Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

American Ecology Corporation, through its subsidiaries, is a hazardous, Polychlorinated biphenyl ("PCB"), non-hazardous and radioactive waste services company providing treatment, disposal and transportation services to commercial and government entities including oil refineries, chemical production facilities, manufacturers, electric utilities, steel mills, biotechnology companies, waste broker aggregators and medical and academic institutions. The majority of the waste received at our facilities is produced in the United States. We generate revenue from fees charged to treat and dispose of waste at our four fixed disposal facilities located near Grand View, Idaho; Richland, Washington; Beatty, Nevada; and Robstown, Texas. We also arrange transportation of waste to our facilities, which has contributed significant revenue in recent years. We or our predecessor companies have been in the waste business since 1952.

Our customers may be divided into categories to better evaluate period-to-period changes in our treatment and disposal revenue based on service mix and type of business (recurring "Base" or "Event" clean-up). Each of these categories is described in the table below, along with information on the percentage of total treatment and disposal revenues for each category for the three months ended March 31, 2009 and 2008.

                                                                    % of           % of
                                                                 Treatment      Treatment
                                                                    and            and
                                                                  Disposal       Disposal
                                                                Revenue (1)    Revenue (1)
                                                                  for the        for the
                                                                Three Months   Three Months
                                                                   ended          ended
                                                                 March 31,      March 31,
Customer Category                  Description                      2009          2008
Broker              Companies that collect and aggregate                 33%            28%
                    waste from their direct customers,
                    comprised of both base and event clean-up
                    business.
Private Clean-up    Private sector clean-up project waste,               21%            27%
                    typically event business.
Government          Federal and State government clean-up                14%            19%
                    project waste, comprised of both base
                    business and event clean-up business.
Refinery            Petroleum refinery customers, comprised              13%             4%
                    of both base and event clean-up business.
Other industry      Electric utilities, chemical                         11%            13%
                    manufacturers and other industrial
                    customers not included in other
                    categories, comprised of both recurring
                    base business and event clean-up
                    business.
Rate regulated      Northwest and Rocky Mountain Compact                  7%             6%
                    customers paying rate-regulated disposal
                    fees set by the State of Washington,
                    predominantly base business.
Steel               Steel mill customers, comprised of both               1%             3%
                    base and event clean-up business.

(1) Excludes all transportation service revenue

A significant portion of our disposal revenue is attributable to discrete Event Business projects which vary widely in size, duration and unit pricing. Approximately 48% and 52% of our treatment and disposal revenue was derived from Event Business projects for the three months ended March 31, 2009 and 2008, respectively. 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 funding availability, changes in laws and regulations, government enforcement actions, public controversy, litigation, weather, real estate redevelopment project timing, government appropriation cycles and other factors. The types and amounts of waste received from Base Business also vary from quarter-to-quarter. As a result of this variability, we can experience significant quarter-to-quarter and year-to-year differences in revenue, gross profit, gross margin, operating income and net income. Also, while many large projects are pursued months or years in advance of work performance, both large and small clean-up project opportunities routinely arise with little prior notice. This uncertainty, which is inherent to the hazardous and radioactive waste disposal business, is factored into our projections and externally communicated business outlook statements. Our projections combine historical experience with identified sales pipeline opportunities and new or expanded service line projections. Management believes that the significant adverse economic conditions emerging in late 2008 and continuing in 2009 exacerbate the uncertainty inherent to projecting future results.

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 east coast (e.g. Honeywell Jersey City project) and other locations distant from our Grand View, Idaho facility, transportation-related revenue can account for as much as three-fourths (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 otherwise have competed for successfully. Our investment in a Company-owned railcar fleet to supplement rail cars obtained under operating leases has reduced transportation expenses incurred when we relied solely on operating leases and short-term rentals.

The increased waste volumes resulting from projects won through this bundling strategy have taken advantage of our operating leverage and increased profitability. While waste treatment and other variable costs are project-specific, the contribution to profitability from the individual projects performed generally increases as overall disposal volumes increase. Management believes that maximizing operating income and earnings per share is a higher priority than maintaining or increasing gross margin. We plan to continue aggressively bidding bundled transportation and disposal services based on this income growth strategy.

We serve oil refineries, chemical production plants, steel mills, waste broker-aggregators serving small manufacturers and other customers that are, or may be, affected by adverse economic conditions and a tight credit environment. Such conditions may cause our customers 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 our 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 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 our business is either government funded or driven by government regulations or enforcement actions, we believe it is less susceptible to general economic conditions. However, spending by government agencies may also be reduced due to declining tax revenues resulting from a weak economy.

Adverse economic trends arising in the second half of 2008 and continuing in 2009 have resulted in a decrease in near-term demand for our services from industrial production and manufacturing activities. These conditions also adversely impact spending on market-driven real estate "brownfield" redevelopment projects and other discretionary industry clean-up projects. We have tightened our credit standards in response to these trends, which may also impact our business. Demand for our services may benefit from greater emphasis on enforcement by the new federal administration as well as increased federal funding for environmental remediation, including funds specifically appropriated for remediation by the recently enacted American Recovery and Reinvestment Act of 2009.

Results of Operations

The following table summarizes our results of operations for the three months
ended March 31, 2009 and 2008 in dollars and as a percentage of total revenue.

(in thousands, except per share amounts)              Three Months Ended March 31,
                                             2009            %           2008            %

Revenue                                    $  34,965        100.0%     $  46,219        100.0%
Transportation costs                          14,174         40.5%        22,058         47.7%
Other direct operating costs                  11,245         32.2%        10,717         23.2%

Gross profit                                   9,546         27.3%        13,444         29.1%

Selling, general and administrative
expenses                                       3,573         10.2%         3,919          8.5%
Operating income                               5,973         17.1%         9,525         20.6%

Other income (expense):
Interest income                                   48          0.1%            63          0.1%
Interest expense                                  (1 )                        (1 )
Other                                             33          0.1%            65          0.2%
Total other income                                80          0.2%           127          0.3%

Income before income taxes                     6,053         17.3%         9,652         20.9%
Income taxes                                   2,409          6.9%         3,784          8.2%
Net income                                 $   3,644         10.4%     $   5,868         12.7%

Earnings per share:
Basic                                      $    0.20                   $    0.32
Dilutive                                   $    0.20                   $    0.32

Shares used in earnings per share
calculation:
Basic                                         18,143                      18,229
Dilutive                                      18,176                      18,277

Dividends paid per share                   $    0.18                   $    0.15

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Revenue - Revenue decreased 24% to $35.0 million for the first quarter of 2009, down from $46.2 million for the first quarter of 2008. This reflects lower treatment and disposal revenue as well as lower transportation revenue in the first quarter of 2009 compared to the first quarter of 2008, which we believe was significantly influenced by adverse economic conditions. In the first quarter of 2009, we disposed of 213,000 tons of waste, down 38% from the 343,000 tons disposed in the first quarter of 2008. This volume decline was partially offset by a 42% increase in average selling price for treatment and disposal services (excluding transportation) in the first quarter of 2009 over the same quarter last year. This increase in average selling price primarily reflects pricing for the thermal desorption and recycling service introduced at our Robstown, TX facility in the second half of 2008.

During the first quarter of 2009, treatment and disposal revenue from recurring Base Business was 5% lower than the first quarter of 2008 and comprised 52% of non-transportation revenue. This compared to 48% of non-transportation Base Business revenue in the first quarter of 2008. This decrease primarily reflects Base Business declines in our broker and steel customer categories. Event Business revenue in the first quarter of 2009 decreased 19% over the same quarter in 2008 and comprised 48% of non-transportation revenue during the quarter. This compared to 52% of non-transportation Event Business in the first quarter of 2008. As discussed further below, this reflects decreased treatment and disposal revenue from both private and government clean-up projects.

The following table summarizes our first quarter 2009 revenue growth (both Base and Event Business) by customer type as compared with the first quarter of 2008.

                                      Treatment and Disposal
                                          Revenue Growth
                                     Three Months Ended March
                                     31, 2009 vs. Three Months
                                       Ended March 31, 2008

                   Refinery                    158%
                   Rate regulated               11%
                   Broker                       3%
                   Other industry              -28%
                   Private                     -31%
                   Government                  -36%
                   Steel                       -65%

Treatment and disposal revenue from our refinery customers increased 158% in the first quarter of 2009 compared to the same quarter in 2008. This increase is primarily due to the introduction of thermal desorption recycling services at our Robstown, Texas facility in the second half of 2008.

Rate-regulated business at our Richland, Washington low-level radioactive waste facility increased 11% in the first quarter of 2009 compared to the first quarter of 2008. Our Richland facility operates under a State-approved revenue requirement. This increase reflects the timing of revenue recognition for the rate-regulated portion of the business.

Our broker business increased 3% in the first quarter of 2009 compared to the same quarter in 2008. This reflects growth in waste brokered to us for thermal desorption and recycling services at our Robstown, Texas facility in the first quarter of 2009, partially offset by decreased business for other brokered wastes. We believe that the decrease in business for other brokered waste reflects reduced industrial production in the United States.

Our other industry revenue decreased 28% in the first quarter of 2009 compared to the first quarter of 2008. This decrease was due primarily to a large clean-up project for an electric utility customer which, was shipped to our Grand View, Idaho site in the first quarter of 2008 and was not replaced in the first quarter of 2009.

Treatment and disposal revenue from private clean-up customers decreased approximately 31% in the first quarter of 2009 as compared to the same period last year. This decline reflects decreased shipments from the Molycorp, Honeywell Jersey City and other smaller projects in the first quarter of 2009 compared to the same period in 2008. We believe that fewer new clean-up opportunities were identified and more previously identified projects were delayed in the first quarter of 2009 than the same quarter last year as a result of the adverse economic conditions which emerged in the second half of 2008 and continued in 2009. The Honeywell Jersey City project contributed 44% of total revenue (including transportation) in the first quarter of 2009 and 38% of total revenue (including transportation) in the first quarter of 2008, or $15.4 million and $17.3 million, respectively. Shipments under our bundled transportation and disposal contract with Chevron/Molycorp which is near completion contributed 4% of total revenue (including transportation) in the first quarter of 2009, or $1.5 million, compared to 8% of total revenue (including transportation) or $3.5 million in the first quarter of 2008.

Government clean-up business revenue decreased 36% in the first quarter of 2009 compared to the first quarter of 2008. This decline reflects a decrease in Event Business under our contract with the U.S. Army Corps of Engineers ("USACE"), which contributed $2.2 million or 6% of total revenue in the first quarter of 2009, compared to $3.8 million or 8% of total revenue in the first quarter of 2008. This quarterly decrease reflects completion of a major project phase at one site in the first quarter of 2008, partially offset by shipments from two other projects sites in the first quarter of 2009. This variability is consistent with project-specific timing at the multiple USACE clean-up sites we serve. Each such site typically is remediated over multiple years in discretely funded project phases. These phases vary by amount of waste received and duration. No USACE projects served by the Company were cancelled or awarded to competitors during the quarter. We believe timing of USACE work in the first quarter of 2009 was also affected by delayed enactment of full-year funding for the fiscal year 2009 federal budget.

Treatment and disposal revenue from our steel mill customers decreased 65% in the first quarter of 2009 compared to the first quarter of 2008. This reflects business lost to zinc recyclers offering a cost-effective alternative to land disposal as well as reduced steel production levels in the first quarter of 2009 at mills served by the Company.

Gross Profit. Gross profit for the first quarter of 2009 decreased by 29% to $9.5 million, down from $13.4 million in the first quarter of 2008. This decrease primarily reflects lower volumes of waste disposed in the first quarter of 2009 compared to the same period in 2008.

Gross margin was 27% in the first quarter of 2009, down from 29% in the first quarter of 2008. This decrease reflects lower treatment and disposal waste volumes partially offset by a decrease in transportation revenue. Disposal gross margins (excluding transportation revenue and costs) were 46% in the first quarter of 2009 as compared to 55% in the first quarter of 2008. This decrease reflects reduced operating leverage caused by lower waste volumes and a greater percentage of waste requiring treatment (and therefore higher costs) prior to disposal.

Selling, General and Administrative ("SG&A"). As a percentage of total revenue, SG&A expenses for the first quarter of 2009 and 2008 were 10% and 9%, respectively. SG&A expenses decreased 9% to $3.6 million, down from $3.9 million for the first quarter of 2008. The decline in SG&A expense was due primarily to lower incentive compensation and business development costs, partially offset by higher professional service fees.

Interest income. During the first quarter of 2009, we earned $48,000 of interest income, down from $63,000 in the first quarter of 2008. This decrease reflects a lower average rate of interest earned on investments.

Other expense/income. Other expense/income includes business activities not included in current year ordinary and usual revenue and expenses. In the first quarter of 2009, we recognized $33,000 in other income. This primarily reflects royalty income from a previously sold municipal waste landfill in Texas, partially offset by foreign currency transaction losses. Other income in the first quarter of 2008 was $65,000, primarily from the Texas royalty income.

Income tax expense. Our effective tax rate for the first quarter 2009 was 39.8% compared to 39.2% in the first quarter of 2008. This increase is primarily due to lower pre-tax earnings in the current year increasing the impact non-tax-deductible expenses have on the effective tax rate.

At March 31, 2009 and December 31, 2008, we had no unrecognized tax benefits. We recognize interest assessed by taxing authorities as interest expense. We recognize any penalties assessed by taxing authorities as SG&A expense. Interest and penalties for the three months ended March 31, 2009 and 2008 were not material.

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 consolidated financial statements are prepared using the same critical accounting policies discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Liquidity and Capital Resources

Our principal source of cash is from operations. The $24.1 million in cash at March 31, 2009 was comprised of cash and cash equivalents immediately available for operations.

We have a $15.0 million unsecured revolving line of credit (the "Revolving Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo") expiring on June 15, 2010. This unsecured line-of-credit is available to supplement daily working capital if needed. Monthly interest-only payments are required on outstanding debt levels based on a pricing grid, under which the interest rate decreases or increases based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization. We can elect to borrow monies utilizing LIBOR plus an applicable spread or the prime rate. The Revolving Credit Agreement contains quarterly financial covenants, including a maximum leverage ratio, a maximum funded debt ratio and a minimum required tangible net worth. Pursuant to our Revolving Credit Agreement, we may only declare quarterly or annual dividends if on the date of declaration, no event of default has occurred, or no other event or condition has occurred that would constitute an event of default after giving effect to the payment of the dividend. At March 31, 2009 we were in compliance with all financial covenants in the Revolving Credit Agreement. We have a standby letter of credit to support our closure and post-closure obligation of $4.0 million that expires in September 2009. At March 31, 2009, we had a borrowing capacity of $11.0 million after deducting the outstanding letter of credit, with no borrowings outstanding.

On October 28, 2008, our Board of Directors authorized management to repurchase up to 600,000 shares, or approximately 3%, of our outstanding common stock. On December 11, 2008, the program was extended until February 28, 2009. On February 23, 2009, the program was extended through December 31, 2009 unless extended, canceled or modified by our Board of Directors. This authorization does not obligate the Company to acquire any particular amount of common stock and is to be executed at management's discretion within Board-established stock price limits. Through March 31, 2009, the Company had purchased 155,315 shares under the plan at an average price of $16.68 per share using cash on hand. We anticipate that any future repurchases would be funded with cash on hand.

We believe that cash on hand and cash flow from operations will be sufficient to meet our operating cash needs, including future dividends as may be approved by our Board of Directors and potential expenditures for the Board-approved stock repurchase plan, if any, during the next 12 months.

Operating Activities - For the three months ended March 31, 2009, net cash provided by operating activities was $11.5 million. This reflects net income of $3.6 million, decreases in receivables of $5.2 million, a $2.5 million decrease in income tax receivable and depreciation, amortization and accretion of $2.3 million. Partially offsetting these sources of cash were decreases in accounts payable and accrued liabilities of $1.7 million and decreases in accrued salaries and benefits of $1.2 million. Impacts on net income are due to the factors discussed above under Results of Operations. The decrease in receivables is primarily attributable to a decline in revenue in the first quarter of 2009 as compared with the same quarter in 2008. Days sales outstanding was 64 days as of March 31, 2009, compared to 66 days at December 31, 2008 and 74 days at March 31, 2008. The decrease in income tax receivable reflects application of prior year over-payments to current year tax liabilities generated during the quarter as well as tax refunds received in the first quarter of 2009. The decrease in accounts payable and accrued liabilities is primarily attributable to lower waste disposal volumes in the first quarter of 2009. The decrease in accrued salaries and benefits reflects incentive compensation earned for 2008 performance and paid in the first quarter of 2009.

For the three months ended March 31, 2008, net cash provided by operating activities was $1.7 million. This reflects net income of $5.9 million, an increase in income tax payable of $2.9 million and depreciation, amortization and accretion of $2.8 million. Partially offsetting these sources of cash were increases in receivables of $8.6 million and decreases in accounts payable and accrued liabilities of $1.0 million.

Investing Activities - For the three months ended March 31, 2009, net cash used in investing activities was $2.6 million. Significant transactions affecting cash used in investing activities during the first three months of 2009 include capital expenditures of $2.6 million. Significant capital projects included equipment purchases at all four operating disposal facilities as well as construction of additional disposal capacity at our Robstown, Texas site.

For the three months ended March 31, 2008, net cash used in investing activities was $2.2 million, including capital expenditures of $3.5 million. Partially offsetting cash outflows for capital expenditures were net maturities of short-term investments totaling $1.2 million.

Financing Activities - For the three months ended March 31, 2009 and 2008, net cash used in financing activities was $3.3 million and $2.7 million, respectively. This primarily reflects payment of dividends partially offset by proceeds from stock option exercises and tax benefits associated with those exercises.

Contractual Obligations and Guarantees

For information on contractual obligations and guarantees, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed on February 25, 2009. There were no material changes in the amounts of our contractual obligations and guarantees during the three months ended March 31, 2009.