Heritage-Crystal Clean, Inc. - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the quarterly period ended March 26, 2022
			OR
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from _________________to _________________

Commission File Number 001-33987

HERITAGE-CRYSTAL CLEAN, INC.

(Exact name of registrant as specified in its charter)


Delaware						26-0351454
State or other jurisdiction of						(I.R.S. Employer
Incorporation						Identification No.)

2175 Point Boulevard

Suite 375

Elgin, IL 60123

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (847) 836-5670

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class

Trading Symbol

Name of Exchange on which registered

Common Stock, par value $0.01 per share

HCCI

NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” "smaller

reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated filer x
Non-accelerated filer o	(Do not check if a smaller reporting company)	Smaller reporting company ☐
		Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No x

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

Table of Contents


PART I

ITEM 1. FINANCIAL STATEMENTS			4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			31
ITEM 4. CONTROLS AND PROCEDURES			31

PART II




ITEM 1 . LEGAL PROCEEDINGS			32
ITEM 6 . EXHIBITS			32

SIGNATURES			33

PART I

ITEM 1. FINANCIAL STATEMENTS

Heritage-Crystal Clean, Inc.

Condensed Consolidated Balance Sheets

(In Thousands, Except Share and Par Value Amounts)


	March 26, 2022		January 1, 2022
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	71,066	$	56,269
Accounts receivable - net	70,047		62,513
Inventory - net	30,195		29,536
Assets held for sale	1,125		1,125
Other current assets	5,954		6,773
Total current assets	178,387		156,216
Property, plant and equipment - net	171,893		166,301
Right of use assets	91,528		83,865
Equipment at customers - net	24,582		24,146
Software and intangible assets - net	44,676		45,949
Goodwill	49,695		49,695
Other assets	654		692
Total assets	$	561,415	$	526,864

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	43,055	$	36,179
Current portion of lease liabilities	21,598		20,146
Contract liabilities - net	2,570		2,094
Accrued salaries, wages, and benefits	6,632		8,980
Taxes payable	13,448		8,474
Other current liabilities	11,944		9,476
Total current liabilities	99,247		85,349
Lease liabilities, net of current portion	72,192		65,041

Other long term liabilities	591		473
Contingent consideration	1,410		2,819
Deferred income taxes	31,525		31,126
Total liabilities	$	204,965	$	184,808

STOCKHOLDERS' EQUITY:
Common stock - 26,000,000 shares authorized at $0.01 par value, 23,477,764 and 23,473,931 shares issued and outstanding at March 26, 2022 and January 1, 2022, respectively	$	235	$	235
Additional paid-in capital	206,390		204,920
Retained earnings	149,945		137,067
Accumulated other comprehensive loss	(120)		(166)
Total stockholders' equity	356,450		342,056

Total liabilities and stockholders' equity	$	561,415	$	526,864

See accompanying notes to financial statements.

Heritage-Crystal Clean, Inc.

Condensed Consolidated Statements of Income

(In Thousands, Except per Share Amounts)

(Unaudited)


		First Quarter Ended,
		March 26, 2022		March 27, 2021

Revenues
	Service revenues	$	68,907	$	57,700
	Product revenues	64,482		42,266
	Rental income	5,977		5,416
Total revenues		$	139,366	$	105,382

Operating expenses
	Operating costs	$	101,783	$	76,771
	Selling, general, and administrative expenses	13,735		12,188
	Depreciation and amortization	6,507		3,782
	Other (income) - net	(210)		(108)
Operating income		17,551		12,749
Interest expense – net		223		324
Income before income taxes		17,328		12,425
Provision for income taxes		4,450		3,219

Net income		$	12,878	$	9,206

Net income per share: basic		$	0.55	$	0.39
Net income per share: diluted		$	0.54	$	0.39

Number of weighted average shares outstanding: basic		23,476		23,373
Number of weighted average shares outstanding: diluted		23,636		23,509

See accompanying notes to financial statements.

Heritage-Crystal Clean, Inc.

Condensed Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)


		First Quarter Ended,
		March 26, 2022		March 27, 2021

Net income		$	12,878	$	9,206
	Other comprehensive income:
	Currency translation adjustments	46		—
	Total other comprehensive income:	$	46	$	—
Comprehensive income		$	12,924	$	9,206

See accompanying notes to financial statements.

Heritage-Crystal Clean, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(In Thousands, Except Share Amounts)

For the First Quarter Ended March 26, 2022 and March 27, 2021

(Unaudited)


First Quarter Ended,
March 26, 2022
	Shares	Par Value Common		Additional Paid–in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Equity

Balance, January 1, 2022	23,473,931	$	235	$	204,920	$	137,067	$	(166)	$	342,056
Net income	—	—		—		12,878		—		12,878
Currency translation adjustment	—	—		—		—		46		46

Issuance of common stock – ESPP	3,833	—		117		—		—		117
Share-based compensation	—	—		1,353		—		—		1,353

Balance at March 26, 2022	23,477,764	$	235	$	206,390	$	149,945	$	(120)	$	356,450



First Quarter Ended,
March 27, 2021
	Shares	Par Value Common		Additional Paid–in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Equity

Balance at January 2, 2021	23,340,700	$	233	$	201,148	$	76,119	$	—	$	277,500
Net income	—	—		—		9,206		—		9,206



Issuance of common stock – ESPP	6,072	—		122		—		—		122
Share-based compensation	43,662	1		1,217		—		—		1,218
Share repurchases to satisfy tax withholding obligations	—	—		(729)		—		—		(729)
Balance at March 27, 2021	23,390,434	$	234	$	201,758	$	85,325	$	—	$	287,317

Heritage-Crystal Clean, Inc.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)


	First Quarter Ended,
	March 26, 2022		March 27, 2021
Cash flows from Operating Activities:
Net income	$	12,878	$	9,206
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	6,507		3,782


Uncollectible provision	147		474
Share-based compensation	1,493		1,218
Deferred taxes	399		3,299
Other, net	84		376
Changes in operating assets and liabilities:
(Increase) in accounts receivable	(7,681)		(4,609)
(Increase) in inventory	(659)		(552)
Decrease in other current assets	819		2,557
Increase in accounts payable	6,210		1,345
Increase (decrease) in accrued liabilities	4,393		(893)

Cash provided by operating activities	$	24,590	$	16,203

Cash flows from Investing Activities:
Capital expenditures	$	(9,146)	$	(5,411)
Proceeds from sale of assets	1		149


Cash used in investing activities	$	(9,145)	$	(5,262)

Cash flows from Financing Activities:
Payment of Term Loan	—		(30,000)
Debt Issuance Costs	—		(804)
Repayment of principal on finance leases	(765)		(436)
Share repurchases to satisfy tax withholding obligations	—		(729)
Proceeds from the issuance of common stock	117		122


Cash used in financing activities	$	(648)	$	(31,847)
Net increase (decrease) in cash and cash equivalents	14,797		(20,906)
Cash and cash equivalents, beginning of period	56,269		67,575
Cash and cash equivalents, end of period	$	71,066	$	46,669

Supplemental disclosure of cash flow information:
Income taxes paid	$	18	$	947
Cash paid for interest	73		108
Supplemental disclosure of non-cash information:
Payables for construction in progress	1,112		754

See accompanying notes to financial statements.

HERITAGE-CRYSTAL CLEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 26, 2022

(1) ORGANIZATION AND NATURE OF OPERATIONS

Heritage-Crystal Clean, Inc., a Delaware corporation and its subsidiaries (collectively the “Company”), provide parts cleaning, hazardous and non-hazardous containerized waste, used oil collection, wastewater vacuum, antifreeze recycling and field services primarily to small and mid-sized industrial and vehicle maintenance customers. The Company owns and operates a used oil re-refinery where it re-refines used oils and sells high quality base oil for use in the manufacture of finished lubricants as well as other re-refinery products. The Company also has multiple locations where it dehydrates used oil. The oil processed at these locations is primarily sold as recycled fuel oil. The Company also operates multiple non-hazardous waste processing facilities as well as antifreeze recycling facilities at which it produces virgin-quality antifreeze. The Company's locations are in the United States and Ontario, Canada. The Company conducts its primary business operations through Heritage-Crystal Clean, LLC, its wholly owned subsidiary, and all intercompany balances have been eliminated in consolidation.

The Company has two reportable segments: "Environmental Services" and "Oil Business." The Environmental Services segment consists of the Company's parts cleaning, containerized waste management, wastewater vacuum, antifreeze recycling activities, and field services. The Oil Business segment consists of the Company's used oil collection, recycled fuel oil sales, used oil re-refining activities, and used oil filter removal and disposal services. No customer represented greater than 10% of consolidated revenues for any of the periods presented. There were no intersegment revenues. Both segments operate in the United States and, to an immaterial degree, in Ontario, Canada. As such, the Company is not disclosing operating results by geographic segment.

The Company’s fiscal year ends on the Saturday closest to December 31. The most recent fiscal year ended on January 1, 2022. Each of the Company's first three fiscal quarters consists of twelve weeks while the last fiscal quarter consists of sixteen or seventeen weeks.

In the Company's Environmental Services segment, product revenues include sales of solvent, machines, absorbent, accessories, and antifreeze; service revenues include servicing of parts cleaning machines, containerized waste removal services, wastewater vacuum services, field services, and other services; rental income includes embedded lease income from certain of our parts cleaning contracts. In the Company's Oil Business segment, product revenues primarily consist of sales of re-refined base oil, re-refinery co-products and recycled fuel oil; service revenues include revenues from used oil collection activities, collecting and disposing of wastewater and removal and disposal of used oil filters. Due to the Company's integrated business model, it is impracticable to separately present costs of tangible products and costs of services.

COVID-19 Pandemic

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

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

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

(3) BUSINESS COMBINATIONS

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

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

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

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


	As of March 26, 2022
(thousands)	Source Environmental, Inc.		Raider Environmental Services of Florida, Inc.		Cole's Environmental

Accounts receivable	$	1,064	$	488	$	—
Inventory	—		—		73
Other current assets	6		162		—

Property, plant, & equipment	174		4,404		2,455

Intangible assets	13,692		6,056		9,620
Goodwill	6,174		2,835		5,144
Accounts payable and accruals	(677)		(218)		—





Total purchase price, net of cash acquired	$	20,433	$	13,727	$	17,292


Less: contingent consideration	—		—		5,819
Less: to be placed in escrow	—		—		100
Net cash paid	$	20,433	$	13,727	$	11,373

(4) REVENUE

We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when our performance obligations under the terms of a contract with our customers are satisfied. Recognition occurs when the Company transfers control by completing the specified services at the point in time the customer benefits from the services performed or once our products are delivered. The majority of revenue is recognized at a point in time, except for rental income which is recognized on an over time basis. The Company measures progress toward complete satisfaction of a performance obligation satisfied over time using a cost-based input method. This method of measuring progress provides a faithful depiction of the transfer of goods or services because the costs incurred are expected to be substantially proportionate to the Company’s satisfaction of the performance obligation. Revenue is measured as the amount of consideration we expect to receive in exchange for completing our performance obligations. Sales tax and other taxes we collect with revenue-producing activities are excluded from revenue. In the case of contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on the relative stand-alone selling prices of the various goods and/or services encompassed by the contract. We do not have any material significant payment terms as payment is generally due within 30 days after the performance obligation has been satisfactorily completed. The Company has elected the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. In applying the guidance in Topic 606, there were no judgments or estimates made that the Company deems significant.

Contract Balances — Contract assets primarily relate to the Company’s rights to consideration for work completed in relation to its services performed but not billed at the reporting date. Contract liabilities primarily consist of advance payments of performance obligations yet to be fully satisfied in the period reported. Our contract liabilities and contract assets are reported in a net position at the end of each reporting period.

We disaggregate our revenue from contracts with customers by major lines of business for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

The following table disaggregates our revenue by major lines:


	First Quarter Ended,
	March 26, 2022						March 27, 2021
Total Net Sales by Major Lines of Business (thousands)	Environmental Services		Oil Business		Total		Environmental Services		Oil Business		Total
Parts Cleaning, Containerized Waste, & related products/services	$	46,857	$	—	$	46,857	$	38,833	$	—	$	38,833
Wastewater Vacuum Services	17,390		—		17,390		13,692		—		13,692
Field Services	6,290		—		6,290		4,096		—		4,096
Antifreeze Business	7,657		—		7,657		6,988		—		6,988
Environmental Services - Other	494		—		494		441		—		441
Re-refinery Product Sales	—		49,139		49,139		—		30,054		30,054
Oil Collection Services & RFO	—		4,313		4,313		—		4,617		4,617
Oil Filter Business	—		1,249		1,249		—		1,245		1,245
Revenues from Contracts with Customers	78,688		54,701		133,389		64,050		35,916		99,966
Rental Income	5,963		14		5,977		5,407		9		5,416
Total Revenues	$	84,651	$	54,715	$	139,366	$	69,457	$	35,925	$	105,382

The following table provides information about contract assets and contract liabilities from contracts with customers:


(thousands)	March 26, 2022		January 1, 2022
Contract assets	$	102	$	268
Contract liabilities	2,672		2,362
Contract liabilities - net	$	2,570	$	2,094

During the fiscal quarter ended March 26, 2022, the Company recognized $2.1 million in revenue that was included in the contract liabilities balance as of January 1, 2022. The Company has no assets recognized from costs to obtain or fulfill a contract with a customer. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

(5) ACCOUNTS RECEIVABLE

Accounts Receivable — Net, includes amounts billed to and currently due from customers. The amounts due are stated at their net estimated realizable value. The allowance for uncollectible accounts is our best estimate of the amount of probable lifetime-expected credit losses in existing accounts receivable and is determined based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole. The Company does not have any off-balance-sheet credit exposure related to its customers.

Accounts receivable for the first quarter ended March 26, 2022, and the fiscal year ended January 1, 2022 consisted of the following:


(thousands)	March 26, 2022		January 1, 2022
Trade	$	67,550	$	59,132
Less: allowance for uncollectible accounts	2,742		2,928
Trade - net	64,808		56,204
Related parties	4,900		5,410
Other	339		899
Total accounts receivable - net	$	70,047	$	62,513

The following table provides the changes in the Company’s allowance for uncollectible accounts for the first quarter ended March 26, 2022, and the fiscal year ended January 1, 2022:



(thousands)	March 26, 2022		January 1, 2022
Balance at beginning of period	$	2,928	$	2,502
Provision for uncollectible accounts	147		1,930
Accounts written off, net of recoveries	(333)		(1,504)
Balance at end of period	$	2,742	$	2,928

(6) INVENTORY

The carrying value of inventory consisted of the following:


(thousands)	March 26, 2022		January 1, 2022
Solvents and solutions	$	8,088	$	7,704
Used oil and processed oil	9,816		9,361
Machines	4,988		4,995
Drums and supplies	5,574		5,731
Other	2,176		2,246
Total inventory	30,642		30,037
Less: machine refurbishing reserve	447		501
Total inventory - net	$	30,195	$	29,536

Inventory consists primarily of used oil, processed oil, solvents and solutions, new and refurbished parts cleaning machines, drums and supplies, and other items. Inventories are valued at the lower of first-in, first-out (FIFO) cost or net realizable value, net of any reserves for excess, obsolete, or unsalable inventory. The Company monitors its inventory levels at each of its locations and evaluates inventories for excess or slow-moving items. If circumstances indicate the cost of inventories exceed their recoverable value, inventories are reduced to net realizable value. The Company had no inventory write downs during the first quarter of fiscal 2022 or 2021.

(7) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is measured as a residual amount as of the acquisition date, which in most cases results in measuring goodwill as an excess of the purchase consideration transferred plus the fair value of any noncontrolling interest in the acquiree over the fair value of the net assets acquired, including any contingent consideration. The Company tests goodwill for impairment annually in the fourth quarter and in interim periods if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company's determination of fair value requires certain assumptions and estimates, such as margin expectations, market conditions, growth expectations, expected changes in working capital, etc., regarding expected future profitability and expected future cash flows. The Company reports and tests goodwill for impairment only in its Environmental Services reporting unit.

The following table shows changes to our goodwill balances by segment from January 1, 2022 to March 26, 2022:


(thousands)	Environmental Services		Total

Goodwill at January 1, 2022
Gross carrying amount	$	49,695	$	49,695
Accumulated impairment loss	—		—
Net book value at January 1, 2022	$	49,695	$	49,695

Goodwill at March 26, 2022
Gross carrying amount	49,695		$	49,695
Accumulated impairment loss	—		—
Net book value at March 26, 2022	$	49,695	$	49,695

The following is a summary of software and other intangible assets:


	March 26, 2022						January 1, 2022
(thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer & supplier relationships	$	47,167	$	21,952	$	25,215	$	47,167	$	20,725	$	26,442
Permits	13,590		1,074		12,516		13,590		879		12,711
Software	11,893		6,605		5,288		11,721		6,399		5,322
Non-compete agreements	4,433		3,450		983		4,048		3,340		708
Patents, formulae, and licenses	1,769		921		848		1,769		906		863
Other*	616		790		(174)		996		1,093		(97)
Total software and intangible assets	$	79,468	$	34,792	$	44,676	$	79,291	$	33,342	$	45,949

*Other intangibles include an above market lease acquired in September 2021 that had a fair value of ($0.7) million upon acquisition and is being accreted over the remaining useful life of the lease.

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

The weighted average useful lives of software and other intangibles are as follows:


						Weighted Average Useful Life (years)
Permits						16
Patents, formulae, & licenses						15
Customer and supplier relationships						12
Software						9
Non-compete agreements						5
Other						7

The estimated amortization expense for the remainder of fiscal 2022 and each of the five succeeding fiscal years is as follows:


(millions)
Fiscal Year						Amortization Expense
2022						$4.7
2023						5.6
2024						3.9
2025						2.9
2026						2.4
2027						2.3

The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, the finalization of the fair value of intangible assets that have been acquired from business combinations, disposal of intangible assets, accelerated amortization of intangible assets, and other events.

(8) ACCOUNTS PAYABLE

Accounts payable consisted of the following:


(thousands)	March 26, 2022		January 1, 2022
Accounts payable	$	42,034	$	35,613
Accounts payable - related parties	1,021		566
Total accounts payable	$	43,055	$	36,179

(9) DEBT AND FINANCING ARRANGEMENTS

Bank Credit Facility

On March 18, 2021, Heritage-Crystal Clean, LLC, (the “Company”), entered into an Amended and Restated Credit Agreement (the "Agreement"), by and among the Company, its parent, Heritage-Crystal Clean, Inc., and the Company’s subsidiaries identified therein and Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., and Wells Fargo Bank, National Association. The Agreement replaces the Company's previous Credit Agreement dated as of February 21, 2017. During the first quarter of 2021 the Company paid down its previous term loan, in full, of $30.0 million. The new Agreement provides for borrowings of up to $100.0 million, in the form of a revolving facility, of which $15 million can be used in the form of a Swing Line loan.

Loans made under the Agreement, as amended, may be Base Rate Loans or LIBOR Rate Loans, at the election of the Borrower subject to certain exceptions. Base Rate Loans have an interest rate equal to (i) the higher of (a) the federal funds rate plus 0.5%, (b) the London Interbank Offering Rate (“LIBOR”) plus 1%, or (c) Bank of America's prime rate, plus (ii) a variable margin of between 0.50% and 1.25% depending on the Company's total leverage ratio, calculated on a consolidated basis. LIBOR rate loans have an interest rate equal to (i) the LIBOR rate plus (ii) a variable margin of between 1.50% and 2.25% depending on the Company's total leverage ratio. Amounts borrowed under the Agreement are secured by a security interest in substantially all of the Company's tangible and intangible assets. The Company incurred $0.8 million of debt issuance costs related to the amended credit agreement.

The Credit Agreement contains customary terms and provisions (including representations, covenants, and conditions) for transactions of this type. Certain covenants, among other things, restrict the Company's and its subsidiaries' ability to incur indebtedness, grant liens, make investments and sell assets. The Credit Agreement also contains customary events of default, covenants and representations and warranties. Financial covenants include:

•An interest coverage ratio (based on interest expense and EBITDA) of at least 3.5 to 1.0;

•A total leverage ratio no greater than 3.0 to 1.0, provided that in the event of a permitted acquisition having an aggregate consideration equal to $10.0 million or more, at the Borrower’s election, the foregoing 3.00 to 1.00 shall be deemed to be 3.50 to 1.00 for the fiscal quarter in which such permitted acquisition occurs and the three immediately following fiscal quarters and will thereafter revert to 3.00 to 1.00.

The Credit Agreement places certain limitations on acquisitions and the payment of dividends.

On July 27, 2017, the Financial Conduct Authority, which regulates LIBOR, announced that it intended to phase out the London Interbank Offered Rate by the end of 2021. Subsequently the phase out deadline has been extended to June 30, 2023. We expect that widespread use of LIBOR will transition to alternative interest rates in the near future. Since loans made under our Credit Agreement may be LIBOR based loans, the phasing out of LIBOR may adversely affect interest rates that could result in higher borrowing costs and higher interest expense. As the Company does not have any outstanding borrowings under the financial instruments impacted by LIBOR, the effect on the financial statements is not material.

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

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

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

(10) SEGMENT INFORMATION

The Company has two reportable segments: "Environmental Services" and "Oil Business." The Environmental Services segment consists primarily of the Company's parts cleaning, containerized waste management, wastewater vacuum services, antifreeze recycling activities, and field services. The Oil Business segment consists primarily of the Company's used oil collection, used oil re-refining activities, and the dehydration of used oil to be sold as recycled fuel oil.

No single customer in either segment accounted for more than 10.0% of consolidated revenues in any of the periods presented. There were no intersegment revenues. Both the Environmental Services and Oil Business segments operate in the United States and, to an immaterial degree, in Ontario, Canada. As such, the Company is not disclosing operating results by geographic segment.

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


First Quarter Ended,
March 26, 2022
(thousands)		Environmental Services		Oil Business		Corporate and Eliminations		Consolidated

Revenues
	Service revenues	$	66,299	$	2,608	$	—	$	68,907
	Product revenues	12,389		52,093		—		64,482
	Rental income	5,963		14		—		5,977
Total revenues		$	84,651	$	54,715	$	—	$	139,366
Operating expenses
	Operating costs	67,618		34,165		—		101,783
	Operating depreciation and amortization	2,888		2,084		—		4,972
Profit before corporate selling, general, and administrative expenses		$	14,145	$	18,466	$	—	$	32,611
Selling, general, and administrative expenses						13,735		13,735
Depreciation and amortization from SG&A						1,535		1,535
Total selling, general, and administrative expenses						$	15,270	$	15,270
Other (income) - net						(210)		(210)
Operating income								17,551
Interest expense – net						223		223
Income before income taxes								$	17,328


First Quarter Ended,
March 27, 2021
(thousands)		Environmental Services		Oil Business		Corporate and Eliminations		Consolidated

Revenues
	Service revenues	$	53,303	$	4,397	$	—	$	57,700
	Product revenues	10,747		31,519		—		42,266
	Rental income	5,407		9		—		5,416
Total revenues		$	69,457	$	35,925	$	—	$	105,382
Operating expenses
	Operating costs	51,880		24,891		—		76,771
	Operating depreciation and amortization	1,579		948		—		2,527
Profit before corporate selling, general, and administrative expenses		$	15,998	$	10,086	$	—	$	26,084
Selling, general, and administrative expenses						12,188		12,188
Depreciation and amortization from SG&A						1,255		1,255
Total selling, general, and administrative expenses						$	13,443	$	13,443
Other (income) - net						(108)		(108)
Operating income								12,749
Interest expense – net						324		324
Income before income taxes								$	12,425

Total assets by segment as of March 26, 2022 and January 1, 2022 were as follows:


(thousands)		March 26, 2022		January 1, 2022
Total Assets:
	Environmental Services	$	292,521	$	281,333
	Oil Business	181,281		171,188
	Unallocated Corporate Assets	87,613		74,343
Total		$	561,415	$	526,864

Segment assets for the Environmental Services and Oil Business segments consist of property, plant, and equipment, right-of-use assets, intangible assets, accounts receivable, goodwill, and inventories. Assets for the corporate unallocated amounts consist of property, plant, and equipment used at the corporate headquarters as well as cash and net deferred tax assets.

(11) COMMITMENTS AND CONTINGENCIES

LEASES

Lessee

The Company leases buildings and property, railcars, machinery and equipment, and various types of vehicles and trailers for use in our operations. Each arrangement is evaluated individually to determine if the arrangement is or contains a lease at inception. The Company has lease agreements with lease and non-lease components and we have elected to not separate lease and non-lease components for all classes of underlying assets. In addition, our lease agreements do not contain any material residual guarantees or restrictive covenants.

Leases may include variable lease payments for common area maintenance, real estate taxes, and truck lease mileage. Variable lease payments are not included in the initial measurement of the right-of-use assets or lease liabilities, and are recorded as lease expense in the period incurred. Options to extend or terminate a lease are included in the lease term when it is reasonably certain that we will exercise that option. We have elected not to record leases with an initial term of 12 months or less on the balance sheet and instead recognize those lease payments on a straight-line basis over the lease term. Leases with initial terms in excess of 12 months are recorded as either operating or financing leases in our Consolidated Balance Sheet.

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

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

Lessor

The Company is a lessor of portions of buildings and property, railcars, and equipment such as embedded leases of parts cleaning machines. Each of the Company’s leases is classified as an operating lease, and the vast majority are short-term leases. Variable lease payments include real and personal property taxes, which are based on the lessee’s pro rata portion of such amounts, and excess mileage charges which are computed as the actual miles traveled in a calendar year minus the maximum average mileage allowance as specified per the contract. Options to extend the lease beyond the original terms range from day-to-day renewals to increments of five-year extensions. Options to terminate the lease range from immediate termination upon return of the asset to various written notification periods following a minimum lease term. Options for a lessee to purchase the underlying asset are not contractually specified but may be negotiated on a case-by-case basis. Significant judgments made in determining whether a contract contains a lease include assessments as to whether or not the contract conveys the right to direct the use of an identified asset. Significant judgments made in allocating consideration between lease and non-lease components include techniques applied in estimating the relative stand-alone selling prices of the lease and non-lease components of the contract in cases where a stand-alone selling price is not directly observable. No leased assets are covered by residual value guarantees. The Company manages the risk associated with the residual value of leased assets through such means as performing periodic maintenance and upkeep activities and the inclusion of contractual terms that hold the lessee responsible for damage incurred to leased assets. The Company has made an accounting policy election to exclude from the consideration in the contract, and from variable payments not included in the consideration in the contract, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific lease revenue-producing transaction and collected by the lessor from a lessee.

The Company recognizes rental income on a straight-line basis for that portion of the consideration allocated to the embedded lease component of certain of our parts cleaning contracts. We also recognize rental income on certain subleases of railcars and portions of buildings and property.

Rental income was as follows:


	First Quarter Ended,
	March 26, 2022						March 27, 2021
(thousands)	Environmental Services		Oil Business		Total		Environmental Services		Oil Business		Total
Parts Cleaning	$	5,939	$	—	$	5,939	$	5,407	$	—	$	5,407

Property	24		14		38		—		9		9
Total rental income	$	5,963	$	14	$	5,977	$	5,407	$	9	$	5,416

Purchase Obligations

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 cancellable with or without notice, without penalty, although certain vendor agreements provide for cancellation fees or penalties depending on the terms of the contract.

The Company has purchase obligations in the form of open purchase orders of $32.3 million as of March 26, 2022, and $16.5 million as of January 1, 2022, primarily for used oil, solvent, machine purchases, disposal and transportation expenses, and capital expenditures.

Litigation and Claims

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. The Company may also be subject to tax audits in a variety of jurisdictions. 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 March 26, 2022 and January 1, 2022, the Company had accrued $3.2 million related to loss contingencies and other contingent liabilities for both periods.

(12) INCOME TAXES

Tax expense for the first fiscal quarter of 2022 was $4.4 million. The Company's effective tax rate for the first quarter of fiscal 2022 was 25.7% compared to 25.9% in the first quarter of fiscal 2021. The rate decrease is principally attributable to the reduced impact of certain adjustments to financial reporting income due to increased levels of profitability as compared to the first quarter of fiscal 2021.

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 $2.2 million for uncertain tax positions as of March 26, 2022. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.

As of March 26, 2022, the Company believes it is more likely than not that a benefit from foreign net operating loss carryforwards will not be realized. The Company provided a valuation allowance against those foreign net operating loss carryforwards of $0.6 million.

(13) SHARE-BASED COMPENSATION

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.

The following table shows a summary of restricted share grants and expense resulting from the awards:


			Compensation Expense
(thousands, except share amounts)			First Quarter Ended,		Unrecognized Expense as of,
Recipient of Grant	Grant Date	Restricted Shares	March 26, 2022	March 27, 2021	March 26, 2022	March 27, 2021
Special Incentive Grant	April, 2018	350,000	313	298	67	1,354
Members of Management	May, 2019	23,560	—	59	—	203
Members of Management	February, 2020	41,138	20	38	67	355
Chief Executive Officer	February, 2021	500,000	613	394	3,268	5,923
Members of Management	February, 2021	35,898	52	22	396	635
Board of Directors	April, 2021	11,487	—	77	—	256
Members of Management	February, 2022	75,355	129	159	1,419	1,917

On January 8, 2021, the Company and Mr. Brian Recatto entered into an amended Executive Employment Agreement (the “Amended Agreement”) which was effective on February 1, 2021. Pursuant to the Amended Agreement, the Company replaced in its entirety section 4.3 of the First Amendment to the Executive Employment Agreement relating to equity compensation that was effective February 1, 2017. As of February 1, 2021, Mr. Recatto received a one-time award of 500,000 shares of restricted stock, subject to the achievement of performance criteria established by the Compensation Committee of the Board of Directors pursuant to the Company's 2019 Incentive Plan.

The award date for such Performance-Based Restricted Stock was on February 1, 2021. Such award was granted pursuant to and governed by the terms of the 2019 Incentive Plan and an award agreement in a form provided by the Company. The Performance-Based Restricted Stock one-time award of 500,000 shares received on February 1, 2021, shall vest on January 31, 2025 if Mr. Recatto is employed by the Company on that date, in an amount determined by applying the applicable percentages from the chart below, with the common stock price increases 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 amended agreement commencement date ($21.77) and the common stock price on the potential vesting date (determined by using the 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.

During the first quarter of fiscal 2022, the Company recorded approximately $0.6 million of compensation expense related to this award. In the future, the Company expects to recognize compensation expense of approximately $3.3 million over the remaining requisite service period, which ends January 31, 2025. 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 0.29%, expected dividend yield of zero, and an expected volatility assumption of 53.07%.


Vesting Table
Increase in Stock Price From the Amended Agreement Commencement Date to the Vesting Date						Total Percentage of Restricted Stock Shares to Be Vested
Less than $5 per share increase						—%
$5 per share increase						25% (vest in 125,000 shares)
$10 per share increase						50% (vest in 250,000 shares)
$15 per share increase						75% (vest in 375,000 shares)
$20 or more per share increase						100% (vest in 500,000 shares)

Provision for possible accelerated vesting of award

If the average closing price of the Company's common stock increases by the marginal levels set forth in the above vesting table for any consecutive 180 day period between February 1, 2021 and January 31, 2025, 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.

In addition, on each of December 31, 2021, December 31, 2022, and December 31, 2023, to the extent Mr. Recatto remains employed by the Company under the Amended Agreement on such date, Mr. Recatto shall receive a grant of restricted stock as of such date valued at Five Hundred Thousand Dollars ($500,000), with the number of shares of restricted stock constituting such grant determined by applying the average closing price for a share of the Company’s common stock for the 90-day period ending on such date. Such awards of Time-Based Restricted Stock shall be granted pursuant to and governed by the terms of the 2019 Incentive Plan and an award agreement in a form provided by the Company. The Time-Based Restricted Stock shall vest only if Mr. Recatto remains employed by the Company under the Amended Agreement through December 31, 2023; provided, that, upon a Change of Control of the Company (as such term is defined in the Amended Agreement), all shares of the Time-Based Restricted Stock awarded up through the date of closing of the Change in Control shall become vested, and no further award of Time-Based Restricted Stock shall be awarded. During the first quarter of fiscal 2022, the Company recorded approximately $0.3 million of compensation expense related to this award.

The following table summarizes the restricted stock activity for the first quarter ended March 26, 2022:


Restricted Stock (Nonvested Shares)	Number of Shares	Weighted Average Grant-Date Fair Value Per Share
Nonvested shares outstanding at January 1, 2022	723,983	$	21.83
Granted	75,355	27.54
Vested	—	—
Forfeited	—	—
Nonvested shares outstanding at March 26, 2022	799,338	$	22.37

Employee Stock Purchase Plan

As of March 26, 2022, the Company had reserved 56,512 shares of common stock available for purchase under the Employee Stock Purchase Plan. In the first quarter of fiscal 2022, employees purchased 3,833 shares of the Company’s common stock with a weighted average fair market value of $32.06 per share.

(14) EARNINGS PER SHARE

The following table reconciles the number of shares outstanding for the first quarter of fiscal 2022 and 2021, 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:


	First Quarter Ended,
(thousands, except per share amounts)	March 26, 2022		March 27, 2021
Net income	$	12,878	$	9,206



Weighted average basic shares outstanding	23,476		23,373
Dilutive shares for share–based compensation plans	160		136
Weighted average diluted shares outstanding	23,636		23,509





Net income per share: basic	$	0.55	$	0.39
Net income per share: diluted	$	0.54	$	0.39

(15) OTHER (INCOME) EXPENSE - NET

Other (income) expense - net was $(0.2) million of income for the first quarter of fiscal 2022, compared to a net $(0.1) million of income in the first quarter of 2021.

(16) SUBSEQUENT EVENTS

On April 8, 2022, the Company invested $3.0 million in its battery recycling partner, HBR Retriev Holdco, LLC ("Retriev"). This investment positions the Company to further capitalize on the opportunity to provide comprehensive collection and recycling services to businesses throughout the U.S. and Canada. The Company's strategic locations will support Retriev's growing demand in end-of-life battery collection and logistics. The Company does not have influence over the investee.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Disclosure Regarding Forward-Looking Statements

You should read the following discussion in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K filed with the SEC on March 2, 2022. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "aim," "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "project," "should," "will be," "will continue," "will likely result," "would" and other words and terms of similar meaning in conjunction with a discussion of future or estimated operating or financial performance. You should read statements that contain these words carefully, because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other “forward-looking” information. Forward-looking statements speak only as of the date of this quarterly report. Factors that could cause such differences include those described in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for fiscal 2021 filed with the SEC on March 2, 2022. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this quarterly report, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this quarterly report or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. Certain tabular information may not foot due to rounding. Our fiscal year ends on the Saturday closest to December 31. Interim results are presented for the twelve weeks ("first quarter" or "quarter") ended March 26, 2022 and March 27, 2021, respectively. "Fiscal 2021" represents the 52-week period ended January 1, 2022 and "Fiscal 2022" represents the 52-week period beginning January 2, 2022, and ending on December 31, 2022.

Overview

We provide parts cleaning, containerized waste management, used oil collection, wastewater vacuum 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 91 branch facilities providing services to customers in 48 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, wastewater vacuum, antifreeze recycling, and field services. Revenues from this segment accounted for approximately 60.7% of our total Company revenues for the first quarter of fiscal 2022. 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, along with our recycled fuel oil ("RFO") sales which together accounted for approximately 39.3% of our total Company revenues in the first quarter of fiscal 2022.

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 obtaining 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 used oil, although we attempt to offset volatility in the oil markets by

managing the spread between the costs we incur to obtain our materials 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, non-hazardous waste processing facilities, hubs, and branch system including personnel costs (including commissions), facility rent, truck leases, fuel, and maintenance. Our operating costs as a percentage of revenues 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 revenues 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 corporate SG&A expense as revenue less operating costs and depreciation and amortization from operations.

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 and marketing, billing, receivables management, accounting and finance, internal audit, logistics management beyond the branch level, environmental health and safety, human resources, and legal.

We operate a used oil re-refinery located in Indianapolis, Indiana, through which we recycle 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 50 million gallons of lubricating base oil per year when operating at full capacity.

Critical Accounting Policies

Critical accounting policies are those that are both important to the accurate portrayal of a company’s financial condition and results and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

In order to prepare financial statements that conform to accounting principles generally accepted in the United States, commonly referred to as GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

There were no material changes during the first quarter of fiscal 2022 to the information provided under the heading "Critical Accounting Policies" included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.

Impact of the COVID-19 Pandemic on Our Business

RESULTS OF OPERATIONS

General

The following table sets forth certain operating data as a percentage of revenues for the periods indicated:


	For the First Quarter Ended,
(thousands)	March 26, 2022				March 27, 2021

Revenues
Service revenues	$	68,907	49.4	%	$	57,700	54.8	%
Product revenues	64,482		46.3	%	42,266		40.1	%
Rental income	5,977		4.3	%	5,416		5.1	%
Total revenues	$	139,366	100.0	%	$	105,382	100.0	%
Operating expenses
Operating costs	$	101,783	73.0	%	$	76,771	72.9	%
Selling, general, and administrative expenses	13,735		9.9	%	12,188		11.6	%
Depreciation and amortization	6,507		4.7	%	3,782		3.6	%
Other (income) - net	(210)		(0.2)	%	(108)		(0.1)	%
Operating income	17,551		12.6	%	12,749		12.1	%
Interest expense – net	223		0.2	%	324		0.3	%
Income before income taxes	17,328		12.4	%	12,425		11.8	%
Provision for income taxes	4,450		3.2	%	3,219		3.1	%
Net income	$	12,878	9.2	%	$	9,206	8.7	%

Revenues

Revenue for the first quarter of 2022 was $139.4 million compared to $105.4 million for the same quarter of 2021, an increase of $34.0 million, or 32.3%. The $34.0 million increase in revenue was mainly driven by higher base oil selling prices and higher demand and increased prices, for our products and services and, to a lesser extent, by revenue from acquisitions made during the second half of 2021.

Operating costs

Operating costs increased $25.0 million, or 32.6%, during the first quarter of 2022 compared to the first quarter of fiscal 2021 mainly due to higher labor costs, disposal costs, and transportation related expenses.

We expect that in the future our operating costs in both the Environmental Services and Oil Business segments may increase or decrease depending on our product and service volumes and changes in commodity pricing, along with other factors.

Selling, general, and administrative expenses

Selling, general, and administrative expenses increased $1.5 million, or 12.7%, from the first quarter of fiscal 2021 to the first quarter of fiscal 2022 mainly due to higher salaries and benefits, restricted stock grants and legal fees.

Other (income) expense - net

Other (income) expense - net was ($0.2) million of income for the first quarter of fiscal 2022, compared to a net ($0.1) million of income in the first quarter of 2021.

Interest expense - net

Interest expense - net for the first quarter of fiscal 2022 and fiscal 2021 was $0.2 million and $0.3 million, respectively.

Provision for income taxes

The Company's effective income tax rate for the first quarter of fiscal 2022 was 25.7% compared to 25.9% in the first quarter of fiscal 2021. The rate decrease is principally attributable to the reduced impact of certain adjustments to financial reporting income due to increased levels of profitability as compared to the first quarter of fiscal 2021.

Segment Information

The following table presents revenues by reportable segment:


		First Quarter Ended,				Change
(thousands)		March 26, 2022		March 27, 2021		$		%
Revenues:
	Environmental Services	$	84,651	$	69,457	$	15,194	21.9	%
	Oil Business	54,715		35,925		18,790		52.3	%
	Total	$	139,366	$	105,382	$	33,984	32.2	%

In the first quarter of fiscal 2022, Environmental Services revenue was $84.7 million compared to $69.5 million during the first quarter of fiscal 2021. The 21.9% increase in revenue was mainly due to the continued increase in demand for our services compared to the prior year quarter and, to a lesser extent, revenue from companies acquired during the second-half of 2021. We experienced revenue increases across all service lines in the segment when compared to the first quarter of 2021.

During the first quarter of fiscal 2022, Oil Business revenue of $54.7 million represents a record high for a 12-week quarter, an increase of $18.8 million, or 52.3%, compared to $35.9 million in the first quarter of fiscal 2021. An increase in base oil prices was the main driver of the increase in revenue compared to the prior year quarter.

Segment Profit Before Corporate Selling, General and Administrative Expenses ("SG&A")

The following table presents profit by reportable segment before corporate SG&A expense:


		First Quarter Ended,				Change
(thousands)		March 26, 2022		March 27, 2021		$		%
Profit before corporate SG&A*
	Environmental Services	$	14,145	$	15,998	$	(1,853)	(11.6)%
	Oil Business	18,466		10,086		8,380		83.1%
	Total	$	32,611	$	26,084	$	6,527	25.0%

*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 11 in our consolidated financial statements included elsewhere in this document.

Environmental Services profit before corporate SG&A expense decreased $1.9 million, or (11.6)%, in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. The decrease in operating margin was mainly driven by higher disposal, transportation and container costs caused by extraordinarily high inflation. Operating margin for first quarter of 2022 was 16.7% compared to 23.0% in the first quarter of 2021.

Oil Business profit before corporate SG&A expense increased $8.4 million, or 83.1% in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. Oil Business segment operating margin increased to 33.7% in the first quarter of 2022 compared to 28.1% in the first quarter of fiscal 2021. The higher operating margin compared to the first quarter of 2021 was mainly due to an increase in the spread between the netback (sales price net of freight impact) on our base oil sales and the price paid/charged to our customers for the removal of their used oil.

FINANCIAL CONDITION

Liquidity and Capital Resources

Cash and Cash Equivalents

As of March 26, 2022 and January 1, 2022, cash and cash equivalents were $71.1 million and $56.3 million, respectively. Our primary sources of liquidity are cash flows from operations and funds available to borrow under our revolving bank credit facility.

Debt and Financing Arrangements

On March 18, 2021, Heritage-Crystal Clean, LLC, (the “Company”), entered into an Amended and Restated Credit Agreement (the "Agreement"), by and among the Company, its parent, Heritage-Crystal Clean, Inc., and the Company’s subsidiaries identified therein and Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., and Wells Fargo Bank, National Association. The Agreement replaces the Company's previous Credit Agreement dated as of February 21, 2017. During the first quarter of fiscal 2021 the Company paid down its previous term loan, in full, of $30.0 million. The Agreement provides for borrowings of up to $100.0 million, in the form of a revolving facility, of which $15 million can be used in the form of a Swing Line loan.

•An interest coverage ratio (based on interest expense and EBITDA) of at least 3.5 to 1.0;

The Credit Agreement places certain limitations on acquisitions and the payment of dividends.

On July 27, 2017, the Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out the London Interbank Offered Rate by the end of 2021. Subsequently the phase out deadline has been extended to June 30, 2023. We expect that widespread use of LIBOR will transition to alternative interest rates in the near future. Since loans made under our Credit Agreement may be LIBOR based loans, the phasing out of LIBOR may adversely affect interest rates that could result in higher borrowing costs and higher interest expense. As the Company does not have any outstanding borrowings under the financial instruments impacted by LIBOR, the effect on the financial statements is not material.

We believe that our existing cash, cash equivalents, available borrowings, and other sources of financings will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. We cannot assure you that this will be the case or that our assumptions regarding revenues and expenses underlying this belief will be accurate. If, in the future, we require more liquidity than is available to us under our credit facility, we may need to raise

additional funds through debt or equity offerings. Adequate funds may not be available when needed or may not be available on terms favorable to us. If additional funds are raised by issuing equity securities, dilution to existing stockholders may result. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

Summary of Cash Flow Activity


	First Quarter Ended,
(thousands)	March 26, 2022		March 27, 2021
Net cash provided by (used in):
Operating activities	$	24,590	$	16,203
Investing activities	(9,145)		(5,262)
Financing activities	(648)		(31,847)
Net increase (decrease) in cash and cash equivalents	$	14,797	$	(20,906)

The most significant items affecting the comparison of our operating activities for the first quarter of fiscal 2022 and the first quarter of fiscal 2021 are summarized below:

Net Cash Provided by Operating Activities —

•Earnings — Our increase in net income during the first quarter of 2022 favorably impacted our net cash provided by operating activities by $3.7 million compared to the first quarter of 2021.

•Accounts Receivable — The increase in accounts receivable had an unfavorable impact on cash provided by operating activities of $3.1 million compared to the increase in accounts receivable during in the first quarter of fiscal 2021.

•Accounts Payable — The increase in accounts payable had a favorable impact on cash provided by operating activities of $4.9 million in the first quarter of fiscal 2022.

Net Cash Used in Investing Activities —

•Capital expenditures — We made capital expenditures as follows:


	First Quarter Ended,
(millions)	March 26, 2022		March 27, 2021
Re-refinery capital improvements	$	2.0	$	1.1
Trucks and trailers	2.6		1.5
Parts cleaning machines	1.4		1.2
IT projects	0.2		—
Various other projects	2.9		1.6
Total	$	9.1	$	5.4

Net Cash Used in Financing Activities — During the first quarter of fiscal 2021 the Company paid down its previous term loan, in full, of $30.0 million.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate risks primarily through borrowings under our bank Credit Facility. Interest on this facility is based upon variable interest rates. We had no borrowings under our Credit Facility during the first quarter of fiscal 2022. We currently do not hedge against interest rate risk. Based on the foregoing, a hypothetical 1% increase or decrease in interest rates would have resulted in no change to our interest expense in the first quarter of fiscal 2022.

ITEM 4. CONTROLS AND PROCEDURES

The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial

Officer, as appropriate, to allow timely decisions regarding financial disclosures.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting during the first quarter ended March 26, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

Environmental Matters

On January 19, 2022, a civil enforcement action was filed in the United States District Court for the Northern District of Illinois, Civil Action No. 1:22-cv-00303: United States of America, Louisiana Department of Environmental Quality, and the State of Indiana vs. Heritage-Crystal Clean, LLC (the “Action”). The Action alleges that the Company’s spent solvent recycling programs violate sections 3008(a) and (g) of the Resource Conservation and Recovery Act (“RCRA”), 42 U.S.C. § 6928(a) and (g), and Indiana Code Section 13-30-4-1, including that the Company’s used 106 solvent program is not exempt under RCRA, and that some of the waste received by the Company under its non-hazardous 142 solvent program included hazardous waste. The Action further alleges that the Company’s storage and handling of used oil at its Shreveport, Louisiana location was not in full compliance with Louisiana environmental laws. The plaintiffs seek civil penalties in an undetermined amount, injunctive relief, and modifications made in the Company’s solvent recycling programs and used oil handling services. The Company is in discussions with members of the U.S. Department of Justice, U.S. Environmental Protection Agency, Louisiana Department of Environmental Quality, and Indiana Department of Environmental Management to resolve the Action but cannot predict the outcome of these discussions. As of March 26, 2022, no liability was accrued related to this Action.

ITEM 6. EXHIBITS



31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1			Certification of Chief Executive Officer pursuant to 18 U.S. C ode Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2			Certification of Chief Financial Officer pursuant to 18 U.S. C ode Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*			XBRL Instance Document
101.SCH*			XBRL Taxonomy Extension Schema Document
101.CAL*			XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*			XBRL Taxonomy Extension Label Linkbase Document
101.PRE*			XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*			XBRL Taxonomy Extension Definition Linkbase Document

*In accordance with Regulation S-T, the XBRL-related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall be deemed to be "furnished" and not "filed."

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HERITAGE-CRYSTAL CLEAN, INC.


Date:	May 4, 2022	By:	/s/ Mark DeVita

			Mark DeVita
			Chief Financial Officer