SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 2004 COMMISSION FILE NUMBER 0-11688
AMERICAN ECOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3889638
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 E. MALLARD, SUITE 300, BOISE, IDAHO 83706
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (208) 331-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [_]
The aggregate market value of the Registrant's voting stock held by
non-affiliates on June 30, 2004 was approximately $134,800,000 based on the
closing price of $11.98 per share as reported on the NASDAQ Stock Market, Inc.'s
National Market System.
At March 1, 2005, Registrant had outstanding 17,411,294 shares of its Common
Stock.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held May 25, 2005. Part III
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TABLE OF CONTENTS
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . 14
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities 15
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Item 9B. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
PART III
Items 10 through 14 are incorporated by reference from the definitive proxy
statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
PART IV
Item 15. Exhibits, Financial Statement Schedules. . . . . . . . . . . . . . . . . . . 63
2
DEFINITIONS
TERM MEANING
---- -------
AEC or the Company . . . . . . . . . . . . . American Ecology Corporation and its subsidiaries
CERCLA or "Superfund". . . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act of 1980
FUSRAP . . . . . . . . . . . . . . . . . . . U.S. Army Corps of Engineers Formerly Utilized Site
Remedial Action Program
LLRW . . . . . . . . . . . . . . . . . . . . Low-level radioactive waste
NORM/NARM. . . . . . . . . . . . . . . . . . Naturally occurring and accelerator produced
radioactive material
NRC. . . . . . . . . . . . . . . . . . . . . U.S. Nuclear Regulatory Commission
PCBs . . . . . . . . . . . . . . . . . . . . Polychlorinated biphenyls
RCRA . . . . . . . . . . . . . . . . . . . . Resource Conservation and Recovery Act of 1976
SEC. . . . . . . . . . . . . . . . . . . . . U. S. Securities and Exchange Commission
TCEQ . . . . . . . . . . . . . . . . . . . . Texas Commission on Environmental Quality
TSCA . . . . . . . . . . . . . . . . . . . . Toxic Substance Control Act of 1976
USACE. . . . . . . . . . . . . . . . . . . . U.S. Army Corps of Engineers
US EPA . . . . . . . . . . . . . . . . . . . U.S. Environmental Protection Agency
WUTC . . . . . . . . . . . . . . . . . . . . Washington Utilities and Transportation Commission
3
PART I
ITEM 1. BUSINESS
The Company provides radioactive, hazardous and industrial waste management
services to commercial and government entities, such as nuclear power plants,
medical and academic institutions, steel mills, refineries and chemical
production facilities. Headquartered in Boise, Idaho, the Company is one of the
nation's oldest providers of radioactive and hazardous waste services. AEC and
its predecessor companies have been in business for more than 50 years. AEC
operates nationally and currently employs 178 people.
The Company's official website can be found at www.americanecology.com. Company
-----------------------
filings with the SEC are posted on the website subsequent to the official
filing. The information found on our website is not part of this or any other
report we file with or furnish to the SEC.
AEC was most recently incorporated as a Delaware corporation in May 1987. The
Company's wholly owned primary operating subsidiaries are US Ecology Nevada,
Inc., a Delaware corporation ("USEN"); US Ecology Washington, Inc., a Delaware
corporation ("USEW"); US Ecology Texas, L.P., a Texas Limited Partnership
("USET"); US Ecology Idaho, Inc., a Delaware corporation ("USEI") and US
Ecology, Inc. a California Corporation ("USE"). American Ecology Recycle Center,
Inc., a Delaware corporation ("AERC") is the subsidiary that previously owned
the discontinued Oak Ridge LLRW processing and field services operations.
The Company operates within two business segments: Operating Disposal
Facilities and Non-Operating Disposal Facilities. These segments reflect AEC's
internal reporting structure and current operational status. The Operating
Disposal Facilities currently accept hazardous and low-level radioactive waste
and include the Company's RCRA hazardous waste treatment and disposal facilities
in Beatty, Nevada; Grand View, Idaho; and Robstown, Texas; and its LLRW disposal
facility in Richland, Washington. Each of the Washington, Idaho and (to a much
lesser degree) Texas facilities accept NORM/NARM waste also. The Non-Operating
Disposal Facilities segment includes non-operating disposal facilities in
Sheffield, Illinois; Beatty, Nevada; and Bruneau, Idaho; a closed hazardous
waste processing and deep-well injection facility in Winona, Texas; and formerly
proposed new disposal facilities in Butte, Nebraska and Ward Valley, California
which are the subject of damages claims filed by the Company. Income taxes are
assigned to Corporate, but all other items are included in the segment where
they originated. Inter-company transactions have been eliminated from the
segment information and are not significant between segments.
The Company's Oak Ridge, Tennessee based LLRW Processing and Field Services
business ceased processing operations in December 2002 and is reported as
discontinued operations. On June 30, 2004, the Company transferred substantially
all of the assets and liabilities of the Oak Ridge business to Toxco, Inc.
("Toxco"). In this transaction, the Company transferred $2,060,000 in Property
and $1,650,000 in Cash to Toxco in exchange for Toxco's assumption of $4,640,000
of Closure and Other Liabilities. When combined with reductions in liabilities,
the transaction resulted in a gain on sale of approximately $930,000. This gain
was recognized during the second quarter of 2004.
On February 13, 2003, the Company sold its El Centro municipal and industrial
waste landfill to a wholly-owned subsidiary of Allied Waste Industries, Inc.
("Allied") for $10 million cash at closing and future volume-based royalty
payments. The El Centro landfill is located adjacent to subsidiary US Ecology
Texas' hazardous and industrial waste treatment and disposal facility. Under the
agreement, Allied pays American Ecology minimum royalties of at least $215,000
annually. Once Allied has paid the Company $14,000,000 it will no longer have an
obligation to pay annual minimum royalties but will still be required to pay
royalties based upon El Centro waste volumes. The El Centro solid waste landfill
was carried on the Company's books at approximately $7 million prior to sale.
When combined with reductions in liabilities and the recognition of future
minimum royalties, the transaction resulted in a gain on sale of approximately
$4.9 million. This gain was recognized during the first quarter of 2003.
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The following table summarizes each segment:
SUBSIDIARY LOCATION SERVICES
- ---------------- ----------------------- ------------------------------------------------------------
OPERATING DISPOSAL FACILITIES
-----------------------------
USEI Grand View, Idaho Hazardous, PCB, NORM/NARM and NRC-exempt
radioactive and mixed waste treatment and disposal, rail
transfer station
USET Robstown, Texas Hazardous, non-hazardous industrial and NORM/NARM
waste treatment and disposal
USEN Beatty, Nevada Hazardous, non-hazardous industrial and PCB waste
treatment and disposal
USEW Richland, Washington Low-Level Radioactive and NORM/NARM waste disposal
NON-OPERATING DISPOSAL FACILITIES
---------------------------------
US Ecology Beatty, Nevada Closed LLRW disposal facility: State of Nevada is licensee
US Ecology Sheffield, Illinois Closed LLRW disposal facility: State of Illinois is licensee
US Ecology Sheffield, Illinois Non-operating hazardous waste disposal facility: US
Ecology is permittee
AEESC Winona, Texas Non-operating hazardous waste processing and deep well
facility: AEESC is permittee
USEI Bruneau, Idaho Closed hazardous waste disposal facility: US Ecology Idaho
is permittee
US Ecology Ward Valley, California Formerly proposed LLRW disposal facility: in litigation
US Ecology Butte, Nebraska Formerly proposed LLRW disposal facility: litigation settled
DISCONTINUED OPERATIONS
-----------------------
AERC Oak Ridge, Tennessee LLRW volume reduction and processing facility and related
Field Services, sold June 30, 2004
Texas Ecologists Robstown, Texas Municipal and industrial solid waste, sold February 13, 2003
OPERATING DISPOSAL FACILITIES
A significant portion of the Company's revenue from operating disposal
facilities is attributable to discrete, one-time clean-up projects ("Event
Business"). Individual clean-up efforts may span weeks, months or years
depending on project scope. The project-specific nature of the Event Business
necessarily creates variability in revenue and earnings. This can produce large
quarter to quarter and year to year changes in earnings, depending on the
relative contribution from Event Business projects. Management's strategy is to
expand its recurring business ("Base Business"), while simultaneously securing
both large and small Event Business sales opportunities. Experience indicates
that by controlling operating costs so that Base Business covers fixed costs, an
increased amount of the Event Business revenue will fall through to the bottom
line. This strategy takes advantage of the predominantly fixed cost nature of
waste disposal operations and the related operating leverage advantages of the
business.
Grand View, Idaho RCRA Facility. USEI is located on 1,304 acres of
Company-owned land about 60 miles southeast of Boise, Idaho in the Owyhee
Desert. This operation, acquired in February 2001, includes a rail transfer
station located approximately 30 miles northeast of the disposal site. As part
of the acquisition, the Company also obtained rights to a patented, U.S.
Environmental Protection Agency ("US EPA") approved technology to stabilize and
"delist" hazardous electric arc furnace dust from steel mills. Delisted waste is
subject to the lower State fees applicable to non-hazardous waste. The facility
is also permitted to accept certain naturally occurring and
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accelerator produced radioactive material and low activity radioactive material
exempted from regulation by the U.S. Nuclear Regulatory Commission, including
certain "mixed" hazardous and radioactive wastes, generated by commercial and
government customers. This material includes waste received under a five year
contract renewal entered with the U.S. Army Corps of Engineers in 2004. The
facility is regulated under permits issued by the Idaho Department of
Environmental Quality and the US EPA, and is subject to applicable Federal and
State law and regulations.
Robstown, Texas RCRA Facility. USET operates on 240 acres of Company-owned land
near Robstown, Texas about 10 miles west of Corpus Christi. The facility,
opened to accept waste in 1973, is regulated under a permit issued by the Texas
Commission on Environmental Quality ("TCEQ"). The site is also subject to US EPA
regulations and is permitted to accept certain low activity radioactive
materials and mixed wastes. Waste treatment at the Company's Robstown Texas
facility was suspended following a July 1, 2004 fire in the facility's waste
treatment building. Treatment revenue previously represented approximately 50%
of facility revenue. Direct disposal operations, which continued without
interruption after the fire, generated the balance of the facility's revenue.
While the Company is insured for property and equipment damage and business
interruption, operational upgrades and loss of customer business impacted 2004
results and may continue to negatively impact financial performance in 2005. The
Company also filed property and business interruption claims with its insurance
carrier. Any differences between the amounts ultimately paid and amounts
recognized by the Company will impact 2005 financial performance. The Texas
facility restored limited treatment services in December 2004 and expects to
resume full treatment services late in the first half of 2005.
Beatty, Nevada RCRA Facility. USEN leases approximately 80 acres from the State
of Nevada on which treatment and disposal operations are conducted. The
Company's lease was renewed for ten years in 1997. The Company expects to timely
renew its lease prior to expiration. Opened to receive hazardous waste in 1970,
the site is located in the Amargosa Desert approximately 100 miles northwest of
Las Vegas, Nevada and 30 miles east of Death Valley, California. The facility is
regulated under permits issued by the Nevada Department of Environmental
Protection and the US EPA.
Richland, Washington LLRW Facility. In operation since 1965, this USEW facility
is located on 100 acres of State leased land on the U.S. Department of Energy
Hanford Site approximately 35 miles west of Richland, Washington. The lease
between the State of Washington and the Federal government expires in 2061. The
Company expects to renew its sublease with the State, which expires in July
2005, based on a February 2004 decision by the State of Washington not to put
the sublease out for competitive bid. The facility is licensed by the Washington
Department of Health for health and safety purposes, and is also regulated by
the Washington Utilities and Transportation Commission ("WUTC"), which sets
disposal rates for low-level radioactive wastes. Rates are set at an amount
sufficient to cover operating costs and provide the Company with a reasonable
profit. A new regulated rate agreement was entered into in 2001 and expires
January 1, 2008. The State also assesses user fees for local economic
development, State regulatory agency expenses, and a dedicated trust account to
pay for long-term care and maintenance after the facility closes. The Richland
facility also serves as home to the US Ecology NORM/NARM Services group offering
waste packaging, removal, off-site shipment and disposal services.
NON-OPERATING DISPOSAL FACILITIES
Beatty, Nevada LLRW Site. Operated by the Company from 1962 to 1993, the Beatty
LLRW disposal site was the nation's first commercial facility licensed to
dispose of LLRW. In 1997, it became the first such LLRW disposal facility to
successfully complete closure and post-closure stabilization and to transfer its
license to the government for long-term institutional control. Since that time,
the Company has performed maintenance and surveillance under a contract with the
State of Nevada that is paid from a State-controlled account funded during
facility operations.
Bruneau, Idaho RCRA Site. This remote 88 acre desert site, acquired along with
the Grand View, Idaho disposal operation in February 2001, was closed by the
prior owner under an approved RCRA plan. Post closure monitoring will continue
for approximately 25 more years in accordance with permit and regulatory
requirements.
Sheffield Illinois LLRW Site. The Company previously operated this LLRW
disposal facility on a 20 acre, State-owned site from 1968 to 1978. After
performing closure work under a 1988 Settlement Agreement with the State of
Illinois, the Company monitored and maintained the site until mid-2001, when the
LLRW license was transferred to
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the State. As at Beatty, the Company has a contract with the State to perform
long-term inspection and maintenance funded from a State-controlled account.
Sheffield Illinois RCRA Site. The Company previously operated two hazardous
waste disposal areas adjacent to the Sheffield LLRW disposal area. One hazardous
waste area was opened in 1968 and ceased accepting waste in 1974. The second
accepted hazardous waste from 1974 through 1983. In November 2003 the Company
renegotiated its closure/post-closure obligations, allowing the Company to
reduce its financial assurance requirement from $3,181,000 to $1,497,000. The
Company also reduced its corrective action financial assurance requirements from
$1,500,000 to $800,000. The Company continues to perform corrective measures at
the facility under regulation by the US EPA. During the fourth quarter of 2004
the Company increased its estimate for closure and post-closure costs at this
site by $715,000. The revised cost estimate and increase in the related reserve
was based on a review of planned remediation activities and environmental
monitoring work. An independent environmental consulting firm with prior
experience at the site provided peer review of the revised estimate. Including
the $715,000, the updated reserve for the Sheffield hazardous waste disposal
area is now $2,489,000. Post closure monitoring will continue for approximately
22 more years in accordance with permit and regulatory requirements.
Winona, Texas Site. From 1980 to 1994, Gibraltar Chemical Resources operated the
Winona hazardous waste processing and deep well facility, at which time AEC
purchased the facility. Solvent recovery, deep well injection and waste
brokerage operations were conducted on an eight acre site until March 1997, when
the Company ceased operations. The Company is proceeding under an Agreed Order
entered with the State of Texas for closure, and maintains a $1,300,000
financial assurance. State action is pending on a Closure Certification Report
submitted in 1999 and supplemented with additional information in 2003 and 2004.
The Company owns an additional 540 acres contiguous to the permitted site.
Ward Valley, California Formerly Proposed LLRW Disposal Facility. In 1993, the
Company received a State of California license to construct and operate a LLRW
disposal facility in the Mojave Desert to serve the Southwestern LLRW Compact.
The Company has alleged that the State of California abandoned its duty to
acquire the project property from the U.S. Department of the Interior in a suit
filed in State court seeking recovery of monetary damages in excess of $162
million. The trial court ruled against the Company in March 2003. Based on the
uncertainty of recovery following this adverse decision, the Company wrote off
the $20,951,000 deferred site development asset. In June 2003, the Company filed
a notice of appeal with the California Fourth Appellate District Court. The
appeal is now fully briefed. Management expects oral argument to be scheduled in
the spring of 2005.
Butte, Nebraska Formerly Proposed LLRW Disposal Facility. The Company submitted
an application to the State of Nebraska to construct and operate this facility,
developed under contract to the Central Interstate LLRW Compact Commission
("CIC"). Following proposed license denial by the State of Nebraska, the CIC,
the Company and a number of nuclear power utilities funding the project sued the
State of Nebraska alleging bad faith in the license review process. In September
2002, the federal district court awarded plaintiffs $153 million in damages,
including approximately $12 million to the Company based on its contributions to
the project and pre-judgment interest. On February 18, 2004, the Eighth U.S.
Circuit Court of Appeals affirmed the district court ruling in its entirety. On
August 9, 2004 Nebraska and the CIC entered into a settlement under which the
State agreed to make four equal payments of $38.5 million to the CIC beginning
August 1, 2005 and annually thereafter for three years. The $154 million
settlement reflects a principal amount of $140.5 million, plus interest of 3.75%
compounded annually and beginning August 1, 2004. The principal may be reduced
to $130 million if Nebraska and the CIC negotiate suitable access to a proposed
future Texas LLRW disposal site. Settlement payments are subject to legislative
appropriation. Should the Nebraska legislature fail to appropriate the required
payments, the CIC retains rights to pursue enforcement by any and all legal
remedies available. Under the settlement, Nebraska waived any claim to sovereign
immunity in a suit brought to enforce payment and agreed to dismiss its petition
for U.S. Supreme Court review.
DISCONTINUED OPERATIONS
Oak Ridge, Tennessee LLRW Processing Facility. AERC, acquired in 1994, processed
LLRW to reduce the volume of waste requiring disposal at licensed LLRW
facilities. The plant, situated on 16 acres in Oak Ridge, Tennessee, primarily
served the commercial nuclear power industry. AERC's processing services were
never successfully integrated with the Company's core disposal business, and
management was unable to identify a viable business strategy to reverse the
recurring losses that occurred at the facility since its acquisition in 1994. In
December 2002,
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the Company ceased commercial operations and focused on efforts to remove
customer waste from the plant site and market the business' physical assets for
sale. On June 30, 2004, the Company transferred substantially all of the assets
and liabilities of its discontinued Oak Ridge Tennessee processing and field
services operations to Toxco, Inc. ("Toxco"). The Company transferred $2,060,000
in Property and $1,650,000 in Cash to Toxco in exchange for Toxco's assumption
of $4,640,000 of Closure and Other Liabilities. When combined with reductions
in liabilities, the transaction resulted in a gain on sale of approximately
$930,000. This gain was recognized during the second quarter of 2004.
Robstown, Texas Municipal Solid Waste Landfill. In July 2000, the Company began
operation of a municipal and industrial waste landfill adjacent to subsidiary US
Ecology Texas' hazardous and industrial waste treatment and disposal facility.
On February 13, 2003, the Company sold the El Centro landfill to a subsidiary of
Allied Waste Industries, Inc. ("Allied") for $10 million cash at closing and
future volume-based royalty payments of at least $215,000 annually. Once Allied
has paid the Company $14,000,000, it no longer has an obligation to pay annual
minimum royalties, but will still be required to pay royalties based upon El
Centro waste volumes. When combined with reductions in liabilities and the
recognition of certain future minimum royalties, the transaction resulted in a
net gain on sale of approximately $4.9 million which was recognized in the first
quarter of 2003.
INDUSTRY
The hazardous waste industry has entered a mature phase after rapid expansion in
the 1970s and 1980s that was driven by new environmental laws and actions by
federal and state agencies to regulate existing hazardous waste management
facilities and direct the clean up of contaminated sites under the federal
Superfund law. By the early 1990s, excess hazardous waste management capacity
had been constructed by the waste services industry. At the same time, to better
manage risk and reduce expenses, many waste generators instituted industrial
process changes and other methods to minimize waste production. The volume of
waste shipped for disposal from Superfund and other properties also diminished
as many contaminated sites were cleaned up. Improved waste management by
generators coupled with excess commercial disposal capacity and a maturing
federal Superfund program created highly competitive market conditions that
still apply today.
Management believes that a baseline demand for hazardous waste services will
remain, but that this demand will fluctuate (increase and decrease) in response
to both general economic conditions and large specific clean-up projects.
Management further believes that the ability to deliver specialized niche
services, while aggressively competing for large volume projects and
non-specialized commodity business, will differentiate successful from less
successful companies going forward. The Company's 2001 acquisition of Envirosafe
Services of Idaho and access to its patented steel mill waste delisting
technology, expanded approvals to manage certain radioactive and mixed waste
materials, operation of patented thermal treatment units at its Beatty, Nevada
hazardous waste facility, and development of more cost-effective treatment
processes for specific customer wastes reflect successful initiatives by the
Company to increase market share and profitability. The Company's Idaho rail
transfer facility was expanded and road improvements were completed to better
position the Company to compete for large volume clean-up projects.
The commercial LLRW business has also experienced significant change. This is
primarily due to failure of the LLRW Policy Act of 1980 ("Policy Act") and
interstate Compacts encouraged to be formed under the Policy Act to develop new
disposal sites and related market responses. Company efforts to site new
disposal facilities in Ward Valley, California and Butte, Nebraska to serve
Compact regions have been unsuccessful. The Company alleged, in separate
litigation, that the states of California and Nebraska abandoned their duties
under the Policy Act and related law. Management believes the Company is
entitled to compensation for its past investments in these statutorily-required
site development projects and has pursued litigation in both instances to
recover monetary damages. In 2004, a damages settlement was reached between
Nebraska and the Central Interstate Compact subject to legislative
appropriation. The California litigation is pending.
The Company's Richland, Washington disposal facility, serving the Northwest and
Rocky Mountain Compacts, is one of only two operating Compact disposal
facilities in the nation. Both were in full operation for many years before
passage of the LLRW Policy Act. While the Richland site has substantial unused
capacity, it can only accept LLRW from the eleven western states comprising the
two Compacts served. The Barnwell, South Carolina site,
8
operated by a competitor, is located in the Atlantic Compact. The Barnwell site
is open to the entire nation until at least 2008 but imposes much higher state
fees.
Restricted access to the Company's Richland, Washington facility, Barnwell's fee
status and future availability uncertainty, and the failure of the Compacts to
establish new disposal facilities created a market opportunity for a privately
held Utah disposal company. The Utah facility is licensed to accept a
substantial subset of the LLRW which Congress made a state responsibility under
the Policy Act. Increased disposal prices have also induced a number of
businesses to offer LLRW processing and volume reduction services. The Company
purchased its Oak Ridge facility in 1994 to participate in this market, along
with other new market entrants. The LLRW volume reduction business has
experienced heavy price competition and a number of companies later ceased
operations and/or declared bankruptcy. This heavy competition and the Oak Ridge
facility's reliance on disposal facilities operated by competitors to ship
processed waste produced substantial losses leading to the Company's decision to
discontinue waste processing in late 2002 and sell the land, plant, and
equipment of this business on June 30 2004.
The significant rise in radioactive waste disposal prices at traditional LLRW
facilities has also heightened demand for more cost-effective disposal services
for soil, debris, consumer products, industrial wastes and other materials
containing low activity radioactive material, as well as mixed wastes exhibiting
both hazardous and radioactive properties. In addition to commercial demand, a
substantial amount of low activity radioactive materials is generated by federal
clean-up projects. Management believes the expanded use of permitted hazardous
waste disposal facilities to dispose of such materials is a safe,
environmentally sound market response. The Company's Grand View, Idaho RCRA
hazardous waste facility has significantly increased waste volume throughput
since 2001. The Company's US Ecology Texas disposal facility is also permitted
to accept, on a much more limited basis, this type of waste.
Management believes the Company is well positioned to grow its low activity
radioactive material business based on its industry reputation, its existing
Idaho and Texas facility permits, its substantial experience handling
radioactive materials at multiple facilities, its high volume waste throughput
capabilities, and its competitive pricing.
PERMITS, LICENSES AND REGULATORY REQUIREMENTS
The Company's hazardous, industrial, non-hazardous, and radioactive materials
business is subject to extensive environmental, health, safety, and
transportation laws, regulations, permits and licenses administered by federal,
state and local agencies. The responsible agencies regularly inspect the
Company's operations to monitor compliance. They have authority to enforce
compliance through the suspension or revocation of operating licenses and
permits and the imposition of civil or criminal penalties in case of violations.
This body of law and regulations contribute to the demand for Company services
and represent a significant obstacle to new market entrants.
The Resource Conservation and Recovery Act of 1976 ("RCRA") provides a
comprehensive framework for regulating hazardous waste handling, transportation,
treatment, storage, and disposal. Certain radioactive materials may also be
managed under RCRA permits, as specifically authorized for the Company's
facilities in Grand View, Idaho and Robstown, Texas. RCRA regulation and
permitting is the responsibility of the US EPA and state agencies delegated such
authority. Listed chemical compounds and residues derived from listed industrial
processes are subject to RCRA standards unless they are delisted through a
formal rulemaking process such as the patented steel mill treatment employed at
the Company's Grand View, Idaho facility. RCRA liability may be imposed for
improper waste management or for failure to take corrective action to address
releases of hazardous substances. To the extent wastes are recycled or
beneficially reused, regulatory controls under RCRA diminish.
CERCLA and its amendments ("Superfund") impose strict, joint and several
liability on owners or operators of facilities where a release of hazardous
substances has occurred, on parties who generated hazardous substances released
at such facilities, and on parties who arranged for the transportation of
hazardous substances. Liability under Superfund may be imposed if releases of
hazardous substances occur at treatment, storage, or disposal sites. Since waste
generators face the same liabilities, they are motivated to minimize the number
of commercial disposal sites utilized to manage their wastes. Commercial
disposal facilities require authorization from the US EPA to receive CERCLA
wastes. The Company's three hazardous waste disposal facilities each maintain
this authorization.
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The Toxic Substances Control Act ("TSCA") establishes a comprehensive regulatory
program for treatment, storage and disposal of PCBs. Regulation and licensing of
PCB wastes is the responsibility of the US EPA. The Company's Grand View, Idaho
and Beatty, Nevada disposal facilities have TSCA permits.
The Atomic Energy Act of 1954 ("AEA") and the Energy Reorganization Act of 1974
assign to the NRC regulatory authority over the receipt, possession, use and
transfer of specified radioactive materials, including disposal. The NRC has
adopted regulations for licensing commercial LLRW processing and disposal sites,
and may delegate regulatory and licensing authority to individual states. The
NRC and U.S. Department of Transportation regulate the transport of radioactive
materials. Shippers and carriers of radioactive materials must comply with both
the general requirements for hazardous materials transportation and with
specific requirements for radioactive materials.
The AEA does not authorize the NRC to regulate NORM/NARM. However, individual
states may assert regulatory jurisdiction. Many states, including Idaho and
Texas where the Company operates facilities, have chosen to do so.
The process of applying for and obtaining licenses and permits to construct and
operate facilities accepting radioactive and hazardous waste is lengthy and
complex. Management believes the Company has significant knowledge and expertise
in this area. The Company also believes it possesses all permits, licenses and
regulatory approvals currently required to maintain regulatory compliance and
safely operate its facilities, and has the specialized expertise required to
obtain additional approvals to continue growing its business in the future.
INSURANCE, FINANCIAL ASSURANCE AND RISK MANAGEMENT
The Company carries a broad range of insurance coverage, including general
liability, automobile liability, real and personal property, workers'
compensation, directors' and officers' liability, environmental impairment
liability, and other coverage customary to the industry. Management does not
expect the impact of any known casualty, property, environmental or other
contingency to be material to its financial condition, results of operations or
cash flows.
Existing regulations require financial assurance to cover the cost of final
closure and/or post-closure obligations at certain Company operating and
non-operating disposal facilities. Acceptable forms of financial assurance
include third party letters of credit, surety bonds and traditional insurance.
Alternatively, facilities may be required to fund State-controlled escrow type
or trust accounts during the operating life of the facility.
Through December 31, 2004, the Company has been able to meet all its financial
assurance requirements through insurance. The Company's current closure and
post-closure policies were renewed on December 19, 2004 with increased
collateral and premium requirements and have a term of one year. The Company
expects to continue renewing these insurance policies. If the Company were
unable to obtain adequate closure, post-closure or environmental insurance in
the future, any partially or completely uninsured claim against the Company, if
successful and of sufficient magnitude, could have a material adverse effect on
the Company's financial condition, results of operations and cash flows.
Additionally, continued access to casualty and pollution legal liability
insurance with sufficient limits, at acceptable terms, is important to obtaining
new business. Failure to maintain adequate financial assurance could also result
in regulatory action being taken against the Company that could include the
early closure of affected facilities. As of December 31, 2004, the Company
provided letters of credit of $5,000,000 as collateral for financial assurance
insurance policies of approximately $32,000,000 for closure and post-closure
obligations. Management believes the Company will be able to maintain the
requisite financial assurance policies. While the Company has been able to
obtain financial assurance for its current operations, premium and collateral
requirements may continue to increase.
Primary casualty insurance programs do not generally cover accidental
environmental contamination losses. To provide insurance protection for
potential claims, the Company maintains environmental impairment liability
insurance and professional environmental consultant's liability insurance for
non-nuclear occurrences. For nuclear liability coverage, the Company maintains
Facility Form nuclear liability insurance provided under the federal Price
Anderson Act. This insurance covers the operations of its facilities, suppliers
and transporters. The Company purchases primary property, casualty and excess
liability policies through traditional third party insurance carriers.
10
CUSTOMERS
The Company disposes of low activity radioactive material and hazardous waste
under a five year contract with the U.S. Army Corps of Engineers Formerly
Utilized Site Remedial Action Program ("FUSRAP"), and steel mill air pollution
control dust (KO61 waste) under individual multi-year steel mill contracts. The
Company also periodically manages the transportation of wastes to its disposal
facilities. These projects may periodically contribute significant revenue. The
following customers accounted for more than 10% of the Company's revenue in
2004, 2003 or 2002:
% OF REVENUE FOR YEAR ENDING
CUSTOMER 2004 2003 2002
------ ------ ------
U.S. Army Corps of Engineers 31 27 27
Nucor Steel Company 6 7 13
Shaw Environmental & Infrastructure, Inc. - 18 -
MARKETS
Disposal Services. The hazardous waste treatment and disposal business is both
competitive and sensitive to transportation costs. NRC-exempt radioactive
material and other specialized niche services are less sensitive to these
factors. Waste transported by rail is less expensive, on a per mile basis, than
waste transported by truck.
The Company's Robstown, Texas hazardous waste facility is geographically well
positioned to serve refineries, chemical production plants and other industries
concentrated on the Texas Gulf coast. The facility is also permitted to accept
certain NORM and NRC-exempt radioactive materials and competes over a larger
area for these wastes. Waste treatment at the Company's Robstown Texas facility
was suspended following a July 1, 2004 fire in the facility's waste treatment
building. Treatment revenue previously represented approximately 50% of facility
revenue. Direct disposal operations, which continued without interruption after
the fire, generated the balance of the facility's revenue. While the Company is
insured for property and equipment damage and business interruption, operational
upgrades and loss of customer business impacted 2004 results and may continue to
negatively impact financial performance in 2005. The Company also filed property
and business interruption claims with its insurance carrier. Any differences
between the amounts ultimately paid and amounts recognized by the Company will
impact 2005 financial performance. The Texas facility restored limited treatment
services in December 2004 and expects to resume full treatment services late in
the first half of 2005.
The Company's Beatty, Nevada facility primarily competes for business in the
California, Arizona, Utah and Nevada markets. Due to the site's superior
geologic and climate conditions in the Amargosa Desert, the Nevada facility can
compete for wastes shipped from more distant locations. The Nevada facility also
competes over a larger geographic area for PCB waste due to the more limited
number of TSCA disposal facilities nationwide. The Beatty facility also offers
thermal treatment services, primarily to customers in western states.
The Company's Grand View, Idaho facility accepts wastes from across the nation
and operates a Company-owned rail transfer station located adjacent to a main
east-west rail line, generally allowing much lower cost transportation than by
truck. The Idaho facility's two primary markets are steel mill air pollution
control dust, NORM and NRC-exempt radioactive materials and mixed wastes in
concentrations specified by permit. Substantial waste volumes are received under
a contract with the U.S. Army Corps of Engineers that is also utilized by other
federal agencies. Effective May 14, 2004 the Corps exercised their option to
extend the contract through May 13, 2009. Permit modifications have expanded
disposal capabilities at the Idaho facility. Waste throughput has been
significantly enhanced by the addition of track at the Company's Idaho rail
transfer station.
Waste stabilization, encapsulation, chemical oxidation and other treatment
technologies are available at the Company's Idaho, Nevada and Texas facilities
to meet US EPA land disposal restrictions. This capability allows all three
sites to manage a significantly broader spectrum of wastes than if pre-disposal
treatment was not offered.
The Richland, Washington disposal facility serves LLRW producers in the eight
member States of the Northwest Compact. The three Rocky Mountain Compact States
are also eligible to use the facility subject to annual volume limits. Since US
Ecology is a monopoly LLRW service provider under the Northwest Compact, the
State of
11
Washington approves the facility's LLRW disposal rates. The site competes for
NORM/NARM from customers across the country. NORM/NARM rates are not regulated,
since a monopoly does not exist.
COMPETITION
The Company competes with large and small companies in each of the markets in
which it operates. The radioactive, hazardous and non-hazardous industrial waste
management industry is highly competitive. Management believes that its primary
disposal competitors are Waste Management, Clean Harbors, Envirocare of Utah,
and Waste Control Specialists and that the principal competitive factors
applicable to its business are:
- - Price
- - Specialized permits and "niche" service offerings
- - Customer service
- - Operational efficiency and technical expertise
- - Environmental compliance and credibility with regulatory agencies
- - Industry reputation and brand name recognition
- - Transportation distance
Management believes the Company is competitive in the geographic areas it seeks
to serve and that it offers a nationally unique mix of services, including
specialized patent rights and niche services which favorably distinguish it from
competitors. Management further believes that its strong "brand" name
recognition from more than 50 years of industry experience, excellent compliance
record and customer service reputation, and positive relationships with
customers, regulators, and the local communities enhance its competitive
position. While the Company is competitive, advantages exist for certain
competitors that have technology, permits, and equipment enabling them to accept
additional wastes streams, that operate in jurisdictions that impose lower
disposal taxes, and/or are located closer to where various wastes are generated.
PERSONNEL
Since 2001, the executive management team has implemented major business system
and organizational changes, which included a large reduction in force following
a December 2002 decision to exit the LLRW processing business. On January 31,
2005, the Company had 178 full time employees, of which 11 were members of the
PACE union at its Richland, Washington facility.
ITEM 2. PROPERTIES
The Company believes that its property and equipment are well maintained, in
good operating condition, and suitable for the Company's current and projected
needs. Company headquarters are located in Boise, Idaho in leased office space.
AEC also leases sales and administrative offices in Washington and Kentucky. The
following table describes the principal properties and facilities owned or
leased by the Company.
CORPORATE FUNCTION ACREAGE OWN/LEASE
- -------------------- ------------------------------- ------------- ---------
Boise, Idaho Corporate office 8,572 sq. ft. Lease
OPERATING DISPOSAL FACILITIES
- -----------------------------
Beatty, Nevada Treatment and disposal facility 80 acres Lease
Grand View, Idaho Treatment and disposal facility 1,304 acres Own
Elmore County, Idaho Rail transfer station 140 acres Own
Robstown, Texas Treatment and disposal facility 240 acres Own
Richland, Washington Disposal facility 100 acres Sublease
NON-OPERATING DISPOSAL FACILITIES
- ---------------------------------
Bruneau, Idaho Closed disposal facility 88 acres Own
Sheffield, Illinois Closed disposal facility 204 acres Own
Sheffield, Illinois Closed disposal facility 170 acres Own
Winona, Texas Non-operating processing and 540 acres Own
deep well facility
DISCONTINUED OPERATIONS
- -----------------------
Oak Ridge, Tennessee Processing facility 16 acres Sold
Robstown, Texas Municipal landfill 200 acres Sold
12
The principal properties of the Company make up less than 10% of the total
assets. The properties utilized are sufficient and suitable for the Company's
needs.
ITEM 3. LEGAL PROCEEDINGS
- ----------------------------
US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR
- ---------------------------------------------------
COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO
In 2000, subsidiary US Ecology, Inc., sued the State of California for monetary
damages exceeding $162 million. The suit stems from California's alleged
abandonment of the formerly proposed Ward Valley LLRW disposal project. State
and federal law requires the State to build a disposal facility for LLRW
produced in California, Arizona, North Dakota and South Dakota, member states of
the Southwestern Compact. USE was selected to site and license the facility
using its own funds on a reimbursable basis and obtained a license in 1993.
On March 26, 2003, the Superior Court ruled that the Company failed to establish
causation and that its claim is further barred by the doctrine of unclean hands.
The latter finding was based on actions the Court concluded had created
obstacles to an agreement to convey the proposed site from the federal
government to the State. The Court also ruled that key elements of the Company's
promissory estoppel claim were proven at trial. Specifically, the Court ruled
that the State made a clear and unambiguous promise to USE in 1988 to use its
best efforts to acquire the site, that the State had abandoned this promise, and
that the Company's reliance on the State's promise was foreseeable. However, the
Court found that the State's breach of its promise was not a substantial factor
in causing damages to USE since the federal government had continued to resist
the land transfer.
Based on the uncertainty of recovery following the trial court's adverse
decision, the Company wrote off the $20,951,000 deferred site development asset
on March 31, 2003.
In June 2003, the Company filed a notice of appeal with the California Fourth
Appellate District Court. The law firm of Cooley Godward was engaged on a fixed
price plus contingency basis to pursue the appeal. The fixed fee was expensed at
the time of engagement in July 2003. The matter is now fully briefed and the
Company expects that oral argument will be held in the spring of 2005. A
decision will be due 90 days following oral argument.
The Company's financial interest in the matter was materially improved by a 2003
amendment to the 1998 Ward Valley Interest Agreement and Assignment entered into
by the Company and its former primary lender. This amendment, entered into with
the former lender's successor, provides that any monetary damages obtained shall
first be allocated to the Company to recover past and future litigation fees and
expenses relating to the case. Any remaining amount recovered shall be divided
equally between the Company and the former lender. The 1998 agreement had
provided that the first $29.6 million less up to $1.0 million in legal fees and
expenses would be owed to the former lender, with any remaining recovery
reserved to the Company.
13
No assurance can be given that the Company will prevail on appeal or reach a
settlement to recover any portion of its investment or legal expenses.
ENTERGY ARKANSAS, INC. ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE
- --------------------------------------------------------------------------------
COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL.,
- ------------------------------------------------------------------------------
CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA
This action was brought in federal court in December of 1999 by electric
utilities that generate LLRW within the Central Interstate Low-Level Radioactive
Waste Compact ("CIC"). CIC member states are Nebraska, Kansas, Oklahoma,
Arkansas, and Louisiana. The action sought declaratory relief and damages for
bad faith in the State of Nebraska's processing and denial of USE's application
to develop and operate a LLRW disposal facility near Butte, Nebraska. US Ecology
is the CIC's contractor and intervened as a plaintiff.
In September 2002, the US District Court for the District of Nebraska entered
judgment against Nebraska in favor of the CIC for $153 million, including
approximately $50 million for prejudgment interest. Of this amount, USE's share
was $6.2 million plus $6.1 million for prejudgment interest. The Company carries
$6.5 million on its balance sheet for capitalized facility development costs.
The State appealed the judgment to the Eighth Circuit Court of Appeals where it
was argued in June 2003.
On February 18, 2004, the Eighth U.S. Circuit Court of Appeals affirmed the
District Court ruling in its entirety. On August 9, 2004 Nebraska and the CIC
entered into a settlement under which the State agreed to make four equal
payments of $38.5 million to the CIC beginning August 1, 2005 and annually
thereafter for three years. The $154 million settlement reflects a principal
amount of $140.5 million, plus interest of 3.75% compounded annually and
beginning August 1, 2004. The principal amount may be reduced to $130 million if
Nebraska and the CIC negotiate suitable access to a proposed future Texas LLRW
disposal site. Settlement payments are subject to legislative appropriation.
Should the Nebraska legislature fail to appropriate the required payments, the
CIC retains rights to pursue enforcement by any and all legal remedies
available. Under the settlement, Nebraska waived any claim to sovereign immunity
in a suit brought to enforce payment and agreed to dismiss its petition for U.S.
Supreme Court review. The Company expects to finalize payment arrangements with
the CIC prior to the intended August 2005 disbursement.
No assurance can be given that the Nebraska legislature will appropriate the
funds required to comply with the settlement agreement or that an acceptable
payment arrangement can be entered into with the CIC.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- --------------------------------
CASE NO. CV-S-97-0655.
In April 1996, Frank Manchak, Jr. ("Manchak") filed suit against subsidiary US
Ecology, Inc., alleging infringement of a sludge treatment patent to stabilize
hazardous waste at the Company's Beatty, Nevada hazardous waste facility.
Manchak sought unspecified damages for infringement, treble damages, interest,
costs and attorney fees. In October 2002, the United States District Court for
the District of Nevada entered a summary judgment in favor of the Company.
Manchak filed a motion for reconsideration that was denied. Manchak's
subsequent appeal to the U.S. Court of Appeals for the Federal Circuit was
dismissed, and his requests for reconsideration and en banc review were finally
rejected in October 2003. On January 8, 2004, Manchak filed a Rule 60(b) motion
in the Nevada District Court seeking relief from that Court's orders granting
summary judgment of non-infringement and denying reconsideration. On March 8,
2004, the District Court rejected Manchak's Rule 60(b) motion, prohibited
further filings with the Court on the matter and imposed sanctions on Manchak.
Based on this, the Company believed the matter was closed. However, Manchak
appealed the District Court's March 8, 2004 order and the Federal Circuit has
agreed to hear the appeal. Oral argument is scheduled for March 8, 2005. No
assurance can be given that the Company will prevail in this matter.
DAVID W. CROW V. AMERICAN ECOLOGY CORPORATION, U.S. DISTRICT COURT OF HARRIS
- --------------------------------------------------
COUNTY, TEXAS; 280TH JUDICIAL DISTRICT.
In the complaint, Mr. Crow alleges he was hired by the Company as its General
Counsel in October 1995 and that his compensation package included 150,000
options to purchase Company common stock with an oral agreement by the prior CEO
that the stock options would be exercisable for ten years.
14
In May 2000, Mr. Crow first contacted the Company regarding the stock options.
The Company informed Mr. Crow by letter that pursuant to the Company's 1992
Employee Stock Option Plan, Mr. Crow's options had expired thirty days after his
employment with the Company ended.
Mr. Crow's lawsuit was initially filed in Harris County (Texas) District Court
on or about May 4, 2004. The Company removed the lawsuit to federal court based
on diversity jurisdiction. The Complaint alleges four counts: breach of written
contract, breach of oral contract, fraudulent inducement, and declaratory
judgment that Crow is entitled to purchase 150,000 shares of AEC stock at a
strike price of $4 per share.
Mr. Crow, the Plaintiff, estimates his damages in the Complaint as between
$1,050,000 and $1,258,500. These figures are calculated by taking the difference
of the Company's current and 52 week high stock trading price and the $4/share
alleged option strike price.
The Company believes it has insurance against the claim and has notified its
carrier of the claim. The Company believes that allegations are without merit
and intends to vigorously defend itself in the matter. However, no assurance can
be given that it will prevail.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the fourth
quarter of 2004.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
American Ecology Corporation common stock is listed on the NASDAQ National
Market System under the symbol ECOL. As of March 1, 2005, there were
approximately 4,000 common stockholders. High and low sales prices for the
common stock for each quarter in the last two years are shown below:
2004 2003
-------------- ------------
PERIOD High Low High Low
------ ------ ----- -----
1st Quarter $ 8.95 $ 6.28 $3.42 $2.69
2nd Quarter 12.10 8.49 3.15 2.60
3rd Quarter 11.77 8.85 3.80 2.80
4th Quarter 12.15 10.09 8.26 3.59
On August 31, 2004 the Company declared a dividend of $.25 per common share to
stockholders of record on September 30, 2004 and payable October 15, 2004. The
dividend was paid out of cash on hand and totaled $4,345,000.
In August 2000, the Company established a credit facility with Wells Fargo Bank.
This credit facility, which has been amended several times, currently provides
the Company with $8.0 million of borrowing capacity and matures on June 15,
2005. This credit facility allows for annual dividends on any of the Company's
outstanding capital stock as long as an event of default has not occurred, and
will not occur as a result of the dividend.
In 2003, a Company offer to repurchase all outstanding Series D Preferred Stock
for the original sales price plus accrued but unpaid dividends was accepted by
all Series D holders and approved as required by the Board of Directors and
Wells Fargo Bank. The Company repurchased the remaining 100,001 shares of
Series D Preferred Stock for $47.50 a share plus accrued but unpaid dividends of
$16.56 a share, for a total payment of $6,406,000.
On February 18, 2004, the Company redeemed a warrant to purchase 1,349,843
shares of common stock for $5,500,000. The warrant was issued in 1998 as part
of the settlement with the Company's former primary bank, and enabled the bank
to acquire 1,349,843 common shares for $1.50 each.
16
ITEM 6 SELECTED FINANCIAL DATA
This summary should be read in conjunction with the consolidated financial
statements and related notes.
(Dollars in thousands, except per share amounts)
YEARS ENDED DECEMBER 31, 2004 2003 2002 2001 2000
- ------------------------ -------- --------- --------- -------- --------
Revenue $54,167 $ 57,047 $ 46,789 $40,175 $27,054
Loss on write off of Ward Valley development costs $ -- $(20,951) $ -- $ -- $ --
Income (loss) from operations $13,148 $(11,069) $ 16,094 $ 2,991 $ 5,510
Income tax benefit from reversal of valuation allowance $14,117 $ -- $ 8,284 $ -- $ --
Cumulative effect of change in accounting principle $ -- $ -- $ 13,141 $ -- $ --
Income (loss) from discontinued operations $ 1,047 $ 2,477 $(10,464) $(2,189) $ (813)
Net Income $23,410 $ (8,592) $ 18,771 $ 802 $ 4,697
Preferred stock dividends accrued $ -- $ 64 $ 398 $ 398 $ 398
Shares used to compute income (loss) per share (000's) 17,226 16,604 14,311 13,738 13,711
Total assets $77,233 $ 66,626 $ 87,125 $86,824 $65,750
Long-term debt, net of current portion $ 2,734 $ 4,200 $ 8,344 $ 4,436 $10,775
Shareholders' equity $51,611 $ 36,351 $ 45,948 $26,416 $25,984
Current ratio (current assets divided by current
liabilities) 2.3:1 2.10:1 1.47:1 0.65:1 1.17:1
Return on average equity (net income divided by
average equity) 53.2% (20.9)% 51.9% 3.1% 19.7%
Dividends declared per common share $ 0.25 $ -- $ -- $ -- $ --
Capital expenditures $ 4,984 $ 6,270 $ 2,737 $ 4,009 $ 3,267
Depreciation, amortization and accretion expense $ 5,957 $ 6,973 $ 6,604 $ 4,076 $ 1,899
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
- --------------------------
When the Company uses words like "may," "believes," "expects," "anticipates,"
"should," "estimates," "projects," "plan," their opposites and similar
expressions, it is making forward-looking statements. These expressions are most
often used in statements relating to business plans, strategies, anticipated
benefits or projections about anticipated revenues, earnings or other aspects of
Company operating results. The Company makes these statements in an effort to
keep stockholders and the public informed about its business based on its
current expectations about future events. Such statements should be viewed with
caution and are not guarantees of future performance or events.
As noted above, and elsewhere in this report, the Company's business is subject
to uncertainties, risks and other influences, many of which are not within its
control. These factors, either alone or taken together, could have a material
adverse effect on the Company and could change whether any forward-looking
statement ultimately proves to be accurate. The Company undertakes no obligation
to publicly release updates or revisions to these statements. The following
discussion should be read in conjunction with audited consolidated financial
statements and the notes thereto for the year ending December 31, 2004, included
elsewhere in this Form 10-K.
17
This document contains forward-looking statements that involve known and unknown
risks and uncertainties which may cause actual results in future periods to
differ materially from those indicated herein. These risks include, but are not
limited to:
- Dependence on key personnel
- compliance with and changes in applicable laws and regulations
- exposure to litigation
- access to capital
- access to cost-effective insurance and financial assurances
- new technologies and patent rights
- competitive environment
- general economic conditions
- potential loss of major contracts
- compliance with Section 404 of Sarbanes-Oxley
- ability to collect on insurance claims
- natural disasters, acts of war or terrorism, or fires may limit
operations
- the effect of weather conditions or other forces of nature
- possible fluctuations in reported earnings due to changes in or new
interpretations of accounting standards
- changes in tax rates and regulations, interest rates, or inflation
rates
- the availability of cost effective rail transportation service
Dependence on Key Personnel
- ------------------------------
The Company has a relatively flat management structure and relies on the
continued service of its senior management. The loss of the services of any key
management employee could adversely effect the business or the price of the
Company's securities. Also, the future success of the Company depends on its
ability to identify, attract, hire, train and motivate other highly skilled
personnel. Failure to do so may adversely affect future results.
Compliance and Changes with Applicable Laws and Regulations
- -----------------------------------------------------------
The changing regulatory framework governing the Company's diverse business
creates significant risks, including potential liabilities from violations of
environmental statutes and regulations. Failure to timely obtain or comply with
applicable federal, state and local governmental licenses, permits or approvals
for its waste treatment and disposal facilities could prevent or inhibit the
Company from operating its facilities and providing services, resulting in a
potentially significant loss of revenue and earnings. Changes in laws or
regulations or changes in the enforcement or interpretation of existing laws and
regulations may require the Company to modify existing operating licenses or
permits, or obtain additional approvals if new environmental legislation or
regulations are enacted or existing legislation or regulations are amended,
reinterpreted or enforced differently than in the past. Any new governmental
requirements that raise compliance standards or require changes in operating
practices or technology requirements may impose significant costs upon the
Company. Failure to comply with applicable statutes, and regulations, licenses
and permits may result in the imposition of substantial fines and penalties and
could adversely affect the Company's ability to carry on its business as
presently constituted.
The Company's revenues are primarily generated as a result of requirements
arising under federal and state laws, regulations, and programs to protect
public health and the environment. Management believes the nation's basic
framework of environmental laws and regulations is widely accepted as sound
public policy. If requirements to comply with these laws and regulations,
particularly those relating to the treatment or disposal of PCB, hazardous,
NORM/NARM and low-level radioactive waste were substantially relaxed or less
vigorously enforced in the future, demand for the Company's services could
materially decrease and revenues could be significantly reduced.
Exposure to Litigation
- ----------------------
Since Company personnel routinely handle radioactive, PCB and hazardous
materials, the Company may be subject to liability claims by employees,
contractors and other third parties. There can be no assurance that the
Company's existing liability insurance is adequate to cover claims asserted
against the Company or that the Company will be able to maintain adequate
insurance in the future. Management believes the Company has adopted prudent
risk
18
management programs to reduce these risks and potential liabilities; however,
there can be no assurance that such programs will fully protect the Company.
Adverse rulings in ongoing legal matters could also have a material adverse
effect on the Company.
Access to Capital
- -------------------
The Company requires cost effective access to capital to implement its strategic
and financial plan. If the Company cannot maintain access to capital or raise
additional capital, the Company may need to delay or scale back planned
infrastructure improvements or disposal capacity expansions. This could
negatively impact the Company's ability to generate earnings. The Company
currently has cash and short term investments on hand to fund its budgeted 2005
capital projects and expects to maintain access to cost-effective capital in the
event borrowings are required. Additionally, the Company has constructed
sufficient disposal capacity to meet foreseeable near-term needs. No assurance
can be given, however, that the Company will continue to have cash on hand for
these purposes or maintain cost-effective access to the capital markets.
Access to Insurance and Financial Assurances
- -------------------------------------------------
The Company is required by license, permit, and prudence to maintain a variety
of insurance instruments and financial assurances. Without cost-effective access
to insurance and/or financial assurance markets, the Company's ability to
operate its facilities would be materially and adversely affected. On December
19, 2004, insurance for the Company's primary financial assurance for its
hazardous waste disposal facilities was renewed for one year. Although the
Company expects to renew these policies prior to expiration, no guarantee can be
given that the Company will be able to renew or procure new financial assurance
insurance on terms favorable to the Company. Inability to obtain cost-effective
insurance and/or financial assurance could have a material adverse effect on the
Company.
New Technologies and Patent Rights
- ----------------------------------
The Company expects to introduce new technologies at its facilities from time to
time. The Company has experienced difficulties implementing new technologies in
the past. If the Company cannot cost-effectively deploy new treatment
technologies in response to market conditions and customer requirements, the
Company's business could be adversely affected.
Competitive Environment
- -----------------------
The Company faces competition from companies with much greater resources and
potentially more cost-effective services. An increase in the number of
commercial treatment or disposal facilities for hazardous or radioactive waste
in the United States, or a decrease in the treatment or disposal fees charged by
competitors could reduce or eliminate the competitive advantage of the Company's
facilities and services. The Company's business is heavily affected by waste
tipping fees assessed by state regulatory entities. These fees, which vary from
State to State, are periodically adjusted. Such adjustments may significantly
impact the competitive environment in which the Company conducts business either
positively or negatively.
General Economic Conditions
- -----------------------------
The Company's hazardous waste facilities serve steel mills, refineries, chemical
production plants and other basic industries that are, or may be, affected by
general economic conditions. During periods of economic weakness, these
industries may curtail production activities producing waste and/or delay
spending on plant maintenance, waste clean-up work and other discretionary
projects. While management believes that bid activity for the services it offers
was solid in 2004, the Company makes no predictions whether general economic
conditions will positively impact its business in 2005.
Potential Loss of Major Contracts
- ---------------------------------
A loss of one or more of the Company's large contracts could significantly
reduce Company revenues and negatively impact earnings. Effective May 14, 2004,
the US Army Corps of Engineers (USACE) exercised its option
19
to extend the term of its disposal contract with USE through May 13, 2009.
Discontinuation of this, or any other, large contract could have a material
adverse impact on the Company. Customers periodically review their contracts
with the Company and may, from time to time, opt not to renew or extend their
disposal contracts with the Company.
Compliance with Section 404 of Sarbanes-Oxley
- ---------------------------------------------
As directed by Section 404 of Sarbanes-Oxley Act of 2002, the Securities and
Exchange Commission adopted rules requiring public companies to issue a report
on management's internal controls over financial reporting in their annual
report on Form 10K. In addition, the independent registered public accounting
firm auditing the Company's financial statements must attest to and report on
management's assessment of internal controls over financial reporting.
Management has conducted a rigorous review of its internal controls and
continues to expend substantial resources to comply with Section 404.Management
is required to issue a report to its independent auditors regarding its internal
controls over financial reporting. Management's assessment of its internal
controls over financial reporting may include an opinion on the effectiveness of
such controls and may describe deficiencies, significant deficiencies or
material weaknesses. If the Company's independent auditors interpret the rules,
requirements, and regulations of Section 404 differently than management, they
may disagree with management's assessment and issue a qualified opinion
regarding management's assessment. If management cannot attest to the adequacy
of its internal controls over financial reporting or the independent auditors
disagree with management's assessment, investors could lose confidence in the
quality of the Company's financial statements which may adversely impact the
price of the Company's common stock. No assurance can be given at this time that
management's internal controls over financial reporting are adequate or that the
auditors will issue an unqualified opinion on management's report on internal
controls over financial reporting. The Company continues to incur significant
costs and management continues to devote substantial time and resources to
comply with Section 404. This compliance effort has diverted management and
resources from implementing the Company's growth initiatives. At this time, the
Company is not prepared to issue our report on the effectiveness of our internal
controls over financial reporting, nor is our independent registered public
accounting firm able to attest to the effectiveness of our internal controls
over financial reporting. The Company anticipates filing an amended Form 10K on
or before May 2, 2005 in compliance with the SEC's exceptive order dated
November 30, 2004 which provided an extension of time to file the required
reports.
Ability to Collect on Insurance
- -------------------------------
While the Company believes its business interruption claim filed in response to
the 2004 fire at its Texas facility and other filed insurance claims are valid,
no assurance can be given that the Company can collect on amounts claimed.
Potential Fires or Other Incidents Limiting Operations
- ------------------------------------------------------
The Company is subject to unexpected occurrences related, or unrelated, to our
daily handling of dangerous substances. A fire or other incident could impair
one or more of the facilities from performing their normal operations which
could have a material adverse impact on the Company.
Access to Cost Effective Rail Transportation Service
- ----------------------------------------------------------
Revenue at the Company's Grand View, Idaho facility is subject to potential
risks from disruptions in rail transportation service. Large volume base
business and event business at this facility frequently arrives by rail. Events
such as strikes, natural disasters and other acts of God, war, or terror could
delay shipments and reduce both volumes and revenues. In addition, rail car
service may be limited by economic conditions, specifically including increasing
demand for rail service, which may result in sustained periods of slower service
and make it difficult to acquire sufficient rolling stock. These economic
conditions could also result in lower volumes and revenues. During the second
half of 2004 the Company did experience delays in receiving waste, as rail
transporters failed to meet agreed to schedules and a tight market for railcars
existed. No assurance can be given that the Company can procure transportation
services at historical rates. The lack of railcars, now and in the future, could
limit the Company's ability to implement its growth plan and increase revenue.
General
- -------
20
The Company is a hazardous, non-hazardous, industrial, and radioactive waste
management company providing treatment and disposal service to commercial and
government entities including but not limited to, nuclear power plants,
refineries, chemical production plants, steel mills, the U.S. Department of
Defense, medical facilities, universities and research institutions. The
majority of revenues are derived from fees charged for waste treated and
disposed of at Company-owned facilities. The Company also manages transportation
of wastes to its facilities which may contribute significant revenue. Fees are
also charged for waste packaging, brokering and transportation to facilities
operated by other service providers. The Company and its predecessors have been
in business for more than 50 years.
Overall Company Performance
- ---------------------------
On a consolidated basis, the Company's financial performance for the
twelve-months ended December 31, 2004, showed material improvement over 2003 and
2002 as measured by income from operations. Management believes this improvement
is due to the strong performance of its Grand View, Idaho and Beatty, Nevada
operations, execution of management's growth strategy and organizational changes
implemented in 2002 and 2003. These actions focused on increasing waste
treatment and disposal throughput at the Company's operating facilities,
securing permit modifications required to expand higher margin "niche" services,
reducing personnel and other costs, streamlining reporting, implementing
centralized information and accounting systems, reducing use of external
consultants and attorneys, and restructuring the sales function to increase
revenue and earnings.
Management believes recent operating performance, as well as future operating
performance, is driven by the Company's core disposal business. A significant
portion of the Company's revenue is derived from government remediation
projects, which are driven by availability of state and federal appropriations
and regulatory requirements. Since 2002, the Army Corps of Engineers (USACE) and
federal contractors have represented significant amounts of the Company's
revenue.
Funding for the USACE FUSRAP program, which contracts with the Company for
disposal, has remained generally constant. Management expects this to continue
for the remaining four years of the contract. The US EPA and other federal
agencies have also used this USACE contract to dispose of Superfund and other
federal clean-up waste.
Superfund projects depend on site-specific fund availability. Federal funding
levels have generally decreased since the early 1990s; however, major projects
continue. The Company is currently accepting waste from several large multi-year
federal Superfund projects. States also fund remediation projects. The majority
of the Company's 2003 Shaw E&I revenue derived from a remediation project funded
by the State of New Jersey.
Non-government remediation project opportunities are driven by regulatory agency
enforcement actions and settlements, litigation, local community controversy,
availability of private funds and other factors. To the extent privately funded
remediation projects are discretionary, management believes a healthy national
economy generally favors increased project availability. Management further
believes that bid activity for such projects increased in the second half of
2003 and 2004, and that this higher level of bid activity will continue during
2005.
The Company's largest base business customer is Nucor Corporation, which
operates electric arc furnace steel mills. The Company treats and disposes of
air pollution control dust (KO61) from Nucor steel mills in several states and
from other steel mills at its Grand View, Idaho facility. Aggressive price
competition from KO61 recyclers resulted in a loss of market share and revenue
during 2003 and 2004. In February 2004, the Company entered into an agreement
with Envirosafe Services of Ohio, Inc. ("ESOI") to provide ESOI's USEPA-approved
KO61 "delisting" technology at the Company's Robstown, Texas and Beatty, Nevada
facilities. The Company plans to extend the regulatory fee advantages enjoyed by
its Idaho operation to these other two facilities. No assurance can be given,
however, that this strategy will result in new KO61 business.
Other than Nucor, no other base business customer contributed more than 5% of
Company revenue in 2004. The Company has been successful in securing new base
business contracts from hazardous waste customers and employs a sales incentive
plan that is weighted to rewarding new base business revenue. The hazardous
waste business is highly competitive, however, and no assurance can be given
that the Company will retain its present base business customers or increase its
market share for steel mill air pollution control dust or other hazardous waste.
21
Year to year comparisons from 2003 to 2004 are made difficult by a series of
material, independent events. These included:
- a reversal in the second quarter of 2004 of the allowance on the
Company's deferred tax asset,
- a gain on sale of the discontinued Oak Ridge, Tennessee facility in
the second quarter of 2004,
- a fire in the third quarter of 2004 in the Company's Robstown, Texas
waste treatment building,
- an increase in the amount reserved for future costs at the closed
Sheffield hazardous waste facility,
- a large single event business project undertaken in the second half of
2003 at the Company's Grand View, Idaho facility,
- unusually high litigation expenses in early 2003 and write off of the
Ward Valley, California litigation,
- a gain on sale of the El Centro landfill assets in early 2003,
- costs to discontinue the Company's Oak Ridge, Tennessee low-level
radioactive waste processing business, remove waste from the premises
and sell the discontinued operation's primary assets in 2003 and 2004,
- a reversal in the fourth quarter of 2002 of the allowance on the
Company's deferred tax asset,
- a large single event business clean-up project undertaken in early
2002 by the Company's Richland, Washington facility, and
- the adoption of a new accounting standard ("FAS 143") which resulted
in a large gain in early 2002.
These events are discussed in detail below.
2004 EVENTS
- ------------
Reversal of the Allowance on the Deferred Tax Asset: Following the June 30, 2004
- ----------------------------------------------------
sale of the discontinued Oak Ridge LLRW processing business, management
reassessed its valuation allowance and determined that most of the Company's
deferred tax assets would likely be utilized prior to expiration. During the
year ended December 31, 2004, the Company reversed $14,117,000 of the valuation
allowance.
Sale of Oak Ridge Facility: On June 30, 2004, the Company transferred
- -------------------------------
substantially all the primary assets and liabilities of its discontinued Oak
Ridge Tennessee processing operation to Toxco, Inc. ("Toxco"). The Company
transferred $2,060,000 in Property and $1,650,000 in Cash to Toxco in exchange
for Toxco's assumption of $4,640,000 of Closure and Other Liabilities. The
Company recorded a $930,000 gain on the sale which is included as a Gain from
discontinued operations in the Consolidated Statements of Operations.
Fire in the Robstown Texas Waste Treatment Building: Waste treatment at the
- ---------------------------------------------------------
Company's Robstown Texas facility was suspended following a July 1, 2004 fire in
the facility's waste treatment building. Treatment revenue previously
represented approximately 50% of facility revenue. Direct disposal operations,
which continued without interruption after the fire, generated the balance of
the facility's revenue. While the Company is insured for property and equipment
damage and business interruption, operational upgrades and loss of customer
business impacted 2004 results and may continue to negatively impact financial
performance in 2005. The Company also filed property and business interruption
claims with its insurance carrier. Any differences between the amounts
ultimately paid and amounts recognized by the Company will impact 2005 financial
performance. The Texas facility restored limited treatment services in December
2004 and expects to resume full treatment services late in the first half of
2005. During the year ended December 31, 2004 the Company recognized the
impairment of $679,000 of assets involved in the fire offset by $954,000 of
expected property insurance proceeds. The Company also recognized $431,000 of
expected business interruption proceeds.
Increase in the amount reserved for future costs at the closed Sheffield
- --------------------------------------------------------------------------------
hazardous waste facility:
- ---------------------------
During the fourth quarter of 2004 the Company increased its estimate for closure
and post-closure costs at this site by $715,000. The revised cost estimate and
increase in the related reserve was based on a review of planned remediation
activities and environmental monitoring work. An independent environmental
consulting firm with prior experience at the site provided peer review of the
revised estimate. Including the $715,000, the updated reserve
22
for the Sheffield hazardous waste disposal area is now $2,489,000. Post closure
monitoring will continue for approximately 22 more years in accordance with
permit and regulatory requirements.
2003 EVENTS
- ------------
Oak Ridge Asset Disposition: During 2003, the Company accrued an additional
- -------------------------------
$2,517,000 in costs to remove waste from the facility and prepare the facility
for sale. This primarily reflects actual expenses, above initial estimates,
incurred to dispose of specific wastes which were identified when the wastes
were shipped to off-site service providers. $442,000 of these additional costs
were accrued for expenses paid during 2004 in accordance with the provisions of
EITF 94-3.
Ward Valley Litigation and Expenses: Following the adverse California state
- ----------------------------------------
trial court decision in March 2003, the Company wrote off $20,951,000 of
deferred site development costs for the Ward Valley project. This is reported as
Loss on write off of Ward Valley facility development costs in the Consolidated
Statement of Operations. Litigation and related costs totaling $1,786,000 were
incurred and included in SG&A during 2003. The Company appealed the trial court
ruling in 2003. Briefing in that appeal is now complete and oral argument is
expected to be scheduled in the spring of 2005. Minimal out-of-pocket costs for
this appeal were incurred and expensed in 2004 based on a fixed price legal
representation agreement entered into and paid for in July 2003. Minimal costs
will also be incurred in 2005 pending a ruling, expected ninety days after oral
argument.
Sale of El Centro: On February 13, 2003, the Company sold the El Centro
- ---------------------
municipal waste landfill to Allied Waste and recognized a $4,909,000 gain on
sale. This gain was included in discontinued operations during the quarter ended
March 31, 2003.
New Jersey PCB Clean-up Project: The Company's Grand View, Idaho facility
- ------------------------------------
performed a $10,053,000 transportation and disposal project in the third and
fourth quarters of 2003. This project represented 18% of 2003 revenues.
2002 EVENTS
- ------------
Financial Accounting Standard No. 143 ("FAS 143"): The Company implemented FAS
- ----------------------------------------------------
143 on January 1, 2002. FAS 143 requires a liability to be recognized as part of
the fair value of future asset retirement obligations. It also requires an
associated asset to be recognized as part of the carrying amount of the
underlying asset. The implementation of FAS 143 resulted in a $13,141,000
cumulative effect of change in accounting principle gain during the quarter
ended March 31, 2002.
Reversal of the Allowance on the Deferred Tax Asset: Following a profitable year
- ----------------------------------------------------
in 2002 and with the expectation of continued profitability, management
reassessed the valuation allowance and determined that a portion of the
Company's deferred tax assets would likely be utilized prior to expiration.
During the year ended December 31, 2002, the Company reversed $8,284,000 of the
valuation allowance.
Army Corps of Engineers Fort Greely, Alaska Project: The Company performed a
- -------------------------------------------------------
$3,850,000 waste packaging and disposal project at its Richland, Washington
facility during the first quarter of 2002. This project represented 8% of 2002
revenues and produced significantly higher margin and earnings than other
projects typically handled by the Richland facility.
Oak Ridge Disposal Plan: On December 27, 2002, the Company discontinued
- ---------------------------
operations at the Oak Ridge facility and recognized $7,018,000 of additional
estimated costs to implement its asset and liability disposal plan.
RESULTS OF OPERATIONS
Operating Disposal Facilities, Non-operating Disposal Facilities, the
discontinued Processing and Field Services operations and Corporate are combined
to arrive at consolidated income. Continuing Operations is comprised of
Operating Disposal Facilities, Non-operating Disposal Facilities, and Corporate.
Only the Operating Disposal
23
Facility segment reports revenue and profits. Revenue, costs and profits or
losses in the discontinued Processing and Field Services segment are reflected
in the consolidated financial statements in a single line item. The
Non-operating Disposal Facility segment generates minimal revenues and does not
generate profits. The Corporate segment generates no revenue and provides
administrative, managerial and support services for the other segments.
Summarized financial information concerning the Company's reportable segments is
shown in the following table.
Operating Non-Operating Discontinued
Disposal Disposal Processing and
($in thousands) Facilities Facilities Field Services Corporate Total
- ---------------
2004
- ----
Revenue $ 54,090 $ 77 $ -- $ -- $ 54,167
Direct operating cost 29,806 1,091 -- -- 30,897
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 24,284 (1,014) -- -- 23,270
S,G&A 4,581 29 -- 5,943 10,553
Business interruption insurance claim (431) -- -- -- (431)
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 20,134 (1,043) -- (5,943) 13,148
Investment income 68 -- -- 135 203
Interest expense 14 -- -- 180 194
Insurance claims net of impairment 275 -- -- -- 275
Other income 42 19 -- 38 99
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax and
discontinued operations 20,505 (1,024) -- (5,950) 13,531
Income tax expense (benefit) -- -- -- (8,832) (8,832)
------------ --------------- ---------------- ----------- ---------
Income (loss) before discontinued
operations 20,505 (1,024) -- 2,882 22,363
Gain (loss) from discontinued operations -- -- 1,047 -- 1,047
------------ --------------- ---------------- ----------- ---------
Net income (loss) $ 20,505 $ (1,024) $ 1,047 $ 2,882 $ 23,410
============ =============== ================ =========== =========
Depreciation and accretion $ 5,550 $ 375 $ -- $ 32 $ 5,957
Capital Expenditures $ 4,952 $ -- $ -- $ 32 $ 4,984
Total Assets $ 37,217 $ 6,526 $ -- $ 33,490 $ 77,233
2003
- ----
Revenue $ 56,973 $ 74 $ -- $ -- $ 57,047
Direct operating cost 32,571 908 -- -- 33,479
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 24,402 (834) -- -- 23,568
S,G&A 6,982 1,794 -- 5,043 13,819
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 17,420 (2,628) -- (5,043) 9,749
Investment income -- -- -- 347 347
Interest expense 36 -- -- 230 266
Loss on writeoff of Ward Valley -- 20,951 -- -- 20,951
Other income 35 89 -- -- 124
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax and
discontinued operations 17,419 (23,490) -- (4,926) (10,997)
Income tax expense -- -- -- 72 72
------------ --------------- ---------------- ----------- ---------
Income (loss) before discontinued
operations 17,419 (23,490) -- (4,998) (11,069)
Gain (loss) from discontinued operations 4,994 -- (2,517) -- 2,477
------------ --------------- ---------------- ----------- ---------
Net income (loss) $ 22,413 $ (23,490) $ (2,517) $ (4,998) $ (8,592)
============ =============== ================ =========== =========
Depreciation and accretion $ 6,515 $ 400 $ -- $ 81 $ 6,996
Capital Expenditures $ 6,582 $ 35 $ 451 $ -- $ 7,068
Total Assets $ 40,377 $ 6,550 $ 2,495 $ 17,204 $ 66,626
2002
- ----
Revenue $ 46,494 $ 295 $ -- $ -- $ 46,789
Direct operating cost 23,436 1,787 -- -- 25,223
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 23,058 (1,492) -- -- 21,566
S,G&A 8,000 103 -- 4,528 12,631
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 15,058 (1,595) -- (4,528) 8,935
Investment income 13 -- -- 18 31
Interest expense 711 -- -- 109 820
Other income (expense) 58 (385) -- (230) (557)
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax,
discontinued operations and cumulative
effect 14,418 (1,980) -- (4,849) 7,589
Income tax benefit -- -- -- 8,505 8,505
------------ --------------- ---------------- ----------- ---------
Income (loss) before discontinued
operations and cumulative effect 14,418 (1,980) -- 3,656 16,094
Gain (loss) from discontinued operations 466 -- (10,930) -- (10,464)
------------ --------------- ---------------- ----------- ---------
Income (loss) before cumulative effect 14,884 (1,980) (10,930) 3,656 5,630
Cumulative effect of change in accounting
principle 14,983 1,548 (3,390) -- 13,141
------------ --------------- ---------------- ----------- ---------
Net income (loss) $ 29,867 $ (432) $ (14,320) $ 3,656 $ 18,771
============ =============== ================ =========== =========
Depreciation and accretion $ 6,443 $ 458 $ 518 $ 361 $ 7,780
Capital Expenditures $ 3,010 $ 6 $ 300 $ 30 $ 3,346
Total Assets $ 44,832 $ 27,467 $ 4,649 $ 10,177 $ 87,125
24
The following table sets forth Continuing Operations in the Statements of
Operations for the three years ended December 31, 2004, as a percentage of
revenue:
Percentage of Revenues for the
Year Ended December 31,
-------------------------------
2004 2003 2002
--------- --------- ---------
Revenue 100.0% 100.0% 100.0%
Operating costs 57.0 58.7 53.9
--------- --------- ---------
Gross profit 43.0 41.3 46.1
Selling, general and administrative expenses 19.5 24.2 27.0
Business interruption insurance claim 0.8 -- --
--------- --------- ---------
Income from operations 24.3 17.1 19.1
Other income (expense), net 0.7 (36.4) (2.9)
--------- --------- ---------
Income (loss) from continuing operations before income taxes 25.0 (19.3) 16.2
Income tax expense (benefit) (16.3) 0.1 (18.2)
--------- --------- ---------
Income from continuing operations 41.3 (19.4) 34.4
========= ========= =========
RESULTS OF OPERATING DISPOSAL FACILITY SEGMENT OPERATIONS
The following discussion and analysis addresses the Company's Operating Disposal
facility operations and does not include the results of Discontinued Operations,
Non-Operating Facilities or Corporate for the 12 months ended December 31, 2004,
2003 and 2002.
Revenue
- -------
During the 12 months ended December 31, 2004, revenue from Operating Disposal
facilities totaled $54,090,000. This was 5% lower than the $56,973,000 posted in
2003 and 16% higher than the $46,494,000 reported in 2002. Of
25
the $10,479,000 increase in Operating Disposal facility revenue from 2002 to
2003, $10,053,000 reflected a single transportation and disposal project
performed in the second half of 2003 by the Idaho facility. For 2004, the
Company secured other significant projects and base business customers, but was
not able to make up all of the revenue reduction following completion of the
single large 2003 project. Despite a slight decrease in average selling price,
increases in volume at the Idaho and Nevada facilities preserved revenue levels
at these facilities from 2003 to 2004. Texas facility revenues were
substantially reduced following the July 1, 2004 fire in the permitted
containment building. The fire resulted in a 42% decrease in waste volumes and a
15% decrease in revenues from 2003 to 2004. The Texas facility resumed limited
waste treatment on December 1, 2004 and expects to resume full treatment
services late in the second quarter of 2005 following construction of a new
waste treatment building.
Direct Operating Costs
- ------------------------
Direct operating costs represent costs at Company disposal facilities that are
directly related to waste treatment and disposal. They include transportation,
labor, equipment depreciation, fuel, treatment, waste treatment additives,
testing, analysis, and amortization of disposal cell "airspace" costs. Except
for transportation, airspace and treatment additives, most of the Company's
direct costs are fixed and do not materially vary with changes in waste volume.
In 2004, direct operating costs dropped to $29,806,000 from $32,571,000 in 2003.
Direct operating costs in 2002 were $23,436,000. A large 2003 project amounting
to $10,053,000 in revenue was completed with rail transportation and disposal
following a strategic decision to 'bundle' rail and disposal costs on certain
projects to more aggressively compete for business served by the Idaho site.
Management believes that the bundling of rail services with disposal allows the
Company to offer potential customers both lower overall pricing and value-added
service. Bundling increases the Company's direct operating costs and reduces
gross margin relative to revenue due to the lower margins realized on the
transportation component of the services as compared to the disposal services
margins. Management considers growth in operating earnings to be more important
and will continue to pursue this plan in 2005 as a key element of the Company's
strategy to increase earnings.
Selling, General and Administrative Expenses ("SG&A")
- -----------------------------------------------------
In late 2001, the newly installed management embarked on an aggressive effort to
reduce SG&A. As a result of cost control initiatives, SG&A associated with
Operating Disposal facility operations declined by 34% in 2004 and 13% in 2003.
All facilities decreased SG&A costs. Decreases in overhead spending were
achieved through improved procurement of goods and services, decreased reliance
on external consultants and legal counsel and other cost control measures. In
2003, the Company installed centralized information and accounting systems that
have increased the availability and timeliness of business information. During
2004, improved invoicing and monitoring of accounts receivable balances produced
a $757,000 decrease in bad debt expense from 2003 to 2004.
Operating Income
- -----------------
For the 12 months ended December 31, 2004, operating income from continuing
operations totaled $13,148,000 or 24% of revenue compared to $9,749,000 (17% of
revenue) in 2003 and $8,935,000 (19% of revenue) in 2002. Operating income from
the Operating Disposal facility segment in 2004 was $20,134,000, a 16% increase
over the $17,420,000 posted for 2003. This replicated the 16% increase over the
$15,058,000 posted in 2002. Increasing disposal volumes combined with relatively
lower disposal costs and SG&A has driven the increase in operating income since
2002. The Company generated an operating margin from the Operating Disposal
segment of 37% in 2004, compared to 31% in 2003 and 32% in 2002.
RESULTS FROM NON-OPERATING DISPOSAL FACILITIES
Revenue
- -------
Revenue generated by Non-Operating Disposal facilities represents amounts
billable to third parties for services performed by the Company's non-operating
segment. In Nebraska, the Company is reimbursed by the Central Interstate
Compact Commission ("CIC") for allowable costs the Company incurs to support the
CIC on the proposed Butte, Nebraska disposal site, related litigation and a
subsequent settlement reached with the State of Nebraska (see Legal Proceedings
above). The States of Illinois and Nevada pay the Company to maintain and
monitor closed low-level radioactive waste sites that were returned to those
states for perpetual care and maintenance. This revenue is
26
generally not material. For the 12 months ended December 31, 2004, revenue
generated from closed sites was $77,000, which was a $3,000 increase and
$218,000 decrease from revenue generated in 2003 and 2002, respectively.
Reimbursement of litigation support expenses incurred on the Nebraska project by
the CIC accounts for the higher revenue in 2002 compared to 2003 and 2004.
Operating Costs and SG&A
- ------------------------
Non-Operating Disposal Facilities incur primarily legal and consulting expenses
to maintain or license the facilities for initial use, and labor costs required
to properly close and maintain facilities subsequent to use. During the year
ended December 31, 2004, the Company recognized $715,000 of direct operating
costs at the Sheffield facility due to an increased estimate of the costs
necessary to properly remediate and monitor the facility. For the years ended
2004, 2003 and 2002, the Company reported $1,043,000, $2,628,000 and $1,595,000,
respectively, in operating losses for the formerly proposed California and
Nebraska disposal site development projects and to close and maintain facilities
subsequent to operational use. Legal expenses of $26,000, $1,919,000 and
$1,383,000 were incurred in 2004, 2003 and 2002, respectively, related to the
formerly proposed California and Nebraska disposal sites. The Company appealed
an adverse trial court ruling in the California litigation in 2003. Significant
legal expenses are not expected in 2005 unless the appeals court rules in the
Company's favor and remands the case for further proceedings to establish
damages. The Company does not expect significant legal expenses following
settlement of the Nebraska litigation in August 2004.
RESULTS FOR CORPORATE
- ---------------------
SG&A
- ----
Over the last two years, management has controlled and reduced SG&A across the
Company. The Company also centralized accounting, information systems and
certain operational and sales functions in the Boise office. This resulted in
reassignment of related costs from the operating disposal facilities to the
Corporate Office. Centralized information systems implemented in 2003 have
increased the availability and timeliness of operating information and
accelerated customer invoicing. The Company has also resolved multiple
longstanding lawsuits, reducing legal fees and freeing up time and resources to
focus on growing the business. During the 12 months ended December 31, 2004,
Corporate SG&A totaled $5,943,000, or $900,000 higher than the $5,043,000 posted
in 2003, and $1,415,000 higher than the $4,528,000 reported in 2002. For the 12
months ended December 31, 2004 the Company accrued $934,000 for payment of
bonuses to selected executives under the American Ecology Corporation Management
Incentive Plan ("MIP"). The Company also incurred costs for independent
contractors and the Company's independent registered public accountant in excess
of $175,000 to support efforts to comply with Section 404 Internal Controls
requirements and the related assessment by its independent registered public
accountant. On March 1, 2005, the Company paid the majority of the $934,000 in
bonuses to the executives participating in the MIP. For the years ended
December 31, 2003 and 2002, no bonus was earned or paid under the MIP.
RESULTS OF DISCONTINUED OPERATIONS
In 2002, the Company entered into discussions with various parties regarding the
potential sale of its municipal solid waste landfill in Texas and with other
parties regarding potential sale of its discontinued LLRW processing business in
Tennessee. The Company reclassified these business operations as discontinued
operations consistent with Generally Accepted Accounting Principles ("GAAP") set
forth in FAS No. 144, "Accounting for the Impairment or Disposal of Long Lived
Assets" and Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity."
El Centro Solid Waste Landfill, Robstown, Texas
- -----------------------------------------------
On February 13, 2003, the Company sold its El Centro municipal and industrial
waste landfill to a wholly-owned subsidiary of Allied Waste Industries, Inc.
("Allied"). The Company sold Prepaid Assets of $117,000 and Property, Plant, and
Equipment of $6,930,000 which was subject to Closure/Post Closure Obligations of
$1,098,000 for $10,000,000 cash and future royalty payments valued at $858,000.
A $4,909,000 gain on sale was recognized in discontinued operations during the
first quarter of 2003.
27
Under the Agreement with Allied, Allied agreed to pay the Company minimum
royalties of at least $215,000 annually. Once Allied has paid the Company
$14,000,000, it will no longer have an obligation to pay annual minimum
royalties but will still be required to pay royalties based upon El Centro waste
volumes. The Royalty Asset, valued at $858,000 as of February 13, 2003,
represented the present value of 5 years of minimum royalty payments. As of
December 31, 2003, the Royalty Asset was reclassified from Discontinued
Operations to the Operating Disposal Facility Segment based on the ongoing
nature of the payments. Annual payments in excess of $215,000, or payments
subsequent to 2007, are included in Other Income at the time of receipt. During
2004 and 2003, Allied paid the Company $300,000 and $237,000 in royalties,
respectively.
The table below provides financial information on the operations of the El
Centro landfill included in Discontinued Operations for the three years ended
December 31, 2004:
($ in thousands) Year Ended December 31,
2004 2003 2002