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 filed with theSEC onMarch 2, 2022 . 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 2021 filed with theSEC onMarch 2, 2022 . Except as required under federal securities laws and the rules and regulations of theSEC , 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 toDecember 31 . Interim results are presented for the twelve weeks ("first quarter" or "quarter") endedMarch 26, 2022 andMarch 27, 2021 , respectively. "Fiscal 2021" represents the 52-week period endedJanuary 1, 2022 and "Fiscal 2022" represents the 52-week period beginningJanuary 2, 2022 , and ending onDecember 31, 2022 .
Overview
We provide parts cleaning, containerized waste management, used oil collection, wastewater vacuum 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 91 branch facilities providing services to customers in 48 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, wastewater vacuum, antifreeze recycling, and field services. Revenues from this segment accounted for approximately 60.7% of our total Company revenues for the first quarter of fiscal 2022. In the Environmental Services segment, we define and measure same-branch revenues for a given period as the subset of all our branches that have been open and operating throughout and between the periods being compared, and we refer to these as established branches. We calculate average revenues per working day by dividing our revenues by the number of non-holiday weekdays in the applicable fiscal year or fiscal quarter. Our Oil Business segment consists primarily of our used oil collection and used oil re-refining activities, along with our recycled fuel oil ("RFO") sales which together accounted for approximately 39.3% of our total Company revenues in the first quarter of fiscal 2022. We have established prices for our services primarily based on the perceived value of those services in the marketplace. Our customer agreements typically provide for annual renewal and price increases. With respect to our oil product sales, some prices are set through contracts or purchase orders with customers, which may be based on the market prices of an underlying commodity or market indicator. Our operating costs include the costs of obtaining the materials we use in our products and services, such as used oil collected from customers or purchased from third party collectors, solvent, and other chemicals. The used solvent that we retrieve from customers in our product reuse program is accounted for as a reduction in our net cost of solvent under operating costs, whether placed in inventory or sold to a purchaser for reuse. Changes in the price of crude oil can impact operating costs indirectly as it may impact the price we pay for solvent or used oil, although we attempt to offset volatility in the oil markets by 25 -------------------------------------------------------------------------------- managing the spread between the costs we incur to obtain our materials and the prices we charge for our products and services. Operating costs also include transportation of solvents and waste, payments to third parties to recycle or dispose of the waste materials that we collect, and the costs of operating our re-refinery, recycling centers, non-hazardous waste processing facilities, hubs, and branch system including personnel costs (including commissions), facility rent, truck leases, fuel, and maintenance. Our operating costs as a percentage of revenues generally increase in relation to the number of new branch openings. As new branches achieve route density and scale efficiencies, our operating costs as a percentage of revenues generally decrease.
We use profit before corporate selling, general, and administrative expenses ("SG&A") as a key measure of segment profitability. We define profit before corporate SG&A expense as revenue less operating costs and depreciation and amortization from operations.
Our selling, general, and administrative expenses include the costs of performing centralized business functions, including sales management at or above the regional level, business management and marketing, billing, receivables management, accounting and finance, internal audit, logistics management beyond the branch level, environmental health and safety, human resources, and legal.
We operate a used oil re-refinery located inIndianapolis, Indiana , through which we recycle used oil into high quality lubricant base oil and other products. We supply the base oil to firms that produce and market finished lubricants. Our re-refinery has an annual nameplate capacity of approximately 75 million gallons of used oil feedstock, allowing it to produce approximately 50 million gallons of lubricating base oil per year when operating at full capacity.
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 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. There were no material changes during the first quarter of fiscal 2022 to the information provided under the heading "Critical Accounting Policies" included in our Annual Report on Form 10-K for the fiscal year endedJanuary 1, 2022 .
Impact of the COVID-19 Pandemic on Our Business
We are closely monitoring the spread and impact of the COVID-19 pandemic and are
continually assessing its potential effects on our business and our financial
performance as well as the businesses of our customers and vendors. The Company
cannot predict the duration or severity of the COVID-19 pandemic, and we cannot
reasonably estimate the financial impact the COVID-19 outbreak will have on our
results and significant estimates going forward.
The ultimate impact of the COVID-19 pandemic on our business, results of
operations, financial condition and cash flows is highly uncertain and cannot be
accurately predicted and is dependent on future developments, including the
duration of the pandemic and the related length of its impact on the global
economy, and any new information that may emerge concerning the COVID-19
outbreak and the actions to contain it or treat its impact. In fiscal 2021, the
continued impact on our business as a result of COVID-19 pandemic resulted in
additional lost work hours which negatively impacted our ability to service our
customers on a timely basis, the effect of which is included in the fiscal 2021
financial operations in this filing. Although no material impact on our business
occurred during the first quarter of 2022, the continued impact on our business
as a result of the COVID-19 pandemic could result in a material adverse effect
on our business, results of operations, financial condition, prospects and the
trading prices of our securities in the near-term and throughout 2022.
26
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
General
The following table sets forth certain operating data as a percentage of revenues for the periods indicated:
For the First Quarter Ended,
March 26, March 27,
(thousands) 2022 2021
Revenues
Service revenues $ 68,907 49.4 % $ 57,700 54.8 %
Product revenues 64,482 46.3 % 42,266 40.1 %
Rental income 5,977 4.3 % 5,416 5.1 %
Total revenues $ 139,366 100.0 % $ 105,382 100.0 %
Operating expenses
Operating costs $ 101,783 73.0 % $ 76,771 72.9 %
Selling, general, and administrative
expenses 13,735 9.9 % 12,188 11.6 %
Depreciation and amortization 6,507 4.7 % 3,782 3.6 %
Other (income) - net (210) (0.2) % (108) (0.1) %
Operating income 17,551 12.6 % 12,749 12.1 %
Interest expense - net 223 0.2 % 324 0.3 %
Income before income taxes 17,328 12.4 % 12,425 11.8 %
Provision for income taxes 4,450 3.2 % 3,219 3.1 %
Net income $ 12,878 9.2 % $ 9,206 8.7 %
Revenues
Revenue for the first quarter of 2022 was $139.4 million compared to $105.4
million for the same quarter of 2021, an increase of $34.0 million , or 32.3%.
The $34.0 million increase in revenue was mainly driven by higher base oil
selling prices and higher demand and increased prices, for our products and
services and, to a lesser extent, by revenue from acquisitions made during the
second half of 2021.
Operating costs
Operating costs increased $25.0 million , or 32.6%, during the first quarter of
2022 compared to the first quarter of fiscal 2021 mainly due to higher labor
costs, disposal costs, and transportation related expenses.
We expect that in the future our operating costs in both the Environmental
Services and Oil Business segments may increase or decrease depending on our
product and service volumes and changes in commodity pricing, along with other
factors.
Selling, general, and administrative expenses
Selling, general, and administrative expenses increased$1.5 million , or 12.7%, from the first quarter of fiscal 2021 to the first quarter of fiscal 2022 mainly due to higher salaries and benefits, restricted stock grants and legal fees.
Other (income) expense - net
Other (income) expense - net was($0.2) million of income for the first quarter of fiscal 2022, compared to a net($0.1) million of income in the first quarter of 2021.
Interest expense - net
Interest expense - net for the first quarter of fiscal 2022 and fiscal 2021 was
27
--------------------------------------------------------------------------------Provision for income taxes
The Company's effective income tax rate for the first quarter of fiscal 2022 was 25.7% compared to 25.9% in the first quarter of fiscal 2021. The rate decrease is principally attributable to the reduced impact of certain adjustments to financial reporting income due to increased levels of profitability as compared to the first quarter of fiscal 2021.
Segment Information
The following table presents revenues by reportable segment:
First Quarter Ended, Change
(thousands) March 26, 2022 March 27, 2021 $ %
Revenues:
Environmental Services $ 84,651 $ 69,457 $ 15,194 21.9 %
Oil Business 54,715 35,925 18,790 52.3 %
Total $ 139,366 $ 105,382 $ 33,984 32.2 %
In the first quarter of fiscal 2022, Environmental Services revenue was $84.7
million compared to $69.5 million during the first quarter of fiscal 2021. The
21.9% increase in revenue was mainly due to the continued increase in demand for
our services compared to the prior year quarter and, to a lesser extent, revenue
from companies acquired during the second-half of 2021. We experienced revenue
increases across all service lines in the segment when compared to the first
quarter of 2021.
During the first quarter of fiscal 2022, Oil Business revenue of $54.7 million
represents a record high for a 12-week quarter, an increase of $18.8 million , or
52.3%, compared to $35.9 million in the first quarter of fiscal 2021. An
increase in base oil prices was the main driver of the increase in revenue
compared to the prior year quarter.
Segment Profit Before Corporate Selling, General and Administrative Expenses ("SG&A")
The following table presents profit by reportable segment before corporate SG&A expense:
First Quarter Ended, Change
(thousands) March 26, 2022 March 27, 2021 $ %
Profit before corporate SG&A*
Environmental Services $ 14,145 $ 15,998 $ (1,853) (11.6)%
Oil Business 18,466 10,086 8,380 83.1%
Total $ 32,611 $ 26,084 $ 6,527 25.0%
*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 decreased $1.9
million , or (11.6)%, in the first quarter of fiscal 2022 compared to the first
quarter of fiscal 2021. The decrease in operating margin was mainly driven by
higher disposal, transportation and container costs caused by extraordinarily
high inflation. Operating margin for first quarter of 2022 was 16.7% compared to
23.0% in the first quarter of 2021.
Oil Business profit before corporate SG&A expense increased $8.4 million , or
83.1% in the first quarter of fiscal 2022 compared to the first quarter of
fiscal 2021. Oil Business segment operating margin increased to 33.7% in the
first quarter of 2022 compared to 28.1% in the first quarter of fiscal 2021. The
higher operating margin compared to the first quarter of 2021 was mainly due to
an increase in the spread between the netback (sales price net of freight
impact) on our base oil sales and the price paid/charged to our customers for
the removal of their used oil.
28
--------------------------------------------------------------------------------
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash and Cash Equivalents
As ofMarch 26, 2022 andJanuary 1, 2022 , cash and cash equivalents were$71.1 million and$56.3 million , respectively. Our primary sources of liquidity are cash flows from operations and funds available to borrow under our revolving bank credit facility.
Debt and Financing Arrangements
OnMarch 18, 2021 ,Heritage-Crystal Clean, LLC , (the "Company"), entered into an Amended and Restated Credit Agreement (the "Agreement"), by and among the Company, its parent,Heritage-Crystal Clean, Inc. , and the Company's subsidiaries identified therein andBank of America, N.A ., as administrative agent,JPMorgan Chase Bank, N.A ., andWells Fargo Bank, National Association . The Agreement replaces the Company's previous Credit Agreement dated as ofFebruary 21, 2017 . During the first quarter of fiscal 2021 the Company paid down its previous term loan, in full, of$30.0 million . The Agreement provides for borrowings of up to$100.0 million , in the form of a revolving facility, of which$15 million can be used in the form of a Swing Line loan. Loans made under the Agreement, as amended, may be Base Rate Loans or LIBOR Rate Loans, at the election of the Borrower subject to certain exceptions. Base Rate Loans have an interest rate equal to (i) the higher of (a) the federal funds rate plus 0.5%, (b) the London Interbank Offering Rate ("LIBOR") plus 1%, or (c) Bank of America's prime rate, plus (ii) a variable margin of between 0.50% and 1.25% 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 1.50% and 2.25% depending on the Company's total leverage ratio. Amounts borrowed under the Agreement are secured by a security interest in substantially all of the Company's tangible and intangible assets. The Company incurred$0.8 million of debt issuance costs related to the amended credit agreement. The Credit Agreement contains customary terms and provisions (including representations, covenants, and conditions) for transactions of this type. Certain covenants, among other things, restrict the Company's and its subsidiaries' ability to incur indebtedness, grant liens, make investments and sell assets. The Credit Agreement also contains customary events of default, covenants and representations and warranties. Financial covenants include:
•An interest coverage ratio (based on interest expense and EBITDA) of at least 3.5 to 1.0;
•A total leverage ratio no greater than 3.0 to 1.0, provided that in the event of a permitted acquisition having an aggregate consideration equal to$10.0 million or more, at the Borrower's election, the foregoing 3.00 to 1.00 shall be deemed to be 3.50 to 1.00 for the fiscal quarter in which such permitted acquisition occurs and the three immediately following fiscal quarters and will thereafter revert to 3.00 to 1.00.
The Credit Agreement places certain limitations on acquisitions and the payment of dividends.
OnJuly 27, 2017 , theFinancial Conduct Authority , which regulates LIBOR, announced that it intends to phase out the London Interbank Offered Rate by the end of 2021. Subsequently the phase out deadline has been extended toJune 30, 2023 . We expect that widespread use of LIBOR will transition to alternative interest rates in the near future. Since loans made under our Credit Agreement may be LIBOR based loans, the phasing out of LIBOR may adversely affect interest rates that could result in higher borrowing costs and higher interest expense. As the Company does not have any outstanding borrowings under the financial instruments impacted by LIBOR, the effect on the financial statements is not material. As ofMarch 26, 2022 andJanuary 1, 2022 , the Company was in compliance with all covenants under its Credit Agreement. As ofMarch 26, 2022 andJanuary 1, 2022 , the Company, had$5.6 million of standby letters of credit issued for both periods, and$94.4 million was available for borrowing under the bank credit facility for both periods. 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 29
--------------------------------------------------------------------------------
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 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.
© Edgar Online, source
