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 | June 14, 2014 | |
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
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) (Zip Code)
Registrant’s telephone number, including area code: (847) 836-5670
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer x | ||
Non-accelerated filer o | Smaller reporting company 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 July 18, 2014, there were outstanding 18,620,802 shares of Common Stock, $0.01 par value, of Heritage-Crystal Clean, Inc.
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Table of Contents
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PART I
ITEM 1. FINANCIAL STATEMENTS
Heritage-Crystal Clean, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
June 14, 2014 | December 28, 2013 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 18,029 | $ | 22,632 | ||||
Accounts receivable - net | 35,921 | 31,172 | ||||||
Inventory - net | 29,940 | 27,307 | ||||||
Deferred income taxes | 1,004 | 1,004 | ||||||
Other current assets | 3,980 | 3,661 | ||||||
Total Current Assets | 88,874 | 85,776 | ||||||
Property, plant and equipment - net | 87,829 | 85,039 | ||||||
Equipment at customers - net | 20,534 | 19,358 | ||||||
Software and intangible assets - net | 15,566 | 16,094 | ||||||
Goodwill | 9,787 | 9,691 | ||||||
Total Assets | $ | 222,590 | $ | 215,958 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 25,538 | $ | 18,291 | ||||
Current maturities of long-term debt and term loan | 2,410 | 2,906 | ||||||
Accrued salaries, wages, and benefits | 3,018 | 4,145 | ||||||
Taxes payable | 1,790 | 1,292 | ||||||
Other accrued expenses | 2,776 | 2,730 | ||||||
Total Current Liabilities | 35,532 | 29,364 | ||||||
Term loan, less current maturities | 17,125 | 17,500 | ||||||
Long-term debt, less current maturities | 448 | 552 | ||||||
Deferred income taxes | 9,205 | 9,238 | ||||||
Total Liabilities | $ | 62,310 | $ | 56,654 | ||||
STOCKHOLDERS' EQUITY: | ||||||||
Common stock - 26,000,000 shares authorized at $0.01 par value, 18,440,828 and 18,360,282 shares issued and outstanding at June 14, 2014 and December 28, 2013, respectively | $ | 184 | $ | 184 | ||||
Additional paid-in capital | 146,829 | 146,043 | ||||||
Retained earnings | 12,413 | 12,143 | ||||||
Total Heritage-Crystal Clean, Inc. Stockholders' Equity | 159,426 | 158,370 | ||||||
Noncontrolling interest | 854 | 934 | ||||||
Total Equity | $ | 160,280 | $ | 159,304 | ||||
Total Liabilities and Stockholders' Equity | $ | 222,590 | $ | 215,958 | ||||
See accompanying notes to financial statements.
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Heritage-Crystal Clean, Inc.
Consolidated Statements of Income
(In Thousands, Except per Share Amounts)
(Unaudited)
Second Quarter Ended, | First Half Ended, | ||||||||||||||||
June 14, 2014 | June 15, 2013 | June 14, 2014 | June 15, 2013 | ||||||||||||||
Revenues | |||||||||||||||||
Product revenues | $ | 38,614 | $ | 28,906 | $ | 67,917 | $ | 55,464 | |||||||||
Service revenues | 39,467 | 34,644 | 76,129 | 68,093 | |||||||||||||
Total revenues | $ | 78,081 | $ | 63,550 | $ | 144,046 | $ | 123,557 | |||||||||
Operating expenses | |||||||||||||||||
Operating costs | $ | 63,525 | $ | 52,201 | $ | 120,890 | $ | 104,487 | |||||||||
Selling, general, and administrative expenses | 8,306 | 7,049 | 17,149 | 13,640 | |||||||||||||
Depreciation and amortization | 2,692 | 2,163 | 5,318 | 4,022 | |||||||||||||
Other expense - net | 236 | 101 | 185 | 93 | |||||||||||||
Operating income | 3,322 | 2,036 | 504 | 1,315 | |||||||||||||
Interest expense – net | 33 | 107 | 86 | 213 | |||||||||||||
Income before income taxes | 3,289 | 1,929 | 418 | 1,102 | |||||||||||||
Provision for income taxes | 1,304 | 872 | 69 | 465 | |||||||||||||
Net income | 1,985 | 1,057 | 349 | 637 | |||||||||||||
Income attributable to noncontrolling interest | 56 | 26 | 79 | 46 | |||||||||||||
Net income attributable to Heritage-Crystal Clean, Inc. common stockholders | $ | 1,929 | $ | 1,031 | $ | 270 | $ | 591 | |||||||||
Net income per share: basic | $ | 0.10 | $ | 0.06 | $ | 0.01 | $ | 0.03 | |||||||||
Net income per share: diluted | $ | 0.10 | $ | 0.06 | $ | 0.01 | $ | 0.03 | |||||||||
Number of weighted average shares outstanding: basic | 18,423 | 18,138 | 18,412 | 18,125 | |||||||||||||
Number of weighted average shares outstanding: diluted | 18,781 | 18,456 | 18,738 | 18,449 | |||||||||||||
See accompanying notes to financial statements.
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Heritage-Crystal Clean, Inc.
Consolidated Statement of Stockholders’ Equity
(In Thousands, Except Share Amounts)
(Unaudited)
Shares | Par Value Common | Additional Paid–in Capital | Retained Earnings | Total Heritage-Crystal Clean, Inc. Stockholders' Equity | Noncontrolling Interest | Total Equity | ||||||||||||||||||||
Balance at December 28, 2013 | 18,360,282 | $ | 184 | $ | 146,043 | $ | 12,143 | $ | 158,370 | $ | 934 | $ | 159,304 | |||||||||||||
Net income | — | — | — | 270 | 270 | 79 | 349 | |||||||||||||||||||
Distribution | — | — | — | — | — | (159 | ) | (159 | ) | |||||||||||||||||
Issuance of common stock - Acquisition | 12,005 | — | 193 | — | 193 | — | 193 | |||||||||||||||||||
Issuance of common stock – ESPP | 11,942 | — | 201 | — | 201 | — | 201 | |||||||||||||||||||
Share-based compensation | 56,599 | — | 392 | — | 392 | — | 392 | |||||||||||||||||||
Balance at June 14, 2014 | 18,440,828 | $ | 184 | $ | 146,829 | $ | 12,413 | $ | 159,426 | $ | 854 | $ | 160,280 | |||||||||||||
See accompanying notes to financial statements.
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Heritage-Crystal Clean, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
First Half Ended, | ||||||||
June 14, 2014 | June 15, 2013 | |||||||
Cash flows from Operating Activities: | ||||||||
Net income | $ | 349 | $ | 637 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 5,318 | 4,022 | ||||||
Bad debt provision | 303 | 285 | ||||||
Share-based compensation | 392 | 445 | ||||||
Loss on disposal of property, plant, and equipment | 222 | — | ||||||
Deferred taxes | (33 | ) | 377 | |||||
Other, net | 23 | 15 | ||||||
Changes in operating assets and liabilities: | ||||||||
Increase in accounts receivable | (4,856 | ) | (4,201 | ) | ||||
Increase in inventory | (2,614 | ) | (1,737 | ) | ||||
(Increase) decrease in other current assets | (310 | ) | 53 | |||||
Increase in accounts payable | 8,557 | 886 | ||||||
(Decrease) increase in accrued expenses | (438 | ) | 1,643 | |||||
Cash provided by operating activities | $ | 6,913 | $ | 2,425 | ||||
Cash flows from Investing Activities: | ||||||||
Capital expenditures | $ | (9,229 | ) | $ | (6,614 | ) | ||
Business acquisitions, net of cash acquired | (954 | ) | (2,405 | ) | ||||
Cash used in investing activities | $ | (10,183 | ) | $ | (9,019 | ) | ||
Cash flows from Financing Activities: | ||||||||
Proceeds from Term Loan | $ | — | $ | 750 | ||||
Payments on Term Loan | (625 | ) | (500 | ) | ||||
Payments of notes payable | (569 | ) | (447 | ) | ||||
Payments of contingent consideration | (181 | ) | (292 | ) | ||||
Distributions to noncontrolling interest | (159 | ) | — | |||||
Proceeds from the issuance of common stock | 201 | 225 | ||||||
Proceeds from the exercise of stock options | — | 76 | ||||||
Cash used in financing activities | $ | (1,333 | ) | $ | (188 | ) | ||
Net decrease in cash and cash equivalents | (4,603 | ) | (6,782 | ) | ||||
Cash and cash equivalents, beginning of period | 22,632 | 47,766 | ||||||
Cash and cash equivalents, end of period | $ | 18,029 | $ | 40,984 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Income taxes paid | $ | 275 | $ | 218 | ||||
Cash paid for interest, net of capitalized interest of $118 and $54, respectively | 92 | 259 | ||||||
Supplemental disclosure of non-cash information: | ||||||||
Payables for construction in progress | $ | 618 | $ | 592 | ||||
Business acquisition, note issued | 203 | 835 | ||||||
Business acquisition, common stock issued | 193 | — | ||||||
See accompanying notes to financial statements.
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HERITAGE-CRYSTAL CLEAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 14, 2014
(1) ORGANIZATION AND NATURE OF OPERATIONS
Heritage-Crystal Clean, Inc., a Delaware corporation and its subsidiaries (collectively the “Company”), provides parts cleaning and hazardous and non-hazardous waste services to small and mid-sized customers in both the manufacturing and vehicle service sectors. The Company's service programs include parts cleaning, containerized waste management, used oil collection, vacuum truck services, and waste antifreeze collection and recycling. The Company also owns and operates a used oil re-refinery through which it recycles used oil into high quality lubricant base oil and byproducts. The Company's locations are in the United States and 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. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the quarter ended June 14, 2014 do not necessarily indicate the results that may be expected for the full year.
The Company’s fiscal year ends on the Saturday closest to December 31. The most recently completed fiscal year ended on December 28, 2013. The current fiscal year will end on January 3, 2015. 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, antifreeze, and accessories; and service revenues include drum waste removal services, servicing of parts cleaning machines, vacuum truck services, and other services. In the Company's Oil Business segment, product revenues include sales of re-refined base oil, byproducts, and used oil; and service revenues include revenues from collecting and disposing of waste water. Due to the Company's integrated business model, it is impracticable to separately present costs of tangible products and costs of services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires the use of certain estimates by management in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions are the allowance for doubtful accounts receivable, valuation of inventory at lower of cost or market, valuation of goodwill and other intangible assets, and income taxes. Actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year.
Revenue Recognition
The Company derives its revenues primarily from the services it performs and from the sale of processed oil from its used oil re-refinery. Parts cleaning and other service revenues are recognized as the service is performed. Product revenues are recognized at the time risk of loss passes to the customer. The risk of loss passes to customers at various times depending on the particular terms of the sales contract in force with each individual customer. Common thresholds for when risk of loss passes to the customer are at the time that product is loaded onto the shipping vessel or at the time that product is offloaded at the customer’s receiving location. Revenues are recognized only if collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable.
Operating Costs
Within operating costs are cost of sales. Cost of sales in the Environmental Services segment includes the costs of the materials the Company sells and provides in its services, such as solvents and other chemicals, cleaning machines sold to customers, transportation of inventory and waste, and payments to third parties to recycle or dispose of the waste materials that the Company collects. The Company’s used solvent that it retrieves from customers in its product reuse program is accounted for as a reduction in net cost of solvent under cost of sales, whether placed in inventory or sold to a purchaser for reuse. If the used solvent is placed in inventory it is recorded at lower of cost or net realizable value. Cost of sales in the Oil Business include the costs paid to customers for used oil, transportation out to customers, and costs to operate the used oil re-refinery, including personnel costs and utilities.
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Operating costs also include the Company's costs of operating its branch system and hubs. These costs include personnel costs (including commissions), facility rent and utilities, truck leases, fuel, transportation, and maintenance. Operating costs are not presented separately for products and services.
Inventory
Inventory consists primarily of used oil, processed oil, new and used solvents, new and refurbished parts cleaning machines, drums, catalyst, accessories, and absorbents. Inventories are valued at the lower of first-in, first-out ("FIFO") cost or market, net of any reserves for excess, obsolete, or unsalable inventory. The Company performs physical inventory counts on a periodic basis and uses the results of these counts to determine inventory quantities. The quantities are used to help determine the value of our inventory. The Company continually monitors its inventory levels at each of our distribution locations and evaluate 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.
Acquisitions
The Company accounts for acquired businesses using the purchase method of accounting, which requires that the assets acquired, liabilities assumed, and contingent consideration be recorded at the date of acquisition at their respective fair values. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred and restructuring costs to be expensed in periods subsequent to the acquisition date. The Company records a preliminary purchase price allocation for its acquisitions and finalizes purchase price allocations as additional information relative to the fair values of the assets acquired becomes known.
Identifiable Intangible Assets
The fair value of identifiable intangible assets is based on significant judgments made by management. The Company has engaged third party valuation appraisal firms to assist the Company in determining the fair values and useful lives of the assets acquired. Such valuations and useful life determinations require the Company to make significant estimates and assumptions. These estimates and assumptions are based on historical experience and information obtained from the management of the acquired companies and also include, but are not limited to, future expected cash flows to be earned from the continued operation of the acquired business and discount rates applied in determining the present value of those cash flows. Unanticipated events and circumstances may occur that could affect the accuracy or validity of such assumptions, estimates, or actual results. Acquisition-related finite lived intangible assets are amortized on a straight-line basis over their estimated economic lives. The Company evaluates the estimated benefit periods and recoverability of its intangible assets when facts and circumstances indicate that the lives may not be appropriate and/or the carrying value of the asset may not be recoverable. If the carrying value is not recoverable, impairment is measured as the amount by which the carrying value exceeds its estimated fair value.
Fair Value of Financial Instruments
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. These tiers include: Level 1, defined as quoted market prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3, defined as unobservable inputs that are not corroborated by market data.
The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, notes payable, contingent consideration, and term debt. As of June 14, 2014 and December 28, 2013, the carrying values of cash and cash equivalents, trade receivables, trade payables, notes payable, and contingent consideration, are considered to be representative of their respective fair values due to the short maturity of these instruments. Term debt is representative of its fair value due to the interest rates being applied.
9
Goodwill
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 changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. The Company's determination of fair value requires certain assumptions and estimates, such as margin expectations, growth expectations, expected changes in working capital, etc., regarding future profitability and cash flows of acquired businesses and market conditions. In the fourth quarter of fiscal 2013, the Company tested goodwill for impairment on a quantitative basis and determined that the fair value of each reporting unit substantially exceeded the carrying value of the assets. The Company intends to test goodwill for impairment in the fourth quarter of fiscal 2014.
The change in the carrying amount of goodwill by segment from December 28, 2013 to June 14, 2014 is as follows (in thousands)
Environmental Services | Oil Business | Total | ||||||||||
Balance at December 28, 2013 | $ | 5,753 | $ | 3,938 | $ | 9,691 | ||||||
Sav-Tech Acquisition | 96 | — | 96 | |||||||||
Balance at June 14, 2014 | $ | 5,849 | $ | 3,938 | $ | 9,787 | ||||||
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016; early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. This update could impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations upon adoption.
(3) BUSINESS COMBINATIONS
On June 26, 2013, the Company purchased substantially all of the operating assets of Recycling Fluid Technologies, Inc. (RFTI), which was based in Battle Creek, Michigan. RFTI's business consisted of collecting and recycling waste antifreeze, producing a line of high quality antifreeze products which were sold for use in vehicle engine applications. The Company purchased RFTI for $4.9 million in cash and $1.2 million of the Company's common stock, or 82,000 shares.
On July 19, 2013, the Company purchased substantially all of the operating assets of Recycle Technologies, Inc. (RTI), which was based in Wood Dale, Illinois. RTI's business and operations were very similar to the business and operations of the former RFTI, which is described above. The Company purchased RTI for $2.9 million in cash at the time of closing, $0.4 million in the form of a note payable, and $1.0 million of the Company's common stock or 69,322 shares.
The acquisitions of RFTI and RTI provided the Company with a presence in the antifreeze recycling market.
On November 1, 2013, the Company acquired certain assets and liabilities of the northern territory of RS Used Oil Services, Inc., a subsidiary of Universal Lubricants, LLC ("ULNT/RS"), in exchange for $11.0 million in cash. The Company purchased these service routes in order to add used oil collection volume in Indiana, Ohio, Wisconsin, and parts of Illinois. The Company has retrospectively adjusted amounts with respect to the ULNT/RS acquisition that were recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. These adjustments are related to the Company's valuation of property and equipment, intangible assets, and goodwill acquired. Such adjustments resulted in a net decrease of less than $0.1 million in property and equipment and an increase of less than $0.1 million to both intangible assets and goodwill. The Company's balance sheet as of December 28, 2013 has been retrospectively adjusted to reflect the adjustments.
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On May 14, 2014, the Company, through a new subsidiary, Heritage-Crystal Clean, Ltd., acquired the outstanding stock of Sav-Tech Solvent, Inc. ("Sav-Tech"), which is based in Ontario, Canada. Sav-Tech's services included parts cleaning and containerized waste management. The Company purchased the stock of Sav-Tech in order to expand operations into Canada. The Company paid $1.4 million consisting of $1.0 million in cash at the time of closing, $0.2 million in the form of notes payable, and $0.2 million of the Company's common stock, or 12,005 shares.
The results of RFTI, RTI, and Sav-Tech are consolidated into the Company's Environmental Services segment subsequent to the closing date. The results of ULNT/RS are consolidated into the Company's Oil Business segment subsequent to the date of closing.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, net of cash acquired, related to the each acquisition (in thousands):
RFTI | RTI | ULNT/RS(a) | Sav-Tech(a) | ||||||||||||
Accounts receivable | $ | 348 | $ | 136 | $ | — | $ | 196 | |||||||
Other current assets | — | — | 101 | 7 | |||||||||||
Inventory | 211 | 106 | 955 | 19 | |||||||||||
Property, plant, & equipment | 1,283 | 793 | 1,463 | 691 | |||||||||||
Intangible assets | 1,590 | 1,340 | 6,314 | 458 | |||||||||||
Goodwill | 3,027 | 1,917 | 2,137 | 96 | |||||||||||
Accounts payable | (91 | ) | — | — | (81 | ) | |||||||||
Accrued expenses | — | — | — | (36 | ) | ||||||||||
Total purchase price, net of cash acquired | $ | 6,368 | $ | 4,292 | $ | 10,970 | $ | 1,350 | |||||||
Less: common stock issued | 1,230 | 1,000 | — | 193 | |||||||||||
Less: note issued | — | 430 | — | 203 | |||||||||||
Less: working capital adjustment | 218 | (8 | ) | — | — | ||||||||||
Net cash paid | $ | 4,920 | $ | 2,870 | $ | 10,970 | $ | 954 | |||||||
______________
(a) The Company is continuing to evaluate the purchase price allocations. Preliminary purchase price allocations are tentative and subject to revision as the Company finalizes appraisals and other analyses. Final determination of the fair values may result in further adjustments to the values presented above.
Unaudited Pro Forma Financial Information
The pro forma financial information in the table below presents the combined results of the Company as if the acquisitions that occurred in fiscal 2013 had occurred December 30, 2012 (in thousands, except per share data). The pro forma information is shown for illustrative purposes only and is not necessarily indicative of future results of operations of the Company or results of operations of the Company that would have actually occurred had the transactions been in effect for the period presented.
Second Quarter Ended, | First Half Ended, | |||||||
June 15, 2013 | June 15, 2013 | |||||||
Total revenues | $ | 68,870 | $ | 134,081 | ||||
Net income (loss) | 553 | (95) | ||||||
Income (loss) per share | ||||||||
Basic | $ | 0.03 | $ | — | ||||
Diluted | 0.03 | — | ||||||
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(4) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following (in thousands):
June 14, 2014 | December 28, 2013 | ||||||
Trade | $ | 34,873 | $ | 29,663 | |||
Less: allowance for doubtful accounts | 1,163 | 1,121 | |||||
Trade - net | 33,710 | 28,542 | |||||
Related parties | 1,965 | 2,045 | |||||
Other | 246 | 585 | |||||
Total accounts receivable - net | $ | 35,921 | $ | 31,172 | |||
The following table provides the changes in the Company’s allowance for doubtful accounts for the first half ended June 14, 2014 and the fiscal year ended December 28, 2013 (in thousands):
June 14, 2014 | December 28, 2013 | ||||||
Balance at beginning of period | $ | 1,121 | $ | 1,244 | |||
Bad debt provision | 303 | 444 | |||||
Accounts written off, net of recoveries | (261 | ) | (567 | ) | |||
Balance at end of period | $ | 1,163 | $ | 1,121 | |||
(5) INVENTORY
The carrying value of inventory consisted of the following (in thousands):
June 14, 2014 | December 28, 2013 | ||||||
Used oil and processed oil | $ | 14,099 | $ | 12,112 | |||
Solvents and solutions | 8,294 | 8,235 | |||||
Machines | 3,352 | 2,934 | |||||
Drums and supplies | 2,824 | 2,629 | |||||
Other | 1,604 | 1,614 | |||||
Total inventory | 30,173 | 27,524 | |||||
Less: machine refurbishing reserve | 233 | 217 | |||||
Total inventory - net | $ | 29,940 | $ | 27,307 | |||
Inventory consists primarily of used oil, processed oil, new and used solvents, new and refurbished parts cleaning machines, drums, catalyst, accessories, and absorbents. Inventories are valued at the lower of first-in, first-out (FIFO) cost or market, net of any reserves for excess, obsolete, or unsalable inventory. The Company continually 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.
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(6) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following (in thousands):
June 14, 2014 | December 28, 2013 | ||||||
Buildings and storage tanks (a) | $ | 52,857 | $ | 53,106 | |||
Machinery, vehicles, and equipment (a) | 34,698 | 33,659 | |||||
Leasehold improvements (a) | 2,866 | 2,877 | |||||
Land (a) | 1,070 | 835 | |||||
Construction in progress | 15,297 | 11,047 | |||||
Total property, plant and equipment | 106,788 | 101,524 | |||||
Less: accumulated depreciation | 18,959 | 16,485 | |||||
Property, plant and equipment - net | $ | 87,829 | $ | 85,039 | |||
June 14, 2014 | December 28, 2013 | ||||||
Equipment at customers | $ | 50,329 | $ | 47,078 | |||
Less: accumulated depreciation | 29,795 | 27,720 | |||||
Equipment at customers - net | $ | 20,534 | $ | 19,358 | |||
_______________
(a) Numbers include preliminary fair values of assets acquired in the acquisitions described in Note 3 that may be adjusted as additional information becomes known. The amounts for machinery, vehicles, and equipment and leasehold improvements have been retrospectively adjusted as of December 28, 2013 by less than $0.1 million.
Depreciation expense for the second quarters ended June 14, 2014 and June 15, 2013 were $2.2 million and $2.0 million, respectively. Depreciation expense for the first halves ended June 14, 2014 and June 15, 2013 were $4.4 million and $3.7 million, respectively.
(7) SOFTWARE AND OTHER INTANGIBLE ASSETS
Following is a summary of software and other intangible assets (in thousands):
June 14, 2014 | December 28, 2013 | ||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
Customer & supplier relationships(a) | $ | 10,896 | $ | 1,318 | $ | 9,578 | $ | 10,529 | $ | 826 | $ | 9,703 | |||||||||||
Software | 4,537 | 2,930 | 1,607 | 4,799 | 2,815 | 1,984 | |||||||||||||||||
Non-compete agreements(a) | 2,973 | 946 | 2,027 | 2,794 | 713 | 2,081 | |||||||||||||||||
Patents, formulae, and licenses(a) | 1,829 | 405 | 1,424 | 1,825 | 370 | 1,455 | |||||||||||||||||
Other (a) | 1,102 | 172 | 930 | 1,008 | 137 | 871 | |||||||||||||||||
Total software and intangible assets | $ | 21,337 | $ | 5,771 | $ | 15,566 | $ | 20,955 | $ | 4,861 | $ | 16,094 | |||||||||||
_______________
(a) Numbers include preliminary fair values of assets acquired in the acquisitions described in Note 3 that may be adjusted as additional information becomes known. The amount for Customer & supplier relationships has been retrospectively adjusted as of December 28, 2013 by less than $0.1 million.
Amortization expense was $0.5 million for the second quarter ended June 14, 2014 and $0.2 million for second quarter ended June 15, 2013. Amortization expense was $0.9 million for the first half ended June 14, 2014 and $0.4 million for the first half ended June 15, 2013. The weighted average useful lives of software; customer relationships; patents, formulae, and licenses; non-compete agreements, and other intangibles were 10 years, 12 years, 15 years, 5 years, and 8 years, respectively.
The expected amortization expense for the remainder of fiscal 2014 and for fiscal years 2015, 2016, 2017, and 2018 is $1.5 million, $1.9 million, $1.7 million, $1.6 million, and $1.5 million, respectively. The preceding expected amortization expense
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is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, disposal of intangible assets, accelerated amortization of intangible assets, and other events.
(8) ACCOUNTS PAYABLE
Accounts payable consisted of the following (in thousands):
June 14, 2014 | December 28, 2013 | ||||||
Accounts payable | $ | 24,971 | $ | 17,908 | |||
Accounts payable - related parties | 567 | 383 | |||||
Total accounts payable | $ | 25,538 | $ | 18,291 | |||
(9) DEBT AND FINANCING ARRANGEMENTS
Bank Credit Facility
On February 5, 2013, the Company entered into an Amended and Restated Credit Agreement ("Credit Agreement") that allows for up to $38.6 million in borrowings. As of June 14, 2014 and December 28, 2013, the Company's total borrowings were $18.6 million and $19.3 million, respectively, under the term loan which has a maturity date of February 5, 2018. The remaining portion of the credit facility is a revolving loan which expires on February 5, 2018. There were no amounts outstanding under the revolver at June 14, 2014 and December 28, 2013.
During the second quarter of fiscal 2014, the Company recorded interest of $0.1 million on the term loan and capitalized less than $0.1 million for various capital projects. During the first half of fiscal 2014, the Company recorded interest of $0.2 million on the term loan and capitalized $0.1 million for various capital projects. During the second quarter of fiscal 2013, the Company recorded interest of $0.1 million on the term loan, of which less than $0.1 million was capitalized for various capital projects. During the first half of fiscal 2013, the Company recorded interest of $0.2 million on the term loan and capitalized $0.1 million for various capital projects.
As of June 14, 2014 and December 28, 2013, the Company was in compliance with all covenants under the Credit Agreement. As of June 14, 2014 and December 28, 2013, the Company had $0.3 million of standby letters of credit issued, and $19.7 million was available for borrowing under the revolving loan portion of the bank credit facility. The actual amount available under the revolving loan portion of the Credit Agreement is limited by the Company's total leverage ratio.
Notes Payable
At June 14, 2014 and December 28, 2013, the Company had outstanding notes payable related to business acquisitions of $1.4 million and $1.7 million, respectively, of which $0.9 million and $1.2 million were recorded as current maturities.
The Company's weighted average interest rate for all debt as of June 14, 2014 and June 15, 2013 was 1.9% and 2.5%, respectively.
(10) SEGMENT INFORMATION
The Company reports in two segments: "Environmental Services" and "Oil Business." The Environmental Services segment consists of the Company's parts cleaning, containerized waste management, vacuum truck service, and antifreeze recycling activities. The Oil Business segment consists of the Company's used oil collection and used oil re-refining activities.
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.
Operating segment results for the second quarters and first halves ended June 14, 2014, and June 15, 2013 were as follows (in thousands):
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Second Quarter Ended, | |||||||||||||||||
June 14, 2014 | |||||||||||||||||
Environmental Services | Oil Business | Corporate and Eliminations | Consolidated | ||||||||||||||
Revenues | |||||||||||||||||
Product revenues | $ | 4,401 | $ | 34,213 | $ | — | $ | 38,614 | |||||||||
Service revenues | 37,249 | 2,218 | 39,467 | ||||||||||||||
Total revenues | $ | 41,650 | $ | 36,431 | $ | — | $ | 78,081 | |||||||||
Operating expenses | |||||||||||||||||
Operating costs | 28,580 | 34,945 | — | 63,525 | |||||||||||||
Operating depreciation and amortization | 1,251 | 916 | — | 2,167 | |||||||||||||
Profit before corporate selling, general, and administrative expenses | $ | 11,819 | $ | 570 | $ | — | $ | 12,389 | |||||||||
Selling, general, and administrative expenses | 8,306 | 8,306 | |||||||||||||||
Depreciation and amortization from SG&A | 525 | 525 | |||||||||||||||
Total selling, general, and administrative expenses | $ | 8,831 | $ | 8,831 | |||||||||||||
Other expense - net | 236 | 236 | |||||||||||||||
Operating income | 3,322 | ||||||||||||||||
Interest expense – net | 33 | 33 | |||||||||||||||
Income before income taxes | $ | 3,289 | |||||||||||||||
Second Quarter Ended, | |||||||||||||||||
June 15, 2013 | |||||||||||||||||
Environmental Services | Oil Business | Corporate and Eliminations | Consolidated | ||||||||||||||
Revenues | |||||||||||||||||
Product revenues | $ | 2,853 | $ | 26,053 | $ | — | $ | 28,906 | |||||||||
Service revenues | 32,980 | 1,664 | 34,644 | ||||||||||||||
Total revenues | $ | 35,833 | $ | 27,717 | $ | — | $ | 63,550 | |||||||||
Operating expenses | |||||||||||||||||
Operating costs | 24,792 | 27,409 | — | 52,201 | |||||||||||||
Operating depreciation and amortization | 1,079 | 824 | — | 1,903 | |||||||||||||
Profit (loss) before corporate selling, general, and administrative expenses | $ | 9,962 | $ | (516 | ) | $ | — | $ | 9,446 | ||||||||
Selling, general, and administrative expenses | 7,049 | 7,049 | |||||||||||||||
Depreciation and amortization from SG&A | 260 | 260 | |||||||||||||||
Total selling, general, and administrative expenses | $ | 7,309 | $ | 7,309 | |||||||||||||
Other expense - net | 101 | 101 | |||||||||||||||
Operating income | 2,036 | ||||||||||||||||
Interest expense – net | 107 | 107 | |||||||||||||||
Income before income taxes | $ | 1,929 | |||||||||||||||
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First Half Ended, | |||||||||||||||||
June 14, 2014 | |||||||||||||||||
Environmental Services | Oil Business | Corporate and Eliminations | Consolidated | ||||||||||||||
Revenues | |||||||||||||||||
Product revenues | $ | 8,645 | $ | 59,272 | $ | — | $ | 67,917 | |||||||||
Service revenues | 71,914 | 4,215 | 76,129 | ||||||||||||||
Total revenues | $ | 80,559 | $ | 63,487 | $ | — | $ | 144,046 | |||||||||
Operating expenses | |||||||||||||||||
Operating costs | 57,459 | 63,431 | — | 120,890 | |||||||||||||
Operating depreciation and amortization | 2,505 | 1,803 | — | 4,308 | |||||||||||||
Profit (loss) before corporate selling, general, and administrative expenses | $ | 20,595 | $ | (1,747 | ) | $ | — | $ | 18,848 | ||||||||
Selling, general, and administrative expenses | 17,149 | 17,149 | |||||||||||||||
Depreciation and amortization from SG&A | 1,010 | 1,010 | |||||||||||||||
Total selling, general, and administrative expenses | $ | 18,159 | $ | 18,159 | |||||||||||||
Other expense - net | 185 | 185 | |||||||||||||||
Operating income | 504 | ||||||||||||||||
Interest expense – net | 86 | 86 | |||||||||||||||
Income before income taxes | $ | 418 | |||||||||||||||
First Half Ended, | |||||||||||||||||
June 15, 2013 | |||||||||||||||||
Environmental Services | Oil Business | Corporate and Eliminations | Consolidated | ||||||||||||||
Revenues | |||||||||||||||||
Product revenues | $ | 5,523 | $ | 49,941 | $ | — | $ | 55,464 | |||||||||
Service revenues | 65,101 | 2,992 | 68,093 | ||||||||||||||
Total revenues | $ | 70,624 | $ | 52,933 | $ | — | $ | 123,557 | |||||||||
Operating expenses | |||||||||||||||||
Operating costs | 50,340 | 54,147 | — | 104,487 | |||||||||||||
Operating depreciation and amortization | 2,160 | 1,438 | — | 3,598 | |||||||||||||
Profit (loss) before corporate selling, general, and administrative expenses | $ | 18,124 | $ | (2,652 | ) | $ | — | $ | 15,472 | ||||||||
Selling, general, and administrative expenses | 13,640 | 13,640 | |||||||||||||||
Depreciation and amortization from SG&A | 424 | 424 | |||||||||||||||
Total selling, general, and administrative expenses | $ | 14,064 | $ | 14,064 | |||||||||||||
Other expense - net | 93 | 93 | |||||||||||||||
Operating income | 1,315 | ||||||||||||||||
Interest expense – net | 213 | 213 | |||||||||||||||
Income before income taxes | $ | 1,102 | |||||||||||||||
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Total assets by segment as of June 14, 2014 and December 28, 2013 were as follows (in thousands):
June 14, 2014 | December 28, 2013 | ||||||||
Total Assets: | |||||||||
Environmental Services | $ | 77,901 | $ | 80,451 | |||||
Oil Business | 119,851 | 110,040 | |||||||
Unallocated Corporate Assets | 24,838 | 25,467 | |||||||
Total | $ | 222,590 | $ | 215,958 | |||||
Segment assets for the Environmental Services and Oil Business segments consist of property, plant, and equipment, 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.
(11) COMMITMENTS AND CONTINGENCIES
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 $20.0 million as of June 14, 2014, 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. 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 June 14, 2014 and December 28, 2013, the Company had accrued $0.5 million and $0.4 million related to loss contingencies, respectively.
(12) INCOME TAXES
In fiscal 2011, the Company deducted for federal income tax purposes 100% bonus depreciation on the majority of its capital expenditures for assets placed in service in fiscal 2011. Therefore, the Company recorded a noncurrent deferred tax liability to reflect the temporary book-tax difference for the resulting inability to deduct the federal income tax depreciation on those same 2011 capital expenditures in future years. As a result of the temporary differences related to the tax treatment of the federal bonus depreciation, the Company recorded a gross Net Operating Loss ("NOL") of $44.7 million, which will expire in 2031. In addition, in fiscal 2012 and 2013, the Company deducted 50% bonus depreciation for federal income tax purposes on certain capital expenditures. These deductions added $2.0 million to the NOL in fiscal 2012 and provided for an additional deduction from taxable income of an estimated $3.0 million in fiscal 2013. The balance on the NOL as of June 14, 2014 was $33.6 million. As of June 14, 2014, the remaining deferred tax asset related to the Company's state and federal NOL was a tax effected balance of $12.4 million.
The Company recognizes windfall tax benefits associated with the exercise of stock options directly to stockholders' equity only when realized. Consequently, deferred tax assets are not recognized for NOLs resulting from windfall tax benefits. At June 14, 2014, deferred tax assets do not include $0.9 million of excess tax benefits from share-based compensation.
The Company's effective tax rate for the second quarter of fiscal 2014 was 39.6% compared to 45.2% in the second quarter of fiscal 2013. The rate decrease is attributed to discrete items having a more favorable effect on the rate in fiscal 2014 than in the same period in fiscal 2013. The Company's effective tax rate for the first half of fiscal 2014 was 16.5% compared to 42.2% in the first half of fiscal 2013. The rate decrease is attributable to year-to-date pre-tax income being relatively low compared to the favorable discrete items such as the release of reserves on uncertain tax positions for 2011 and 2012, as well as to tax credits received in fiscal 2014 for the prior year.
17
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 $0.2 million and $0.3 million for uncertain tax positions as of June 14, 2014 and December 28, 2013, respectively. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.
(13) SHARE-BASED COMPENSATION
The aggregate number of shares of common stock which may be issued under the Company’s 2008 Omnibus Plan ("Plan") is 1,902,077 plus any common stock that becomes available for issuance pursuant to the reusage provision of the Plan. As of June 14, 2014, the number of shares available for issuance under the Plan was 649,387 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 28, 2013 | 579,614 | $ | 10.98 | 4.35 | $ | 5,133 | |||||||
Exercised | — | — | |||||||||||
Options outstanding at June 14, 2014 | 579,614 | $ | 10.98 | 3.89 | $ | 3,533 | |||||||
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 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. On May 3, 2014, 18,666 restricted shares that had been granted for service in fiscal 2013 vested. On May 1, 2014, the Company granted 17,772 restricted shares for service in fiscal 2014. Expense related to the Board of Directors' restricted stock in the first halves of fiscal 2014 and 2013 was $0.1 million and $0.1 million, respectively. As of June 14, 2014, there was $0.2 million unrecognized expense associated with these awards, which will be recorded throughout fiscal 2014.
In March 2011, the Company granted 92,909 restricted shares to certain members of management under the Company's 2010 Long Term Incentive Plan (LTIP). In October 2011, the Company granted 12,783 restricted shares based on the completion of the front part of the used oil re-refinery. These restricted shares were subject to a graded vesting schedule over a three year period starting January 1, 2012. On January 1, 2014, the final shares related to these grants vested.
In February 2012, the Company granted 59,502 restricted shares to certain members of management under the Company's 2011 LTIP. These restricted shares are subject to a graded vesting schedule over a three year period starting January 1, 2013. There was approximately $0.2 million and $0.3 million of unrecognized compensation expense remaining related to these awards as of June 14, 2014 and December 28, 2013 respectively. In the first halves of fiscal 2014 and 2013, $0.2 million and $0.2 million of compensation expense was recorded related to these awards, respectively.
In February 2013, the Company granted 10,000 restricted shares to a member of management based on the performance of the individual in fiscal 2012 and having met certain goals. The restricted shares are subject to a graded vesting schedule over a three year period. There was less than $0.1 million of unrecognized compensation expense remaining related to this award as of June 14, 2014 and December 28, 2013. In each of the first halves of fiscal 2014 and 2013, less than $0.1 million of compensation expense was recorded related to this award.
In February 2014, the Company granted certain members of management 132,107 restricted shares based on the Company's performance in fiscal 2013. These restricted shares are subject to a graded vesting schedule over a three year period starting January 1, 2015. There was approximately $1.4 million and $1.7 million in unrecognized compensation expense remaining related to these awards as of June 14, 2014 and December 28, 2013, respectively. In the first halves of fiscal 2014 and 2013, $0.3 million and $0.2 million of compensation expense was recorded related to these awards, respectively.
18
In February 2014, as part of management's annual compensation for fiscal 2014, the Company approved a plan to grant certain members of management restricted shares in the future based on the Company's performance in fiscal 2014. Based on the relevant guidance, the Company determined that the service inception date for these awards was prior to the grant date and therefore began accruing compensation expense in fiscal 2014, based on the Company's assessment as to the probability that the performance criteria would be achieved. As such, there was approximately $1.7 million in unrecognized compensation expense relating to these awards as of June 14, 2014. In the first half of fiscal 2014, $0.2 million of compensation expense was recorded related to these awards.
The following table summarizes information about restricted stock awards for the period ended June 14, 2014:
Restricted Stock (Nonvested Shares) | Number of Shares | Weighted Average Grant-Date Fair Value Per Share | |||||
Nonvested shares outstanding at December 28, 2013 | 100,052 | $ | 16.97 | ||||
Granted | 149,879 | 16.59 | |||||
Vested | (76,935 | ) | 15.73 | ||||
Nonvested shares outstanding at June 14, 2014 | 172,996 | $ | 17.19 | ||||
Employee Stock Purchase Plan
As of June 14, 2014, the Company had reserved 152,265 shares of common stock available for purchase under the Employee Stock Purchase Plan of 2008, including 125,000 additional shares made available for purchase under the Plan at the Company's fiscal 2014 annual meeting. In the first half of fiscal 2014, employees purchased 11,942 shares of the Company’s common stock with a weighted average fair market value of $17.71 per share.
(14) EARNINGS PER SHARE
The following table reconciles the number of shares outstanding for the second quarters of fiscal 2014 and 2013, 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 (in thousands, except per share data):
Second Quarter Ended, | First Half Ended, | ||||||||||||||
June 14, 2014 | June 15, 2013 | June 14, 2014 | June 15, 2013 | ||||||||||||
Net income | $ | 1,985 | $ | 1,057 | $ | 349 | $ | 637 | |||||||
Less: Income attributable to noncontrolling interest | 56 | 26 | 79 | 46 | |||||||||||
Net income attributable to Heritage-Crystal Clean, Inc. available to common stockholders | $ | 1,929 | $ | 1,031 | $ | 270 | $ | 591 | |||||||
Weighted average basic shares outstanding | 18,423 | 18,138 | 18,412 | 18,125 | |||||||||||
Dilutive shares for share–based compensation plans | 358 | 318 | 326 | 324 | |||||||||||
Weighted average diluted shares outstanding | 18,781 | 18,456 | 18,738 | 18,449 | |||||||||||
Net income per share: basic | $ | 0.10 | $ | 0.06 | $ | 0.01 | $ | 0.03 | |||||||
Net income per share: diluted | $ | 0.10 | $ | 0.06 | $ | 0.01 | $ | 0.03 | |||||||
19
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 3, 2014. 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 2013 filed with the SEC on March 3, 2014. 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 week periods ended June 14, 2014 and June 15, 2013, each referred to as "quarter ended" or "second quarter ended" or "second fiscal quarter" and "first half" respectively.
Overview
We provide parts cleaning, containerized waste management, used oil collection, vacuum truck services, antifreeze recycling, and we own and operate a used oil re-refinery. 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 76 branch facilities providing services to customers in 43 states and parts of Canada. We conduct business through two principal operating segments: Environmental Services and Oil Business.
Our Environmental Services segment revenues are generated primarily from providing parts cleaning services, containerized waste management, vacuum truck services, and antifreeze recycling. Revenues from this segment accounted for approximately 55.9% of our total company revenues for the first half of fiscal 2014. In the Environmental Services segment, we define and measure same-branch revenues for a given period as the subset of all our branches that have been open and operating throughout and between the periods being compared, and we refer to these as established branches. We calculate average revenues per working day by dividing our revenues by the number of non-holiday weekdays in the applicable fiscal year or fiscal quarter.
Our Oil Business segment consists of our used oil collection and used oil re-refining activities and accounted for 44.1% of our total company revenues in the first half of fiscal 2014.
Our operating costs include the costs of the materials we use in our services, such as solvents and other chemicals, transportation of solvents and waste, and our payments to other parties to recycle or dispose of the waste materials that we collect. 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. Increased costs of crude oil, a component of solvent, can increase operating costs, although we attempt to offset such increases with increased prices for our services. Operating costs also include the costs of operating our branch system and hubs, 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.
20
We use profit before corporate selling, general and administrative expenses ("SG&A") as a key measure of segment profitability. We define profit before SG&A as revenues less operating costs and depreciation and amortization from operations.
We operate a used oil re-refinery located in Indianapolis, Indiana, through which we recycle used oil into high quality lubricant base oil and byproducts. We supply the base oil to firms that produce and market finished lubricants. Our used oil re-refinery currently has a nameplate capacity of approximately 65 million gallons of used oil feedstock per year when operating at full capacity. During the second quarter of fiscal 2014, we produced base oil at a rate of approximately 100% of nameplate capacity.
On May 14, 2014, through a new subsidiary, Heritage-Crystal Clean, Ltd., we acquired the outstanding stock of Sav-Tech Solvent, Inc. ("Sav-Tech"), which is based in Ontario, Canada. Sav-Tech's services included parts cleaning and containerized waste management. We purchased the stock of Sav-Tech in order to expand operations into Canada. We paid $1.4 million consisting of $1.0 million in cash at the time of closing, $0.2 million in the form of notes payable, and $0.2 million of our common stock, or 12,005 shares.
For further discussion on our acquisitions, see Note 3 in our consolidated financial statements included elsewhere in this document.
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.
We have identified the following accounting policies as those that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations. Actual results in these areas could differ materially from management's estimates under different assumptions and conditions.
Revenue Recognition
We derive our revenues primarily from the services we perform and from the sale of processed oil from our used oil re-refinery. Parts cleaning and other service revenues are recognized as the service is performed. Product revenues are recognized at the time risk of loss passes to the customer. The risk of loss passes to customers at various times depending on the particular terms of the sales contract in force with each individual customer. Common thresholds for when risk of loss passes to the customer are at the time that product is loaded onto the shipping vessel or at the time that product is offloaded at the customer’s receiving location. Revenues are recognized only if collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable.
Operating Costs
Within operating costs are cost of sales. Cost of sales in the Environmental Services segment includes the costs of the materials we sell and provide in our services, such as solvents and other chemicals, cleaning machines sold to customers, transportation of inventory and waste, and payments to third parties to recycle or dispose of the waste materials that we collect. Our used solvent that we retrieve from customers in our product reuse program is accounted for as a reduction in net cost of solvent under cost of sales, whether placed in inventory or sold to a purchaser for reuse. If the used solvent is placed in inventory it is recorded at lower of cost or net realizable value. Cost of sales in the Oil Business includes the costs paid to customers for used oil, transportation out to customers, and costs to operate the used oil re-refinery, including personnel costs and utilities.
Operating costs also include the costs of operating our branch system and hubs. These costs include personnel costs (including commissions), facility rent and utilities, truck leases, fuel, transportation, and maintenance. Operating costs are not presented separately for products and services.
21
Inventory
Inventory consists primarily of used oil, processed oil, new and used solvents, new and refurbished parts cleaning machines, drums, catalyst, accessories, and absorbents. Inventories are valued at the lower of first-in, first-out ("FIFO") cost or market, net of any reserves for excess, obsolete, or unsalable inventory. We perform a physical inventory count on a periodic basis and use the results of these counts to determine inventory quantities. The quantities are used to help determine the value of our inventory. We continually monitor our inventory levels at each of our distribution locations and evaluate inventories for excess or slow-moving items. If circumstances indicate the cost of inventories exceed their recoverable value, inventories are reduced to net realizable value.
Acquisitions
We account for acquired businesses using the purchase method of accounting, which requires that the assets acquired, liabilities assumed, and contingent consideration be recorded at the date of acquisition at their respective fair values. It further requires acquisition-related costs to be recognized separately from the acquisition and expensed as incurred and restructuring costs to be expensed in periods subsequent to the acquisition date.
Identifiable Intangible Assets
The fair value of finite lived intangible assets may be based on significant judgments made by management. We sometimes engage third party valuation appraisal firms to assist us in determining the fair values and useful lives of the assets acquired. Such valuations and useful life determinations require us to make significant estimates and assumptions. These estimates and assumptions are based on historical experience and information obtained from the management of the acquired companies and also include, but are not limited to, future expected cash flows to be earned from the continued operation of the acquired business and discount rates applied in determining the present value of those cash flows. Unanticipated events and circumstances may occur that could affect the accuracy or validity of such assumptions, estimates, or actual results. These intangible assets are amortized on a straight-line basis over their estimated economic lives.
Goodwill
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. We test goodwill for impairment annually and in interim periods if changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Our determination of fair value requires certain assumptions and estimates regarding future profitability and cash flows of acquired businesses and market conditions. In fiscal 2013, we tested goodwill for impairment. Our tests indicated that the fair values were substantially in excess of carrying values and thus did not fail step one of the goodwill impairment test. However, due to the inherent uncertainties associated with using these assumptions, impairment charges could occur in future periods.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016; early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. This update could impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations upon adoption.
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RESULTS OF OPERATIONS
General
The following table sets forth certain operating data as a percentage of revenues for the periods indicated (dollars in thousands):
Second Quarter Ended, | First Half Ended, | ||||||||||||||||||||||
June 14, 2014 | June 15, 2013 | June 14, 2014 | June 15, 2013 | ||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Product revenues | $ | 38,614 | 49.5 | % | $ | 28,906 | 45.5 | % | $ | 67,917 | 47.1 | % | $ | 55,464 | 44.9 | % | |||||||
Service revenues | 39,467 | 50.5 | % | 34,644 | 54.5 | % | 76,129 | 52.9 | % | 68,093 | 55.1 | % | |||||||||||
Total Revenues | $ | 78,081 | 100.0 | % | $ | 63,550 | 100.0 | % | $ | 144,046 | 100.0 | % | $ | 123,557 | 100.0 | % | |||||||
Operating expenses - | |||||||||||||||||||||||
Operating costs | $ | 63,525 | 81.4 | % | $ | 52,201 | 82.1 | % | $ | 120,890 | 83.9 | % | $ | 104,487 | 84.6 | % | |||||||
Selling, general and administrative expenses | 8,306 | 10.6 | % | 7,049 | 11.1 | % | 17,149 | 11.9 | % | 13,640 | 11.0 | % | |||||||||||
Depreciation and amortization | 2,692 | 3.4 | % | 2,163 | 3.4 | % | 5,318 | 3.7 | % | 4,022 | 3.3 | % | |||||||||||
Other expense - net | 236 | 0.3 | % | 101 | 0.2 | % | 185 | 0.1 | % | 93 | 0.1 | % | |||||||||||
Operating income | 3,322 | 4.3 | % | 2,036 | 3.2 | % | 504 | 0.3 | % | 1,315 | 1.1 | % | |||||||||||
Interest expense – net | 33 | — | % | 107 | 0.2 | % | 86 | 0.1 | % | 213 | 0.2 | % | |||||||||||
Income before income taxes | 3,289 | 4.2 | % | 1,929 | 3.0 | % | 418 | 0.3 | % | 1,102 | 0.9 | % | |||||||||||
Provision for income taxes | 1,304 | 1.7 | % | 872 | 1.4 | % | 69 | — | % | 465 | 0.4 | % | |||||||||||
Net income | 1,985 | 2.5 | % | 1,057 | 1.7 | % | 349 | 0.2 | % | 637 | 0.5 | % | |||||||||||
Income attributable to noncontrolling interest | 56 | 0.1 | % | 26 | — | % | 79 | 0.1 | % | 46 | — | % | |||||||||||
Net income attributable to Heritage-Crystal Clean, Inc. common stockholders | $ | 1,929 | 2.5 | % | $ | 1,031 | 1.6 | % | $ | 270 | 0.2 | % | $ | 591 | 0.5 | % | |||||||
Revenues
For the second quarter of fiscal 2014, revenues increased $14.5 million, or 22.9%, from $63.6 million in the second quarter of fiscal 2013 to $78.1 million in the second quarter of fiscal 2014. For the first half of fiscal 2014, revenues increased $20.5 million, or 16.6%, from $123.6 million in the first half of fiscal 2013 to $144.0 million in the first half of fiscal 2014. Revenues in the Environmental Services segment increased through volume growth and improved pricing, as well as through revenues from our antifreeze line of business. Oil Business revenues increased as a result of the increase in volume of base oil and re-refinery byproducts sold in the first half of 2014, compared to the first half of fiscal 2013. However, the market selling price for the type of re-refined base oil we produce declined from the second quarter of fiscal 2013 to the second quarter of fiscal 2014.
Operating expenses
Operating costs
Operating costs increased $11.3 million, or 21.7%, from the second quarter of fiscal 2013 to the second quarter of fiscal 2014. For the first half of fiscal 2014, operating costs increased $16.4 million, or 15.7%, from $104.5 million in the first half of fiscal 2013 to $120.9 million in the first half of fiscal 2014. Operating costs decreased slightly as a percentage of revenues compared to the prior year as a result of our ability to leverage fixed costs as we grew our business.
The sale of used solvent generated by customers participating in our product reuse program for parts cleaning is not accounted for as revenues but rather as a reduction in our net cost of solvent under operating costs. Sales of reuse solvent provided a benefit during the second quarter of fiscal 2014 of $0.2 million compared to a benefit of $0.1 million in the second quarter of fiscal 2013. Sales of reuse solvent had an immaterial impact during the first half of fiscal 2014, compared to a benefit of $0.3 million in the first half of fiscal 2013.
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Selling, general, and administrative expenses
Selling, general, and administrative expenses increased $1.3 million, or 17.8%, from the second quarter of fiscal 2013 to the second quarter of fiscal 2014. SG&A decreased as a percentage of revenues from 11.1% in the second quarter of fiscal 2013 to 10.6% as we were able to grow revenues at a faster pace than SG&A costs during the second quarter of fiscal 2014. In addition, we did not incur certain one-time costs for research and development and relocation that were incurred in the second quarter of fiscal 2013. For the first half of fiscal 2014, selling, general, and administrative expenses increased $3.5 million, or 25.7%, from $13.6 million in the first half of fiscal 2013 to $17.1 million in the first half of fiscal 2014. The increase in SG&A as a percentage of revenues is the result of due diligence costs related to potential acquisitions and increased personnel costs and professional services fees. Due diligence costs were $0.4 million in the second quarter of fiscal 2014 and $1.6 million in the first half of fiscal 2014.
Interest expense
Interest expense for the second quarter of fiscal 2014 was less than $0.1 million, and interest expense for the second quarter of fiscal 2013 was $0.1 million. In the second quarters of fiscal 2014 and 2013, we capitalized less than $0.1 million in interest. Interest expense for the first half of fiscal 2014 was $0.1 million, compared to interest expense of $0.2 million in the first half of fiscal 2013. In the first half of fiscal 2014, we capitalized $0.1 million in interest compared to less than $0.1 million in the first half of fiscal 2013. Interest expense decreased from the first half of fiscal 2013 to the first half of fiscal 2014 as a result of a lower balance on our outstanding debt. In addition, we were able to capitalize more interest related to our re-refinery expansion.
Provision for income taxes
Our effective tax rate for the second quarter of fiscal 2014 was 39.6% compared to 45.2% in second quarter of fiscal 2013. Our effective tax rate for the first half of fiscal 2014 was 16.5% compared to 42.2% in the first half of fiscal 2013. The rate decrease is attributed to discrete items having a more favorable effect on the rate in fiscal 2014 than in the same period in fiscal 2013. The rate decrease in the first half of fiscal 2014 compared to the first half of fiscal 2013 is attributable to year to date pre-tax income being relatively low compared to the favorable discrete items such as the release of reserves on uncertain tax positions for 2011 and 2012, as well as to tax credits received in fiscal 2014 for the prior year.
Segment Information
The following table presents sales by operating segment (dollars in thousands):
Second Quarter Ended, | Increase | |||||||||||||||
June 14, 2014 | June 15, 2013 | $ | % | |||||||||||||
Revenues: | ||||||||||||||||
Environmental Services | $ | 41,650 | $ | 35,833 | $ | 5,817 | 16.2 | % | ||||||||
Oil Business | 36,431 | 27,717 | 8,714 | 31.4 | % | |||||||||||
Total | $ | 78,081 | $ | 63,550 | $ | 14,531 | 22.9 | % | ||||||||
First Half Ended, | Increase | |||||||||||||||
June 14, 2014 | June 15, 2013 | $ | % | |||||||||||||
Revenues: | ||||||||||||||||
Environmental Services | $ | 80,559 | $ | 70,624 | $ | 9,935 | 14.1 | % | ||||||||
Oil Business | 63,487 | 52,933 | 10,554 | 19.9 | % | |||||||||||
Total | $ | 144,046 | $ | 123,557 | $ | 20,489 | 16.6 | % | ||||||||
In the second quarter of fiscal 2014, Environmental Services revenues increased $5.8 million, or 16.2%, from $35.8 million in the second quarter of fiscal 2013 to $41.7 million in the second quarter of fiscal 2014. For the first half of fiscal 2014, Environmental Services revenues increased $9.9 million, or 14.1%, from $70.6 million in the first half of fiscal 2013 to $80.6 million in the first half of fiscal 2014. We experienced increased revenues from our antifreeze acquisitions of $2.9 million for the first half of 2014.
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Revenues grew in all Environmental Services business lines which included parts cleaning, containerized waste, and vacuum truck services from a combination of higher pricing and increased volume. At the end of the second quarter of fiscal 2014, the Environmental Services segment was operating in 76 branch locations compared with 73 at the end of the second quarter of fiscal 2013. There were 73 branches that were in operation during both the second quarters of fiscal 2014 and fiscal 2013. Same branch revenues increased $4.0 million, or 11.3%, in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. For the first half of fiscal 2014, same branch revenues increased $6.1 million, or 8.8% compared to the same period in fiscal 2013.
In the second quarter of fiscal 2014, Oil Business revenues increased $8.7 million compared to the second quarter of fiscal 2013 due to increased volumes at the used oil re-refinery. During the second quarter of fiscal 2014, we sold approximately 9.2 million gallons of base oil compared to the second quarter of fiscal 2013, when we sold approximately 6.5 million gallons of base oil. However, base oil pricing declined in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. For the first half of fiscal 2014, Oil Business revenues increased $10.6 million, or 19.9%, from $52.9 million in the first half of fiscal 2013 to $63.5 million in the first half of fiscal 2014. In the first half of fiscal 2014, we sold approximately 16.4 million gallons of base oil compared to the first half of fiscal 2013, when we sold approximately 13.1 million gallons. However, base oil pricing declined in the first half of fiscal 2014 compared to the first half of fiscal 2013.
Segment Profit (Loss) Before Corporate Selling, General and Administrative Expenses ("SG&A")
The following table presents profit (loss) by operating segment before corporate SG&A (dollars in thousands):
Second Quarter Ended, | Increase | |||||||||||||||
June 14, 2014 | June 15, 2013 | $ | % | |||||||||||||
Profit (loss) before corporate SG&A* | ||||||||||||||||
Environmental Services | $ | 11,819 | $ | 9,962 | $ | 1,857 | 18.6 | % | ||||||||
Oil Business | 570 | (516 | ) | 1,086 | N/A | |||||||||||
Total | $ | 12,389 | $ | 9,446 | $ | 2,943 | 31.2 | % | ||||||||
First Half Ended, | Increase | |||||||||||||||
June 14, 2014 | June 15, 2013 | $ | % | |||||||||||||
Profit (loss) before corporate SG&A* | ||||||||||||||||
Environmental Services | $ | 20,595 | $ | 18,124 | $ | 2,471 | 13.6 | % | ||||||||
Oil Business | (1,747 | ) | (2,652 | ) | 905 | 34.1 | % | |||||||||
Total | $ | 18,848 | $ | 15,472 | $ | 3,376 | 21.8 | % | ||||||||
*Includes depreciation and amortization related to operating activity but not depreciation and amortization related to corporate
selling, general, and administrative activity. For further discussion see Note 10 in our consolidated financial statements included elsewhere in this document.
Environmental Services profit before SG&A increased 18.6% in the second quarter of fiscal 2014, as compared to the second quarter of fiscal 2013. Environmental Services profit before SG&A increased 13.6% in the first half of fiscal 2014, as compared to the first half of fiscal 2013. The improvement in profit before corporate SG&A was due to sales volume and pricing increasing at a faster rate than our operating costs in this segment.
Oil Business income before corporate SG&A increased $1.1 million in the second quarter of fiscal 2014, from a loss of $0.5 million in the second quarter of fiscal 2013, to income of $0.6 million in the second quarter of fiscal 2014. Oil Business loss before SG&A decreased $0.9 million in the first half of fiscal 2014, as compared to the first half of fiscal 2013. We believe the improvement in profit before corporate SG&A during the second quarter of fiscal 2014 would have been greater compared to the second quarter of fiscal 2013 if we did not experience lower base oil selling prices.
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FINANCIAL CONDITION
Liquidity and Capital Resources
Cash and Cash Equivalents
As of June 14, 2014 and December 28, 2013, cash and cash equivalents were $18.0 million and $22.6 million, respectively. Our primary sources of liquidity are cash flows from operations and funds available to borrow under our term loan and revolving bank credit facility.
Debt and Financing Arrangements
On February 5, 2013, we entered into an Amended and Restated Credit Agreement ("Credit Agreement") that allows for up to $38.6 million in borrowings. As of June 14, 2014 and December 28, 2013, our total borrowings were $18.6 million and $19.3 million, respectively, under the term loan which has a maturity date of February 5, 2018. The remaining portion of the credit facility is a revolving loan which expires on February 5, 2018. There were no amounts outstanding under the revolver at June 14, 2014 and December 28, 2013.
During the second quarter of fiscal 2014, we recorded interest of $0.1 million on the term loan and capitalized less than $0.1 million for various capital projects. During the first half of fiscal 2014, we recorded interest of $0.2 million on the term loan and capitalized $0.1 million for various capital projects. During the second quarter of fiscal 2013, we recorded interest of $0.1 million on the term loan, of which less than $0.1 million was capitalized for various capital projects. During the first half of fiscal 2013, we recorded interest of $0.2 million on the term loan and capitalized $0.1 million for various capital projects.
As of June 14, 2014 and December 28, 2013, we were in compliance with all covenants under the Credit Agreement. As of June 14, 2014 and December 28, 2013, we had $0.3 million of standby letters of credit issued, and $19.7 million was available for borrowing under the credit facility. The actual amount available under the revolving loan portion of the Credit Agreement is limited by our total leverage ratio.
At June 14, 2014 and December 28, 2013, we had outstanding notes payable related to business acquisitions of $1.4 million and $1.7 million, respectively, of which $0.9 million and $1.2 million were recorded as current maturities.
Our weighted average interest rate for all debt outstanding as of June 14, 2014 and June 15, 2013, 2013 was 1.9% and 2.5%, respectively.
We believe that our existing cash, cash equivalents, available borrowings, and other sources of financings will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. We cannot assure you that this will be the case or that our assumptions regarding revenues and expenses underlying this belief will be accurate. If, in the future, we require more liquidity than is available to us under our credit facility, we may need to raise additional funds through debt or equity offerings. Adequate funds may not be available when needed or may not be available on terms favorable to us. If additional funds are raised by issuing equity securities, dilution to existing stockholders may result. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
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Summary of Cash Flow Activity
First Half Ended, | |||||||
(In Thousands) | |||||||
June 14, 2014 | June 15, 2013 | ||||||
Net cash provided by (used in): | |||||||
Operating activities | $ | 6,913 | $ | 2,425 | |||
Investing activities | (10,183 | ) | (9,019 | ) | |||
Financing activities | (1,333 | ) | (188 | ) | |||
Net decrease in cash and cash equivalents | $ | (4,603 | ) | $ | (6,782 | ) | |
The most significant items affecting the comparison of our operating activities for the first half of fiscal 2014 and the first half of fiscal 2013 are summarized below:
Net Cash Provided by Operating Activities —
• | Accounts Payable — Our increase in accounts payable due to increased volume and activity positively impacted cash flows from operations by $7.7 million in the first half of fiscal 2014 compared to the first half of fiscal 2013. |
• | Earnings decline — Our decrease in net income in the first half of fiscal 2014 negatively impacted our net cash provided by operating activities by $0.3 million compared to the first half of fiscal 2013. |
Net Cash Used in Investing Activities —
• | Capital expenditures and software and intangible assets— We used $9.2 million and $6.6 million for capital expenditures and software and intangible assets during the first halves of fiscal 2014 and fiscal 2013, respectively. During the first half of fiscal 2014, we spent $3.5 million for capital improvements, including the expansion project, at the used oil re-refinery compared to $3.3 million on capital improvements at the re-refinery in the first half of fiscal 2013. Additionally, in the first half of fiscal 2014, approximately $3.1 million of the capital expenditures were for purchases of parts cleaning machines compared to $2.4 million in the first half of fiscal 2013. The remaining $2.6 million in the first half of fiscal 2014 was for other items including vehicles, computer equipment, leasehold improvements, and intangible assets consistent with $0.9 million spent in the first half of fiscal 2013. |
• | Acquisitions — In the first half of fiscal 2013, we used $2.4 million for the purchases of certain assets of Mirachem. In the first half of fiscal 2014, we used $1.0 million for the purchase of the stock of Sav-Tech. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risks primarily through borrowings under our bank credit facility. Interest on this facility is based upon variable interest rates. Our weighted average borrowings under our bank credit facility during the second quarter of fiscal 2014 were $18.8 million, and the annual effective interest rate for the credit facility for the second quarter of fiscal 2014 was 2.1%. We currently do not hedge against interest rate risk. Based on the foregoing, a hypothetical 1% increase or decrease in interest rates would have resulted in a change of $0.2 million to our interest expense in the second quarter of fiscal 2014.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding financial disclosures.
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There was no change in the Company's internal control over financial reporting that occurred during the second quarter of fiscal 2014 that has materially affected or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 14, 2014, the Company issued 12,005 shares of common stock, valued at $0.2 million, to the owners of Sav-Tech, Inc. as part of the consideration paid in the purchase of its outstanding stock.
ITEM 6. EXHIBITS
21.1 | Subsidiaries of Heritage-Crystal Clean, Inc. |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS* | XBRL Instance Document |
101.SCH* | XBRL Taxonomy Extension Schema Document |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
*In accordance with Regulation S-T, the XBRL-related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall be deemed to be "furnished" and not "filed."
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HERITAGE-CRYSTAL CLEAN, INC.
Date: | July 24, 2014 | By: | /s/ Mark DeVita |
Mark DeVita | |||
Chief Financial Officer | |||
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