10-Q 1 hcci-20220326.htm 10-Q hcci-20220326
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 2022
 OR
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

hcci-20220326_g1.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 ClassTrading SymbolName of Exchange on which registered
Common Stock, par value $0.01 per shareHCCINASDAQ

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

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
1


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  
Emerging growth company  
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 No x

On May 3, 2022, there were outstanding 24,281,896 shares of Common Stock, $0.01 par value, of Heritage-Crystal Clean, Inc.



2


Table of Contents

3


PART I

    ITEM 1. FINANCIAL STATEMENTS
Heritage-Crystal Clean, Inc.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
 March 26,
2022
January 1,
2022
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$71,066 $56,269 
Accounts receivable - net70,047 62,513 
Inventory - net30,195 29,536 
Assets held for sale1,125 1,125 
Other current assets5,954 6,773 
Total current assets178,387 156,216 
Property, plant and equipment - net171,893 166,301 
Right of use assets91,528 83,865 
Equipment at customers - net24,582 24,146 
Software and intangible assets - net44,676 45,949 
Goodwill49,695 49,695 
Other assets654 692 
Total assets$561,415 $526,864 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$43,055 $36,179 
Current portion of lease liabilities21,598 20,146 
Contract liabilities - net2,570 2,094 
Accrued salaries, wages, and benefits6,632 8,980 
Taxes payable13,448 8,474 
Other current liabilities11,944 9,476 
Total current liabilities99,247 85,349 
  Lease liabilities, net of current portion72,192 65,041 
Other long term liabilities591 473 
Contingent consideration1,410 2,819 
Deferred income taxes31,525 31,126 
Total liabilities$204,965 $184,808 
STOCKHOLDERS' EQUITY:
Common stock - 26,000,000 shares authorized at $0.01 par value, 23,477,764 and 23,473,931 shares issued and outstanding at March 26, 2022 and January 1, 2022, respectively
$235 $235 
Additional paid-in capital206,390 204,920 
Retained earnings149,945 137,067 
Accumulated other comprehensive loss(120)(166)
Total stockholders' equity 356,450 342,056 
Total liabilities and stockholders' equity$561,415 $526,864 
 
See accompanying notes to financial statements.
4



Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Income
(In Thousands, Except per Share Amounts)
(Unaudited)
 First Quarter Ended,
 March 26,
2022
March 27, 2021
Revenues
Service revenues$68,907 $57,700 
Product revenues64,482 42,266 
Rental income5,977 5,416 
Total revenues$139,366 $105,382 
Operating expenses
Operating costs$101,783 $76,771 
Selling, general, and administrative expenses13,735 12,188 
Depreciation and amortization6,507 3,782 
Other (income) - net(210)(108)
Operating income17,551 12,749 
Interest expense – net223 324 
Income before income taxes17,328 12,425 
Provision for income taxes4,450 3,219 
Net income$12,878 $9,206 
Net income per share: basic$0.55 $0.39 
Net income per share: diluted$0.54 $0.39 
Number of weighted average shares outstanding: basic23,476 23,373 
Number of weighted average shares outstanding: diluted23,636 23,509 

 
See accompanying notes to financial statements.
5




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

 First Quarter Ended,
 March 26,
2022
March 27,
2021
Net income$12,878 $9,206 
Other comprehensive income:
Currency translation adjustments46  
Total other comprehensive income:$46 $ 
Comprehensive income$12,924 $9,206 

See accompanying notes to financial statements.
6


Heritage-Crystal Clean, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(In Thousands, Except Share Amounts)
For the First Quarter Ended March 26, 2022 and March 27, 2021
(Unaudited)


First Quarter Ended,
March 26, 2022
SharesPar
Value
Common
Additional Paidin
Capital
Retained EarningsAccumulated Other Comprehensive LossTotal Equity
Balance, January 1, 202223,473,931 $235 $204,920 $137,067 $(166)$342,056 
Net income— — — 12,878 — 12,878 
Currency translation adjustment— — — — 46 46 
Issuance of common stock – ESPP3,833 — 117 — — 117 
Share-based compensation— — 1,353 — — 1,353 
Balance at March 26, 202223,477,764 $235 $206,390 $149,945 $(120)$356,450 
First Quarter Ended,
March 27, 2021
SharesPar
Value
Common
Additional Paidin
Capital
Retained EarningsAccumulated Other Comprehensive LossTotal Equity
Balance at January 2, 202123,340,700 $233 $201,148 $76,119 $ $277,500 
Net income— — — 9,206 — 9,206 
Issuance of common stock – ESPP6,072 — 122 — — 122 
Share-based compensation43,662 1 1,217 — — 1,218 
Share repurchases to satisfy tax withholding obligations— — (729)— — (729)
Balance at March 27, 202123,390,434 $234 $201,758 $85,325 $ $287,317 
 




7


Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 First Quarter Ended,
 March 26,
2022
March 27,
2021
Cash flows from Operating Activities: 
Net income$12,878 $9,206 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization6,507 3,782 
Uncollectible provision147 474 
Share-based compensation1,493 1,218 
Deferred taxes399 3,299 
Other, net84 376 
Changes in operating assets and liabilities:
   (Increase) in accounts receivable(7,681)(4,609)
   (Increase) in inventory(659)(552)
   Decrease in other current assets819 2,557 
   Increase in accounts payable 6,210 1,345 
   Increase (decrease) in accrued liabilities4,393 (893)
Cash provided by operating activities$24,590 $16,203 
Cash flows from Investing Activities:  
Capital expenditures$(9,146)$(5,411)
Proceeds from sale of assets1 149
Cash used in investing activities$(9,145)$(5,262)
Cash flows from Financing Activities:  
Payment of Term Loan (30,000)
Debt Issuance Costs  (804)
Repayment of principal on finance leases(765)(436)
Share repurchases to satisfy tax withholding obligations (729)
Proceeds from the issuance of common stock117 122 
Cash used in financing activities$(648)$(31,847)
Net increase (decrease) in cash and cash equivalents14,797 (20,906)
Cash and cash equivalents, beginning of period56,269 67,575 
Cash and cash equivalents, end of period$71,066 $46,669 
Supplemental disclosure of cash flow information:  
Income taxes paid$18 $947 
Cash paid for interest73 108 
Supplemental disclosure of non-cash information: 
Payables for construction in progress1,112 754 

See accompanying notes to financial statements.

8



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

March 26, 2022


(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, wastewater 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 use in the manufacture of finished 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 primarily sold as recycled fuel oil. The Company also operates multiple non-hazardous waste processing facilities as well as 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, wastewater vacuum, 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 January 1, 2022. 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, containerized waste removal services, wastewater vacuum services, field services, and other services; rental income includes embedded lease income from certain of our parts cleaning contracts. In the Company's Oil Business segment, product revenues primarily consist of sales of re-refined base oil, re-refinery co-products and recycled fuel oil; service revenues include revenues from used oil collection activities, collecting and disposing of wastewater 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.

COVID-19 Pandemic

We are closely monitoring the spread and impact of the COVID-19 pandemic and are continually assessing its potential effects on our business and our financial performance as well as the businesses of our customers and vendors. The Company cannot predict the duration or severity of the COVID-19 pandemic, and we cannot reasonably estimate the financial impact the COVID-19 outbreak will have on our results and significant estimates going forward.

The ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is highly uncertain and cannot be accurately predicted and is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, and any new information that may emerge concerning the COVID-19 outbreak and the actions to contain it or treat its impact. In fiscal 2021, the continued impact on our business as a result of COVID-19 pandemic resulted in additional lost work hours which negatively impacted our ability to service our customers on a timely basis, the effect of which is included in the fiscal 2021 financial operations in this filing. Although no material impact on our business occurred during the first quarter of 2022, the continued impact on our business as a result of the COVID-19 pandemic could result in a material adverse effect on our business, results of operations, financial condition, prospects and the trading prices of our securities in the near-term and throughout 2022.


9


(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    The Company's significant accounting policies are described in Note 2, "Summary of Significant Accounting Policies," in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2022. There have been no material changes in these policies or their application during the first quarter of fiscal 2022.


10



(3)    BUSINESS COMBINATIONS

On September 27, 2021, the Company completed the acquisition of Source Environmental, Inc., ("Source Environmental"), which increases the Company's penetration in the hazardous and non-hazardous waste business in several markets in the western U.S. This transaction also provides us the opportunity to internalize the performance of certain field service activities in the western U.S. Total consideration for the acquisition was approximately $20.4 million. To date, there have been no adjustments to the purchase price. Factors leading to goodwill being recognized are the Company’s expectation of synergies from combining operations of Source Environmental, and the Company as well as the value of intangible assets that are not separately recognized, such as the assembled workforce. Transaction costs incurred in conjunction with the acquisition of Source Environmental were immaterial. The results of Source Environmental are consolidated into the Company’s Environmental Services segment.

On September 13, 2021, the Company completed the acquisition of Raider Environmental Services of Florida, Inc., ("Raider Environmental"), which has expanded our network of wastewater processing, oil collection and non-hazardous waste consolidation and solidification to better serve our customers in Florida and throughout the Southern United States. Total consideration for the acquisition was approximately $13.7 million. To date, there have been no adjustments to the purchase price. This acquisition provides the Company with another wastewater treatment facility as well as assets to help further our initiative to increase our non-hazardous containerized waste processing capabilities. This also provides us exposure to industry verticals in which we didn't previously participate. Factors leading to goodwill being recognized are the Company’s expectation of synergies from combining operations of Raider Environmental, and the Company as well as the value of intangible assets that are not separately recognized, such as the assembled workforce. Transaction costs incurred in conjunction with the acquisition of Raider Environmental were immaterial. The results of Raider Environmental are consolidated primarily into the Company’s Environmental Services segment and an immaterial amount in the Oil Business segment from the date of acquisition.

On August 24, 2021, Heritage-Crystal Clean completed the acquisition of certain assets of Bakersfield Transfer, Inc., and Cole’s Services, Inc., together known as ("Cole's Environmental"), which processed, stored, and disposed of hazardous waste within the state of California. The purchase price was $17.3 million subject to certain adjustments, including a contingent consideration provision. Goodwill recognized from the acquisition of Cole's Environmental, represents the excess of the estimated purchase consideration transferred over the estimated fair value of the assets acquired and liabilities assumed. To date, there have been no adjustments to the purchase price. Factors leading to goodwill being recognized are the Company’s expectation of synergies from combining operations of Cole's Environmental, and the Company as well as the value of intangible assets that are not separately recognized, such as the assembled workforce. The results of Cole's Environmental are consolidated primarily into the Company’s Environmental Services segment and an immaterial amount in the Oil Business segment from the date of acquisition.

The following table summarizes the estimated fair values of the assets acquired, net of cash acquired, related to each acquisition as of March 26, 2022:


As of March 26, 2022
(thousands)
Source Environmental, Inc.
Raider Environmental Services of Florida, Inc.
Cole's Environmental
Accounts receivable$1,064 $488 $ 
Inventory  73 
Other current assets6 162  
Property, plant, & equipment174 4,404 2,455 
Intangible assets13,692 6,056 9,620 
Goodwill6,174 2,835 5,144 
Accounts payable and accruals(677)(218) 
Total purchase price, net of cash acquired$20,433 $13,727 $17,292 
Less: contingent consideration  5,819 
Less: to be placed in escrow  100 
Net cash paid$20,433 $13,727 $11,373 


11


(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 majority of revenue is recognized at a point in time, except for rental income which is recognized on an over time basis. 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.

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:
First Quarter Ended,
March 26, 2022March 27, 2021
Total Net Sales by Major Lines of Business (thousands)
Environmental ServicesOil BusinessTotalEnvironmental ServicesOil BusinessTotal
Parts Cleaning, Containerized Waste, & related products/services$46,857 $ $46,857 $38,833 $ $38,833 
Wastewater Vacuum Services17,390  17,390 13,692  13,692 
Field Services6,290  6,290 4,096  4,096 
Antifreeze Business7,657  7,657 6,988  6,988 
Environmental Services - Other494  494 441  441 
Re-refinery Product Sales 49,139 49,139  30,054 30,054 
Oil Collection Services & RFO 4,313 4,313  4,617 4,617 
Oil Filter Business 1,249 1,249  1,245 1,245 
Revenues from Contracts with Customers78,688 54,701 133,389 64,050 35,916 99,966 
Rental Income5,963 14 5,977 5,407 9 5,416 
Total Revenues$84,651 $54,715 $139,366 $69,457 $35,925 $105,382 


12


The following table provides information about contract assets and contract liabilities from contracts with customers:
(thousands)March 26, 2022January 1, 2022
Contract assets$102 $268 
Contract liabilities2,672 2,362 
Contract liabilities - net$2,570 $2,094 

During the fiscal quarter ended March 26, 2022, the Company recognized $2.1 million in revenue that was included in the contract liabilities balance as of January 1, 2022. 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 — Net, includes amounts billed to and currently due from customers. The amounts due are stated at their net estimated realizable value. The allowance for uncollectible accounts is our best estimate of the amount of probable lifetime-expected credit losses in existing accounts receivable and is determined based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole. The Company does not have any off-balance-sheet credit exposure related to its customers.

Accounts receivable for the first quarter ended March 26, 2022, and the fiscal year ended January 1, 2022 consisted of the following:
(thousands)March 26,
2022
January 1,
2022
Trade$67,550 $59,132 
Less: allowance for uncollectible accounts2,742 2,928 
Trade - net64,808 56,204 
Related parties4,900 5,410 
Other339 899 
Total accounts receivable - net$70,047 $62,513 

The following table provides the changes in the Company’s allowance for uncollectible accounts for the first quarter ended March 26, 2022, and the fiscal year ended January 1, 2022:
(thousands)March 26,
2022
January 1,
2022
Balance at beginning of period$2,928 $2,502 
Provision for uncollectible accounts147 1,930 
Accounts written off, net of recoveries(333)(1,504)
Balance at end of period$2,742 $2,928 
13




(6)    INVENTORY

The carrying value of inventory consisted of the following:
 (thousands)March 26,
2022
January 1,
2022
Solvents and solutions$8,088 $7,704 
Used oil and processed oil9,816 9,361 
Machines4,988 4,995 
Drums and supplies5,574 5,731 
Other2,176 2,246 
Total inventory30,642 30,037 
Less: machine refurbishing reserve447 501 
Total inventory - net$30,195 $29,536 
 
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 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 quarter of fiscal 2022 or 2021.


(7) 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 reports and tests goodwill for impairment only in its Environmental Services reporting unit.

The following table shows changes to our goodwill balances by segment from January 1, 2022 to March 26, 2022:
(thousands)
Environmental ServicesTotal
Goodwill at January 1, 2022
    Gross carrying amount$49,695 $49,695 
    Accumulated impairment loss  
Net book value at January 1, 2022$49,695 $49,695 
Goodwill at March 26, 2022
     Gross carrying amount49,695 $49,695 
     Accumulated impairment loss  
Net book value at March 26, 2022$49,695 $49,695 


14


The following is a summary of software and other intangible assets:
March 26, 2022January 1, 2022
(thousands)
Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Customer & supplier relationships$47,167 $21,952 $25,215 $47,167 $20,725 $26,442 
Permits13,590 1,074 12,516 13,590 879 12,711 
Software11,893 6,605 5,288 11,721 6,399 5,322 
Non-compete agreements4,433 3,450 983 4,048 3,340 708 
Patents, formulae, and licenses1,769 921 848 1,769 906 863 
Other*616 790 (174)996 1,093 (97)
Total software and intangible assets$79,468 $34,792 $44,676 $79,291 $33,342 $45,949 
*Other intangibles include an above market lease acquired in September 2021 that had a fair value of ($0.7) million upon acquisition and is being accreted over the remaining useful life of the lease.

Amortization expense was $1.4 million for the first quarter ended March 26, 2022, and $1.2 million for the first quarter ended March 27, 2021.

The weighted average useful lives of software and other intangibles are as follows:
Weighted Average Useful Life (years)
Permits16
Patents, formulae, & licenses15
Customer and supplier relationships12
Software9
Non-compete agreements5
Other7

    The estimated amortization expense for the remainder of fiscal 2022 and each of the five succeeding fiscal years is as follows:
(millions)
Fiscal YearAmortization Expense
2022$4.7
20235.6
20243.9
20252.9
20262.4
20272.3

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.

15



(8)    ACCOUNTS PAYABLE

Accounts payable consisted of the following:
(thousands)
March 26,
2022
January 1,
2022
Accounts payable$42,034 $35,613 
Accounts payable - related parties1,021 566 
Total accounts payable$43,055 $36,179 


(9)    DEBT AND FINANCING ARRANGEMENTS
Bank Credit Facility

On March 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 and Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., and Wells Fargo Bank, National Association. The Agreement replaces the Company's previous Credit Agreement dated as of February 21, 2017. During the first quarter of 2021 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.
On July 27, 2017, the Financial Conduct Authority, which regulates LIBOR, announced that it intended to phase out the London Interbank Offered Rate by the end of 2021. Subsequently the phase out deadline has been extended to June 30, 2023. We expect that widespread use of LIBOR will transition to alternative interest rates in the near future. Since loans made under our Credit Agreement may be LIBOR based loans, the phasing out of LIBOR may adversely affect interest rates that could result in higher borrowing costs and higher interest expense. As the Company does not have any outstanding borrowings under the financial instruments impacted by LIBOR, the effect on the financial statements is not material.

The Company had no outstanding borrowings as of March 26, 2022 and January 1, 2022.

16


For the first quarter ended March 26, 2022, the Company recorded interest expense of $0.2 million with respect to our credit line and related amortization of debt issuance costs. For the first quarter ended March 27, 2021, the Company recorded interest expense of $0.3 million with respect to our term loan and credit line, and related amortization of debt issuance costs.

As of March 26, 2022 and January 1, 2022, the Company was in compliance with all covenants under its Credit Agreement. As of March 26, 2022 and January 1, 2022, the Company, had $5.6 million of standby letters of credit issued for both periods, and $94.4 million was available for borrowing under the bank credit facility for both periods.
17


(10)    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, wastewater vacuum services, 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 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.

Segment results for the first quarter ended March 26, 2022 and March 27, 2021 were as follows:

First Quarter Ended,
March 26, 2022
(thousands)Environmental
Services
Oil BusinessCorporate and
Eliminations
Consolidated
Revenues
Service revenues$66,299 $2,608 $ $68,907 
Product revenues12,389 52,093  64,482 
Rental income5,963 14  5,977 
Total revenues$84,651 $54,715 $ $139,366 
Operating expenses
Operating costs67,61834,165 101,783 
Operating depreciation and amortization2,8882,084 4,972 
Profit before corporate selling, general, and administrative expenses$14,145 $18,466 $ $32,611 
Selling, general, and administrative expenses13,73513,735
Depreciation and amortization from SG&A1,5351,535
Total selling, general, and administrative expenses$15,270 $15,270 
Other (income) - net(210)(210)
Operating income17,551
Interest expense – net223223
Income before income taxes$17,328 









18


First Quarter Ended,
March 27, 2021
(thousands)
Environmental
Services
Oil BusinessCorporate and
Eliminations
Consolidated
Revenues
Service revenues$53,303 $4,397 $ $57,700 
Product revenues10,747 31,519  42,266 
Rental income5,407 9  5,416 
Total revenues$69,457 $35,925 $ $105,382 
Operating expenses
Operating costs51,88024,891 76,771
Operating depreciation and amortization1,579948 2,527
Profit before corporate selling, general, and administrative expenses$15,998 $10,086 $ $26,084 
Selling, general, and administrative expenses12,18812,188
Depreciation and amortization from SG&A1,2551,255
Total selling, general, and administrative expenses$13,443 $13,443 
Other (income) - net(108)(108)
Operating income12,749
Interest expense – net324324
Income before income taxes$12,425 
Total assets by segment as of March 26, 2022 and January 1, 2022 were as follows:
(thousands)March 26, 2022January 1, 2022
Total Assets:
Environmental Services$292,521 $281,333 
Oil Business181,281 171,188 
Unallocated Corporate Assets87,613 74,343 
Total$561,415 $526,864 

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.

19


(11)    COMMITMENTS AND CONTINGENCIES

LEASES

Lessee

The Company leases buildings and property, railcars, machinery and equipment, and various types of vehicles and trailers 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. Variable lease payments are not included in the initial measurement of the right-of-use assets or lease liabilities, and are recorded as lease expense in the period incurred. Options to extend or terminate a lease are included in the lease term when it is reasonably certain that we will exercise that option. We have elected not to record leases with an initial term of 12 months or less on the balance sheet and instead recognize those lease payments on a straight-line basis over the lease term. Leases with initial terms in excess of 12 months are recorded as either operating or financing leases in our Consolidated Balance Sheet.

Right-of-use assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Our leased right-of-use assets are measured at the initial measurement of the lease liability, adjusted for any lease payments made prior to the lease commencement date, less any lease incentives received and other initial direct costs incurred. Our lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments.

Our leases have remaining terms ranging from less than one month to approximately 12 years and may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term. Our finance leases include a fleet of mobile equipment.

Lessor

The Company is a lessor of portions of buildings 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. 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. 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 buildings and property.

Rental income was as follows:

20


First Quarter Ended,
March 26, 2022March 27, 2021
(thousands)Environmental ServicesOil BusinessTotalEnvironmental ServicesOil BusinessTotal
Parts Cleaning$5,939 $ $5,939 $5,407 $ $5,407 
Property24