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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

or

 

o

TRANSITION REPORT PURSUANT TO Section 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to           .

 

Commission file number: 000-11688

 

 

US ECOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-3889638

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer Identification No.)

 

 

 

251 E. Front St., Suite 400

 

 

Boise, Idaho

 

83702

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (208) 331-8400

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

 

 

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o     No  x

 

At July 27, 2016, there were 21,773,650 shares of the registrant’s Common Stock outstanding.

 

 

 



Table of Contents

 

US ECOLOGY, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

Item

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

 

 

1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

21

 

 

 

 

 

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

4.

 

Controls and Procedures

 

36

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Cautionary Statement

 

37

1.

 

Legal Proceedings

 

38

1A.

 

Risk Factors

 

38

2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

3.

 

Defaults Upon Senior Securities

 

38

4.

 

Mine Safety Disclosures

 

38

5.

 

Other Information

 

38

6.

 

Exhibits

 

39

 

 

 

 

 

 

 

SIGNATURE

 

40

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.                      FINANCIAL STATEMENTS

 

US ECOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value amount)

 

 

 

June 30, 2016

 

December 31, 2015

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

12,789

 

$

5,989

 

Receivables, net

 

100,567

 

106,380

 

Prepaid expenses and other current assets

 

7,388

 

8,484

 

Income taxes receivable

 

3,510

 

2,017

 

Total current assets

 

124,254

 

122,870

 

 

 

 

 

 

 

Property and equipment, net

 

215,484

 

210,334

 

Restricted cash and investments

 

5,818

 

5,748

 

Intangible assets, net

 

237,501

 

239,571

 

Goodwill

 

193,835

 

191,823

 

Other assets

 

1,360

 

1,641

 

Total assets

 

$

778,252

 

$

771,987

 

 

 

 

 

 

 

Liabilities And Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

14,467

 

$

17,169

 

Deferred revenue

 

6,928

 

8,078

 

Accrued liabilities

 

26,082

 

25,634

 

Accrued salaries and benefits

 

12,417

 

11,513

 

Income taxes payable

 

166

 

117

 

Current portion of closure and post-closure obligations

 

2,680

 

2,787

 

Revolving credit facility

 

3,966

 

 

Current portion of long-term debt

 

2,954

 

3,056

 

Total current liabilities

 

69,660

 

68,354

 

 

 

 

 

 

 

Long-term closure and post-closure obligations

 

69,755

 

68,367

 

Long-term debt

 

280,133

 

290,684

 

Other long-term liabilities

 

10,382

 

5,825

 

Deferred income taxes

 

81,181

 

82,622

 

Total liabilities

 

511,111

 

515,852

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Common stock $0.01 par value, 50,000 authorized; 21,774 and 21,744 shares issued, respectively

 

218

 

217

 

Additional paid-in capital

 

171,230

 

169,873

 

Retained earnings

 

111,920

 

103,300

 

Treasury stock, at cost, 0 and 5 shares, respectively

 

(5

)

(189

)

Accumulated other comprehensive loss

 

(16,222

)

(17,066

)

Total stockholders’ equity

 

267,141

 

256,135

 

Total liabilities and stockholders’ equity

 

$

778,252

 

$

771,987

 

 

The accompanying notes are an integral part of these financial statements.

 

3



Table of Contents

 

US ECOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

122,351

 

$

139,732

 

$

235,669

 

$

276,383

 

Direct operating costs

 

85,445

 

98,262

 

163,555

 

195,069

 

Gross profit

 

36,906

 

41,470

 

72,114

 

81,314

 

Selling, general and administrative expenses

 

19,819

 

22,675

 

39,244

 

47,568

 

Impairment charges

 

 

6,700

 

 

6,700

 

Operating income

 

17,087

 

12,095

 

32,870

 

27,046

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

33

 

6

 

82

 

47

 

Interest expense

 

(4,303

)

(5,433

)

(8,862

)

(11,127

)

Foreign currency gain (loss)

 

(343

)

292

 

416

 

(775

)

Other

 

2,330

 

233

 

2,499

 

769

 

Total other expense

 

(2,283

)

(4,902

)

(5,865

)

(11,086

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

14,804

 

7,193

 

27,005

 

15,960

 

Income tax expense

 

5,866

 

5,055

 

10,550

 

7,957

 

Net income

 

$

8,938

 

$

2,138

 

$

16,455

 

$

8,003

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.41

 

$

0.10

 

$

0.76

 

$

0.37

 

Diluted

 

$

0.41

 

$

0.10

 

$

0.76

 

$

0.37

 

 

 

 

 

 

 

 

 

 

 

Shares used in earnings per share calculation:

 

 

 

 

 

 

 

 

 

Basic

 

21,700

 

21,617

 

21,692

 

21,600

 

Diluted

 

21,790

 

21,748

 

21,768

 

21,719

 

 

 

 

 

 

 

 

 

 

 

Dividends paid per share

 

$

0.18

 

$

0.18

 

$

0.36

 

$

0.36

 

 

The accompanying notes are an integral part of these financial statements.

 

4



Table of Contents

 

US ECOLOGY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,938

 

$

2,138

 

$

16,455

 

$

8,003

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

36

 

1,003

 

3,289

 

(3,171

)

Net changes in interest rate hedge, net of taxes of ($297), $663, ($1,316) and ($91), respectively

 

(551

)

1,231

 

(2,445

)

(169

)

Comprehensive income, net of tax

 

$

8,423

 

$

4,372

 

$

17,299

 

$

4,663

 

 

The accompanying notes are an integral part of these financial statements.

 

5



Table of Contents

 

US ECOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

16,455

 

$

8,003

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Impairment charges

 

 

6,700

 

Depreciation and amortization of property and equipment

 

12,106

 

15,135

 

Amortization of intangible assets

 

5,256

 

6,606

 

Accretion of closure and post-closure obligations

 

2,049

 

2,077

 

Gain on disposition of business

 

(2,208

)

 

Unrealized foreign currency (gain) loss

 

(685

)

1,510

 

Deferred income taxes

 

(1,340

)

(3,096

)

Share-based compensation expense

 

1,578

 

1,089

 

Net loss on disposal of property and equipment

 

22

 

908

 

Amortization of debt issuance costs

 

1,065

 

1,001

 

Amortization of debt discount

 

74

 

74

 

Changes in assets and liabilities:

 

 

 

 

 

Receivables

 

6,613

 

16,952

 

Income taxes receivable

 

(1,439

)

6,328

 

Other assets

 

1,272

 

2,373

 

Accounts payable and accrued liabilities

 

(872

)

(6,241

)

Deferred revenue

 

(1,220

)

(6,089

)

Accrued salaries and benefits

 

787

 

(1,651

)

Income taxes payable

 

49

 

839

 

Closure and post-closure obligations

 

(848

)

(2,136

)

Net cash provided by operating activities

 

38,714

 

50,382

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(14,488

)

(19,376

)

Business acquisition (net of cash acquired)

 

(4,934

)

 

Purchases of restricted cash and investments

 

(1,043

)

(840

)

Proceeds from divestitures (net of cash divested)

 

2,723

 

 

Proceeds from sale of restricted cash and investments

 

973

 

817

 

Proceeds from sale of property and equipment

 

96

 

314

 

Net cash used in investing activities

 

(16,673

)

(19,085

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on long-term debt

 

(11,502

)

(33,935

)

Dividends paid

 

(7,835

)

(7,792

)

Payments on revolving credit facility

 

(22,166

)

 

Proceeds from revolving credit facility

 

26,132

 

 

Proceeds from exercise of stock options

 

124

 

1,042

 

Other

 

(162

)

(262

)

Net cash used in financing activities

 

(15,409

)

(40,947

)

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash

 

168

 

(244

)

Increase (decrease) in cash and cash equivalents

 

6,800

 

(9,894

)

Cash and cash equivalents at beginning of period

 

5,989

 

22,971

 

Cash and cash equivalents at end of period

 

$

12,789

 

$

13,077

 

 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

Income taxes paid, net of receipts

 

$

13,203

 

$

7,994

 

Interest paid

 

$

7,438

 

$

9,864

 

Non-cash investing and financing activities:

 

 

 

 

 

Capital expenditures in accounts payable and other payables

 

$

2,403

 

$

1,804

 

Restricted stock issued from treasury shares

 

$

415

 

$

272

 

 

The accompanying notes are an integral part of these financial statements.

 

6



Table of Contents

 

US ECOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.                    GENERAL

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements include the results of operations, financial position and cash flows of US Ecology, Inc. and its wholly-owned subsidiaries. All inter-company balances have been eliminated. Throughout these financial statements words such as “we,” “us,” “our,” “US Ecology” and the “Company” refer to US Ecology, Inc. and its subsidiaries.

 

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly, in all material respects, the results of the Company for the periods presented. These consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted pursuant to the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2016. For comparative purposes, certain amounts in prior periods’ consolidated financial statements have been reclassified to conform to the current period presentation.

 

On November 1, 2015, we sold our Allstate Power Vac, Inc. (“Allstate”) subsidiary to a private investor group. See Note 3 for additional information.

 

The Company’s consolidated balance sheet as of December 31, 2015 has been derived from the Company’s audited consolidated balance sheet as of that date.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements. As it relates to estimates and assumptions in amortization rates and environmental obligations, significant engineering, operations and accounting judgments are required. We review these estimates and assumptions no less than annually. In many circumstances, the ultimate outcome of these estimates and assumptions will not be known for decades into the future. Actual results could differ materially from these estimates and assumptions due to changes in applicable regulations, changes in future operational plans and inherent imprecision associated with estimating environmental impacts far into the future.

 

Recently Issued Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718). This ASU was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. The update is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. We are assessing the impact the adoption of ASU 2016-09 may have on our consolidated financial position, results of operations and cash flows.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance for revenue recognition. The ASU’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The guidance permits the use of either the retrospective or cumulative effect transition method. The ASU also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. In August 2015, the FASB issued ASU 2015-14: Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date established in ASU 2014-09. The amendments in ASU 2014-09 are now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is

 

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permitted but not before annual periods beginning after December 15, 2016. We are currently assessing the impact the adoption of ASU 2014-09 may have on our consolidated financial position, results of operations and cash flows.

 

NOTE 2.                    BUSINESS COMBINATION

 

On May 2, 2016, the Company acquired 100% of the outstanding shares of Environmental Services Inc., (“ESI”), an environmental services company based in Tilbury, Ontario, Canada. ESI is focused primarily on hazardous and non-hazardous transportation and disposal, hazardous and non-hazardous waste treatment, industrial services, confined space rescue and emergency response work throughout Ontario. The total purchase price was $4.9 million, net of cash acquired, and was funded with cash on hand. ESI is reported as part of our Environmental Services segment, however, revenues and total assets of ESI are not material to our consolidated financial position or results of operations.

 

We have allocated the purchase price to the assets acquired and liabilities assumed based on estimates of the fair value at the date of the acquisition, resulting in $939,000 allocated to goodwill (which is not deductible for tax purposes), $861,000 allocated to intangible assets (primarily customer relationships) to be amortized over a weighted average life of approximately 14 years, and $638,000 allocated to indefinite-lived environmental permits. The purchase price allocation is preliminary, as estimates and assumptions are subject to change as more information becomes available.

 

NOTE 3.                    DIVESTITURES

 

Divestiture of Augusta, Georgia Facility (“Augusta”)

 

On April 5, 2016, we completed the divestiture of Augusta for cash proceeds of $1.9 million. Augusta was reported as part of our Environmental Services segment. Sales, net income and total assets of Augusta are not material to our consolidated financial position or results of operations in any period presented. We recognized a $1.9 million pre-tax gain on the divestiture of Augusta, which is included in Other income (expense) in our consolidated statements of operations for the three and six months ended June 30, 2016.

 

Divestiture of Allstate

 

On November 1, 2015, we completed the divestiture of Allstate for cash proceeds at closing of $58.8 million. For the year ended December 31, 2015, we recognized a pre-tax loss on the divestiture of Allstate, including transaction-related costs, of $542,000, which was included in Other income (expense) in our consolidated statements of operations. On April 25, 2016, we received additional cash proceeds of $827,000 in settlement of final post-closing adjustments, resulting in a pre-tax gain of $351,000, which is included in Other income (expense) in our consolidated statements of operations for the three and six months ended June 30, 2016.

 

Prior to the divesture, Allstate represented the majority of the industrial services business included in our Field & Industrial Services segment. The sale of Allstate did not meet the requirements to be reported as a discontinued operation as defined in ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. See Note 5 to the Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 for additional information.

 

NOTE 4.                    ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Changes in accumulated other comprehensive income (loss) (“AOCI”) consisted of the following:

 

 

 

Foreign
Currency
Translation

 

Unrealized Loss
on Interest Rate
Hedge

 

Total

 

Balance at December 31, 2015

 

$

(14,028

)

$

(3,038

)

$

(17,066

)

Other comprehensive income (loss) before reclassifications, net of tax

 

3,289

 

(3,506

)

(217

)

Amounts reclassified out of AOCI, net of tax (1)

 

 

1,061

 

1,061

 

Other comprehensive income (loss)

 

3,289

 

(2,445

)

844

 

Balance at June 30, 2016

 

$

(10,739

)

$

(5,483

)

$

(16,222

)

 


(1)   Before-tax reclassifications of $808,000 ($525,000 after-tax) and $1.6 million ($1.1 million after-tax) for the three and six months ended June 30, 2016, respectively, and before-tax reclassifications of $879,000 ($572,000 after-tax) and $1.8 million ($1.1 million after-tax) for the three and six months ended June 30, 2015,

 

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respectively, were included in Interest expense in the Company’s consolidated statements of operations. Amounts relate to our interest rate swap which is designated as a cash flow hedge. Changes in fair value of the swap recognized in AOCI are reclassified to interest expense when hedged interest payments on the underlying debt are made. Amounts in AOCI expected to be recognized in interest expense over the next 12 months total approximately $3.2 million ($2.1 million after tax).

 

NOTE 5.                    CONCENTRATIONS AND CREDIT RISK

 

Major Customers

 

No customer accounted for more than 10% of total revenue for the three or six months ended June 30, 2016 or the three or six months ended June 30, 2015. No customer accounted for more than 10% of total trade receivables as of June 30, 2016 or December 31, 2015.

 

Credit Risk Concentration

 

We maintain most of our cash and cash equivalents with nationally recognized financial institutions like Wells Fargo Bank, National Association (“Wells Fargo”) and Comerica, Inc. Substantially all balances are uninsured and are not used as collateral for other obligations. Concentrations of credit risk on accounts receivable are believed to be limited due to the number, diversification and character of the obligors and our credit evaluation process.

 

NOTE 6.                    RECEIVABLES

 

Receivables consisted of the following:

 

 

 

June 30,

 

December 31,

 

$s in thousands

 

2016

 

2015

 

 

 

 

 

 

 

Trade

 

$

84,273

 

$

95,055

 

Unbilled revenue

 

17,267

 

11,983

 

Other

 

1,357

 

2,568

 

Total receivables

 

102,897

 

109,606

 

Allowance for doubtful accounts

 

(2,330

)

(3,226

)

Receivables, net

 

$

100,567

 

$

106,380

 

 

NOTE 7.                    FAIR VALUE MEASUREMENTS

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities;

 

Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;

 

Level 3 - Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions that market participants would use to value the asset or liability.

 

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, restricted cash and investments, accounts payable, accrued liabilities, debt and interest rate swap agreements. The estimated fair value of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and revolving credit facility approximate their carrying value due to the short-term nature of these instruments.

 

The Company estimates the fair value of its variable-rate debt using Level 2 inputs, such as interest rates, related terms and maturities of similar obligations. At June 30, 2016, the fair value of the Company’s variable-rate debt was estimated to be $289.9 million. The Company’s assets and liabilities measured at fair value on a recurring basis consisted of the following:

 

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June 30, 2016

 

 

 

Quoted Prices in
Active Markets

 

Other Observable
Inputs

 

Unobservable
Inputs

 

 

 

$s in thousands

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Fixed-income securities (1)

 

$

823

 

$

3,214

 

$

 

$

4,037

 

Money market funds (2)

 

1,781

 

 

 

1,781

 

Total

 

$

2,604

 

$

3,214

 

$

 

$

5,818

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap agreement (3)

 

$

 

$

8,436

 

$

 

$

8,436

 

Total

 

$

 

$

8,436

 

$

 

$

8,436

 

 

 

 

December 31, 2015

 

 

 

Quoted Prices in
Active Markets

 

Other Observable
Inputs

 

Unobservable
Inputs

 

 

 

$s in thousands

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Fixed-income securities (1)

 

$

403

 

$

3,573

 

$

 

$

3,976

 

Money market funds (2)

 

1,772

 

 

 

1,772

 

Total

 

$

2,175

 

$

3,573

 

$

 

$

5,748

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap agreement (3)

 

$

 

$

4,676

 

$

 

$

4,676

 

Total

 

$

 

$

4,676

 

$

 

$

4,676

 

 


(1)   We invest a portion of our Restricted cash and investments in fixed-income securities, including U.S. Treasury and U.S. agency securities. We measure the fair value of U.S. Treasury securities using quoted prices for identical assets in active markets. We measure the fair value of U.S. agency securities using observable market activity for similar assets. The fair value of our fixed-income securities approximates our cost basis in the investments.

 

(2)   We invest a portion of our Restricted cash and investments in money market funds. We measure the fair value of these money market fund investments using quoted prices for identical assets in active markets.

 

(3)   In order to manage interest rate exposure, we entered into an interest rate swap agreement in October 2014 that effectively converts a portion of our variable-rate debt to a fixed interest rate. The swap is designated as a cash flow hedge, with gains and losses deferred in other comprehensive income to be recognized as an adjustment to interest expense in the same period that the hedged interest payments affect earnings. The interest rate swap has an effective date of December 31, 2014 with an initial notional amount of $250.0 million. The fair value of the interest rate swap agreement represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of the interest rate swap agreement quarterly based on the quoted market price for the same or similar financial instruments. The fair value of the interest rate swap agreement is included in Other long-term liabilities in the Company’s consolidated balance sheet as of June 30, 2016 and December 31, 2015.

 

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NOTE 8.                    PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

 

 

June 30,

 

December 31,

 

$s in thousands

 

2016

 

2015

 

 

 

 

 

 

 

Cell development costs

 

$

123,215

 

$

121,473

 

Land and improvements

 

33,158

 

31,606

 

Buildings and improvements

 

73,820

 

70,990

 

Railcars

 

17,375

 

17,375

 

Vehicles and other equipment

 

102,779

 

92,797

 

Construction in progress

 

21,450

 

20,067

 

Total property and equipment

 

371,797

 

354,308

 

Accumulated depreciation and amortization

 

(156,313

)

(143,974

)

Property and equipment, net

 

$

215,484

 

$

210,334

 

 

Depreciation and amortization expense for the three months ended June 30, 2016 and 2015 was $6.2 million and $7.7 million, respectively. Depreciation and amortization expense for the six months ended June 30, 2016 and 2015 was $12.1 million and $15.1 million, respectively.

 

NOTE 9.                    GOODWILL AND INTANGIBLE ASSETS

 

Changes in goodwill for the six months ended June 30, 2016 consisted of the following:

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Total

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

$

147,692

 

$

44,131

 

$

191,823

 

ESI acquisition

 

939

 

 

939

 

Foreign currency translation

 

1,073

 

 

1,073

 

Balance at June 30, 2016

 

$

149,704

 

$

44,131

 

$

193,835

 

 

Intangible assets, net consisted of the following:

 

 

 

June 30, 2016

 

December 31, 2015

 

$s in thousands

 

Cost

 

Accumulated
Amortization

 

Net

 

Cost

 

Accumulated
Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizing intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Permits, licenses and lease

 

$

111,120

 

$

(8,254

)

$

102,866

 

$

109,652

 

$

(6,682

)

$

102,970

 

Customer relationships

 

83,001

 

(11,791

)

71,210

 

82,021

 

(9,015

)

73,006

 

Technology - formulae and processes

 

7,023

 

(1,241

)

5,782

 

6,560

 

(1,054

)

5,506

 

Customer backlog

 

3,652

 

(743

)

2,909

 

3,652

 

(561

)

3,091

 

Tradename

 

4,318

 

(2,930

)

1,388

 

4,318

 

(2,210

)

2,108

 

Developed software

 

2,917

 

(848

)

2,069

 

2,899

 

(678

)

2,221

 

Non-compete agreements

 

747

 

(735

)

12

 

732

 

(732

)

 

Internet domain and website

 

540

 

(58

)

482

 

540

 

(44

)

496

 

Database

 

390

 

(105

)

285

 

385

 

(85

)

300

 

Total amortizing intangible assets

 

213,708

 

(26,705

)

187,003

 

210,759

 

(21,061

)

189,698

 

Nonamortizing intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Permits and licenses

 

50,367

 

 

50,367

 

49,750

 

 

49,750

 

Tradename

 

131

 

 

131

 

123

 

 

123

 

Total intangible assets, net

 

$

264,206

 

$

(26,705

)

$

237,501

 

$

260,632

 

$

(21,061

)

$

239,571

 

 

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Amortization expense for the three months ended June 30, 2016 and 2015 was $2.6 million and $3.3 million, respectively. Amortization expense for the six months ended June 30, 2016 and 2015 was $5.3 million and $6.6 million, respectively. Foreign intangible asset carrying amounts are affected by foreign currency translation.

 

NOTE 10.             DEBT

 

Long-term debt consisted of the following:

 

 

 

June 30,

 

December 31,

 

$s in thousands

 

2016

 

2015

 

 

 

 

 

 

 

Term loan

 

$

289,491

 

$

300,994

 

Unamortized discount and debt issuance costs

 

(6,404

)

(7,254

)

Total debt

 

283,087

 

293,740

 

Current portion of long-term debt

 

(2,954

)

(3,056

)

Long-term debt

 

$

280,133

 

$

290,684

 

 

On June 17, 2014, in connection with the acquisition of EQ Holdings, Inc. and its wholly-owned subsidiaries (collectively “EQ”), the Company entered into a new $540.0 million senior secured credit agreement (the “Credit Agreement”) with a syndicate of banks comprised of a $415.0 million term loan (the “Term Loan”) with a maturity date of June 17, 2021 and a $125.0 million revolving line of credit (the “Revolving Credit Facility”) with a maturity date of June 17, 2019. Upon entering into the Credit Agreement, the Company terminated its existing credit agreement with Wells Fargo, dated October 29, 2010, as amended (the “Former Agreement”). Immediately prior to the termination of the Former Agreement, there were no outstanding borrowings under the Former Agreement. No early termination penalties were incurred as a result of the termination of the Former Agreement.

 

Term Loan

 

The Term Loan provided an initial commitment amount of $415.0 million, the proceeds of which were used to acquire 100% of the outstanding shares of EQ and pay related transaction fees and expenses. The Term Loan bears interest at a base rate (as defined in the Credit Agreement) plus 2.00% or LIBOR plus 3.00%, at the Company’s option. The Term Loan is subject to amortization in equal quarterly installments in an aggregate annual amount equal to 1.00% of the original principal amount of the Term Loan. At June 30, 2016, the effective interest rate on the Term Loan, including the impact of our interest rate swap, was 4.74%. Interest only payments are due either monthly or on the last day of any interest period, as applicable. As set forth in the Credit Agreement, the Company is required to enter into one or more interest rate hedge agreements in amounts sufficient to fix the interest rate on at least 50% of the principal amount of the $415.0 million Term Loan. In October 2014, the Company entered into an interest rate swap agreement with Wells Fargo, effectively fixing the interest rate on $220.0 million, or 76%, of the Term Loan principal outstanding as of June 30, 2016.

 

Revolving Credit Facility

 

The Revolving Credit Facility provides up to $125.0 million of revolving credit loans or letters of credit with the use of proceeds restricted solely for working capital and other general corporate purposes. Under the Revolving Credit Facility, revolving loans are available based on a base rate (as defined in the Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to consolidated earnings before interest, taxes, depreciation and amortization (as defined in the Credit Agreement). At June 30, 2016, the effective interest rate on the Revolving Credit Facility was 5.25%. The Company is required to pay a commitment fee of 0.50% per annum on the unused portion of the Revolving Credit Facility, with such commitment fee to be reduced based upon the Company’s total leverage ratio as defined in the Credit Agreement. The maximum letter of credit capacity under the Revolving Credit Facility is $50.0 million and the Credit Agreement provides for a letter of credit fee equal to the applicable margin for LIBOR loans under the Revolving Credit Facility. Interest payments are due either monthly or on the last day of any interest period, as applicable. At June 30, 2016, there were $4.0 million of working capital borrowings outstanding on the Revolving Credit Facility. These borrowings are due “on demand” and presented as short-term debt in the consolidated balance sheets. As of June 30, 2016, the availability under the Revolving Credit Facility was $113.5 million with $7.5 million of the Revolving Credit Facility issued in the form of standby letters of credit utilized as collateral for closure and post-closure financial assurance and other assurance obligations.

 

Except as set forth below, the Company may prepay the Term Loan or permanently reduce the Revolving Credit Facility commitment under the Credit Agreement at any time without premium or penalty (other than customary “breakage” costs with respect to the early

 

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termination of LIBOR loans). Subject to certain exceptions, the Credit Agreement provides for mandatory prepayment upon certain asset dispositions, casualty events and issuances of indebtedness. The Credit Agreement is also subject to mandatory annual prepayments commencing in December 2015 if our total leverage (defined as the ratio of our consolidated funded debt as of the last day of the applicable fiscal year to our adjusted EBITDA for such period) exceeds certain ratios as follows: 50% of our adjusted excess cash flow (as defined in the Credit Agreement and which takes into account certain adjustments) if our total leverage ratio is greater than 2.50 to 1.00, with step-downs to 0% if our total leverage ratio is equal to or less than 2.50 to 1.00.

 

Pursuant to (i) an unconditional guarantee agreement (the “Guarantee”) and (ii) a collateral agreement, each entered into by the Company and its domestic subsidiaries on June 17, 2014, the Company’s obligations under the Credit Agreement are jointly and severally and fully and unconditionally guaranteed on a senior basis by all of the Company’s existing and certain future domestic subsidiaries and the Credit Agreement is secured by substantially all of the Company’s and its domestic subsidiaries’ assets except the Company’s and its domestic subsidiaries’ real property.

 

The Credit Agreement contains customary restrictive covenants, subject to certain permitted amounts and exceptions, including covenants limiting the ability of the Company to incur additional indebtedness, pay dividends and make other restricted payments, repurchase shares of our outstanding stock and create certain liens. We may only declare quarterly or annual dividends if on the date of declaration, no event of default has occurred and no other event or condition has occurred that would constitute default due to the payment of the dividend.

 

The Credit Agreement also contains a financial maintenance covenant, which is a maximum Consolidated Senior Secured Leverage Ratio, as defined in the Credit Agreement, and is only applicable to the Revolving Credit Facility. Our Consolidated Senior Secured Leverage Ratio as of the last day of any fiscal quarter, commencing with June 30, 2014, may not exceed the ratios indicated below:

 

Fiscal Quarters Ending

 

Maximum Ratio

December 31, 2015 through September 30, 2016

 

3.75 to 1.00

December 31, 2016 through September 30, 2017

 

3.50 to 1.00

December 31, 2017 through September 30, 2018

 

3.25 to 1.00

December 31, 2018 and thereafter

 

3.00 to 1.00

 

At June 30, 2016, we were in compliance with all of the financial covenants in the Credit Agreement.

 

NOTE 11.             CLOSURE AND POST-CLOSURE OBLIGATIONS

 

Our accrued closure and post-closure liability represents the expected future costs, including corrective actions, associated with closure and post-closure of our operating and non-operating disposal facilities. We record the fair value of our closure and post-closure obligations as a liability in the period in which the regulatory obligation to retire a specific asset is triggered. For our individual landfill cells, the required closure and post-closure obligations under the terms of our permits and our intended operation of the landfill cell are triggered and recorded when the cell is placed into service and waste is initially disposed in the landfill cell. The fair value is based on the total estimated costs to close the landfill cell and perform post-closure activities once the landfill cell has reached capacity and is no longer accepting waste. We perform periodic reviews of both non-operating and operating facilities and revise accruals for estimated closure and post-closure, remediation or other costs as necessary. Recorded liabilities are based on our best estimates of current costs and are updated periodically to include the effects of existing technology, presently enacted laws and regulations, inflation and other economic factors.

 

Changes to closure and post-closure obligations consisted of the following:

 

 

 

Three Months Ended

 

Six Months Ended

 

$s in thousands

 

June 30, 2016

 

June 30, 2016

 

 

 

 

 

 

 

Closure and post-closure obligations, beginning of period

 

$

71,786

 

$

71,154

 

Accretion expense

 

1,025

 

2,049

 

Payments

 

(376

)

(848

)

Foreign currency translation

 

 

80

 

Closure and post-closure obligations, end of period

 

72,435

 

72,435

 

Less current portion

 

(2,680

)

(2,680

)

Long-term portion

 

$

69,755

 

$

69,755

 

 

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NOTE 12.             INCOME TAXES

 

Our effective tax rate for the three months ended June 30, 2016 was 39.6%, down from 70.3% for the three months ended June 30, 2015. Our effective tax rate for the six months ended June 30, 2016 was 39.1%, down from 49.9% for the six months ended June 30, 2015. The decreases for both the three and six months ended June 30, 2016 primarily reflect non-deductible impairment charges of $6.7 million recorded during the three and six months ended June 30, 2015. The decreases are partially offset by a lower proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate, for the three and six months ended June 30, 2016 compared with the three and six months ended June 30, 2015. The decreases are also partially offset by a higher U.S. effective tax rate in the three and six months ended June 30, 2016 driven by a higher overall effective state tax rate resulting from changes in our apportionment between the various states in which we operate.

 

We file a consolidated U.S. federal income tax return with the Internal Revenue Service (“IRS”) as well as income tax returns in various states and Canada. During the six months ended June 30, 2016, the US Ecology, Inc. IRS examination for the 2012 tax year concluded with no material changes. US Ecology, Inc. is subject to examination by the IRS for tax years 2013 through 2015. During the six months ended June 30, 2016, the EQ IRS examination for the 2012 tax year concluded with no material changes. EQ is subject to examination by the IRS for tax years 2013 through 2015. We may be subject to examinations by the Canada Revenue Agency as well as various state and local taxing jurisdictions for tax years 2011 through 2015. We are currently not aware of any other examinations by taxing authorities.

 

NOTE 13.             EARNINGS PER SHARE

 

 

 

Three Months Ended June 30,

 

$s and shares in thousands, except per share

 

2016

 

2015

 

amounts

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net income

 

$

8,938

 

$

8,938

 

$

2,138

 

$

2,138

 

Weighted average basic shares outstanding

 

21,700

 

21,700

 

21,617

 

21,617

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock-based awards

 

 

 

90

 

 

 

131

 

Weighted average diluted shares outstanding

 

 

 

21,790

 

 

 

21,748

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.41

 

$

0.41

 

$

0.10

 

$

0.10

 

Anti-dilutive shares excluded from calculation

 

 

 

251

 

 

 

178

 

 

 

 

Six Months Ended June 30,

 

$s and shares in thousands, except per share

 

2016

 

2015

 

amounts

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net income

 

$

16,455

 

$

16,455

 

$

8,003

 

$

8,003

 

Weighted average basic shares outstanding

 

21,692

 

21,692

 

21,600

 

21,600

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock-based awards

 

 

 

76

 

 

 

119

 

Weighted average diluted shares outstanding

 

 

 

21,768

 

 

 

21,719

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.76

 

$

0.76

 

$

0.37

 

$

0.37

 

Anti-dilutive shares excluded from calculation

 

 

 

304

 

 

 

197

 

 

14



Table of Contents

 

NOTE 14.             EQUITY

 

Stock Repurchase Program

 

On June 1, 2016, the Company’s Board of Directors authorized the repurchase of $25.0 million of the Company’s outstanding common stock. Repurchases may be made from time to time in open market or through privately negotiated transactions. The timing of any repurchases will be based upon prevailing market conditions and other factors. The Company did not repurchase any shares of common stock under the repurchase program during the three months ended June 30, 2016. The repurchase program will remain in effect until June 2, 2018, unless extended by our Board of Directors.

 

Omnibus Incentive Plan

 

On May 27, 2015, our stockholders approved the Omnibus Incentive Plan (“Omnibus Plan”), which was approved by our Board of Directors on April 7, 2015. The Omnibus Plan was developed to provide additional incentives through equity ownership in US Ecology and, as a result, encourage employees and directors to contribute to our success. The Omnibus Plan provides, among other things, the ability for the Company to grant restricted stock, performance stock, options, stock appreciation rights, restricted stock units (“RSUs”), performance stock units (“PSUs”) and other stock-based awards or cash awards to officers, employees, consultants and non-employee directors. Subsequent to the approval of the Omnibus Plan in May 2015, we stopped granting equity awards under our 2008 Stock Option Incentive Plan and our 2006 Restricted Stock Plan (collectively, the “Previous Plans”), and the Previous Plans will remain in effect solely for the settlement of awards granted under the Previous Plans. No shares that are reserved but unissued under the Previous Plans or that are outstanding under the Previous Plans and reacquired by the Company for any reason will be available for issuance under the Omnibus Plan. The Omnibus Plan expires on April 7, 2025 and authorizes 1,500,000 shares of common stock for grant over the life of the Omnibus Plan. As of June 30, 2016, 1,241,752 shares of common stock remain available for grant under the Omnibus Plan.

 

PSUs, RSUs and Restricted Stock

 

On January 4, 2016, the Company granted 16,000 PSUs to certain employees. Each PSU represents the right to receive, on the settlement date, one share of the Company’s common stock. The total number of PSUs each participant is eligible to earn ranges from 0% to 200% of the target number of PSUs granted. The actual number of PSUs that will vest and be settled in shares is determined at the end of a three-year performance period beginning January 1, 2016, based on total stockholder return relative to a set of peer companies. The fair value of the PSUs estimated on the grant date using a Monte Carlo simulation was $41.22 per unit. Compensation expense is recorded over the awards’ vesting period.

 

Assumptions used in the Monte Carlo simulation to calculate the fair value of the PSUs granted in 2016 and 2015 are as follows:

 

 

 

2016

 

2015

 

Stock price on grant date

 

$

35.05

 

$

46.89

 

Expected term (years)

 

3.0

 

2.6

 

Expected volatility

 

29

%

29

%

Risk-free interest rate

 

1.3

%

0.9

%

Expected dividend yield

 

2.1

%

1.5

%

 

A summary of our PSU, restricted stock and RSU activity for the six months ended June 30, 2016 is as follows:

 

 

 

PSUs

 

Restricted Stock

 

RSUs

 

 

 

Shares

 

Weighted
Average
Grant Date
Fair Value

 

Shares

 

Weighted
Average
Grant Date
Fair Value

 

Shares

 

Weighted
Average
Grant
Date Fair
Value

 

Outstanding as of December 31, 2015

 

6,929

 

$

65.78

 

59,413

 

$

42.67

 

 

$

 

Granted

 

16,000

 

41.22

 

34,300

 

37.90

 

20,830

 

39.10

 

Vested

 

 

 

(29,371

)

37.21

 

 

 

Cancelled, expired or forfeited

 

 

 

 

 

 

 

Outstanding as of June 30, 2016

 

22,929

 

$

48.64

 

64,342

 

$

42.62

 

20,830

 

$

39.10

 

 

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Table of Contents

 

Stock Options

 

A summary of our stock option activity for the six months ended June 30, 2016 is as follows:

 

 

 

Shares

 

Weighted
Average
Exercise
Price

 

Outstanding as of December 31, 2015

 

336,417

 

$

35.83

 

Granted

 

147,660

 

37.83

 

Exercised

 

(7,873

)

27.78

 

Cancelled, expired or forfeited

 

 

 

Outstanding as of June 30, 2016

 

476,204

 

$

36.59

 

 

 

 

 

 

 

Exercisable as of June 30, 2016

 

154,568

 

$

32.52

 

 

Treasury Stock

 

During the six months ended June 30, 2016, the Company issued 10,412 shares of restricted stock, under the Omnibus Plan, from our treasury stock at an average cost of $39.82 per share and repurchased 5,667 shares of the Company’s common stock in connection with the net share settlement of employee equity awards at an average cost of $40.59 per share. During the six months ended June 30, 2016, option holders exercised 7,873 options with a weighted-average exercise price of $27.78 per option. Option holders exercised 2,083 of these options via net share settlement.

 

NOTE 15.             COMMITMENTS AND CONTINGENCIES

 

Litigation and Regulatory Proceedings

 

In the ordinary course of business, we are involved in judicial and administrative proceedings involving federal, state, provincial or local governmental authorities, including regulatory agencies that oversee and enforce compliance with permits. Fines or penalties may be assessed by our regulators for non-compliance. Actions may also be brought by individuals or groups in connection with permitting of planned facilities, modification or alleged violations of existing permits, or alleged damages suffered from exposure to hazardous substances purportedly released from our operated sites, as well as other litigation. We maintain insurance intended to cover property and damage claims asserted as a result of our operations. Periodically, management reviews and may establish reserves for legal and administrative matters, or other fees expected to be incurred in relation to these matters.

 

We are not currently a party to any material pending legal proceedings and are not aware of any other claims that could, individually or in the aggregate, have a materially adverse effect on our financial position, results of operations or cash flows.

 

NOTE 16.             OPERATING SEGMENTS

 

Financial Information by Segment

 

Our operations are managed in two reportable segments reflecting our internal reporting structure and nature of services offered as follows:

 

Environmental Services - This segment provides a broad range of hazardous material management services including transportation, recycling, treatment and disposal of hazardous and non-hazardous waste at Company-owned landfill, wastewater and other treatment facilities.

 

Field & Industrial Services - This segment provides packaging and collection of hazardous waste and total waste management solutions at customer sites and through our 10-day transfer facilities. Services include on-site management, waste characterization, transportation and disposal of non-hazardous and hazardous waste. This segment also provides specialty services such as high-pressure cleaning, tank cleaning, decontamination, remediation, transportation, spill cleanup and emergency response and other services to commercial and industrial facilities and to government entities.

 

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The operations not managed through our two reportable segments are recorded as “Corporate.” Corporate selling, general and administrative expenses include typical corporate items such as legal, accounting and other items of a general corporate nature. 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.

 

Effective January 1, 2016, we changed our internal reporting structure by moving the financial results of our Sulligent, Alabama and Tampa, Florida facilities from our Environmental Services segment to our Field & Industrial Services segment. The purpose of this change is to align our internal reporting structure with how we manage our business based on the primary service offering of each facility. Throughout this Quarterly Report on Form 10-Q, our segment results for all periods presented have been recast to reflect this change.

 

Summarized financial information of our reportable segments is as follows:

 

 

 

Three Months Ended June 30, 2016

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

66,908

 

$

2,897

 

$

 

$

69,805

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

15,889

 

4,955

 

 

20,844

 

Industrial Cleaning (2)

 

 

7,201

 

 

7,201

 

Technical Services (3)

 

 

19,167

 

 

19,167

 

Remediation (4)

 

 

4,653

 

 

4,653

 

Other (5)

 

 

681

 

 

681

 

Total Revenue

 

$

82,797

 

$

39,554

 

$

 

$

122,351

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

8,371

 

$

1,377

 

$

125

 

$

9,873

 

Capital expenditures

 

$

5,575

 

$

1,021

 

$

673

 

$

7,269

 

Total assets

 

$

591,511

 

$

127,836

 

$

58,905

 

$

778,252

 

 

 

 

Three Months Ended June 30, 2015

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services (6)

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

71,641

 

$

3,123

 

$

 

$

74,764

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

15,345

 

5,040

 

 

20,385

 

Industrial Cleaning (2)

 

 

23,735

 

 

23,735

 

Technical Services (3)

 

 

18,083

 

 

18,083

 

Remediation (4)

 

 

2,580

 

 

2,580

 

Other (5)

 

 

185

 

 

185

 

Total Revenue

 

$

86,986

 

$

52,746

 

$

 

$

139,732

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

8,795

 

$

3,064

 

$

143

 

$

12,002

 

Capital expenditures

 

$

5,975

 

$

3,269

 

$

901

 

$

10,145

 

Total assets

 

$

595,161

 

$

203,744

 

$

64,166

 

$

863,071

 

 

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Six Months Ended June 30, 2016

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

133,633

 

$

5,649

 

$

 

$

139,282

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

30,688

 

10,343

 

 

41,031

 

Industrial Cleaning (2)

 

 

11,472

 

 

11,472

 

Technical Services (3)

 

 

36,772

 

 

36,772

 

Remediation (4)

 

 

5,490

 

 

5,490

 

Other (5)

 

 

1,622

 

 

1,622

 

Total Revenue

 

$

164,321

 

$

71,348

 

$

 

$

235,669

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

16,451

 

$

2,713

 

$

247

 

$

19,411

 

Capital expenditures

 

$

11,414

 

$

1,521

 

$

1,553

 

$

14,488

 

Total assets

 

$

591,511

 

$

127,836

 

$

58,905

 

$

778,252

 

 

 

 

Six Months Ended June 30, 2015

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services (6)

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

143,559

 

$

6,219

 

$

 

$

149,778

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

30,809

 

14,656

 

 

45,465

 

Industrial Cleaning (2)

 

 

43,542

 

 

43,542

 

Technical Services (3)

 

 

32,603

 

 

32,603

 

Remediation (4)

 

 

4,239

 

 

4,239

 

Other (5)

 

 

756

 

 

756

 

Total Revenue

 

$

174,368

 

$

102,015

 

$

 

$

276,383

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

17,428

 

$

6,111

 

$

279

 

$

23,818

 

Capital expenditures

 

$

12,861

 

$

5,072

 

$

1,443

 

$

19,376

 

Total assets

 

$

595,161

 

$

203,744

 

$

64,166

 

$

863,071

 

 


(1)   Includes such services as collection, transportation and disposal of non-hazardous and hazardous waste.

(2)   Includes such services as industrial cleaning and maintenance for refineries, chemical plants, steel and automotive plants, and refinery services such as tank cleaning and temporary storage.

(3)   Includes such services as Total Waste Management (“TWM”) programs, retail services, laboratory packing, less-than-truck-load (“LTL”) service and Household Hazardous Waste (“HHW”) collection.

(4)   Includes such services as site assessment, onsite treatment, project management and remedial action planning and execution.

(5)   Includes such services as emergency response and marine.

(6)   Financial data includes the operations of our Allstate business. We completed the divestiture of Allstate on November 1, 2015.

 

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)

 

The primary financial measure used by management to assess segment performance is Adjusted EBITDA. Adjusted EBITDA is defined as net income before interest expense, interest income, income tax expense, depreciation, amortization, stock based compensation, accretion of closure and post-closure liabilities, foreign currency gain/loss, non-cash impairment charges and other income/expense, which are not considered part of usual business operations. Adjusted EBITDA is a complement to results provided in accordance with GAAP and we believe that such information provides additional useful information to analysts, stockholders and other users to understand the Company’s operating performance. Since Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data

 

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presented in the consolidated financial statements as indicators of financial performance or liquidity. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or a substitute for analyzing our results as reported under GAAP. Some of the limitations are:

 

·      Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

·      Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt;

·      Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes;

·      Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; and

·      Although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

 

A reconciliation of Net Income to Adjusted EBITDA is as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

$s in thousands

 

2016

 

2015

 

2016

 

2015

 

Net income

 

$

8,938

 

$

2,138

 

$

16,455

 

$

8,003

 

Income tax expense

 

5,866

 

5,055

 

10,550

 

7,957

 

Interest expense

 

4,303

 

5,433

 

8,862

 

11,127

 

Interest income

 

(33

)

(6

)

(82

)

(47

)

Foreign currency (gain) loss

 

343

 

(292

)

(416

)

775

 

Other income

 

(2,330

)

(233

)

(2,499

)

(769

)

Depreciation and amortization of plant and equipment

 

6,202

 

7,656

 

12,106

 

15,135

 

Amortization of intangibles

 

2,646

 

3,304

 

5,256

 

6,606

 

Stock-based compensation

 

783

 

627

 

1,578

 

1,089

 

Accretion and non-cash adjustment of closure & post-closure liabilities

 

1,025

 

1,042

 

2,049

 

2,077

 

Impairment charges

 

 

6,700

 

 

6,700

 

Adjusted EBITDA

 

$

27,743

 

$

31,424

 

$

53,859

 

$

58,653

 

 

Adjusted EBITDA, by operating segment, is as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

$s in thousands

 

2016

 

2015

 

2016

 

2015

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

Environmental Services

 

$

33,551

 

$

35,790

 

$

66,604

 

$

72,359

 

Field & Industrial Services

 

5,123

 

5,686

 

8,801

 

9,355

 

Corporate

 

(10,931

)

(10,052

)

(21,546

)

(23,061

)

Total

 

$

27,743

 

$

31,424

 

$

53,859

 

$

58,653

 

 

Revenue, Property and Equipment and Intangible Assets Outside of the United States

 

We provide services in the United States and Canada. Revenues by geographic location where the underlying services were performed were as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

$s in thousands

 

2016

 

2015

 

2016

 

2015

 

United States

 

$

111,183

 

$

129,568

 

$

214,374

 

$

254,331

 

Canada

 

11,168

 

10,164

 

21,295

 

22,052

 

Total revenue

 

$

122,351

 

$

139,732

 

$

235,669

 

$

276,383

 

 

Long-lived assets, comprised of property and equipment and intangible assets net of accumulated depreciation and amortization, by geographic location are as follows:

 

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June 30,

 

December 31,

 

$s in thousands

 

2016

 

2015

 

United States

 

$

396,700

 

$

400,320

 

Canada

 

56,285

 

49,585

 

Total long-lived assets

 

$

452,985

 

$

449,905

 

 

NOTE 17.             SUBSEQUENT EVENTS

 

Quarterly Dividend

 

On July 1, 2016, we declared a quarterly dividend of $0.18 per common share to stockholders of record on July 22, 2016. The dividend was paid using cash on hand on July 29, 2016 in an aggregate amount of $3.9 million.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of
US Ecology, Inc.
Boise, Idaho

 

We have reviewed the accompanying consolidated balance sheet of US Ecology, Inc. and subsidiaries (the “Company”) as of June 30, 2016, and the related consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2016 and 2015, and the consolidated statements of cash flows for the six-month periods ended June 30, 2016 and 2015. This interim financial information is the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial information taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of US Ecology, Inc. and subsidiaries as of December 31, 2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 29, 2016, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2015 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ Deloitte & Touche LLP

 

Boise, Idaho

August 1, 2016

 

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

 

The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report words such as “we,” “us,” “our,” “US Ecology” and the “Company” refer to US Ecology, Inc. and its subsidiaries.

 

OVERVIEW

 

US Ecology, Inc. is a leading North American provider of environmental services to commercial and government entities. The Company addresses the complex waste management needs of its customers, offering treatment, disposal and recycling of hazardous, non-hazardous and radioactive waste, as well as a wide range of complementary field and industrial services. US Ecology’s comprehensive knowledge of the waste business, its collection of waste management facilities and focus on safety, environmental compliance, and customer service enables us to effectively meet the needs of our customers and to build long-lasting relationships.

 

We have fixed facilities and service centers operating in the United States, Canada and Mexico. Our fixed facilities include five Resource Conservation and Recovery Act of 1976 subtitle C hazardous waste landfills and one low-level radioactive waste landfill located near Beatty, Nevada; Richland, Washington; Robstown, Texas; Grand View, Idaho; Detroit, Michigan and Blainville, Québec, Canada. These facilities generate revenue from fees charged to treat and dispose of waste and from fees charged to perform various field and industrial services for our customers.

 

On November 1, 2015, we sold our Allstate Power Vac, Inc. (“Allstate”) subsidiary to a private investor group. See Note 3 to the Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q for additional information.

 

Our operations are managed in two reportable segments reflecting our internal management reporting structure and nature of services offered as follows:

 

Environmental Services - This segment provides a broad range of hazardous material management services including transportation, recycling, treatment and disposal of hazardous and non-hazardous waste at Company-owned landfill, wastewater and other treatment facilities.

 

Field & Industrial Services - This segment provides packaging and collection of hazardous waste and total waste management solutions at customer sites and through our 10-day transfer facilities. Services include on-site management, waste characterization, transportation and disposal of non-hazardous and hazardous waste. This segment also provides specialty services such as high-pressure cleaning, tank cleaning, decontamination, remediation, transportation, spill cleanup and emergency response and other services to commercial and industrial facilities and to government entities.

 

Effective January 1, 2016, we changed our internal reporting structure by moving the financial results of our Sulligent, Alabama and Tampa, Florida facilities from our Environmental Services segment to our Field & Industrial Services segment. The purpose of this change is to align our internal reporting structure with how we manage our business based on the primary service offering of each facility. Throughout this Quarterly Report on Form 10-Q, our segment results for all periods presented have been recast to reflect this change.

 

In order to provide insight into the underlying drivers of our waste volumes and related treatment and disposal (“T&D”) revenues, we evaluate period-to-period changes in our T&D revenue for our Environmental Services segment based on the industry of the waste generator, based on North American Industry Classification System (“NAICS”) codes. The composition of Environmental Services segment T&D revenues by waste generator industry for the three and six months ended June 30, 2016 and 2015 were as follows:

 

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% of Treatment and Disposal Revenue (1)(2) for the
Three Months Ended June 30,

 

Generator Industry

 

2016

 

2015

 

Metal Manufacturing

 

17%

 

15%

 

Broker / Treatment, Storage & Disposal Facilities (“TSDF”)

 

15%

 

15%

 

General Manufacturing

 

14%

 

11%

 

Chemical Manufacturing

 

13%

 

18%

 

Refining

 

10%

 

12%

 

Government

 

6%

 

7%

 

Utilities

 

5%

 

4%

 

Mining, Exploration & Production

 

3%

 

3%

 

Transportation

 

2%

 

3%

 

Waste Management & Remediation

 

2%

 

2%

 

Other (3)

 

13%

 

10%

 

 


(1) Excludes all transportation service revenue

(2) Excludes treatment and disposal revenue from the Augusta, Georgia facility which we divested on April 5, 2016.

(3) Includes retail and wholesale trade, rate regulated, construction and other industries

 

 

 

% of Treatment and Disposal Revenue (1)(2) for the
Six Months Ended June 30,

 

Generator Industry

 

2016

 

2015

 

Metal Manufacturing

 

17%

 

16%

 

Broker / TSDF

 

15%

 

15%

 

Chemical Manufacturing

 

13%

 

22%

 

General Manufacturing

 

13%

 

10%

 

Refining

 

11%

 

11%

 

Government

 

6%

 

7%

 

Utilities

 

5%

 

3%

 

Mining, Exploration and Production

 

3%

 

3%

 

Transportation

 

3%

 

3%

 

Waste Management & Remediation

 

2%

 

2%

 

Other (3)

 

12%

 

8%

 

 


(1) Excludes all transportation service revenue

(2) Excludes treatment and disposal revenue from the Augusta, Georgia facility which we divested on April 5, 2016.

(3) Includes retail and wholesale trade, rate regulated, construction and other industries

 

We also categorize our Environmental Services T&D revenue as either “Base Business” or “Event Business” based on the underlying nature of the revenue source. We define Event Business as non-recurring projects that are expected to equal or exceed 1,000 tons, with Base Business defined as all other business not meeting the definition of Event Business.

 

A significant portion of our disposal revenue is attributable to discrete Event Business projects which vary widely in size, duration and unit pricing. For the three months ended June 30, 2016, approximately 16% of our T&D revenue was derived from Event Business projects, down from 22% for the three months ended June 30, 2015. For the three months ended June 30, 2016, Event Business revenue decreased 32% compared to the three months ended June 30, 2015. For the six months ended June 30, 2016, approximately 17% of our T&D revenue was derived from Event Business projects, down from 25% for the six months ended June 30, 2015. For the six months ended June 30, 2016, Event Business revenue decreased 39% compared to the six months ended June 30, 2015. The one-time nature of Event Business, diverse spectrum of waste types received and widely varying unit pricing necessarily creates variability in revenue and earnings. This variability may be influenced by general and industry-specific economic conditions, funding availability, changes in laws and regulations, government enforcement actions or court orders, public controversy, litigation, weather, commercial real estate, closed military bases and other project timing, government appropriation and funding cycles and other factors. The types and amounts of waste received from Base Business also vary from quarter to quarter. This variability can cause significant

 

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quarter-to-quarter and year-to-year differences in revenue, gross profit, gross margin, operating income and net income. Also, while we pursue many large projects months or years in advance of work performance, both large and small clean-up project opportunities routinely arise with little or no prior notice. These market dynamics are inherent to the waste disposal business and are factored into our projections and externally communicated business outlook statements. Our projections combine historical experience with identified sales pipeline opportunities, new or expanded service line projections and prevailing market conditions.

 

For the three months ended June 30, 2016, Base Business revenue was consistent with the three months ended June 30, 2015. Base Business revenue was approximately 84% of total T&D revenue for the three months ended June 30, 2016, up from 78% for the three months ended June 30, 2015. For the six months ended June 30, 2016, Base Business revenue increased 3% compared to the six months ended June 30, 2015. Base Business revenue was approximately 83% of total T&D revenue for the six months ended June 30, 2016, up from 75% for the six months ended June 30, 2015. Our business is highly competitive and no assurance can be given that we will maintain these revenue levels or increase our market share.

 

Depending on project-specific customer needs and competitive economics, transportation services may be offered at or near our cost to help secure new business. For waste transported by rail from the eastern United States and other locations distant from our Grand View, Idaho and Robstown, Texas facilities, transportation-related revenue can account for as much as 75% of total project revenue. While bundling transportation and disposal services reduces overall gross profit as a percentage of total revenue (“gross margin”), this value-added service has allowed us to win multiple projects that management believes we could not have otherwise competed for successfully. Our Company-owned fleet of gondola railcars, which is periodically supplemented with railcars obtained under operating leases, has reduced our transportation expenses by largely eliminating reliance on more costly short-term rentals. These Company-owned railcars also help us to win business during times of demand-driven railcar scarcity.

 

The increased waste volumes resulting from projects won through this bundling service strategy further drive the operating leverage benefits inherent to the disposal business, increasing profitability. While waste treatment and other variable costs are project-specific, the incremental earnings contribution from large and small projects generally increases as overall disposal volumes increase. Based on past experience, management believes that maximizing operating income, net income and earnings per share is a higher priority than maintaining or increasing gross margin. We intend to continue aggressively bidding bundled transportation and disposal services based on this proven strategy.

 

We serve oil refineries, chemical production plants, steel mills, waste brokers/aggregators serving small manufacturers and other industrial customers that are generally affected by the prevailing economic conditions and credit environment. Adverse conditions may cause our customers as well as those they serve to curtail operations, resulting in lower waste production and/or delayed spending on off-site waste shipments, maintenance, waste clean-up projects and other work. Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, consumer and industrial spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other global economic factors affecting spending behavior. Market forces may also induce customers to reduce or cease operations, declare bankruptcy, liquidate or relocate to other countries, any of which could adversely affect our business. To the extent business is either government funded or driven by government regulations or enforcement actions, we believe it is less susceptible to general economic conditions. Spending by government agencies may also be reduced due to declining tax revenues resulting from a weak economy or changes in policy. Disbursement of funds appropriated by Congress may also be delayed for various reasons.

 

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RESULTS OF OPERATIONS

 

THREE MONTHS ENDED JUNE 30, 2016 COMPARED TO THREE MONTHS ENDED JUNE 30, 2015

 

Operating results and percentage of revenues were as follows:

 

 

 

Three Months Ended June 30,

 

2016 vs. 2015

 

$s in thousands

 

2016

 

%

 

2015

 

%

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Services

 

$

82,797

 

68%

 

$

86,986

 

62%

 

$

(4,189

)

-5%

 

Field & Industrial Services

 

39,554

 

32%

 

52,746

 

38%

 

(13,192

)

-25%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

122,351

 

100%

 

139,732

 

100%

 

(17,381

)

-12%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Services

 

30,595

 

37%

 

32,536

 

37%

 

(1,941

)

-6%

 

Field & Industrial Services

 

6,311

 

16%

 

8,934

 

17%

 

(2,623

)

-29%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

36,906

 

30%

 

41,470

 

30%

 

(4,564

)

-11%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, General & Administrative Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Services

 

5,538

 

7%

 

5,626

 

6%

 

(88

)

-2%

 

Field & Industrial Services

 

2,621

 

7%

 

6,369

 

12%

 

(3,748

)

-59%

 

Corporate

 

11,660

 

n/a

 

10,680

 

n/a

 

980

 

9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

19,819

 

16%

 

22,675

 

16%

 

(2,856

)

-13%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

8,938

 

7%

 

2,138

 

2%

 

6,800

 

318%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Services

 

33,551

 

41%

 

35,790

 

41%

 

(2,239

)

-6%

 

Field & Industrial Services

 

5,123

 

13%

 

5,686

 

11%

 

(563

)

-10%

 

Corporate

 

(10,931

)

n/a

 

(10,052

)

n/a

 

(879

)

9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

27,743

 

23%

 

$

31,424

 

22%

 

$

(3,681

)

-12%

 

 

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)

 

The primary financial measure used by management to assess segment performance is Adjusted EBITDA. Adjusted EBITDA is defined as net income before interest expense, interest income, income tax expense, depreciation, amortization, stock based compensation, accretion of closure and post-closure liabilities, foreign currency gain/loss, non-cash impairment charges and other income/expense, which are not considered part of usual business operations. The reconciliation of Net Income to Adjusted EBITDA is as follows:

 

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Table of Contents

 

 

 

Three Months Ended June 30,

 

2016 vs. 2015

 

$s in thousands

 

2016

 

2015

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

8,938

 

$

2,138

 

$

6,800

 

318%

 

Income tax expense

 

5,866

 

5,055

 

811

 

16%

 

Interest expense

 

4,303

 

5,433

 

(1,130

)

-21%

 

Interest income

 

(33

)

(6

)

(27

)

450%

 

Foreign currency (gain) loss

 

343

 

(292

)

635

 

-217%

 

Other income

 

(2,330

)

(233

)

(2,097

)

900%

 

Depreciation and amortization of plant and equipment

 

6,202

 

7,656

 

(1,454

)

-19%

 

Amortization of intangibles

 

2,646

 

3,304

 

(658

)

-20%

 

Stock-based compensation

 

783

 

627

 

156

 

25%

 

Accretion and non-cash adjustment of closure and post-closure liabilities

 

1,025

 

1,042

 

(17

)

-2%

 

Impairment charges

 

 

6,700

 

(6,700

)

n/m

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

27,743

 

$

31,424

 

$

(3,681

)

-12%

 

 

Adjusted EBITDA is a complement to results provided in accordance with accounting principles generally accepted in the United States (“GAAP”) and we believe that such information provides additional useful information to analysts, stockholders and other users to understand the Company’s operating performance. Since Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity.

 

Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or a substitute for analyzing our results as reported under GAAP. Some of the limitations are:

 

·      Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

·      Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt;

·      Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes;

·      Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; and

·       Although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

 

Revenue

 

Total revenue decreased 12% to $122.4 million for the second quarter of 2016 compared with $139.7 million for the second quarter of 2015.

 

Environmental Services

 

Environmental Services segment revenue decreased 5% to $82.8 million for the second quarter of 2016 compared to $87.0 million for the second quarter of 2015. T&D revenue decreased 7% in the second quarter of 2016, primarily as a result of a 32% decrease in project-based Event Business. Transportation service revenue increased 4% compared to the second quarter of 2015, reflecting more Event Business projects utilizing the Company’s transportation and logistics services. Tons of waste disposed of or processed decreased 6% for the second quarter of 2016 compared to the second quarter of 2015.

 

T&D revenue from recurring Base Business waste generators was consistent in the second quarter of 2016 compared to the second quarter of 2015 and comprised 84% of total T&D revenue. During the second quarter of 2016, increases in Base Business T&D revenue from the refining, general manufacturing and “Other” industry groups were offset by decreases in T&D revenue from Base Business in the broker/TSDF, transportation, government and chemical manufacturing industry groups.

 

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Table of Contents

 

T&D revenue from Event Business waste generators decreased 32% for the second quarter of 2016 compared to the second quarter of 2015 and was 16% of T&D revenue for the second quarter of 2016. The decrease in Event Business T&D revenue compared to the prior year primarily reflects lower T&D revenue from the chemical manufacturing and refining industry groups, partially offset by higher T&D revenue from the general manufacturing and waste management & remediation industry groups. The decrease in revenue from the chemical manufacturing industry group is primarily attributable to the completion of a large East Coast remedial cleanup project in the third quarter of 2015 and the completion of a nuclear fuels fabrication plant decommissioning in the first quarter of 2016. The decrease in revenue from the refining industry group is primarily attributable to lower volumes of refinery Event Business.

 

The following table summarizes combined Base Business and Event Business T&D revenue growth, within the Environmental Services segment, by generator industry for the second quarter of 2016 as compared to the second quarter of 2015:

 

 

 

Treatment and Disposal Revenue Growth
Three Months Ended June 30, 2016 vs.
Three Months Ended June 30, 2015

 

 

 

 

 

Waste Management & Remediation

 

29%

 

General Manufacturing

 

25%

 

Utilities

 

21%

 

Other

 

9%

 

Metal Manufacturing

 

3%

 

Broker / TSDF

 

-6%

 

Mining, Exploration & Production

 

-10%

 

Government

 

-18%

 

Refining

 

-19%

 

Transportation

 

-33%

 

Chemical Manufacturing

 

-36%

 

 

Field & Industrial Services

 

Field & Industrial Services segment revenue decreased 25% to $39.6 million for the second quarter of 2016 compared with $52.7 million for the second quarter of 2015. The Allstate business, divested on November 1, 2015, contributed segment revenue of $16.9 million in the second quarter of 2015. Lower industrial services revenues as a result of the Allstate divestiture were partially offset by higher remediation and technical services revenues in the second quarter of 2016 compared with the second quarter of 2015.

 

Gross Profit

 

Total gross profit decreased 11% to $36.9 million for the second quarter of 2016, down from $41.5 million for the second quarter of 2015. Total gross margin was 30% for the second quarter of both 2016 and 2015.

 

Environmental Services

 

Environmental Services segment gross profit decreased 6% to $30.6 million for the second quarter of 2016, down from $32.6 million for the second quarter of 2015. This decrease primarily reflects lower T&D volumes for the second quarter of 2016 compared to the second quarter of 2015. Total segment gross margin was 37% for the second quarter of both 2016 and 2015. T&D gross margin was 42% for the second quarter of both 2016 and 2015.

 

Field & Industrial Services

 

Field & Industrial Services segment gross profit decreased 29% to $6.3 million for the second quarter of 2016, down from $8.9 million for the second quarter of 2015. Total segment gross margin was 16% for the second quarter of 2016 compared with 17% for the second quarter of 2015. The Allstate business, divested on November 1, 2015, contributed segment gross profit of $3.3 million in the second quarter of 2015.

 

Selling, General and Administrative Expenses (“SG&A”)

 

Total SG&A decreased to $19.8 million, or 16% of total revenue, for the second quarter of 2016 compared with $22.7 million, or 16% of total revenue, for the second quarter of 2015.

 

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Table of Contents

 

Environmental Services

 

Environmental Services segment SG&A decreased 2% to $5.5 million, or 7% of segment revenue, for the second quarter of 2016 compared with $5.6 million, or 6% of segment revenue, for the second quarter of 2015, primarily reflecting lower bad debt expenses and professional services expenses, partially offset by higher employee-related labor and benefits expenses in the second quarter of 2016 compared with the second quarter of 2015.

 

Field & Industrial Services

 

Field & Industrial Services segment SG&A decreased 59% to $2.6 million, or 7% of segment revenue, for the second quarter of 2016 compared with $6.4 million, or 12% of segment revenue, for the second quarter of 2015. The Allstate business, divested on November 1, 2015, contributed segment SG&A of $3.7 million in the second quarter of 2015. The remaining decrease in segment SG&A primarily reflects lower administrative labor costs in the second quarter of 2016 compared with the second quarter of 2015.

 

Corporate

 

Corporate SG&A was $11.7 million, or 10% of total revenue, for the second quarter of 2016 compared with $10.7 million, or 8% of total revenue, for the second quarter of 2015, primarily reflecting higher employee labor and incentive costs and higher business development expenses in the second quarter of 2016 compared with the second quarter of 2015.

 

Components of Adjusted EBITDA

 

Income tax expense

 

Our effective income tax rate for the second quarter of 2016 was 39.6% compared with 36.4% when excluding non-deductible goodwill impairment charges of $6.7 million recorded during the second quarter of 2015. The increase primarily reflects a lower proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate, in the second quarter of 2016 compared with the second quarter of 2015. The increase is also partially attributable to a higher U.S. effective tax rate in the second quarter of 2016 driven by a higher overall effective state tax rate resulting from changes in our apportionment between the various states in which we operate.

 

Interest expense

 

Interest expense was $4.3 million for the second quarter of 2016 compared with $5.4 million for the second quarter of 2015. The decrease is primarily due to lower debt levels in the second quarter of 2016 compared with the second quarter of 2015.

 

Foreign currency gain (loss)

 

We recognized a $343,000 non-cash foreign currency loss for the second quarter of 2016 compared with a $292,000 non-cash foreign currency gain for the second quarter of 2015. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the United States dollar (“USD”), our functional currency. Additionally, we established intercompany loans between our Canadian subsidiaries, whose functional currency is the Canadian dollar (“CAD”), and our parent company, US Ecology, as part of a tax and treasury management strategy allowing for repayment of third-party bank debt. These intercompany loans are payable by our Canadian subsidiaries to US Ecology in CAD requiring us to revalue the outstanding loan balance through our statements of operations based on USD/CAD currency movements from period to period. At June 30, 2016, we had $20.7 million of intercompany loans subject to currency revaluation.

 

Other Income

 

Other income for the second quarter of 2016 includes approximately $2.2 million related to the gain on sale of the Augusta, Georgia facility in April 2016 and final closing adjustments on the Allstate divestiture recorded in the second quarter of 2016.

 

Depreciation and amortization of plant and equipment

 

Depreciation and amortization expense was $6.2 million for the second quarter of 2016 compared with $7.7 million for the second quarter of 2015. The Allstate business, divested on November 1, 2015, contributed depreciation and amortization expense of $967,000 in the second quarter of 2015.

 

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Table of Contents

 

Amortization of intangibles

 

Intangible assets amortization expense was $2.6 million for the second quarter of 2016 compared with $3.3 million for the second quarter of 2015. The Allstate business, divested on November 1, 2015, contributed intangible assets amortization expense of $569,000 in the second quarter of 2015.

 

Stock-based compensation

 

Stock-based compensation expense increased 25% to $783,000 for the second quarter of 2016 compared with $627,000 for the second quarter of 2015 as a result of an increase in equity-based awards granted to employees.

 

Accretion and non-cash adjustment of closure and post-closure liabilities

 

Accretion and non-cash adjustment of closure and post-closure liabilities was $1.0 million for the second quarter of 2016 compared with $1.0 million for the second quarter of 2015.

 

Impairment charges

 

On August 4, 2015, we entered into a definitive agreement to sell Allstate to a private investor group for approximately $58.0 million cash, subject to adjustments for working capital and capital expenditures. As a result of this agreement and management’s strategic review, we evaluated the recoverability of the assets associated with our industrial services business. Based on this analysis, we recorded a non-cash goodwill impairment charge of $6.7 million, or $0.31 per diluted share, in the second quarter of 2015.

 

SIX MONTHS ENDED JUNE 30, 2016 COMPARED TO SIX MONTHS ENDED JUNE 30, 2015

 

Operating results and percentage of revenues were as follows:

 

 

 

Six Months Ended June 30,

 

2016 vs. 2015

 

$s in thousands

 

2016

 

%

 

2015

 

%

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Services

 

$

164,321

 

70%

 

$

174,368

 

63%

 

$

(10,047

)

-6%

 

Field & Industrial Services

 

71,348

 

30%

 

102,015

 

37%

 

(30,667

)

-30%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

235,669

 

100%

 

276,383

 

100%

 

(40,714

)

-15%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Services

 

61,050

 

37%

 

65,727

 

38%

 

(4,677

)

-7%

 

Field & Industrial Services

 

11,064

 

16%

 

15,587

 

15%

 

(4,523

)

-29%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

72,114

 

31%

 

81,314

 

29%

 

(9,200

)

-11%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, General & Administrative Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Services

 

11,116

 

7%

 

10,941

 

6%

 

175

 

2%

 

Field & Industrial Services

 

5,074

 

7%

 

12,434

 

12%

 

(7,360

)

-59%

 

Corporate

 

23,054

 

n/a

 

24,193

 

n/a

 

(1,139

)

-5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

39,244

 

17%

 

47,568

 

17%

 

(8,324

)

-17%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

16,455

 

7%

 

8,003

 

3%

 

8,452

 

106%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Services

 

66,604

 

41%

 

72,359

 

41%

 

(5,755

)

-8%

 

Field & Industrial Services

 

8,801

 

12%

 

9,355

 

9%

 

(554

)

-6%

 

Corporate

 

(21,546

)

n/a

 

(23,061

)

n/a

 

1,515

 

-7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

53,859

 

23%

 

$

58,653

 

21%

 

$

(4,794

)

-8%

 

 

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Table of Contents

 

Adjusted EBITDA

 

As discussed above, the primary financial measure used by management to assess segment performance is Adjusted EBITDA. The reconciliation of Net Income to Adjusted EBITDA is as follows:

 

 

 

Six Months Ended June 30,

 

2016 vs. 2015

 

$s in thousands

 

2016

 

2015

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

16,455

 

$

8,003

 

$

8,452

 

106%

 

Income tax expense

 

10,550

 

7,957

 

2,593

 

33%

 

Interest expense

 

8,862

 

11,127

 

(2,265

)

-20%

 

Interest income

 

(82

)

(47

)

(35

)

74%

 

Foreign currency (gain) loss

 

(416

)

775

 

(1,191

)

-154%

 

Other income

 

(2,499

)

(769

)

(1,730

)

225%

 

Depreciation and amortization of plant and equipment

 

12,106

 

15,135

 

(3,029

)

-20%

 

Amortization of intangibles

 

5,256

 

6,606

 

(1,350

)

-20%

 

Stock-based compensation

 

1,578

 

1,089

 

489

 

45%

 

Accretion and non-cash adjustment of closure and post-closure liabilities

 

2,049

 

2,077

 

(28

)

-1%

 

Impairment charges

 

 

6,700

 

(6,700

)

n/m

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

53,859

 

$

58,653

 

$

(4,794

)

-8%

 

 

Revenue

 

Total revenue decreased 15% to $235.7 million for the first six months of 2016 compared with $276.4 million for the first six months of 2015.

 

Environmental Services

 

Environmental Services segment revenue decreased 6% to $164.3 million for the first six months of 2016 compared to $174.4 million for the first six months of 2015. T&D revenue decreased 7% in the first six months of 2016, primarily as a result of a 39% decrease in project-based Event Business. Transportation service revenue for the first six months of 2016 was consistent with the first six months of 2015. Tons of waste disposed of or processed decreased 10% for the first six months of 2016 compared to the first six months of 2015.

 

T&D revenue from recurring Base Business waste generators increased 3% for the first six months of 2016 compared to the first six months of 2015 and comprised 83% of total T&D revenue. During the first six months of 2016, increases in Base Business T&D revenue from the refining, “Other” and general manufacturing industry groups were partially offset by decreases in T&D revenue from Base Business in the chemical manufacturing, broker/TSDF, government and transportation industry groups.

 

T&D revenue from Event Business waste generators decreased 39% for the first six months of 2016 compared to the first six months of 2015 and was 17% of T&D revenue for the first six months of 2016. The decrease in Event Business T&D revenue compared to the prior year primarily reflects lower T&D revenue from the chemical manufacturing and refining industry groups, partially offset by higher T&D revenue from the “Other” and utilities industry groups. The decrease in revenue from the chemical manufacturing industry group is primarily attributable to the completion of a large East Coast remedial cleanup project in the third quarter of 2015 and the completion of a nuclear fuels fabrication plant decommissioning in the first quarter of 2016. The decrease in revenue from the refining industry group is primarily attributable to lower volumes of refinery Event Business.

 

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Table of Contents

 

The following table summarizes combined Base Business and Event Business T&D revenue growth, within the Environmental Services segment, by generator industry for the first six months of 2016 as compared to the first six months of 2015:

 

 

 

Treatment and Disposal Revenue Growth
Six Months Ended June 30, 2016 vs.
Six Months Ended June 30, 2015

 

 

 

 

 

Utilities

 

28%

 

Other

 

27%

 

General Manufacturing

 

19%

 

Waste Management & Remediation

 

12%

 

Metal Manufacturing

 

-2%

 

Broker / TSDF

 

-5%

 

Refining

 

-8%

 

Transportation

 

-13%

 

Government

 

-16%

 

Chemical Manufacturing

 

-44%

 

 

Field & Industrial Services

 

Field & Industrial Services segment revenue decreased 30% to $71.4 million for the first six months of 2016 compared with $102.0 million for the first six months of 2015. The Allstate business, divested on November 1, 2015, contributed segment revenue of $30.9 million in the first six months of 2015.

 

Gross Profit

 

Total gross profit decreased 11% to $72.1 million for the first six months of 2016, down from $81.3 million for the first six months of 2015. Total gross margin was 31% for the first six months of 2016 compared with 29% for the first six months of 2015.

 

Environmental Services

 

Environmental Services segment gross profit decreased 7% to $61.1 million for the first six months of 2016, down from $65.7 million for the first six months of 2015. This decrease primarily reflects lower T&D volumes for the first six months of 2016 compared to the first six months of 2015. Total segment gross margin for the first six months of 2016 was 37% compared with 38% for the first six months of 2015. T&D gross margin was 41% for the first six months of 2016 compared with 42% for the first six months of 2015.

 

Field & Industrial Services

 

Field & Industrial Services segment gross profit decreased 29% to $11.1 million for the first six months of 2016, down from $15.6 million for the first six months of 2015. Total segment gross margin was 16% for the first six months of 2016 compared with 15% for the first six months of 2015. The Allstate business, divested on November 1, 2015, contributed segment gross profit of $5.9 million in the first six months of 2015.

 

Selling, General and Administrative Expenses (“SG&A”)

 

Total SG&A decreased to $39.2 million, or 17% of total revenue, for the first six months of 2016 compared with $47.6 million, or 17% of total revenue, for the first six months of 2015.

 

Environmental Services

 

Environmental Services segment SG&A increased 2% to $11.1 million, or 7% of segment revenue, for the first six months of 2016 compared with $10.9 million, or 6% of segment revenue, for the first six months of 2015, primarily reflecting higher bad debt expenses in the first six months of 2016 compared to the first six months of 2015.

 

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Table of Contents

 

Field & Industrial Services

 

Field & Industrial Services segment SG&A decreased 59% to $5.1 million, or 7% of segment revenue, for the first six months of 2016 compared with $12.4 million, or 12% of segment revenue, for the first six months of 2015. The Allstate business, divested on November 1, 2015, contributed segment SG&A of $6.7 million in the first six months of 2015. The remaining decrease in segment SG&A primarily reflects lower administrative labor costs in the first six months of 2016 compared with the first six months of 2015.

 

Corporate

 

Corporate SG&A was $23.1 million, or 10% of total revenue, for the first six months of 2016 compared with $24.2 million, or 9% of total revenue, for the first six months of 2015, primarily reflecting lower business development expenses, partially offset by higher employee-related expenses, in the first six months of 2016 compared with the first six months of 2015.

 

Components of Adjusted EBITDA

 

Income tax expense

 

Our effective income tax rate for the first six months of 2016 was 39.1% compared with 35.1% when excluding non-deductible goodwill impairment charges of $6.7 million recorded during the second quarter of 2015. The increase primarily reflects a lower proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate, in the first six months of 2016 compared with the first six months of 2015. The increase is also partially attributable to a higher U.S. effective tax rate in the first six months of 2016 driven by a higher overall effective state tax rate resulting from changes in our apportionment between the various states in which we operate.

 

Interest expense

 

Interest expense was $8.9 million for the first six months of 2016 compared with $11.1 million for the first six months of 2015. The decrease is primarily due to lower debt levels in the first six months of 2016 compared with the first six months of 2015. Interest expense during the first six months of 2016 includes $200,000 of incremental non-cash amortization of deferred financing fees associated with debt principal prepayments made during the first six months of 2016.

 

Foreign currency gain (loss)

 

We recognized a $416,000 non-cash foreign currency gain for the first six months of 2016 compared with a $775,000 non-cash foreign currency loss for the first six months of 2015. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the USD, our functional currency. Additionally, we established intercompany loans between our Canadian subsidiaries, whose functional currency is the CAD, and our parent company, US Ecology, as part of a tax and treasury management strategy allowing for repayment of third-party bank debt. These intercompany loans are payable by our Canadian subsidiaries to US Ecology in CAD requiring us to revalue the outstanding loan balance through our statements of operations based on USD/CAD currency movements from period to period. At June 30, 2016, we had $20.7 million of intercompany loans subject to currency revaluation.

 

Other Income

 

Other income for the first six months of 2016 includes approximately $2.2 million related to the gain on sale of the Augusta, Georgia facility in April 2016 and final closing adjustments on the Allstate divestiture recorded in the second quarter of 2016.

 

Depreciation and amortization of plant and equipment

 

Depreciation and amortization expense was $12.1 million for the first six months of 2016 compared with $15.1 million for the first six months of 2015. The Allstate business, divested on November 1, 2015, contributed depreciation and amortization expense of $1.9 million in the first six months of 2015.

 

Amortization of intangibles

 

Intangible assets amortization expense was $5.3 million for the first six months of 2016 compared with $6.6 million for the first six months of 2015. The Allstate business, divested on November 1, 2015, contributed intangible assets amortization expense of $1.1 million in the first six months of 2015.

 

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Stock-based compensation

 

Stock-based compensation expense increased 45% to $1.6 million for the first six months of 2016 compared with $1.1 million for the first six months of 2015 as a result of an increase in equity-based awards granted to employees.

 

Accretion and non-cash adjustment of closure and post-closure liabilities

 

Accretion and non-cash adjustment of closure and post-closure liabilities was $2.0 million for the first six months of 2016 compared with $2.1 million for the first six months of 2015.

 

Impairment charges

 

On August 4, 2015, we entered into a definitive agreement to sell Allstate to a private investor group for approximately $58.0 million cash, subject to adjustments for working capital and capital expenditures. As a result of this agreement and management’s strategic review, we evaluated the recoverability of the assets associated with our industrial services business. Based on this analysis, we recorded a non-cash goodwill impairment charge of $6.7 million, or $0.31 per diluted share, in the second quarter of 2015.

 

CRITICAL ACCOUNTING POLICIES

 

Financial statement preparation requires management to make estimates and judgments that affect reported assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities. The accompanying unaudited consolidated financial statements are prepared using the same critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

For information about recently issued accounting standards, see Note 1, of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this Form 10-Q.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of liquidity are cash and cash equivalents, cash generated from operations and borrowings under the senior secured credit agreement (the “Credit Agreement”). At June 30, 2016, we had $12.8 million in cash and cash equivalents immediately available and $113.5 million of borrowing capacity available under our revolving line of credit (the “Revolving Credit Facility”). We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our primary ongoing cash requirements are funding operations, capital expenditures, paying interest and required principal payments on our long-term debt, and paying declared dividends pursuant to our dividend policy. We believe future operating cash flows will be sufficient to meet our future operating, investing and dividend cash needs for the foreseeable future. Furthermore, existing cash balances and availability of additional borrowings under our Credit Agreement provide additional sources of liquidity should they be required.

 

Operating Activities

 

For the six months ended June 30, 2016, net cash provided by operating activities was $38.7 million. This primarily reflects net income of $16.5 million, non-cash depreciation, amortization and accretion of $19.4 million, a decrease in accounts receivable of $6.6 million, share-based compensation expense of $1.6 million, a decrease in other assets of $1.3 million, and non-cash amortization of debt issuance costs of $1.1 million, partially offset by the gain recognized on the divestiture of the Augusta, Georgia facility in April 2016 and final closing adjustments on the Allstate divestiture of $2.2 million, an increase in income taxes receivable of $1.4 million, a decrease in deferred income taxes of $1.3 million, a decrease in deferred revenue of $1.2 million, a decrease in accounts payable and accrued liabilities of $872,000 and a decrease in closure and post closure obligations of $848,000. Impacts on net income are due to the factors discussed above under “Results of Operations.” The decrease in receivables is primarily attributable to the timing of customer payments. The increase in income taxes receivable is primarily attributable to the timing of estimated income tax payments. The decrease in deferred revenue is primarily attributable to the timing of the treatment and disposal of waste received but not yet processed. The decrease in closure and post-closure obligations is primarily attributable to payments made for closure and post-closure activities primarily at our closed landfills.

 

Days sales outstanding were 74 days as of June 30, 2016, compared to 68 days as of December 31, 2015 and 80 days as of June 30, 2015. The increase in days sales outstanding compared to December 31, 2015 is primarily attributable to a higher proportion of accounts receivable as a percentage of lower second quarter revenues.

 

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For the six months ended June 30, 2015, net cash provided by operating activities was $50.4 million. This primarily reflects net income of $8.0 million, non-cash impairment charges of $6.7 million, non-cash depreciation, amortization and accretion of $23.8 million, a decrease in accounts receivable of $17.0 million, a decrease in income taxes receivable of $6.3 million, a decrease in other assets of $2.4 million, unrealized foreign currency losses of $1.5 million and non-cash amortization of debt issuance costs of $1.0 million, partially offset by a decrease in accounts payable and accrued liabilities of $6.2 million, a decrease in deferred revenue of $6.1 million, a decrease in deferred income taxes of $3.1 million, a decrease in closure and post-closure obligations of $2.1 million and a decrease in accrued salaries and benefits of $1.6 million. Impacts on net income are due to the factors discussed above under Results of Operations. Non-cash foreign currency losses reflect a weaker CAD relative to the USD in the first six months of 2015. The decrease in receivables and deferred revenue is primarily attributable to the timing of the treatment and disposal of waste associated with a significant east coast clean-up project. The changes in income taxes payable and receivable are primarily attributable to the timing of income tax payments. The decrease in accrued salaries and benefits is primarily attributable to cash payments during 2015 for accrued fiscal year 2014 incentive compensation. The decrease in closure and post-closure obligations is primarily attributable to payments made for closure and post-closure activities primarily at our closed landfills.

 

Investing Activities

 

For the six months ended June 30, 2016, net cash used in investing activities was $16.7 million, primarily related to capital expenditures of $14.5 million and the purchase of Environmental Services Inc., (“ESI”), for $4.9 million, net of cash acquired, partially offset by proceeds from the divestiture of our Augusta, Georgia facility for $2.7 million, net of cash divested. Significant capital projects included construction of additional disposal capacity at our Blainville, Quebec, Canada and Robstown, Texas facilities and equipment purchases and infrastructure upgrades at our corporate and operating facilities.

 

For the six months ended June 30, 2015, net cash used in investing activities was $19.1 million, primarily related to capital expenditures of $19.4 million. Significant capital projects included construction of additional disposal capacity at our Blainville, Quebec, Canada and Robstown, Texas facilities and equipment purchases and infrastructure upgrades at all of our corporate and operating facilities.

 

Financing Activities

 

For the six months ended June 30, 2016, net cash used in financing activities was $15.4 million, consisting primarily of $11.5 million of payments on the Company’s term loan and $7.8 million of dividend payments to our stockholders, partially offset by $4.0 of net borrowings on our revolving credit facility to fund working capital requirements.

 

For the six months ended June 30, 2015, net cash used in financing activities was $40.9 million, consisting primarily of $33.9 million of payments on the Company’s term loan and $7.8 million of dividend payments to our stockholders.

 

Credit Facility

 

On June 17, 2014, in connection with the acquisition of EQ, the Company entered into a new $540.0 million Credit Agreement with a syndicate of banks comprised of a $415.0 million Term Loan with a maturity date of June 17, 2021 and a $125.0 million Revolving Credit Facility with a maturity date of June 17, 2019. Upon entering into the Credit Agreement, the Company terminated its existing credit agreement with Wells Fargo, dated October, 29, 2010, as amended (the “Former Agreement”). Immediately prior to the termination of the Former Agreement, there were no outstanding borrowings under the Former Agreement. No early termination penalties were incurred as a result of the termination of the Former Agreement.

 

Term Loan

 

The Term Loan provided an initial commitment amount of $415.0 million, the proceeds of which were used to acquire 100% of the outstanding shares of EQ and pay related transaction fees and expenses. The Term Loan bears interest at a base rate (as defined in the Credit Agreement) plus 2.00% or LIBOR plus 3.00%, at the Company’s option. The Term Loan is subject to amortization in equal quarterly installments in an aggregate annual amount equal to 1.00% of the original principal amount of the Term Loan. At June 30, 2016, the effective interest rate on the Term Loan, including the impact of our interest rate swap, was 4.74%. Interest only payments are due either monthly or on the last day of any interest period, as applicable. As set forth in the Credit Agreement, the Company is required to enter into one or more interest rate hedge agreements in amounts sufficient to fix the interest rate on at least 50% of the principal amount of the $415.0 million Term Loan. In October 2014, the Company entered into an interest rate swap agreement with Wells Fargo, effectively fixing the interest rate on $220.0 million, or 76%, of the Term Loan principal outstanding as of June 30, 2016.

 

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Revolving Credit Facility

 

The Revolving Credit Facility provides up to $125.0 million of revolving credit loans or letters of credit with the use of proceeds restricted solely for working capital and other general corporate purposes. Under the Revolving Credit Facility, revolving loans are available based on a base rate (as defined in the Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to consolidated earnings before interest, taxes, depreciation and amortization (as defined in the Credit Agreement). At June 30, 2016, the effective interest rate on the Revolving Credit Facility was 5.25%. The Company is required to pay a commitment fee of 0.50% per annum on the unused portion of the Revolving Credit Facility, with such commitment fee to be reduced based upon the Company’s total leverage ratio as defined in the Credit Agreement. The maximum letter of credit capacity under the Revolving Credit Facility is $50.0 million and the Credit Agreement provides for a letter of credit fee equal to the applicable margin for LIBOR loans under the Revolving Credit Facility. Interest payments are due either monthly or on the last day of any interest period, as applicable. At June 30, 2016, there were $4.0 million of working capital borrowings outstanding on the Revolving Credit Facility. These borrowings are due “on demand” and presented as short-term debt in the consolidated balance sheets. As of June 30, 2016, the availability under the Revolving Credit Facility was $113.5 million with $7.5 million of the Revolving Credit Facility issued in the form of standby letters of credit utilized as collateral for closure and post-closure financial assurance and other assurance obligations.

 

For more information about our debt, see Note 10, of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q.

 

CONTRACTUAL OBLIGATIONS AND GUARANTEES

 

There were no material changes in the amounts of our contractual obligations and guarantees during the six months ended June 30, 2016. For further information on our contractual obligations and guarantees, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

 

ITEM 3.                        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

We do not maintain equities, commodities, derivatives, or any other similar instruments for trading purposes. We have minimal interest rate risk on investments or other assets due to our preservation of capital approach to investments. At June 30, 2016, $5.8 million of restricted cash was invested in fixed-income U.S. Treasury and U.S. government agency securities and money market accounts.

 

We are exposed to changes in interest rates as a result of our borrowings under the Credit Agreement. Under the Credit Agreement, Term Loan borrowings incur interest at a base rate (as defined in the Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin. Revolving loans under the Revolving Credit Facility are available based on a base rate (as defined in the Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to EBITDA. On October 29, 2014, the Company entered into an interest rate swap agreement with Wells Fargo with the intention of hedging the Company’s interest rate exposure on a portion of the Company’s outstanding LIBOR-based variable rate debt. Under the terms of the swap, the Company pays to Wells Fargo interest at the fixed effective rate of 5.17% and receives from Wells Fargo interest at the variable one-month LIBOR rate on an initial notional amount of $250.0 million.

 

As of June 30, 2016, there were $289.5 million of borrowings outstanding under the Term Loan and $4.0 million of borrowings outstanding under the Revolving Credit Facility. If interest rates were to rise and outstanding balances remain unchanged, we would be subject to higher interest payments on our outstanding debt. Subsequent to the effective date of the interest rate swap on December 31, 2014, we are subject to higher interest payments on only the unhedged borrowings under the Credit Agreement.

 

Based on the outstanding indebtedness of $293.5 million under our Credit Agreement at June 30, 2016 and the impact of our interest rate hedge, if market rates used to calculate interest expense were to average 1% higher in the next twelve months, our interest expense would increase by approximately $546,000 for the corresponding period.

 

Foreign Currency Risk

 

We are subject to currency exposures and volatility because of currency fluctuations. The majority of our transactions are in USD; however, our Canadian subsidiaries conduct business in both Canada and the United States. In addition, contracts for services our

 

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Canadian subsidiaries provide to U.S. customers are generally denominated in USD. During the six months ended June 30, 2016, our Canadian subsidiaries transacted approximately 53% of their revenue in USD and at any time have cash on deposit in USD and outstanding USD trade receivables and payables related to these transactions. These USD cash, receivable and payable accounts are subject to non-cash foreign currency translation gains or losses. Exchange rate movements also affect the translation of Canadian generated profits and losses into USD.

 

We established intercompany loans between our Canadian subsidiaries and our parent company, US Ecology, as part of a tax and treasury management strategy allowing for repayment of third-party bank debt. These intercompany loans are payable using CAD and are subject to mark-to-market adjustments with movements in the CAD. At June 30, 2016, we had $20.7 million of intercompany loans outstanding between our Canadian subsidiaries and US Ecology. During the six months ended June 30, 2016, the CAD strengthened as compared to the USD resulting in a $692,000 non-cash foreign currency translation gain being recognized in the Company’s consolidated statements of operations related to the intercompany loans. Based on intercompany balances as of June 30, 2016, a $0.01 CAD increase or decrease in currency rate compared to the USD at June 30, 2016 would have generated a gain or loss of approximately $207,000 for the six months ended June 30, 2016.

 

We had a total pre-tax foreign currency gain of $416,000 for the six months ended June 30, 2016. We currently have no foreign exchange contracts, option contracts or other foreign currency hedging arrangements. Management evaluates the Company’s risk position on an ongoing basis to determine whether foreign exchange hedging strategies should be employed.

 

ITEM 4.                        CONTROLS AND PROCEDURES

 

Management of the Company, including the Chief Executive Officer and the Chief Financial Officer of the Company, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2016. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, including the accumulation and communication of disclosures to the Company’s Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure, are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission (“SEC”).

 

There were no changes in our internal control over financial reporting that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995

 

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about the Company’s beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar expressions. These statements include, among others, statements regarding our financial and operating results, strategic objectives and means to achieve those objectives, the amount and timing of capital expenditures, repurchases of its stock under approved stock repurchase plans, the amount and timing of interest expense, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

 

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions include, among others, those regarding demand for Company services, expansion of service offerings geographically or through new or expanded service lines, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include the replacement of non-recurring event clean-up projects, a loss of a major customer, our ability to permit and contract for timely construction of new or expanded disposal cells, our ability to renew our operating permits or lease agreements with regulatory bodies, loss of key personnel, compliance with and changes to applicable laws, rules, or regulations, access to insurance, surety bonds and other financial assurances, a deterioration in our labor relations or labor disputes, our ability to perform under required contracts, failure to realize anticipated benefits and operational performance from acquired operations, adverse economic or market conditions, government funding or competitive pressures, incidents or adverse weather conditions that could limit or suspend specific operations, access to cost effective transportation services, fluctuations in foreign currency markets, lawsuits, our willingness or ability to pay dividends, implementation of new technologies, limitations on our available cash flow as a result of our indebtedness and our ability to effectively execute our acquisition strategy and integrate future acquisitions.

 

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission (the “SEC”), we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance. Before you invest in our common stock, you should be aware that the occurrence of the events described in the “Risk Factors” section in this report could harm our business, prospects, operating results, and financial condition.

 

Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of US Ecology, Inc.

 

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ITEM 1.                        LEGAL PROCEEDINGS

 

We are not currently a party to any material pending legal proceedings and are not aware of any other claims that could, individually or in the aggregate, have a materially adverse effect on our financial position, results of operations or cash flows.

 

ITEM 1A.               RISK FACTORS

 

The Company is subject to various risks and uncertainties that could have a material impact on our business, financial condition, results of operations and cash flows. The discussion of these risk factors is included in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and there have been no material changes from the risk factors reported on the Form 10-K.

 

ITEM 2.                        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On June 1, 2016, the Company’s Board of Directors authorized the repurchase of $25.0 million of the Company’s outstanding common stock. Repurchases may be made from time to time in open market or through privately negotiated transactions. The timing of any repurchases will be based upon prevailing market conditions and other factors. The Company did not repurchase any shares of common stock under the repurchase program during the three months ended June 30, 2016. The repurchase program will remain in effect until June 2, 2018, unless extended by our Board of Directors.

 

The following table summarizes the purchases of shares of our common stock during the three months ended June 30, 2016:

 

Period

 

Total Number of
Shares Purchased

 

Average Price
Paid per Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plan or
Program

 

Approximate Dollar
Value of Shares that
May Yet be Purchased
Under the Plans or
Programs

 

 

 

 

 

 

 

 

 

 

 

April 1 to 30, 2016

 

 

$

 

 

$

 

May 1 to 31, 2016

 

 

 

 

 

June 1 to 30, 2016 (1)

 

103

 

45.95

 

 

25,000,000

 

 

 

 

 

 

 

 

 

 

 

Total

 

103

 

$

45.95

 

 

$

25,000,000

 

 

 


(1)   Represents shares surrendered or forfeited in connection with certain employees’ tax withholding obligations related to the vesting of shares of restricted stock.

 

ITEM 3.                        DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.                        MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.                        OTHER INFORMATION

 

Not applicable.

 

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ITEM 6.                        EXHIBITS

 

15

 

Letter re: Unaudited Interim Financial Statements

 

 

 

31.1

 

Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

The following materials from the quarterly report on Form 10-Q of US Ecology, Inc. for the quarter ended June 30, 2016 formatted in Extensible Business Reporting Language (XBRL) include: (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Cash Flows, and (v) Notes to the Unaudited Consolidated Financial Statements

 

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SIGNATURE

 

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

 

 

US Ecology, Inc.

 

(Registrant)

 

 

 

 

Date: August 1, 2016

/s/ Eric L. Gerratt

 

Eric L. Gerratt

Executive Vice President, Chief Financial Officer and Treasurer

 

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