HERITAGE-CRYSTAL CLEAN, INC. 2018 ANNUAL REPORT
FINANCIAL AND STATISTICAL HIGHLIGHTS
CLOSING STOCK PRICE
Stock symbol HCCI
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2014
2015
2016
2017
2018
2014 2015 2016 2017 2018Revenues $ 339,052 $ 350,018 $ 347,627 $ 365,957 $ 410,183Operating (loss) income $ (9,659) $ 4,189 $ 10,894 $ 35,427 $ 21,541EBITDA $ 3,218 $ 21,386 $ 28,885 $ 53,394 $ 37,698Adjusted EBITDA $ 18,296 $ 38,703 $ 40,853 $ 47,193 $ 43,751Total Assets $ 319,819 $ 301,848 $ 314,307 $ 314,657 $ 347,822Total Debt $ 79,153 $ 70,895 $ 64,195 $ 30,000 $ 30,000Same Branch Sales Growth 10.9% 10.3% -0.7% 6.1% 12.2%Branches 84 82 83 86 89Employees 1,441 1,251 1,195 1,274 1,338Basic EPS $ (0.38) $ 0.06 $ 0.26 $ 1.24 $ 0.64Diluted EPS $ (0.38) $ 0.06 $ 0.26 $ 1.23 $ 0.63dollars in thousands, except EPS$10.60 $12.29$15.70$21.75$22.36
DEAR SHAREHOLDERS
A Message from
Brian Recatto
Looking back on 2018, I’m thrilled with the record setting financial performance we achieved. Such
a performance would not have been possible without the willingness of our dedicated employees to
embrace change and work hard to further improve what has already proved to be a very successful
company. We are also appreciative of the support we have received from our investors, which has allowed
us to focus on creating long-term value for the company. It is this focus and commitment to improvement
that will propel us to continued growth and success in the years to come.
PROGRESS ACROSS OUR DIVERSIFIED BUSINESS
I am proud to report the progress made in 2018, as we surpassed $400 million in revenue for the first time
in company history, a 12.1% increase over fiscal year 2017. We also exited the year with Environmental
Services (ES) segment operating margins of 27%, despite the addition of new resources and branches as
well as higher cost inflation. Our efforts to reduce recordable incidents proved to be successful, resulting
in the best safety year in company history, with a double-digit year-over-year improvement.
Our continued expansion in the Environmental Services segment has led to the following progress:
• Completion of two tuck-in ES acquisitions that will increase route density in key markets
• An expanding customer base with 2,000 new clients, as well as strengthened relationships
with existing customers
• Opening of two new branches in the western half of the U.S.
• Double-digit organic growth with a year-over-year improvement of 13.9%
Our plan is to continue to invest in new branches and additional professional sales and service resources
to sustain the momentum we created during 2018. Our balance sheet is strong and affords us the
opportunity to pursue strategic acquisitions and enter new geographic markets, creating synergies within
markets we currently serve and expanding our menu by entering verticals that fit our industrial focus.
Turning to our Oil Business segment, our continued efforts for optimization have resulted in:
• Three consecutive years of increased base oil production
• Record production of 44 million gallons of base oil
• Improved metallurgy in critical path processing equipment
• 10% year-over-year increase in oil route truck efficiency
As we have outlined during our investor conference calls, we expect IMO 2020 should improve both
the feedstock costs and finished product portion of our spread by year end 2019. Our focus will
continue to be on optimization of the re-refinery by minimizing down time and plant operating costs
as well as driving down our used oil collection costs.
VISION FOR YEARS TO COME
In addition to our financial growth, we are focused on the following strategic initiatives to improve
operational efficiency and strengthen brand image:
Organic Expansion: Adding five branches in the western half of the U.S. to continue high single-digit
organic ES growth as well as adding a western hub to improve logistics and waste disposal costs for
our western U.S. business
Logistics Optimization: Embarking on a fleet improvement program to increase unit uptime and
reduce maintenance costs, optimizing service routes to ensure a maximized field operation
Limiting Field Turnover: Augmenting branch efforts with a corporate-based training program to
aid in hiring, onboarding, and developing quality field sales and service representatives across our
network, as well as cross selling
Expanding Internal Waste Water Treatment Capabilities: Continuing to add capital and allow for
increased capacity at our existing internal waste water plants to manage water collected by our route
vacuum trucks as well as from third parties
Safety Initiatives: Continuing our march to a top tier safety program by means of proper job
planning and safety hazard identification
We remain steadfast in our commitment to provide our
customers with solutions that promote the health and safety of
both people and the environment. I am confident in our ability to
grow and look forward to continuing my role in helping ensure
the long and successful future of Heritage-Crystal Clean.
Thank you for your confidence. Brian Recatto President, Chief Executive Officer and Shareholder 2018
FORM
10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 29, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________to _________________
Commission File Number 001-33987
HERITAGE-CRYSTAL CLEAN, INC.
(Exact name of registrant as specified in its charter)
Delaware
State or other jurisdiction of
Incorporation
26-0351454
(I.R.S. Employer
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
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of Class
Common Stock, $0.01 par value
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes
No
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
No
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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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
Non-accelerated filer
Emerging growth Company
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
On June 15, 2018 (the last business day of the registrant's most recently completed second fiscal quarter), the aggregate market
value of the common stock of the registrant held by non-affiliates of the registrant was approximately $276.6 million, based on
the closing price of such common stock as of that date on the NASDAQ Global Select Market.
On March 1, 2019, there were outstanding 23,118,007 shares of Common Stock, $0.01 par value, of Heritage-Crystal Clean,
Inc.
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Disclosure Regarding Forward-Looking Statements
In addition to historical information, this annual report contains forward-looking statements that are based on current
management expectations and that involve substantial risks and uncertainties, which could cause actual results to differ
materially from the results expressed in, or implied by, these forward-looking statements. 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.
The factors listed under “Risk Factors,” as well as any cautionary language in this annual report, provide examples of risks,
uncertainties, and events that may cause our actual results to differ materially from the expectations or estimates we describe in
our forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, actual results
may differ materially from those in the forward-looking statements as a result of various factors, including, but not limited to,
those described under the heading “Risk Factors” and elsewhere in this annual report.
Forward-looking statements speak only as of the date of this annual report. We do not have any intention, and do not
undertake, to update any forward-looking statements. As a result of these risks and uncertainties, readers are cautioned not to
place undue reliance on the forward-looking statements included in this annual 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.
PART I
ITEM 1. BUSINESS
Overview
Heritage-Crystal Clean, LLC (herein collectively referred to as “we,” “us,” “our,” "HCC" or “the Company”) is a wholly
owned subsidiary of Heritage-Crystal Clean, Inc. (herein referred to as "HCCI"). HCC provides full-service parts cleaning,
containerized waste management, used oil collection, vacuum truck services, antifreeze recycling, field services, and owns and
operates a used oil re-refinery. We believe that we are the second largest provider of full-service parts cleaning, hazardous and
non-hazardous waste services and used oil collection services to small and mid-sized customers in both the industrial and
vehicle maintenance sectors in North America, and we are the second largest used oil re-refiner by capacity in North America.
We operate our business through our Environmental Services and Oil Business segments.
Environmental Services Segment
Our Environmental Services segment consists of our full-service parts cleaning, containerized waste management, vacuum
truck, antifreeze, and field services. These services allow our customers to outsource their handling and disposal of parts
cleaning solvents as well as other hazardous and non-hazardous waste. Many of these substances are subject to extensive and
complex regulations, and mismanagement can result in citations, penalties, and substantial direct costs both to the service
provider and to the generator. We allow our customers to focus more on their core business and devote fewer resources to
industrial and hazardous waste management and its related administrative burdens.
We have adopted innovative approaches in our Environmental Services segment to minimize the regulatory burdens for
our customers and have made “ease of use” of our services and products a priority. Our company has pioneered a program
whereby our customers' used parts cleaning solvent may be excluded from the U.S. Environmental Protection Agency's
("EPA") definition of hazardous waste. These two programs not only simplify the management of used solvent generated by
our customers, but also reduce the total volume of hazardous waste generated at many of our customers’ locations. This can
allow the customer to achieve a lower “generator status” with the EPA and thereby reduce their overall regulatory burden,
including reduced reporting obligations and inspections.
Our focus on providing ease of use for our customers is also part of our containerized waste management, vacuum
services, antifreeze services, and field services offerings. As part of our containerized waste and vacuum service programs, we
assist our customers in identifying and characterizing their regulated wastes as well as providing the proper labeling and
shipping documentation for their regulated materials. Our antifreeze recycling service offers our customers a fully-compliant
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method to safely manage their used antifreeze while providing a high quality, environmentally friendly, remanufactured product
which allows them to further their sustainability goals. Similarly, our field services allow our customers to focus on their core
business activities while we manage non-core activities such as tank cleanings and spill clean-up.
Oil Business Segment
The Oil Business segment consists of used oil collection activities, re-refining activities, oil filter removal and disposal
services, and the sale of recycled fuel oil. Through our re-refining process, we recycle used oil into high quality lubricant base
oil and other products, and we are a supplier to firms that produce and market finished lubricants. We operate a used oil re-
refinery with an annual nameplate capacity of 75 million gallons.We are currently feeding the re-refinery with a combination of
used oil collected from our customers and used oil that we purchase from third parties.
Industry
We operate within markets for industrial and hazardous waste services in the U.S. and a portion of Ontario, Canada.
Specifically, we focus on the parts cleaning, containerized waste management, used oil collection and re-refining, vacuum truck
services, antifreeze recycling, and field services areas of the industrial and hazardous waste services markets mainly for small
to mid-sized establishments. These establishments have a need to remove grease and dirt from machine and engine parts and
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. These businesses also generate waste
materials such as used oil, waste paint, or antifreeze that generally cannot be legally discarded as municipal trash or poured
down standard drains.
Environmental Services Segment
Parts cleaning machines and the related cleaning chemicals and solutions are used by operators and maintenance personnel
in industrial plants and technicians in automotive service locations to clean dirty machine parts. Through use, the cleaning
chemicals and solutions become contaminated with oil and sediment and must be replaced regularly. This replacement of used
cleaning chemicals and solutions is subject to environmental regulations prohibiting disposal with municipal trash or by
pouring down drains. Vehicle maintenance facilities as well as small to medium sized industrial businesses generate other
regulated materials which may not be legally disposed of in the municipal trash or poured down drains, such as used oil, waste
paint, antifreeze, used oil filters, discarded fluorescent light tubes, spent batteries, etc. Because the management of these wastes
is subject to changing regulatory requirements, most businesses need specialized knowledge to prepare required paperwork,
maintain records, and ensure compliance with environmental laws. Large businesses, which generate substantial volumes of
industrial and hazardous wastes, may find it more efficient to employ highly trained employees to manage these wastes. Small
and mid-sized businesses that generate lesser quantities of waste often cannot justify such personnel investments and typically
prefer to outsource these services to providers that can assist them in their disposal of used cleaning chemicals and solutions as
well as other wastes subject to environmental regulations.
Oil Business Segment
Through our used oil collection services, we compete in the used oil collection market. Automotive shops generate used oil
as a result of performing oil changes on passenger cars and trucks. Industrial plants also generate used oil, often as a result of
changing lubricants used in heavy machinery. Environmental regulations prohibit the disposal of used oil into sewers or
landfills, so most commercial generators arrange to have their used oil picked up periodically by a used oil collector.
Since fiscal 2012, we have produced and sold lubricating base oil from our re-refinery. Most lubricating base oil is
produced at refineries that process crude oil, and lubricating base oil is just one of the many products of the refining process
along with gasoline, diesel fuel, jet fuel, asphalt, and other hydrocarbon products. Major refining companies such as Chevron,
ExxonMobil, and Motiva produce a significant share of the total U.S. base oil output. These refiners who produce base oil
from crude oil, typically set the market price for base oil and re-refiners such as HCC, who produce base oil from used oil, are
price takers. Some of the major refining companies use base oil to produce their own branded lubricant products and also sell
some of their produced material to other firms that focus on the blending and packaging of lubricants. The market price of base
oil is primarily driven by the market price of crude oil feedstock and the balance between the supply and demand for base oil.
As of December 29, 2018, we operated 12 oil processing operations. Certain locations remove excess water from the used
oil and separate oil from oily water mixtures using thermal treatment, gravity separation, and mechanical filtration. The
finished product from this process is called Recycled Fuel Oil ("RFO"). The RFO we produce is sold to industrial burners and
5
used oil processors, such as Vacuum Gas Oil ("VGO") producers and used oil re-refiners, or sold as a blend or cutter stock. We
also operate four commercial wastewater treatment operations that service our Environmental Services segment. These
facilities allow us to remove oil from wastewater, treat the wastewater, and then discharge it according to the standards in the
applicable discharge permits. Some of the oil removed in the wastewater treatment process may become RFO.
The Crystal Clean Solution
Through our network of 89 branches, as of December 29, 2018, we provided parts cleaning, used oil collection, industrial
waste removal, vacuum services, antifreeze recycling services, and field services to over 90,000 active customer locations.
Environmental Services Segment
During fiscal 2018, we performed more than 615,000 environmental services, of which over 305,000 were parts cleaning
services. We believe our services are highly attractive to our customers, who value features such as assistance in preparing
waste manifests and drum labels, regularly-scheduled service visits to check inventories and remove accumulated waste, and
minimizing the number of vendors they must deal with related to the management of these materials. Our focus is to meet the
service requirements of small and mid-sized clients, which we define as firms that generally spend less than $50,000 per year
on industrial and hazardous waste services. Small and mid-sized clients have needs that are often highly differentiated from the
needs of larger accounts. We believe that our company is structured to meet these particular needs. Revenues in our
Environmental Services segment accounted for approximately 66% of our revenues for fiscal 2018 and are generated primarily
from providing parts cleaning services, industrial waste removal, and vacuum services for our clients.
Oil Business Segment
Through our used oil collection service, we collect the used oil generated by our customers when they replace used
lubricating oil in vehicles and machinery. Most customers store used oil they generate in tanks, which must be emptied
regularly to mitigate the risk of overflow or termination of their oil change activities. As a result, these customers have a strong
need for timely used oil service. We have designed our services to deliver regularly-scheduled pickups, as well as the capability
to respond to unscheduled requests on short notice. The used oil we collect is either transported to our used oil re-refinery or
processed into RFO. When we re-refine or recycle their used oil, we are able to provide our customers with the satisfaction that
their used oil is re-refined into high quality lubricants, using the approach cited as preferred by the EPA, or recycled by being
used in the production of RFO.
We operate our used oil re-refinery in Indianapolis, Indiana where we re-refine used oil, collected from our customers or
purchased from other oil collection service providers, into lubricating base oil that we sell to firms who then blend, package,
and market finished lubricants. The nameplate capacity is 75 million gallons of annual input of used oil feedstock including the
impact of periodic shutdowns to perform routine maintenance. In fiscal 2018, we collected over 64 million gallons of used oil
from our customers. Revenues in our Oil Business segment accounted for approximately 34% of our total revenues in fiscal
2018.
Services
Across our full range of services, we focus on reducing our customers' burdens associated with their generation of
hazardous and non-hazardous wastes. Many of these wastes are subject to extensive and complex regulations, and
mismanagement can result in citations, penalties, and substantial direct costs, both to the service provider and the generator.
Many customers are familiar with “Superfund liability” and the possibility that they will be required to pay for future cleanups
if their waste is mismanaged in a way that leads to environmental damage. Our services allow customers to focus more on their
core business and devote fewer resources to industrial and hazardous waste management. A majority of our customers use a
combination of our parts cleaning, waste management, and/or used oil collection services which are offered at most of our
branches.
Environmental Services Segment
In our full-service parts cleaning business, we provide customers with parts cleaning equipment and chemicals to remove
oil, grease, and other contaminants from engine parts and machine parts. Most commonly, we provide a parts cleaning machine
that contains either a petroleum or aqueous-based solvent in a reservoir. The customer activates a pump that circulates the
cleaning solvent through a nozzle where it is used to enable our customers to remove contaminants from their parts. The
solvent can be reused until the contamination level is too high to allow for proper cleaning and requires replacement. We
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typically visit our customers every 4 to 12 weeks to remove the used solvent and replace it with clean solvent, while at the
same time cleaning and inspecting the parts cleaning equipment to ensure that it is functioning properly and assisting our
customers with relevant regulatory paperwork. We believe there are still quite a few parts cleaning services performed in the
U.S. which are structured as hazardous waste services, meaning that when the solvent has been used, it is managed as a
regulated hazardous waste subject to numerous laws and regulatory filings. We reduce this burden for our customers by
offering three alternative parts cleaning programs (our non-hazardous and reuse programs for mineral spirits parts cleaning and
our aqueous parts cleaning program) that do not subject the customer to the same hazardous waste regulations. These low-
burden approaches help certain customers to achieve regulatory compliance while minimizing the paperwork and bureaucracy
associated with hazardous waste management - ultimately saving them time and money. For example, these programs currently
enable many of our customers to reduce their generation of hazardous wastes below the 220 pounds per month maximum
threshold for retaining the EPA generator status of Very Small Quantity Generator ("VSQG"). For our customers, maintaining a
VSQG status provides significant savings associated with not having to maintain an EPA identification number; prepare, track,
and file transportation manifests; or produce other reports related to the use, storage, and disposal of used solvents. We offer a
wide variety of different models of parts cleaning machines from which our customers may choose the machine that best fits
their specific parts cleaning needs. While the majority of our customers are provided or sold machines directly from us, we also
offer parts cleaning services for customers who purchase their parts cleaning machines from other sources. We offer a variety of
petroleum solvents and aqueous chemicals for use in parts cleaning machines. We also have a wide range of service schedules
from weekly service visits to triannual service visits.
In our containerized waste services, we collect drums, pails, boxes, and other containers of hazardous and non-hazardous
waste materials from our customers. Typical wastes from vehicle maintenance include used antifreeze, used oil filters, waste
paint, and used absorbent material. Typical wastes from manufacturing operations include waste paint and solvents, oily water
wastes, used absorbents, and discarded fluorescent lighting tubes. We endeavor to find the lowest burden regulatory approach
for managing each of these materials for our clients. In some cases, we can develop lower burden alternatives based on
recycling materials for component recovery, such as with oil filters, or by following the less onerous universal waste
regulations, such as with fluorescent tubes and waste paint. In other cases, the hazardous waste regulations may apply, in which
case we assist customers with the complete hazardous waste disposal process, including performing analysis to characterize
their waste, preparing manifests and drum labels, and selecting the appropriate destination facility. As part of our full-service
approach, we visit our customers periodically to check their inventory of used or waste materials and remove full containers as
appropriate. Because there are statutory limits on the amount of time that customers can store these waste materials, these
service visits are valuable to help customers stay in compliance. To the extent that we can coordinate these service visits
together with a regularly scheduled parts cleaning service, we are able to perform both tasks during the same visit, with the
same truck and service employee.
In a majority of our branch locations, we provide vacuum truck services for the removal of mixtures of oil, water, and
sediment from wastewater pretreatment devices and other sources. Many shops and plants have floor drain systems that lead to
pits, sumps, or separators that are designed to separate and retain oil and dirt, but allow clear water to flow out to a municipal
sewer. Periodically, these drains and collection points accumulate excess oil or sediment needing removal. Because some of the
material is very thick, a specialized vacuum truck is utilized for efficient removal of the material. Our vacuum truck service
includes the removal of the oil, water, and sediment so that the customer's equipment operates as intended. We also offer bulk
oily water removal. These services are scheduled on a regular basis. We currently offer vacuum truck service at 60 of our
branches. We believe we have the opportunity to grow this business by adding vacuum truck service to almost all of our
remaining branches. We operate four commercial wastewater treatment facilities that allow us to remove oil from wastewater ,
treat the wastewater, and discharge it according to the standards in the applicable discharge permits.
Through our antifreeze recycling service, we offer customers a legally-compliant method to safely manage their used
antifreeze while providing a high quality, environmentally friendly, remanufactured product. We offer responsive, on-time
scheduled or on-demand collection and transportation of used antifreeze to our six antifreeze recycling facilities, where it is
recycled into high quality clean antifreeze. We then sell a variety of formulations of this antifreeze to our vehicle maintenance
customers.
We also offer a variety of field services to assist customers with on-site equipment cleaning and the removal and proper
management of various types of waste. Typical projects include lab pack services, soil remediation services, the cleaning of
above ground storage tanks, sumps, separators, ship-to-shore fluid transfers, and other environmental remediation services. We
typically serve as a contractor and engage contract labor or outsourced labor to provide our field services.
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Oil Business Segment
As of the end of fiscal year 2018, we offered bulk used oil collection services in 81 of our branch locations. Although we
manage some used oil through our containerized waste program, most customers who generate used oil (typically from vehicle
engine oil changes) produce large quantities that are stored in bulk tanks. These volumes are handled more efficiently via bulk
tank trucks, such as the type we utilize, where we pump the customer's material into our tank truck for proper handling. We
transfer a majority of the used oil we collect to our re-refinery to be recycled into lubricating base oil. We recycle the remaining
used oil into RFO, some of which is sold to industrial burners, such as asphalt plants that use the RFO as a less expensive
substitute for other fuels, and some of which is sold to used oil processors such as VGO producers and used oil re-refiners and
some of it is sold for use as blend or cutter stock. As with our other services, we offer to visit customers on a regularly
scheduled basis to arrange for the removal of their accumulated oil.
Competitive Strengths
We believe that we are the second largest provider of full-service parts cleaning services and used oil collection services in
the U.S., and a leading provider of containerized waste and antifreeze recycling services to small and medium sized customers.
From our base of 89 branch locations, we employ an organized and disciplined approach to increasing our market share by
taking advantage of the following competitive strengths:
Excellent Customer Service. Since our founding, we have followed a standardized, sales-oriented approach to our
customers across our branch network. Our branch personnel are focused on local sales and service delivery, and a significant
portion of their compensation is linked to revenue growth and new business development. In order to achieve this revenue
growth, our personnel understand that they must retain existing business, which is best achieved by providing a very high level
of customer service which can lead to cross-selling opportunities and referrals to new prospects. During fiscal 2018,
approximately 97% of our Environmental Services revenues were generated from customers that we also served during fiscal
2017.
Cost-Efficient Branch Rollout Model. Our branch model allows us to consolidate operational and administrative functions
not critical to sales and service at a regional hub, treatment or processing facility, or at our headquarters. This model has been
the foundation for our new branch rollout as we have expanded from 14 branches in 1999, and we expect to extend this model
to new locations. Furthermore, as we grow within each branch, we improve our route density, which is an important
contribution to profitability in our business.
Large Branch Network. We have spent over nineteen years building and developing a large network of branches that has
enabled us to rapidly grow our environmental services and used oil collection services efficiently and cost effectively. Our
investments in this network help us to rapidly open new branches and cross sell products and services through existing
branches.
Large and Highly Diverse Customer Base. Our focus on small and mid-sized businesses has enabled us to attract a variety
of customers engaged in a wide range of industrial businesses (such as manufacturing, transportation and distribution) and
vehicle service. This diversification helps insulate us from disruption caused by the possible loss of a single large account. Our
customer base consists of approximately 90,000 active customer locations. In fiscal 2018, our largest single customer in our
Environmental Services segment represented 1.3% of our consolidated revenues, and our largest ten customers represented
approximately 4.7% of our consolidated revenues. In the Oil Business segment, revenues from our largest single customer
accounted for 6.1% of our consolidated revenues for fiscal 2018, and our largest ten customers represented 19.7% of our
consolidated revenues for fiscal 2018.
Experience in Re-Refining Technology. Our management team has substantial experience in the development and operation
of used oil re-refineries and is able to design and construct re-refining capacity for a comparatively low capital cost due to this
experience. In 2012, we began operating our re-refinery which had an original nameplate capacity of 50 million gallons of used
oil. We were able to construct the original re-refining capacity for approximately $54 million, or approximately $1 per gallon of
capacity. In 2015, we completed the re-refinery expansion from 50 million to 75 million gallons of annual capacity for
approximately $1 of capital cost per gallon of annual capacity. We believe other re-refineries recently constructed in the United
States have had a capital cost of substantially more than $1 per gallon of capacity.
Innovative Services that Reduce Customers' Regulatory Burdens. We have designed our service programs to meet the
needs of our target customers. In particular, these customers desire to minimize their regulatory compliance burdens, and we
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have developed innovative methods to help our customers achieve this objective. For example, we have created parts-cleaning
service programs which exempt our customers from certain hazardous waste regulations and filing requirements:
(cid:127)
Non-hazardous Program for Parts Cleaning. In our non-hazardous program for parts cleaning, we provide our
customers with a solvent that is not included in the EPA's definition of hazardous waste due to its increased flashpoint,
and we educate each participating customer to prevent harmful contaminants from being added to the solvent during
use. Because of the reduced solvent flammability, as long as the customer does not add toxic or flammable
contaminants during use, neither the clean solvent that we supply nor the resulting used solvent generated by
customers participating in the program is classified as hazardous waste by the EPA, and as a result can be managed as
non-hazardous waste. To participate in this program, our customers must provide certification that no hazardous
wastes have been added to the parts cleaning solvent. After we collect the used solvent from customers participating in
our non-hazardous program for parts cleaning, we recycle it via distillation for re-delivery to our parts cleaning
customers. The recycling process removes oil, water, and other impurities, resulting in solvent suitable to be re-used
by our customers for parts cleaning. At the same time, this process minimizes the burdensome hazardous waste
regulations faced by our customers and allows us to minimize our virgin solvent purchases. Our solvent recycling
system located in Indianapolis, Indiana is capable of recycling up to six million gallons per year of used solvent
generated by customers participating in our non-hazardous program. This provides adequate capacity in excess of our
current requirements.
(cid:127) Product Reuse Program for Parts Cleaning. Rather than managing used solvent as a waste, we have developed a
program that uses the solvent as an ingredient in the manufacture of asphalt roofing materials. Used solvent generated
by customers participating in our product reuse program for parts cleaning is sold as a direct substitute for virgin
solvent that is otherwise used in the manufacturing process for asphalt roofing materials. Because the used solvent is
destined for reuse, it is not deemed a waste, and therefore it is not subject to hazardous waste regulations. To enhance
the marketing of these programs, in the past 20 plus years we and our predecessor, Heritage Environmental Services,
have voluntarily obtained concurrence letters from more than 30 state environmental agencies to validate this
approach.
(cid:127) Aqueous Program. In addition to our petroleum-based solvent, we offer a full suite of proprietary aqueous-based parts
cleaning solutions, including our patented aqueous parts cleaning equipment and patented filtration technology for
water-based fluids, which we believe is the most comprehensive aqueous-based solutions offering in the industry.
After our customer is finished using the solution, we remove the used solution and almost exclusively manage it as
non-hazardous waste. Similar to the two solvent-based programs described above, our customers’ used cleaning
material will not be included in the EPA’s definition of a hazardous waste, which helps reduce our customers’
regulatory burdens. In addition, our patented Aqua Filtration Unit provides our customers with an innovative method
to remove contaminants from their water-based fluids.
Experienced Management Team. Our management team has substantial experience in the industry and possesses particular
expertise in the small to mid-sized customer segment. As of December 29, 2018, our senior managers had on average more than
25 years of industry experience and our middle managers have on average more than 15 years of industry experience.
Growth Strategies
We intend to grow by providing environmental solutions that meet the needs of our customers. We have several different
strategies to accomplish this which include:
Same-Branch Sales Growth. We seek to generate year-over-year growth in existing markets by obtaining new customers
and by cross-selling multiple services to existing customers. Our sales and marketing strategy includes providing significant
incentives to our field sales and service personnel to find and secure new business. These incentives include commission
compensation for individuals and managers as well as prize awards and contests at the individual and team level. Our company
culture is designed to consistently emphasize the importance of sales and service excellence and to build and maintain
enthusiasm that supports continued sales success. Additionally, we intend to drive profitability by leveraging fixed costs against
incremental sales growth at our existing branches.
Expanded Service Offerings. Of our 89 branches, all branches currently offer parts cleaning and containerized waste
management services, 81 offer used oil collection services, and 60 offer vacuum truck services. As our business grows and we
achieve sufficient market penetration, we have the opportunity to expand our used oil collection and vacuum truck services to
each branch location. We also have other new business programs in various stages of development which have the potential to
be offered through our branch locations in the future.
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Geographic Expansion. We currently operate from 89 branch locations that offer all or portions of our service menu to
customers in the vast majority of the United States, the District of Columbia, and parts of Ontario, Canada. We have historically
been able to install new branches at a relatively low cost, although installation of branches in the Western U.S. is relatively
more costly. Within the contiguous United States, we believe that there are opportunities to open more branches and provide
convenient local service to additional markets.
Selectively Pursue Acquisition Opportunities. Our management team has significant experience in identifying and
integrating acquisition targets. Given the number of small competitors in our business, there are generally multiple acquisition
opportunities available to us at any given time. In fiscal 2016, we acquired the assets of Phoenix Environmental Services, Inc.
and Recycled Engine Coolant, Inc. in order to expand our operations into the Pacific Northwest and to increase our used
antifreeze recycling capabilities, respectively. In fiscal 2018, the Company purchased the assets of Products Plus, Inc. and AO
Holding Company-Kansas City, LLC to expand the Company’s market share in the collection, recycling, and sales of a full
line of antifreeze products. We also purchased the assets of a small business based in Fresno, CA focused primarily on
providing parts cleaning related services during 2018. In January 2019, we purchased the assets of the antifreeze collection and
recycling business of GlyEco, Inc. to both increase our route density in our current service area and further expand our
antifreeze business in other areas. On February 1, 2019, we completed the acquisition of certain assets of W. S. Supplies, Inc., a
subsidiary of Merrill’s Inc. W.S. Supplies, Inc., which provided chemical sales and service to auto dealerships and auto body-
shops in Iowa, Nebraska, Minnesota, Missouri and South Dakota to expand geographically while potentially providing new
services and products for this market. As the markets for some of our services mature, we will increasingly consider making
acquisitions which are adjacent to the businesses we currently operate in. Specifically, we will explore opportunities to leverage
our core strengths which include our branch network and our customer relationships. Our growth plan is not dependent on
acquisitions, but we will continue to pursue acquisitions that leverage our established infrastructure.
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Sales and Marketing
Our mission and culture emphasize sales and service excellence and entrepreneurship, and our sales philosophy starts with
the principle of “sales through service.” We assign a territory to each of our Sales & Service Representatives ("SSRs"), and
require and encourage them to grow their business on their routes by delivering excellent service to existing customers. This
helps our SSRs retain business, sell more services to satisfied customers, and obtain valued referrals to potential new
customers. In addition to the efforts of our SSRs, we employ a branch manager at each of our branches, and we also employ
branch sales managers at approximately two-thirds of our branches, all of whom have dedicated sales territories and
responsibilities.
Suppliers and Recycling/Disposal Facilities
We purchase goods such as parts cleaning machines, solvent (petroleum naphtha mineral spirits), cleaning chemicals, bulk
used oil, bulk antifreeze (ethylene glycol) and used antifreeze, and absorbent from a limited group of suppliers. We also have
arrangements with various firms that can recycle, burn, or dispose of the waste materials we collect from customers. These
suppliers and disposal facilities are important to our business, and we have identified backup suppliers in the event that our
current suppliers and disposal facilities cannot satisfy our supply or disposal needs. Heritage Environmental Services, an
affiliate of The Heritage Group, Fred Fehsenfeld and the Fehsenfeld family trusts, which collectively beneficially owned 31.5%
of our common stock as of December 29, 2018, operates one of the largest privately-owned hazardous waste treatment
businesses in the U.S. We have used their hazardous waste services in the past, and it is likely that we will continue some level
of use in the future.
We operate four commercial waste water treatment facilities. These facilities allow us to remove oil from wastewater, treat
the waste water, and then discharge it according to the standards in the applicable discharge permits. These facilities allow us
the flexibility to dispose of our oily water and vacuum services waste water collected from certain branches internally as well
as accepting wastewater from our customers directly at most of these facilities.
Competition
The markets for parts cleaning, containerized waste management, used oil collection, vacuum truck services, antifreeze
recycling, and field services in which we participate are intensely competitive. While numerous small companies provide these
services, our largest competitor, Safety-Kleen (a wholly-owned subsidiary of Clean Harbors, Inc.), has held substantial market
share in the full-service parts cleaning industry for the last five decades and has developed significant market share in used oil
collection and containerized waste management. We believe that Safety-Kleen has greater financial and other resources and
greater name recognition than us. We estimate that in the full-service portion of the parts cleaning market, Safety-Kleen is
significantly larger than us, and that we are substantially larger than the next largest competitor.
Many of our smaller competitors tend to be regional firms or parts cleaning companies that operate in a single city.
Although many of these smaller competitors lack the resources to offer clients a full menu of services, they generally offer
parts cleaning services ancillary to a primary line of business, such as used oil collection, in order to present a more complete
menu to customers. In addition, companies involved in the waste management industry, including waste hauling, separation,
recovery, and recycling, may have the expertise, access to customers, and financial resources that would encourage them to
develop and market services and products competitive with those offered by us. We also face competition from alternative
services that provide similar benefits to our customers as those provided by us.
Price, service quality and timeliness, breadth of service offering, reputation, financial strength, and compliance history are
the principal competitive factors in the markets in which we compete. While we feel that most market competitors compete
primarily on price, we believe that our competitive strength comes from our focus on customer service and our broad menu of
services. Although we employ a pricing structure that controls discounts, we are able to deliver a sound value proposition
through the reduced regulatory burden achieved through our programs. We could lose a significant number of customers if
Safety-Kleen or other competitors materially lower their prices, improve service quality, develop more competitive product and
service offerings, or offer a non-hazardous, reuse or aqueous program for parts cleaning more appealing to customers than ours.
We have the second largest used oil re-refinery, by capacity, in North America. We believe that our largest competitor,
Safety-Kleen, currently controls a majority of the used oil re-refining capacity in North America.
Seasonality
Our operations may be affected by seasonal fluctuations due to weather cycles influencing the timing of customers' need
for products and services. Typically during the first quarter and the end of the fourth quarter of each year there is less demand
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for most of our products and services due to the lower levels of activities by our customers as a result of the cold weather,
particularly in the Northern and Midwestern regions of the United States. This lower level of activity also results in lower
volumes of used oil generated for collection by us in the first quarter. In the winter months there is less construction activity,
which reduces demand for certain re-refinery products. In addition, factory closings for the year-end holidays reduce the
volume of industrial waste generated, which results in lower volumes of waste handled by us during the first quarter of the
following year. However, we generally experience the opposite seasonality impact (higher levels of activity in the first quarter
and end of the fourth quarter) in our antifreeze business.
Information Technology
We believe that automation and technology can enhance customer convenience, lower labor costs, improve cash
management, and increase overall profitability. We are constantly evaluating opportunities to develop technologies that can
improve our sales and service processes. Our commitment to the application of technology has resulted in the creation of a
custom web-based application for scheduling, tracking, and management of customer services, billing, and collections. This
system has been used as an integral part of our business operations since 2003. We believe that our standardized processes and
controls enhance our ability to successfully add new branches and expand our operations into new markets. Mobile devices are
used by our employees in the field to access customer service information, capture substantially all service transactions and
certain inventory movements. Statistics are gathered and reported on a daily and weekly basis. These capabilities provide
timely, automated data measurement and control for service activities to accelerate response to market and operational change.
Employees
As of December 29, 2018, we employed 1,270 full time and 68 part time employees. None of our employees are
represented by a labor union or covered by a collective bargaining agreement. We believe that our employee relations are good.
Intellectual Property
We regard our intellectual property as important to our success and we rely on trademark, copyright, and other intellectual
property laws in the United States to protect our proprietary rights. We have, in the past, successfully defended our patents
against infringement, and we intend to continue to defend our intellectual property rights. In addition, we seek to protect our
proprietary rights through the use of confidentiality agreements with employees, consultants, vendors, advisors, and others.
Our intellectual property includes the Crystal Clean brand and logo as well as our patented aqueous parts cleaning
equipment, chemistry formulae, and filtration technology. Our patents expire at various times through 2034. Although we do
not regard any single trade secret or component of our proprietary know-how to be material to our operations as a whole, if one
or more of our competitors were to use or independently develop such know-how or trade secrets, our market share, sales
volumes and profit margins could be adversely affected.
Regulation
Substantially all of our services and products involve the collection, transportation, storage, recycling and/or disposal of
industrial and hazardous waste or hazardous materials, including solvents used in parts cleaners; containerized waste including
waste paint, inks, adhesives, used antifreeze, used oil, and used oil filters; and bulk waste including used oil, oily water, and
antifreeze. Our services are highly regulated by various governmental agencies at the federal, state, and local levels, as
described in more detail below. Regulations govern matters such as the disposal of residual chemical wastes, operating
procedures, storm water and wastewater discharges, fire protection, worker and community right-to-know, and emergency
response plans.
Our services and products require us to comply with these laws and regulations and to obtain federal, state, and local
environmental permits or approvals for some of our operations. Some of these permits must be renewed periodically, and
governmental authorities have the ability to revoke, deny, or modify these permits. Zoning and land use restrictions also apply
to all of our facilities. Siting and other state-operating approvals also apply in some states.
We are subject to federal and state regulations governing hazardous and solid wastes. The Resource Conservation and
Recovery Act ("RCRA") is the principal federal statute governing hazardous waste generation, treatment, transportation,
storage, and disposal. Under RCRA, the EPA has established comprehensive “cradle-to-grave” regulations for the management
of a wide range of materials identified as hazardous or solid waste. The regulations impose technical and operating
requirements that must be met by facilities that generate, store, treat, transport, and dispose of these wastes. A number of states
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have regulatory programs governing the operations and permitting of hazardous and solid waste facilities. In addition, some
states classify some wastes as hazardous that are not regulated under RCRA. Accordingly, we must comply with the state
requirements for handling state regulated wastes.
On June 30th, 2018 the EPA implemented an e-Manifest system for the capture of manifest documents electronically. This
functionality included full electronic manifests, scanned image upload, scanned image plus document data, and mailing of
physical manifests to the EPA for processing. The EPA assesses a different fee depending on which of the above approaches is
used. Functionality for paper/electronic hybrid documents, and transporter/broker features have not been made available by the
EPA. Expectations are this functionality will become available in the first half of 2019. EPA development may be materially
impacted by the December 2018 government shutdown.
Disposal partners utilized by the Company are at various stages of implementation of the available features with partners
passing their costs incurred to the Company. The Company has mailed physical manifests it terminates to the EPA for state
regulated wastes which require manifesting. Once the EPA enables the broker and transporter functionality, this should enable
intermediaries like the Company to implement more direct e-Manifest features into it its handling and systems. The Company
intends to pass along the direct costs imposed by the EPA, or indirectly from disposal partners, to its customers. As partners and
the Company are able to implement costs saving measures provided by e-Manifesting, regulatory costs which are currently
passed on to customers could be reduced.
Our branch and distribution hub operations are governed by 10-day transfer requirements and do not typically require a
hazardous waste facility permit. Under RCRA, states are delegated to implement the regulatory programs through state
regulations, and we obtain appropriate permits in those states with regulations more stringent than the federal EPA.
The Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended ("CERCLA") governs
the cleanup of inactive hazardous waste sites and imposes liability for the cleanup on “responsible parties” generating or
transporting waste to a site. CERCLA further provides for immediate response and removal actions coordinated by the EPA to
releases of hazardous substances into the environment and authorizes the government to respond to the release or threatened
release of hazardous substances or to order responsible persons to perform any necessary cleanup. CERCLA imposes strict
liability on current or former owners and operators of facilities that release hazardous substances into the environment as well
as on businesses that generate those substances or transport them to the facilities. Responsible parties may be liable for
substantial investigation and cleanup costs even if they operated their businesses properly and complied with applicable federal
and state laws and regulations. Liability under CERCLA may be joint and several. Certain of our customers' and third-party
contractors' facilities have been in operation for many years and, over time, the operators of these facilities may have generated,
used, handled, and disposed of hazardous and other regulated wastes or other hazardous substances. Environmental liabilities
could therefore exist under CERCLA, including cleanup obligations at these facilities or off-site locations where materials from
our operations were disposed. In the past, we have been involved as a potentially responsible party (“PRP”) at CERCLA
cleanup sites, and it is possible that we may be involved at similar cleanup sites in the future.
In addition to regulations under RCRA and CERCLA, the EPA has adopted regulations under the Clean Air Act ("CAA")
and the Clean Water Act ("CWA"). The CAA regulates emissions of pollutants into the air from mobile and stationary sources.
CAA permits limit the emissions from parts cleaning units. One of our distribution hubs, our used oil re-refinery, and several of
our oily water treatment operations are subject to facility-based permits under the CAA. The used oil re-refinery was
constructed and is operating under CAA New Source Performance Standards and an associated permit. This air permit was
modified to accommodate the ongoing expansion of the re-refinery. Our transportation fleet of trucks is regulated for emissions
as mobile sources. Regulations under the CWA govern the discharge of pollutants into surface waters and sewers and require
discharge permits and sampling and monitoring requirements. The CWA also requires specific spill plans governing the storage
of waste and product hydrocarbons. A more detailed spill plan is also required at the used oil re-refinery because of the large
volume of certain storage tanks. All of our recycling, used oil and oily water processing facilities currently hold CWA National
Pollution Discharge Elimination System ("NPDES") permits for stormwater runoff and water pollution prevention. Our
operations are also regulated pursuant to state statutes and implementing regulations, including those addressing clean water
and clean air.
Our transportation fleet, truck drivers, and the transportation of hazardous materials are regulated by the U.S. Department
of Transportation ("DOT") Motor Carrier and the Federal Railroad Administration ("FRA"), as well as by the regulatory
agencies of each state in which we operate or through which our vehicles pass. Governmental regulations apply to the vehicles
used by us to transport the chemicals we distribute to customers and the waste and other residuals collected from customers.
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These vehicle requirements include the licensing requirements for the vehicles and the drivers, vehicle safety requirements,
vehicle weight limitations, shipping papers, and vehicle placarding requirements.
The Department of Labor Occupational Safety & Health Administration ("OSHA") safety standards are applicable to all of
our operations. The used oil re-refinery and mineral spirits distillation facility are also subject to OSHA Process Safety
Management standards that govern the operation of the facilities.
In August 1997, the South Coast Air Quality Management District in California (the “SCAQMD”), enacted Rule 1171,
which prohibits the use of certain types of solvents that we currently sell for parts cleaning operations. In the areas of California
affected by this or similar regulations (including Los Angeles, San Francisco, and Sacramento), aqueous parts cleaning is the
primary substitute. We currently have three branches located in California, one in Los Angeles, Fresno and Oakland. Although
other states have not passed regulations similar to Rule 1171, we cannot predict if or when other state and/or local governments
will promulgate similar regulations which may restrict or prevent the use of solvent for parts cleaning. Pending air regulation
laws in the northeastern United States may restrict, or possibly eliminate, the use of our typical parts washer solvent in cold
parts cleaners. Due to the size of the states in the northeastern U.S. and the transport of pollutants over state boundaries, the
Ozone Transport Commission ("OTC") develops overarching air pollution programs for member states to adopt. While there
has been some delay in implementation of the regulations throughout the northeastern OTC states, additional regulations
limiting the use of certain solvents and other ozone forming chemicals are expected to begin going into effect within the next
five years. The OTC states include twelve states in the far northeastern U.S. as well as the District of Columbia. Among the
OTC states, Maryland and Delaware have initiated development of rules to limit the use of ozone pollution forming
compounds.
More specifically to our traditional parts cleaning services, federal and state laws and regulations dictate and restrict to
varying degrees what types of cleaning solvents may be used, how a solvent may be stored, and the manner in which
contaminated or used solvents may be handled, transported, disposed of, or recycled. These legal and regulatory mandates have
been instrumental in shaping the parts cleaning industry. We have developed methods of managing solvent as non-hazardous so
as to significantly reduce the regulatory burden on us and on our customers. Any changes to, relaxation of, or repeal of federal
or state laws and regulations affecting the parts cleaning industry may significantly affect the demand for our products as well
as our competitive position in the market.
The EPA has promulgated regulations that govern the management of used oils. Although used oil is not classified as a
hazardous waste under federal law, certain states do regulate used oil as state-regulated waste. Our used oil collection services
require compliance with both federal and state regulations. As with our parts cleaning services, we make use of various
programs to reduce the administrative burden associated with our customers' compliance with used oil regulations. Any used oil
contaminated with polychlorinated biphenyls ("PCBs") is regulated under the Toxic Substances Control Act ("TSCA"). The
rules set minimum requirements for storage, treatment, and disposal of PCB wastes. Used oil contaminated with a certain level
of PCBs may require incineration or special TSCA authorization or permits. The EPA has recently proposed CAA regulations
requiring more stringent air permits governing the burning of certain recyclable materials, including non-specification used oil.
We do not anticipate any negative impacts to the Company from this pending court ordered regulation.
One of the products of the re-refining process is Vacuum Tower Asphalt Extender ("VTAE"). VTAE is sold for use as an
ingredient in asphalt used in the construction of roadways and other applications. State Departments of Transportation may
regulate the characteristics of materials that are used as ingredients in roadway asphalt. A small number of states have banned
the use of VTAE as an ingredient in asphalt used on roadways. We believe, when used in the proper proportion, the VTAE
produced at our re-refinery can be used in a paving asphalt formulation that meets all relevant performance standards.
Regulatory restrictions on the use of VTAE have negatively impacted the marketability of this product and the profitability of
our oil business.
Governmental authorities have the power to enforce compliance with these and other regulations, and violators are subject
to civil and criminal penalties. Private individuals may also have the right to sue to enforce compliance with certain
governmental requirements.
Available Information
We maintain a website at the following Internet address: http://www.crystal-clean.com. Through a link on this website to
the SEC website, http://www.sec.gov, we provide free access to our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 as soon as reasonably practicable after electronic filing with the SEC. The public can
14
obtain copies of these materials by accessing the SEC's website at http://www.sec.gov. Our guidelines on corporate governance,
the charters for our Board Committees, and our code of ethics are also available on our website, and we will post on our
website any waivers of, or amendments to, such code of ethics. Our website and the information contained therein or connected
thereto are not incorporated by reference into this annual report.
Executive Officers of Registrant
The following table sets forth the names, ages and titles, as well as a brief account of the business experience of each
person who was an executive officer of Heritage-Crystal Clean as of December 29, 2018.
Name
Brian Recatto
John Lucks
Mark DeVita
Ellie Bruce
Age
Position
54 President, Chief Executive Officer, and Director
65 Senior Vice President of Sales and Marketing
50
Chief Financial Officer
54 Vice President of Business Management and Marketing
Brian Recatto
President, Chief Executive Officer, and Director
On February 1, 2017, Mr. Recatto was appointed President and Chief Executive Officer and has been a director of the
Company since 2012. From 2014 to January 2017, Mr. Recatto served as President U.S. Operations for Gibson Energy Inc., one
of the largest independent midstream energy companies in Canada and a major U.S. crude oil logistics operator. Mr. Recatto
joined Gibsons through its acquisition of OMNI Energy Services, where he had served in various executive positions since
2007, including Vice President and Chief Operating Officer, and President and Chief Executive Officer. Mr. Recatto was
President from 2004 to 2007 of Charles Holston, Inc., a waste management and environmental cleaning company, which OMNI
acquired. He served in various operating and executive positions from 1997 to 2004 with Philip Services Corporation, an
environmental and industrial services company, including roles as General Manager of Gulf Coast Waste Operations, Senior
Vice President By-Products Services Group and President Industrial Services. Mr. Recatto joined Philip Services Corporation
through its acquisition of Meklo, Inc., an industrial waste management company, where he had served as President for six
years. Mr. Recatto holds a bachelor’s degree in Finance from Louisiana State University.
John Lucks
Senior Vice President of Sales and Marketing
Mr. Lucks has been our Senior Vice President of Sales and Marketing since 2012. Before that, Mr. Lucks served as our
Vice President of Sales and Marketing from 2010, and prior to that as our Vice President of Sales from 2000 to 2010. From
1988 to 1997, Mr. Lucks served as the Vice President of Industrial Marketing and Business Management of Safety-Kleen,
where he was in charge of and oversaw a $300 million revenue business unit. Mr. Lucks also led the development of several
lines of business, in particular the industrial parts cleaning and drum waste business which became the largest segment of
Safety-Kleen. Mr. Lucks has over 30 years of experience in the industrial and hazardous waste services industry.
Mark DeVita
Chief Financial Officer
Mr. DeVita has been our Chief Financial Officer since 2012. He served as Vice President, Business Management in
2011. Mr. DeVita has been with the Company since 2000 and has served in a variety of roles related to business management,
finance, and acquisitions. He took the lead in developing multi-million dollar lines of business for the Company. Mr. DeVita
has over 20 years of experience in the industrial and hazardous waste services industry. Mr. DeVita earned his Bachelor of
Science in Accountancy with honors from the University of Illinois and his MBA from Northern Illinois University. Mr.
DeVita earned his CPA and worked in public accounting for four years.
Ellie Bruce
Vice President Business Management and Marketing
Ms. Bruce became Vice President Business Management and Marketing in 2016. Prior to this, Ms. Bruce was Vice
President of Sales from 2012 to 2015. She has also served as Vice President Oil from 2010 to 2015. She served as Chief
Accounting Officer from June of 2007 to 2012 and has been with the Company since March 2006. She began her career in the
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used oil collection and re-refining business in 1988 when she joined Safety-Kleen, working at the oil re-refinery in Breslau,
Canada and served in a number of positions, including Controller of Safety-Kleen Canada Inc., where she was responsible for
the accounting and business management for all of the branch lines of business.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following factors, as well
as other information contained or incorporated by reference in this report, before deciding to invest in shares of our common
stock. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of
those risks actually occurs, our business, financial condition and results of operations would suffer. In that event, the trading
price of our common stock could decline, and you may lose all or part of your investment. The risks discussed below also
include forward-looking statements and our actual results may differ substantially from those discussed in these forward-
looking statements. See “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this document.
Risks Relating to Our Business
Our operating margins and profitability may be negatively impacted by the volatility in crude oil, solvent, fuel, energy, and
commodity prices.
The price at which we sell oil-based products in our Oil Business segment, such as re-refined base oil, hydrotreated fuel,
VTAE, and RFO is affected by changes in certain oil indices, such as the price for crude oil. If the relevant oil indices rise or
fall, we can typically expect a corresponding increase or decrease in prices for the oil products we sell to reflect the change in
the relevant oil indices. However, there may be a lag between the time an oil index increases or decreases and the time when we
are able to increase or decrease the price of the oil products we sell. The costs to collect used oil, including the amounts we
must pay or charge to obtain used oil and the fuel costs of our oil collection fleet, generally increases or decreases when the
relevant index increases or decreases. As with the prices for the oil products we sell there may be a time lag between when an
oil index increases or decreases and when we are able to adjust the amounts we pay or charge to obtain used oil. Even though
the prices we can charge for the oil products we sell and the costs to collect and re-refine used oil generally correlate, they do
not always increase or decrease by the same magnitude, and we cannot assure you that any increased costs we experience can
be passed through to the prices we charge for the oil products we sell or that the costs to collect and re-refine used oil will
decline when re-refined oil prices decline. Because of the competitive nature of the oil collection industry, we may not be able
to adjust the amounts we pay or charge for used oil in a timely manner or to fully compensate for decreases in the prices for the
oil products we sell which could materially and negatively impact our operating results and profitability. Any increases in our
costs to collect used oil could adversely affect the profitability of our Oil Business segment.
Increased costs of crude oil can significantly increase our operating costs in our Environmental Services segment. Because
solvent is a product of crude oil, we are also susceptible to increases in solvent costs when crude oil costs increase. During a
period of rising crude oil costs, we typically experience increases in the cost of solvent, fuel, and other petroleum-based
products. We have in the past been able to mitigate increased solvent and fuel costs through the imposition of price increases
and energy surcharges to customers. However, because of the competitive nature of the industry, there can be no assurance that
we will be able to pass on future price increases. Due to political instability in oil-producing countries, oil prices could increase
significantly in the future. A significant or sudden increase in solvent or fuel costs could lower our operating margins and
negatively impact our profitability. We currently do not use financial instruments to hedge against fluctuations in oil, solvent, or
energy prices. If this volatility continues, our operating results could be volatile and adversely affected.
In addition, a significant portion of our inventory consists of new and used solvents and oil products. Volatility in the price
of crude oil has impacted the value of this inventory in the past and can significantly impact the value of this inventory in the
future. Further, because we apply a first-in first-out accounting method, volatility in oil prices and solvent can significantly
impact our operating margins. If volatility in the price of crude oil continues, our operating results will be difficult to predict
and could be adversely affected. If we do not increase how much we charge to generators to acquire their used oil as quickly as
the price for our oil products decline, the profitability of our Oil Business segment would be negatively impacted.
Many small automotive repair shops and manufacturing companies burn used oil as a source of heat as an alternative to
using natural gas. If the price of natural gas were to increase significantly, these potential customers may choose to retain their
used oil for fuel purposes rather than allowing us to collect their used oil. This could make it difficult to supply our re-refinery
with internally collected feedstock at competitive prices. In addition, increases in the cost of natural gas may increase the cost
to operate our used oil re-refinery.
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Our used oil re-refinery may not generate the operating results that we anticipate and may lead to greater volatility in our
revenue and earnings.
There can be no assurance that unforeseen market conditions, such as a significant drop in crude oil prices, will not
adversely impact the operation or profitability of our re-refinery. Our success in operating our re-refinery at capacity and
realizing the anticipated benefits therefrom in a timely manner, or at all, may be affected by the following factors:
Operation of the Re-refinery - Operating at capacity depends on the ability of our employees and management to
run the re-refinery at design rates safely and in compliance with all relevant regulations. Nameplate capacity
includes the impact of periodic shutdowns for routine maintenance. Any extended or unscheduled shutdowns may
inhibit our ability to operate the re-refinery at or near capacity.
Balance of Base Lube Oil Demand vs Supply - Operating at capacity depends on the demand for base lube oil in
general and specifically the base lube oil produced at our re-refinery. If the capacity for base lube oil production
(i.e. supply) exceeds the demand for base lube oil then it is likely that there will be downward pressure on the
price of base lube oil. In addition, we may experience increased downward pricing pressure when compared to
suppliers of virgin lubricating base oil, which has historically sold at a premium to re-refined lubricating base oil.
Logistics - Operating at capacity depends on our ability to efficiently transport used oil to our re-refinery and to
transport base lube oil and related products out of our re-refinery as well as on our access to adequate storage
facilities for raw materials and products. Our ability to transport used oil and oil products efficiently is dependent
on the third parties we utilize to help us execute these activities.
Base Lube Oil Pricing - The price at which we sell oil-based products from our used oil re-refinery is affected by
changes in certain oil indices. If the relevant oil indices decline, we would typically reduce prices for our re-
refined lubricating base oil, even if our costs do not experience a similar decline. If we reduce prices for our
products, we may not realize expected results, and our operating margins may be adversely impacted.
Used Oil Feedstock - Operating at capacity depends on our ability to obtain the required volume from either
company customers or third-party collectors and to acquire the feedstock at competitive rates.
Our continued growth depends on our ability to recruit, train and retain sales and service personnel and we also depend on
the service of key individuals, the loss of whom could materially harm our business.
Our success will depend, in part, on the efforts of our executive officers and other key employees, including Brian Recatto,
President, Chief Executive Officer, and Director; Mark DeVita, our Chief Financial Officer; Ellie Bruce, our Vice President of
Business Management and Marketing; and Glenn Casbourne, our Vice President of Engineering. These individuals possess
extensive experience in our markets and are critical to the operation and growth of our business. If we lose or suffer an
extended interruption in the services of one or more of our executive officers or other key employees, our business, results of
operations, and financial condition may be negatively impacted. Moreover, the market for qualified individuals is highly
competitive and we may not be able to attract and retain qualified personnel to succeed members of our management team or
other key employees, should the need arise. We do not maintain key man life insurance policies on any of our named executive
officers.
In addition, our operations and growth strategy rely on the expansion of our business through the creation and growth of
new and existing branches. In order for us to create and grow new and existing branches properly, we must continually recruit
and train a pool of hardworking and motivated branch manager and sales and service representatives, or SSRs, to develop new
customer leads as well as support our existing customer base. If we are not able to retain and recruit a sufficient number of
branch managers and SSRs, or if we experience an increase in the turnover of existing branch managers and SSRs, we may not
be able to support the continued growth of our business, which could have a material adverse impact on our financial
performance.
We may not be able to service our customers and operate our business in an adequately safe manner.
In the operation of our facilities and in servicing our customers, our employees are exposed to potential hazards. If we are
not able to provide a safe environment for our employees and properly train them to identify, avoid, report, and help rectify
unsafe conditions, this may lead to an excessive number of recordable incidents, lost work time, etc. An excessive number of
recordable incidents and lost work time can lead to excessive expense and a poor safety rating which could prevent us from
achieving our profitability goals. A poor safety rating could potentially eliminate us from being able to service certain
customers and further limit our chances of meeting our profitability goals.
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Our operations are subject to numerous environmental, transportation, and other laws and regulations and, to the extent we
are found to be in violation of any such laws and regulations, we may be subject to involuntary shutdowns and/or
significant financial penalties.
Our operations are subject to extensive federal, state, and local laws and regulations relating to the protection of the
environment which, among other things:
Regulate the collection, sale, transportation, handling, processing, and disposal of the hazardous and non-
hazardous wastes that we collect from our customers;
Regulate the treatment and processing of waste material that we collect from our customers and the discharge of
treated material;
Impose liability on persons involved in generating, handling, processing, transporting, or disposing hazardous
materials; and
Impose joint and several liability for the remediation and clean-up of environmental contamination.
We are also subject to various transportation rules and regulations enforced by the DOT, Federal Railroad Administration
(FRA), the Federal Motor Carrier Safety Administration, and the Department of Homeland Security. The breadth and
complexity of these laws and regulations affecting our business make consistent compliance extremely difficult and often result
in increased operating and compliance costs. Even with these programs, we and other companies in the industry are routinely
faced with legal and administrative proceedings which can result in civil and criminal penalties (including the loss of certain
licenses and permits that are required for our business), interruption of business operations, fines or other sanctions, and require
expenditures for remedial work at our and third-party facilities. Under current law, we may be held liable for damage caused by
conditions that existed before we acquired the assets or operations involved or if we arrange for the transportation, disposal, or
treatment of hazardous substances that cause environmental contamination. We may also be held liable for the mishandling of
waste streams resulting from the misrepresentations by a customer as to the nature of such waste streams. We may be subject to
monetary fines, civil or criminal penalties, remediation, clean-up or stop orders, injunctions, orders to cease or suspend certain
practices, or denial of permits we require to operate our facilities.
We are also required to obtain and maintain permits, licenses, and approvals to conduct our operations in compliance with
such laws and regulations. If we are unable to maintain our currently held permits, licenses, and approvals, we may not be able
to continue certain of our operations. If we are unable to obtain additional permits, licenses, and approvals which may be
required as we expand our operations, we may not be able to grow our business. We have in the past been subject to penalties
and fines for noncompliance with environmental regulations and could be subject to penalties and fines in the future.
In addition, the operation of our used oil re-refinery exposes us to risks related to the potential loss of permits,
contamination of feedstock, adverse environmental impact of a spill or other release, the risk of explosion or fire or other
hazards, the risk of injury to our employees or others, as well as the negative publicity due to public concerns regarding our
operation. The occurrence of any of these events could result in reduced production rates, loss of inventory, operational
inefficiencies, clean-up costs, or other items that might negatively affect the operating results of the Company. While these risks
are in some respects similar to risks that we have experienced in our traditional service businesses, the magnitude of exposure
may be greater due to the nature of the used oil re-refining industry and the greater volumes, temperatures, and pressures
involved. While we may maintain some insurance that covers portions of these exposures, in many cases the risks are
uninsurable or we will not choose to procure insurance at levels that will cover all potential exposure.
CERCLA and similar state laws impose strict liability on current or former owners and operators of facilities that release
hazardous substances into the environment, as well as on the businesses that generate those substances or transport them to the
facilities. As a potentially responsible party, we may be liable under CERCLA for substantial investigation and cleanup costs
even if we operate our business properly and comply with applicable federal and state laws and regulations. Liability under
CERCLA may be joint and several, which means that if we were found to be a business with responsibility for a particular
CERCLA site, we could be required to pay the entire cost of the investigation and cleanup, even though we were not the party
responsible for the release of the hazardous substance and even though other companies might also be liable. Even if we were
able to identify who the other responsible parties might be, we may not be able to compel them to contribute to the remediation
costs, or they might be insolvent or unable to contribute due to lack of financial resources. Our facilities and the facilities of our
customers and third party contractors may have generated, used, handled and/or disposed of hazardous substances and other
regulated wastes. Environmental liabilities could exist, including cleanup obligations at these facilities or at off-site locations
where materials from our operations were disposed of, which could result in future expenditures that cannot be currently
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quantified and which could materially reduce our profits. It is also possible that government officials responsible for enforcing
environmental laws may view an environmental liability as more significant than we then currently estimate, or that we will fail
to identify or fully appreciate an existing liability before we become legally responsible to address potential environmental
liabilities.
Our pollution liability insurance excludes certain liabilities under CERCLA. Thus, if we were to incur liability under
CERCLA that was not covered by our insurance, and if we could not identify other parties responsible under the law whom we
are able to compel to contribute to the liabilities, the cost to us could be substantial and could impair our profitability, reduce
our liquidity, and have a material adverse effect on our business. Although our customer service agreements typically provide
that the customer is responsible for ensuring that only appropriate materials are disposed of, we could be exposed to third party
claims if customers dispose of improper waste, and we might not be successful in recovering our damages from those
customers. In addition, new services or products offered by us could expose us to further environmental liabilities for which we
have no historical experience and cannot estimate our potential exposure to liabilities.
In addition, there currently exists a high level of public concern over hazardous waste operations, including with respect to
the siting and operation of transfer, processing, storage, and disposal facilities. For example, under the DOT’s Compliance,
Safety, Accountability (CSA) initiative, a compliance and enforcement initiative designed to monitor commercial motor vehicle
safety, the fleets and drivers in our network are evaluated and ranked based on certain safety-related standards. A poor fleet
ranking or a reduction in eligible drivers could impact our ability to service our customers and could cause our customers to use
a competitor with higher fleet rankings than ours, which could have a material adverse effect on our business, financial
condition and results of operations.
Part of our business strategy is to increase revenues by adding branch operations in new geographies. This effort may
require us to undergo a regulatory approval process that could be time consuming and impact the success of our business
strategy. Zoning, permit, and licensing applications and proceedings, as well as regulatory enforcement proceedings, are all
matters open to public scrutiny and comment. Accordingly, from time to time we have been, and may in the future be, subject
to public opposition and publicity which may damage our reputation and delay or limit the expansion of our business or impair
our ability to renew existing permits which could prevent us from implementing our growth strategy and have a material
adverse effect on our business, financial condition or results of operations.
A system failure could delay or interrupt our ability to provide services and products and could increase our costs and
reduce our sales.
Our operations are dependent upon our ability to support our branch infrastructure. Our business operates through five
hubs that service our 89 local branches. Any damage or failure that causes interruptions in our operations could result in the
loss of customers. To date, we have not experienced any significant interruptions or delays which have affected our ability to
provide services and products to our customers. The occurrence of a natural disaster, technological, transportation, or
operational disruption or other unanticipated problem could cause interruptions in the services we provide and impair our
ability to generate sales and achieve profits.
A cyber incident could result in information theft, data corruption, operational disruption, and/or financial loss.
We are increasingly dependent on digital technology, including information systems and related infrastructure, to process
and record financial and operating data, and communicate with our employees and business partners. Cyber incidents, including
deliberate attacks or unintentional events, have increased. A cyber attack could include gaining unauthorized access to digital
systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption or
result in denial of service on websites.
Our technologies, systems, networks, and those of our business partners may become the target of cyber attacks or
information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of
proprietary and other information, or other disruption of our business operations. Any cyber attack on our business could
materially harm our business and operating results. While we carry insurance for cyber security and network interruption risks
there is no guarantee that any losses we may suffer in the future will not exceed coverage amounts or that all cyber incidents
will be covered by our insurance.
As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or
enhance our protective measures or to investigate and remediate any information security vulnerabilities.
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If current environmental laws and regulations are changed, we may be forced to significantly alter our business model,
which could have a material adverse effect on our financial performance.
Environmental laws and regulations are subject to change and may become increasingly stringent or relaxed. Interpretation
or enforcement of existing laws and regulations, or the adoption of new laws and regulations, may require us to modify or
curtail our operations or replace or upgrade our facilities or equipment at substantial costs which we may not be able to pass on
to our customers. On the other hand, if new laws and regulations are less stringent, then our customers or competitors may be
able to manage waste more effectively without reliance on our service, which could decrease the need for our services and/or
increase competition which could adversely affect our revenues and profitability. For example, the EPA currently excludes
waste used as an ingredient in the production of a product from being defined as hazardous waste. Our product reuse program
for parts cleaning operates under this exclusion and provides an advantage by excluding our customers' used solvent from being
regulated as hazardous waste. Similarly, under our non-hazardous program for parts cleaning, we provide our customers with a
different solvent that has a higher flashpoint than traditional solvents. The resulting used solvent is not considered to be
hazardous waste so long as our customers ensure that no inappropriate contaminants were contributed to the used solvent.
If the EPA were to broaden the definition of hazardous waste to include used solvents generated by our customers under
our product reuse and/or non-hazardous programs for parts cleaning, the value of our offerings may be significantly reduced,
which could have a material adverse effect on our financial performance. Examples of changes by the EPA that could adversely
affect our services include, but are not limited to, the following:
Elimination of the reuse exception to the definition of hazardous waste;
Increase in the minimum flashpoint threshold at which solvent becomes included in the definition of hazardous
waste;
Increased requirements to test the used solvent that we pick up from our customers for the presence of toxic or
more flammable contaminants; and
Adoption of regulations similar to those enacted in some California air quality districts that prohibit the use of
the solvents of the type that we sell for parts cleaning operations.
Similarly, if current environmental laws were changed so as to ban the use of mineral spirits in parts cleaning, we may be
forced to discontinue offering mineral spirits-based parts cleaning services. This could lead to a write-down in the value of our
inventory of mineral spirits, mineral spirits drums, and our parts cleaning machines (both at our sites and customer locations)
designed to utilize mineral spirits, as well as our mineral spirits distillation equipment.
One of the products produced from our re-refining process is Vacuum Tower Asphalt Extender ("VTAE"). VTAE is sold for
use as an ingredient in asphalt used in the construction of roadways. State Departments of Transportation may regulate the
characteristics of materials that are used as ingredients in roadway asphalt. A small number of states have banned the use of
VTAE as an ingredient in asphalt used on roadways. We believe, when used in the proper proportion, the VTAE produced at
our re-refinery can be used in a paving asphalt formulation that meets all relevant performance standards. Regulatory
restrictions on the use of VTAE have negatively impacted the marketability of this product and the profitability of our oil
business.
In addition, new laws and regulations, new interpretations of existing laws and regulations, increased governmental
enforcement, or other developments could require us to make additional unforeseen expenditures. We are not able to predict the
impact of new or changed laws or regulations or changes in the ways that such laws or regulations are administered,
interpreted, or enforced. The requirements to be met, as well as the technology and length of time available to meet those
requirements, continue to develop and change. To the extent that our costs associated with meeting any of these requirements
are substantial and cannot adequately be passed through to our customers, our earnings and cash flows could suffer.
We operate our business through many locations, and if we are unable to effectively oversee all of these locations, our
business reputation and operating results could be materially adversely affected.
Because we rely on our extended network of 89 branch locations to operate independently to carry out our business plan,
we are subject to risks related to our ability to oversee these locations. If in the future we are unable to effectively oversee our
branch locations, our results of operations could be materially adversely affected, we could fail to comply with environmental
regulations, we could lose customers, we could lose control of inventory and other assets, and our business could be materially
adversely affected.
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Our results of operations and financial condition have been and could in the future be materially adversely impacted by an
economic downturn.
The overall levels of demand for our products and services are influenced by fluctuations in levels of end-user demand,
which depend in large part on general macroeconomic conditions in the U.S. and the regional economic conditions affecting
our branches. Our customers and suppliers may face severe financial difficulties, causing them to cease some or all their
business operations or to reduce the volume of products or services they purchase from us in the future. We may have accounts
receivable from customers who may not be able to honor their obligations to us. Failure to collect a significant portion of
amounts due on those receivables could have a material adverse effect on our results of operations and financial condition.
Many of our customers are heavily dependent on general economic conditions, including the availability of affordable energy
sources, employment levels, interest rates, financial credit availability, consumer confidence, and housing demand. Downturns
in these general economic conditions can significantly affect the business of our customers, which in turn affects demand,
volumes, pricing, and operating margins for our services and products. In past economic downturns, demand from our services
has declined as our customers’ reduced their costs which in turn reduced their demand for our services. During 2016, we felt the
impact of a downturn in economic activity for businesses in, and doing business with, the oil industry due to the continued
decline in the price of crude oil. Such downturns in the oil industry negatively impact the operating results of our
Environmental Services segment.
In addition, adverse economic and financial market conditions may cause our suppliers to be unable to provide materials
and components to us or may cause suppliers to make changes in the credit terms they extend to us, such as shortening the
required payment period for amounts owed to them or reducing the maximum amount of trade credit available to us. Such
changes could adversely affect our liquidity and could have a material adverse effect on our results of operations and financial
condition. If we are unable to successfully anticipate changing economic and financial market conditions, we could be
adversely affected.
We face intense competition in the industrial and hazardous waste services industries and from other used oil re-refiners.
The markets for parts cleaning, containerized waste management, used oil collection, vacuum truck services, antifreeze
recycling, and field services are intensely competitive. Numerous small companies provide these services at a regional or local
level and may be able to compete with lower overhead and operating costs. In addition, Safety-Kleen, a wholly-owned
subsidiary of Clean Harbors, Inc. and our largest competitor, has held substantial market share in the full-service parts cleaning
industry for the last four decades and has developed a significant market share in used oil services, including used oil collection
and containerized waste management. Safety-Kleen has greater financial and other resources and greater name recognition than
us. Our business growth, financial performance, and prospects may be adversely affected if we cannot effectively compete
against these competitors, or if any of our competitors develop products or services superior to those offered by us. We could
lose a significant number of customers if Safety-Kleen or other competitors materially lower their prices, improve service
quality, or develop more competitive product and service offerings.
In addition, companies involved in the waste management industry, including waste hauling, separation, recovery, and
recycling, may have the expertise, access to customers, and financial resources that would encourage them to develop and
market services and products competitive with those offered by us. We also face competition from alternative services that
provide similar benefits to our customers as those provided by us. In addition, new technology regarding the treatment and
recycling of used solvent may lead to functionally equivalent or superior products becoming available, which may decrease the
demand for our services and products or cause our products and services to become obsolete.
In the past many of our competitors announced plans to enter the used oil re-refining or base oil production business or expand
their existing used oil re-refining or base oil producing businesses by adding additional capacity. If the price of crude oil and
the price for re-refined oil products increases, competitors may again consider these plans. The additional competition may
make it harder for us to sell our re-refined base lube oil. In addition, extra competition in the collection of used oil feedstock
may require us to pay more for our used oil or prevent us from collecting enough feedstock to operate the used oil re-refinery at
capacity.
Consolidation and/or declines in the U.S. vehicle repair and U.S. manufacturing industries could cause us to experience
lower sales volumes which could materially affect our growth and financial performance.
Our business relies on continued demand for our parts cleaning and waste management services in the U.S. vehicle repair
and U.S. manufacturing industries, which may suffer from declining market size and number of locations, due in part to the
uncertainty of economic conditions, international competition, and consolidation in U.S. markets. Industry trends affecting our
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customers have caused our customers' businesses to contract. Additional decline could reduce the demand for our parts cleaning
and other services and products and have a material adverse impact on our business. As a result, we may not be able to continue
to grow our business by increasing penetration into the industries which we serve, and our ability to retain our market share and
base of sales could become more difficult. Also, the increase in the percentage of electric vehicles in use in the U.S. could
negatively impact the demand for several of our services since we believe electric vehicles create less demand for our services
compared to gasoline or diesel powered vehicles.
Our focus on small business customers causes us to be subject to the trends and downturns impacting small businesses,
which could adversely affect our business.
Our customer base is primarily composed of small companies in the vehicle repair and manufacturing industries. The high
concentration of our customers that are small businesses exposes us to some of the broad characteristics of small businesses
across the U.S. Small businesses start, close, relocate, and get purchased or sold frequently. In addition, small businesses tend
to be more significantly affected by economic recessions than larger businesses. This leads to a certain amount of ongoing
turnover in the market. As a result, we must continually identify new customers and expand our business with existing
customers in order to sustain our growth. If we experience a rise in levels of customer turnover, it may have a negative impact
on the profitability of our business.
We are dependent on third parties to supply us with the necessary components and materials to service our customers.
We are also dependent on third party transport, including rail, recycling, and disposal contractors.
In the operation of our business, we supply a large amount of virgin solvent and parts cleaning equipment to our customers.
We do not maintain extensive inventories for most of these products. If we become unable to obtain, or experience delays in the
transportation of adequate supplies and components in a timely and/or cost-effective manner, we may be unable to provide
sufficient quantities of our services and products to our customers, which could have a material adverse effect on our financial
condition and results of operations.
We are dependent on third parties for the disposal of most of our customers’ non-used oil, and non-wastewater waste
streams. We and our third party transporters ship waste collected from our customers to a number of third party recycling and
disposal facilities, including incinerators, landfill operators, and waste-to-energy facilities. We generally do not have long-term
fixed price contracts with our third party contractors. If our current disposal vendors or subcontractors cannot perform up to our
standards, our reputation with our customers could be damaged, and we may be required to replace these vendors. Although we
believe there are a number of potential replacement disposal vendors and subcontractors that could provide such services, we
may incur additional costs and delays in identifying and qualifying such replacements. In addition, any mishandling of our
customers’ waste streams by disposal vendors or subcontractors could expose both us and our customers to liability. Any failure
by disposal vendors or subcontractors to properly collect, transport, handle or dispose of our customers’ waste streams, or any
insolvency or business closure of disposal vendors or subcontractors, could expose us to liability, damage our reputation and
generally have a material adverse effect on our business, financial condition, or results of operations.
The operation of our antifreeze recycling centers and waste water processing facilities expose us to risks that may be
uninsurable.
Similar to our re-refining operation, the operations of our antifreeze recycling centers and waste water processing facilities
expose us to risks related to the potential contamination of feedstock, adverse environmental impact of a spill or other release,
or the risk of injury to our employees or others. While we may maintain some insurance that covers portions of these exposures,
in many cases the risks are uninsurable, or we will not choose to procure insurance at levels that will cover all potential
exposure.
We may not be able to protect our intellectual property adequately.
We rely upon our experience and technological innovation and other trade secrets to develop and maintain our competitive
position. We also rely, to a significant extent, on trade secrets, confidentiality agreements, and other contractual provisions to
protect our proprietary technology, and such agreements may not adequately protect us. Our competitors could gain knowledge
of our know-how or trade secrets, either directly or through one or more of our employees or other third parties. Although we
do not regard any single trade secret or component of our proprietary expertise to be material to our operations as a whole, if
one or more of our competitors were to use or independently develop such expertise or trade secrets, our market share, sales
volumes and profit margins could be adversely affected.
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In the event we become involved in defending or pursuing intellectual property litigation, such action may increase our
costs and divert management's time and attention from our business. In addition, any potential intellectual property litigation
could force us to take specific actions, including, but not limited to, the following:
Cease selling products that use the challenged intellectual property;
Obtain from the owner of the infringed intellectual property a license to sell or use the relevant technology,
which license may not be available on reasonable terms, or at all; or
Redesign those products that use infringing intellectual property.
We have financial assurance requirements, and increases in the costs of obtaining adequate financial assurance could
negatively impact our business, financial condition or results of operations.
We are required to provide financial assurance that funds will be available, if needed, to cover various environmental,
insurance and other obligations. The costs of these obligations could be material. We typically have several options to
demonstrate satisfactory financial assurance requirements, including letters of credit, surety bonds, trust funds, and a financial
net worth test. The financial assurance instrument is provided for the benefit of the insurance underwriter, permitting authority,
or other entity and is not available for use at our discretion. The amount of financial assurance required varies based on the
specific obligations it is designed to satisfy and it may change based on the requesting parties assessment of risk related to each
obligation. The cost of financial assurance instruments is difficult to accurately predict and depends on many factors, some of
which are outside of our control, including the availability of instruments in the marketplace, the amount and form of financial
assurance required by a state, our creditworthiness and our operating history. General economic factors, including
developments within the insurance industry, may adversely affect the cost of our current financial assurance instruments and
changes in regulations may impose stricter requirements on the types of financial assurance that will be accepted. In the event
the cost of financial assurance instruments we are required to provide increases, or if we are otherwise unable to obtain
sufficient coverage, our business, financial condition, or results of operations could be materially adversely affected. Our ability
to continue conducting our industrial waste management operations could be adversely affected if we should become unable to
obtain sufficient insurance and/or financial assurance to meet our business and regulatory requirements in the future.
Climate change legislation or regulations restricting emissions of “Greenhouse Gases” could result in increased operating
costs and reduced demand for our services.
In 2009, the EPA published its findings that emissions of carbon dioxide, methane, and other greenhouse gases (“GHGs”),
present an endangerment to public health and the environment because emissions of such gases are, according to the EPA,
contributing to the warming of the earth's atmosphere and other climate changes. These findings allow the EPA to adopt and
implement regulations that would restrict emissions of GHGs under existing provisions of the federal Clean Air Act. The EPA
has adopted two sets of regulations under the existing Clean Air Act that would require a reduction in emissions of GHGs from
motor vehicles and could trigger permit review for GHG emissions from certain stationary sources. In addition, both houses of
Congress have actively considered legislation to reduce emissions of GHGs, and almost one-half of the states have taken legal
measures to reduce emissions of GHGs primarily through the planned development of GHG emission inventories and/or
regional GHG cap and trade programs. Most of these cap and trade programs work by requiring either major sources of
emissions or major producers of fuels to acquire and surrender emission allowances, with the number of allowances available
for purchase reduced each year until the overall GHG emission reduction goal is achieved. The adoption and implementation of
any regulations imposing GHG reporting obligations on, or limiting emissions of GHGs from, our equipment and operations
could require us to incur costs to monitor emissions and to reduce emissions of GHGs associated with our operations.
Expansion of our business may result in unanticipated adverse consequences.
In the future, we may seek to grow our business by investing in new or existing facilities, making acquisitions, entering
into partnerships and joint ventures, or constructing or expanding facilities such as the used oil re-refinery. Acquisitions,
partnerships, joint ventures, investments, or construction projects may require significant managerial attention, which may
divert our management from our other activities and may impair the operation of our existing businesses. Any future
acquisitions of businesses or facilities or the development of a new business line could entail a number of additional risks.
We may not be able to realize the expected benefits from any recent or future acquisitions, new facility developments,
partnerships, joint ventures or other investments.
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We may be unable to manage our growth.
Our growth to date has placed and may continue to place significant strain on our management and operational and
financial resources. We anticipate that continued growth will require us to recruit, hire, and retain new managerial, finance,
sales, marketing, and operational personnel. We cannot be certain that we will be successful in recruiting, hiring, or retaining
those personnel. Our ability to compete effectively and to manage our future growth, if any, will depend on our ability to
maintain and improve operational, financial, and management information systems on a timely basis and to expand, train,
motivate, and manage our work force. If we continue to grow, we cannot be certain that our personnel, systems, procedures,
and controls will be adequate to support our operations.
We carry inventory of used solvents generated by customers participating in our product reuse program for parts cleaning.
Our inventory of used solvent has fluctuated and it may continue to fluctuate. If we are unable to sell our reuse inventory,
we may be required to write down the value of the inventory, and we may incur additional costs for storage and/or disposal
which would adversely impact our operating results. In addition, while we sold enough used solvent to satisfy speculative
accumulation requirements of the EPA for fiscal 2018 and prior years, we may not be able to do so in future years.
Our insurance policies do not cover all losses, costs, or liabilities that we may experience.
We maintain insurance coverage, but these policies do not cover all of our potential losses, costs, or liabilities. We could
suffer losses for uninsurable or uninsured risks or in amounts in excess of our existing insurance coverage which would
significantly affect our financial performance. For example, our pollution legal liability insurance excludes costs related to
fines, penalties, or assessments. Our insurance policies also have deductibles and self-retention limits that could expose us to
significant financial expense. Our ability to obtain and maintain adequate insurance may be affected by conditions in the
insurance market over which we have no control. The occurrence of an event that is not fully covered by insurance could have a
material adverse effect on our business, financial condition, and results of operations. In addition, our business requires that we
maintain various types of insurance. If such insurance is not available or not available on economically acceptable terms, our
business could be materially and adversely affected.
We are subject to potential liability claims relating to our services and products.
We offer our customers specific guarantees that we will be responsible for all expenses resulting from any spill that occurs
while we are transporting, processing, or disposing of customers' used solvent and other waste. Accordingly, we may be
required to indemnify our customers for any liability under CERCLA or other environmental, employment, health and safety
laws and regulations. We may also be exposed to product liability claims by our customers, users of our parts cleaning
products, or third parties claiming damages stemming from the mechanical failure of parts cleaned with solvents and/or
equipment provided by us. Although we maintain product liability insurance coverage, if our insurance coverage proves
inadequate or adequate insurance becomes unreasonably costly or otherwise unavailable, future claims may not be fully
insured. An uninsured or partially insured successful claim against us could have a material adverse effect on our business,
financial condition, and results of operations.
Litigation related to personal injury from exposure to solvents and the operation of our business may result in significant
liabilities and affect our profitability.
We have been, and in the future may be, involved in claims and litigation filed on behalf of persons alleging injury
predominantly as a result of exposure to hazardous chemicals that are a part of the solvents that we provide. In addition, the
hazards and risks associated with the use, transport, storage, handling, and disposal of our customers' waste by us and our
customers (such as fires, natural disasters, explosions, and accidents) and our customers' improper or negligent use or misuse of
aqueous parts cleaning equipment to heat our aqueous cleaning solution, or solvent to clean parts may also expose us to
personal injury claims, property damage claims, and/or products liability claims from our customers or third parties. As
protection against such claims and operating hazards, we maintain insurance coverage against some, but not all, potential
losses. However, we could sustain losses for uninsurable or uninsured risks, or in amounts in excess of existing insurance
coverage. Due to the unpredictable nature of personal injury litigation, it is not possible to predict the ultimate outcome of these
claims and lawsuits, and we may be held liable for significant personal injury or damage to property or third parties, or other
losses, that are not fully covered by our insurance, which could have a material adverse effect on our business.
24
Our fixed cost structure may result in reduced earnings or a loss.
Our network, including our re-refinery and other facilities, fleet, and personnel, subjects us to fixed costs, which makes our
margins and earnings sensitive to changes in revenues. In periods of declining demand, our fixed cost structure may limit our
ability to cut costs, which may put us at a competitive disadvantage to firms with lower cost structures, or may result in reduced
operating margins and operating losses.
Our indebtedness could harm our operating flexibility and competitive position as well as adversely affect our financial
condition and ability to fulfill our obligations, and expose us to interest rate risk.
As of December 29, 2018, we had $30.0 million outstanding under the Credit Agreement in the form of Term A Loans.
Amounts borrowed under the Credit Agreement are secured by a security interest in substantially all of our tangible and
intangible assets. The Credit Agreement contains various requirements and covenants, including one that requires us to
maintain a specified total leverage ratio. Our ability to comply with these ratios or tests may be affected by events beyond our
control, including prevailing economic, financial, and industry conditions. A breach of any of these covenants, ratios, or tests
could result in a default under the Credit Agreement. Our level of debt and the limitations imposed on us by the debt
agreements related to such indebtedness could adversely affect our operating flexibility and put us at a competitive
disadvantage. Our debt level may adversely affect our future performance, because, among other things:
(cid:127) We may be placed at a competitive disadvantage relative to our competitors, some of which have lower debt service
obligations and greater financial resources than we do;
(cid:127)
Our ability to complete future acquisitions may be limited;
(cid:127) We will have to use a portion of our cash flow for debt service rather than for operations;
(cid:127) We may not be able to obtain further debt financing and may have to pay more for financing;
(cid:127)
The indebtedness may bear interest at variable interest rates, making us vulnerable to increases in interest rates; and
(cid:127) We will be more vulnerable to adverse economic conditions.
The indebtedness will require future interest and principal payments. Our ability to make scheduled payments of
principal, to pay interest on, or to refinance our indebtedness and to satisfy our other debt obligations will depend upon our
future operating performance, which may be affected by factors beyond our control. In addition, there can be no assurance that
future borrowings or equity financing will be available to us on favorable terms or at all for the payment or refinancing of our
indebtedness. If we are unable to service our indebtedness, our business, financial condition and results of operations would be
materially adversely affected. Borrowings under our Credit Agreement are tied to the various stated interest rates. In the event
of an increase in interest rates or an increase in the amount of our indebtedness, our interest expense will increase and could
have a material adverse effect on our net income.
A decline in expected profitability of the Company or individual reporting units of the Company could result in the
impairment of assets, including goodwill, other long-lived assets, and deferred tax assets.
We hold material amounts of goodwill, other long-lived assets, and deferred tax assets on our balance sheet. A decline
in expected profitability of one of our operating segments or a decline in the global economy, could call into question the
recoverability of our related goodwill, other long-lived tangible and intangible assets, or deferred tax assets and require us to
write down or write off these assets or, in the case of deferred tax assets, recognize a valuation allowance through a charge to
income. Such an occurrence could have a material adverse effect on our annual results of operations and financial position.
Our future capital needs are uncertain and our ability to access additional financing may be negatively impacted by the
volatility and disruption of the capital and credit markets and adverse changes in the global economy.
Our capital requirements in the future will depend on many factors, including, but not limited to:
(cid:127)
(cid:127)
Acceptance of and demand for, and pricing of our products and services;
The extent to which we invest in new technology and product development;
25
(cid:127)
(cid:127)
The costs of developing new products, services or technologies;
The costs associated with the growth of our business, if any.
If global economic conditions worsen, we could experience a decrease in cash flows from operations and may need
additional financing to fund operations and access to additional debt or equity may not be available on acceptable terms or at
all. In addition, the terms of the Credit Agreement restrict our ability to incur additional indebtedness. If we cannot raise funds
on acceptable terms when necessary, we may not be able to develop or enhance products and services, execute our business
plan, take advantage of future opportunities or respond to competitive pressures or unanticipated customer requirements.
Risks Related to our Common Stock
The price of our shares of common stock may be volatile.
The trading price of shares of our common stock may fluctuate substantially. In particular, it is possible that our operating
results may be below the expectations of public market analysts and investors, and, as a result, the price of our common stock
may decline. These fluctuations could cause you to lose part or all of your investment in shares of our common stock. Factors
that could cause fluctuations include, but are not limited to, the following:
Variations in our operating results, including variations due to changes in the price of crude oil or base lubricating
oil;
Announcements by us, our competitors, or others of significant business developments, changes in customer
relationships, acquisitions, or expansion plans;
Analysts' earnings estimates, ratings, and research reports;
The depth and liquidity of the market for our common stock;
Speculation in the press;
Strategic actions by us or our competitors, such as sales promotions or acquisitions;
Actions by our large stockholders or by institutional and other stockholders;
Material litigation;
Conditions in the industrial and hazardous waste services industry as a whole and in the geographic markets served
by our branches; and
Domestic and international economic factors unrelated to our performance.
The stock markets, in general, periodically experience volatility that is sometimes unrelated to the operating performance
of particular companies. These broad market fluctuations may cause the trading price of our common stock to decline.
The small public float for our shares may make it difficult to sell your shares and may cause volatility in our stock price.
A substantial portion of our shares of common stock are closely held by certain inside investors, and our common stock has
experienced limited trading volume since our initial public offering. As of December 29, 2018, our directors and executive
officers, and stockholders affiliated with our directors and executive officers, beneficially owned 35.7% of our common
stock. In addition, under a participation rights agreement between us and The Heritage Group, an affiliate of our Chairman Fred
Fehsenfeld ("Heritage"), Heritage has the right, except in limited circumstances, to purchase shares from us when we issue
common stock so that its percentage ownership interest in our common stock does not decrease. Therefore, if Heritage
purchases all of the shares reserved for sale to Heritage when we issue common stock, Heritage will maintain its ownership
interests in our common stock. Consequently, our public float is expected to remain small for a public company, the availability
of our shares may be limited, and you may encounter difficulty selling your shares or obtaining a suitable price at which to sell
your shares. In addition, as a result of the small float, you could experience meaningful volatility in the trading price of our
common stock.
26
There may be future sales or issuances of our common stock, which will dilute the ownership interests of stockholders and
may adversely affect the market price of our common stock.
We may issue additional common stock, including securities that are convertible into or exchangeable for, or that represent
the right to receive, common stock or substantially similar securities, which may result in dilution to our stockholders. In
addition, our stockholders may be further diluted by future issuances, or exercises or vesting of outstanding equity awards,
under our equity incentive plans. Sales of substantial amounts of common stock by us or our stockholders in the public market
could adversely affect the market price of the common stock. The market price of our common stock could decline as a result
of sales or issuances of a large number of our common stock or similar securities in the market after this offering or the
perception that such sales or issuances could occur.
If securities or industry analysts do not publish research or reports about our business or publish unfavorable research, or
our results are below analysts' estimates, our stock price and trading volume could decline.
The trading market for our common stock may depend on the research and reports that industry or securities analysts
publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us
downgrade our stock or our results are below analysts' estimates, our stock price would likely decline. If one or more of these
analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial
markets, which in turn could cause our stock price or trading volume to decline. Moreover, if our operating results do not meet
the expectations of the investor community, it is possible that the analysts who cover us may change their recommendations
regarding our company, and our stock price could decline.
Heritage, the Fehsenfeld family trusts, and Mr. Fehsenfeld are affiliates of each other and have significant influence over
our company, and their influence could delay or deter a change of control or other business combination or otherwise cause
us to take actions with which you may disagree.
As of December 29, 2018, Heritage, the Fehsenfeld family trusts and Mr. Fehsenfeld, who are all affiliates of each other
(collectively, the “Heritage Stockholders”), collectively beneficially own over 31.5% of our common stock. As a result, the
Heritage Stockholders have significant influence over the outcome of matters requiring a stockholder vote, including the
election of directors and the approval of significant matters and their interests may not align with the interest of other
stockholders. This concentration of voting power could have the effect of delaying, deterring or preventing a change of control
or other business combination that might otherwise be beneficial to our stockholders.
We are required to evaluate our internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of
2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and
could have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our
internal control over financial reporting. Such report contains, among other matters, an assessment of the effectiveness of our
internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal
control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal
control over financial reporting identified by management. Each year we must prepare or update the process documentation and
perform the evaluation needed to comply with Section 404. During this process, if our management identifies one or more
material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is
effective. Ensuring that we have adequate internal financial and accounting controls and procedures in place is a costly and
time-consuming effort that needs to be re-evaluated frequently. We and our independent auditors may in the future discover
areas of our internal controls that need further attention and improvement, particularly with respect to any other businesses that
we decide to acquire in the future. Implementing any appropriate changes to our internal controls may require specific
compliance training of our directors, officers, and employees, entail substantial costs in order to modify our existing accounting
systems, and take a significant period of time to complete. However, such changes may not be effective in maintaining the
adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate
financial statements on a timely basis, could increase our operating costs and could harm our ability to operate our business.
Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm
our operating results or cause us to fail to meet our reporting obligations. Investor perception that our internal controls are
inadequate or that we are unable to produce accurate financial statements on a timely, consistent basis may adversely affect our
stock price. Failure to comply with Section 404 could also potentially subject us to sanctions or investigations by the Securities
and Exchange Commission ("SEC"), NASDAQ, or other regulatory authorities.
27
We do not currently intend to pay cash dividends on our common stock to our stockholders and any determination to pay
cash dividends in the future will be at the discretion of our Board of Directors.
We currently intend to retain any profits to provide capacity for general corporate uses and growth of our business. Our
Board of Directors does not intend to declare cash dividends in the foreseeable future. Any determination to pay dividends to
our stockholders in the future will be at the discretion of our Board of Directors and will depend on our results of operations,
financial condition, and other factors deemed relevant by our Board of Directors. Further, our Credit Agreement restricts the
amount of dividends which can be paid in a given year. Consequently, it is uncertain when, if ever, we will declare dividends to
our stockholders. If we do not pay dividends, investors will only obtain a return on their investment if the value of our shares of
common stock appreciates. In addition, the terms of our existing or future borrowing arrangements may limit our ability to
declare and pay dividends.
Provisions in our certificate of incorporation and bylaws and under Delaware law could prevent or delay transactions that
stockholders may favor.
Our company is incorporated in Delaware. Our certificate of incorporation and bylaws, as well as Delaware corporate law,
contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might
consider favorable, including a provision that authorizes our Board of Directors to issue preferred stock with such voting rights,
dividend rates, liquidation, redemption, conversion, and other rights as our Board of Directors may fix and without further
stockholder action. The issuance of preferred stock with voting rights could make it more difficult for a third party to acquire a
majority of our outstanding voting stock. This could frustrate a change in the composition of our Board of Directors, which
could result in entrenchment of current management. Takeover attempts generally include offering stockholders a premium for
their stock. Therefore, preventing a takeover attempt may cause you to lose an opportunity to sell your shares at a premium. If a
change of control or change in management is delayed or prevented, the market price of our common stock could decline.
Delaware law also prohibits a corporation from engaging in a business combination with any holder of 15% or more of its
capital stock until the holder has held the stock for three years unless, among other possibilities, the Board of Directors
approves the transaction. This provision may prevent changes in our management or corporate structure. Also, under applicable
Delaware law, our Board of Directors is permitted to and may adopt additional anti-takeover measures in the future.
Our certificate of incorporation provides that the affirmative vote of at least seventy-five percent (75%) of our total voting
power is required to amend our certificate of incorporation or to approve mergers, consolidations, conversions, or the sale of all
or substantially all of our assets. Given the voting power of the Heritage Stockholders, we would need the approval of two of
the Heritage Stockholders for any of these transactions to occur.
Our bylaws provide for the division of our Board of Directors into three classes with staggered three year terms. The
classification of our Board of Directors could have the effect of making it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, control of us.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Corporate Headquarters. Our headquarters is based in a 31,935 square foot leased facility in Elgin, Illinois and is leased
with a term expiring in 2022.
Re-refinery, recycling and waste processing operations. As of December 29, 2018 we owned and operated a used oil re-
refinery in Indianapolis, IN, with an annual nameplate capacity of approximately 75 million gallons of used oil feedstock and
we owned and operated a solvent recycling facility at the same site which has an annual capacity of approximately six million
gallons. We operated twelve oil processing facilities, of which four perform waste water treatment and one performs oil filter
processing. Our wastewater treatment operations have the capacity to process approximately 105 million gallons per year. We
owned the properties where eleven of our oil processing operations are located, including our waste water treatment operations
and one of our used oil filter processing operations. We leased the remaining oil processing facility with a term of year to year
tenancy. In addition, we operated six antifreeze recycling centers, of which two facilities are owned and four facilities are
leased.
28
Hubs. We operated five distribution hubs. One in Indianapolis, IN; Shreveport, LA; Philadelphia, PA; Atlanta, GA; and
Kansas City, KS. All of our hubs are leased with terms ranging two to ten years. These operating hubs are warehouse operations
with the capability to receive and unload multiple trailers. The used solvent that arrives at the hubs is bulked and stored for
future sale or stored for future shipment to our solvent recycling unit, depending on whether the used solvent came from our
non-hazardous program or our reuse program. Containers of hazardous and non-hazardous waste that arrive at the hubs are
organized based on the destination facility. These containers are staged and loaded back into trailers for reshipment to third-
party recyclers, incinerators, landfills, and waste-to-energy facilities.
Branches. We operated 89 branches that vary in size and serve customer locations in the vast majority of the United States,
the District of Columbia, and parts of Ontario, Canada. Depending on the maturity of our branches, our branch facilities range
from small locations that only provide space to park a few vehicles and semi-trailers to larger locations that provide office
space and warehouse storage as well as additional parking. We owned 10 branch facilities, and the remaining 79 are leased with
terms ranging from month-to-month to up to twelve years.
ITEM 3. LEGAL PROCEEDINGS
In February 2016 the Company received an information request from the U.S. EPA ("EPA") regarding the operation of our
Indianapolis, Indiana re-refinery in relation to our Clean Air Act permit for the facility. During 2016 we responded fully to the
EPA's information request. On April 7, 2017 we received a notice of violation and finding of violation of the Clean Air Act
related to our operation of the re-refinery. We continue to cooperate with the EPA in order to address the notice and finding of
violation. As of the end of December 29, 2018, no liability was accrued related to this situation.
In October 2016, the EPA issued a Notice of Intent to file an administrative complaint against the Company for certain
alleged violations of the Emergency Planning and Community Right to Know Act (“EPCRA”) and regulations under the Clean
Water Act (involving Spill Prevention, Control and Countermeasure plans). We have reached a settlement with USEPA
involving the alleged EPCRA violations for an immaterial amount. We expect the settlement to be executed by the first half of
fiscal 2019. We are also providing USEPA additional information it has requested with regard to the alleged Clean Water Act
matter and expect to have this matter resolved by the end of 2019.
The Company is currently defending a putative class action lawsuit, Adelphia, Inc. d/b/a/ Village Auto and Dan’s One Stop
Shop, LLC v. Heritage-Crystal Clean, Inc. and Heritage-Crystal Clean, LLC, Case No. 15-L-386, in the Circuit Court for the
Sixteenth Judicial Circuit in Kane County, Illinois, alleging that the Company charged fees in violation of both its contracts and
applicable state laws. The case involves claims brought under the Illinois Consumer Fraud and Deceptive Business Practices
Act, 815 ILCS 505/1 et seq., as well as claims for breach of contract and unjust enrichment. The case has been brought as a
putative class action on behalf of all customers of HCC who entered into a written contract and have paid a fuel surcharge from
2005 to present. The Circuit Court granted Plaintiffs’ request for class certification on August 28, 2018. We have petitioned the
Illinois Court of Appeals for an interlocutory appeal of this order. It was granted and we are proceeding with the appellant
process. As of December 29, 2018, no liability was accrued related to this lawsuit.
On August 2, 2018, we received a request for information from the Indiana Department of Environmental Management
(“IDEM”) seeking information related to the past and present use of our site located in Franklin, IN. We cooperated with IDEM
by providing the requested information, and on December 12, 2018, IDEM closed the RFI with no further action required.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
29
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
Our common stock trades on the NASDAQ Global Select Market under the symbol “HCCI”. The following table sets
forth the high and low sales prices of our common stock for the indicated periods as reported by NASDAQ.
2017
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 15.75
Low
$ 13.10
$ 16.20
$ 13.30
$ 20.50
$ 15.00
$ 22.35
$ 18.30
High
Low
$ 24.15
$ 19.90
$ 23.55
$ 19.10
$ 24.20
$ 19.00
$ 28.01
$ 19.66
On March 1, 2019, the closing price of our common stock on the NASDAQ Global Select Market was $25.03 per share.
On March 1, 2019, there were 508 stockholders of record of our common stock. Several brokerage firms, banks, and other
institutions (“nominees”) are listed once on the stockholders of record listing. However, in most cases, the nominees' holdings
represent blocks of our common stock held in brokerage accounts for a number of individual stockholders. As such, our actual
number of beneficial stockholders would be higher than the number of registered stockholders of record.
We have never declared nor paid any cash dividends on our common stock, and we do not intend to pay any dividends on
our common stock in the foreseeable future. We intend to retain any future earnings for use in the operation and expansion of
our business and payment of our outstanding debt. In addition, our current credit agreement limits the amount of dividends we
can pay on our common stock (see "Liquidity and Capital Resources" under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
Unregistered Sales of Equity Securities and Use of Proceeds
All repurchase activity of equity securities during the period covered by this Annual Report were previously disclosed in our
current Quarterly Reports on Form 10-Q. The Company had no unregistered sales of equity securities during 2018.
30
Performance Graph
The graph set forth below compares the cumulative total stockholder return on our common stock between December 28,
2013 and December 29, 2018, with the cumulative total return of (i) the NASDAQ Composite Index and (ii) the NASDAQ
Industrials Index, over the same period. This graph assumes the investment of $100 on December 28, 2013 in our common
stock, in the NASDAQ Composite Index, and in the NASDAQ Industrials Index, and assumes the reinvestment of dividends, if
any.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance
shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our
common stock.
December 28,
2013
January 3,
2015
January 2,
2016
December 31,
2016
December
30, 2017
December
29, 2018
Heritage-Crystal Clean, Inc.
NASDAQ Composite Index
NASDAQ Industrials Index
$
$
$
100.00 $
100.00 $
100.00 $
62.00
114.00
102.00
$
$
$
53.00
120.00
111.00
$
$
$
79.00
130.00
120.00
$
$
$
110.00
166.00
149.00
$
$
$
116.00
158.00
145.00
Securities Authorized for Issuance under Equity Compensation Plans
See Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," for a
description of the securities which are authorized for issuance under our equity compensation plans.
ITEM 6. SELECTED FINANCIAL DATA
The following summary of consolidated financial information has been derived from the audited consolidated financial
statements included in Item 8, "Financial Statements and Supplementary Data," of this report. This information should be
reviewed in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements and the notes thereto included in Item 8, "Financial Statements and
Supplementary Data" of this report. Our fiscal year ends on the Saturday closest to December 31. "Fiscal 2018" represents the
52-week period ended December 29, 2018. "Fiscal 2017" represents the 52-week period ended December 30, 2017. "Fiscal
2016" represents the 52-week period ended December 31, 2016. "Fiscal 2015" represents the 52-week period ended January 2,
31
2016. "Fiscal 2014" represents the 53-week period ended January 3, 2015. We have derived the statement of operations for the
fiscal years ended January 2, 2016 and January 3, 2015 and the balance sheet data at December 31, 2016, January 2, 2016, and
January 3, 2015, from our audited consolidated financial statements not included in this report.
Fiscal Year
(Dollars in thousands, except per share data)
2016
2015
2017
2014
STATEMENTS OF OPERATIONS DATA
Revenues
Service revenues
Product revenues
Total revenues
Operating Expenses
Operating Costs
Selling, general, and administrative expenses
Depreciation and amortization
Impairment of goodwill
Other expense (income) - net
Operating income (loss)
Interest expense - net
$
$
$
2018
250,262
159,921
410,183
323,165
47,714
16,157
—
1,606
21,541
1,052
$
$
$
$
$
$
233,999
131,958
365,957
276,102
47,401
17,967
—
(10,940)
35,427
1,094
235,898
$
215,698
$
178,973
111,729
134,320
160,079
347,627 $
350,018 $
339,052
267,503 $
280,708 $
290,622
49,823
45,269
17,991
—
1,416
10,894
2,069
17,197
3,952
(1,297)
4,189
1,880
45,646
12,877
—
(434)
(9,659)
689
(10,348)
(3,483)
(6,865)
143
Income (loss) before income taxes
$
20,489
$
34,333
$
8,825 $
2,309 $
Provision for (benefit from) income taxes
Net income (loss)
Income attributable to noncontrolling interest
Income (loss) attributable to Heritage-Crystal
Clean, Inc. common stockholders
Net income (loss) per share available to
common stockholders: basic
Net income (loss) per share available to
common stockholders: diluted
$
$
$
5,451
15,038
310
5,923
28,410
287
2,811
6,014
172
899
1,410
160
14,728
$
28,123
$
5,842 $
1,250 $
(7,008)
0.64
0.63
$
$
1.24
1.23
$
$
0.26 $
0.06 $
(0.38)
0.26 $
0.06 $
(0.38)
Number of weighted average common shares
outstanding :
Basic 23,026
Diluted 23,334
22,662
22,922
22,258
22,516
22,146
22,408
18,604
18,604
2018
2017
Fiscal Year
2016
2015
2014
OTHER OPERATING DATA
(UNAUDITED):
Average revenues per working day -
Environmental Services (in thousands)
$
1,130
$
970
$
885
$
895
$
Number of branches at end of fiscal year 89
86
83
82
740
84
(thousands)
2018
2017
2016
2015
2014
At Fiscal Year End
BALANCE SHEET DATA:
Cash and cash equivalents
Total assets
Debt, net of unamortized issuance costs
Total stockholders' equity
$
$
43,579
347,822
29,046
254,231
$
$
41,889
314,657
28,744
235,926
$
$
36,610 $
314,307
63,454
198,269 $
23,608 $
301,848
69,478
189,833 $
21,555
319,819
77,045
187,414
32
ITEM 7. 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. 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. 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. We undertake no obligation to update any of the forward-looking statements.
Certain tabular information may not foot due to rounding. Our fiscal year ends on the Saturday closest to December 31.
"Fiscal 2018" represents the 52-week period ended December 29, 2018. "Fiscal 2017" represents the 52-week period ended
December 30, 2017. "Fiscal 2016" represents the 52-week period ended December 31, 2016.
Overview
We provide parts cleaning, containerized waste management, used oil collection, vacuum truck services, antifreeze
recycling, and field services, and we own and operate a used oil re-refinery where we re-refine used lubricating oils into high
quality lubricant base oil and other products. 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 industries, 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 89 branch facilities
providing services to customers in 45 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, containerized waste
management, vacuum truck, antifreeze recycling services, and field services. Revenues from this segment accounted for 66%
of our total company revenues for fiscal 2018. 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 primarily of our used oil collection and used oil re-refining activities, which accounted
for 34% of our fiscal 2018 total company revenues.
No single customer accounted for more than 10% of consolidated revenues in fiscal 2018, 2017, or 2016. There were no
intersegment revenues during fiscal 2018.
We have established prices for our services primarily based on the perceived value of those services in the marketplace.
Our customer agreements typically provide for annual renewal and price increases. With respect to our oil product sales, some
prices are set through contracts or purchase orders with customers, which may be based on the market prices of an underlying
commodity or market indicator.
Our operating costs include the costs of the materials we use in our products and services, such as used oil collected from
customers or purchased from third party collectors, solvent, and other chemicals. The used solvent that we retrieve from
customers in our product reuse program is accounted for as a reduction in our net cost of solvent under operating costs, whether
placed in inventory or sold to a purchaser for reuse. Changes in the price of crude oil can impact operating costs indirectly as it
may impact the price we pay for solvent or our cost to obtain used oil, although we attempt to offset volatility in the oil markets
by managing the spread between our costs to procure used oil and the prices we charge for our products and services. Operating
costs also include transportation of solvents and waste, payments to third parties to recycle or dispose of the waste materials
that we collect, and the costs of operating our re-refinery, recycling centers, hubs, and branch system including personnel costs
(including commissions), facility rent, truck leases, fuel, and maintenance. Our operating costs as a percentage of sales
generally increase in relation to the number of new branch openings. As new branches achieve route density and scale
efficiencies, our operating costs as a percentage of sales generally decrease.
We use profit before corporate selling, general, and administrative expenses ("SG&A") as a key measure of segment
profitability. We define profit before SG&A as revenue less operating costs and depreciation and amortization from operations.
33
Our selling, general, and administrative expenses include the costs of performing centralized business functions, including
sales management at or above the regional level, business management, billing, receivables management, accounting and
finance, information technology, environmental health and safety, and legal.
We operate a used oil re-refinery located in Indianapolis, Indiana, through which we re-refine used oil into high quality
lubricant base oil and other products. We supply the base oil to firms that produce and market finished lubricants. Our re-
refinery has an annual nameplate capacity of approximately 75 million gallons of used oil feedstock, allowing it to produce
approximately 47 million gallons of lubricating base oil per year when operating at full capacity.
Critical Accounting Policies
Critical accounting policies are those that 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 as of 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 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
In fiscal 2016, we tested goodwill for impairment. The Oil Business reporting unit had zero goodwill throughout fiscal
2016. The fair value of the Environmental Services reporting unit was substantially in excess of its carrying amount including
goodwill, and therefore no impairment was indicated.
In fiscal 2017, the Company performed a qualitative assessment to determine whether the two-step quantitative impairment
test was necessary. The Oil Business reporting unit had zero goodwill throughout fiscal 2017. Based on the qualitative
assessment, the Company concluded it is more likely than not that the fair value of the Environmental Services reporting unit is
greater than its carrying amount including goodwill, and therefore the two-step quantitative test was not necessary and no
impairment was indicated.
In fiscal 2018, the Company performed a qualitative assessment to determine whether the two-step quantitative impairment
test was necessary. The Oil Business reporting unit had zero goodwill throughout fiscal 2018. Based on the qualitative
assessment, the Company concluded it is more likely than not that the fair value of the Environmental Services reporting unit is
34
greater than its carrying amount including goodwill, and therefore the two-step quantitative test was not necessary and no
impairment was indicated.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Consistent with industry practices,
we require payment from most customers within 30 days of invoice date. The allowance for doubtful accounts is our best
estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on
analysis of customer creditworthiness, historical losses, and general economic trends and conditions. We perform periodic
credit evaluations of our customers and typically do not require collateral. We have an estimation procedure, based on historical
data and recent changes in the aging of these receivables that we use to record reserves throughout the year. In the last five
years, our provisions for doubtful accounts have averaged 0.2% of sales. We do not have any off-balance sheet credit exposure
related to our customers.
Inventory
Inventory consists primarily of used oil, processed oil, catalyst, new and used solvents, new and used antifreeze products,
new and refurbished parts cleaning machines, drums, and other items. Inventories are valued at the lower of first-in, first-out
("FIFO") cost and net realizable value, 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.
In evaluating inventory for impairment, the Company considers factors that may impact the valuation of inventory,
including declines in net realizable value. If circumstances indicate the cost basis of inventories exceed their net realizable
value, inventories are reduced to net realizable value. In fiscal 2018, we recorded no inventory impairment charges.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair
value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and would no longer be depreciated.
35
RESULTS OF OPERATIONS
General
Fiscal Year Ended December 29, 2018 versus Fiscal Year Ended December 30, 2017
The following table sets forth certain operating data as a percentage of revenues for the periods indicated:
(thousands)
Revenues
Service revenues
Product revenues
Total revenues
Operating expenses -
Operating costs
Selling, general, and administrative expenses
Depreciation and amortization
Other expense (income) - net
Operating income
Interest expense – net
Income before income taxes
Provision for income taxes
Net income
Income attributable to noncontrolling interest
Income attributable to Heritage-Crystal Clean,
Inc. common stockholders
$
$
$
For the Fiscal Years Ended,
December 29, 2018
December 30, 2017
250,262
159,921
410,183
61.0% $ 233,999
39.0%
131,958
63.9 %
36.1 %
100.0% $ 365,957
100.0 %
323,165
78.8% $ 276,102
47,714
16,157
1,606
21,541
1,052
11.6%
3.9%
0.4%
5.3%
0.3%
47,401
17,967
(10,940)
35,427
1,094
$
20,489
5.0% $
34,333
5,451
15,038
310
1.3%
3.7%
0.1%
5,923
28,410
287
75.4 %
13.0 %
4.9 %
(3.0)%
9.7 %
0.3 %
9.4 %
1.6 %
7.8 %
0.1 %
$
14,728
3.6% $
28,123
7.7 %
Revenues
In 2018, we generated $410.2 million of revenue compared to prior year revenue of $366.0 million, an increase of $44.2
million, or 12.1%, driven by strong growth in our Environmental Services segment. In fiscal 2018, Environmental Services
revenues increased $33.1 million, or 13.9%, compared to fiscal 2017. The increase in revenue from our Environmental Services
segment was driven by growth in all Environmental Services segment product and service lines of business primarily due to
growth in our field services, containerized waste, and antifreeze businesses. Revenue from our Oil Business increased $11.2
million, or 8.7%, compared to fiscal 2017. The increase in revenue was primarily due to stronger base oil pricing and higher
volumes of base oil gallons sold, due in part to strong base oil production at our re-refinery during the second and third quarters
of fiscal 2018, but partially offset by a planned, extended shut-down at our re-finery during the fourth quarter of fiscal 2018 and
unplanned downtime at our re-refinery during the first quarter of fiscal 2018. During fiscal 2018, the average spot market price
for the type of base oil product we produce increased approximately 14% compared to fiscal 2017.
Operating costs
Operating costs increased $47.1 million, or 17.0%, to $323.2 million in fiscal 2018 compared to $276.1 million in fiscal
2017. The increase in operating costs was primarily a result of significantly higher labor, transportation, and disposal costs,
along with higher re-refinery shutdown and maintenance costs compared to fiscal 2017. Higher labor costs is the result of
investment in new resources to support future revenue growth. Higher transportation costs in the Environmental Services
segment was driven mainly by continued expansion geographically, and the roll-out of some of our newer service offerings to
existing branches. We expect that in the future our operating costs in the Environmental Services business will continue to
increase as our service volume increases; however, a decrease in crude oil prices could partially offset this cost increase
because a decrease in price could cause a decline in the price we pay for parts cleaning solvent and diesel fuel. Whether or not
we have an increase in service volume, an increase in the price of crude oil could result in an increase in operating costs in the
Environmental Services segment since this will likely result in an increase in the price we pay for parts cleaning solvent and
diesel fuel. In the Oil Business segment, our operating costs could increase or decrease in the future depending on changes in
the price for crude oil which could directly impact our used oil collection costs and processing costs at our re-refinery.
36
Selling, general, and administrative expenses
Selling, general, and administrative expenses of $47.7 million in fiscal 2018 remained flat to fiscal 2017. Overall, selling,
general and administrative expenses as a percentage of revenues decreased to 11.6% in fiscal 2018 from 13.0% in fiscal 2017
primarily due to a higher revenue base along with lower severance, legal fees and bank fees, partially offset by higher share-
based compensation expenses.
Other (income) expense - net
Other expense of $1.6 million for fiscal 2018 primarily consists of $1.0 million of site closure costs. Other (income) of
$10.9 million for fiscal 2017 included a gain of $5.1 million received in the first quarter of fiscal 2017 as a result of having
received a partial award for a claim made in arbitration and a gain of $3.6 million received during the second quarter of fiscal
2017 from a settlement agreement, both of which were related to our acquisition of FCC Environmental, LLC and International
Petroleum Corp. of Delaware in 2014, partially offset by other net losses of $0.9 million. Additionally, during the third quarter
of 2017, the Company recorded a gain of $3.1 million from having sold the Company's facility located in Pompano Beach,
Florida.
Interest expense - net
Interest expense - net for fiscal 2018 and 2017 was $1.1 million. In fiscal 2018, the Company recorded interest expense
of $1.5 million, of which $1.2 million of interest expense is on our term loan, and $0.3 million is amortization of debt issuance
costs, partially offset by $0.5 million of interest income. In fiscal 2017 we recorded interest expense of $1.2 million, along with
$0.4 million for the amortization of debt issuance costs as a result of our Term Loan, partially offset by $0.4 million of interest
income we received as part of our award from the arbitration related to our acquisition of FCC Environmental and International
Petroleum Corp. of Delaware in 2014.
Provision for income taxes
The Company's effective tax rate for fiscal 2018 was 26.6% compared to 17.3% in fiscal 2017. The difference in the
effective tax rate is principally attributable to the impact on our deferred taxes as of December 30, 2017 of the reduction in the
U.S. federal corporate tax rate to 21%. The 21% statutory federal rate is increased by state taxes and non-deductible expenses
and it is partially reduced by the favorable impact of stock compensation windfall benefit.
Segment Information
The following table presents revenues by segment:
(thousands)
Revenues:
For the Fiscal Years Ended,
Increase
December 29, 2018
December 30, 2017
$
%
Environmental Services
Oil Business
Total
$
$
271,130
139,053
410,183
$
$
238,055
127,902
365,957
$
$
33,075
11,151
44,226
13.9%
8.7%
12.1%
In fiscal 2018, Environmental Services revenues increased $33.1 million, or 13.9%, compared to fiscal 2017. The increase
in revenue from our Environmental Services segment was driven by growth in all Environmental Services segment product and
service lines of business primarily due to growth in our field services, containerized waste, and antifreeze businesses.
In fiscal 2018, Oil Business revenues increased $11.2 million, or 8.7%, primarily due to stronger base oil pricing and
higher volumes of base oil gallons sold, due in part to strong base oil production at our re-refinery during the second and third
quarters of fiscal 2018, but partially offset by a planned, extended shut-down at our re-finery during the fourth quarter of fiscal
2018. During fiscal 2018, the average spot market price for the type of base oil product we produce increased approximately
14% compared to fiscal 2017. During fiscal 2018 and 2017, we sold approximately 42 million gallons of base oil.
37
Segment Profit before Corporate Selling, General and Administrative Expenses ("SG&A")
The following table presents profit by segment before corporate SG&A:
(thousands)
Profit before corporate SG&A*
Environmental Services
Oil Business
Total
For the Fiscal Years Ended,
Increase/(Decrease)
December 29, 2018
December 30, 2017
$
%
$
$
69,405
4,706
74,111
$
$
66,896
8,657
75,553
$
$
2,509
(3,951)
(1,442)
3.8 %
(45.6)%
(1.9)%
*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 13 in our consolidated financial statements and the notes thereto included
in Item 8.
In fiscal 2018, Environmental Services profit before SG&A increased $2.5 million, or 3.8%, due to higher revenue
outpacing higher labor, transportation, and disposal costs year over year. However, profit before corporate SG&A expense as a
percentage of revenues in the Environmental Services segment dropped to 25.6% in fiscal 2018 compared to 28.1% in fiscal
2017.
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. In both fiscal 2018 and
2017, the impact of reused solvent sales was immaterial.
In fiscal 2018, the Oil Business generated profit before corporate SG&A of $4.7 million compared to a profit before
corporate SG&A of $8.7 million during fiscal 2017. The decline in profitability of the Oil Business during fiscal 2018 was
primarily due to extended downtime at the re-refinery compared to 2017 which led to lower leveraging of fixed costs, higher
shut-down expenses and higher logistics costs. An increase in the cost of used oil feedstock compared to fiscal 2017 also
negatively impacted profitability in this segment.
38
Fiscal Year Ended December 30, 2017 versus Fiscal Year Ended December 31, 2016
The following table sets forth certain operating data as a percentage of revenues for the periods indicated:
(thousands)
Revenues
Service revenues
Product revenues
Total Revenues
Operating expenses -
Operating costs
Selling, general and administrative expenses
Depreciation and amortization
Other (income) expense - net
Operating income
Interest expense – net
Income before income taxes
Provision for income taxes
Net income
Income attributable to noncontrolling interest
Net income attributable to Heritage-Crystal
Clean, Inc. common stockholders
Revenues
$
$
$
$
For the Fiscal Years Ended,
December 30, 2017
December 31, 2016
233,999
131,958
63.9 % $
235,898
36.1 %
111,729
67.9%
32.1%
365,957
100.0 % $
347,627
100.0%
276,102
75.4 % $
267,503
47,401
13.0 %
17,967
(10,940)
35,427
1,094
34,333
5,923
28,410
287
4.9 %
(3.0)%
9.7 %
0.3 %
9.4 % $
1.6 %
7.8 %
0.1 %
49,823
17,991
1,416
10,894
2,069
8,825
2,811
6,014
172
$
28,123
7.7 % $
5,842
77.0%
14.3%
5.2%
0.4%
3.1%
0.6%
2.5%
0.8%
1.7%
—%
1.7%
In fiscal 2017, revenues increased $18.3 million, or 5.3%, to $366.0 million from $347.6 million in fiscal 2016. Revenues
in the Environmental Services segment increased primarily due to growth in our containerized waste, aqueous parts cleaning,
and antifreeze businesses, along with year over year increase in revenue from our Oil Business segment mainly due to higher
pricing for our base oil products, partially offset by lower used oil collection charges. During fiscal 2017, the average spot
market price for the type of base oil product we produce increased approximately 31% compared to fiscal 2016.
Operating costs
Operating costs increased $8.6 million, or 3.2%, in fiscal 2017 versus fiscal 2016. The increase in operating costs was
primarily a result of significantly higher labor and transportation costs, partially offset by lower disposal costs throughout fiscal
2017. Higher labor costs is the result of investment in new resources to support future revenue growth. Higher transportation
costs in the Environmental Services segment was driven mainly by continued expansion geographically, and the roll-out of
some of our newer service offerings to existing branches. We expect that in the future our operating costs in the Environmental
Services business will continue to increase as our service volume increases; however, a decrease in crude oil prices could
partially offset this cost increase because a decrease in price could cause a decline in the price we pay for parts cleaning solvent
and diesel fuel. Whether or not we have an increase in service volume, an increase in the price of crude oil could result in an
increase in operating costs in the Environmental Services segment since this will likely result in an increase in the price we pay
for parts cleaning solvent and diesel fuel. In the Oil Business segment, our operating costs could increase or decrease in the
future depending on changes in the price for crude oil which could directly impact our used oil collection costs and processing
costs at our re-refinery.
Selling, general, and administrative expenses
Selling, general, and administrative expenses decreased $2.4 million, or 4.9%, in fiscal 2017 versus fiscal 2016. Overall,
selling, general and administrative expenses as a percentage of revenues decreased to 13.0% in fiscal 2017 from 14.3% in fiscal
2016 primarily due to lower legal and bank fees and a higher revenue base, partially offset by higher personnel expenses.
39
Other (income) expense - net
Other (income) expense includes a gain of $5.1 million received in the first quarter of fiscal 2017 as a result of having
received a partial award for a claim made in arbitration and a gain of $3.6 million received during the second quarter of fiscal
2017 from a settlement agreement, both of which were related to our acquisition of FCC Environmental, LLC and International
Petroleum Corp. of Delaware in 2014, partially offset by other net losses of $0.9 million. Additionally, during the third quarter
of 2017, the Company recorded a gain of $3.1 million from having sold the Company's facility located in Pompano Beach,
Florida.
Interest expense - net
Interest expense - net for fiscal 2017 was $1.1 million, compared $2.1 million in fiscal 2016. The decrease in interest
expense was due mainly to lower weighted average debt in fiscal 2017 versus fiscal 2016. In fiscal 2017 we recorded interest
expense of $1.2 million, along with $0.4 million for the amortization of debt issuance costs as a result of our Term Loan,
partially offset by $0.4 million of interest income we received as part of our award from the arbitration related to our
acquisition of FCC Environmental and International Petroleum Corp. of Delaware in 2014.
Provision for income taxes
Our effective tax rate for fiscal 2017 was 17.3% compared to 31.9% in fiscal 2016. The difference in the effective tax rate
is principally attributable to the impact on our deferred taxes as of December 30, 2017 of the reduction in the U.S. federal
corporate tax rate to 21% beginning in fiscal 2018.
Segment Information
The following table presents revenues by segment:
(thousands)
Revenues:
Environmental Services
Oil Business
Total
For the Fiscal Years Ended,
Increase
December 30, 2017
December 31, 2016
$
%
$
$
238,055
127,902
365,957
$
$
224,378
123,249
347,627
$
$
13,677
4,653
18,330
6.1%
3.8%
5.3%
In fiscal 2017, Environmental Services revenues increased $13.7 million, or 6.1%, compared to fiscal 2016. The revenue
increase in this segment was primarily driven by growth in our containerized waste, aqueous parts cleaning, vacuum services,
and antifreeze businesses.
In fiscal 2017, Oil Business revenues increased $4.7 million, or 3.8%, mainly driven by a 31% increase in the spot market
price for the type of lube oil we sell compared to fiscal 2016, partially offset by a decrease in the prices we charged our
customers for used oil collection services. During fiscal 2017 and 2016, we sold approximately 42 million gallons of base oil.
Segment Profit before Corporate Selling, General and Administrative Expenses ("SG&A")
The following table presents profit by segment before corporate SG&A:
(thousands)
Profit before corporate SG&A*
Environmental Services
Oil Business
Total
For the Fiscal Years Ended,
Increase
December 30, 2017
December 31, 2016
$
%
$
$
66,896
8,657
75,553
$
$
65,001
822
65,823
$
$
1,895
7,835
9,730
2.9%
953.2%
14.8%
*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 13 in our consolidated financial statements and the notes thereto included
in Item 8.
40
In fiscal 2017, Environmental Services profit before SG&A increased $1.9 million, or 2.9%, due to higher revenue more
than offsetting higher labor and transportation expenses year over year. Revenues in the Environmental Services segment
increased primarily due to growth in our containerized waste, aqueous parts cleaning, vacuum services and antifreeze
businesses. However, operating margin in the Environmental Services segment dropped slightly to 28.1% in fiscal 2017
compared to 29.0% in fiscal 2016 due to higher labor costs as well as higher solvent and fuel costs associated with geographic
expansion.
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. In both fiscal 2017 and
2016, the impact of reused solvent sales was immaterial.
In fiscal 2017, the Oil Business generated profit before corporate SG&A of $8.7 million compared to a profit before
corporate SG&A of $0.8 million during fiscal 2016. The improvement in profitability of the Oil Business during fiscal 2017
was primarily due to the higher spread between our base oil selling price and our used oil collection charges, along with
increased operating efficiencies and the absence of any inventory write-downs in fiscal 2017 as compared to fiscal 2016.
41
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash and Cash Equivalents
As of December 29, 2018 and December 30, 2017, cash and cash equivalents were $43.6 million and $41.9 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 21, 2017, the Company entered into a new Credit Agreement ("Credit Agreement") replacing the prior Credit
Agreement ("Prior Credit Agreement") dated as of June 29, 2015. The Credit Agreement provides for borrowings of up to $95.0
million, subject to the satisfaction of certain terms and conditions, comprised of a term loan of $30.0 million and up to $65.0
million of borrowings under the revolving loan portion. The actual amount available under the revolving loan portion of the
Credit Agreement is limited by the Company's total leverage ratio. The amount available to draw at any point in time would be
further reduced by any standby letters of credit issued.
Loans made under the Credit Agreement may be Base Rate Loans or LIBOR Rate Loans, at the election of the Company
subject to certain exceptions. Base Rate Loans have an interest rate equal to (i) the higher of (a) the federal funds rate plus
0.5%, (b) the London Interbank Offering Rate (“LIBOR”) plus 1%, or (c) Bank of America's prime rate, plus (ii) a variable
margin of between 0.75% and 1.75% depending on the Company's total leverage ratio, calculated on a consolidated basis.
LIBOR rate loans have an interest rate equal to (i) the LIBOR rate plus (ii) a variable margin of between 1.75% and 2.75%
depending on the Company's total leverage ratio. Amounts borrowed under the Credit Agreement are secured by a security
interest in substantially all of the Company's tangible and intangible assets. In June 2017, the Company entered into a First
Amendment to the Credit Agreement which expanded the Company's ability to make dispositions without bank group approval.
As of the Effective date of the Credit Agreement February 21, 2017, the effective interest rate on the Term A loan was
3.28% and the effective rate on the revolving loan was 3.28%.
The Agreement contains customary terms and provisions (including representations, covenants, and conditions) for
transactions of this type. Certain covenants, among other things, restrict the Company's and its Subsidiaries' ability to incur
indebtedness, grant liens, make investments and sell assets. The Agreement contains customary events of default, covenants
and representations and warranties. Financial covenants include:
(cid:127) An interest coverage ratio (based on interest expense and EBITDA) of at least 3.5 to 1.0;
(cid:127) A total leverage ratio no greater than 3.0 to 1.0, provided that in the event of a permitted acquisition having an
aggregate consideration equal to $10.0 million or more, at the Borrower’s election, the foregoing 3.00 to 1.00 shall be
deemed to be 3.25 to 1.00 for the fiscal quarter in which such permitted acquisition occurs and the three immediately
following fiscal quarters and will thereafter revert to 3.00 to 1.00;
(cid:127) A capital expenditures covenant limiting capital expenditures to $100.0 million plus, if the capital expenditures
permitted have been fully utilized, an additional amount for the remaining term of the Agreement equal to 35% of
EBITDA for the thirteen “four-week” periods most recently ended immediately prior to the full utilization of such
$100.0 million basket
As of December 29, 2018 and December 30, 2017, the Company was in compliance with all covenants under the credit
facility then in effect. As of December 29, 2018, and December 30, 2017, the Company had $1.3 million and $0.9 million of
standby letters of credit issued, respectively, and $63.7 million and $64.1 million was available for borrowing under the bank
credit facility, respectively.
42
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
guarantee 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, especially given the current condition of the financial credit markets. 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.
Summary of Cash Flow Activity
(thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase in cash and cash equivalents
For the Fiscal Years Ended,
December 29,
2018
December 30,
2017
December 31,
2016
$
$
30,072
(27,536)
(846)
1,690
$
$
45,331
(10,008)
(30,044)
5,279
$
$
38,099
(18,901)
(6,196)
13,002
The most significant items affecting the comparison of our operating activities for fiscal 2018 and fiscal 2017 are
summarized below:
Net Cash Provided by Operating Activities —
(cid:127) Earnings — Our decrease in net income during fiscal 2018 negatively impacted our net cash provided by operating
activities by $13.4 million compared to fiscal 2017.
(cid:127) Accounts Receivable — The increase in accounts receivable had an unfavorable impact on cash provided by operating
activities of $7.6 million in fiscal 2018 compared to fiscal 2017 mainly due to higher sales year over year, along with a
one-time receipt of $4.3 million related to a settlement agreement with the sellers of FCC Environmental in the first
quarter of 2017.
(cid:127) Accounts Payable — The increase in accounts payable favorably affected cash flows from operating activities by
$10.9 million in fiscal 2018 compared to fiscal 2017. The increase in accounts payable was mainly driven by an
increase in higher transportation and disposal cost related charges during fiscal 2018.
(cid:127)
Inventory — In fiscal 2018, the increase in inventory unfavorably affected cash flows from operating activities by $8.1
million compared to fiscal 2017 driven mainly by higher carrying value of inventory.
Net Cash Used in Investing Activities —
Capital expenditures — We used $22.8 million and $14.4 million for capital expenditures during fiscal 2018 and fiscal
2017, respectively. During fiscal 2018 we spent $8.9 million for capital improvements to the re-refinery compared to
$5.7 million in fiscal 2017. Additionally, in fiscal 2018, we spent approximately $4.8 million for purchases of parts
cleaning machines compared to $4.7 million in fiscal 2017. The remaining $9.1 million of capital expenditures in
fiscal 2018 included $3.7 million for purchases of trucks, $2.1 million of IT related projects and $3.3 million on other
various items compared to approximately $4.0 million spent in fiscal 2017 for other items.
(cid:127) Business acquisitions, net of cash acquired — We used $4.8 million of cash outflows for the acquisitions of Products
Plus, Inc. and AO Holding-Kansas City, LLC, and Hot Tank Supply Company in fiscal 2018. See footnote 3 —
Business Combinations. We did not make any acquisitions during fiscal 2017.
43
The most significant items affecting the comparison of our operating activities for fiscal 2017 and fiscal 2016 are
summarized below:
Net Cash Provided by Operating Activities —
(cid:127) Earnings increase — Our increase in net income for fiscal 2017 favorably impacted our net cash provided by
operating activities by $22.4 million compared to fiscal 2016. Earnings were favorably impacted by higher spreads in
our Oil Business Segment and gains from an arbitration award and settlement with the sellers of FCC Environmental.
(cid:127) Accounts Payable — The decrease in accounts payable negatively affected cash flows from operations by $12.8
million in fiscal 2017 compared to fiscal 2016. The decrease in accounts payable in fiscal 2017 was mainly driven by
cash outlays to settle our legal fees payable.
(cid:127)
Inventory — The increase in inventory had a unfavorable impact on cash provided by operating activities of $7.7
million in fiscal 2017 compared to fiscal 2016 primarily due to higher carrying value of solvents and solutions, and
higher stock levels of machines.
(cid:127) Accounts Receivable — The decrease in accounts receivable had a favorable impact on cash provided by operating
activities of $7.9 million in fiscal 2017 compared to fiscal 2016 primarily due to collection of a $5.0 million receivable
related to a settlement agreement with the sellers of FCC Environmental.
Net Cash Used in Investing Activities —
(cid:127) Capital expenditures and software and intangible assets — We used $14.4 million and $15.9 million for capital
expenditures during fiscal 2017 and fiscal 2016, respectively. In fiscal 2017, we spent $5.7 million for capital
improvements to the re-refinery, compared to $8.0 million on capital improvements at the re-refinery in fiscal 2016.
Additionally, we spent approximately $4.7 million for purchases of parts cleaning machines in fiscal 2017 compared
to $4.3 million in fiscal 2016. The remaining $4.0 million spend in fiscal 2017 was for leasehold improvements and
other items compared to approximately $3.6 million spent in fiscal 2016.
(cid:127) Proceeds from the disposal of assets — During the third quarter of fiscal 2017, the Company received $4.1 million of
cash from having sold a facility located in Pompano Beach, Florida.
Net Cash Used in Financing Activities —
(cid:127) Proceeds from New Credit Agreement — We received $30.0 million of proceeds from our new Term Loan.
(cid:127) Repayment of our Old Credit Agreement — We paid $64.2 million to repay our prior Term Loan.
(cid:127) Proceeds from exercise of stock options — We received $5.5 million of proceeds from stock option exercises in fiscal
2017 compared to $0.2 million of proceeds in fiscal 2016 due to many options expiring in March of 2018.
Contractual Obligations
Our contractual commitments consist of operating leases and short-term purchasing commitments. We anticipate that we
will experience an increase in our lease commitments consistent with anticipated growth in operations, infrastructure, and
personnel and additional resources devoted to building our network of hubs and branches.
44
The following table summarizes our existing obligations as of December 29, 2018:
Payments Due by Fiscal Year
(In thousands)
Contractual Obligations
Operating lease obligations (1)
Future maturities of long term debt (2)
Interest on long term debt(3)
Purchase obligations (4)
Total (5)
Total
2019
2020
2021
2022
2023
Thereafter
$
71,832
$ 22,226
$ 16,095
$ 12,458
$
9,247
$
6,020
$
30,000
4,271
18,625
$ 124,728
—
1,352
18,625
$ 42,203
—
1,378
—
$ 17,473
—
1,352
—
$ 13,810
30,000
189
—
$ 39,436
—
—
—
6,020
$
$
5,786
—
—
—
5,786
(1) We lease railcars, office space, warehouse facilities, equipment and vehicles under noncancelable operating lease
agreements which expire at various dates through 2030.
(2) Excludes interest payments.
(3) Interest on long term debt is calculated at the contractual rate or, in the case of the Term A loan, at the effective rate as of
December 29, 2018.
(4) Our purchase obligations are open purchase orders as of December 29, 2018, and are primarily for capital expenditures,
used oil, catalyst, disposal, and solvent. They represent expected payments to third party service providers and other
commitments entered into during the normal course of our business. While our purchase obligations are generally
cancelable with or without notice without penalty, certain vendor agreements provide for cancellation fees or penalties
depending on the terms of the contract.
(5) Unrecognized tax benefits have not been included because no reasonable estimate can be made as to the likelihood, dollar
amount, or timing of potential future cash expenditures.
We offer a guarantee for our services. To date, costs relating to this guarantee have not been material.
Off-Balance Sheet Arrangements
As of the end of fiscal 2018, we had no off-balance sheet arrangements, other than operating leases reported above under
"Contractual obligations."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risks primarily through borrowings under our bank credit facility. Interest on these
borrowings is based upon variable interest rates. Our weighted average borrowings under our bank credit facility during fiscal
2018 were $30.0 million, and the annual effective interest rate for fiscal 2018 was 3.9%. We currently do not hedge against
interest rate risk. Based on the foregoing, a hypothetical 1.0% increase or decrease in interest rates would have resulted in a
$0.3 million change to our interest expense in fiscal 2018.
45
ITEM 8. FINANCIAL STATEMENTS AND OTHER SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Heritage-Crystal Clean, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Heritage-Crystal Clean, Inc. (a Delaware corporation) and
subsidiaries (the “Company”) as of December 29, 2018 and December 30, 2017, the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 29, 2018, and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 29, 2018 and December 30, 2017, and the results of
its operations and its cash flows for each of the three years in the period ended December 29, 2018, in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 29, 2018, based on criteria established in
the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”), and our report dated March 5, 2019 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2008.
Chicago, IL
March 5, 2019
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Heritage-Crystal Clean, Inc
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Heritage-Crystal Clean, Inc. (a Delaware corporation) and
subsidiaries (the “Company”) as of December 29, 2018, based on criteria established in the 2013 Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2018,
based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 29, 2018, and our
report dated March 5, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Chicago, IL
March 5, 2019
47
Heritage-Crystal Clean, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable - net
Inventory - net
Other current assets
Total current assets
Property, plant and equipment - net
Equipment at customers - net
Software and intangible assets - net
Goodwill
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Contract liabilities - net
Accrued salaries, wages, and benefits
Taxes payable
Other current liabilities
Total current liabilities
Term loan, less current maturities - net
Deferred income taxes
Total liabilities
Commitments and contingencies (Note 14)
STOCKHOLDERS' EQUITY:
Common stock - 26,000,000 shares authorized at $0.01 par value, 23,058,584
and 22,891,674 shares issued and outstanding at December 29, 2018 and
December 30, 2017, respectively
Additional paid-in capital
Retained earnings
Total Heritage-Crystal Clean, Inc. stockholders' equity
Noncontrolling interest
Total equity
Total liabilities and stockholders' equity
December 29,
2018
December 30,
2017
$
$
$
$
$
$
43,579
51,744
33,059
6,835
135,217
139,987
23,814
14,681
34,123
347,822
32,630
166
6,024
6,120
5,089
50,029
29,046
14,516
93,591
231
197,533
55,819
253,583
648
254,231
347,822
$
$
$
$
$
$
41,889
45,491
21,639
5,895
114,914
128,119
23,312
16,732
31,580
314,657
25,568
—
6,386
5,787
2,690
40,431
28,744
9,556
78,731
229
193,640
41,359
235,228
698
235,926
314,657
See accompanying notes to consolidated financial statements.
48
Heritage-Crystal Clean, Inc.
Consolidated Statements of Operations
(In Thousands, Except per Share Amounts)
Revenues
Service revenues
Product revenues
Total revenues
Operating expenses
Operating costs
Selling, general, and administrative expenses
Depreciation and amortization
Other expense (income) - net
Operating income
Interest expense – net
Income before income taxes
Provision for income taxes
Net income
Income attributable to noncontrolling interest
Income attributable to Heritage-Crystal Clean, Inc. common
stockholders
Net income per share: basic
Net income per share: diluted
Number of weighted average shares outstanding: basic
Number of weighted average shares outstanding: diluted
For the Fiscal Years Ended,
December 29,
2018
December 30,
2017
December 31,
2016
$
$
$
$
$
$
$
$
$
$
$
$
$
$
250,262
159,921
410,183
323,165
47,714
16,157
1,606
21,541
1,052
20,489
5,451
15,038
310
14,728
0.64
0.63
23,026
23,334
$
$
$
$
$
$
$
233,999
131,958
365,957
276,102
47,401
17,967
(10,940)
35,427
1,094
34,333
5,923
28,410
287
28,123
1.24
1.23
22,662
22,922
235,898
111,729
347,627
267,503
49,823
17,991
1,416
10,894
2,069
8,825
2,811
6,014
172
5,842
0.26
0.26
22,258
22,516
See accompanying notes to consolidated financial statements.
49
Heritage-Crystal Clean, Inc.
Consolidated Statement of Stockholders’ Equity
(In Thousands, Except Share Amounts)
Par
Value
Common
Additional
Paid–in
Capital
Retained
Earnings
Shares
Total
Heritage-
Crystal
Clean, Inc.
Stockholders'
Equity
Noncontrolling
Interest
Total
Equity
Balance, January 2, 2016
22,213,364
$
222
$ 182,558
$ 6,385
$
189,165
$
668
$ 189,833
Net income
Distribution
Issuance of common stock
– ESPP
Exercise of stock options
Share-based compensation
—
—
39,805
20,141
26,697
—
—
—
—
1
—
—
423
200
1,918
5,842
—
—
—
—
5,842
—
423
200
1,919
172
(120)
—
—
—
6,014
(120)
423
200
1,919
Balance, December 31, 2016 22,300,007
$
223
$ 185,099
$ 12,227
$
197,549
$
720
$ 198,269
Adjustment from adopting
ASC 718
Net income
Distribution
Issuance of common stock
– ESPP
Exercise of stock options
Share-based compensation
—
—
—
26,153
491,619
73,895
—
—
—
—
5
1
—
1,009
— 28,123
—
402
5,459
2,680
—
—
—
—
1,009
28,123
—
402
5,464
2,681
—
287
(309)
1,009
28,410
(309)
—
—
—
402
5,464
2,681
Balance, December 30, 2017 22,891,674
$
229
$ 193,640
$ 41,359
$
235,228
$
698
$ 235,926
Adjustment from adopting
ASC 606
Net income
Distribution
Issuance of common stock
– ESPP
Exercise of stock options
—
—
—
20,764
16,675
Share-based compensation
129,471
Share repurchases to satisfy
tax withholding obligations
—
Balance, December 29, 2018 23,058,584
$
—
—
—
—
—
2
—
(268)
— 14,728
—
422
122
4,379
—
—
—
—
—
$ 55,819
$
(268)
14,728
—
422
122
4,381
—
310
(360)
(268)
15,038
(360)
—
—
—
422
122
4,381
(1,030)
253,583
$
—
648
(1,030)
$ 254,231
—
231
(1,030)
$ 197,533
See accompanying notes to consolidated financial statements.
50
Heritage-Crystal Clean, Inc
Consolidated Statements of Cash Flow
(thousands)
Cash flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization
Net (gain) on disposition of assets
Non-cash inventory impairment
Bad debt provision
Share-based compensation
Deferred taxes
Other, net
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
(Increase) decrease in inventory
(Increase) decrease in prepaid and other current assets
Increase (decrease) in accounts payable
Increase (decrease) in accrued expenses
Cash provided by operating activities
Cash flows from Investing Activities:
Capital expenditures
Proceeds from the disposal of assets
Business acquisitions, net of cash acquired
Cash used in investing activities
Cash flows from Financing Activities:
Payments of Term Loan
Proceeds of Term Loan
Proceeds from the exercise of stock options
Proceeds under revolving credit facility
Payments of revolving credit facility
Payments of debt issuance costs
Proceeds from the issuance of common stock
Share repurchases to satisfy tax withholding obligations
Distributions to noncontrolling interest
Cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Income taxes paid
Cash paid for interest, net of capitalized interest of $ -, $ -, and $106,
respectively
Supplemental disclosure of non-cash information:
Payables for construction in progress
.
December 29,
2018
For the Fiscal Years Ended,
December 30,
2017
December 31,
2016
$
15,038
$
28,410
$
6,014
16,157
—
—
628
4,381
4,960
321
(5,923)
(11,158)
(940)
6,002
606
30,072
$
(22,820) $
89
(4,805)
(27,536) $
— $
—
122
—
—
—
422
(1,030)
(360)
(846) $
1,690
41,889
43,579
$
17,967
(2,680)
—
402
3,036
5,251
624
1,627
(3,081)
198
(4,912)
(1,511)
45,331
$
(14,400) $
4,392
—
(10,008) $
(64,195) $
30,000
5,464
4,000
(4,000)
(1,051)
402
(355)
(309)
(30,044) $
5,279
36,610
41,889
$
933
$
485
$
1,154
1,413
1,129
386
17,991
—
1,651
687
1,919
2,589
575
(6,276)
4,648
(1,283)
7,881
1,703
38,099
(15,875)
367
(3,393)
(18,901)
(6,699)
—
200
—
—
—
423
—
(120)
(6,196)
13,002
23,608
36,610
316
2,223
666
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
51
HERITAGE-CRYSTAL CLEAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2018
(1) ORGANIZATION AND NATURE OF OPERATIONS
Heritage-Crystal Clean, Inc., a Delaware corporation and its subsidiaries (collectively the “Company”), provide parts
cleaning, hazardous and non-hazardous containerized waste, used oil collection, vacuum, antifreeze recycling and field services
primarily to small and mid-sized industrial and vehicle maintenance customers. The Company owns and operates a used oil re-
refinery where it re-refines used oils and sells high quality base oil for lubricants as well as other re-refinery products. The
Company also has multiple locations where it dehydrates used oil. The oil processed at these locations is sold as recycled fuel
oil. The Company also operates multiple wastewater treatment plants and antifreeze recycling facilities at which it produces
virgin-quality antifreeze. The Company's locations are in the United States and Ontario, Canada. The Company conducts its
primary business operations through Heritage-Crystal Clean, LLC, its wholly owned subsidiary, and all intercompany balances
have been eliminated in consolidation.
The Company has two reportable segments: "Environmental Services" and "Oil Business." The Environmental Services
segment consists of the Company's parts cleaning, containerized waste management, vacuum truck services, antifreeze
recycling activities, and field services. The Oil Business segment consists of the Company's used oil collection, recycled fuel
oil sales, used oil re-refining activities, and used oil filter removal and disposal services. No customer represented greater than
10% of consolidated revenues for any of the periods presented. There were no intersegment revenues. The Environmental
Services segment operates in the United States and, to an immaterial degree, in Ontario, Canada. As such, the Company is not
disclosing operating results by geographic segment.
The Company’s fiscal year ends on the Saturday closest to December 31. "Fiscal 2018" represents the 52-week period
ended December 29, 2018. "Fiscal 2017" represents the 52-week period ended December 30, 2017, and "Fiscal 2016"
represents the 53-week period ended December 31, 2016. The most recent fiscal year ended on December 29, 2018. Each of the
Company's first three fiscal quarters consists of twelve weeks while the last fiscal quarter consists of sixteen or seventeen
weeks.
In the Company's Environmental Services segment, product revenues include sales of solvent, machines, absorbent,
accessories, and antifreeze; service revenues include servicing of parts cleaning machines, drum waste removal services,
vacuum truck services, field services, and other services. In the Company's Oil Business segment, product revenues primarily
include sales of re-refined base oil, re-refinery co-products and recycled fuel oil; service revenues include revenues from used
oil collection activities, collecting and disposing of waste water and removal and disposal of used oil filters. Due to the
Company's integrated business model, it is impracticable to separately present costs of tangible products and costs of services.
(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 net realizable value, valuation of goodwill and other intangible
assets, share-based compensation, and income taxes. Actual results could differ from those estimates.
Revenue Recognition
See description of our revenue accounting policy in footnote 4.
Sales Tax
Amounts billed for sales tax, value added tax, or other transactional taxes imposed on revenue producing transactions are
presented on a net basis and are not recognized as revenues.
52
Operating Costs
Within operating costs are cost of sales. Cost of sales in the Environmental Services segment includes the cost of the
materials the Company sells and provides in its services, such as solvents and other chemicals, transportation of inventory and
waste, and payments to third parties to recycle or dispose of the waste materials that the Company collects. Parts cleaning
machines are either sold to a customer or continue to be owned by the Company but placed offsite at a customer location to be
used in parts cleaning services. When sold to a customer, machines are removed from inventory, and the costs are recognized
under operating costs. The used solvent that the Company 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 (if any), transportation out to customers, and costs to operate the used oil re-
refinery, including utilities.
Operating costs also include the Company's costs of operating its branch system and hubs. These costs include personnel
costs, facility rent and utilities, truck leases, fuel, transportation, and maintenance. Operating costs are not presented separately
for products and services.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses include costs of performing centralized business functions, including sales
management at or above the regional level, billing, receivables management, accounting and finance, information technology,
environmental health and safety, and legal.
Cash and Cash Equivalents
The Company considers highly liquid investments, purchased with an original maturity of ninety days or less, to be cash
equivalents. Included in cash and cash equivalents are $0.2 million and $0.5 million of cash on deposit outside the United
States of America as of December 29, 2018 and December 30, 2017, respectively.
Concentration Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash
deposits. Accounts at each institution in the United States of America are insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to $250,000. The Company had cash deposits in excess of the FDIC insured limit of $43.4 million and $41.1
million at December 29, 2018 and December 30, 2017, respectively. The Company has not experienced any losses in such
accounts. The Company has a broad customer base and believes it is not exposed to any significant concentration of credit risk.
Accounts Receivable
Trade accounts receivable represent amounts due from customers. The allowance for doubtful accounts is the Company's
best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines
the allowance based on analysis of customer credit worthiness, historical losses, and general economic trends and conditions.
Accounts receivable are written off once the Company determines the account to be uncollectible. The Company does not have
any off-balance-sheet credit exposure related to its customers.
Inventory
Inventory consists primarily of used oil, processed oil, catalyst, new and used solvents, new and refurbished parts cleaning
machines, new and used antifreeze products, drums, and other items. Inventories are valued at the lower of first-in, first-out
("FIFO") cost or net realizable value, net of any reserves for excess, obsolete, or unsalable inventory. The Company performs a
physical inventory count on a periodic basis and uses the results of these counts to determine inventory quantities. These
quantities are used to help determine the value of the inventory.
Processed oil inventory consists of the costs of feedstock, transportation, labor, conversion costs, and re-refining
overhead costs incurred in bringing the inventory to its existing condition and location. Fixed production overhead costs are
capitalized in processed oil inventory based on the normal capacity of the production facility. In periods of abnormal
production levels, excess overhead costs are recognized as expense in the period they are incurred. The Company continually
monitors its inventory levels at each of its distribution locations and evaluates inventories for excess or slow-moving items.
53
If circumstances indicate the cost of inventories exceed their recoverable value, inventories are reduced to net realizable value.
In fiscal years 2018 and 2017 the Company did not incur inventory write-downs.
Prepaid and Other Current Assets
Prepaid and other current assets include, but are not limited to, insurance and vehicle license contract costs, which are
expensed over the term of the underlying contract.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Expenditures for major renewals and betterments are capitalized, while
expenditures for repair and maintenance charges are expensed as incurred. Property, plant, and equipment acquired in business
combinations is stated at fair value as of the date of the acquisition.
Depreciation of property, plant, and equipment is calculated using the straight-line method over the estimated useful lives
of the assets. The estimated useful lives of buildings and storage tanks range from 10 to 39 years. The estimated useful lives of
machinery, vehicles, and equipment range from 3 to 25 years. Leasehold improvements are amortized over the shorter of the
lease terms or five years using the straight-line method.
The Company capitalizes interest on borrowings during the active construction period of major capital projects.
Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets once the
assets are placed into service. The interest rate used to capitalize interest is based upon the borrowing rate on the Company's
bank debt outstanding. In fiscal years 2018 and 2017 the Company capitalized no interest for capital projects, but capitalized
interest of $0.1 million for capital projects in fiscal 2016.
Equipment at Customers
The Company records purchases of new parts cleaning and aqua filtration machines as inventory. Parts cleaning machines
are either sold to a customer or continue to be owned by the Company but placed off-site at a customer location to be used in
parts cleaning services. Aqua filtration machines are exclusively placed off-site at a customer location to be used to filter
customer fluids. When sold to a customer, machines are removed from inventory, and the appropriate revenues and costs are
recognized in the Income Statement. When the Company retains title to a machine that is placed off-site at a customer location
to be used in parts cleaning services, the Company capitalizes the machine as a productive non-current asset under the Balance
Sheet caption “Equipment at Customers” at the time the machine is placed at the customer’s site. Machines capitalized as
Equipment at Customers are depreciated over their estimated useful lives of 7 to 15 years, depending on the model.
Depreciation of in-service equipment commences when equipment is placed in service at a customer location. Expenditures for
machines that are sold to a customer are treated as a cash outflow from operating activities on the Statement of Cash Flows.
Expenditures for machines that are placed at a customer’s site to be used in parts cleaning services are treated as a cash outflow
from investing activities.
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 as of 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 that restructuring costs be expensed in periods subsequent to the acquisition date. In many cases, the Company engaged
third party valuation appraisal firms to assist the Company in determining the fair values and useful lives of the assets acquired
and liabilities assumed. The Company records a preliminary purchase price allocation for its acquisitions and finalizes purchase
price allocations at the earlier of one year after acquisition date, or 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
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 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
54
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.
There were no impairment charges in fiscal 2018 or fiscal 2017.
Software Costs
The Company expenses costs incurred in the research stage of developing or acquiring internal use software, such as
research and feasibility studies, as well as costs incurred in the post-implementation/operational stage, such as maintenance and
training. Capitalization of software costs occurs only after the research stage is complete and after the development stage
begins. The capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, ranging from
5 to 10 years.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair
value of the asset. There were no impairment charges in fiscal 2018 or in fiscal 2017. Assets to be disposed of would be
separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and
would no longer be depreciated.
Income Taxes
The Company accounts for income taxes to recognize the amount of taxes payable or refundable for the current year and
the amount of deferred tax assets and liabilities resulting from the future tax consequences of differences between the financial
statements and tax basis of the respective assets and liabilities. The Company estimates and reserves for any material uncertain
tax position that is unlikely to withstand an audit by the taxing authorities. These estimates are based on judgments made with
currently available information. The Company reviews these estimates and makes changes to recorded amounts of any
uncertain tax positions as facts and circumstances warrant. For additional information about income taxes, see Note 15.
Shipping Costs
For all periods presented, amounts billed to customers related to shipping and handling are classified as revenue, and the
Company's shipping and handling costs are included in operating costs.
Research and Development
Research and development costs are expensed as incurred within general, selling, and administrative expenses. Such costs
incurred during fiscal 2018, 2017, and 2016 were $0.4 million, $0.5 million, and $0.2 million, respectively.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $0.4 million, $0.5 million, and $0.5 million for fiscal
2018, 2017, and 2016, respectively.
Share-Based Compensation
When a future restricted grant is approved, the Company evaluates the probability that the award will be granted, based on
certain performance conditions. If satisfaction of the performance criteria is deemed probable, the Company accrues
compensation expense related to these awards prior to the grant date. The Company accrues compensation expense based on
the fair value of the performance awards at each reporting period when the performance criteria are deemed probable. Once the
performance awards have been granted, the Company values the awards at fair value on the date of grant and amortizes the
expense through the end of the vesting period, or requisite service period, on a straight-line basis. The requisite service period
55
is a function of the service condition defined for each award on a case by case basis. See Note 16 “Share-Based Compensation”
for more details.
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, and term debt. As of December 29, 2018 and December 30, 2017, the carrying values of cash and cash
equivalents, trade receivables, trade payables, and notes payable 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.
Insurance and Self-Insurance Policy
The Company purchases insurance providing financial protection from a range of risks; as of the end of fiscal 2018, the
Company's insurance policies provided coverage for general liability, vehicle liability, and pollution liability, among other
exposures. Each of these policies contains exclusions and limitations such that they would not cover all related exposures and
each of these policies have maximum coverage limits and deductibles such that even in the event of an insured claim, the
Company's net exposure could still have a material adverse effect on its financial results.
The Company is self-insured for certain healthcare benefits provided to its employees. The liability for the self-insured
benefits is limited by the purchase of stop-loss insurance. The stop-loss coverage provides payment for medical and
prescription claims exceeding $300,000 per covered person, as well as an aggregate, cumulative claims cap for any given year.
Accruals for losses are made based on the Company's claim experience and actuarial estimates based on historical data. Actual
losses may differ from accrued amounts. At December 29, 2018 and December 30, 2017, the Company's liability for its self-
insured benefits was $1.2 million and $1.3 million, respectively. Should actual losses exceed the amounts expected and the
recorded liabilities be insufficient, additional expense will be recorded. Expenses incurred for healthcare benefits in fiscal 2018,
2017, and 2016 were $13.3 million, $11.9 million, and $11.6 million, respectively.
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 an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. The Company's determination of fair value requires certain
assumptions and estimates, such as margin expectations, market conditions, growth expectations, expected changes in working
capital, etc., regarding expected future profitability and expected future cash flows. The Company tests goodwill for
impairment at each of its two reporting units, Environmental Services and Oil Business.
In fiscal 2016, we tested goodwill for impairment. The Oil Business reporting unit had zero goodwill throughout fiscal
2016. The fair value of the Environmental Services reporting unit was substantially in excess of its carrying amount including
goodwill, and therefore no impairment was indicated.
In fiscal 2017, the Company performed a qualitative assessment to determine whether the two-step quantitative impairment
test was necessary. The Oil Business reporting unit had zero goodwill throughout fiscal 2017. Based on the qualitative
assessment, the Company concluded it is more likely than not that the fair value of the Environmental Services reporting unit is
greater than its carrying amount including goodwill, and therefore the two-step quantitative test was not necessary and no
impairment was indicated.
56
In fiscal 2018, the Company performed a qualitative assessment to determine whether the two-step quantitative impairment
test was necessary. The Oil Business reporting unit had zero goodwill throughout fiscal 2018. Based on the qualitative
assessment, the Company concluded it is more likely than not that the fair value of the Environmental Services reporting unit is
greater than its carrying amount including goodwill, and therefore the two-step quantitative test was not necessary and no
impairment was indicated.
Recently Issued Accounting Pronouncements
Accounting standards not yet adopted
Standard
ASU 2016-02
Leases
(Topic 842)
Issuance
Date
February
2016
Our Effective
Date
December 30,
2018
Description
This update was issued to
increase transparency
and comparability among
organizations by
recognizing lease assets
and lease liabilities on
the balance sheet and
disclosing key
information about leasing
arrangements. For
lessees, the new standard
requires recognition on
the balance sheet of a
right-of-use asset and a
lease liability, initially
measured at the present
value of the lease
payments. For lessees in
operating leases, it
further requires
recognition in the
statement of income of a
single lease cost,
allocated over the lease
term on a generally
straight-line basis. Early
application of the
amendments in this
update is permitted for
all entities.
ASU 2016-13
Financial Instruments –
Credit Losses
(Topic 326)
December 29,
2019
June 2016 Topic 326 eliminates the
probable initial
recognition threshold
and, instead, requires the
measurement of all
expected credit losses for
financial assets held at
the reporting date based
on historical experience,
current conditions, and
reasonable and
supportable forecasts.
57
Effect on the Financial Statements
The Company is currently evaluating
the effect that implementation of this
update will have on its consolidated
financial position and results of
operations. The Company anticipates
that implementation of this standard will
result, upon adoption, in the recognition
of right-of-use assets and lease
liabilities of approximately $59 million
to $68 million, based on the rights and
obligations created by those contracts in
which the Company is a lessee, in leases
classified generally as operating leases,
with a lease term of more than twelve
months.
To date, certain personnel have attended
technical training concerning this new
lease accounting standard.The Company
has engaged a third party to assist in
implementing the standard and to
provide a software solution to aid in
accounting for leases. Contract reviews
have been performed and software
configuration is currently underway in
preparation for our adoption of the
requirements of Topic 842. The
Company will elect the package of
practical expedients permitted under the
transition guidance within the new
standard, which allows the Company to
carry forward whether contracts are or
contain a lease and the historical lease
classification; the Company will not
elect to use of hindsight in determining
the lease term. The Company will use a
transition method as of the beginning of
the period of adoption; comparative
prior periods will continue to be
presented in accordance with the
guidance in Topic 840.
The Company is currently evaluating
the impact of Topic 326 on our
consolidated financial position, results
of operations and disclosures. The
Company does not expect the adoption
of Topic 326 to have a significant
impact to our consolidated financial
statements.
Effective Date
Effect on the Financial
Statements
December 31, 2017 On December 31, 2017, we
adopted the new accounting
standard ASC 606, “Revenue
from Contracts with Customers”
using the modified retrospective
method. We recognized the
cumulative effect as an
adjustment to our opening
balance of retained earnings.
Recently issued accounting standards adopted
Standard
ASU 2014-09
“Revenue from
Contracts with
Customers (Topic
606),” ASU 2014-15
“Revenue from
Contracts with
Customers (Topic
606): Deferral of the
Effective Date,”
ASU 2016-08
“Revenue from
Contracts with
Customers (Topic
606): Principal
versus Agent
Considerations
(Reporting Revenue
Gross versus Net),”
ASU 2016-10 “
Revenue from
Contracts with
Customers (Topic
606): Identifying
Performance
Obligations and
Licensing,” and ASU
2016-12 “Revenue
from Contracts with
Customers (Topic
606): Narrow-Scope
Improvements and
Practical
Expedients”
Issuance Date
May 2014 and
subsequent
Description
These standards
outline a single
comprehensive model
for entities to use in
accounting for
revenue using a five-
step process that
supersedes virtually
all existing revenue
guidance. The
underlying principle
is that an entity
should recognize
revenue to depict the
transfer of promised
goods or services to
customers in an
amount that reflects
the consideration to
which the entity
expects to be entitled
in exchange for those
goods or services.
Entities have the
option of using either
a full retrospective
approach or a
modified
retrospective
approach to adopt the
guidance. Early
adoption is permitted.
58
March 2016
ASU 2016-09
Compensation -
Stock Compensation:
Improvements to
Employee Share-
Based Payment
Accounting.
(Topic 718)
January 1, 2017
This update addresses
the simplification of
accounting for
employee share-based
payment transactions
as it pertains to
income taxes, the
classification of
awards as equity or
liabilities, accounting
for forfeitures,
statutory tax
withholding
requirements, and
certain classifications
on the statement of
cash flows. Early
adoption is permitted.
ASU 2016-09 simplified the
treatment for employee share-
based compensation by allowing
an entity to recognize excess tax
benefits in the current period
whether or not current taxes
payable are reduced. Prior to
2017 the Company could not
recognize windfall tax benefits
associated with employee share-
based compensation because it
was in an NOL position and
current taxes payable would not
be reduced by the excess tax
benefits. As a result of ASU
2016-09 the Company recognized
excess tax benefits of $2.5
million from share-based
compensation from prior years,
resulting in cumulative-effect
increases to retained earnings and
deferred tax assets of
approximately $1.0 million. In
conjunction with the adoption of
ASU 2016-09, the Company
reclassified $131 thousand of
cash outflows for share
repurchases to satisfy tax
withholding obligations from
Cash flows from Operating
Activities to Cash flows from
Financing Activities compared to
the amounts previously reported
for the fiscal year ended January
2, 2016.
The adoption of ASU 2015-11 at
the start of fiscal 2017 resulted in
no impact to our consolidated
financial statements.
January 1, 2017
December 31, 2016 The adoption of ASU 2014-15 in
fiscal 2016 resulted in no impact
to our consolidated financial
statements.
July 2015
ASU 2015-11,
Simplifying the
Measurement of
Inventory. (Topic
330)
August 2014
ASU 2014-15
Presentation of
Financial Statements
- Disclosure of
Uncertainties about
an Entity’s Ability to
Continue as a Going
Concern.
(Subtopic 205-40)
This update requires
the measurement of
inventory at the lower
of cost or net
realizable value. Net
realizable value is the
estimated selling
price in the ordinary
course of business,
less reasonably
predictable costs of
completion, disposal
and transportation.
This update provides
guidance about
management’s
responsibility to
evaluate whether
there is substantial
doubt about an
entity’s ability to
continue as a going
concern and to
provide related
footnote disclosures.
Early adoption is
permitted.
59
Effective December 31, 2017, we adopted the requirements of Topic 606. The cumulative effects of the changes made to
our statement of income and balance sheet were as follows:
(thousands)
Statement of Income
Service revenues
Total revenues
Operating income
Income before income taxes
Provision for income taxes
Net income
Net income attributable to Heritage-Crystal Clean, Inc.
common stockholders
(thousands)
Balance Sheet
Contract liabilities - net
Total Current Liabilities
Deferred income taxes
Total Liabilities
Retained earnings
For the Fiscal Year Ended, December 29,
2018
Balances
Without
Adoption of
Topic 606
Effect of
Change
Higher/
(Lower)
As Reported
$
250,262
$
250,160
$
410,183
410,081
21,541
20,489
5,451
15,038
21,439
20,387
5,424
14,963
$
14,728
$
14,653
$
102
102
102
102
27
75
75
December 29, 2018
Balances
Without
Adoption of
Topic 606
As Reported
Effect of
Change
Higher/
(Lower)
$
166
$
— $
50,029
14,516
93,591
55,819
49,863
14,492
93,401
56,009
166
166
24
190
(190)
(190)
(190)
Total Heritage-Crystal Clean, Inc. Stockholders' Equity
253,583
253,773
Total Equity
$
254,231
$
254,421
$
60
(3) BUSINESS COMBINATIONS
On May 3, 2018, the Company purchased the assets of Products Plus, Inc. and AO Holding Company-Kansas City, LLC
(collectively "PPI") pursuant to an Asset Purchase Agreement. The Company purchased the assets of PPI to expand the
Company’s market share in the collection, recycling, and sales of a full line of antifreeze products. The purchase price was set
at $5.9 million subject to certain adjustments, including a working capital adjustment and a contingent consideration provision,
and is preliminarily allocated based on our estimates and assumptions of the approximate fair values of assets acquired on the
acquisition date. We are still in the process of completing our valuation, and accordingly our estimates and assumptions are
subject to change within the measurement period. The Company is continuing to examine facts and circumstances that existed
at the acquisition date and how those affect the estimated fair value of contingent consideration, working capital, and the
allocation of the estimated purchase price to other tangible and intangible assets. Contingent consideration to be paid
subsequent to December 29, 2018 is contingent upon several business performance metrics over the three year period starting
with the acquisition date and ending May 3, 2021. The range of the potential contingent consideration, which is to be paid out
subsequent to December 29, 2018, is between zero to $1.5 million. Goodwill recognized from the acquisition of PPI represents
the excess of the estimated purchase consideration transferred over the estimated fair value of the assets acquired. Factors
leading to goodwill being recognized are the Company's expectations of synergies from combining operations of PPI and the
Company as well as the value of intangible assets that are not separately recognized, such as assembled workforce. The results
of PPI are consolidated into the Company’s Environmental Services segment.
On June 11, 2018, the Company purchased the assets of Kurt Lanse d/b/a Hot Tank Supply Company ("HTSC") pursuant
to an Asset Purchase Agreement. The Company purchased the assets of HTSC to expand the Company’s market share in
California. The purchase price was set at $0.7 million subject to certain adjustments, including a working capital adjustment
and a deferred and contingent consideration provision, and is preliminarily allocated based on our estimates and assumptions of
the approximate fair values of assets acquired on the acquisition date. We are still in the process of completing our valuation,
and accordingly our estimates and assumptions are subject to change within the measurement period. The Company is
continuing to examine facts and circumstances that existed at the acquisition date and how those affect the estimated fair value
of contingent consideration, working capital, and the allocation of the estimated purchase price to other tangible and intangible
assets. The Company estimates that contingent consideration to be paid subsequent to December 29, 2018 will be
approximately $0.1 million. Goodwill recognized from the acquisition of HTSC represents the excess of the estimated purchase
consideration transferred over the estimated fair value of the assets acquired. Factors leading to goodwill being recognized are
the Company's expectations of synergies from combining operations of HTSC and the Company as well as the value of
intangible assets that are not separately recognized, such as assembled workforce. The results of HTSC are consolidated into
the Company’s Environmental Services segment.
The following table summarizes the estimated fair values of the assets acquired, net of cash acquired, related to each
acquisition:
(thousands)
Accounts receivable
Inventory
Property, plant, & equipment
Equipment at customers
Intangible assets
Goodwill
Total purchase price, net of cash acquired
Less: working Capital adjustment
Less: deferred consideration
Less: contingent consideration
Net cash paid
PPI
HTSC
$
$
$
$
909
259
1,969
—
528
2,172
5,837
(62)
—
1,450
$
4,449
$
40
3
47
104
100
377
671
(9)
225
100
355
Subsequent to the closing date, the Company has consolidated each acquisition into its financial statements. The Company
has included revenues of approximately $5.2 million and earnings of approximately $0.2 million in its fiscal 2018 financial
results from acquisitions in fiscal 2018.
Unaudited Pro Forma Financial Information
61
The pro forma financial information in the table below presents the combined results of the Company as if the PPI and
HTSC acquisitions that occurred in fiscal 2018 had occurred January 1, 2017. 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 periods presented.
(Thousands, except per share data)
Total revenues
Income attributable to HCCI Common Stockholders
Net income per share: basic
Net income per share: diluted
Fiscal Year Ended,
December 29,
2018
December 30,
2017
$
$
$
413,279
14,886
0.65
0.64
$
$
$
373,587
28,739
1.27
1.25
62
(4) REVENUE
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified,
payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is
recognized when our performance obligations under the terms of a contract with our customers are satisfied. Recognition
occurs when the Company transfers control by completing the specified services at the point in time the customer benefits from
the services performed or once our products are delivered. The Company measures progress toward complete satisfaction of a
performance obligation satisfied over time using a cost-based input method. This method of measuring progress provides a
faithful depiction of the transfer of goods or services because the costs incurred are expected to be substantially proportionate
to the Company’s satisfaction of the performance obligation. Revenue is measured as the amount of consideration we expect to
receive in exchange for completing our performance obligations. Sales tax and other taxes we collect with revenue-producing
activities are excluded from revenue. In the case of contracts with multiple performance obligations, the Company allocates the
transaction price to each performance obligation based on the relative stand-alone selling prices of the various goods and/or
services encompassed by the contract. We do not have any material significant payment terms as payment is generally due
within 30 days after the performance obligation has been satisfactorily completed. The Company has elected the practical
expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of
the asset that we otherwise would have recognized is one year or less. In applying the guidance in Topic 606, there were no
judgments or estimates made that the Company deems significant.
Accounts Receivable — Net, includes amounts billed and currently due from customers. The amounts due are stated at their
net estimated realizable value. The allowance for doubtful accounts is the Company's best estimate of the amount of probable
credit losses in the Company's existing accounts receivable. The Company determines the allowance based on analysis of
customer credit worthiness and historical losses. Accounts receivable are written off once the Company determines the account
to be uncollectible. The Company does not have any off-balance-sheet credit exposure related to its customers.
Contract Balances — Contract assets primarily relate to the Company’s rights to consideration for work completed in
relation to its services performed but not billed at the reporting date. Contract liabilities primarily consist of advance payments
of performance obligations yet to be fully satisfied in the period reported. Our contract liabilities and contract assets are
reported in a net position at the end of each reporting period.
We disaggregate our revenue from contracts with customers by major lines of business for each of our segments, as we
believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic
factors.
The following table disaggregates our revenue by major lines:
Total Net Sales by Major Lines of
Business (thousands)
Parts cleaning, containerized waste, &
related products/services
Vacuum Services & Wastewater
Treatment
Antifreeze Business
Field Services
Environmental Services - Other
Re-refinery Product Sales
Oil Collection Services & RFO
Oil Filter Business
Revenues from Contracts with
Customers
Other Revenue
Total Revenues
For the Fourth Quarter Ended,
December 29, 2018
For the Fiscal Year Ended,
December 29, 2018
Environmental
Services
Oil
Business
Total
Environmental
Services
Oil
Business
Total
$
56,732
$
— $ 56,732
$
178,607
$
— $178,607
17,062
7,027
4,539
543
—
—
—
85,903
—
85,903
—
—
—
—
33,218
6,351
1,504
17,062
7,027
4,539
543
33,218
6,351
1,504
53,934
19,021
17,692
1,877
—
—
—
—
— 112,472
21,405
—
4,838
—
53,934
19,021
17,692
1,877
112,472
21,405
4,838
41,073
83
$ 41,156
126,976
83
$ 127,059
$
271,131
—
271,131
138,715
337
$139,052
409,846
337
$410,183
$
63
The following table provides information about contract assets and contract liabilities from contracts with customers:
(thousands)
Contract assets
Contract liabilities
Contract liabilities - net
December 29, 2018
December 31, 2017
$
$
100
266
166
$
$
59
327
268
During the fiscal year ended December 29, 2018, the Company recognized $0.3 million of revenue that was included in the
contract liabilities balance as of December 31, 2017. The Company has no assets recognized from costs to obtain or fulfill a
contract with a customer. We do not disclose the value of unsatisfied performance obligations for contracts with an original
expected length of one year or less.
(5) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
(thousands)
Trade
Less: allowance for doubtful accounts
Trade - net
Related parties
Other
Total accounts receivable - net
December 29,
2018
December 30,
2017
$
$
51,118
1,816
49,302
1,595
847
51,744
$
$
43,301
1,881
41,420
1,906
2,165
45,491
The following table provides the changes in the Company’s allowance for doubtful accounts for the fiscal year ended
December 29, 2018 and the fiscal year ended December 30, 2017:
(thousands)
Balance at beginning of period
Provision for bad debts
Accounts written off, net of recoveries
Balance at end of period
December 29,
2018
December 30,
2017
$
$
1,881
628
(693)
1,816
$
$
2,176
402
(697)
1,881
64
(6) INVENTORY
Inventory consists primarily of used oil and processed oil, solvents and solutions, new and refurbished parts cleaning
machines, drums and supplies, and other items. Inventories are valued at the lower of FIFO cost or market, net of any reserves
for excess, obsolete, or unsalable inventory.
The carrying value of inventory consisted of the following:
(thousands)
Used oil and processed oil
Solvents and solutions
Machines
Drums and supplies
Other
Total inventory
Less: Machine refurbishing reserve
Total inventory - net
December 29,
2018
December 30,
2017
$
$
12,124
8,216
5,334
5,231
2,378
33,283
224
33,059
$
$
$
5,788
6,201
3,679
4,430
1,936
22,034
395
21,639
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. In fiscal 2018 and 2017, the Company recorded no inventory impairment charges.
The following table provides the changes in the Company's machine refurbishing reserve related to inventory for fiscal
years 2018 and 2017:
(thousands)
Balance at beginning of period
Net change in reserve
Balance at end of period
(7) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
(thousands)
Machinery, vehicles, and equipment
Buildings and storage tanks
Land
Leasehold improvements
Construction in progress
Assets held for sale
Total property, plant, and equipment
Less: accumulated depreciation
Property, plant, and equipment - net
(thousands)
Equipment at customers
Less: accumulated depreciation
Equipment at customers - net
December 29,
2018
December 30,
2017
$
$
395
(171)
224
$
$
214
181
395
December 29,
2018
December 30,
2017
$
$
98,708
69,791
9,546
5,701
15,405
4
199,155
59,168
139,987
$
$
85,427
69,009
9,562
5,427
9,378
53
178,856
50,737
128,119
December 29,
2018
December 30,
2017
$
$
73,075
49,261
23,814
$
$
68,234
44,922
23,312
Depreciation expense was $13.1 million, $14.7 million, and $14.7 million for fiscal 2018, 2017 and 2016, respectively.
65
(8) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is measured as a residual amount as of the acquisition date, which in most cases results in measuring goodwill as
an excess of the purchase consideration transferred plus the fair value of any noncontrolling interest in the acquiree over the
fair value of the net assets acquired, including any contingent consideration. The Company tests goodwill for impairment
annually in the fourth quarter and in interim periods if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. The Company's determination of fair value requires certain
assumptions and estimates, such as margin expectations, market conditions, growth expectations, expected changes in working
capital, etc., regarding expected future profitability and expected future cash flows. The Company tests goodwill for
impairment at each of its two reporting units, Environmental Services and Oil Business.
In fiscal 2016, we tested goodwill for impairment. The Oil Business reporting unit had zero goodwill throughout fiscal
2016. The fair value of the Environmental Services reporting unit was substantially in excess of its carrying amount including
goodwill, and therefore no impairment was indicated.
In fiscal 2017, the Company performed a qualitative assessment to determine whether the two-step quantitative impairment
test was necessary. The Oil Business reporting unit had zero goodwill throughout fiscal 2017. Based on the qualitative
assessment, the Company concluded it is more likely than not that the fair value of the Environmental Services reporting unit is
greater than its carrying amount including goodwill, and therefore the two-step quantitative test was not necessary and no
impairment was indicated.
In fiscal 2018, the Company performed a qualitative assessment to determine whether the two-step quantitative impairment
test was necessary. The Oil Business reporting unit had zero goodwill throughout fiscal 2018. Based on the qualitative
assessment, the Company concluded it is more likely than not that the fair value of the Environmental Services reporting unit is
greater than its carrying amount including goodwill, and therefore the two-step quantitative test was not necessary and no
impairment was indicated.
The following table shows changes to our goodwill balances by segment during the years ended December 30, 2017, and
December 29, 2018:
(thousands)
Goodwill at December 31, 2016
Gross carrying amount
Accumulated impairment loss
Net book value at December 31, 2016
Measurement period adjustments
Goodwill at December 30, 2017
Gross carrying amount
Accumulated impairment loss
Net book value at December 30, 2017
Acquisitions
Goodwill at December 29, 2018
Gross carrying amount
Accumulated impairment loss
Net book value at December 29, 2018
Oil Business
Environmental
Services
Total
3,952
(3,952)
— $
—
3,952
(3,952)
— $
—
3,952
(3,952)
31,483
—
31,483
$
97
31,580
—
31,580
$
2,543
34,123
—
— $
34,123
$
35,435
(3,952)
31,483
97
35,532
(3,952)
31,580
2,543
38,075
(3,952)
34,123
$
$
$
66
Following is a summary of software and other intangible assets:
(thousands)
Customer & supplier relationships
Patents, formulae, and licenses
Software
Non-compete agreements
Other
December 29, 2018
December 30, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
23,686
$
11,445
$
12,241
$
23,077
$
9,027
$
14,050
1,769
5,040
2,937
1,442
708
4,094
2,904
1,042
1,061
946
33
400
1,769
4,724
2,949
1,348
642
3,899
2,617
950
1,127
825
332
398
Total software and intangible assets
$
34,874
$
20,193
$
14,681
$
33,867
$
17,135
$
16,732
Amortization expense was $3.1 million, $3.3 million, and $3.3 million for fiscal 2018, 2017, and 2016, respectively. The
weighted average useful lives of customer and supplier relationships; patents, formulae, and licenses; software; non-compete
agreements, and other intangibles were 10 years, 15 years, 9 years, 5 years, and 8 years, respectively.
The expected amortization expense for fiscal years 2019, 2020, 2021, 2022 and 2023 is $2.8 million, $2.7 million, $2.5
million, $2.3 million, and $1.8 million, respectively. The preceding expected amortization expense is an estimate. Actual
amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, disposal of
intangible assets, accelerated amortization of intangible assets, adjustment to purchase price allocations for assets acquired, and
other events. No impairment of software or other intangible assets was recorded in fiscal 2018, 2017, or 2016.
(9) ACCOUNTS PAYABLE
Accounts payable consisted of the following:
(thousands)
Accounts payable
Accounts payable - related parties
Total accounts payable
December 29,
2018
December 30,
2017
$
$
32,471
159
32,630
$
$
25,540
28
25,568
67
(10) DEBT AND FINANCING ARRANGEMENTS
Bank Credit Facility
On February 21, 2017, the Company entered into a new Credit Agreement ("Credit Agreement") replacing the prior Credit
Agreement ("Prior Credit Agreement") dated as of June 29, 2015. The Credit Agreement provides for borrowings of up to $95.0
million, subject to the satisfaction of certain terms and conditions, comprised of a term loan of $30.0 million and up to $65.0
million of borrowings under the revolving loan portion. The actual amount of borrowings available under the revolving loan
portion of the Credit Agreement is limited by the Company's total leverage ratio. The amount available to draw at any point in
time would be further reduced by any standby letters of credit issued.
Loans made under the New Credit Agreement may be Base Rate Loans or LIBOR Rate Loans, at the election of the
Company subject to certain exceptions. Base Rate Loans have an interest rate equal to (i) the higher of (a) the federal funds rate
plus 0.5%, (b) the London Interbank Offering Rate (“LIBOR”) plus 1%, or (c) Bank of America's prime rate, plus (ii) a variable
margin of between 0.75% and 1.75% depending on the Company's total leverage ratio, calculated on a consolidated basis.
LIBOR rate loans have an interest rate equal to (i) the LIBOR rate plus (ii) a variable margin of between 1.75% and 2.75%
depending on the Company's total leverage ratio. Amounts borrowed under the New Credit Agreement are secured by a security
interest in substantially all of the Company's tangible and intangible assets. In June 2017, the Company entered into a First
Amendment to the Credit Agreement that expands the Company's ability to make dispositions without bank group approval.
As of the Effective date of February 21, 2017, the effective interest rate on the term loan was 3.28% and the effective rate
on the revolving loan was 3.28%.
The Credit Agreement contains customary terms and provisions (including representations, covenants, and conditions) for
transactions of this type. Certain covenants, among other things, restrict the Company's and its subsidiaries' ability to incur
indebtedness, grant liens, make investments and sell assets. The Credit Agreement also contains customary events of default,
covenants and representations and warranties. Financial covenants include:
(cid:127) An interest coverage ratio (based on interest expense and EBITDA) of at least 3.5 to 1.0;
(cid:127) A total leverage ratio no greater than 3.0 to 1.0, provided that in the event of a permitted acquisition having an
aggregate consideration equal to $10.0 million or more, at the Borrower’s election, the foregoing 3.00 to 1.00 shall be
deemed to be 3.25 to 1.00 for the fiscal quarter in which such permitted acquisition occurs and the three immediately
following fiscal quarters and will thereafter revert to 3.00 to 1.00; and
(cid:127) A capital expenditures covenant limiting capital expenditures to $100.0 million plus, if the capital expenditures
permitted have been fully utilized, an additional amount for the remaining term of the Credit Agreement equal to 35%
of EBITDA for the thirteen “four-week” periods most recently ended immediately prior to the full utilization of such
$100.0 million basket
The Credit Agreement places certain limitations on acquisitions and the payment of dividends.
During fiscal 2017, the Company paid and capitalized $1.1 million of debt issuance costs pertaining to the New Credit
Agreement and charged $0.2 million of unamortized debt issuance costs pertaining to the Prior Credit Agreement to selling,
general, and administrative expenses.
Debt at December 29, 2018 and December 30, 2017 consisted of the following:
(thousands)
Principal amount
Less: unamortized debt issuance costs
Debt less unamortized debt issuance costs
December 29, 2018 December 30, 2017
$
$
30,000
954
29,046
$
$
30,000
1,256
28,744
In fiscal 2018, the Company recorded interest expense of $1.5 million, of which $1.2 million of interest expense is on our
term loan, and $0.3 million is amortization of debt issuance costs. In fiscal 2017, the Company recorded interest expense
of $1.6 million, of which $1.2 million of interest expense is on our term loan, and $0.4 million is amortization of debt issuance
costs. No interest was capitalized in fiscal years 2018 and 2017.
68
As of December 29, 2018 and December 30, 2017, the Company was in compliance with all covenants under the credit
facility then in effect. As of December 29, 2018, and December 30, 2017, the Company had $1.3 million and $0.9 million of
standby letters of credit issued, respectively, and $63.7 million and $64.1 million was available for borrowing under the bank
credit facility, respectively.
The Company's weighted average interest rate as December 29, 2018, December 30, 2017, and December 31, 2016 was
3.9%, 3.5%, and 3.3%, respectively. The Company's effective interest rate as of December 29, 2018, December 30, 2017, and
December 31, 2016 was 3.9%, 3.5%, and 3.3%, respectively.
Future Maturities
The aggregate contractual annual maturities for debt as of December 29, 2018 are as follows:
(thousands)
Fiscal Year:
Term Loan
2019
2020
2021
2022
2023
$
—
—
—
30,000
—
Aggregate Maturities
$
30,000
(11) EMPLOYEE BENEFIT PLAN
Heritage-Crystal Clean offers a defined contribution benefit plan for its employees who are immediately eligible to
participate in the plan. Participants are allowed to contribute 1% to 70% of their pre-tax earnings to the plan. The Company
matches 100% of the first 3% contributed by the participant and 50% of the next 2% contributed by the participant for a
maximum contribution of 4% per participant. The Company's matching contribution under this plan was $2.0 million, $1.8
million, and $1.7 million in fiscal 2018, 2017, and 2016, respectively.
(12) RELATED PARTY AND AFFILIATE TRANSACTIONS
As of December 29, 2018, the Heritage Group beneficially owned 31.5% of the Company's common stock. The Fehsenfeld
Family Trusts, which are related to the Heritage Group owned 6.4% of the Company's common stock, and Fred Fehsenfeld, Jr.,
the Chairman of the Board and an affiliate of the Heritage Group, beneficially owned 4.3% of the Company's common stock.
Companies affiliated with the Heritage Group are listed as affiliates.
During fiscal 2018, 2017, and 2016, the Company had transactions with the Heritage Group affiliates and other related
parties. The following table sets forth related-party transactions:
(thousands)
Heritage Group affiliates
Other related parties / affiliates
Total
Fiscal 2017
Revenues Expenses
Fiscal 2018
Revenues Expenses
$
$
8,168
6,497
14,665
$
$
2,202 $
827
3,029 $
4,740
4,516
9,256
$
$
Fiscal 2016
Revenues Expenses
6,150
3,381
9,531
4,031
4,383
8,414
$
$
2,965 $
50
3,015 $
Revenues from related parties and affiliates are for sales of products and services performed by the Company.
Payments to related parties and affiliates include solvent purchases, insurance premiums, disposal services, transportation,
and various other services.
The Company participated in a self-insurance program for workers' compensation with a shareholder and several related
companies. In connection with this program, payments were made to the shareholder. Expenses paid to the shareholder in fiscal
2018, 2017, and 2016 were approximately $0.5 million, $0.9 million, and $2.2 million, respectively. Our participation in this
self-insurance program ended on January 31, 2019.
69
(13) SEGMENT INFORMATION
The Company has two reportable segments: "Environmental Services" and "Oil Business." The Environmental Services
segment consists of the Company's parts cleaning, containerized waste management, vacuum truck services, antifreeze
recycling activities, and field services. The Oil Business segment consists of the Company's used oil collection, recycled fuel
oil sales, used oil re-refining activities, and used oil filter removal and disposal services. No customer represented greater than
10% of consolidated revenues for any of the periods presented. There were no intersegment revenues. The Environmental
Services segment operates in the United States and, to an immaterial degree, in Ontario, Canada. As such, the Company is not
disclosing operating results by geographic segment.
Segment results for the fiscal years ended December 29, 2018, December 30, 2017, and December 31, 2016 were as
follows:
(thousands)
Revenues
Service revenues
Product revenues
Total revenues
Operating expenses
Operating costs
Operating depreciation and amortization
Profit before corporate selling, general, and
administrative expenses
Selling, general, and administrative expenses
Depreciation and amortization from SG&A
Total selling, general, and administrative
expenses
Other expense - net
Operating income
Interest expense - net
Income before income taxes
For the Fiscal Years Ended,
December 29, 2018
Environmental
Services
Oil Business
Corporate and
Eliminations
Consolidated
$
$
$
$
$
237,806
33,324
271,130
194,959
6,766
$
$
12,456
126,597
139,053
128,206
6,141
— $
—
— $
—
—
69,405
$
4,706
$
— $
47,714
3,250
$
50,964
$
1,606
1,052
$
250,262
159,921
410,183
323,165
12,907
74,111
47,714
3,250
50,964
1,606
21,541
1,052
20,489
70
(thousands)
Revenues
Service revenues
Product revenues
Total revenues
Operating expenses
Operating costs
Operating depreciation and amortization
Profit before corporate selling, general, and
administrative expenses
Selling, general, and administrative expenses
Depreciation and amortization from SG&A
Total selling, general, and administrative
expenses
Other (income) - net
Operating income
Interest expense - net
Income before income taxes
(thousands)
Revenues
Service revenues
Project revenues
Total revenues
Operating expenses
Operating costs
Operating depreciation and amortization
Profit before corporate selling, general, and
administrative expenses
Selling, general, and administrative expenses
Depreciation and amortization from SG&A
Total selling, general, and administrative
expenses
Other expense - net
Operating income
Interest expense - net
Income before income taxes
December 30, 2017
Environmental
Services
Oil Business
Corporate and
Eliminations
Consolidated
$
$
$
$
$
212,883
25,172
238,055
163,633
7,526
$
$
21,116
106,786
127,902
112,469
6,776
— $
—
— $
—
—
66,896
$
8,657
$
— $
$
47,401
3,665
51,066
(10,940)
1,094
$
$
233,999
131,958
365,957
276,102
14,302
75,553
47,401
3,665
51,066
(10,940)
35,427
1,094
34,333
December 31, 2016
Environmental
Services
Oil Business
Corporate and
Eliminations
Consolidated
$
$
$
$
$
202,496
21,882
224,378
151,860
7,517
$
$
33,402
89,847
123,249
115,643
6,784
— $
—
— $
—
—
65,001
$
822
$
— $
49,823
3,690
$
53,513
$
1,416
2,069
$
235,898
111,729
347,627
267,503
14,301
65,823
49,823
3,690
53,513
1,416
10,894
2,069
8,825
71
Total assets by segment as of December 29, 2018 and December 30, 2017 were as follows:
(thousands)
Total Assets:
Environmental Services
Oil Business
Unallocated Corporate Assets
Total
December 29,
2018
December 30,
2017
$
$
148,192
$
142,691
56,939
347,822
$
131,457
129,936
53,264
314,657
Segment assets for the Environmental Services and Oil Business segments consist of property, plant, and equipment,
intangible assets, goodwill, accounts receivable, and inventories allocated to each segment. Assets for the corporate unallocated
amounts consist of cash, prepaids, and property, plant, and equipment used at the corporate headquarters.
Capital expenditures by segment for fiscal 2018, 2017, and 2016 were as follows:
(thousands)
Total Capital Expenditures:
Environmental Services
Oil Business
Unallocated Corporate Assets
Total
December 29,
2018
For the Fiscal Years Ended,
December 30,
2017
December 31,
2016
$
$
12,756
$
6,843
$
9,858
206
6,998
559
5,643
9,548
684
22,820
$
14,400
$
15,875
72
(14) 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 had purchase obligations in the form of open purchase orders of $18.6 million as of December 29, 2018, and
$15.6 million as of December 30, 2017, primarily for capital expenditures, used oil, catalyst, disposal, and solvent.
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 December 29, 2018 and December 30, 2017, the Company had accrued $4.2 million and $4.5 million related to loss
contingencies, respectively.
The Company leases office space, equipment and vehicles under noncancelable operating leases that expire at various
dates through 2030. Many of the building leases obligate the Company to pay real estate taxes, insurance, and certain
maintenance costs and contain multiple renewal provisions, exercisable at the Company's option. Leases that contain
predetermined fixed escalations of the minimum rentals are recognized in rental expense on a straight-line basis over the lease
term. Rental expense under operating leases was approximately $30.3 million, $27.2 million, and $26.2 million for fiscal years
2018, 2017, and 2016, respectively.
Future minimum lease payments under noncancelable operating leases as of December 29, 2018 are as follows:
(thousands)
Fiscal year:
2019
2020
2021
2022
2023
Thereafter
Total
$
$
22,226
16,095
12,458
9,247
6,020
5,786
71,832
73
(15) INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law and introduced significant changes to U.S. tax law.
In addition to the federal income tax rate reduction from 35% to 21% effective for tax years beginning after December 31,
2017, the new legislation set forth a variety of other changes, including a limitation on the tax deductibility of interest expense,
the acceleration of business asset expensing, a limitation on the use of net operating losses generated in future years, the repeal
of the alternative minimum tax ("AMT"), created new taxes on certain foreign-sourced earnings (GILTI - Global Intangible
Low Taxed Income ), and a reduction in the amount of executive pay that could qualify as a tax deduction. For the year-ended
December 29, 2018, the Company will be impacted by the repeal of AMT, acceleration of business asset expensing and
limitation of executive compensation. The Company may or may not be impacted by the other aforementioned changes to the
tax law in the future.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118) which addresses income tax
accounting implications of the Tax Act. The purpose of SAB 118 was to address any uncertainty or diversity of view in
applying ASC 740 Income Taxes in the reporting period in which the Tax Act was enacted. SAB 118 allows for a measurement
period to finalize the impacts of the Tax Act, not to extend beyond one year from the date of enactment.
Due to the timing and the complexity involved in applying the provisions of the Act in the prior year, the Company did not
record provisional amounts in our financial statements as of December 30, 2017 related to the one time deemed repatriation of
foreign earnings. The Internal Revenue Service issued guidance in 2018 with respect to the one time deemed repatriation of
foreign earnings and the Company determined there was no income inclusion related to its controlled foreign corporation under
IRC 965 for the year ended December 30, 2017.
The Company deducted for federal income tax purposes accelerated "bonus" depreciation on the majority of its capital
expenditures for assets placed in service in fiscal 2011 through fiscal 2018. Therefore, the Company recorded a noncurrent
deferred tax liability as to the difference between the book basis and the tax basis of those assets. In addition, as a result of the
federal bonus depreciation, the Company recorded a Net Operating Loss ("NOL"). The balance on the federal NOL as of
December 29, 2018 was $20.9 million. There are also state NOLs of varying amounts, dependent on each state’s conformity
with bonus depreciation. The remaining deferred tax asset related to the Company's state and federal NOL was a tax effected
balance of $5.0 million. The Company has not set up a valuation allowance on the NOL balance as we believe more likely than
not that this will be realized.
The Company's effective tax rate for fiscal 2018 was 26.6% compared to 17.3% in fiscal 2017. The difference in the
effective tax rate is principally attributable to the impact on our deferred taxes as of December 30, 2017 of the reduction in the
U.S. federal corporate tax rate to 21%. The 21% statutory federal rate is increased by state taxes and non-deductible expenses
and it is partially reduced by the favorable impact of stock compensation windfall benefit.
Components of the Company's income tax benefit and provision consist of the following for fiscal years 2018, 2017, and
2016:
(thousands)
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Income tax provision
December 29,
2018
For the Fiscal Years Ended,
December 30,
2017
December 31,
2016
$
$
$
$
$
(306) $
797
—
491
$
$
409
263
—
672
$
4,093
$
4,501
$
778
89
4,960
5,451
$
$
829
(79)
5,251
5,923
$
$
19
203
—
222
1,943
643
3
2,589
2,811
A reconciliation of the expected income tax expense at the statutory federal rate to the Company's actual
income tax expense is as follows:
74
(thousands)
Tax expense at statutory federal rate
State and local tax, net of federal expense
Shortfalls from share-based compensation
Transaction and transaction-related costs
Impact of Federal Rate Change
Valuation allowance
Other
Total income tax provision
For the Fiscal Years Ended,
December 30,
2017
December 31,
2016
December 29,
2018
$
4,303 $
11,673 $
3,004
1,245
(331)
—
—
192
42
720
(412)
—
(6,156)
(126)
224
561
23
(808)
—
—
31
$
5,451 $
5,923 $
2,811
Components of deferred tax assets (liabilities) are as follows:
(thousands)
Deferred tax assets:
Net operating loss carryforward
Stock compensation
Tax intangible assets
Reserves and accruals
Income tax credits
Allowance for doubtful accounts
Total deferred tax asset
Less: valuation allowance
Net deferred tax asset
Deferred tax liabilities:
Prepaids
Depreciation and amortization
Total deferred tax liability
Net deferred tax liability
As of,
December 29,
2018
December 30,
2017
$
4,966
$
1,640
1,444
5,776
1,345
525
5,869
1,097
1,515
4,452
1,545
527
$
15,696 $
15,005
193
15,503
$
(645) $
(29,374)
(30,019)
1
15,004
(544)
(24,016)
(24,560)
$
(14,516) $
(9,556)
As of December 29, 2018, the Company is no longer subject to U.S. federal examinations by taxing authorities for years
prior to 2015. Federal and state income tax returns for fiscal years 2015 through 2018 are still open for examination.
As of December 29, 2018, the Company believes it is more likely than not that a benefit from foreign net operating loss
carryforwards will not be realized. As of December 29, 2018, the Company has provided a valuation allowance against those
foreign net operating loss carryforwards of $0.2 million.
The Company establishes reserves when it is more likely than not that the Company will not realize the full tax benefit of a
position. The Company had a reserve of $2.5 million for uncertain tax positions as of both December 29, 2018 and December
30, 2017. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.
Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve
months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition
and measurement considerations related to the results of published tax cases or other similar activities, we do not anticipate any
significant changes to unrecognized tax benefits over the next 12 months.
The Company recognizes interest and penalties associated with income tax liabilities as income tax expense in the
Statement of Operations. No significant penalties or interest are included in income taxes or accounted for on the balance sheet
related to unrecognized tax positions as of December 29, 2018.
The following table summarizes the movement in unrecognized tax benefits:
75
(thousands)
Gross Unrecognized Tax Benefits:
Beginning Balance
Additions based on current year's tax positions
Net changes based on prior year's tax positions
Ending Balance
For the Fiscal Years Ended,
December 29,
2018
December 30,
2017
$
$
2,509
$
2,443
36
(1)
2,544
10
56
$
2,509
76
(16) SHARE-BASED COMPENSATION
The aggregate number of shares of common stock which may be issued under the Company’s 2008 Omnibus Plan ("Plan")
is 2,602,077 plus any common stock that becomes available for issuance pursuant to the reusage provision of the Plan. As of
December 29, 2018, the number of shares available for issuance under the Plan was 178,842 shares.
Stock Option Awards
A summary of stock option activity under this Plan is as follows:
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 31, 2016
514,287
$
Exercised
Options outstanding at December 30, 2017
Exercised
Options outstanding at December 29, 2018
(494,852) $
19,435
$
(16,675) $
2,760
$
11.00
11.15
7.33
7.33
7.33
1.33
$
2,414
1.23
$
0.24
$
280
41
The remaining 2,760 options will expire in March of 2019.
Restricted Stock Compensation/Awards
Annually, the Company grants restricted shares to its Board of Directors. The shares become fully vested one year from
their grant date. The fair value of each restricted stock grant is based on the closing price of the Company's common stock on
the date of grant. The Company amortizes the expense over the service period, which is the fiscal year in which the award is
granted. In addition, the Company may grant restricted shares to certain members of management based on their services and
contingent upon continued service with the Company. The restricted shares vest over a period of approximately three years
from the grant date. The fair value of each restricted stock grant is based on the closing price of the Company's common stock
on the date of grant.
Pursuant to the Heritage-Crystal Clean, Inc. Omnibus Incentive Plan of 2008, on April 13, 2018, the Company granted
350,000 shares of restricted stock to certain members of Management as part of a Special Incentive Program. The number of
shares granted may be increased up to 612,500 shares depending on the Company’s level of performance with regard to certain
market conditions. Up to 612,500 shares will vest on April 13, 2022, depending on the satisfaction of certain service and
market conditions.
The following table shows a summary of restricted shares grants and expense resulting from the awards:
(thousands, except share amounts)
Recipient of Grant
Grant Date
Members of Management
January, 2016
Board of Directors
May, 2016
Members of Management
February, 2017
Chief Executive Officer
February, 2017
Board of Directors
April 2017
Members of Management
February, 2018
Members of Management
April, 2018
Board of Directors
May, 2018
Compensation
Expense
For the fiscal years
ended,
Unrecognized Expense as of,
Restricted
Shares
2018
2017
2016
December 29,
2018
December 30,
2017
$111
$
— $
$97
—
439
$86
—
360
285
875
1,194
1,112 —
—
549
241
—
1,436 —
285
—
—
—
—
—
43,208
28,674
146,564
500,000
14,980
116,958
350,000
13,800
77
—
385
1,230
—
1,176
6,633
—
101
—
841
2,423
—
—
—
—
During fiscal 2018, the Company also incurred $0.4 million of share-based compensation expense for potential expected
future restricted share grants.
In February 2017, as part of Mr. Recatto's employment agreement, the Company granted a restricted stock award of
500,000 shares of common stock, which vests through January 2021 in an amount based on the vesting table below, with the
common stock price increase to be determined based on the increase in the price of the Company’s common stock (if any) from
the closing price of the common stock as reported by Nasdaq on the employment commencement date ($15.00) and the
common stock price on the potential vesting date (determined by using the weighted average closing price of a share of the
Company's common stock for the 90-day period ending on the vesting date). If the stock price does not increase by $5.00, then
no shares shall vest. In fiscal 2018, the Company recorded approximately $1.2 million of compensation expense related to this
award. In the future, the Company expects to recognize compensation expense of approximately $1.2 million over the
remaining requisite service period, which ends January 31, 2021. The fair value of this restricted stock award as of the grant
date was estimated using a Monte Carlo simulation model. Key assumptions used in the Monte Carlo simulation to estimate the
grant date fair value of this award are a risk-free rate of 1.70%, expected dividend yield of zero, and an expected volatility
assumption of 41.73%.
Increase in Stock Price From the Employment
Commencement Date to the Vesting Date
Total percentage of Restricted Stock
Shares to Be Vested
Vesting Table
Less than $5 per share increase
$5 per share increase
$10 per share increase
$15 per share increase
$20 or more per share increase
Provision for possible accelerated vesting of award
—%
25%
50%
75%
100%
If the weighted average closing price of the Company's common stock increases by the marginal levels set forth in the
above vesting table for 180 consecutive days during any period between the award date and final vesting date, Mr. Recatto shall
become vested in 50% of the corresponding total percentage of restricted shares earned on the last day of the 180 day period.
The following table summarizes information about restricted stock awards for the periods ended December 30, 2017
through December 29, 2018:
Restricted Stock (Nonvested Shares)
Nonvested shares outstanding at December 31, 2016
Granted
Vested
Forfeited
Nonvested shares outstanding at December 30, 2017
Granted
Vested
Forfeited
Nonvested shares outstanding at December 29, 2018
Number of Shares
136,171
659,842
(96,514)
(13,500)
685,999
480,755
(149,710)
(3,181)
1,013,863
Weighted Average Grant-
Date Fair Value Per Share
12.42
$
15.11
13.17
14.28
14.52
21.81
14.57
17.75
18.20
$
$
Employee Stock Purchase Plan
The Employee Stock Purchase Plan of 2008 ("ESPP") is a shareholder approved plan under which all employees regularly
scheduled to work 20 or more hours per week may purchase the Company’s common stock through payroll deductions at a
price equal to 95% of the fair market values of the stock as of the end of the first day following each three-month offering
period. An employee’s payroll deductions under the ESPP are limited to 10% of the employee’s regular earnings, and
employees may not purchase more than $25,000 of stock during any calendar year.
As of December 29, 2018, the Company had reserved 129,262 shares of common stock available for purchase under the
ESPP. In fiscal 2018, employees purchased 20,764 shares of the Company’s common stock with a weighted average fair market
value of $21.42 per share.
78
(17) STOCKHOLDERS' EQUITY
Heritage Participation Rights
The Company has a Participation Rights Agreement with The Heritage Group (“Heritage”), an affiliate of Heritage-Crystal
Clean, Inc. pursuant to which Heritage has the option to participate, pro rata based on its percentage ownership interest in the
Company's common stock in any equity offerings for cash consideration, including (i) contracts with parties for equity
financing (including any debt financing with an equity component) and (ii) issuances of equity securities or securities
convertible, exchangeable or exercisable into or for equity securities (including debt securities with an equity component). If
Heritage exercises its rights with respect to all offerings, it will be able to maintain its percentage ownership interest in the
Company's common stock. The Participation Rights Agreement does not have an expiration date. Heritage is not required to
participate or exercise its right of participation with respect to any offerings. Heritage's right to participate does not apply to
certain offerings of securities that are not conducted to raise or obtain equity capital or cash such as stock issued as
consideration in a merger or consolidation, in connection with strategic partnerships or joint ventures, or for the acquisition of a
business, product, license, or other asset by the Company.
(18) EARNINGS PER SHARE
The following table reconciles the number of shares outstanding for fiscal 2018, 2017, and 2016 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:
(Thousands, except per share data)
Net income
Less: Income attributable to noncontrolling interest
Net income attributable to Heritage-Crystal Clean, Inc.
common stockholders
Weighted average basic shares outstanding
Dilutive shares for share–based compensation plans
Weighted average diluted shares outstanding
Net income per share: basic
Net income per share: diluted
(19) OTHER EXPENSE (INCOME) - NET
For the Fiscal Years Ended,
December 29,
2018
December 30,
2017
December 31,
2016
$
$
$
$
$
15,038
310
$
28,410
287
6,014
172
14,728
$
28,123
$
5,842
23,026
308
23,334
22,662
260
22,922
0.64
0.63
$
$
1.24
1.23
$
$
22,258
258
22,516
0.26
0.26
Other expense of $1.6 million for fiscal 2018 primarily consists of $1.0 million of site closure costs. Other (income) of
$10.9 million for fiscal 2017 includes a gain of $5.1 million received in the first quarter of fiscal 2017 as a partial award for an
arbitration claim and a gain of $3.6 million received during the second quarter of fiscal 2017 from a settlement agreement, both
of which were related to our acquisition of FCC Environmental, LLC and International Petroleum Corp. of Delaware in 2014.
Additionally, during the third quarter of 2017, the Company recorded a gain of $3.1 million from having sold the Company's
facility located in Pompano Beach, Florida.
79
(20) SUBSEQUENT EVENTS
Acquisition of Certain Assets from GlyEco, Inc.
On January 11, 2019, Heritage-Crystal Clean completed the acquisition of certain assets of GlyEco, Inc.’s Consumer
Division. The Consumer Division provided retail antifreeze sales, collection and recycling services across twenty-six states
with focus in the Southeast, Mid-Atlantic and the Midwest. This acquisition represents an expansion of HCC’s recycling
capacity and provides increased route density in areas where HCC currently provides antifreeze collection, sales and recycling
services. HCC acquired three sites, including two additional recycling facilities in Florida and Minnesota and operations in
South Dakota forming the basis for an additional sales branch for the Company. Total consideration for the acquisition was $1.4
million.
Acquisition of Certain Assets from W.S. Supplies, Inc.
On February 1, 2019, Heritage-Crystal Clean completed the acquisition of certain assets of W. S. Supplies, Inc. a subsidiary
of Merrill’s Inc. W.S. Supplies, Inc. which provided chemical sales and service to auto dealerships and auto body-shops in
Iowa, Nebraska, Minnesota, Missouri and South Dakota. The acquisition represents an expansion of HCC’s Environmental
Services business in this geographic area while potentially providing new services and products for this market. No facilities
were acquired in the transaction and all service employees and activity will be consolidated in existing branch territories. Total
consideration for the acquisition was $0.5 million.
80
(20) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 2018
Fiscal 2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter (a)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter (a)
(In thousands, except per share data)
STATEMENT OF
OPERATIONS DATA:
Revenues
Service revenues
Product revenues
Total revenues
Operating expenses
Operating costs
Selling, general, and administrative
expenses
Depreciation and amortization
Other expense (income) - net
Operating (loss) income
Interest expense – net
$
$
$
54,137
$
60,014
29,010
40,289
83,147
$
100,303
68,386
$
76,272
$
$
$
58,054
$
78,057
$
53,473
41,620
49,002
26,980
99,674
$
127,059 $
80,453
76,045
$
102,462 $
61,290
11,022
3,643
389
(293)
245
11,522
10,641
3,659
341
8,509
240
3,776
253
8,959
256
14,529
5,079
623
4,366
310
12,341
4,132
(5,006)
7,696
87
$
$
$
$
$
$
54,550
31,832
86,382
63,270
10,575
4,184
(3,027)
11,380
412
54,048
$
71,928
29,283
43,863
83,331
$
115,791
63,650
$
87,892
10,955
4,186
(3,079)
7,619
275
13,530
5,465
172
8,732
320
(Loss) income before income taxes
$
(538) $
8,269
$
8,703
$
4,056 $
7,609
$
10,968
$
7,344
$
8,412
(Benefit of) provision for income
taxes
Net (loss) income
Less: Income attributable to
noncontrolling interest
Net (loss) income attributable to
Heritage-Crystal Clean, Inc. common
stockholders
(436)
(102)
18
2,149
6,120
121
2,284
6,419
74
1,455
2,601
97
2,792
4,817
53
3,982
6,986
52
2,587
4,757
(3,438)
11,850
52
130
$
(120) $
5,999
$
6,345
$
2,504
$
4,764
$
6,934
$
4,705
$
11,720
Net (loss) income per share: basic
Net (loss) income per share: diluted
(0.01)
(0.01)
0.26
0.26
0.28
0.27
0.11
0.11
0.21
0.21
0.31
0.30
0.21
0.21
0.51
0.51
Number of weighted average
shares outstanding: basic
Number of weighted average
shares outstanding: diluted
OTHER OPERATING DATA:
Average revenues per working day -
Environmental Services
22,962
23,029
23,048
23,056
22,353
22,506
22,686
22,887
22,962
23,361
23,404
23,411
22,892
22,832
22,970
23,099
$
970
$
1,090
$
1,090
$
1,130 $
900
$
935
$
935
$
890
(a) Reflects a sixteen week quarter.
81
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Effectiveness of Controls and Procedures
The Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") 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 CEO and CFO, as appropriate, to
allow timely decisions regarding financial disclosures.
Changes in Internal Control over Financial Reporting
The Company's management, together with our CEO and CFO, evaluated the changes in our internal control over financial
reporting during the quarter ended December 29, 2018. There was no change in the Company's internal control over financial
reporting that occurred during the quarter ended December 29, 2018 that has materially affected or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
Management's Annual Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company's management, with the participation of the
Company's CEO and CFO, has evaluated the effectiveness of the Company's internal control over financial reporting based on
the framework in Internal Control-Integrated Framework (2013 Framework) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, the Company's management has concluded that, as of
December 29, 2018, the Company's internal control over financial reporting was effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Grant Thornton LLP, an independent registered public accounting firm, has audited the Company's consolidated financial
statements and the effectiveness of internal control over financial reporting as of December 29, 2018 as stated in its reports
which are included in Item 8 of this Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
82
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Certain information required by Item 401 of Regulation S-K will be included under the caption “Proposal 1 - Election of
Directors” and "Executive Compensation" in the 2019 Proxy Statement, and that information is incorporated by reference
herein. The information required by Item 405 of Regulation S-K will be included under the caption “Corporate Governance -
Section 16(a) Beneficial Ownership Reporting Compliance” in the 2019 Proxy Statement, and that information is incorporated
by reference herein.
The information required by Item 407(c)(3) of Regulation S-K will be included under the caption “Corporate Governance -
Director Selection Procedures,” and the information required under Items 407(d)(4) and (d)(5) of Regulation S-K will be
included under the caption “Corporate Governance - Committees of the Board of Directors - Audit Committee” in the 2019
Proxy Statement, and that information is incorporated by reference herein.
We have adopted a Code of Business Conduct and Ethics that applies to all our employees. This code of conduct is
available on our website at www.crystal-clean.com. Amendments to, or waivers from, the Code of Conduct is posted on our
website and provided to you without charge upon written request to Heritage-Crystal Clean, Inc., Attention: Chief Financial
Officer, 2175 Point Boulevard, Suite 375, Elgin, Illinois, 60123.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K will be included under the caption “Executive Compensation” in
the 2019 Proxy Statement, and that information is incorporated by reference herein.
The information required by Items 407(e)(4) and (e)(5) of Regulation S-K will be included under the captions “Corporate
Governance - Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the
2019 Proxy Statement, and that information is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 403 of Regulation S-K will be included under the caption “Security Ownership” in the
2019 Proxy Statement, and that information is incorporated by reference herein.
Equity Compensation Plan Information
Plan category
Equity compensation plans approved by
security holders
Equity compensation plans not
approved by security holders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(a)
(b)
(c)
2,760 $
n/a
2,760 $
7.33
n/a
7.33
176,082
n/a
176,082
83
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 404 of Regulation S-K will be included under the caption “Certain Relationships and
Related Party Transactions” in the 2019 Proxy Statement, and that information is incorporated by reference herein.
The information required by Item 407(a) of Regulation S-K will be included under the caption “Corporate Governance -
Independence of Directors” in the 2019 Proxy Statement, and that information is incorporated by reference herein.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information concerning principal accounting fees and services and the information required by Item 14 will be
included under the caption “Fees Incurred for Services of Independent Registered Public Accounting Firm” and “Approval of
Services Provided by Independent Registered Public Accounting Firm” in the 2019 Proxy Statement, and that information is
incorporated by reference herein.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)(1) Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 29, 2018 and December 30, 2017
Consolidated Statements of Income for the fiscal years ended December 29, 2018, December 30, 2017, and December 31,
2016
Consolidated Statements of Cash Flows for the fiscal years ended December 29, 2018, December 30, 2017, and December
31, 2016
Consolidated Statements of Stockholders' Equity for the fiscal years ended December 29, 2018, December 30, 2017, and
December 31, 2016
Notes to Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedules:
All schedules have been omitted because the required information is not significant or is included in the financial
statements or notes thereto or is not applicable.
(a)(3) Exhibits
See the Exhibit Index below for a list of the exhibits being filed or furnished with or incorporated by reference into this
annual report on Form 10-K.
Exhibit
No.
3.1
3.2
4.1
10.1
10.2
Exhibit Description
Certificate of Incorporation of Heritage-Crystal Clean, Inc., amended (Incorporated herein by reference to
Exhibit 3.1 of the Company's Annual Report on 10-K filed with the SEC on February 29, 2012).
By-Laws of Heritage-Crystal Clean, Inc. (Incorporated herein by reference to Exhibit 3.2 of Amendment No.
6 to the Company’s Registration Statement on Form S-1 (No. 333-1438640) filed with the SEC on February
25, 2008).
Form of Specimen Common Stock Certificate of Heritage-Crystal Clean, Inc. (Incorporated herein by
reference to Exhibit 4.1 of Amendment No. 7 to the Company’s Registration Statement on Form S-1 (No.
333-1438640) filed with the SEC on March 7, 2008).
2017 Credit Agreement by and among Heritage-Crystal Clean, Inc. and its subsidiaries identified therein and
Bank of America, N.A., as administrative agent. (Incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the SEC on February 27, 2017).
First Amendment to 2017 Credit Agreement***
84
10.4
10.42*
10.6
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
21.1
23.1
31.1
31.2
32.1
32.2
Form of Participation Rights Agreement between Heritage-Crystal Clean, Inc. and The Heritage Group
(Incorporated herein by reference to Exhibit 10.9 of Amendment No. 7 to the Company’s Registration
Statement on Form S-1 (No. 333-1438640) filed with the SEC on March 7, 2008).
Form of Restricted Stock Award under Omnibus Incentive Plan***
Heritage-Crystal Clean, Inc. Omnibus Incentive Plan (Incorporated herein by reference to Exhibit 10.25 of
Amendment No. 6 to the Company’s Registration Statement on Form S-1 (No. 333-1438640) filed with the
SEC on February 25, 2008).
Heritage-Crystal Clean, Inc. Performance-Based Annual Incentive Plan (Incorporated herein by reference to
Exhibit 10.26 of Amendment No. 6 to the Company’s Registration Statement on Form S-1 (No. 333-1438640)
filed with the SEC on February 25, 2008).
Heritage-Crystal Clean, Inc. Non-Qualified Deferred Compensation Plan (Incorporated herein by reference to
Exhibit 10.27 of Amendment No. 7 to the Company’s Registration Statement on Form S-1 (No. 333-1438640)
filed with the SEC on March 7, 2008).
Form of Option Grant Agreement under Omnibus Incentive Plan (Incorporated herein by reference to Exhibit
10.28 of Amendment No. 6 to the Company’s Registration Statement on Form S-1 (No. 333-1438640) filed
with the SEC on February 25, 2008).
Heritage-Crystal Clean, Inc. Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit
10.29 of Amendment No. 7 to the Company’s Registration Statement on Form S-1 (No. 333-1438640) filed
with the SEC on March 7, 2008).
Form of Indemnity Agreement with Directors of the Company (Incorporated herein by reference to Exhibit
10.30 of Amendment No. 7 to the Company’s Registration Statement on Form S-1 (No. 333-1438640) filed
with the SEC on March 7, 2008).
Non-Competition and Non-Disclosure Agreement between John Lucks and Heritage-Crystal Clean, LLC
dated March 1, 2000 (Incorporated herein by reference to Exhibit 10.34 of Amendment No. 1 to the
Company’s Registration Statement on Form S-1 (No. 333-1438640) filed with the SEC on August 3, 2007).
Non-Competition and Non-Disclosure Agreement among BRS-HCC Investment Co., Inc., Bruckmann,
Rosser, Sherrill & Co. II, L.P., Bruckmann, Rosser, Sherrill & Co., Inc., Bruce C. Bruckmann and Heritage-
Crystal Clean, LLC dated February 24, 2004 (Incorporated herein by reference to Exhibit 10.35 of
Amendment No. 1 to the Company’s Registration Statement on Form S-1 (No. 333-1438640) filed with the
SEC on August 3, 2007).
Form of Restricted Stock Award Agreement (Incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q filed with the SEC on May 9, 2011).
Employment Agreement between Brian Recatto, and Heritage-Crystal Clean, Inc. (Incorporated herein by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K/A filed with the SEC on December 9,
2016).
Employment Agreement between Mark DeVita, and Heritage-Crystal Clean, Inc. (Incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on October 23,
2017).
Employment Agreement between Ellie Bruce, and Heritage-Crystal Clean, Inc. (Incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on November 3,
2017).
Subsidiaries of Heritage-Crystal Clean, Inc.***
Consent of Grant Thornton LLP, Independent Registered Public Accountants***
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002***
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002***
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***
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***
*
***
Management or compensatory plan or arrangement
Included herein
85
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: March 5, 2019
By:
/s/ Brian Recatto
Brian Recatto
President, Chief Executive Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated as of March 5, 2019.
Signature
Title
/s/ Brian Recatto
Brian Recatto
/s/ Mark DeVita
Mark DeVita
/s/ Fred Fehsenfeld, Jr.
Fred Fehsenfeld, Jr.
/s/ Bruce Bruckmann
Bruce Bruckmann
/s/ Carmine Falcone
Carmine Falcone
/s/ Charles E. Schalliol
Charles E. Schalliol
/s/ Robert W. Willmschen, Jr.
Robert W. Willmschen, Jr.
/s/ James Schumacher
Jim Schumacher
President, Chief Executive Officer and Director
(Principal Executive Officer of the Registrant)
Chief Financial Officer,
(Principal Financial Officer and Principal Accounting
Officer of the Registrant)
Director
Director
Director
Director
Director
Director
86
CORPORATE INFORMATION
Board of Directors
Fred Fehsenfeld, Jr.
Chairman of the Board
of Directors
Brian Recatto
Director, President and
Chief Executive Officer
Bruce Bruckmann
Director
Carmine Falcone
Director and Chair of
Nominating & Governance
Committee
Charles E. Schalliol
Director and Chair of
Compensation Committee
Jim Schumacher
Director
Robert W. Willmschen, Jr.
Director and Chair of
Audit Committee
Officers and Senior Management
Brian Recatto
President and
Chief Executive Officer
Mark DeVita
Chief Financial Officer
Ellie Bruce
Vice President, Business
Management and Marketing
Craig Rose
Chief Information Officer
Glenn Casbourne
Vice President, Engineering
and Oil Re-Refinery Operations
David P. Chameli
Vice President, General
Counsel and Secretary
Anita Decina
Vice President, Environment,
Health & Safety
Thomas G. Hillstrom
Vice President, Strategic
Operations and Acquisitions
Ted Sinclair
Vice President, Oil Services
and Logistics
Dennis J. Wolff
Vice President, Branch Sales
and Hub Operations
Matthew Snyder
Corporate Controller
Edward Guglielmi
Vice President of Sales
and Service, Division 1
Todd Rohde
Vice President of Sales
and Service, Division 2
Matthew Munz
Vice President of Base Oil
Sales
Gary Farrar
Vice President of Oil Supply
and Distillate/Heavy Fuel
Management
Heritage-Crystal Clean, Inc.
2175 Point Boulevard, Suite 375
Elgin, Illinois 60123
www.crystal-clean.com