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, 2021 . 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 2020 filed with theSEC onMarch 2, 2021 . 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 ("third quarter" or "quarter") endedSeptember 11, 2021 andSeptember 5, 2020 , respectively. "Fiscal 2020" represents the 53-week period endedJanuary 2, 2021 and "Fiscal 2021" represents the 52-week period beginningJanuary 3, 2021 , and ending onJanuary 1, 2022 .
Overview
We provide parts cleaning, containerized waste management, used oil collection, wastewater vacuum, 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 industrial services and vehicle maintenance sectors inNorth America , 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 90 branch facilities providing services to customers in 45 states and parts ofCanada . We conduct business through two 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 58.7% of our total Company revenues for the third quarter of fiscal 2021. 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 41.3% of our total Company revenues in the third quarter of fiscal 2021. 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 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, wastewater treatment facilities, hubs, and 28 -------------------------------------------------------------------------------- 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 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 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 49 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 third quarter of fiscal 2021 to the information provided under the heading "Critical Accounting Policies" included in our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 .
Impact of the COVID-19 Pandemic on Our Business
The COVID-19 pandemic has caused significant disruption and volatility on a
global scale resulting in, among other things, an economic slowdown. In response
to the COVID-19 outbreak, national and local governments around the world have
instituted certain measures, including travel bans, prohibitions on group events
and gatherings, shutdowns of certain businesses, curfews, shelter-in-place
orders and recommendations to practice social distancing. As our operations have
been deemed essential, we have taken several measures to combat the COVID-19
downturn which have resulted in attenuating activity and, in some cases,
required temporary closures of certain of our facilities. In addition, we have
taken steps to minimize the negative impact of the COVID-19 pandemic throughout
our business and to protect the safety of our employees and customers. The
duration of these measures is unknown and may be extended, and additional
measures may be necessary.
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. 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 2021.
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RESULTS OF OPERATIONS
General
The following table sets forth certain operating data as a percentage of revenues for the periods indicated:
Third Quarter Ended, First Three Quarters Ended,
September 11, September 5, September 11, September 5,
(thousands) 2021 2020 2021 2020
Revenues
Service revenues $ 59,737 48.5 % $ 53,257 61.1 % $ 177,469 51.3 % $ 169,262 61.8 %
Product revenues 57,713 46.9 % 28,522 32.7 % 151,529 43.8 % 88,106 32.2 %
Rental income 5,725 4.6 % 5,355 6.1 % 16,836 4.9 % 16,548 6.0 %
Total revenues $ 123,175 100.0 % $ 87,134 100.0 % $ 345,834 100.0 % $ 273,916 100.0 %
Operating expenses
Operating costs $ 79,486 64.5 % $ 67,125 77.0 % $ 234,584 67.8 % $ 222,669 81.3 %
Selling, general, and
administrative expenses 13,294 10.8 % 9,410 10.8 % 38,522 11.1 % 32,066 11.7 %
Depreciation and amortization 5,767 4.7 % 5,635 6.5 % 15,168 4.4 % 16,358 6.0 %
Other (income) - net (230) (0.2) % (441) (0.5) % (669) (0.2) % (6,967) (2.5) %
Operating income 24,858 20.2 % 5,405 6.2 % 58,229 16.8 % 9,790 3.6 %
Interest expense - net 206 0.2 % 284 0.3 % 707 0.2 % 842 0.3 %
Income before income taxes 24,652 20.0 % 5,121 5.9 % 57,522 16.6 % 8,948 3.3 %
Provision for income taxes 6,144 5.0 % 1,163 1.3 % 14,697 4.2 % 2,357 0.9 %
Net income $ 18,508 15.0 % $ 3,958 4.5 % $ 42,825 12.4 % $ 6,591 2.4 %
Revenues
Revenue for the third quarter of 2021 was $123.2 million compared to $87.1
million for the same quarter of 2020, an increase of $36.0 million , or 41.3%.
The $36.0 million increase in revenue was mainly driven by higher base oil
selling prices and higher base oil sales volume during the third quarter. In
addition, we experienced a continued growth and recovery as a result of the
COVID-19 pandemic which negatively impacted 2020 revenues. For the first three
quarters of fiscal 2021, revenues increased $71.9 million , or 26.2%, from $273.9
million in the first three quarters of fiscal 2020 to $345.8 million in the
first three quarters of 2021 mainly driven by the factors mentioned above.
Operating costs
Operating costs increased$12.4 million , or 18.5%, during the third quarter of 2021 compared to the third quarter of fiscal 2020 mainly due to higher labor costs, health and welfare costs, transportation related expenses and higher used oil feedstock volume as a result of more business activity due to the lessening impacts of the COVID-19 pandemic. Operating costs increased$11.9 million , or 5.3%, in the first three quarters of fiscal 2021 compared to the first three quarters of fiscal 2020. 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$3.9 million , or 41.4%, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021 mainly driven by the increase in bonus reserve. Selling, general, and administrative expenses increased$6.5 million , or 20.3%, from the first three quarters of fiscal 2020 to the first three quarters of fiscal 2021 mainly driven by the factors mentioned above. 30 --------------------------------------------------------------------------------
Other (income) expense - net
Other (income) expense - net was$0.2 of income for the third quarter of fiscal 2021, compared to a net$0.4 million of income in the third quarter of 2020 mainly due to the gain on sale of assets. Other (income) expense - net was$0.7 million of income for the first three quarters of fiscal 2021, compared to a net$7.0 million of income in the first three quarters of 2020 driven mainly by a$6.5 million reversal of a portion of the expense accrual for a class action lawsuit settlement. Interest expense - net Interest expense - net for the third quarter of fiscal 2021 and fiscal 2020 was$0.2 million and$0.3 million , respectively. Interest expense - net for the first three quarters of fiscal 2021 and 2020 was$0.7 million and$0.8 million respectively. Provision for income taxes The Company's effective income tax rate for the third quarter of fiscal 2021 was 25.1% compared to 22.7% in the third quarter of fiscal 2020. The rate increase is principally attributable to the opposing effect of non-deductible expenses in a projected loss year as compared to a projected income year. The Company's effective rate for the first three quarters of fiscal 2021 was 25.6% compared to 26.3% in the first three quarters of fiscal 2020. The rate decrease is principally attributable to income taxes which are computed on a tax base that reflects substantial modifications to federal taxable income, and that has created comparatively lower anticipated tax expense due to higher pre-tax income for fiscal 2021. Segment Information
The following table presents revenues by reportable segment:
Third Quarter Ended, Change
September 11, September 5,
(thousands) 2021 2020 $ %
Revenues:
Environmental Services $ 72,339 $ 62,439 $ 9,900 15.9 %
Oil Business 50,836 24,695 26,141 105.9 %
Total $ 123,175 $ 87,134 $ 36,041 41.4 %
First Three Quarters Ended, Change(thousands) September 11, 2021 September 5, 2020 $ % Revenues: Environmental Services$ 214,511 $ 199,691$ 14,820 7.4 % Oil Business 131,323 74,225 57,098 76.9 % Total$ 345,834 $ 273,916$ 71,918 26.3 % In the third quarter of fiscal 2021, Environmental Services revenue was$72.3 million compared to$62.4 million during the third quarter of fiscal 2020. The 15.9% increase in revenue was mainly due to the lessening impacts of the COVID-19 pandemic on our business during the third quarter of 2021 compared to the third quarter of 2020. We saw volume increases in all of our lines of business compared to the third quarter of 2020. For the first three quarters of fiscal 2021, Environmental Services revenue was$214.5 million , compared to$199.7 million during the first three quarters of fiscal 2020. During the third quarter of fiscal 2021, Oil Business revenues were a record of$50.8 million , an increase of$26.1 million , or 105.9%, compared to$24.7 million in the third quarter of fiscal 2020. An increase in base oil prices was the main driver of the increase in revenue along with an increase in base oil sales volume compared to the prior year quarter. For the first three quarters of fiscal 2021, Oil Business revenues were$131.3 million , compared to$74.2 million during the first three quarters of fiscal 2020. The increase in revenue was driven primarily by the higher base oil sales price and an increase in the volume of base oil sold during the first three quarters of fiscal 2021 compared to the first three quarters of fiscal 2020. 31 --------------------------------------------------------------------------------
Segment Profit Before Corporate Selling, General and Administrative Expenses ("SG&A")
The following table presents profit by reportable segment before corporate SG&A
expense:
Third Quarter Ended, Change
September 5,
(thousands) September 11, 2021 2020 $ %
Profit before corporate SG&A*
Environmental Services $ 17,259 $ 14,625 $ 2,634 18.0%
Oil Business 21,773 851 20,922 N/M
Total $ 39,032 $ 15,476 $ 23,556 152.2%
First Three Quarters Ended, Change
September 11, September 5,
(thousands) 2021 2020 $ %Profit (loss) before corporate SG&A*
Environmental Services $ 52,425 $ 41,751 $ 10,674 25.6%
Oil Business 47,102 (3,791) 50,893 N/M
Total $ 99,527 $ 37,960 $ 61,567 162.2%
*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 $2.6
million , or 18.0%, in the third quarter of fiscal 2021 compared to the third
quarter of fiscal 2020. The increase was mainly driven by higher revenues due to
the waning negative impacts of the COVID-19 pandemic which produced improved
leveraging of fixed costs during the third quarter of fiscal 2021 partially
offset by inflationary cost pressures for disposal and containers. Operating
margin for third quarter of 2021 was 23.9% compared to 23.4% in the third
quarter of 2020.
Environmental Services profit before corporate SG&A expense increased $10.7
million , or 25.6%, in the first three quarters of fiscal 2021 compared to the
first three quarters of fiscal 2020. The improvement in profitability during the
first three quarters of fiscal 2021 compared to fiscal 2020 was due to the
factors mentioned above which occurred during the third quarter of fiscal 2021.
Operating margin for first three quarters of 2021 was 24.4% compared to 20.9% in
the first three quarters of 2020.
Oil Business profit before corporate SG&A expense increased $20.9 million in the
third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. The
higher operating margin compared to the third quarter of 2020 was mainly due to
the improvement between the cost of our used oil feedstock and the selling price
of our base oil. Oil Business segment operating margin sharply increased to a
record 42.8% in the third quarter of 2021 compared to 3.4% in the third quarter
of fiscal 2020.
Oil Business profit before corporate SG&A expense increased $50.9 million in the
first three quarters of fiscal 2021 compared to the first three quarters of
fiscal 2020. The factors which drove the improvement during the third quarter
were primarily responsible for the improvement in profitability during the first
three quarters of fiscal 2021 compared to the first three quarters of fiscal
2020.
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FINANCIAL CONDITION
Liquidity and Capital Resources
Cash and Cash Equivalents
As ofSeptember 11, 2021 andJanuary 2, 2021 , cash and cash equivalents were$75.3 million and$67.6 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 the Company paid down its previous term loan, in full, of$30.0 million . The new 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. 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. The Company is currently evaluating its options under our Credit Agreement, but at this time we cannot reasonably estimate the impact to our financial statements. The Company's weighted average interest rate for all debt through the third fiscal quarters of 2021, and 2020, was 2.04% and 3.2%, respectively. As ofSeptember 11, 2021 andJanuary 2, 2021 , the Company was in compliance with all covenants under its Credit Agreement. As ofSeptember 11, 2021 andJanuary 2, 2021 , the Company, had$5.6 million and$3.9 million , of standby letters of credit issued, respectively, and$94.4 million and$61.0 million was available for borrowing under the bank credit facility, respectively. 33
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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 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.
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