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, recycling and transportation services to commercial and government entities including but not limited to oil refineries, chemical production facilities, manufacturers, electric utilities, steel mills, biotechnology companies, military installations, 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 manage a dedicated fleet of railcars and arrange for the transportation of waste to our facilities. Transportation services have contributed significant revenue in recent years. We also utilize this railcar fleet to provide transportation services for disposal at facilities operated by other companies on a less frequent basis. 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 business). Each of these categories is described in the table below with information on the percentage of total treatment and disposal revenues for each category for the three and nine months ended September 30, 2009.

                                                       % of Treatment   % of Treatment
                                                        and Disposal     and Disposal
                                                        Revenue (1)      Revenue (1)
                                                       for the Three     for the Nine
                                                        Months ended     Months ended
 Customer                                              September 30,    September 30,
 Category                 Description                       2009             2009
Broker       Companies that collect and aggregate                 36%              34%
             waste from their direct customers,
             comprised of both Base and Event
             clean-up business.
Private      Private sector clean-up project waste,               23%              24%
Clean-up     typically Event business.
Government   Federal and State government clean-up                14%              14%
             project waste, comprised of both Base
             business and Event clean-up business.
Refinery     Petroleum refinery customers, comprised              11%              12%
             of both Base and Event clean-up
             business.
Other        Electric utilities, chemical                          8%               9%
industry     manufacturers and other industrial
             customers not included in other
             categories, comprised of both recurring
             Base business and Event clean-up
             business.
Rate         Northwest and Rocky Mountain Compact                  7%               6%
regulated    customers paying rate-regulated
             disposal fees set by the State of
             Washington, predominantly Base
             business.
Steel        Steel mill customers, comprised of both               1%               1%
             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 46% and 48% of our treatment and disposal revenue was derived from Event Business for the three and nine months ended September 30, 2009, 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 or court orders, public controversy, litigation, weather, real estate redevelopment project timing, government appropriation and funding commitment 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, new or expanded service line projections and prevailing market conditions. Management believes that the significant adverse economic conditions emerging in late 2008 and continuing in 2009 exacerbate the uncertainty inherent in 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 eastern United States (e.g. Honeywell Jersey City contract work) 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 percent 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 acquisition of a Company-owned railcar fleet to supplement railcars obtained under operating leases has reduced our reliance on short-term rentals and ultimately has reduced transportation expenses.

The increased waste volumes resulting from projects won through this bundling strategy have driven operating leverage benefits and increased profitability. While waste treatment and other variable costs are project-specific, the earnings contribution from the individual projects 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 strategy.

To maximize utilization of our railcar fleet, we periodically deploy available railcars to transport waste from clean-up sites to disposal facilities operated by other companies. Such transportation services may be bundled with for-profit logistics and field services support work.

We serve oil refineries, chemical production plants, steel mills, waste broker-aggregators serving small manufacturers and other industrial 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 or changes in policy. Disbursement of funds appropriated by Congress may also be delayed for administrative or other reasons.

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, manufacturing activities and waste-generating businesses that support them. 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. Demand for our services may benefit over time from greater emphasis on enforcement by the current federal administration as well as increased federal funding for environmental remediation, including funds specifically appropriated for remediation by the American Recovery and Reinvestment Act of 2009 ("ARRA"). While we have received ARRA funding commitments on certain projects served by the Company and believe additional opportunities exist, this process has been slower than initially anticipated and we are not in a position to estimate the overall opportunity to the Company represented by the ARRA.

Results of Operations

The following table summarizes our results of operations for the three and nine
months ended September 30, 2009 and 2008 in dollars and as a percentage of total
revenue.

(in thousands,
except per               Three Months Ended September 30,                    Nine Months Ended September 30,
share amounts)       2009          %          2008          %          2009           %          2008           %

Revenue            $ 37,529       100.0 %   $ 41,051       100.0 %   $ 108,871       100.0 %   $ 131,786       100.0 %
Transportation
costs                16,694        44.5 %     20,477        49.9 %      46,131        42.4 %      61,786        46.9 %
Other direct
operating costs      10,852        28.9 %     10,553        25.7 %      34,099        31.3 %      32,957        25.0 %

Gross profit          9,983        26.6 %     10,021        24.4 %      28,641        26.3 %      37,043        28.1 %

Selling, general
and
administrative
expenses              3,206         8.5 %      3,209         7.8 %      10,175         9.3 %      10,860         8.2 %
Operating income      6,777        18.1 %      6,812        16.6 %      18,466        17.0 %      26,183        19.9 %


Other income
(expense):
Interest income          18         0.0 %        138         0.3 %         103         0.1 %         312         0.2 %
Interest expense         (1 )       0.0 %         (2 )       0.0 %          (2 )       0.0 %          (6 )       0.0 %
Other                   101         0.3 %         78         0.2 %         225         0.2 %         237         0.2 %
Total other
income                  118         0.3 %        214         0.5 %         326         0.3 %         543         0.4 %


Income before
income taxes          6,895        18.4 %      7,026        17.1 %      18,792        17.3 %      26,726        20.3 %
Income taxes          2,731         7.3 %      2,755         6.7 %       7,466         6.9 %      10,477         8.0 %
Net income         $  4,164        11.1 %   $  4,271        10.4 %   $  11,326        10.4 %   $  16,249        12.3 %

Earnings per
share:
Basic              $   0.23                 $   0.23                 $    0.62                 $    0.89
Dilutive           $   0.23                 $   0.23                 $    0.62                 $    0.89

Shares used in
earnings per
share
calculation:
Basic                18,148                   18,261                    18,145                    18,241
Dilutive             18,170                   18,330                    18,173                    18,301

Dividends paid
per share          $   0.18                 $   0.18                 $    0.54                 $    0.48

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Revenue - Revenue decreased 9% to $37.5 million for the third quarter of 2009, down from $41.1 million in the third quarter of 2008. This reflects lower transportation revenue and lower treatment and disposal revenue in the third quarter of 2009 as compared to the third quarter of 2008, which we believe was a result of the adverse economic conditions initially experienced by the Company in late 2008 and continuing into 2009. In the third quarter of 2009, we disposed of 201,000 tons of waste, down 24% from 263,000 tons disposed in the third quarter of 2008. This volume decline was partially offset by a 31% increase in average selling price for treatment and disposal services (excluding transportation) in the third quarter of 2009 compared to the third quarter of 2008. This increase primarily reflects pricing on thermal recycling services introduced at our Robstown, TX facility in the second half of 2008.

During the third quarter of 2009, treatment and disposal revenue from recurring Base Business customers was 2% lower than the third quarter of 2008 and comprised 54% of non-transportation revenue. This compared to 53% of non-transportation Base Business revenue in the third quarter of 2008. This decrease primarily reflects declines in our other industry, steel and refinery customer categories.

Event Business revenue in the third quarter of 2009 decreased 2% compared to the same quarter in 2008 and was 46% of non-transportation revenue for the quarter. This compared to 47% of non-transportation Event Business in the third quarter of 2008. As discussed further below, this reflects decreased treatment and disposal revenue from private, government and steel customer categories.

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

                   Treatment and Disposal Revenue Growth
                 Three Months Ended September 30, 2009 vs.
                   Three Months Ended September 30, 2008

Refinery                           107%
Broker                              7%
Rate regulated                      6%
Government                          -5%
Private                            -17%
Other industry                     -21%
Steel                              -72%

Treatment and disposal revenue from our refinery customers increased 107% in the third quarter of 2009 compared to the same quarter in 2008. This increase primarily reflects initial introduction of thermal recycling services at our Robstown, Texas facility in the third quarter of 2008.

Our broker business increased 7% in the third quarter of 2009 compared to the same quarter in 2008. This increase reflects our continued success working with national and smaller regional waste broker companies that do not compete with us for disposal business.

Rate-regulated business at our Richland, Washington low-level radioactive waste facility increased 6% in the third quarter of 2009 compared to the third quarter of 2008. Our Richland facility operates under a State-approved revenue requirement. The increase is due to the timing of revenue recognition for the rate-regulated portion of the business.

Government clean-up business revenue decreased 5% in the third quarter of 2009 compared to the third quarter of 2008. This decline reflects lower shipment volumes from U.S. Army Corps of Engineers ("USACE") project sites. Event Business under our contract with USACE contributed $2.2 million or 6% of total revenue in the third quarter of 2009, compared to $2.4 million or 6% of total revenue in the third quarter of 2008. Project-specific timing at the multiple USACE clean-up sites we serve contributed to this variability. Each such site typically is remediated over multiple years in discretely funded project phases that may involve different types of waste being shipped to different disposal companies. These phases vary by type and amount of waste shipped and duration. No USACE projects served by the Company were cancelled or awarded to competitors during the quarter. We believe the timing and disbursement of funds for discrete work phases in the second and third quarters of 2009 were negatively impacted by competing administrative demands associated with USACE implementation of the ARRA.

Treatment and disposal revenue from private clean-up customers decreased 17% in the third quarter of 2009 as compared to the same quarter last year. This decrease primarily reflects lower waste shipments from the Honeywell Jersey City Study Area 7 site, which was essentially completed during the third quarter, and the Molycorp, Pennsylvania project which was completed in early 2009. The Honeywell project contributed 43% of total revenue (including transportation) in the third quarter of 2009 and 52% of total revenue (including transportation) in the third quarter of 2008, or $16.0 million and $21.4 million, respectively.

Our other industry revenue category decreased 21% in the third quarter of 2009 compared to the third quarter of 2008. This decrease reflects both Base and Event Business declines over multiple manufacturing and other industrial customers as a result of weaker period over period economic conditions for our industry.

Treatment and disposal revenue from our steel mill customers decreased 72% in the third quarter of 2009 compared to the third quarter of 2008. This reflects business lost to zinc recyclers offering a cost-effective alternative to land disposal combined with substantially reduced steel production in the third quarter of 2009 at mills currently served by the Company.

Gross Profit. Gross profit for the third quarter of 2009 and 2008 was $10.0 million. Gross profit in the third quarter of 2008 benefited from a favorable adjustment of $857,000 to our closure and post-closure obligations. This favorable adjustment was based on written confirmation from the State of Nevada that cash contributed by the Company and held in a dedicated state account maintained to satisfy closure and post-closure obligations at our Beatty, Nevada hazardous waste disposal facility can be used to fund interim closure activities.

Gross margin was 27% in the third quarter of 2009, up from 24% in the third quarter of 2008. This increase includes gross profit resulting from the arrangement of transportation and logistics services by the Company for waste shipped to a disposal facility operated by another company during the third quarter of 2009. This was partially offset by a decrease in treatment and disposal gross profit. Disposal gross margins (excluding transportation revenue and costs) were 46% in the third quarter of 2009 compared to 49% in the third quarter of 2008. This decrease reflects the favorable adjustment to our closure and post-closure obligations recognized in the third quarter of 2008.

Selling, General and Administrative ("SG&A"). As a percentage of total revenue, SG&A expenses for the third quarter of 2009 and 2008 were 9% and 8%, respectively. SG&A expenses were $3.2 million, flat when compared to $3.2 million for the third quarter of 2008.

Interest income. During the third quarter of 2009, we earned $18,000 of interest income, down from $138,000 in the third quarter of 2008. This decrease reflects a lower average rate of interest earned on cash and short-term investments.

Other expense/income. Other expense/income includes business activities not included in current year ordinary and usual revenue and expenses. In the third quarter of 2009, we recognized $101,000 in other income. This reflects royalty income from a previously sold municipal waste landfill in Texas and a gain on the sale of building and land associated with a non-operating facility in Texas. Other income in the third quarter of 2008 was $78,000, primarily from royalty income.

Income tax expense. Our effective tax rate for the third quarter 2009 was 39.6% compared to 39.2% in the third quarter of 2008. This increase is primarily due to lower pre-tax earnings in the current year which increased the impact that non-tax-deductible expenses had on the effective tax rate.

At September 30, 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 each of the three months ended September 30, 2009 and 2008 were not material.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Revenue - Revenue decreased 17% to $108.9 million for the first nine months of 2009, down from $131.8 million for the first nine months of 2008. This decrease reflects lower treatment and disposal revenue and lower revenue on bundled rail transportation and disposal contracts. In the nine months ended September 30, 2009, we disposed of 642,000 tons of waste, down 31% from 931,000 tons disposed in the first nine months of 2008. Our average selling price for treatment and disposal services (excluding transportation) in the first nine months of 2009 was 32% higher than in the first nine months of 2008. This increase primarily reflects pricing for the thermal recycling service initially introduced at our Robstown, TX facility in the second half of 2008.

During the nine months ended September 30, 2009, treatment and disposal revenue from recurring Base Business customers was 3% lower than the same period of 2008 and comprised 52% of non-transportation revenue. This compared to 48% of non-transportation revenue in the nine months ended September 30, 2008. This primarily reflects Base Business declines in our steel, broker and other industry customer categories partially offset by growth in our broker business.

Event Business revenue in the nine months ended September 30, 2009 decreased 19% compared to the first nine months of 2008 and comprised 48% of non-transportation revenue for the nine months ended September 30, 2009. This compared to 52% of non-transportation revenue in the nine months ended September 30, 2008. As discussed further below, this reflects decreased treatment and disposal revenue from government, private and other industry customer categories.

The following table summarizes our revenue growth (both Base and Event Business) by industry customer type for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008.

                  Treatment and Disposal Revenue Growth
                 Nine Months Ended September 30, 2009 vs.
                   Nine Months Ended September 30, 2008

Refinery                           130%
Broker                              5%
Rate Regulated                      5%
Private                            -15%
Other industry                     -28%
Government                         -44%
Steel                              -74%

Treatment and disposal revenue from our refinery customers increased 130% in the nine months ended September 30, 2009 compared to the same period in 2008. This increase is primarily due to initial introduction of thermal recycling services at our Robstown, Texas facility in the second half of 2008.

Broker business increased 5% in the nine months ended September 30, 2009 compared to the first nine months of 2008. This increase primarily reflects growth in waste brokered to us for thermal recycling services at our Robstown, Texas facility in the second quarter of 2009.

Rate-regulated business at our Richland, Washington low-level radioactive waste facility increased 5% for the nine months ended September 30, 2009 compared to the same period in 2008. Our Richland facility operates under a State-approved revenue requirement. This increase is due to the timing of revenue recognition for the rate-regulated portion of the business.

Treatment and disposal revenue from private clean-up customers for the nine months ended September 30, 2009 decreased 15% when compared to the nine months ended September 30, 2008. The decrease is due primarily to decreased shipments on the Molycorp, Pennsylvania and Honeywell Study Area 7 projects in the first nine months of 2009 compared to the first nine months of 2008. The Molycorp project, which ramped down to completion in the second quarter of 2009, contributed 2% of total revenue (including transportation), or $2.0 million for the nine months ended September 30, 2009, as compared to 5% of total revenue (including transportation), or $7.0 million for the nine months ended September 30, 2008. The Honeywell Study Area 7 site and other much smaller Honeywell Study Area sites contributed 46% of total revenue (including transportation) for the nine months ended September 30, 2009, or $49.9 million compared to 43% of total revenue (including transportation), or $56.7 million, for the same period of 2008.

Other industry revenue decreased 28% in the first nine months of 2009 compared to the first nine months of 2008. This reflects a PCB waste clean-up for an electric utility customer shipped to our Grand View, Idaho facility that was completed in 2008 coupled with a decline in business with electric utility, manufacturing and other industrial customers as a result of weaker period over period economic conditions for our industry.

Government clean-up business revenue decreased 44% in the first nine months of 2009 compared to the first nine months of 2008. This decrease reflects state-funded clean-up projects shipped to our Robstown, Texas and Beatty, Nevada facilities, a US Army remediation project shipped to our Grand View, Idaho facility from an overseas military base and a military base clean-up project shipping to our Beatty, Nevada facility which were all completed in 2008 and not fully replaced in 2009. Cleanup work under the USACE contract also declined, contributing 6% of total revenue or $7.0 million in the first nine months of 2009 compared to 7% of total revenue or $9.0 million in the first nine months of 2008. Project-specific timing at the multiple USACE clean-up sites we serve contributed to this variability. Each such site typically is remediated over multiple years in discretely funded project phases that may involve different types of waste being shipped to different disposal companies. These phases vary by type and amount of waste shipped and duration. No USACE projects served by the Company were cancelled or awarded to competitors during the previous nine months. We believe the timing and disbursement of funds for discrete work phases in the second and third quarters of 2009 were negatively impacted by competing administrative demands associated with USACE implementation of the ARRA.

Treatment and disposal revenue from steel mill customers decreased 74% in the first nine months of 2009 compared to the same period of 2008. This reflects business lost to zinc recyclers offering a cost-effective alternative to land disposal as well as substantially reduced steel production levels in the first nine months of 2009 at mills currently served by the Company.

. . .