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HCCI > SEC Filings for HCCI > Form 10-Q on 25-Jul-2013All Recent SEC Filings

Show all filings for HERITAGE-CRYSTAL CLEAN, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HERITAGE-CRYSTAL CLEAN, INC.


25-Jul-2013

Quarterly Report


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 February 27, 2013. 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 2012 filed with the SEC on February 27, 2013. 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 and twenty-four week periods ended June 15, 2013 and June 16, 2012, 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, and vacuum truck services and 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 74 branch facilities providing services to customers in 42 states. 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, containerized waste management, and vacuum services for our customers. Revenues from this segment accounted for approximately 57.2% of our total company revenues for the first half of fiscal 2013. The sale of used solvent generated by customers participating in our product reuse program for parts cleaning is not accounted for as sales, but rather as a reduction in our net cost of solvent under operating costs. In the Environmental Services segment, we define and measure same-branch sales 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 sales per working day by dividing our sales 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, which accounted for 42.8% of our total company revenues in the first half of fiscal 2013.

Our operating costs includes 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.


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 sales 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 has an input capacity of approximately 50 million gallons of used oil feedstock per year with an expected production of about 30 million gallons of base oil per year when operating at full capacity. We are in the process of expanding the annual input capacity of the Indianapolis re-refinery to 75 million gallons, which we believe will allow us to improve our utilization of resources and the operating results of our Oil Business segment. We expect the additional capacity to be added incrementally over the remainder of 2013 and the first half of 2014 with the entire amount of additional capacity in place by mid-2014. We estimate the capital cost to complete the expansion project will be approximately $20 to $25 million through fiscal 2014.

In the first quarter of fiscal 2013, through a new Delaware subsidiary, Mirachem, LLC, we purchased substantially all of the operating assets of Mirachem Corporation. Since 2004, Mirachem Corporation had provided us with cleaning chemistry used in our aqueous parts cleaning service. We made an initial payment of approximately $2.5 million in cash at the time of closing and provided a note payable for an additional $0.8 million over two years.

In a separate transaction, we acquired from a third party additional aqueous technologies in exchange for a 20% interest in Mirachem, LLC. We have an option to repurchase this 20% interest, and the holder of this 20% interest has a right to sell the interest after January 1, 2016, at a price based on the trailing EBITDA of Mirachem, LLC, subject to potential modifications.

We completed these transactions in order to secure the supply of our aqueous parts cleaning chemistry which, together with our patented aqueous parts cleaning equipment, should provide us with a strong platform from which to compete in the aqueous parts cleaning market. We have consolidated Mirachem, LLC into our financial statements as part of the Environmental Services segment beginning in fiscal 2013.

On June 26, 2013, we purchased substantially all of the operating assets of Recycling Fluid Technologies, Inc. (RFTI), which was based in Battle Creek, Michigan. RFTI collects waste antifreeze, recycles the waste antifreeze, and through the recycling process produces a line of high quality antifreeze products which are sold for use in vehicle engine applications. We purchased RFTI for $4.9 million in cash and $1.2 million of our common stock, or 82,000 shares.

On July 19, 2013, we 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. We 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 our common stock or 69,322 shares.

The acquisitions of RFTI and RTI provide us with an immediate presence in the antifreeze recycling market. We will account for the purchase of both RFTI and RTI as business combinations, and the financial results of our antifreeze businesses will be included in the Environmental Services segment beginning in the third quarter of fiscal 2013.

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.

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.

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 2012, 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.


RESULTS OF OPERATIONS

General

The following table sets forth certain operating data as a percentage of
revenues for the periods indicated (dollars in thousands):
                           For the Second Quarter Ended,                 For the First Half Ended,
                           June 15,             June 16,              June 15,               June 16,
                             2013                 2012                  2013                   2012

Revenues
  Product revenues    $ 28,906    45.5 %   $ 31,941    51.3  %   $  55,464    44.9 %   $  53,157    47.1  %
  Service revenues      34,644    54.5 %     30,330    48.7  %      68,093    55.1 %      59,623    52.9  %
Total Revenues        $ 63,550   100.0 %   $ 62,271   100.0  %   $ 123,557   100.0 %   $ 112,780   100.0  %
Operating expenses -
  Product revenues    $ 52,201    82.1 %   $ 51,908    83.4  %   $ 104,487    84.6 %   $  94,245    83.6  %
  Selling, general
and administrative
expenses                 7,049    11.1 %      6,237    10.0  %      13,640    11.0 %      11,994    10.6  %
  Depreciation and
amortization             2,163     3.4 %      1,911     3.1  %       4,022     3.3 %       3,683     3.3  %
  Other expense
(income) - net             101     0.2 %         (2 )     -  %          93     0.1 %          (2 )     -  %
Operating income         2,036     3.2 %      2,217     3.6  %       1,315     1.1 %       2,860     2.5  %
  Interest expense -
net                        107     0.2 %        146     0.2  %         213     0.2 %         333     0.3  %
Income before income
taxes                    1,929     3.0 %      2,071     3.3  %       1,102     0.9 %       2,527     2.2  %
Provision for income
taxes                      872     1.4 %        853     1.4  %         465     0.4 %       1,039     0.9  %
Net income               1,057     1.7 %      1,218     2.0  %         637     0.5 %       1,488     1.3  %
Income attributable
to noncontrolling
interest                    26       - %          -       -  %          46       - %           -       -  %
Net income
attributable to
Heritage-Crystal
Clean, Inc. common
stockholders          $  1,031     1.6 %   $  1,218     2.0  %   $     591     0.5 %   $   1,488     1.3  %

Revenues

For the second quarter of fiscal 2013, revenues increased $1.3 million, or 2.1%, from $62.3 million in the second quarter of fiscal 2012 to $63.6 million in the second quarter of fiscal 2013. For the first half of fiscal 2013, revenues increased $10.8 million, or 9.6%, to $123.6 million from $112.8 million in the first half of fiscal 2012. The increase was partially the result of the increase in volume of base oil and re-refinery byproducts sold in our Oil Business segment in the first half of 2013, compared to the first half of fiscal 2012, when we began initial sales of base oil and the re-refinery was in the start-up phase. Overall for the first half of 2013, the increase in base oil sales volume was offset by lower base oil prices in the first half of 2013 compared to the first half of 2012. The average spot market price for the Group II base oil product we produce declined approximately 22% from the second quarter of fiscal 2012 to the second quarter of fiscal 2013. In addition, revenues grew in the Environmental Services segment in the first half of fiscal 2013 compared to the first half of fiscal 2012 as we realized increased volume and improved pricing.

Operating expenses

Operating costs

Operating costs increased $0.3 million, or 0.6%, from the second quarter of fiscal 2012 to the second quarter of fiscal 2013. Operating costs decreased as a percentage of sales compared to the prior year as a result of our ability to leverage fixed costs as we grew our business. Operating costs increased $10.2 million, or 10.9%, from the first half of fiscal 2012 to the first half of fiscal 2013. In the first half of fiscal 2013, the increase in operating costs was related to increased production volumes in the Oil Business compared to the first half of fiscal 2012. As the Oil Business increased production, it also experienced weaker pricing on the sale of base oil from the used oil re-refinery from the same period last year, which caused operating costs to increase as a percentage of sales.


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. Reuse solvent sales provided a benefit during the second quarter of fiscal 2013 of $0.1 million compared to a benefit of $0.1 million in the second quarter of fiscal 2012. Reuse solvent sales provided a benefit during the first half of fiscal 2013 of $0.3 million compared to a benefit of $0.2 million in the first half of fiscal 2012.

Selling, general, and administrative expenses

Selling, general, and administrative expenses increased $0.8 million, or 13.0%, from the second quarter of fiscal 2012 to the second quarter of fiscal 2013. Selling, general, and administrative expenses increased $1.6 million, or 13.7%, from the first half of fiscal 2012 to the first half of fiscal 2013. Overall, selling, general and administrative expenses as a percentage of revenues increased to 11.0% in the first half of fiscal 2013 from 10.6% in the first half of fiscal 2012. The increase in selling, general, and administrative expenses as a percentage of sales is primarily due to higher personnel costs and acquisition-related expenses.

Interest expense

Interest expense for the second quarter of fiscal 2013 was $0.1 million, compared to interest expense of $0.1 million in the second quarter of fiscal 2012. Interest expense for the first half of fiscal 2013 was $0.2 million, compared $0.3 million in the first half of fiscal 2012. The decrease in interest expense in the first half of fiscal 2013 was a result of higher average debt outstanding in the first half of fiscal 2012 from our bank revolver, compared to the first half of fiscal 2013 when our only bank debt outstanding was the Term A loan. In each of the first halves of fiscal 2013 and 2012, we capitalized less than $0.1 million in interest.

Provision for income taxes

Our effective tax rate for the first half of fiscal 2013 was 42.2% compared to 41.1% in first half of fiscal 2012. The rate increase is attributed to a higher projected state income tax rate, as well as permanent book to tax differences having a greater effect on the rate in fiscal 2013 than in the same period in fiscal 2012.

Segment Information

The following table presents sales by operating segment (dollars in thousands):
                                       For the Second Quarter Ended,              Increase (Decrease)

                                                                                    $                %
                                     June 15, 2013        June 16, 2012
Revenues:
   Environmental Services          $        35,833      $        32,047      $      3,786            11.8 %
   Oil Business                             27,717               30,224            (2,507 )           N/A
           Total                   $        63,550      $        62,271      $      1,279             2.1 %



                                         For the First Half Ended,                  Increase (Decrease)

                                                                                      $                  %
                                     June 15, 2013        June 16, 2012
Revenues:
   Environmental Services          $        70,624      $        62,560      $      8,064                12.9 %
   Oil Business                             52,933               50,220             2,713                 5.4 %
           Total                   $       123,557      $       112,780      $     10,777                 9.6 %

In the second quarter of fiscal 2013, Environmental Services revenues increased $3.8 million, or 11.8%, from $32.0 million in the second quarter of fiscal 2012 to $35.8 million in the second quarter of fiscal 2013. In the first half of fiscal 2013, Environmental Services revenues increased $8.1 million, or 12.9%, compared to the first half of fiscal 2012. Revenues grew in all Environmental Services product lines which included parts cleaning, containerized waste, and vacuum truck services in the first half of fiscal 2013. We continued to add customers through the expansion of our branch network and increased penetration of markets at our existing branches. In addition we realized revenue growth from a combination of higher pricing and volume.


At the end of the second quarter of fiscal 2013, the Environmental Services segment was operating in 74 branch locations compared with 71 at the end of the second quarter of fiscal 2012. There were 70 branches that were in operation during both the second quarters of fiscal 2013 and fiscal 2012. Same branch sales increased $3.1 million, or 9.6%, in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 for these branches. Excluding the three branches in this group that gave up customers to new branch openings, the remaining 67 branches experienced an increase of $3.2 million, or 10.5% from the second quarter of fiscal 2012 to the second quarter of fiscal 2013. On a year-to-date basis, same branch sales increased $6.7 million, or 10.7%, for the 70 branches that were in operation during both years. Excluding the three branches in this group that gave up customers to new branch openings, the remaining 67 branches experienced an increase of $6.7 million, or 11.4%, for the first half of fiscal 2013.

In the second quarter of fiscal 2013, Oil Business revenues decreased $2.5 million compared to the second quarter of fiscal 2012 due to the decline in the average selling price of base oil. The average spot market price for the Group II base oil product we produce declined approximately 22% from the second quarter of fiscal 2012 to the second quarter of fiscal 2013. However, during the second quarter of fiscal 2013, we saw a slight improvement in base oil pricing compared to the first quarter of fiscal 2013. During the second quarter of fiscal 2013, we fed approximately 10.6 million gallons of used oil into the re-refinery and sold approximately 6.5 million gallons of base oil. In the first half of fiscal 2013, Oil Business revenues increased $2.7 million, or 5.4%, as the used oil re-refinery was running at a higher capacity throughout the first half of fiscal 2013 than throughout the first half of fiscal 2012. During the first half of fiscal 2013, we fed approximately 21.3 million gallons of used oil into the re-refinery and sold approximately 13.1 million gallons of base oil.

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):
                                                For the Second Quarter Ended,                Increase (Decrease)


                                            June 15, 2013           June 16, 2012              $                %
Profit (loss) before corporate SG&A*
       Environmental Services            $          9,962         $          7,199      $      2,763            38.4 %
       Oil Business                                  (516 )                  1,397            (1,913 )           N/A
              Total                      $          9,446         $          8,596      $        850             9.9 %

                                                For the First Half Ended,                 Increase (Decrease)


                                           June 15, 2013         June 16, 2012              $                %
Profit (loss) before corporate SG&A*
       Environmental Services            $        18,124       $         12,381      $      5,743            46.4 %
       Oil Business                               (2,652 )                2,752            (5,404 )           N/A
              Total                      $        15,472       $         15,133      $        339             2.2 %

*Includes depreciation and amortization related to operating activity but not depreciation and amortization related to corporate selling, general, and administrative activity. For further discussion see Note 10 in our consolidated financial statements included elsewhere in this document.

Environmental Services profit before SG&A increased 38.4% in the second quarter of fiscal 2013, as compared to the second quarter of fiscal 2012 in part due to increased revenues of 11.8%. For the first half of fiscal 2013, Environmental Services profit before SG&A increased 46.4% on increased sales of 12.9%. Revenues grew as a result of increased pricing and volume. During the first half of fiscal 2013, we also improved our leveraging of fixed costs, which resulted in increased margin. During the first half of fiscal 2012, we added various sales and service resources which have grown in productivity and contributed to segment sales growth and profitability. In addition, in the first half of fiscal 2013, our new Mirachem subsidiary contributed $0.7 million to our profit before corporate SG&A in this segment.

Oil Business profit before corporate SG&A decreased $1.9 million in the second quarter of fiscal 2013, from profit before corporate SG&A of $1.4 million in the second quarter of fiscal 2012, to a loss before corporate SG&A of $0.5 million in the second quarter of fiscal 2013. In the first half of fiscal 2013, Oil Business profit before corporate SG&A decreased $5.4 million to a loss before corporate SG&A of $2.7 million. While the loss before corporate SG&A in this segment shrunk by $1.6 million from the first quarter to the second quarter of 2013, we did experience higher production costs for catalyst, labor, and disposal which, in total, negatively impacted second quarter costs by approximately $0.5 million. The decline in


profitability in the Oil Business compared to the first half of fiscal 2012 was primarily the result of the decreased average selling price of base oil, which was experienced across the industry, continuing a trend that began in the second half of fiscal 2012.

FINANCIAL CONDITION

Liquidity and Capital Resources

Cash and Cash Equivalents

As of June 15, 2013 and December 29, 2012, cash and cash equivalents were $41.0 million and $47.8 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.

On February 5, 2013, we entered into an Amended and Restated Credit Agreement . . .

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