Results

Heritage-Crystal Clean Inc.

10/20/2021 | Press release | Distributed by Public on 10/20/2021 14:20

Quarterly Report (Form 10-Q)

hcci-20210911




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 September 11, 2021
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, IL60123
(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. YesxNo 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). YesxNo o

1

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 filerx
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 October 19, 2021, there were outstanding 24,188,476 shares of Common Stock, $0.01 par value, of Heritage-Crystal Clean, Inc.



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Table of Contents
PART I
ITEM 1. FINANCIAL STATEMENTS
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
35
ITEM 4. CONTROLS AND PROCEDURES
35
PART II
ITEM 5. EXHIBITS
36
SIGNATURES
37

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PART I

ITEM 1. FINANCIAL STATEMENTS
Heritage-Crystal Clean, Inc.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
September 11,
2021
January 2,
2021
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 75,273 $ 67,575
Accounts receivable - net 60,293 48,479
Inventory - net 27,854 24,978
Assets held for sale 1,125 2,446
Other current assets 9,032 8,005
Total current assets 173,577 151,483
Property, plant and equipment - net 157,972 153,016
Right of use assets 79,855 78,942
Equipment at customers - net 24,012 23,111
Software and intangible assets - net 20,491 19,576
Goodwill 48,185 35,541
Other assets 742 -
Total assets $ 504,834 $ 461,669
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,253 $ 29,663
Current portion of lease liabilities 21,849 19,198
Contract liabilities - net 2,267 1,983
Accrued salaries, wages, and benefits 7,636 6,647
Taxes payable 17,173 10,592
Other current liabilities 9,027 4,918
Total current liabilities 90,205 73,001
Lease liabilities, net of current portion 59,874 60,294
Long-term debt, less current maturities - 29,656
Other long term liabilities 2,085 -
Contingent consideration 2,819 -
Deferred income taxes 27,287 21,218
Total liabilities $ 182,270 $ 184,169
STOCKHOLDERS' EQUITY:
Common stock - 26,000,000 shares authorized at $0.01 par value, 23,450,869 and 23,340,700 shares issued and outstanding at September 11, 2021 and January 2, 2021, respectively
$ 234 $ 233
Additional paid-in capital 203,529 201,148
Retained earnings 118,944 76,119
Accumulated other comprehensive loss (143) -
Total stockholders' equity 322,564 277,500
Total liabilities and stockholders' equity $ 504,834 $ 461,669
See accompanying notes to financial statements.
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Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Income
(In Thousands, Except per Share Amounts)
(Unaudited)
Third Quarter Ended, First Three Quarters Ended,
September 11,
2021
September 5, 2020 September 11, 2021 September 5, 2020
Revenues
Service revenues $ 59,737 $ 53,257 $ 177,469 $ 169,262
Product revenues 57,713 28,522 151,529 88,106
Rental income 5,725 5,355 16,836 16,548
Total revenues $ 123,175 $ 87,134 $ 345,834 $ 273,916
Operating expenses
Operating costs $ 79,486 $ 67,125 $ 234,584 $ 222,669
Selling, general, and administrative expenses 13,294 9,410 38,522 32,066
Depreciation and amortization 5,767 5,635 15,168 16,358
Other (income) - net (230) (441) (669) (6,967)
Operating income 24,858 5,405 58,229 9,790
Interest expense - net 206 284 707 842
Income before income taxes 24,652 5,121 57,522 8,948
Provision for income taxes 6,144 1,163 14,697 2,357
Net income $ 18,508 $ 3,958 $ 42,825 $ 6,591
Net income per share: basic $ 0.79 $ 0.17 $ 1.83 $ 0.28
Net income per share: diluted $ 0.79 $ 0.17 $ 1.82 $ 0.28
Number of weighted average shares outstanding: basic 23,431 23,294 23,403 23,277
Number of weighted average shares outstanding: diluted 23,570 23,479 23,548 23,456

See accompanying notes to financial statements.
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Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(In Thousands)
(Unaudited)

Third Quarter Ended, First Three Quarters Ended,
September 11,
2021
September 5,
2020
September 11,
2021
September 5,
2020
Net income $ 18,508 $ 3,958 $ 42,825 $ 6,591
Other comprehensive loss:
Currency translation adjustments (143) - (143) -
Total other comprehensive loss: $ (143) $ - $ (143) $ -


See accompanying notes to financial statements.
6

Heritage-Crystal Clean, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(In Thousands, Except Share Amounts)
For the Third Quarter Ended September 11, 2021 and September 5, 2020
(Unaudited)
Third Quarter Ended,
September 11, 2021
Shares Par
Value
Common
Additional Paid-in
Capital
Retained Earnings Accumulated Other Comprehensive Loss Total Equity
Balance, June 19, 2021 23,410,606 $ 234 $ 203,356 $ 100,436 $ - $ 304,026
Net income - - - 18,508 - 18,508
Currency translation adjustment - - - - (143) (143)
Issuance of common stock - ESPP 4,324 - 124 - - 124
Share-based compensation 35,939 - 916 - - 916
Share repurchases to satisfy tax withholding obligations - - (867) - - (867)
Balance at September 11, 2021 23,450,869 $ 234 $ 203,529 $ 118,944 $ (143) $ 322,564
Third Quarter Ended,
September 5, 2020
Shares Par
Value
Common
Additional Paid-in
Capital
Retained Earnings Accumulated Other Comprehensive Income Total Equity
Balance at June 13, 2020 23,269,462 $ 233 $ 198,992 $ 66,815 $ - $ 266,040
Net income - - - 3,958 - 3,958
Issuance of common stock - ESPP 7,299 - 117 - - 117
Share-based compensation 18,839 - 726 - - 726
Balance at September 5, 2020 23,295,600 $ 233 $ 199,835 $ 70,773 $ - $ 270,841

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Heritage-Crystal Clean, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(In Thousands, Except Share Amounts)
For the First Three Quarters Ended September 11, 2021 and September 5, 2020
(Unaudited)

First Three Quarters Ended,
September 11, 2021
Shares Par Value Common Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Heritage-Crystal Clean, Inc. Stockholders' Equity Non-controlling Interest Total Equity
Balance, January 2, 2021 23,340,700 $ 233 $ 201,148 $ 76,119 $ - $ 277,500 $ - $ 277,500
Net income - - - 42,825 - 42,825 - 42,825
Non-controlling interest acquisition - - - - - - - -
Currency translation adjustment - - - - (143) (143) - (143)
Issuance of common stock - ESPP 15,146 - 371 - - 371 - 371
Share-based compensation 95,023 1 3,606 - - 3,607 - 3,607
Share repurchases to satisfy tax withholding obligations - - (1,596) - - (1,596) - (1,596)
Balance at September 11, 2021 23,450,869 $ 234 $ 203,529 $ 118,944 $ (143) $ 322,564 $ - $ 322,564
First Three Quarters Ended,
September 5, 2020
Shares Par Value Common Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Total Heritage-Crystal Clean, Inc. Stockholders' Equity Non-controlling Interest Total Equity
Balance at December 28, 2019 23,191,498 $ 232 $ 200,583 $ 64,182 $ - $ 264,997 $ 634 $ 265,631
Net income - - - 6,591 - 6,591 - 6,591
Currency Translation Adjustment - - - - - - - -
Non-controlling interest acquisition - - (2,678) - - (2,678) - (2,678)
Distribution - - - - - - (634) (634)
Issuance of common stock - ESPP 20,560 - 374 - - 374 - 374
Share-based compensation 83,542 1 2,347 - - 2,348 - 2,348
Share repurchases to satisfy tax withholding obligations - - (791) - - (791) - (791)
Balance at June 13, 2020 23,295,600 $ 233 $ 199,835 $ 70,773 $ - $ 270,841 $ - $ 270,841



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Heritage-Crystal Clean, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
First Three Quarters Ended,
September 11,
2021
September 5,
2020
Cash flows from Operating Activities:
Net income $ 42,825 $ 6,591
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 15,168 16,358
Reversal of provision for class action settlement in excess of payout - (6,502)
Uncollectible provision 1,069 1,210
Share-based compensation 3,922 2,348
Deferred taxes 6,068 2,487
Other, net (165) (766)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (12,883) 6,252
(Increase) decrease in inventory (2,803) 4,538
(Increase) in other current assets (1,032) (1,373)
Increase (decrease) in accounts payable 2,254 (9,012)
Increase in accrued liabilities 8,704 686
Cash provided by operating activities $ 63,127 $ 22,817
Cash flows from Investing Activities:
Capital expenditures $ (12,039) $ (16,465)
Proceeds from sale of assets 1,612 422
Business acquisitions, net of cash acquired (11,373) (10,129)
Cash used in investing activities $ (21,800) $ (26,172)
Cash flows from Financing Activities:
Payment of Term Loan (30,000) -
Debt Issuance Costs (822) -
Repayment of principal on finance leases (1,582) (762)
Share repurchases to satisfy tax withholding obligations (1,596) (791)
Proceeds from the issuance of common stock 371 374
Payments of deferred and contingent consideration - (198)
Distributions to noncontrolling interest - (3,312)
Cash used in financing activities $ (33,629) $ (4,689)
Net increase (decrease) in cash and cash equivalents 7,698 (8,044)
Cash and cash equivalents, beginning of period 67,575 60,694
Cash and cash equivalents, end of period $ 75,273 $ 52,650
Supplemental disclosure of cash flow information:
Income taxes paid $ 637 $ 286
Cash paid for interest 125 743
Supplemental disclosure of non-cash information:
Payables for construction in progress 719 447

See accompanying notes to financial statements.


9


HERITAGE-CRYSTAL CLEAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

September 11, 2021


(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 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, 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 2, 2021. 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.


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(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 2, 2021. There have been no material changes in these policies or their application during the third quarter of fiscal 2021.
Recently Issued Accounting Standards Adopted
Standard Issuance Date Description Effective Date Effect on the Financial Statements
ASU 2020-04: Reference Rate Reform (Topic 848) March 12, 2020 In March 2020, the FASB issued ASU 2020-04: Reference Rate Reform which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuance of LIBOR or another referenced rate. The guidance may be applied to any applicable contract entered into before December 31, 2022. The Company plans on applying the accounting standard to contracts, hedging relationships, and other transactions affected by the discontinuance of LIBOR on a prospective basis.
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.



















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(3) BUSINESS COMBINATIONS

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. 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.

On March 31, 2020, the Company completed the acquisition of certain assets of Gro America ("Gro"), which has expanded our network of wastewater processing facilities and augmented our field services capabilities to better serve our customers throughout the Midwestern United States. The purchase price was $10.0 million subject to certain adjustments, including a working capital adjustment, and was allocated based on the Company's estimates and assumptions of the approximate fair values of assets acquired and liabilities assumed on the acquisition date. To date, there have been no adjustments to the purchase price. Goodwill recognized from the acquisition of Gro America represents the excess of the estimated purchase consideration transferred over the estimated fair value of the assets acquired and liabilities assumed. Factors leading to goodwill being recognized consist of the Company's expectations of synergies from combining operations of Gro America and the Company as well as the value of intangible assets that are not separately recognized, such as assembled workforce. Transaction costs incurred in conjunction with the acquisition of Gro America were immaterial. The results of Gro America are consolidated into the Company's Environmental Services segment from the date of acquisition.

The following table summarizes the preliminary fair values for Cole's Environmental and finalized fair values for Gro America of the assets acquired and liabilities assumed, net of cash acquired, related to each acquisition:
As of September 11, 2021
(thousands)
Cole's Environmental Gro America
Accounts receivable $ - $ 752
Inventory 73 -
Property, plant, & equipment 2,455 1,490
Intangible assets 2,120 5,300
Goodwill 12,644 2,541
Accounts payable - (76)
Total purchase price, net of cash acquired $ 17,292 $ 10,007
Less: contingent consideration 5,819 -
Less: to be placed in escrow 100 -
Net cash paid $ 11,373 $ 10,007


(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
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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:
Third Quarter Ended,
September 11, 2021 September 5, 2020
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 $ 40,232 $ - $ 40,232 $ 35,480 $ - $ 35,480
Wastewater Vacuum Services 15,131 - 15,131 12,529 - 12,529
Field Services 5,063 - 5,063 3,100 - 3,100
Antifreeze Business 5,730 - 5,730 5,649 - 5,649
Environmental Services - Other 458 - 458 371 - 371
Re-refinery Product Sales - 45,275 45,275 - 17,409 17,409
Oil Collection Services & RFO - 4,425 4,425 - 6,161 6,161
Oil Filter Business - 1,136 1,136 - 1,080 1,080
Revenues from Contracts with Customers 66,614 50,836 117,450 57,129 24,650 81,779
Rental income 5,725 - 5,725 5,310 45 5,355
Total Revenues $ 72,339 $ 50,836 $ 123,175 $ 62,439 $ 24,695 $ 87,134


First Three Quarters Ended,
September 11, 2021 September 5, 2020
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 $ 119,805 $ - $ 119,805 $ 109,053 $ - $ 109,053
Wastewater Vacuum Services 43,671 - 43,671 38,705 - 38,705
Field Services 13,908 - 13,908 17,285 - 17,285
Antifreeze Business 19,003 - 19,003 16,887 - 16,887
Environmental Services - Other 1,306 - 1,306 1,278 1,278
Re-refinery Product Sales - 114,158 114,158 - 54,896 54,896
Oil Collection Services & RFO - 13,594 13,594 - 16,109 16,109
Oil Filter Business - 3,553 3,553 - 3,155 3,155
Revenues from Contracts with Customers 197,693 131,305 328,998 183,208 74,160 257,368
Rental income 16,818 18 16,836 16,483 65 16,548
Total Revenues $ 214,511 $ 131,323 $ 345,834 $ 199,691 $ 74,225 $ 273,916
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The following table provides information about contract assets and contract liabilities from contracts with customers:
(thousands) September 11, 2021 January 2, 2021
Contract assets $ 116 $ 71
Contract liabilities 2,383 2,054
Contract liabilities - net $ 2,267 $ 1,983

During the fiscal quarter ended September 11, 2021, the Company recognized zero revenue that was included in the contract liabilities balance as of January 2, 2021. During the first three quarters ended September 11, 2021, the Company recognized $2.1 million of revenue that was included in the contract liabilities balance as of January 2, 2021. 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 third quarter ended September 11, 2021, and the fiscal year ended January 2, 2021 consisted of the following:
(thousands) September 11, 2021 January 2,
2021
Trade $ 54,875 $ 47,191
Less: allowance for uncollectible accounts 2,730 2,502
Trade - net 52,145 44,689
Related parties 7,421 3,276
Other 727 514
Total accounts receivable - net $ 60,293 $ 48,479

The following table provides the changes in the Company's allowance for uncollectible accounts for the first three quarters ended September 11, 2021, and the fiscal year ended January 2, 2021:
(thousands) September 11,
2021
January 2,
2021
Balance at beginning of period $ 2,502 $ 2,221
Provision for uncollectible accounts 1,069 1,919
Accounts written off, net of recoveries (841) (1,638)
Balance at end of period $ 2,730 $ 2,502
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(6) INVENTORY

The carrying value of inventory consisted of the following:
(thousands) September 11, 2021 January 2,
2021
Solvents and solutions $ 7,445 $ 6,672
Used oil and processed oil 8,764 6,345
Machines 5,127 5,704
Drums and supplies 4,771 4,423
Other 2,201 2,221
Total inventory 28,308 25,365
Less: machine refurbishing reserve 454 387
Total inventory - net $ 27,854 $ 24,978
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 third quarter of fiscal 2021 or 2020.





(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 tests goodwill for impairment at each of its two reporting units, Environmental Services and Oil Business.

The following table shows changes to our goodwill balances by segment from January 2, 2021 to September 11, 2021:
(thousands)
Environmental Services Total
Goodwill at January 2, 2021
Gross carrying amount $ 35,541 $ 35,541
Accumulated impairment loss - -
Net book value at January 2, 2021 $ 35,541 $ 35,541
Acquisitions 12,644 12,644
Goodwill at September 11, 2021
Gross carrying amount 48,185 $ 48,185
Accumulated impairment loss - -
Net book value at September 11, 2021 $ 48,185 $ 48,185

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The following is a summary of software and other intangible assets:
September 11, 2021 January 2, 2021
(thousands)
Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount
Customer & supplier relationships $ 32,858 $ 19,655 $ 13,203 $ 30,857 $ 16,934 $ 13,923
Software 11,528 6,105 5,423 9,592 5,645 3,947
Non-compete agreements 3,647 3,299 348 3,607 3,212 395
Patents, formulae, and licenses 1,769 886 883 1,769 850 919
Other 2,047 1,413 634 1,738 1,346 392
Total software and intangible assets $ 51,849 $ 31,358 $ 20,491 $ 47,563 $ 27,987 $ 19,576

Amortization expense was $1.1 million for the third quarter ended September 11, 2021, and $1.1 million for the third quarter ended September 5, 2020. Amortization expense was $3.4 million for the first three quarters ended September 11, 2021, and $2.9 million for the first three quarters ended September 5, 2020.

The weighted average useful lives of software and other intangibles are as follows:
Weighted Average Useful Life (years)
Patents, formulae, & licenses 15
Customer and supplier relationships 10
Software 9
Non-compete agreements 5
Other intangibles 7

The estimated amortization expense for the remainder of fiscal 2021 and each of the five succeeding fiscal years is as follows:
(millions)
Fiscal Year Amortization Expense
2021 $1.5
2022 4.6
2023 4.0
2024 2.4
2025 1.4
2026 0.8

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)
September 11,
2021
January 2,
2021
Accounts payable $ 31,544 $ 29,263
Accounts payable - related parties 709 400
Total accounts payable $ 32,253 $ 29,663

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(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 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 intends to phase out the London Interbank Offered Rate by the end of 2021. 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. The Company is currently evaluating its options under our Credit Agreement.

Debt at September 11, 2021 and January 2, 2021 consisted of the following:
(thousands) September 11, 2021 January 2, 2021
Principal amount $ - $ 30,000
Less: unamortized debt issuance costs - 344
Long-term debt, less current maturities $ - $ 29,656

For the third quarter ended September 11, 2021, the Company recorded interest expense of $0.2 million with respect to our credit line and related amortization of debt issuance costs. For the third quarter ended September 5, 2020, the Company recorded interest expense of $0.3 million of which $0.2 million was with respect to our term loan, and $0.1 million related to amortization of debt issuance costs. For the first three quarters ended September 11, 2021, the Company recorded interest expense of $0.7 million with respect to our term loan and credit line, and related amortization of debt issuance costs. For the first three quarters ended September 5, 2020, the Company recorded interest expense of $1.2 million, of which $1.0 million was with respect to our term loan, and $0.2 million related to amortization of debt issuance costs.

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The Company's weighted average interest rate for all debt through the third fiscal quarters of 2021, and 2020, was 2.04% and 3.2%, respectively.

As of September 11, 2021 and January 2, 2021, the Company was in compliance with all covenants under its Credit Agreement. As of September 11, 2021 and January 2, 2021, the Company, had $5.6 million and $3.9 million, of standby letters of credit issued, respectively, and $94.4 million and $61.0 million was available for borrowing under the bank credit facility, respectively.

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(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 service, 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 third quarters ended September 11, 2021 and September 5, 2020 were as follows:

Third Quarter Ended,
September 11, 2021
(thousands) Environmental
Services
Oil Business Corporate and
Eliminations
Consolidated
Revenues
Service revenues $ 56,887 $ 2,850 $ - $ 59,737
Product revenues 9,727 47,986 - 57,713
Rental income 5,725 - - 5,725
Total revenues $ 72,339 $ 50,836 $ - $ 123,175
Operating expenses
Operating costs 52,598 26,888 - 79,486
Operating depreciation and amortization 2,482 2,175 - 4,657
Profit before corporate selling, general, and administrative expenses $ 17,259 $ 21,773 $ - $ 39,032
Selling, general, and administrative expenses 13,294 13,294
Depreciation and amortization from SG&A 1,110 1,110
Total selling, general, and administrative expenses $ 14,404 $ 14,404
Other (income) - net (230) (230)
Operating income 24,858
Interest expense - net 206 206
Income before income taxes $ 24,652









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Third Quarter Ended,
September 5, 2020
(thousands)

Environmental
Services
Oil Business Corporate and
Eliminations
Consolidated
Revenues
Service revenues $ 47,532 $ 5,725 $ - $ 53,257
Product revenues 9,597 18,925 - 28,522
Rental income 5,310 45 - 5,355
Total revenues $ 62,439 $ 24,695 $ - $ 87,134
Operating expenses
Operating costs 45,383 21,742 - 67,125
Operating depreciation and amortization 2,431 2,102 - 4,533
Profit before corporate selling, general, and administrative expenses $ 14,625 $ 851 $ - $ 15,476
Selling, general, and administrative expenses 9,410 9,410
Depreciation and amortization from SG&A 1,102 1,102
Total selling, general, and administrative expenses $ 10,512 $ 10,512
Other (income) - net (441) (441)
Operating income 5,405
Interest expense - net 284 284
Income before income taxes $ 5,121

Segment results for the first three quarters ended September 11, 2021, and September 5, 2020 were as follows:

First Three Quarters Ended,
September 11, 2021
(thousands) Environmental
Services
Oil Business Corporate and
Eliminations
Consolidated
Revenues
Service revenues $ 166,593 $ 10,876 $ 177,469
Product revenues 31,100 120,429 - 151,529
Rental income 16,818 18 16,836
Total revenues $ 214,511 $ 131,323 $ - $ 345,834
Operating expenses
Operating costs 155,596 78,988 - 234,584
Operating depreciation and amortization 6,490 5,233 11,723
Profit before corporate selling, general, and administrative expenses $ 52,425 $ 47,102 $ - $ 99,527
Selling, general, and administrative expenses 38,522 38,522
Depreciation and amortization from SG&A 3,445 3,445
Total selling, general, and administrative expenses $ 41,967 $ 41,967
Other (income) - net (669) (669)
Operating income 58,229
Interest expense - net 707 707
Income before income taxes $ 57,522
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First Three Quarters Ended,
September 5, 2020
(thousands) Environmental Services Oil Business Corporate and Eliminations Consolidated
Revenues
Service revenues $ 154,589 $ 14,673 $ - $ 169,262
Product revenues 28,619 59,487 - 88,106
Rental income 16,483 65 - 16,548
Total revenues $ 199,691 $ 74,225 $ - $ 273,916
Operating expenses
Operating costs 150,891 71,778 - 222,669
Operating depreciation and amortization 7,049 6,238 - 13,287
Profit (loss) before corporate selling, general, and administrative expenses $ 41,751 $ (3,791) $ - $ 37,960
Selling, general, and administrative expenses 32,066 32,066
Depreciation and amortization from SG&A 3,071 3,071
Total selling, general, and administrative expenses $ 35,137 $ 35,137
Other (income) - net (6,967) (6,967)
Operating income 9,790
Interest expense - net 842 842
Income before income taxes $ 8,948


Total assets by segment as of September 11, 2021 and January 2, 2021 were as follows:
(thousands) September 11, 2021 January 2, 2021
Total Assets:
Environmental Services $ 237,841 $ 217,297
Oil Business 176,094 160,165
Unallocated Corporate Assets 90,899 84,207
Total $ 504,834 $ 461,669

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.

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(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 11 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.
























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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. Contained in Note 7, "Property, plant, and equipment," are disclosures concerning the Company's underlying assets under operating leases. 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:

Third Quarter Ended,
September 11, 2021 September 5, 2020
(thousands) Environmental Services Oil Business Total Environmental Services Oil Business Total
Parts Cleaning $ 5,701 $ - $ 5,701 $ 5,310 $ - $ 5,310
Railcars - - - - - -
Property 24 - 24 - 45 45
Total rental income $ 5,725 $ - $ 5,725 $ 5,310 $ 45 $ 5,355

First Three Quarters Ended,
September 11, 2021 September 5, 2020
(thousands) Environmental Services Oil Business Total Environmental Services Oil Business Total
Parts Cleaning $ 16,744 $ - $ 16,744 $ 16,483 $ - $ 16,483
Railcars - - - - 16 16
Property 74 18 92 - 49 49
Total rental income $ 16,818 $ 18 $ 16,836 $ 16,483 $ 65 $ 16,548


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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 $27.8 million as of September 11, 2021, and $20.0 million as of January 2, 2021, primarily for used oil, solvent, machine purchases, disposal and transportation expenses, and capital expenditures.

The Company may be subject to investigations, claims or lawsuits as a result of operating its business, including matters governed by environmental laws and regulations. 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 September 11, 2021 and January 2, 2021, the Company had accrued $3.2 million and $3.9 million related to loss contingencies and other contingent liabilities, respectively.


(12) INCOME TAXES

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 the third quarter of 2021. Therefore, the Company recorded a noncurrent deferred tax liability as to the difference between the book basis and the tax basis of those assets. The accelerated tax depreciation generated tax losses in most years from fiscal 2011 through fiscal 2019 which resulted in Net Operating Loss ("NOL") carryovers that would begin to expire in 2031. We expect to fully utilize substantially all of the NOLs during 2021.

In December 2019, the FASB issued ASU 2019-12, (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 intends to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application of Topic 740. This guidance is effective for fiscal years beginning after December 15, 2020, including interim periods therein. The adoption of ASU 2019-12 does not have a material effect on the Company's financial statements.

The Company's effective tax rate for the third quarter of fiscal 2021 was 25.1% compared to 22.7% in the third quarter of fiscal 2020. The rate increase is principally attributable to consistent levels of profitability as compared to the same quarter in the previous year.

The Company's effective rate for the first three quarters of fiscal 2021 was 25.6% compared to 26.3% in the first three quarters of fiscal 2020. The rate decrease is principally attributable to income taxes which are computed on a tax base that reflects substantial modifications to federal taxable income, and that has created comparatively lower anticipated tax expense due to higher pre-tax income for 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 $2.8 million for uncertain tax positions as of September 11, 2021. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.


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(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 Three Quarters Ended, Unrecognized Expense as of,
Recipient of Grant Grant Date Restricted Shares September 11, 2021 September 5, 2020 September 11, 2021 September 5, 2020
Chief Executive Officer February, 2017 500,000 $ - $ 319 $ - $ 187
Members of Management February, 2018 116,958 - 373 - 193
Special Incentive Grant April, 2018 350,000 1,123 548 798 2,073
Members of Management May, 2019 23,560 36 132 - 326
Members of Management February, 2020 41,138 75 165 114 453
Board of Directors April, 2020 14,988 - 197 - 88
Chief Executive Officer February, 2021 500,000 1,619 - 4,698 -
Members of Management February, 2021 35,898 114 - 517 -
Board of Directors April, 2021 11,487 227 - 105 -

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 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.

During the third quarter of fiscal 2021, 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 $4.7 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%.

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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 third quarter of fiscal 2021, the Company recorded approximately $0.1 million of compensation expense related to this award. During the first three quarters of fiscal 2021, the Company recorded approximately $0.3 million of compensation expense related to this award.

The following table summarizes the restricted stock activity for the third quarter ended September 11, 2021:
Restricted Stock (Nonvested Shares) Number of Shares Weighted Average Grant-Date Fair Value Per Share
Nonvested shares outstanding at January 2, 2021 646,634 $ 18.28
Granted 547,385 22.17
Vested (86,007) 18.49
Forfeited (370,405) 15.52
Nonvested shares outstanding at September 11, 2021 737,607 $ 22.48

Employee Stock Purchase Plan

As of September 11, 2021, the Company had reserved 64,488 shares of common stock available for purchase under the Employee Stock Purchase Plan. In the third quarter of fiscal 2021, employees purchased 4,324 shares of the Company's common stock with a weighted average fair market value of $25.78 per share.

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(14) EARNINGS PER SHARE

The following table reconciles the number of shares outstanding for the third quarters and first three quarters of fiscal 2021 and 2020, 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:
Third Quarter Ended, First Three Quarters Ended,
(thousands, except per share amounts) September 11, 2021 September 5, 2020 September 11, 2021 September 5, 2020
Net income $ 18,508 $ 3,958 $ 42,825 $ 6,591
Weighted average basic shares outstanding 23,431 23,294 23,403 23,277
Dilutive shares for share-based compensation plans 139 185 145 179
Weighted average diluted shares outstanding 23,570 23,479 23,548 23,456
Net income per share: basic $ 0.79 $ 0.17 $ 1.83 $ 0.28
Net income per share: diluted $ 0.79 $ 0.17 $ 1.82 $ 0.28


(15) OTHER (INCOME) EXPENSE - NET

Other (income) expense - net was $0.2 million of income for the third quarter of fiscal 2021, compared to a net $0.4 million of income in the third quarter of 2020. Other (income) expense - net was $0.7 million of income for the first three quarters of fiscal 2021, compared to a net $7.0 million of income in the first three quarters of fiscal 2020. The 2020 other income included approximately $6.5 million of income from the reversal of a portion of the expense accrual for a class action lawsuit settlement.



(16) SUBSEQUENT EVENTS

On September 13, 2021, the Company completed the acquisition of Raider Environmental Services of Florida, Inc., which has expanded our network of wastewater processing, oil collection and non-hazardous waste solidification to better serve our customers in Florida and throughout the Southern United States. Total consideration for the acquisition was approximately $13.5 million. 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. The valuation is currently being performed and is expected to be completed before year-end.

On September 27, 2021, the Company completed the acquisition of Source Environmental, Inc., 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 $20.5 million. The valuation is currently being performed and is expected to be completed before year-end.





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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, 2021. 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 2020 filed with the SEC on March 2, 2021. 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 ("third quarter" or "quarter") ended September 11, 2021 and September 5, 2020, respectively. "Fiscal 2020" represents the 53-week period ended January 2, 2021 and "Fiscal 2021" represents the 52-week period beginning January 3, 2021, and ending on January 1, 2022.

Overview

We provide parts cleaning, containerized waste management, used oil collection, wastewater vacuum, antifreeze recycling, and field services primarily to small and medium sized industrial customers as well as vehicle maintenance customers. We own and operate a used oil re-refinery, several wastewater treatment plants and multiple antifreeze recycling facilities. We believe we are the second largest provider of industrial and hazardous waste services to small and mid-sized customers in both the industrial services and vehicle maintenance sectors in North America, and we have the second largest used oil re-refining capacity in North America. Our services help our customers manage their used chemicals and liquid and solid wastes while also helping to minimize their regulatory burdens. We operate from a network of 90 branch facilities providing services to customers in 45 states and parts of Canada. We conduct business through two 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 58.7% of our total Company revenues for the third quarter of fiscal 2021. 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 41.3% of our total Company revenues in the third quarter of fiscal 2021.

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, wastewater treatment facilities, hubs, and
28

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 corporate 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, procurement, real estate management, information technology, 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 49 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 third quarter of fiscal 2021 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 2, 2021.

Impact of the COVID-19 Pandemic on Our Business

The COVID-19 pandemic has caused significant disruption and volatility on a global scale resulting in, among other things, an economic slowdown. In response to the COVID-19 outbreak, national and local governments around the world have instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. As our operations have been deemed essential, we have taken several measures to combat the COVID-19 downturn which have resulted in attenuating activity and, in some cases, required temporary closures of certain of our facilities. In addition, we have taken steps to minimize the negative impact of the COVID-19 pandemic throughout our business and to protect the safety of our employees and customers. The duration of these measures is unknown and may be extended, and additional measures may be necessary.

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. 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 2021.










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RESULTS OF OPERATIONS

General

The following table sets forth certain operating data as a percentage of revenues for the periods indicated:
Third Quarter Ended, First Three Quarters Ended,
(thousands) September 11,
2021
September 5,
2020
September 11,
2021
September 5,
2020
Revenues
Service revenues $ 59,737 48.5 % $ 53,257 61.1 % $ 177,469 51.3 % $ 169,262 61.8 %
Product revenues 57,713 46.9 % 28,522 32.7 % 151,529 43.8 % 88,106 32.2 %
Rental income 5,725 4.6 % 5,355 6.1 % 16,836 4.9 % 16,548 6.0 %
Total revenues $ 123,175 100.0 % $ 87,134 100.0 % $ 345,834 100.0 % $ 273,916 100.0 %
Operating expenses
Operating costs $ 79,486 64.5 % $ 67,125 77.0 % $ 234,584 67.8 % $ 222,669 81.3 %
Selling, general, and administrative expenses 13,294 10.8 % 9,410 10.8 % 38,522 11.1 % 32,066 11.7 %
Depreciation and amortization 5,767 4.7 % 5,635 6.5 % 15,168 4.4 % 16,358 6.0 %
Other (income) - net (230) (0.2) % (441) (0.5) % (669) (0.2) % (6,967) (2.5) %
Operating income 24,858 20.2 % 5,405 6.2 % 58,229 16.8 % 9,790 3.6 %
Interest expense - net 206 0.2 % 284 0.3 % 707 0.2 % 842 0.3 %
Income before income taxes 24,652 20.0 % 5,121 5.9 % 57,522 16.6 % 8,948 3.3 %
Provision for income taxes 6,144 5.0 % 1,163 1.3 % 14,697 4.2 % 2,357 0.9 %
Net income $ 18,508 15.0 % $ 3,958 4.5 % $ 42,825 12.4 % $ 6,591 2.4 %

Revenues

Revenue for the third quarter of 2021 was $123.2 million compared to $87.1 million for the same quarter of 2020, an increase of $36.0 million, or 41.3%. The $36.0 million increase in revenue was mainly driven by higher base oil selling prices and higher base oil sales volume during the third quarter. In addition, we experienced a continued growth and recovery as a result of the COVID-19 pandemic which negatively impacted 2020 revenues. For the first three quarters of fiscal 2021, revenues increased $71.9 million, or 26.2%, from $273.9 million in the first three quarters of fiscal 2020 to $345.8 million in the first three quarters of 2021 mainly driven by the factors mentioned above.

Operating costs

Operating costs increased $12.4million,or 18.5%, during the third quarter of 2021 compared to the third quarter of fiscal 2020 mainly due to higher labor costs, health and welfare costs, transportation related expenses and higher used oil feedstock volume as a result of more business activity due to the lessening impacts of the COVID-19 pandemic. Operating costs increased $11.9million, or 5.3%,in the first three quarters of fiscal 2021 compared to the first three quarters of fiscal 2020.

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 $3.9 million, or 41.4%, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021 mainly driven by the increase in bonus reserve. Selling, general, and administrative expenses increased $6.5 million, or 20.3%, from the first three quarters of fiscal 2020 to the first three quarters of fiscal 2021 mainly driven by the factors mentioned above.

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Other (income) expense - net

Other (income) expense - net was $0.2 of income for the third quarter of fiscal 2021, compared to a net $0.4 million of income in the third quarter of 2020 mainly due to the gain on sale of assets. Other (income) expense - net was $0.7 million of income for the first three quarters of fiscal 2021, compared to a net $7.0 million of income in the first three quarters of 2020 driven mainly by a $6.5 million reversal of a portion of the expense accrual for a class action lawsuit settlement.

Interest expense - net

Interest expense - net for the third quarter of fiscal 2021 and fiscal 2020 was $0.2million and $0.3million, respectively. Interest expense - net for the first three quarters of fiscal 2021 and 2020 was $0.7 million and $0.8 million respectively.

Provision for income taxes

The Company's effective income tax rate for the third quarter of fiscal 2021 was 25.1% compared to 22.7% in the third quarter of fiscal 2020. The rate increase is principally attributable to the opposing effect of non-deductible expenses in a projected loss year as compared to a projected income year.

The Company's effective rate for the first three quarters of fiscal 2021 was 25.6% compared to 26.3% in the first three quarters of fiscal 2020. The rate decrease is principally attributable to income taxes which are computed on a tax base that reflects substantial modifications to federal taxable income, and that has created comparatively lower anticipated tax expense due to higher pre-tax income for fiscal 2021.

Segment Information

The following table presents revenues by reportable segment:
Third Quarter Ended, Change
(thousands) September 11, 2021 September 5, 2020 $ %
Revenues:
Environmental Services $ 72,339 $ 62,439 $ 9,900 15.9 %
Oil Business 50,836 24,695 26,141 105.9 %
Total $ 123,175 $ 87,134 $ 36,041 41.4 %

First Three Quarters Ended, Change
(thousands) September 11, 2021 September 5, 2020 $ %
Revenues:
Environmental Services $ 214,511 $ 199,691 $ 14,820 7.4 %
Oil Business 131,323 74,225 57,098 76.9 %
Total $ 345,834 $ 273,916 $ 71,918 26.3 %

In the third quarter of fiscal 2021, Environmental Services revenue was $72.3 million compared to $62.4 million during the third quarter of fiscal 2020. The 15.9% increasein revenue was mainly due to the lessening impacts of the COVID-19 pandemic on our business during the third quarter of 2021 compared to the third quarter of 2020. We saw volume increases in all of our lines of business compared to the third quarter of 2020. For the first three quarters of fiscal 2021, Environmental Services revenue was $214.5 million, compared to $199.7 million during the first three quarters of fiscal 2020.

During the third quarter of fiscal 2021, Oil Business revenues were a record of $50.8 million, an increaseof $26.1 million, or 105.9%, compared to $24.7 million in the third quarter of fiscal 2020. An increase in base oil prices was the main driver of the increase in revenue along with an increase in base oil sales volume compared to the prior year quarter. For the first three quarters of fiscal 2021, Oil Business revenues were $131.3 million, compared to $74.2 million during the first three quarters of fiscal 2020. The increase in revenue was driven primarily by the higher base oil sales price and an increase in the volume of base oil sold during the first three quarters of fiscal 2021 compared to the first three quarters of fiscal 2020.

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

The following table presents profit by reportable segment before corporate SG&A expense:
Third Quarter Ended, Change
(thousands) September 11, 2021 September 5, 2020 $ %
Profit before corporate SG&A*
Environmental Services $ 17,259 $ 14,625 $ 2,634 18.0%
Oil Business 21,773 851 20,922 N/M
Total $ 39,032 $ 15,476 $ 23,556 152.2%

First Three Quarters Ended, Change
(thousands) September 11, 2021 September 5, 2020 $ %
Profit (loss) before corporate SG&A*
Environmental Services $ 52,425 $ 41,751 $ 10,674 25.6%
Oil Business 47,102 (3,791) 50,893 N/M
Total $ 99,527 $ 37,960 $ 61,567 162.2%
*Includes depreciation and amortization related to operating activity but not depreciation and amortization related to corporate selling, general, and administrative activity. For further discussion see Note 11 in our consolidated financial statements included elsewhere in this document.

Environmental Services profit before corporate SG&A expense increased$2.6 million, or 18.0%, in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. The increase was mainly driven by higher revenues due to the waning negative impacts of the COVID-19 pandemic which produced improved leveraging of fixed costs during the third quarter of fiscal 2021 partially offset by inflationary cost pressures for disposal and containers. Operating margin for third quarter of 2021 was 23.9%compared to 23.4%in the third quarter of 2020.

Environmental Services profit before corporate SG&A expense increased$10.7 million, or 25.6%, in the first three quarters of fiscal 2021 compared to the first three quarters of fiscal 2020. The improvement in profitability during the first three quarters of fiscal 2021 compared to fiscal 2020 was due to the factors mentioned above which occurred during the third quarter of fiscal 2021. Operating margin for first three quarters of 2021 was 24.4% compared to 20.9% in the first three quarters of 2020.

Oil Business profit before corporate SG&A expense increased $20.9 million in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. The higher operating margin compared to the third quarter of 2020 was mainly due to the improvement between the cost of our used oil feedstock and the selling price of our base oil. Oil Business segment operating margin sharply increased to a record 42.8%in the third quarter of 2021 compared to 3.4% in the third quarter of fiscal 2020.

Oil Business profit before corporate SG&A expense increased $50.9 million in the first three quarters of fiscal 2021 compared to the firstthree quartersof fiscal 2020. The factors which drove the improvement during the third quarter were primarily responsible for the improvement in profitability during the first three quartersof fiscal 2021 compared to the first three quartersof fiscal 2020.

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FINANCIAL CONDITION
Liquidity and Capital Resources

Cash and Cash Equivalents

As of September 11, 2021 and January 2, 2021, cash and cash equivalents were $75.3 million and $67.6 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 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 intends to phase out the London Interbank Offered Rate by the end of 2021. 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. The Company is currently evaluating its options under our Credit Agreement, but at this time we cannot reasonably estimate the impact to our financial statements.
The Company's weighted average interest rate for all debt through the third fiscal quarters of 2021, and 2020, was 2.04% and 3.2%, respectively.

As of September 11, 2021 and January 2, 2021, the Company was in compliance with all covenants under its Credit Agreement. As of September 11, 2021 and January 2, 2021, the Company,had $5.6 million and $3.9 million, of standby letters of credit issued, respectively, and $94.4 million and $61.0 million was available for borrowing under the bank credit facility, respectively.

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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 Three Quarters Ended,
(thousands) September 11,
2021
September 5,
2020
Net cash provided by (used in):
Operating activities $ 63,127 $ 22,817
Investing activities (21,800) (26,172)
Financing activities (33,629) (4,689)
Net increase (decrease) in cash and cash equivalents $ 7,698 $ (8,044)
The most significant items affecting the comparison of our operating activities for the first three quarters of fiscal 2021 and the first three quarters of fiscal 2020 are summarized below:

Net Cash Provided by Operating Activities-

Earnings - Our increase in net income during the first three quarters of 2021 favorably impacted our net cash provided by operating activities by $36.2 millioncompared to the first three quarters of 2020.

Accounts Receivable - The increase in accounts receivable had an unfavorable impact on cash provided by operating activities of $19.1 million compared to the decrease in accounts receivable during in the first three quarters of fiscal 2020.

Accounts Payable - The increase in accounts payable had a favorable impact on cash provided by operating activities of $11.3 million in the first three quarters of fiscal 2021.

Net Cash Used in Investing Activities-

Capital expenditures -We made capital expenditures as follows:
First Three Quarters Ended,
(thousands) September 11,
2021
September 5,
2020
Re-refinery capital improvements $ 2.4 $ 6.5
Trucks and trailers 5.9 3.1
Parts cleaning machines 3.1 2.9
IT projects 0.3 1.9
Various other projects 0.3 2.1
Total $ 12.0 $ 16.5

Net Cash Used in Investing Activities- During the first three quarters of 2021, the Company used $11.4 million of cash outflows for an acquisition.

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

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 third quarter ended September 11, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.








35

PART II

ITEM 5. 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 Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
*In accordance with Regulation S-T, the XBRL-related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall be deemed to be "furnished" and not "filed."




36


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: October 20, 2021 By: /s/ Mark DeVita
Mark DeVita
Chief Financial Officer

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