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ECOL > SEC Filings for ECOL > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for US ECOLOGY, INC.

Form 10-Q for US ECOLOGY, INC.


11-Aug-2014

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, Inc. is a leading North American provider of environmental services to commercial and government entities. The Company addresses the complex waste management needs of its customers, offering treatment, disposal and recycling of hazardous and radioactive waste, as well as a wide range of complementary field and industrial services. US Ecology's focus on safety, environmental compliance, and customer service, enables us to effectively meet the needs of our customers and to build long-lasting relationships. The Company's headquarters are in Boise, Idaho, with operations in the United States, Canada and Mexico.

On June 17, 2014, the Company acquired 100% of the outstanding shares of EQ Holdings, Inc. and its wholly-owned subsidiaries (collectively "EQ"). EQ is a fully integrated environmental services company providing waste treatment and disposal, wastewater treatment, remediation, recycling, industrial cleaning and maintenance, transportation, total waste management, technical services, and emergency response services to a variety of industries and customers in North America. EQ contributed $14.6 million of revenue for the 13 days following the acquisition on June 17, 2014. Throughout "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report we have excluded revenue from EQ when calculating Base Business and Event Business revenue and changes in disposal revenue between our customer categories, as we believe that excluding revenue from EQ provides more meaningful comparative information on the Company's results of operations for the three and six months ended June 30, 2014.

We generate revenue from fees charged to treat and dispose of waste at our fixed disposal facilities and from fees charged to perform various field and industrial services to our customers. We also own and manage a dedicated fleet of gondola railcars and arrange for the transportation of waste to our facilities which contributes significant revenue. We also utilize our railcar fleet to transport waste disposed 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 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 treatment and disposal revenues (excluding EQ) by category for the three and six months ended June 30, 2014 and 2013.


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                                                         % of Treatment and Disposal Revenue (1),(2) for the
Customer                                                             Three Months Ended June 30,
Category                      Description                        2014                           2013
Broker              Companies that collect and
                    aggregate waste from their
                    direct customers, generally
                    comprised of Base Business with
                    periodic Event Business for
                    larger projects.                              48%                            50%

Other industry      Electric utilities, chemical
                    manufacturers, steel mill and
                    other industrial customers not
                    included in other categories,
                    comprised of both Base and Event
                    Business.                                     19%                            17%

Private Clean-up    Private sector clean-up project
                    waste, typically Event Business.              17%                            11%

Refinery            Petroleum refinery customers,
                    comprised of both Base and Event
                    Business.                                     9%                             12%

Government          Federal and State government
                    clean-up project waste,
                    comprised of both Base and Event
                    Business.                                     4%                             6%

Rate regulated      Northwest and Rocky Mountain
                    Compact customers paying
                    rate-regulated disposal fees set
                    by the State of Washington,
                    predominantly Base Business.                  3%                             4%



(1) Excludes all transportation service revenue

(2) Excludes all revenue from EQ Holdings, Inc. which was acquired on June 17, 2014

                                                         % of Treatment and Disposal Revenue (1),(2) for the
Customer                                                              Six Months Ended June 30,
Category                      Description                        2014                           2013
Broker              Companies that collect and
                    aggregate waste from their
                    direct customers, generally
                    comprised of Base Business with
                    periodic Event Business for
                    larger projects.                              47%                            51%

Other industry      Electric utilities, chemical
                    manufacturers, steel mill and
                    other industrial customers not
                    included in other categories,
                    comprised of both Base and Event
                    Business.                                     19%                            17%

Private Clean-up    Private sector clean-up project
                    waste, typically Event Business.              19%                            10%

Refinery            Petroleum refinery customers,
                    comprised of both Base and Event
                    Business.                                     8%                             11%

Government          Federal and State government
                    clean-up project waste,
                    comprised of both Base and Event
                    Business.                                     4%                             7%

Rate regulated      Northwest and Rocky Mountain
                    Compact customers paying
                    rate-regulated disposal fees set
                    by the State of Washington,
                    predominantly Base Business.                  3%                             4%



(1) Excludes all transportation service revenue

(2) Excludes all revenue from EQ Holdings, Inc. which was acquired on June 17, 2014

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 six month periods ended June 30, 2014, approximately 38% and 42%, respectively, of our T&D revenue


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

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 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 business is driven by government regulations or enforcement actions, we believe it is less susceptible to general economic conditions. Spending by government agencies may also be reduced due to declining tax revenues resulting from a weak economy or changes in policy. Disbursement of funds appropriated by Congress may also be delayed for various reasons.


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RESULTS OF OPERATIONS



The following table summarizes our results of operations for the three and six
months ended June 30, 2014 and 2013 in dollars and as a percentage of total
revenue.



$s and shares in thousands, except per       Three Months Ended June 30,            Six Months Ended June 30,
share amounts                              2014       %       2013       %       2014        %       2013       %

Revenue                                  $ 66,024   100.0 % $ 45,777   100.0 % $ 119,378   100.0 % $ 88,676   100.0 %
Direct operating costs                     31,400    47.6 %   19,759    43.2 %    54,021    45.3 %   40,843    46.1 %
Transportation costs                        9,377    14.2 %    7,090    15.5 %    17,990    15.0 %   13,523    15.2 %

Gross profit                               25,247    38.2 %   18,928    41.3 %    47,367    39.7 %   34,310    38.7 %

Selling, general and administrative
expenses                                   14,225    21.5 %    6,519    14.2 %    20,861    17.5 %   12,245    13.8 %
Operating income                           11,022    16.7 %   12,409    27.1 %    26,506    22.2 %   22,065    24.9 %

Other income (expense):
Interest income                                39     0.1 %        2     0.0 %        83     0.1 %        7     0.0 %
Interest expense                             (858 )  -1.3 %     (222 )  -0.5 %      (944 )  -0.8 %     (443 )  -0.5 %
Foreign currency gain (loss)                  743     1.1 %   (1,193 )  -2.6 %      (197 )  -0.2 %   (2,131 )  -2.4 %
Other                                         166     0.3 %       94     0.2 %       252     0.2 %      191     0.2 %
Total other income (expense)                   90     0.2 %   (1,319 )  -2.9 %      (806 )  -0.7 %   (2,376 )  -2.7 %

Income before income taxes                 11,112    16.9 %   11,090    24.2 %    25,700    21.5 %   19,689    22.2 %
Income taxes                                4,247     6.5 %    3,880     8.4 %     9,474     7.9 %    7,073     8.0 %
Net income                               $  6,865    10.4 % $  7,210    15.8 % $  16,226    13.6 % $ 12,616    14.2 %

Earnings per share:
Basic                                    $   0.32           $   0.39           $    0.75           $   0.69
Dilutive                                 $   0.32           $   0.39           $    0.75           $   0.68

Shares used in earnings per share
calculation:
Basic                                      21,528             18,401              21,503             18,362
Dilutive                                   21,667             18,483              21,632             18,446

Dividends paid per share                 $   0.18           $   0.18           $    0.36           $   0.18

Other Financial Data:
Adjusted EBITDA (1)                      $ 17,104           $ 16,927           $  37,379           $ 30,841



(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.


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The following reconciliation itemizes the differences between reported Net income and Adjusted EBITDA for the three and six months ended June 30, 2014 and 2013:

                                    Three Months Ended June 30,         Six Months Ended June 30,
$s in thousands                        2014              2013             2014             2013

Net income                        $        6,865    $        7,210    $      16,226    $      12,616
Income tax expense                         4,247             3,880            9,474            7,073
Interest expense                             858               222              944              443
Interest income                              (39 )              (2 )            (83 )             (7 )
Foreign currency (gain) loss                (743 )           1,193              197            2,131
Other income                                (166 )             (94 )           (252 )           (191 )
Depreciation and amortization
of plant and equipment                     4,579             3,632            8,417            7,071
Amortization of intangibles                  862               362            1,215              729
Stock-based compensation                     255               218              525              363
Accretion and non-cash
adjustment of closure &
post-closure liabilities                     386               306              716              613
Adjusted EBITDA                   $       17,104    $       16,927    $      37,379    $      30,841

THREE MONTHS ENDED JUNE 30, 2014 COMPARED TO THREE MONTHS ENDED JUNE 30, 2013

Revenue. Revenue increased 44% to $66.0 million for the second quarter of 2014, up from $45.8 million for the second quarter of 2013. EQ contributed $14.6 million of revenue for the 13 days following the acquisition on June 17, 2014. T&D revenue (excluding EQ) increased 13% in the second quarter of 2014 compared to the second quarter of 2013, primarily as a result of a 26% increase in project-based Event Business. Transportation service revenue (excluding EQ) increased 12% compared to the second quarter of 2013, reflecting more Event Business projects utilizing the Company's transportation and logistics services.

During the second quarter of 2014 we disposed of or processed 289,000 tons of waste (excluding EQ), up 14% from 253,000 tons disposed or processed in the second quarter of 2013. Our average selling price for treatment and disposal services (excluding transportation and EQ) during the second quarter of 2014 was unchanged compared to the same quarter last year.

During the second quarter of 2014, T&D revenue from recurring Base Business (excluding EQ) increased 4% compared to the second quarter of 2013 and comprised 62% of T&D revenue. This compared to 66% of T&D revenue in the second quarter of 2013. As discussed further below, the increase in Base Business T&D revenue compared to the prior year primarily reflects higher T&D revenue from the "other industry", broker and government customer categories, partially offset by lower T&D revenue from our refinery customer category.

Event Business revenue (excluding EQ) in the second quarter of 2014 increased 26% as compared to the same quarter in 2013 and was 38% of T&D revenue for the second quarter of 2014. This compared to 34% of T&D revenue in the second quarter of 2013. 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, broker and "other industry" customer categories, partially offset by lower T&D revenue from our government and refinery customer categories.

The following table summarizes combined Base Business and Event Business revenue growth (excluding EQ) by customer category for the second quarter of 2014 compared to the second quarter of 2013.

                   Treatment and Disposal Revenue Growth
                   Three Months Ended June 30, 2014 vs.
                     Three Months Ended June 30, 2013

Private clean-up                    69%
Other industry                      27%
Broker                              7%
Rate regulated                      -3%
Refinery                           -18%
Government                         -28%


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T&D revenue (excluding EQ) from private clean-up projects increased 69% in the second quarter of 2014 compared to the second quarter of 2013. This increase primarily reflects revenue from an east coast clean-up project and a nuclear fuel fabrication facility decommissioning project.

Our other industry revenue (excluding EQ) category increased 27% in the second quarter of 2014 compared to the second quarter of 2013 as a result of increased shipments from this broadly diverse industrial customer category.

Our broker business (excluding EQ) increased 7% in the second quarter of 2014 compared to the second quarter of 2013. This increase was the result of higher 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.

T&D revenue (excluding EQ) from our refinery customers decreased 18% in the second quarter of 2014 compared to the second quarter of 2013. This decrease primarily reflects lower landfill disposal volumes.

Government clean-up business revenue (excluding EQ) decreased 28% in the second quarter of 2014 compared to the second quarter of 2013, primarily due to a completed military base clean-up that was not replaced in the second quarter of 2014 and reduced shipments from the U.S. Army Corps of Engineers ("USACE"). Excluding transportation service revenue, T&D revenue with the USACE decreased approximately 26% in the second quarter of 2014 compared with the second quarter of 2013. 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 $2.5 million, or 4%, of total revenue in the second quarter of 2014 compared to $1.4 million, or 3%, of total revenue in the second quarter of 2013. No USACE projects served by the Company were cancelled or, to our knowledge, awarded to competitors during the quarter.

Gross Profit. Gross profit for the second quarter of 2014 increased 33% to $25.2 million, up from $18.9 million in the second quarter of 2013. EQ contributed $4.0 million of gross profit for the 13 days following the acquisition on June 17, 2014. Excluding EQ, gross profit for the second quarter of 2014 increased 12% compared to the second quarter of 2013. This increase primarily reflects higher volumes in the second quarter of 2014 compared to the second quarter of 2013. Excluding EQ, total gross margin was 41% for both the second quarter of 2014 and 2013. Excluding EQ, T&D gross margin was 49% for both the second quarter of 2014 and 2013.

Selling, General and Administrative ("SG&A"). SG&A expenses increased to $14.2 million, or 22% of total revenue, in the second quarter of 2014 compared with $6.5 million, or 14% of total revenue, in the second quarter of 2013. EQ contributed $2.4 million of SG&A expenses for the 13 days following the acquisition on June 17, 2014. Excluding EQ, SG&A expenses increased to $11.8 million, or 23% of total revenue, in the second quarter of 2014 compared with $6.5 million, or 14% of total revenue, in the second quarter of 2013. SG&A expenses for the second quarter of 2014 include $5.1 million of business development expenses related to the acquisition of EQ on June 17, 2014. The remaining increase primarily reflects higher labor and variable compensation costs.

Interest expense. Interest expense in the second quarter of 2014 was $858,000, up from $222,000 in the second quarter of 2013, primarily reflecting interest expense on borrowings under the Company's new $415.0 million term loan used to partially finance the acquisition of EQ on June 17, 2014.

Foreign Currency Gain (Loss). We recognized $743,000 in non-cash foreign currency gains in the second quarter of 2014 compared with $1.2 million in non-cash foreign currency losses in the second quarter of 2013. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the U.S. dollar ("USD"), our functional currency. Our Stablex facility is owned by our Canadian subsidiary, whose functional currency is the Canadian dollar ("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 June 30, 2014, we had $31.1 million of intercompany loans subject to currency revaluation.

Other income. Other income includes non-operating business activities and unusual revenue and expenses. Other income in the second quarter of 2014 was $166,000, compared with $94,000 in the second quarter of 2013.

Income tax expense. Our effective tax rate for the second quarter of 2014 was 38.2% compared to 35.0% in the second quarter of 2013. The increase reflects non-deductible business development expenses associated with the acquisition of EQ, partially offset by a higher proportion of earnings from our Canadian . . .

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