$0.9 million includes interest expense of$1.7 million , of which approximately$1.2 million of interest expense related to our term loan, and$0.3 million was amortization of debt issuance costs, partially offset by$0.8 million of interest income. In fiscal 2018, interest expense - net of$1.1 million , includes interest expense of$1.5 million , of which$1.2 million of interest expense was on our term loan, and$0.3 million was amortization of debt issuance costs, partially offset by$0.5 million of interest income. No interest was capitalized in fiscal years 2019 and 2018.
Provision for income taxes
The Company's effective tax rate for fiscal 2019 was 27.0% compared to 26.6% in fiscal 2018. The difference in the effective tax rate is principally attributable to state income taxes.
Segment Information
The following table presents revenues by segment:
For the Fiscal Years Ended, Increase
(thousands) December 28, 2019 December 29, 2018 $ %
Revenues:
Environmental Services $ 302,543 $ 271,131 $ 31,412 11.6 %
Oil Business 141,884 139,052 2,832 2.0 %
Total $ 444,427 $ 410,183 $ 34,244 8.3 %
In fiscal 2019, Environmental Services revenues increased $31.4 million , or
11.6%, compared to fiscal 2018. The increase in revenues was driven by growth in
all Environmental Services segment product and service lines of business
primarily due to growth in our antifreeze recycling, containerized waste, and
vacuum services businesses.
Revenue from our Oil Business increased $2.8 million , or 2.0%, compared to
fiscal 2018. The increase in revenue was primarily due to higher volumes of base
oil gallons sold, due in part to a 10% increase of base lube gallons produced,
partially offset by lower base oil pricing. During fiscal 2019, the average
selling price for our base oil product decreased approximately 11% compared to
fiscal 2018. During fiscal 2019 and 2018, we sold approximately 47 million and
42 million gallons of base oil, respectively.
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Segment Profit before Corporate Selling, General and Administrative Expenses ("SG&A")
The following table presents profit by segment before corporate SG&A:
For the Fiscal Years Ended, Increase/(Decrease)
(thousands) December 28, 2019 December 29, 2018 $ %
Profit before corporate SG&A*
Environmental Services $ 75,735 $ 69,406 $ 6,329 9.1 %
Oil Business 4,665 4,705 (40) (0.9) %
Total $ 80,400 $ 74,111 $ 6,289 8.5 %
*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 13 in our consolidated
financial statements and the notes thereto included in Item 8.
In fiscal 2019, Environmental Services profit before SG&A increased $6.3
million , or 9.1%, due to higher revenue outpacing higher labor and healthcare,
disposal, and transportation related costs year-over-year. Profit before
corporate SG&A expense as a percentage of revenues in the Environmental Services
segment decreased to 25.0% in fiscal 2019 compared to 25.6% in fiscal 2018.
The sale of used solvent generated by customers participating in our product
reuse program for parts cleaning is not accounted for as revenues, but rather as
a reduction in our net cost of solvent under operating costs. In both fiscal
2019 and 2018, the impact of used solvent sales was immaterial.
In fiscal 2019, the Oil Business profit before corporate SG&A was essentially
flat compared to fiscal 2018 at approximately $4.7 million . Profitability of the
Oil Business during fiscal 2019 was impacted by lower pricing for base oil
product and higher transportation costs, partially offset by higher base oil
sales volume and lower re-refinery shutdown and maintenance costs compared to
fiscal 2018.
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Fiscal Year Ended
The following table sets forth certain operating data as a percentage of revenues for the periods indicated:
For the Fiscal Years Ended,
(thousands) December 29, 2018 December 30, 2017
Revenues
Service revenues $ 250,262 61.0 % $ 233,999 63.9 %
Product revenues 159,921 39.0 % 131,958 36.1 %
Total revenues $ 410,183 100.0 % $ 365,957 100.0 %
Operating expenses -
Operating costs $ 323,165 78.8 % $ 276,102 75.4 %
Selling, general, and administrative expenses 47,714 11.6 % 47,401 13.0 %
Depreciation and amortization 16,157 3.9 % 17,967 4.9 %
Other expense (income) - net 1,606 0.4 % (10,940) (3.0) %
Operating income 21,541 5.3 % 35,427 9.7 %
Interest expense - net 1,052 0.3 % 1,094 0.3 %
Income before income taxes $ 20,489 5.0 % $ 34,333 9.4 %
Provision for income taxes 5,451 1.3 % 5,923 1.6 %
Net income 15,038 3.7 % 28,410 7.8 %
Income attributable to noncontrolling interest 310 0.1 % 287 0.1 %
Income attributable to Heritage-Crystal Clean ,
Inc. common stockholders $ 14,728 3.6 % $ 28,123 7.7 %
Revenues
In 2018, we generated $410.2 million of revenue compared to prior year revenue
of $366.0 million , an increase of $44.2 million , or 12.1%, driven by strong
growth in our Environmental Services segment. In fiscal 2018, Environmental
Services revenues increased $33.1 million , or 13.9%, compared to fiscal 2017.
The increase in revenue from our Environmental Services segment was driven by
growth in all Environmental Services segment product and service lines of
business primarily due to growth in our field services, containerized waste, and
antifreeze businesses. Revenue from our Oil Business increased $11.2 million , or
8.7%, compared to fiscal 2017. The increase in revenue was primarily due to
stronger base oil pricing and higher volumes of base oil gallons sold, due in
part to strong base oil production at our re-refinery during the second and
third quarters of fiscal 2018, but partially offset by a planned, extended
shut-down at our re-finery during the fourth quarter of fiscal 2018 and
unplanned downtime at our re-refinery during the first quarter of fiscal 2018.
During fiscal 2018, the average spot market price for the type of base oil
product we produce increased approximately 14% compared to fiscal 2017.
Operating costs
Operating costs increased$47.1 million , or 17.0%, to$323.2 million in fiscal 2018 compared to$276.1 million in fiscal 2017. The increase in operating costs was primarily a result of significantly higher labor, transportation, and disposal costs, along with higher re-refinery shutdown and maintenance costs compared to fiscal 2017. Higher labor costs is the result of investment in new resources to support future revenue growth. Higher transportation costs in the Environmental Services segment was driven mainly by continued expansion geographically, and the roll-out of some of our newer service offerings to existing branches. 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. Whether or not we have an increase in service volume, an increase in the price of crude oil could result in an increase in operating costs in the Environmental Services segment since this will likely result in 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 directly impact our used oil collection costs and processing costs at our re-refinery. 40
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Selling, general, and administrative expenses
Selling, general, and administrative expenses of$47.7 million in fiscal 2018 remained flat to fiscal 2017. Overall, selling, general and administrative expenses as a percentage of revenues decreased to 11.6% in fiscal 2018 from 13.0% in fiscal 2017 primarily due to a higher revenue base along with lower severance, legal fees and bank fees, partially offset by higher share-based compensation expenses.
Other (income) expense - net
Other expense of$1.6 million for fiscal 2018 primarily consists of$1.0 million of site closure costs. Other (income) of$10.9 million for fiscal 2017 included a gain of$5.1 million received in the first quarter of fiscal 2017 as a result of having received a partial award for a claim made in arbitration and a gain of$3.6 million received during the second quarter of fiscal 2017 from a settlement agreement, both of which were related to our acquisition ofFCC Environmental, LLC andInternational Petroleum Corp. of Delaware in 2014, partially offset by other net losses of$0.9 million . Additionally, during the third quarter of 2017, the Company recorded a gain of$3.1 million from having sold the Company's facility located inPompano Beach, Florida .
Interest expense - net
Interest expense - net for fiscal 2018 and 2017 was$1.1 million . In fiscal 2018, the Company recorded interest expense of$1.5 million , of which$1.2 million of interest expense is on our term loan, and$0.3 million is amortization of debt issuance costs, partially offset by$0.5 million of interest income. In fiscal 2017 we recorded interest expense of$1.2 million , along with$0.4 million for the amortization of debt issuance costs as a result of our Term Loan, partially offset by$0.4 million of interest income we received as part of our award from the arbitration related to our acquisition ofFCC Environmental and International Petroleum Corp. ofDelaware in 2014. Provision for income taxes The Company's effective tax rate for fiscal 2018 was 26.6% compared to 17.3% in fiscal 2017. The difference in the effective tax rate is principally attributable to the impact on our deferred taxes as ofDecember 30, 2017 of the reduction in theU.S. federal corporate tax rate to 21%. The 21% statutory federal rate is increased by state taxes and non-deductible expenses and it is partially reduced by the favorable impact of stock compensation windfall benefit.
Segment Information
The following table presents revenues by segment:
For the Fiscal Years Ended, Increase
(thousands) December 29, 2018 December 30, 2017 $ %
Revenues:
Environmental Services $ 271,131 $ 238,055 $ 33,076 13.9 %
Oil Business 139,052 127,902 11,150 8.7 %
Total $ 410,183 $ 365,957 $ 44,226 12.1 %
In fiscal 2018, Environmental Services revenues increased
In fiscal 2018, Oil Business revenues increased$11.2 million , or 8.7%, primarily due to stronger base oil pricing and higher volumes of base oil gallons sold, due in part to strong base oil production at our re-refinery during the second and third quarters of fiscal 2018, but partially offset by a planned, extended shut-down at our re-finery during the fourth quarter of fiscal 2018. During fiscal 2018, the average spot market price for the type of base oil product we produce increased approximately 14% compared to fiscal 2017. During fiscal 2018 and 2017, we sold approximately 42 million gallons of base oil.
Segment Profit before Corporate Selling, General and Administrative Expenses ("SG&A")
The following table presents profit by segment before corporate SG&A:
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For the Fiscal Years Ended, Increase/(Decrease)
(thousands) December 29, 2018 December 30, 2017 $ %Profit before corporate SG&A*
Environmental Services $ 69,406 $ 66,896 $ 2,510 3.8 %
Oil Business 4,705 8,657 (3,952) (45.7) %
Total $ 74,111 $ 75,553 $ (1,442) (1.9) %
*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 13 in our consolidated
financial statements and the notes thereto included in Item 8.
In fiscal 2018, Environmental Services profit before SG&A increased $2.5
million , or 3.8%, due to higher revenue outpacing higher labor, transportation,
and disposal costs year-over-year. However, profit before corporate SG&A expense
as a percentage of revenues in the Environmental Services segment dropped to
25.6% in fiscal 2018 compared to 28.1% in fiscal 2017.
The sale of used solvent generated by customers participating in our product
reuse program for parts cleaning is not accounted for as revenues, but rather as
a reduction in our net cost of solvent under operating costs. In both fiscal
2018 and 2017, the impact of reused solvent sales was immaterial.
In fiscal 2018, the Oil Business generated profit before corporate SG&A of $4.7
million compared to a profit before corporate SG&A of $8.7 million during fiscal
2017. The decline in profitability of the Oil Business during fiscal 2018 was
primarily due to extended downtime at the re-refinery compared to 2017 which led
to lower leveraging of fixed costs, higher shut-down expenses and higher
logistics costs. An increase in the cost of used oil feedstock compared to
fiscal 2017 also negatively impacted profitability in this segment.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash and Cash Equivalents
As ofDecember 28, 2019 andDecember 29, 2018 , cash and cash equivalents were$60.7 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 ("Credit Agreement"), dated February 21, 2017 ,
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 a revolving loan. 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. Please see "Item 1A. Risk Factors" for more
information in regard to the phasing out of LIBOR after 2021.
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
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--------------------------------------------------------------------------------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 3.0 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; •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 ofDecember 28, 2019 andDecember 29, 2018 , the Company was in compliance with all covenants under the Credit Agreement. As ofDecember 28, 2019 , andDecember 29, 2018 , the Company had$1.1 million and$1.3 million of standby letters of credit issued, respectively, and$63.9 million and$63.7 million was available for borrowing under the bank credit facility, respectively. We believe that our existing cash, cash equivalents, available borrowings, and other sources of financings will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. We cannot guarantee 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, especially given the current condition of the financial credit markets. If additional funds are raised by issuing equity securities, dilution to existing stockholders may result. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
Summary of Cash Flow Activity
For the Fiscal Years Ended,
December 28, December 29, December 30,
(thousands) 2019 2018 2017
Net cash provided by (used in):
Operating activities $ 53,254 $ 30,072 $ 45,331
Investing activities (34,814) (27,536) (10,008)
Financing activities (1,325) (846) (30,044)
Net increase in cash and cash equivalents $ 17,115 The most significant items affecting the comparison of our operating activities for fiscal 2019 and fiscal 2018 are summarized below:
Net Cash Provided by Operating Activities -
•Earnings - Our decrease in net income during fiscal 2019 negatively impacted our net cash provided by operating activities by$6.3 million compared to fiscal 2018. •Inventory - In fiscal 2019, the decrease in inventory favorably affected cash flows from operating activities by$4.0 million , driven mainly by lower carrying value of inventory, compared to an$11.2 million increase in inventory in fiscal 2018. 43
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•Non-cash item- The Company entered into a class action settlement agreement
taking a non-cash charge of
•Capital expenditures - We made capital expenditures as follows:
For the Fiscal Years Ended,
December 28, December 29,
(thousands) 2019 2018
Re-refinery capital improvements $ 7.0 $ 8.9
Parts cleaning machines 4.8 4.8
Trucks and trailers 13.5 3.7
IT projects 1.7 2.1
Various other projects 4.3 3.3
Total $ 31.3 $ 22.8
•Business acquisitions, net of cash acquired - We used $3.5 million of cash
outflows for acquisitions during fiscal 2019, and $4.8 million of cash outflows
for acquisitions in fiscal 2018. See footnote 3 - Business Combinations for more
information.
The most significant items affecting the comparison of our operating activities for fiscal 2018 and fiscal 2017 are summarized below:
Net Cash Provided by Operating Activities -
•Earnings - Our decrease in net income during fiscal 2018 negatively impacted
our net cash provided by operating activities by
•Accounts Receivable - The increase in accounts receivable had an unfavorable impact on cash provided by operating activities of$7.6 million in fiscal 2018 compared to fiscal 2017 mainly due to higher sales year-over-year, along with a one-time receipt of$4.3 million related to a settlement agreement with the sellers of FCC Environmental in the first quarter of 2017. •Accounts Payable - The increase in accounts payable favorably affected cash flows from operating activities by$10.9 million in fiscal 2018 compared to fiscal 2017. The increase in accounts payable was mainly driven by an increase in higher transportation and disposal cost related charges during fiscal 2018. •Inventory - In fiscal 2018, the increase in inventory unfavorably affected cash flows from operating activities by$8.1 million compared to fiscal 2017 driven mainly by higher carrying value of inventory.
Capital expenditures - We used$22.8 million and$14.4 million for capital expenditures during fiscal 2018 and fiscal 2017, respectively. During fiscal 2018 we spent$8.9 million for capital improvements to the re-refinery compared to$5.7 million in fiscal 2017. Additionally, in fiscal 2018, we spent approximately$4.8 million for purchases of parts cleaning machines compared to$4.7 million in fiscal 2017. The remaining$9.1 million of capital expenditures in fiscal 2018 included$3.7 million for purchases of trucks,$2.1 million of IT related projects and$3.3 million on other various items compared to approximately$4.0 million spent in fiscal 2017 for other items. •Business acquisitions, net of cash acquired - We used$4.8 million of cash outflows for the acquisitions ofProducts Plus, Inc. andAO Holding-Kansas City, LLC , andHot Tank Supply Company in fiscal 2018. See footnote 3 - Business Combinations. We did not make any acquisitions during fiscal 2017. 44 --------------------------------------------------------------------------------
Contractual Obligations
Our contractual commitments consist of operating leases and short-term purchasing commitments. We anticipate that we will experience an increase in our lease commitments consistent with anticipated growth in operations, infrastructure, and personnel and additional resources devoted to building our network of hubs and branches. The following table summarizes our existing obligations as ofDecember 28, 2019 : Payments Due by Fiscal Year (In thousands) Contractual Obligations Total 2020 2021 2022 2023 2024 Thereafter Operating lease obligations (1)$ 96,094 $ 23,894 $ 20,484 $ 16,902 $ 12,745 $ 8,702 $ 13,367 Finance lease obligations (2) 7,243 883 883 883 883 883 2,828 Future maturities of long term debt (3) 30,000 - - 30,000 - - - Interest on long term debt (4) 2,261 1,067 1,047 147 - - - Purchase obligations (5) 28,327 28,327 - - - - - Total (6)$ 163,925 $ 54,171 $ 22,414 $ 47,932 $ 13,628 $ 9,585 $ 16,195
(1) We lease railcars, office space, warehouse facilities, equipment and vehicles under
noncancelable operating lease agreements which expire at various dates through 2030.
(2) Finance leases include a fleet of mobile equipment.
(3) Excludes interest payments.
(4) Interest on long term debt is calculated at the contractual rate or, in the case of the
Term A loan, at the effective rate as of
(5) Our purchase obligations are open purchase orders as of
primarily for capital expenditures, used oil, catalyst, disposal, and solvent. They
represent expected payments to third party service providers and other commitments
entered into during the normal course of our business. While our purchase obligations
are generally cancelable with or without notice without penalty, certain vendor
agreements provide for cancellation fees or penalties depending on the terms of the
contract.
(6) Unrecognized tax benefits have not been included because no reasonable estimate can be
made as to the likelihood, dollar amount, or timing of potential future cash
expenditures.
We offer a guarantee for our services. To date, costs relating to this guarantee have not been material.
Off-Balance Sheet Arrangements
As of the end of fiscal 2019, we had no off-balance sheet arrangements.
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