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| HCCI > SEC Filings for HCCI > Form 10-Q on 17-Oct-2008 | All Recent SEC Filings |
17-Oct-2008
Quarterly Report
All references to the "Company," "we," "our," and "us" refer to Heritage-Crystal Clean, Inc., and its subsidiaries.
This report contains forward-looking statements that are based upon current management expectations. Generally, the words "aim," "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "project," "should," "will be," "will continue," "will likely result," "would" and similar expressions identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements or industry results to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other important factors include, among others: our ability to comply with the extensive environmental, health and safety and employment laws and regulations that our Company is subject to; changes in environmental laws that affect our business model; competition; claims relating to our handling of hazardous substances; the limited demand for our used solvent; our dependency on key employees; our ability to effectively manage our extended network of branch locations; warranty expense and liability claims; personal injury litigation; dependency of suppliers; economic conditions and downturns in the business cycles of automotive repair shops, industrial manufacturing business and small businesses in general; increased solvent, fuel and energy costs; the control of The Heritage Group over our Company; and the risks identified in our filings with the Securities and Exchange Commission, including our Registration Statement on Form S-1. Given these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. We assume no obligation to update or revise them or provide reasons why actual results may differ. The information in this report should be read in light of such risks and in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this report.
Overview
Heritage-Crystal Clean, Inc. provides parts cleaning, hazardous and non-hazardous waste services to small and mid-sized customers in both the manufacturing and automotive service sectors. Our service programs include parts cleaning, containerized waste management, used oil collection, and vacuum truck services. These services help our customers manage their used chemicals and liquid and solid wastes, while also helping to minimize their regulatory burdens. Our customers include businesses involved in vehicle maintenance operations, such as car dealerships, automotive repair shops, and trucking firms, as well as small manufacturers, such as metal product fabricators and printers. Heritage-Crystal Clean, Inc. is headquartered in Elgin, Illinois, and operates through more than 50 branches serving over 36,000 customer locations.
On March 11, 2008 we completed a reorganization, initial public offering, and direct placement. In connection with our reorganization, initial public offering, and direct placement we:
• Became a 'C' corporation through the reorganization of Heritage-Crystal Clean, LLC and a merger of BRS-HCC Investment Co., Inc. with and into Heritage-Crystal Clean, Inc.;
• Issued an aggregate of 1,217,390 shares of common stock as part of the exchange of preferred units of Heritage-Crystal Clean, LLC into common stock of Heritage-Crystal Clean, Inc. in the reorganization;
• Issued an aggregate of 6,056,900 shares of common stock as part of the exchange of common units of Heritage-Crystal Clean, LLC into common stock of Heritage-Crystal Clean, Inc.
• Sold 2,201,100 shares of common stock in the initial public offering, at $11.50 per share, raising approximately $20.4 million after underwriting discounts and transaction costs;
• Sold 1,200,000 new shares at $11.50 per share in a direct placement, raising approximately $12.8 million after underwriting discounts and transaction costs;
• Repaid approximately $21.3 million of indebtedness with the proceeds raised in the initial public offering and direct placement;
• Paid distributions of $10.9 million to preferred unit holders of Heritage-Crystal Clean, LLC as part of the reorganization relating to an accrued return through March 11, 2008; and
• Recorded a cumulative net deferred tax liability of $2.2 million and a corresponding charge to our provision for income taxes upon becoming taxable as a 'C' corporation.
Critical Accounting Policies
Critical accounting policies are those that both are 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.
Management believes that there have been no significant changes during the first three quarters ended September 6, 2008 to the items that we disclosed as our critical accounting policies and estimates in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Registration Statement on Form S-1 filed with the United States Securities and Exchange Commission on March 11, 2008 (as amended) for the fiscal year ended December 29, 2007.
Recent Accounting Pronouncements
In December 2007, the FASB issued FASB Statement No. 141R, Business Combinations (Statement 141R) and FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment to ARB No. 51 (Statement 160). Statements 141R and 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at "full fair value" and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both Statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. Statement 141R will be applied to business combinations occurring after the effective date. Statement 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. The impact of SFAS 141R on the Company will be dependant upon the extent to which we have transactions or events occur that are within its scope.
RESULTS OF OPERATIONS
Third quarter and first three quarters ended September 6, 2008 compared to third
quarter and first three quarters ended September 8, 2007
Sales, Cost of sales, and Gross profit
Third Quarter Ended
(Dollars in thousands)
September 6, 2008 September 8, 2007 Change
Sales $ 25,646 $ 20,967 $ 4,679
Cost of sales 6,020 5,480 540
Gross profit $ 19,626 $ 15,487 $ 4,139
Gross profit as % of sales 77 % 74 %
First Three Quarters Ended
(Dollars in thousands)
September 6, 2008 September 8, 2007 Change
Sales $ 73,482 $ 60,541 $ 12,941
Cost of sales 17,936 15,361 2,575
Cost of sales - inventory impairment - 2,182 (2,182 )
Gross profit $ 55,546 $ 42,998 $ 12,548
Gross profit as % of sales 76 % 71 %
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For the quarter ended September 6, 2008, sales increased $4.7 million, or 22%, to $25.6 million from $20.9 million for the quarter ended September 8, 2007. For the first three quarters ended September 6, 2008, sales increased $12.9 million, or 21%, to $73.4 million from $60.5 million for the first three quarters ended September 8, 2007. At the end of the third fiscal quarter of 2008, we were operating 54 branch locations compared with 48 at the end of the third fiscal quarter of 2007. There were 47 branches that were in operation during both the third fiscal quarters of 2008 and 2007, which experienced same-branch sales growth of $4.1 million, or 20%. Excluding the 5 branches in this group that gave up customers to new branch openings, the remaining 42 branches experienced same-branch sales growth of 21%. On a year-to-date basis, same-branch sales growth was $11.1 million, or 19% for the 47 branches and $10.1 or 19% excluding the 5 branches in this group that gave up customers to new branch openings.
For the quarter ended September 6, 2008, total cost of sales increased $0.5 million, or 10%, to $6.0 million from $5.5 million for the quarter ended September 8, 2007. Within cost of sales, increased solvent costs related to higher energy costs were partially mitigated by improved margins on the reuse solvent, as we sold solvent that had been carried in inventory at historically lower values.
For the first three quarters ended September 6, 2008, total cost of sales increased $0.4 million, or 2%, to $17.9 million from $17.5 million for the first three quarters ended September 8, 2007. In the first quarter of 2007, we received $3.0 million from the termination of a contract for our used solvent with a customer who had failed to meet their volume purchase obligations. We recorded cost of sales of $2.2 million to reduce solvent inventories to net realizable value in connection with this settlement.
Operating costs
Third Quarter Ended
(Dollars in thousands)
September 6, 2008 September 8, 2007 Change
Operating costs $ 12,523 $ 10,100 $ 2,423
As a % of sales 49 % 48 %
First Three Quarters Ended
(Dollars in thousands)
September 6, 2008 September 8, 2007 Change
Operating costs $ 36,640 $ 29,270 $ 7,370
As a % of sales 50 % 48 %
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For the quarter ended September 6, 2008, operating costs increased $2.4 million, or 24%, to $12.5 million from $10.1 million in the quarter ended September 8, 2007. For the first three quarters ended September 6, 2008, operating costs increased $7.3 million, or 25%, to $36.6 million from $29.3 million for the first three quarters ended September 8, 2007. Operating costs, including branch labor and collection truck costs, increased primarily due to volume increases and higher costs for fuel and transportation related to fuel prices.
Selling, general & administrative
Third Quarter Ended
(Dollars in thousands)
September 6, 2008 September 8, 2007 Change
Selling, general & administrative $ 4,278 $ 3,263 $ 1,015
As a % of sales 17 % 16 %
First Three Quarters Ended
(Dollars in thousands)
September 6, 2008 September 8, 2007 Change
Selling, general & administrative $ 15,042 $ 9,882 $ 5,160
As a % of sales 20 % 16 %
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For the quarter ended September 6, 2008, selling, general and administrative expense increased $1.0 million, or 31%, to $4.3 million from $3.3 million in the quarter ended September 8, 2007. Selling, general and administrative expense increased by approximately $0.4 million due to costs associated with being a public company which include among others, Board of Directors compensation and insurance, incremental legal and accounting fees and Sarbanes-Oxley consulting services.
For the first three quarters ended September 6, 2008, selling, general and administrative expense increased $5.1million, or 52%, to $15.0 million from $9.9 million for the first three quarters ended September 8, 2007. Selling, general and administrative expense included employee share-based compensation charges of $3.2 million related to employee stock options granted at the time of our initial public offering which vested immediately and also related to the vesting of certain Key Employee Membership Interest Trust "KEMIT" units and additional costs associated with being a public company which include among others, Board of Directors compensation and insurance, incremental legal and accounting fees and Sarbanes-Oxley consulting services.
Proceeds from contract termination
First Three Quarters Ended
(Dollars in thousands)
September 6, 2008 September 8, 2007 Change
Proceeds from contract termination $ - $ 3,000 $ (3,000 )
As a % of sales 0 % 5 %
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In the first quarter of 2007, we received $3.0 million from the termination of a contract for our used solvent with a customer who had failed to meet their volume purchase obligations. We recorded cost of sales of $2.2 million to reduce solvent inventories to net realizable value in connection with this settlement. Please refer to the above section referenced "Cost of sales - inventory impairment."
Interest expense - net
Third Quarter Ended
(Dollars in thousands)
September 6, 2008 September 8, 2007 Change
Interest expense - net $ 24 $ 314 $ (290 )
As a % of sales 0 % 1 %
First Three Quarters Ended
(Dollars in thousands)
September 6, 2008 September 8, 2007 Change
Interest expense - net $ 395 $ 957 $ (562 )
As a % of sales 1 % 2 %
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For the quarter ended September 6, 2008, interest expense decreased by $0.3 million, or 93%, from $0.3 million in the quarter ended September 8, 2007. For the first three quarters ended September 6, 2008, interest expense decreased $0.6 million, or 59%, to $0.4 million from $1.0 million for the first three quarters ended September 8, 2007. The decrease was due to our reduction in total debt outstanding substantially due to our initial public offering in March 2008.
Provision for income taxes
Third Quarter Ended
(Dollars in thousands)
September 6, 2008 September 8, 2007 Change
Provision for income taxes $ 1,179 $ - $ 1,179
As a % of sales 5 % 0 %
First Three Quarters Ended
(Dollars in thousands)
September 6, 2008 September 8, 2007 Change
Provision for income taxes $ 3,206 $ - $ 3,206
As a % of sales 4 % 0 %
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In connection with our initial public offering, we changed our parent company legal structure from a limited liability company to a 'C' corporation. As a limited liability company, we were not subject to federal or state corporate income taxes and as such had not incurred any historical taxes. For comparison purposes, we have presented pro forma net income, which reflects income taxes assuming we had been a corporation since the time of our formation and assuming tax rates equal to the rates that would have been in effect had we been required to report tax expense in such years. A one-time charge to earnings of $2.2 million was recorded in the first quarter of 2008 reflecting the net deferred tax assets and deferred tax liabilities at the time of the reorganization of the LLC to a 'C' corporation. Income subject to federal and state income taxes since becoming a 'C' corporation was $5.4 million. For the three quarters ended September 6, 2008, our current provision for income tax was $2.2 million and the deferred portion was $1.0 million.
FINANCIAL CONDITION
Liquidity and Capital Resources
First Three Quarters Ended
(Dollars in thousands)
September 6, 2008 September 8, 2007
Net cash provided by (used in):
Operating activities $ 2,237 $ 7,339
Investing activities (3,925 ) (5,738 )
Financing activities 1,572 (1,670 )
Net increase (decrease) in cash and cash equivalents $ (116 ) $ (69 )
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We had $0.4 million of cash and cash equivalents at September 6, 2008 and $0.5 million at December 29, 2007. We have historically financed our operations primarily through the private placement of preferred equity securities, borrowings from banks and investors and through funds from operations. During the first quarter of 2007, we received $3.0 million from the termination of a contract with a customer for used solvent who had failed to meet their volume purchase obligations. In March 2008, we received net proceeds of $35.1 million from an initial public offering and concurrent direct placement. These net proceeds exclude offering costs of $0.9 million paid prior to fiscal year end 2007 and $0.1 million accrued but not yet paid as of September 6, 2008. The proceeds were used to reduce borrowings under our credit facility which included $10.9 million borrowed in March 2008 used to pay preferred members for an accrued return on preferred units as part of the reorganization described above under "Overview."
Our secured bank credit facility provides for borrowings of up to $25 million. On March 3, 2008, we amended the facility to extend the maturity date to December 31, 2010. As of September 6, 2008 and December 29, 2007 $1.2 million and $22.0 million, respectively, were outstanding under the credit facility. Under the credit facility, interest is payable monthly at the prime rate, unless the total leverage ratio is greater than or equal to 2.75 to 1. The weighted average effective interest rate for amounts outstanding was 6.68% and 8.34% at September 6, 2008 and December 29, 2007, respectively. Amounts borrowed under the credit facility are secured by a security interest in substantially all of our tangible and intangible assets. As of September 6, 2008, we were in compliance with all covenants under the credit facility. As of September 6, 2008 and December 29, 2007, $23.8 million and $3.0 million respectively, were available under the credit facility.
At September 6, 2008, our working capital was $21.0 million compared to $14.6 million at December 29, 2007. The increase was primarily due to a $4.1 million increase in inventory, a $2.1 million increase in net accounts receivable and a $1.2 million current deferred tax asset. The increase was partially offset by the increase in current taxes payable of approximately $1.1 million. The increase in inventory was due to rising solvent prices. The increase in our deferred tax asset was due to our conversion from a limited liability company to a 'C' corporation and the establishment of beginning balances for our net current deferred tax assets and liabilities. The increase in accounts receivable was due to our increase in sales.
Net cash provided by operations was $2.2 million and $7.3 million in the first three quarters of 2008 and 2007, respectively. The decrease primarily reflects the receipt of $3.0 million in the first quarter of 2007 from the termination of a contract with a customer coupled with an increase in inventory of $4.1 million versus the $2.6 million increase reported in 2007.
Net cash used in investing activities was $3.9 million and $5.7 million in the first three quarters of 2008 and 2007, respectively. In the first three quarters of 2007, approximately $3.5 million was for expenditures relating to the construction of our distillation tower. Approximately $2.5 million of the capital expenditures made in the first three quarters of 2008 was for purchases of parts cleaning machines, and $1.4 million was for other items including office equipment, leasehold improvements, software and intangible assets. We expect future capital expenditures commensurate with business growth.
Net cash provided by (used in) financing activities was $1.6 million and $(1.7) million in the first three quarters of 2008 and 2007, respectively. The increase is primarily due to the net proceeds from the issuance of common stock net of offering costs. The net proceeds were primarily used to repay bank debt and to make a distribution to preferred members of the Company prior to the reorganization.
We believe that our existing cash, cash equivalents and available borrowings will be sufficient to meet our anticipated cash needs for working capital and capital expenditures in the next twelve months. We cannot assure you that this will be the case or that our assumptions regarding sales and expense underlying this belief will be accurate.
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