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ECOL > SEC Filings for ECOL > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for US ECOLOGY, INC.

Form 10-K for US ECOLOGY, INC.


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

US Ecology is a hazardous, PCBs, 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 US Ecology Michigan, Inc. ("USEM"), formerly Dynecol, Inc., a chemical and industrial byproducts treatment and reuse facility located in Detroit, Michigan, for a total purchase price of $10.8 million, including net working capital


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adjustments. Revenue from USEM after the date of acquisition included in US Ecology's consolidated statements of operations was $12.3 million and $6.7 million for the years ended December 31, 2013 and 2012, respectively.

We generate revenue from fees charged to treat and dispose of waste at our six fixed facilities located near Beatty, Nevada; Richland, Washington; Robstown, Texas; Grand View, Idaho; Detroit, Michigan and Blainville, Québec, Canada. We own and manage a dedicated fleet of gondola railcars and arrange for the transportation of waste to our facilities. Transportation services have contributed significant revenue since acquisition of our 234 railcar fleet. We also utilize our railcar fleet to transport waste 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.

We divide our customers into categories to better evaluate period-to-period changes in our treatment and disposal ("T&D") revenue based on service mix and type of business (recurring customer "Base Business" or waste clean-up project "Event Business"). Each of these categories is described in the table below, along with information on the percentage of total T&D revenues by category, for the years ended December 31, 2013 and 2012.

                                                                          % of T&D
                                                                       Revenue(1)(2)
                                                                       for the Years
                                                                           Ended
                                                                        December 31,
Customer Category                     Description                      2013      2012
Broker              Companies that collect and aggregate waste from    48%       51%
                    their direct customers, generally comprised of
                    Base Business with periodic Event Business for
                    larger projects.
Other industry      Electric utilities, chemical manufacturers,        16%       18%
                    steel mill and other industrial customers not
                    included in other categories, comprised of both
                    recurring Base and Event Business.
Private Clean-up    Private sector clean-up project waste,             15%        6%
                    typically Event Business.
Refinery            Petroleum refinery customers, comprised of both    11%        9%
                    Base and Event Business.
Government          Federal and State government waste, comprised       6%       12%
                    of both Base and Event Business.
Rate regulated      Northwest and Rocky Mountain Compact customers      4%        4%
                    paying rate-regulated disposal fees set by the
                    State of Washington, predominantly Base
                    Business.


--------------------------------------------------------------------------------
   º (1)


º Excludes all transportation service revenue

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

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 year ended December 31, 2013, approximately 40% of our T&D revenue, excluding USEM, 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 controversy, litigation, weather, commercial real estate, closed military bases and other redevelopment project timing, government appropriation and funding cycles and other factors.


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The types and amounts of waste received from Base Business also vary from quarter to quarter. This variability can cause significant 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 hazardous and radioactive 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.

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 234 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 bundled service strategy further drive 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.

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 also 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 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.

Overall Performance

On a consolidated basis, our financial performance for the year ended December 31, 2013 ("2013") improved compared to the years ended December 31, 2012 ("2012") and December 31, 2011 ("2011").


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A portion of our disposal revenue is derived from government Event Business clean-up projects which are primarily driven by federal, state/provincial and (to a lesser extent) local government appropriations. Government Event Business projects include federal and state Superfund projects which, like other remediation work, depend on project-specific funding.

We believe that private sector remediation projects are driven by economic conditions, regulatory agency enforcement actions and settlements including regulatory enforcement actions, judicial proceedings, availability of private funds, post-remediation real estate redevelopment plans and other factors. During economic downturns, management believes that privately-funded remediation projects that are not driven by enforcement actions are more likely to be delayed than when the economy is strong. The economic condition of a specific industry (e.g. refining or steel production) is also relevant, as is the financial condition of specific customers. We serve multiple private clean-up efforts on an ongoing basis. The revenue and gross margin for individual projects vary considerably depending on the amount of waste shipped to our disposal sites, the rate at which the waste is received and unit pricing.

During 2013, Base Business revenue, excluding USEM, increased 2% compared to 2012. Base Business revenue was approximately 60% of total 2013 T&D revenue, down from 65% in 2012. Our business is highly competitive and no assurance can be given that we will maintain these revenue levels or increase our market share.

2013 to 2011 year-to-year comparisons are affected by multiple significant events including, but not limited to:

2013 Events

Unrealized Foreign Currency Loss: In conjunction with our acquisition of Stablex in 2010, we established intercompany loans between Stablex and US Ecology as part of our tax and treasury management strategy. These intercompany loans are payable using Canadian dollars ("CAD") and are subject to mark-to-market adjustments with movements in the CAD relative to the U.S. dollar ("USD"). At December 31, 2013 we had $35.7 million of intercompany loans outstanding between Stablex and US Ecology. During 2013 the CAD weakened as compared to the USD resulting in a $2.8 million non-cash foreign currency translation loss recognized in the Company's Consolidated Statement of Operations related to the intercompany loans.

Closure Post Closure Trust Fund Reimbursement: In 2013, the Company recorded a $1.3 million refund from the State of Nevada closure and post-closure trust fund, which is maintained by the State and funded by the Company to cover closure and post-closure obligations at the Beatty, Nevada facility. Any excess in the trust fund over future estimated costs to complete closure and post-closure obligations is returned to the Company and included as Revenue in the Consolidated Statement of Operations.

Full year of USEM Operations: 2013 includes a full year of operating results for USEM, which was acquired on May 31, 2012. Revenue and operating loss from USEM included in the Company's consolidated statements of operations for the year ended December 31, 2013 were $12.3 million and $72,000, respectively.

Public Common Stock Offering: In December 2013, we sold and issued 2,990,000 shares of our common stock, including 390,000 shares pursuant to the underwriters' option to purchase additional shares, at a price of $34.00 per share. We received net proceeds of $96.4 million after deducting underwriting discounts, commissions and offering expenses. $30.0 million of the net proceeds were used to repay amounts outstanding under the Credit Agreement with the remainder available for general corporate purposes, including potential future acquisitions.


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2012 Events

Acquisition of Dynecol, Inc.: On May 31, 2012, the Company acquired 100% of the outstanding shares of Dynecol, Inc., a chemical and industrial byproducts treatment and reuse facility located in Detroit, Michigan, for a total purchase price of $10.8 million. The acquisition of Dynecol, Inc. (subsequently renamed US Ecology Michigan, Inc. ("USEM")) affects the comparability of 2012 with previous years as follows:

º •
º Revenue and operating loss from USEM included in the Company's consolidated statements of operations for the seven months of ownership in 2012 were $6.7 million and $161,000, respectively.

º •
º We incurred $348,000 of business development expense in connection with the USEM acquisition primarily for due diligence and business integration purposes.

º •
º We recorded $1.9 million of intangible assets and $1.3 million of goodwill on the Consolidated Balance Sheet as a result of the acquisition. Finite-lived intangibles will be amortized over their estimated useful life ranging from 1 to 15 years. Goodwill and indefinite-lived intangibles are tested for impairment at least annually.

Unrealized Foreign Currency Loss: In conjunction with our acquisition of Stablex in 2010, we established intercompany loans between Stablex and US Ecology as part of our tax and treasury management strategy. These intercompany loans are payable using CAD and are subject to mark-to-market adjustments with movements in the CAD relative to the USD. At December 31, 2012 these intercompany loans totaled $46.7 million. During 2012 the CAD strengthened relative to the USD resulting in a $1.2 million non-cash foreign currency translation gain in the Company's Consolidated Statement of Operations.

Closure Post Closure Trust Fund Reimbursement: In 2012, the Company recorded a $638,000 refund from the State of Nevada closure and post-closure trust fund, which is maintained by the State and funded by the Company to cover closure and post-closure obligations at the Beatty, Nevada facility. Any excess in the trust fund over the estimated future costs to complete closure and post-closure obligations is returned to the Company and included as Revenue in the Consolidated Statement of Operations.

2011 Events

Unrealized Foreign Currency Loss: In conjunction with our acquisition of Stablex in 2010, we established intercompany loans between Stablex and US Ecology as part of our tax and treasury management strategy. These intercompany loans are payable using CAD and are subject to mark-to-market adjustments with movements in the CAD relative to the USD. At December 31, 2011 these intercompany loans totaled $51.7 million. During 2011, the CAD weakened relative to the USD resulting in a $1.3 million non-cash foreign currency translation loss in the Company's Consolidated Statement of Operations.

Closure Post Closure Trust Fund Reimbursement: In 2011, the Company recorded a $1.3 million refund from the State of Nevada closure and post-closure trust fund, which is maintained by the State of Nevada and funded by the Company to cover closure and post-closure obligations at the Beatty, Nevada facility. Any excess in the trust fund over the estimated future costs to complete closure and post-closure obligations is returned to the Company. The refund is included as Revenue in the Consolidated Statement of Operations.


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Results of Operations

Our operating results and percentage of revenues for the years ended December 31, 2013, 2012 and 2011 were as follows:

$s in thousands                    2013         %        2012         %        2011         %
Revenue                          $ 201,126     100.0 % $ 169,138     100.0 % $ 154,917     100.0 %
Direct operating costs              86,238      42.9 %    79,177      46.8 %    73,758      47.6 %
Transportation costs                35,902      17.9 %    23,664      14.0 %    27,292      17.6 %


Gross profit                        78,986      39.3 %    66,297      39.2 %    53,867      34.8 %
Selling, general and
administrative expenses             26,055      13.0 %    25,659      15.2 %    21,502      13.9 %


Operating income                    52,931      26.3 %    40,638      24.0 %    32,365      20.9 %
Other income (expense)
Interest income                         19                    17                    26
Interest expense                      (828 )    -0.4 %      (878 )    -0.5 %    (1,604 )    -1.0 %
Foreign currency gain (loss)        (2,327 )    -1.2 %     1,213       0.7 %    (1,321 )    -0.9 %
Other                                  352       0.2 %       728       0.4 %       341       0.2 %


Total other income (expense)        (2,784 )    -1.4 %     1,080       0.6 %    (2,558 )    -1.7 %
Income before income tax            50,147      24.9 %    41,718      24.7 %    29,807      19.2 %
Income tax expense                  17,996       8.9 %    16,059       9.5 %    11,437       7.4 %


Net income                       $  32,151      16.0 % $  25,659      15.2 % $  18,370      11.9 %

Segments

We operate within two segments, Operating Disposal Facilities and Non-Operating Disposal Facilities, which are combined with Corporate to arrive at consolidated income. Only the Operating Disposal Facilities segment reports significant revenue and profits. Non-Operating Disposal Facilities generate virtually no revenue and no profit. Corporate generates no revenue and provides administrative, management and support services to the other segments. Income taxes are assigned to Corporate. 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. Detailed financial information for our reportable segments can be found in Note 18 to the Consolidated Financial Statements under Item 8-Financial Statements and Supplementary Data to this Form 10-K.

2013 Compared to 2012

Revenue. Revenue increased 19% to $201.1 million in 2013, up from $169.1 million in 2012. This increase reflects a 13% increase in T&D revenue and a 54% increase in transportation service revenue in 2013 compared to 2012. The increase in transportation service revenue reflects more Event Business projects utilizing the Company's transportation and logistics services.

During 2013, we disposed of or processed 1.1 million tons of waste, up 2% from 1.0 million tons disposed or processed in 2012. Our average selling price for treatment and disposal services (excluding transportation) in 2013 was 11% higher than our average selling price in 2012, reflecting a more favorable service mix in 2013.

USEM, acquired May 31, 2012, contributed $12.3 million of total revenue in 2013 compared with $6.7 million of total revenue during the seven months we owned the operation in 2012. Revenue from USEM is excluded from percentages of Base and Event Business and customer category information in the following paragraphs.


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During 2013, the Company recorded revenue of $1.3 million related to refunds from the State of Nevada closure and post-closure trust fund maintained by the State to cover closure and post-closure obligations at the Beatty, Nevada facility. Any excess in the trust fund over the estimated costs is refunded to the Company. In 2012, the Company received $638,000 in refunds from the State of Nevada post-closure trust fund.

During 2013, T&D revenue from recurring Base Business customers increased 2% compared to 2012 and comprised 60% of T&D revenue. This compared to 65% of T&D revenue in 2012. As discussed further below, the slight increase in Base Business T&D revenue compared to the prior year primarily reflects higher T&D revenue from our broker Base Business customer category, partially offset by lower T&D revenue from our "other industry" and refinery Base Business customer categories.

Event Business revenue in 2013 increased 27% compared to 2012 and was 40% of T&D revenue for 2013. This compared to 35% of T&D revenue in 2012. As discussed further below, the increase in Event Business T&D revenue compared to the prior year primarily reflects higher T&D revenue from our private clean-up and refinery Event Business customer categories, partially offset by lower T&D revenue from our government Event Business customer category.

The following table summarizes combined Base Business and Event Business revenue growth by customer category for 2013 as compared to 2012.

                                        T&D Revenue Growth
                                          2013 vs. 2012
                       Private                 188%
                       Refinery                33%
                       Broker                   5%
                       Rate regulated           3%
                       Other industry          -3%
                       Government              -45%

T&D revenue from private clean-up projects increased 188% in 2013 compared to 2012. This increase primarily reflects revenue from a nuclear fuel fabrication facility decommissioning project and an East Coast clean-up project.

T&D revenue from our refinery customers increased 33% in 2013 compared to 2012. This increase primarily reflects T&D revenue on thermal recycling projects sourced directly from refinery customers. The increase is also partially attributable to a refinery clean-up project in 2013.

Our broker business increased 5% in 2013 compared to 2012. This increase was the result of shipments across the broad range of government and industry waste generators directly served by multiple broker customers, partially offset by lower volumes of brokered thermal recycling projects.

Rate-regulated business at our Richland, Washington LLRW disposal facility increased 3% in 2013 compared to 2012. Our Richland facility operates under a State-approved annual revenue requirement. The increase reflects the timing of revenue recognition for the rate-regulated portion of the business.

Our other industry revenue category decreased 3% in 2013 compared to 2012 as a result of reduced shipments from this broadly diverse industrial customer category.

Government clean-up business revenue decreased 45% in 2013 compared to 2012 due to reduced shipments from the USACE and a military base clean-up project in 2012 that was not replaced in 2013. T&D revenue from the USACE decreased approximately 30% in 2013 compared with 2012. This decrease was due to project-specific timing at multiple USACE clean-up sites and federal spending reductions. Total revenue, including transportation service revenue, under our USACE contract was $10.9 million, or 5%, of total revenue in 2013 compared to $10.3 million, or 6%, of total revenue in 2012. No USACE projects served by the Company were cancelled or, to our knowledge, awarded to competitors during 2013.


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Gross Profit. In 2013, gross profit increased 19% to $79.0 million, up from $66.3 million in 2012. This increase primarily reflects a higher average selling price in 2013 compared to 2012. Total gross margin was 39% in both 2013 and 2012. T&D gross margin was 48% in 2013, up from 46% in 2012, reflecting a more favorable service mix in 2013. The increase was also partially attributable to lower costs for chemical reagents used to treat waste prior to disposal in 2013 compared to 2012.

Selling, General and Administrative ("SG&A"). SG&A expenses increased to $26.1 million, or 13% of total revenue, in 2013, compared with $25.7 million, or 15% of total revenue, in 2012. The dollar increase primarily reflects a full twelve months of SG&A expenses related to USEM operations in 2013 and higher labor expenses, partially offset by lower variable incentive compensation, business development expenses and severance.

Interest expense. Interest expense for 2013 was $828,000, down from $878,000 for 2012, primarily reflecting lower average debt levels in 2013.

Foreign Currency Gain (Loss). We recognized a $2.3 million non-cash foreign currency loss in 2013 compared with a $1.2 million non-cash foreign currency gain in 2012. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the USD, our functional currency. Our Stablex facility is owned by our Canadian subsidiary, whose functional currency is the CAD. Also, as part of our treasury management strategy we established intercompany loans between our parent company, US Ecology, and Stablex. These intercompany loans are payable by Stablex 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 December 31, 2013, we had $35.7 million of intercompany loans subject to currency revaluation.

Other income. Other income includes non-operating business activities and unusual revenue and expenses. Other income for 2013 was $352,000, compared with $728,000 for 2012. The decrease primarily reflects $474,000 of other income recorded in connection with the sale of an excess water right at our Grand View, Idaho property during 2012.

Income tax expense. Our effective income tax rate for 2013 was 35.9% compared to 38.5% in 2012. This decrease reflects a higher proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate, partially offset by higher U.S. state income taxes. As of December 31, 2013, we had approximately $122.1 million in state net operating loss carry forwards ("NOLs") for which we maintain nearly a full valuation allowance. These state NOLs are located in states where we currently do little or no business or where we do not expect to generate future taxable income. We consider it unlikely that we will utilize these NOLs in the future. As of December 31, 2013 we had unrecognized tax benefits of $438,000 that, if recognized, would favorably . . .

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