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ECOL > SEC Filings for ECOL > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for US ECOLOGY, INC.

Form 10-Q for US ECOLOGY, INC.


2-Nov-2012

Quarterly Report


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 is a hazardous, polychlorinated biphenyls ("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 brokers/aggregators and medical and academic institutions. The majority of the waste received at our facilities is produced in the United States.

On May 31, 2012, the Company acquired 100% of the outstanding shares of Dynecol, Inc. ("Dynecol"), a chemical and industrial byproducts treatment and reuse facility located in Detroit, Michigan, for a total purchase price of $10.8 million, after giving effect to net working capital adjustments. The acquisition of Dynecol, subsequently renamed US Ecology Michigan, Inc. ("US Ecology Michigan"), strengthens our mid-western and eastern U.S. presence to better serve key North American hazardous waste markets. In addition, US Ecology Michigan provides us with an opportunity to win more Event Business (as defined below) work; expand penetration with national accounts; improve and enhance transportation, logistics, and service offerings with existing customers; and attract new customers. Management also believes that the acquisition offers meaningful synergies in combination with our Stablex facility. Revenue from US Ecology Michigan included in US Ecology's consolidated statements of operations was $2.9 million and $4.0 million, respectively, for the three month and nine months ended September 30, 2012.

We generate revenue from fees charged to treat and dispose of waste at our five fixed disposal facilities located near Grand View, Idaho; Richland, Washington; Beatty, Nevada; Robstown, Texas; Detroit, Michigan and Blainville, Québec, Canada. We manage a dedicated fleet of railcars and a small fleet of trucks and trailers and arrange for the transportation of waste to our facilities. Transportation services 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 customer "Base Business" or discrete waste clean-up project "Event 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, 2012 and 2011.


Table of Contents

                                                         % of Treatment and Disposal Revenue (1),(2) for the
Customer                                                           Three Months Ended September 30,
Category                      Description                        2012                           2011

Broker              Companies that collect and
                    aggregate waste from their
                    direct customers, generally
                    comprised of Base Business with
                    periodic Event Business for
                    larger projects.                                         50 %                           57 %

Other industry      Electric utilities, chemical
                    manufacturers, steel mill and
                    other industrial customers not
                    included in other categories,
                    comprised of both recurring Base
                    and Event Business.                                      19 %                           14 %

Government          Federal and State government
                    clean-up project waste,
                    comprised of both Base and Event
                    Business.                                                14 %                            6 %

Refinery            Petroleum refinery customers,
                    comprised of both Base and Event
                    Business.                                                 8 %                            8 %

Private Clean-up    Private sector clean-up project
                    waste, typically Event Business.                          5 %                           11 %

Rate regulated      Northwest and Rocky Mountain
                    Compact customers paying
                    rate-regulated disposal fees set
                    by the State of Washington,
                    predominantly Base Business.                              4 %                            4 %



(1) Excludes all transportation service revenue

(2) Excludes US Ecology Michigan which was acquired on May 31, 2012

                                                         % of Treatment and Disposal Revenue (1),(2) for the
Customer                                                           Nine Months Ended September 30,
Category                      Description                        2012                           2011

Broker              Companies that collect and
                    aggregate waste from their
                    direct customers, generally
                    comprised of Base Business with
                    periodic Event Business for
                    larger projects.                                         52 %                           50 %

Other industry      Electric utilities, chemical
                    manufacturers, steel mill and
                    other industrial customers not
                    included in other categories,
                    comprised of both recurring Base
                    and Event Business.                                      19 %                           15 %

Government          Federal and State government
                    clean-up project waste,
                    comprised of both Base and Event
                    Business.                                                12 %                           10 %

Refinery            Petroleum refinery customers,
                    comprised of both Base and Event
                    Business.                                                 8 %                           10 %

Private Clean-up    Private sector clean-up project
                    waste, typically Event Business.                          5 %                           11 %

Rate regulated      Northwest and Rocky Mountain
                    Compact customers paying
                    rate-regulated disposal fees set
                    by the State of Washington,
                    predominantly Base Business.                              4 %                            4 %



(1) Excludes all transportation service revenue

(2) Excludes US Ecology Michigan which was acquired on May 31, 2012


Table of Contents

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 and nine months ended September 30, 2012, approximately 36% and 33%, respectively, of our treatment and disposal revenue, excluding US Ecology Michigan, was derived from Event Business projects. 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 controversies, litigation, weather, real estate redevelopment 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. 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.

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 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 have otherwise competed for successfully. Our Company-owned railcar fleet, which supplements 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 drive operating leverage and increase profitability. While waste treatment and other variable costs are project-specific, the earnings contribution from individual projects generally increases as overall disposal volumes increase. Management believes that maximizing operating income, net 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 brokers/aggregators serving small manufacturers and other industrial customers that are generally affected by adverse economic conditions and a tight credit environment. Such 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 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 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 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.


Table of Contents

RESULTS OF OPERATIONS



The following table summarizes our results of operations for the three and nine
months ended September 30, 2012 and 2011 in dollars and as a percentage of total
revenue.



$s and shares in thousands, except          Three Months Ended September 30,                  Nine Months Ended September 30,
per share amounts                        2012           %         2011         %          2012           %         2011          %

Revenue                               $    45,739      100.0 %  $ 39,670      100.0 %  $   118,732      100.0 %  $ 113,350      100.0 %
Direct operating costs                     19,893       43.5 %    18,810       47.4 %       56,164       47.3 %     54,825       48.4 %
Transportation costs                        7,257       15.9 %     5,571       14.0 %       14,577       12.3 %     20,689       18.3 %

Gross profit                               18,589       40.6 %    15,289       38.6 %       47,991       40.4 %     37,836       33.3 %

Selling, general and
administrative expenses                     6,196       13.5 %     5,722       14.4 %       18,167       15.3 %     15,874       14.0 %
Operating income                           12,393       27.1 %     9,567       24.2 %       29,824       25.1 %     21,962       19.3 %

Other income (expense):
Interest income                                 4        0.0 %         6        0.0 %           13        0.0 %         21        0.0 %
Interest expense                             (231 )     -0.5 %      (395 )     -1.0 %         (659 )     -0.6 %     (1,277 )     -1.1 %
Foreign currency gain (loss)                1,605        3.5 %    (3,661 )     -9.2 %        1,775        1.5 %     (2,193 )     -1.9 %
Other                                          70        0.2 %        73        0.2 %          672        0.6 %        245        0.2 %
Total other income (expense)                1,448        3.2 %    (3,977 )    -10.0 %        1,801        1.5 %     (3,204 )     -2.8 %

Income before income taxes                 13,841       30.3 %     5,590       14.2 %       31,625       26.6 %     18,758       16.5 %
Income taxes                                5,179       11.4 %     1,864        4.8 %       12,078       10.1 %      7,087        6.3 %
Net income                            $     8,662       18.9 %  $  3,726        9.4 %  $    19,547       16.5 %  $  11,671       10.2 %

Earnings per share:
Basic                                 $      0.48               $   0.20               $      1.07               $    0.64
Dilutive                              $      0.47               $   0.20               $      1.07               $    0.64

Shares used in earnings per share
calculation:
Basic                                      18,236                 18,202                    18,228                  18,194
Dilutive                                   18,270                 18,227                    18,262                  18,219

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

Other Financial Data:
Adjusted EBITDA (1)                   $    16,722               $ 14,062               $    42,724               $  34,542



(1) For all periods presented, Adjusted EBITDA is defined as net income before net interest expense, income tax expense, depreciation, amortization, stock based compensation, accretion of closure and post-closure liabilities, foreign currency gain/loss and other income/expense, which are not considered part of usual business operations. 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.


Table of Contents

The following reconciliation itemizes the differences between reported Net income and Adjusted EBITDA for the three and nine months ended September 30, 2012 and 2011:

                                              Three Months Ended September 30,            Nine Months Ended September 30,
$s in thousands                                  2012                  2011                 2012                  2011

Net income                                 $           8,662     $           3,726    $          19,547     $          11,671
Income tax expense                                     5,179                 1,864               12,078                 7,087
Interest expense                                         231                   395                  659                 1,277
Interest income                                           (4 )                  (6 )                (13 )                 (21 )
Foreign currency (gain) loss                          (1,605 )               3,661               (1,775 )               2,193
Other income                                             (70 )                 (73 )               (672 )                (245 )
Depreciation and amortization of plant
and equipment                                          3,428                 3,604               10,222                 9,911
Amortization of intangibles                              372                   358                1,096                 1,076
Stock-based compensation                                 181                   210                  564                   623
Accretion of closure & post-closure
liabilities                                              348                   323                1,018                   970
Adjusted EBITDA                            $          16,722     $          14,062    $          42,724     $          34,542

THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2011

Revenue. Revenue increased 15% to $45.8 million for the third quarter of 2012, up from $39.7 million for the third quarter of 2011, representing a 12% increase in treatment and disposal ("T&D") revenue and a 40% increase in transportation service revenue. The increase in transportation service revenue reflects more Event Business projects utilizing the Company's transportation and logistics services.

During the third quarter of 2012 we disposed of a total of 266,000 tons of waste, or 7% less than the 287,000 tons disposed of in the third quarter of 2011. Average selling price increased 21% during the third quarter of 2012 compared to the same quarter last year. The decline in volume and pricing improvement primarily reflects the high-volume low-price waste received in the third quarter of 2011 from the GE Hudson River cleanup project.

US Ecology Michigan, which was acquired on May 31, 2012, contributed $2.9 million of total revenue during the third quarter of 2012. Revenue from US Ecology Michigan is excluded from quarterly percentages of Base and Event Business and customer category information in the following paragraphs.

During the third quarter of 2012, T&D revenue from recurring Base Business customers was 22% higher than the third quarter of 2011 and comprised 64% of T&D revenue. This compares to 57% of T&D revenue in the third quarter of 2011. As discussed further below, this increase primarily reflects higher broker and other industry Base Business T&D revenue.

Event Business revenue in the third quarter of 2012 decreased 9% compared to the same quarter in 2011 and was 36% of T&D revenue for the third quarter of 2012. This compares to 43% of T&D revenue in the third quarter of 2011. As discussed further below, this decrease primarily reflects lower broker and private clean-up Event Business T&D revenue, partially offset by higher government and other industry Event Business T&D revenue.

The following table summarizes our T&D revenue growth (both Base and Event Business) by customer type for the third quarter of 2012 compared to the third quarter of 2011.

                     Treatment and Disposal Revenue Growth
                   Three Months Ended September 30, 2012 vs.
                     Three Months Ended September 30, 2011

Government                                               175 %
Other industry                                            44 %
Rate regulated                                             9 %
Refinery                                                   7 %
Broker                                                    -4 %
Private clean-up                                         -53 %


Table of Contents

Government clean-up business revenue increased 175% in the third quarter of 2012 compared to the third quarter of 2011 due to higher shipments from the U.S. Army Corps of Engineers ("USACE)" and a new military base clean-up project in the third quarter of 2012. Event Business under our USACE contract contributed $2.7 million, or 6%, of total revenue in the third quarter of 2012 compared to $1.7 million, or 4%, of total revenue in the third quarter of 2011. Excluding transportation service revenue, T&D revenue with the USACE increased approximately 118% in the third quarter of 2012 compared with the third quarter of 2011. This increase was due to project-specific timing at the multiple USACE clean-up sites. No USACE projects served by the Company were cancelled or, to our knowledge, awarded to competitors during the quarter.

Our other industry revenue category increased 44% in the third quarter of 2012 compared to the third quarter of 2011 on strong shipments from the broadly diversified group of industrial customers we serve.

Rate-regulated business at our Richland, Washington low-level radioactive waste disposal facility increased 9% in the third quarter of 2012 compared to the third quarter of 2011. Our Richland facility operates under a State-approved annual revenue requirement.

T&D revenue from our refinery customers increased 7% in the third quarter of 2012 compared to the third quarter of 2011. This increase primarily reflects higher volumes and improved pricing on thermal recycling projects sourced directly from refinery customers.

Our broker business decreased 4% in the third quarter of 2012 compared to the third quarter of 2011. This decrease was the result of lower shipments of brokered thermal recycling projects during the third quarter of 2012 compared to the third quarter of 2011. Excluding brokered thermal recycling business, our broker business was up 7.5% in the third quarter of 2012 compared to the third quarter of 2011.

T&D revenue from private clean-up customers decreased 53% in the third quarter of 2012 compared to the third quarter of 2011. This decrease primarily reflects the completion of the GE Hudson River project in 2011 that was not fully replaced in the third quarter of 2012.

Gross Profit. Gross profit for the third quarter of 2012 increased 22% to $18.6 million, up from $15.3 million in the third quarter of 2011. This increase primarily reflects higher average selling prices in the third quarter of 2012 compared to the third quarter of 2011. Gross margin was 41% in the third quarter of 2012, up from 39% in the third quarter of 2011. T&D gross margin (which excludes transportation revenue and costs) was 48% in the third quarter of 2012 compared to 46% in the third quarter of 2011. The increase in gross margin and T&D gross margin primarily reflects a favorable service mix and lower costs for chemical reagents, used to treat waste prior to disposal, in the third quarter of 2012 compared to the third quarter of 2011.

Selling, General and Administrative ("SG&A"). As a percentage of total revenue, SG&A expenses for the third quarter of 2012 and 2011 were each 14%. SG&A expenses were $6.2 million in the third quarter of 2012 and $5.7 million in the third quarter of 2011. The increase primarily reflects higher business development costs, higher payroll-related costs, including variable incentive compensation resulting from stronger financial performance, and higher other general administrative costs associated with increased levels of business activity in the third quarter of 2012 compared to the third quarter of 2011. The increase was also partially attributable to $343,000 in SG&A expenses in the third quarter of 2012 associated with US Ecology Michigan, which was acquired on May 31, 2012.

Interest expense. Interest expense in the third quarter of 2012 was $231,000, down from $395,000 in the third quarter of 2011, primarily reflecting lower debt levels and lower interest rates in the third quarter of 2012.

Foreign Currency Gain (Loss). We recognized a $1.6 million foreign currency gain in the third quarter of 2012 compared with a $3.7 million foreign currency loss in the third quarter of 2011. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the United States dollar ("USD"), our functional currency. Our Stablex facility is owned by our Canadian subsidiary, whose functional currency is the Canadian dollar ("CAD"). As part of . . .

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