Document






UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
March 23, 2019
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________________to _________________

Commission File Number 001-33987

logoa66.jpg

HERITAGE-CRYSTAL CLEAN, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
26-0351454
State or other jurisdiction of
 
(I.R.S. Employer
Incorporation
 
Identification No.)

2175 Point Boulevard
Suite 375
Elgin, IL 60123
(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 April 30, 2019, there were outstanding 23,125,474 shares of Common Stock, $0.01 par value, of Heritage-Crystal Clean, Inc.




2



Table of Contents

 
 
 
 
 
 
 
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 


3



PART I

ITEM 1. FINANCIAL STATEMENTS
  
Heritage-Crystal Clean, Inc.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
 
 
March 23,
2019
 
December 29,
2018
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
42,692

 
$
43,579

Accounts receivable - net
 
53,326

 
51,744

Inventory - net
 
29,661

 
33,059

Other current assets
 
4,914

 
6,835

Total current assets
 
130,593

 
135,217

Property, plant and equipment - net
 
144,796

 
139,987

Right of use assets
 
62,929

 

Equipment at customers - net
 
23,839

 
23,814

Software and intangible assets - net
 
17,070

 
14,681

Goodwill
 
32,358

 
34,123

Total assets
 
$
411,585

 
$
347,822

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 

Current liabilities:
 
 
 
 

Accounts payable
 
$
34,858

 
$
32,630

Current portion of lease liabilities
 
18,433

 

Contract liabilities - net

2,399

 
166

Accrued salaries, wages, and benefits
 
4,483

 
6,024

Taxes payable
 
6,290

 
6,120

Other current liabilities
 
5,986

 
5,089

Total current liabilities
 
72,449

 
50,029

  Lease liabilities, net of current portion
 
44,298

 

  Long-term debt
 
29,116

 
29,046

Deferred income taxes
 
13,544

 
14,516

Total liabilities
 
$
159,407

 
$
93,591

 
 
 
 
 
STOCKHOLDERS' EQUITY:
 
 
 
 

Common stock - 26,000,000 shares authorized at $0.01 par value, 23,120,998 shares and 23,058,584 shares issued and outstanding at March 23, 2019 and December 29, 2018, respectively
 
$
231

 
$
231

Additional paid-in capital
 
197,909

 
197,533

Retained earnings
 
53,307

 
55,819

Total Heritage-Crystal Clean, Inc. stockholders' equity
 
251,447

 
253,583

Noncontrolling interest
 
731

 
648

Total equity
 
252,178

 
254,231

Total liabilities and stockholders' equity
 
$
411,585

 
$
347,822

 
See accompanying notes to financial statements.

4



Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Income/(Loss)
(In Thousands, Except per Share Amounts)
(Unaudited)


 
 
 
First Quarter Ended,
 
 
 
March 23,
2019
 
March 24,
2018
 
 
 
 
 
 
Revenues
 
 
 
 
 
Service revenues
 
$
56,366

 
$
54,137

 
Product revenues
 
35,858

 
29,010

 
Rental income
 
3,548

 

Total revenues
 
$
95,772

 
$
83,147

 
 
 
 
 
 
Operating expenses
 
 
 
 
 
Operating costs
 
$
82,483

 
$
68,386

 
Selling, general, and administrative expenses
 
12,396

 
11,022

 
Depreciation and amortization
 
4,136

 
3,643

 
Other (income) expense - net
 
(58
)
 
389

Operating loss
 
(3,185
)
 
(293
)
Interest expense – net
 
230

 
245

Loss before income taxes
 
(3,415
)
 
(538
)
Benefit from income taxes
 
(986
)
 
(436
)
Net loss
 
(2,429
)
 
(102
)
Income attributable to noncontrolling interest
 
83

 
18

Net loss attributable to Heritage-Crystal Clean, Inc. common stockholders
 
$
(2,512
)
 
$
(120
)

 
 
 
 
Net loss per share: basic
 
$
(0.11
)
 
$
(0.01
)
Net loss per share: diluted
 
$
(0.11
)
 
$
(0.01
)
 
 
 
 
 
Number of weighted average shares outstanding: basic
 
23,117

 
22,962

Number of weighted average shares outstanding: diluted
 
23,117

 
22,962


 
See accompanying notes to financial statements.



5



Heritage-Crystal Clean, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(In Thousands, Except Share Amounts)

(Unaudited)


 
Shares
 
Par
Value
Common
 
Additional Paidin
Capital
 
Retained Earnings
 
Total Heritage-Crystal Clean, Inc. Stockholders' Equity
 
Non-controlling Interest
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 30, 2017
22,891,674

 
$
229

 
$
193,640

 
$
41,359

 
$
235,228

 
$
698

 
$
235,926

   Adjustment from adopting ASC 606

 

 

 
(268
)
 
(268
)
 

 
(268
)
   Net (loss) income

 

 

 
(120
)
 
(120
)
 
18

 
(102
)
     Issuance of common stock – ESPP
4,822

 

 
100

 

 
100

 

 
100

     Share-based compensation
114,237

 
1

 
827

 

 
828

 

 
828

Share repurchases to satisfy tax withholding obligations

 

 
(1,031
)
 

 
(1,031
)
 

 
(1,031
)
Balance at March 24, 2018
23,010,733

 
$
230

 
$
193,536

 
$
40,971

 
$
234,737

 
$
716

 
$
235,453

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 29, 2018
23,058,584

 
$
231

 
$
197,533

 
$
55,819

 
$
253,583

 
$
648

 
$
254,231

   Net (loss) income

 

 

 
(2,512
)
 
(2,512
)
 
83

 
(2,429
)
     Issuance of common stock – ESPP
4,975

 

 
111

 

 
111

 

 
111

     Exercise of stock options
2,760

 

 
20

 

 
20

 

 
20

     Share-based compensation
54,679

 

 
889

 

 
889

 

 
889

Share repurchases to satisfy tax withholding obligations

 

 
(644
)
 

 
(644
)
 

 
(644
)
Balance at March 23, 2019
23,120,998

 
$
231

 
$
197,909

 
$
53,307

 
$
251,447

 
$
731

 
$
252,178

 

 
See accompanying notes to financial statements.



6



Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

 
 
For the First Quarter Ended,
 
 
March 23,
2019
 
March 24,
2018
Cash flows from Operating Activities:
 
 
 
 
Net loss
 
$
(2,429
)
 
$
(102
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
4,136

 
3,643

Bad debt provision
 
249

 
286

Share-based compensation
 
889

 
828

Deferred taxes
 
(972
)
 
(386
)
Other, net
 
(171
)
 
74

Changes in operating assets and liabilities:
 
 
 
 
   Increase in accounts receivable
 
(1,473
)
 
(1,678
)
   Decrease (increase) in inventory
 
3,716

 
(3,755
)
   Decrease in other current assets
 
1,921

 
773

   Increase in accounts payable
 
1,531

 
2,344

   Increase (decrease) in accrued liabilities
 
1,781

 
(2,564
)
Cash provided by (used in) operating activities
 
$
9,178


$
(537
)
 
 
 
 
 
Cash flows from Investing Activities:
 
 

 
 

Capital expenditures
 
$
(7,579
)
 
$
(3,568
)
Business acquisitions, net of cash acquired
 
(1,973
)
 

Proceeds from the disposal of assets
 

 
55

Cash used in investing activities
 
$
(9,552
)

$
(3,513
)
 
 
 
 
 
Cash flows from Financing Activities:
 
 

 
 

Proceeds from the exercise of stock options
 
$
20

 
$

Share repurchases to satisfy tax withholding obligations
 
(644
)
 
(382
)
Proceeds from the issuance of common stock
 
111

 
100

Cash used in financing activities
 
$
(513
)
 
$
(282
)
Net decrease in cash and cash equivalents
 
(887
)
 
(4,332
)
Cash and cash equivalents, beginning of period
 
43,579

 
41,889

Cash and cash equivalents, end of period
 
$
42,692

 
$
37,557

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 

 
 

Income taxes paid
 
$

 
$
2

Cash paid for interest
 
334

 
249

Supplemental disclosure of non-cash information:
 
 

 
 

Payables for construction in progress
 
$
1,933

 
$
451

Payables for share-based tax withholdings

 

 
649

See accompanying notes to financial statements.

7



HERITAGE-CRYSTAL CLEAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

March 23, 2019

(1)    ORGANIZATION AND NATURE OF OPERATIONS

Heritage-Crystal Clean, Inc., a Delaware corporation and its subsidiaries (collectively the “Company”), provide parts cleaning, hazardous and non-hazardous containerized waste, used oil collection, vacuum, antifreeze recycling and field services primarily to small and mid-sized industrial and vehicle maintenance customers. The Company owns and operates a used oil re-refinery where it re-refines used oils and sells high quality base oil for lubricants as well as other re-refinery products. The Company also has multiple locations where it dehydrates used oil. The oil processed at these locations is sold as recycled fuel oil. The Company also operates multiple wastewater treatment plants and antifreeze recycling facilities at which it produces virgin-quality antifreeze. The Company's locations are in the United States and Ontario, Canada. The Company conducts its primary business operations through Heritage-Crystal Clean, LLC, its wholly owned subsidiary, and all intercompany balances have been eliminated in consolidation.

The Company 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. 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.


8



(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 quarter 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.
 
December 29, 2019

 
 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.
 
December 30, 2018
 
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.












9



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:
 
 
For the First Quarter Ended,
March 23, 2019
 
 
As Reported
 
Balances Without Adoption of Topic 842
 
Effect of Change
(thousands)
 
 
 
Higher/(Lower)
Statement of Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Service revenues
 
$
56,366

 
$
62,116

 
$
(5,750
)
Rental income
 
3,548

 

 
3,548

Total revenues
 
95,772

 
97,974

 
(2,202
)
Operating loss
 
(3,185
)
 
(983
)
 
(2,202
)
Loss before income taxes
 
(3,415
)
 
(1,213
)
 
(2,202
)
Net loss
 
(2,429
)
 
(862
)
 
(1,567
)
Net loss attributable to Heritage-Crystal Clean, Inc. common stockholders
 
$
(2,512
)
 
$
(945
)
 
$
(1,567
)
 
 
 
 
 
 
 
Net loss per share: basic
 
$
(0.11
)
 
$
(0.04
)
 
$
(0.07
)
Net loss per share: diluted
 
$
(0.11
)
 
$
(0.04
)
 
$
(0.07
)

 
 
March 23, 2019
 
 
As Reported
 
Balances Without Adoption of Topic 842
 
Effect of Change
(thousands)
 
 
 
Higher/(Lower)
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
Right of use assets
 
$
62,929

 
$

 
$
62,929

Total assets
 
411,585

 
348,656

 
62,929

Current portion of lease liabilities
 
18,433

 

 
18,433

Contract liabilities - net
 
2,399

 
197

 
2,202

Other current liabilities
 
5,986

 
5,788

 
198

Total current liabilities
 
72,449

 
51,616

 
20,833

Lease liabilities, net of current portion
 
44,298

 

 
44,298

Deferred income taxes
 
13,544

 
14,179

 
(635
)
Total liabilities
 
159,407

 
94,911

 
64,496

Retained earnings
 
53,307

 
54,874

 
(1,567
)
Heritage-Crystal Clean, Inc. stockholders' equity
 
$
251,447

 
$
253,014

 
$
(1,567
)
Total equity
 
$
252,178

 
$
253,745

 
$
(1,567
)
Total liabilities and stockholders' equity
 
$
411,585

 
$
348,656

 
$
62,929



10



(3)    BUSINESS COMBINATIONS

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 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 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 March 23, 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 March 23, 2019, is between zero to $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 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 contingent consideration, working capital, and the allocation of the estimated purchase price to other tangible and intangible assets. The Company estimates that contingent consideration to be paid subsequent to March 23, 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.


The following table summarizes the estimated fair values of the assets acquired, some of which are preliminary, related to each acquisition:

11




 
 
As of March 23, 2019
(thousands) 
 
GlyEco
 
WSS
 
PPI
 
HTSC
 
 
 
 
 
 
 
 
 
Accounts receivable
 
$
359

 
$

 
$
909

 
$
40

Inventory
 
290

 
28

 
259

 
3

Property, plant, & equipment
 
746

 
154

 
2,154

 
47

Equipment at customers
 

 
24

 

 
104

Intangible assets
 
251

 
298

 
2,001

 
100

Goodwill
 

 

 
406

 
377

Total purchase price, net of cash acquired
 
$
1,646

 
$
504

 
$
5,729

 
$
671

Less: working capital adjustment
 
23

 
14

 
(62
)
 
(9
)
Less: deferred consideration
 

 

 

 
225

Less: contingent consideration
 

 
90

 
1,341

 
100

Less: to be placed in escrow
 

 
50

 

 

Net cash paid
 
$
1,623

 
$
350

 
$
4,450

 
$
355


Unaudited Pro-forma Financial Information

Pro forma financial information was not presented as results were immaterial to the Company's consolidated results for the quarter ended March 23, 2019.

12



(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:
 
 
For the First Quarter Ended, March 23, 2019
Total Net Sales by Major Lines of Business (thousands)
 
Environmental Services
 
Oil Business
 
Total
Parts cleaning, containerized waste, & related products/services
 
$
38,134

 
$

 
$
38,134

Vacuum Services & Wastewater Treatment
 
13,976

 

 
13,976

Antifreeze Business
 
6,658

 

 
6,658

Field Services
 
3,841

 

 
3,841

Environmental Services - Other
 
403

 

 
403

Re-refinery Product Sales
 

 
24,035

 
24,035

Oil Collection Services & RFO
 

 
3,962

 
3,962

Oil Filter Business
 

 
1,215

 
1,215

Revenues from Contracts with Customers
 
63,012

 
29,212

 
92,224

Other Revenue
 
3,484

 
64

 
3,548

Total Revenues
 
$
66,496

 
$
29,276

 
$
95,772







13



The following table provides information about contract assets and contract liabilities from contracts with customers:
(thousands)
 
March 23, 2019
 
December 29, 2018
Contract assets
 
$
45

 
$
100

Contract liabilities
 
2,444

 
266

Contract liabilities - net
 
$
2,399

 
$
166


During the quarter ended March 23, 2019, the Company recognized $0.3 million of revenue that was included in the contract liabilities balance as of December 29, 2018. During the quarter ended March 23, 2019, the Company recognized within Contract liabilities - net approximately $2.2 million of deferred rental income as a result of the Company having adopted ASC 842 on December 30, 2018. 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 consisted of the following:
(thousands)
 
March 23,
2019
 
December 29,
2018
Trade
 
$
52,455

 
$
51,118

Less: allowance for doubtful accounts
 
1,841

 
1,816

Trade - net
 
50,614

 
49,302

Related parties
 
2,083

 
1,595

Other
 
629

 
847

Total accounts receivable - net
 
$
53,326

 
$
51,744


The following table provides the changes in the Company’s allowance for doubtful accounts for the first quarter ended March 23, 2019, and the fiscal year ended December 29, 2018:
(thousands)
 
March 23,
2019
 
December 29,
2018
Balance at beginning of period
 
$
1,816

 
$
1,881

Provision for bad debts
 
249

 
628

Accounts written off, net of recoveries
 
(224
)
 
(693
)
Balance at end of period
 
$
1,841

 
$
1,816



14




(6)    INVENTORY

The carrying value of inventory consisted of the following:
 (thousands)
 
March 23,
2019
 
December 29,
2018
Used oil and processed oil
 
$
8,664

 
$
12,124

Solvents and solutions
 
7,983

 
8,216

Machines
 
5,988

 
5,334

Drums and supplies
 
5,098

 
5,231

Other
 
2,170

 
2,378

Total inventory
 
29,903

 
33,283

Less: machine refurbishing reserve
 
242

 
224

Total inventory - net
 
$
29,661

 
$
33,059

 
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 quarters of fiscal 2019 or fiscal 2018.


(7)    PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following:
 (thousands)
 
March 23,
2019
 
December 29,
2018
Machinery, vehicles, and equipment
 
$
100,350

 
$
98,708

Buildings and storage tanks
 
69,977

 
69,791

Land
 
9,659

 
9,546

Leasehold improvements
 
5,738

 
5,701

Construction in progress
 
20,251

 
15,405

Assets held for sale
 
4

 
4

Total property, plant and equipment
 
205,979

 
199,155

Less: accumulated depreciation
 
61,183

 
59,168

Property, plant and equipment - net
 
$
144,796

 
$
139,987

 
 
 
 
 
 (thousands)
 
March 23,
2019
 
December 29,
2018
Equipment at customers
 
$
74,113

 
$
73,075

Less: accumulated depreciation
 
50,274

 
49,261

Equipment at customers - net
 
$
23,839

 
$
23,814


Depreciation expense for the first quarters ended March 23, 2019 and March 24, 2018 was $3.1 million and $2.9 million, respectively.

15




(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.

The following table shows changes to our goodwill balances by segment from December 29, 2018 to March 23, 2019:
(thousands) 
 
Oil Business
 
Environmental Services
 
Total
 
 
 
 
 
 
 
Goodwill at December 29, 2018
 
 
 
 
 
 
     Gross carrying amount
 
$
3,952

 
$
34,123

 
$
38,075

     Accumulated impairment loss
 
(3,952
)
 

 
(3,952
)
Net book value at December 29, 2018
 
$

 
$
34,123

 
$
34,123

Measurement period adjustments
 

 
(1,765
)
 

Goodwill at March 23, 2019
 
 
 
 
 
 
     Gross carrying amount
 
3,952

 
32,358

 
36,310

     Accumulated impairment loss
 
(3,952
)
 

 
(3,952
)
Net book value at March 23, 2019
 
$

 
$
32,358

 
$
32,358

The following is a summary of software and other intangible assets:
 
 
March 23, 2019
 
December 29, 2018
(thousands) 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer & supplier relationships
 
$
25,020

 
$
12,001

 
$
13,019

 
$
23,686

 
$
11,445

 
$
12,241

Software
 
6,446

 
4,452

 
1,994

 
5,040

 
4,094

 
946

Non-compete agreements
 
3,369

 
2,952

 
417

 
2,937

 
2,904

 
33

Patents, formulae, and licenses
 
1,769

 
723

 
1,046

 
1,769

 
708

 
1,061

Other
 
1,701

 
1,107

 
594

 
1,442

 
1,042

 
400

Total software and intangible assets - net
 
$
38,305

 
$
21,235

 
$
17,070

 
$
34,874

 
$
20,193

 
$
14,681


Amortization expense was $1.0 million for the first quarter ended March 23, 2019, and $0.7 million for the first quarter ended March 24, 2018. The weighted average useful lives of software; customer & supplier relationships; patents, formulae, and licenses; non-compete agreements, and other intangibles were 10 years, 11 years, 15 years, 5 years, and 7 years, respectively.

The expected amortization expense for the remainder of fiscal 2019 and for fiscal years 2020, 2021, 2022, and 2023 is $2.4 million, $3.0 million, $2.8 million, $2.6 million, and $2.1 million, respectively. The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, 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.


16



(9)    ACCOUNTS PAYABLE

Accounts payable consisted of the following:
(thousands) 
 
March 23,
2019
 
December 29,
2018
Accounts payable
 
$
34,459

 
$
32,471

Accounts payable - related parties
 
399

 
159

Total accounts payable
 
$
34,858

 
$
32,630



(10)    DEBT AND FINANCING ARRANGEMENTS
 
Bank Credit Facility

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.

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 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.
Debt at March 23, 2019 and December 29, 2018 consisted of the following:
(thousands)
 
March 23, 2019
 
December 29, 2018
Principal amount
 
$
30,000

 
$
30,000

Less: unamortized debt issuance costs
 
884

 
954

Debt less unamortized debt issuance costs
 
$
29,116

 
$
29,046




17



The Company recorded interest expense of $0.4 million, of which $0.3 million is on our term loan, and $0.1 million which is amortization of debt issuance costs, for the first quarter ended March 23, 2019. The Company recorded interest expense of $0.3 million for the first quarter ended March 24, 2018 which was primarily on our term loan.

The Company's weighted average interest rate for all debt as of March 23, 2019, and March 24, 2018 was 4.5% and 3.4%, respectively.

As of March 23, 2019 and December 29, 2018, the Company was in compliance with all covenants under its Credit Agreement. As of March 23, 2019 and December 29, 2018, the Company had $1.2 million and $1.3 million of standby letters of credit issued, respectively, and $63.8 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 March 23, 2019 approximates fair value.



18




(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 results for the first quarters ended March 23, 2019, and March 24, 2018 were as follows:
First Quarter Ended,
March 23, 2019
 
(thousands)
 

Environmental
Services
 
Oil Business
 
Corporate and
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Service revenues
 
$
52,875

 
$
3,491

 
$

 
$
56,366

 
Product revenues
 
10,137

 
25,721

 

 
35,858

 
Rental income
 
3,484

 
64

 

 
3,548

Total revenues

$
66,496

 
$
29,276

 
$

 
$
95,772

Operating expenses

 
 
 
 
 
 
 
 
Operating costs

50,163

 
32,320

 

 
82,483

 
Operating depreciation and amortization

1,636

 
1,434

 

 
3,070

Profit (loss) before corporate selling, general, and administrative expenses

$
14,697

 
$
(4,478
)
 
$

 
$
10,219

Selling, general, and administrative expenses

 
 
 
 
12,396

 
12,396

Depreciation and amortization from SG&A

 
 
 
 
1,066

 
1,066

Total selling, general, and administrative expenses

 
 
 
 
$
13,462

 
$
13,462

Other income - net

 
 
 
 
(58
)
 
(58)

Operating loss

 
 
 
 
 
 
(3,185)

Interest expense – net

 
 
 
 
230

 
230

Loss before income taxes

 
 
 
 
 
 
$
(3,415
)











19



First Quarter Ended,
March 24, 2018
 
(thousands)
 

Environmental
Services
 
Oil Business
 
Corporate and
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Service revenues
 
$
51,032

 
$
3,105

 
$

 
$
54,137

 
Product revenues
 
6,444

 
22,566

 

 
29,010

Total revenues
 
$
57,476

 
$
25,671

 
$

 
$
83,147

Operating expenses
 
 
 
 
 
 
 
 
 
Operating costs
 
42,725

 
25,661

 

 
68,386

 
Operating depreciation and amortization
 
1,490

 
1,389

 

 
2,879

Profit (loss) before corporate selling, general, and administrative expenses
 
$
13,261

 
$
(1,379
)
 
$

 
$
11,882

Selling, general, and administrative expenses
 
 
 
 
 
11,022

 
11,022

Depreciation and amortization from SG&A
 
 
 
 
 
764

 
764

Total selling, general, and administrative expenses
 
 
 
 
 
$
11,786

 
$
11,786

Other expense - net
 
 
 
 
 
389

 
389

Operating loss
 
 
 
 
 
 
 
(293)

Interest expense – net
 
 
 
 
 
245

 
245

Loss before income taxes
 
 
 
 
 
 
 
$
(538
)


Total assets by segment as of March 23, 2019, and December 29, 2018 were as follows:
(thousands)
 
March 23, 2019
 
December 29, 2018
Total Assets:
 
 
 
 
 
Environmental Services
 
$
197,092

 
$
148,192

 
Oil Business
 
157,383

 
142,691

 
Unallocated Corporate Assets
 
57,110

 
56,939

 
Total
 
$
411,585

 
$
347,822


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.


20



(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. Unless leases include an option to renew terms for longer than a year, leases with an initial term of 12 months or less are not recorded on our Consolidated Balance Sheet. Leases with initial terms in excess of 12 months are recorded as operating 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. Operating 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. Operating 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. Operating lease expense is recognized on a straight-line basis over the lease term. We have no finance leases as of March 23, 2019.

The components of lease expense were as follows:
(thousands)
 
For the First Quarter Ended, March 23, 2019
Operating lease cost
 
$
6,031
 
Short-term lease cost
 
1,404
 
Variable lease cost
 
1,093
 
Total lease cost
 
$
8,528
 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
    Operating cash flows from operating leases
 
$
6,341
 
 
 
 
Right-of-use assets obtained in exchange for new operating lease liabilities
 
$
67,593
 
 
 
 
 
 
As of March 23, 2019
Weighted-average remaining lease term
 
4.40
 
Weighted-average discount rate
 
5.5
%











21






Future annual minimum lease payment commitments as of March 23, 2019 were as follows:
(thousands)
 
 
2019
 
$
16,705

2020
 
16,997

2021
 
13,355

2022
 
10,139

2023
 
6,887

2024 and thereafter
 
6,822

Total minimum lease payments
 
$
70,905

Less: imputed interest
 
8,174

Lease liability
 
$
62,731



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 March 23, 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 first quarter ended March 23, 2019 was as follows:
(thousands)
 
Environmental Services
 
Oil Business
 
Total
Parts Cleaning
 
$
3,484

 
$

 
$
3,484

Railcars
 

 
57

 
57

Property
 

 
7

 
7

Total rental income
 
$
3,484

 
$
64

 
$
3,548


Purchase Obligations


22



The Company may enter into purchase obligations with certain vendors. They represent expected payments to third party service providers and other commitments entered into during the normal course of our business. These purchase obligations are generally cancelable with or without notice, without penalty, although certain vendor agreements provide for cancellation fees or penalties depending on the terms of the contract.

The Company has purchase obligations in the form of open purchase orders of $19.0 million as of March 23, 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 March 23, 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 first 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. In addition, as a result of the federal bonus depreciation, the Company recorded a Net Operating Loss ("NOL"). The balance on the federal NOL as of March 23rd, 2019 was $26.2 million. 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 $5.9 million.

The Company's effective tax rate for the first quarter of fiscal 2019 was 28.9% compared to 81.1% in the first quarter of fiscal 2018. The rate difference is principally attributable to windfall tax benefits associated with stock compensation having a lesser effect on the tax rate compared to the first quarter of 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 March 23, 2019. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.


23




(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 is subject to shareholder approval, and if the stockholders approve the 2019 Plan, the total number of shares of common stock that will be made available for award grants under the 2019 Plan will be 1,500,000 shares.

Stock Option Awards

A summary of stock option activity under this Plan is as follows:
Outstanding Stock Options
Number of
Options
Outstanding
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
(in years)
 
Aggregate
Intrinsic Value as of Date Listed
(in thousands)
Options outstanding at December 29, 2018
2,760

 
$
7.33

 
0.24

 
$
41

   Exercised
(2,760
)
 
7.33

 

 

Options outstanding at March 23, 2019

 
$

 

 
$


 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:
    
 
 
 
 
 
 
Compensation Expense
 
 
 
 
(thousands, except share amounts)
 
First Quarters Ended,
 
Unrecognized Expense as of,
Recipient of Grant
 
Grant Date
 
Restricted Shares
 
March 23, 2019
 
March 24, 2018
 
March 23, 2019
 
December 29, 2018
Members of Management
 
February, 2017
 
146,564

 
$
89

 
$
99

 
$
296

 
$
385

Chief Executive Officer
 
February, 2017
 
500,000

 
205

 
511

 
1,025

 
1,230

Members of Management
 
February, 2018
 
116,958

 
136

 
122

 
1,040

 
1,176

Members of Management
 
April, 2018
 
350,000

 
163

 

 
5,192

 
6,633

Board of Directors
 
May, 2018
 
13,800

 

 
66

 

 


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 quarter of fiscal 2019, the Company recorded approximately $0.2 million of compensation expense related to this award. In the future, the Company expects to recognize compensation expense of approximately $1.0 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%.

    

24



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%

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. 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 quarter ended March 23, 2019:
Restricted Stock (Nonvested Shares)
 
Number of Shares
 
Weighted Average Grant-Date Fair Value Per Share
Nonvested shares outstanding at December 29, 2018
 
1,013,863

 
$
18.20

Granted
 

 

Vested
 
(82,072
)
 
16.99

Forfeited
 
(65,641
)
 
22.04

Nonvested shares outstanding at March 23, 2019
 
866,150

 
$
18.02


Employee Stock Purchase Plan

As of March 23, 2019, the Company had reserved 124,287 shares of common stock available for purchase under the Employee Stock Purchase Plan. In the first quarter of fiscal 2019, employees purchased 4,975 shares of the Company’s common stock with a weighted average fair market value of $23.54 per share.


25




(15)  EARNINGS PER SHARE

The following table reconciles the number of shares outstanding for the first 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:
 
 
First Quarter Ended,
 (thousands, except share amounts)
 
March 23, 2019
 
March 24, 2018
Net loss
 
$
(2,429
)
 
$
(102
)
Less: income attributable to noncontrolling interest
 
83

 
18

Net loss attributable to Heritage-Crystal Clean, Inc. available to common stockholders
 
$
(2,512
)
 
$
(120
)
 
 
 
 
 
Weighted average basic shares outstanding
 
23,117

 
22,962

Weighted average diluted shares outstanding
 
23,117

 
22,962

 
 
 
 
 
Number of anti–dilutive potentially issuable shares excluded from diluted shares outstanding
 
248

 
170

 
 
 
 
 
Net loss per share: basic
 
$
(0.11
)
 
$
(0.01
)
Net loss per share: diluted
 
$
(0.11
)
 
$
(0.01
)

(16)  OTHER (INCOME) EXPENSE - NET

Other (income) expense - net was $0.1 million of income for the first quarter of fiscal 2019. Other expense (income) - net of $0.4 million of expense for the first quarter of fiscal 2018 primarily related to $0.3 million of site closure costs for a facility in Wilmington, DE.



26



(17) SUBSEQUENT EVENTS

On February 20, 2019, the Compensation Committee and the Board of Directors of the Company adopted the 2019 Incentive Award Plan (the “2019 Plan”). The 2019 plan was approved by shareholders on May 1, 2019 at the Company's Annual Meeting. See footnote 14 Share-Based Compensation for more information.

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 approximately $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.



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 ("first quarter" or "quarter") ended March 23, 2019 and March 24, 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 manufacturing 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 70% of our total Company revenues for the first quarter 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.


27



Our Oil Business segment consists primarily of our used oil collection, used oil re-refining activities, and recycled fuel oil ("RFO") sales which accounted for approximately 30% of our total Company revenues in the first quarter 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, billing, receivables management, accounting and finance, 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 quarter 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 820. See footnote 12 Commitments and Contingencies for more information.


28



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,
(thousands)
 
March 23,
2019
 
March 24,
2018
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
Service revenues
 
$
56,366

58.9
 %
 
$
54,137

65.1
 %
Product revenues
 
35,858

37.4
 %
 
29,010

34.9
 %
Rental income
 
3,548

3.7
 %
 

 %
Total revenues
 
$
95,772

100.0
 %
 
$
83,147

100.0
 %
Operating expenses
 
 
 
 
 
 
Operating costs
 
$
82,483

86.1
 %
 
$
68,386

82.2
 %
Selling, general, and administrative expenses
 
12,396

12.9
 %
 
11,022

13.3
 %
Depreciation and amortization
 
4,136

4.3
 %
 
3,643

4.4
 %
Other (income) expense - net
 
(58
)
(0.1
)%
 
389

0.5
 %
Operating loss
(3,185
)
(3.3
)%
 
(293
)
(0.4
)%
Interest expense – net
230

0.2
 %
 
245

0.3
 %
Loss before income taxes
(3,415
)
(3.6
)%
 
(538
)
(0.6
)%
Benefit from income taxes
(986
)
(1.0
)%
 
(436
)
(0.5
)%
Net loss
(2,429
)
(2.5
)%
 
(102
)
(0.1
)%
Income attributable to noncontrolling interest
83

0.1
 %
 
18

 %
Net loss attributable to Heritage-Crystal Clean, Inc. common stockholders
$
(2,512
)
(2.6
)%
 
$
(120
)
(0.1
)%

Revenues

For the first quarter of fiscal 2019, revenues increased $12.6 million, or 15.2%, from $83.1 million in the first quarter of fiscal 2018 to $95.8 million in the first quarter of fiscal 2019. The increase in revenue was driven by growth in most Environmental Services segment product and service lines of business with the strongest growth in our antifreeze, vacuum, and containerized waste businesses. In addition, the Company achieved a 14.0% increase in revenue from our Oil Business segment mainly due to an increase in volume of base oil gallons sold, partially offset by a decrease in our selling price.

Operating costs

Operating costs increased $14.1 million, or 20.6%, from the first quarter of fiscal 2018 compared to the first quarter of fiscal 2019. The largest portion of this increase was mainly driven by lower spreads in our Oil Business segment, and higher labor and disposal costs in our Environmental Services segment. Higher labor costs were primarily due to additional resources added as part of our growth initiatives, while higher disposal costs were mainly attributable to the increased operations from sales growth and increased disposal costs as a percentage of revenue in our field services business.

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.
        






29



Selling, general, and administrative expenses

Selling, general, and administrative expenses increased $1.4 million, or 12.5%, from the first quarter of fiscal 2018 to the first quarter of fiscal 2019. The increase in expense was mainly driven by higher professional services fees and retirement costs.

Other expense (income) - net

Other (income) expense - net was $0.1 million of income for the first quarter of fiscal 2019. Other expense (income) - net of $0.4 million of expense for the first quarter of fiscal 2018 was primarily related to $0.3 million of site closure costs for a facility in Wilmington, DE.

Interest expense - net

Net interest expense for the first quarter of fiscal 2019 and fiscal 2018 was $0.2 million.

Provision for income taxes

The Company's effective tax rate for the first quarter of fiscal 2019 was 28.9% compared to 81.1% in the first quarter of fiscal 2018. The rate difference is principally attributable to windfall tax benefits associated with stock compensation having a lesser effect on the tax rate compared to the first quarter of 2018.

Segment Information

The following table presents revenues by reportable segment:
 
 
 
 
For the First Quarter Ended,
 
Change
 
 
 
 
 
 
 
 
 
 
 
(thousands)
 
March 23, 2019
 
March 24, 2018
 
$
 
%
Revenues:
 
 
 
 
 
 
 
 
 
Environmental Services
 
$
66,496

 
$
57,476

 
$
9,020

 
15.7
%
 
Oil Business
 
29,276

 
25,671

 
3,605

 
14.0
%
 
 
Total
 
$
95,772

 
$
83,147

 
$
12,625

 
15.2
%
 
 
 
 
 
 
 
 
 
 
 
In the first quarter of fiscal 2019, Environmental Services revenue increased by $9.0 million, or 15.7%, from $57.5 million in the first quarter of fiscal 2018 to $66.5 million in the first quarter of fiscal 2019. The 15.7% increase in revenue was driven by growth in all of our product and service lines with the strongest growth in our antifreeze, vacuum, and containerized waste businesses.

In the first quarter of fiscal 2019, Oil Business revenues were up $3.6 million, or 14.0%, compared to the first quarter of fiscal 2018. The revenue increase was mainly due to a 32.1% increase in volume of base oil gallons sold, partially offset by a decrease in our selling price. During the first quarter of fiscal 2019, we produced 9.4 million gallons of base oil at an 86.9% rate of nameplate capacity compared to 8.1 million gallons at a 74.6% rate of nameplate capacity during the first quarter of fiscal of 2018.

Segment Profit Before Corporate Selling, General and Administrative Expenses ("SG&A")

The following table presents profit by reportable segment before corporate SG&A expense:
 
 
 
 
For the First Quarter Ended,
 
Change
 
 
 
 
 
 
 
 
 
 
 
(thousands)
 
March 23, 2019
 
March 24, 2018
 
$
 
%
 
 
 
Profit (loss) before corporate SG&A*
 
 
 
 
 
 
 
 
 
Environmental Services
 
$
14,697

 
$
13,261

 
$
1,436

 
10.8
 %
 
Oil Business
 
(4,478
)
 
(1,379
)
 
(3,099
)
 
224.7
 %
 
Total
 
$
10,219

 
$
11,882

 
$
(1,663
)
 
(14.0
)%

30