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EX-31.1 - EX-31.1 - US ECOLOGY, INC.a15-17807_1ex31d1.htm
EX-10.1 - EX-10.1 - US ECOLOGY, INC.a15-17807_1ex10d1.htm
EX-31.2 - EX-31.2 - US ECOLOGY, INC.a15-17807_1ex31d2.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

or

 

 

o

TRANSITION REPORT PURSUANT TO Section 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to           .

 

Commission file number: 0000-11688

 

 

US ECOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-3889638

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer Identification No.)

 

 

 

251 E. Front St., Suite 400

 

 

Boise, Idaho

 

83702

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (208) 331-8400

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

 

Accelerated filer  o

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o  No  x

 

At October 30, 2015, there were 21,735,305 shares of the registrant’s Common Stock outstanding.

 

 

 



Table of Contents

 

US ECOLOGY, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

Item

 

 

 

Page

 

 

 

 

 

 

 

PART I — FINANCIAL INFORMATION

 

3

 

 

 

 

 

1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

23

 

 

 

 

 

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

37

4.

 

Controls and Procedures

 

38

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

39

 

 

 

 

 

 

 

Cautionary Statement

 

39

1.

 

Legal Proceedings

 

40

1A.

 

Risk Factors

 

40

2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

3.

 

Defaults Upon Senior Securities

 

40

4.

 

Mine Safety Disclosures

 

40

5.

 

Other Information

 

40

6.

 

Exhibits

 

41

 

 

 

 

 

 

 

SIGNATURE

 

42

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.                      FINANCIAL STATEMENTS

 

US ECOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value amount)

 

 

 

September 30, 2015

 

December 31, 2014
As Adjusted

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

9,350

 

$

22,971

 

Receivables, net

 

104,283

 

135,261

 

Prepaid expenses and other current assets

 

10,241

 

11,984

 

Income taxes receivable

 

332

 

6,912

 

Deferred income taxes

 

2,599

 

2,109

 

Assets held for sale

 

78,775

 

 

Total current assets

 

205,580

 

179,237

 

 

 

 

 

 

 

Property and equipment, net

 

204,387

 

227,684

 

Restricted cash and investments

 

5,773

 

5,729

 

Intangible assets, net

 

243,187

 

278,667

 

Goodwill

 

194,825

 

217,609

 

Other assets

 

9,624

 

11,308

 

Deferred income taxes

 

 

85

 

Total assets

 

$

863,376

 

$

920,319

 

 

 

 

 

 

 

Liabilities And Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

16,745

 

$

24,513

 

Deferred revenue

 

7,212

 

13,190

 

Accrued liabilities

 

28,119

 

36,251

 

Accrued salaries and benefits

 

10,624

 

13,322

 

Income taxes payable

 

1,730

 

4,124

 

Current portion of closure and post-closure obligations

 

4,402

 

5,359

 

Current portion of long-term debt

 

3,505

 

3,828

 

Liabilities associated with assets held for sale

 

20,240

 

 

Total current liabilities

 

92,577

 

100,587

 

 

 

 

 

 

 

Long-term closure and post-closure obligations

 

67,061

 

67,511

 

Long-term debt

 

356,410

 

390,825

 

Other long-term liabilities

 

7,351

 

4,336

 

Deferred income taxes

 

87,771

 

105,723

 

Total liabilities

 

611,170

 

668,982

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Common stock $0.01 par value, 50,000 authorized; 21,735 and 21,632 shares issued, respectively

 

217

 

216

 

Additional paid-in capital

 

168,978

 

165,524

 

Retained earnings

 

99,509

 

93,301

 

Treasury stock, at cost, 1 shares

 

(60

)

(18

)

Accumulated other comprehensive loss

 

(16,438

)

(7,686

)

Total stockholders’ equity

 

252,206

 

251,337

 

Total liabilities and stockholders’ equity

 

$

863,376

 

$

920,319

 

 

The accompanying notes are an integral part of these financial statements.

 

3



Table of Contents

 

US ECOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenue

 

$

148,414

 

$

170,864

 

$

424,797

 

$

290,237

 

Direct operating costs

 

102,474

 

118,556

 

297,543

 

190,664

 

Gross profit

 

45,940

 

52,308

 

127,254

 

99,573

 

Selling, general and administrative expenses

 

23,507

 

25,508

 

71,075

 

46,271

 

Impairment charges

 

 

 

6,700

 

 

Operating income

 

22,433

 

26,800

 

49,479

 

53,302

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

17

 

11

 

64

 

94

 

Interest expense

 

(5,081

)

(4,543

)

(16,208

)

(5,488

)

Foreign currency loss

 

(994

)

(830

)

(1,769

)

(1,027

)

Other

 

387

 

301

 

1,156

 

557

 

Total other expense

 

(5,671

)

(5,061

)

(16,757

)

(5,864

)

Income before income taxes

 

16,762

 

21,739

 

32,722

 

47,438

 

Income tax expense

 

6,858

 

8,406

 

14,815

 

17,880

 

Net income

 

$

9,904

 

$

13,333

 

$

17,907

 

$

29,558

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.46

 

$

0.62

 

$

0.83

 

$

1.37

 

Diluted

 

$

0.46

 

$

0.61

 

$

0.82

 

$

1.37

 

 

 

 

 

 

 

 

 

 

 

Shares used in earnings per share calculation:

 

 

 

 

 

 

 

 

 

Basic

 

21,655

 

21,570

 

21,619

 

21,526

 

Diluted

 

21,749

 

21,680

 

21,723

 

21,649

 

 

 

 

 

 

 

 

 

 

 

Dividends paid per share

 

$

0.18

 

$

0.18

 

$

0.54

 

$

0.54

 

 

The accompanying notes are an integral part of these financial statements.

 

4



Table of Contents

 

US ECOLOGY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

9,904

 

$

13,333

 

$

17,907

 

$

29,558

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

(3,590

)

(2,156

)

(6,761

)

(2,078

)

Net changes in interest rate hedge, net of taxes of ($981), $0, ($1,072) and $0, respectively

 

(1,821

)

 

(1,991

)

 

Comprehensive income, net of tax

 

$

4,493

 

$

11,177

 

$

9,155

 

$

27,480

 

 

The accompanying notes are an integral part of these financial statements.

 

5



Table of Contents

 

US ECOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

17,907

 

$

29,558

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Impairment charges

 

6,700

 

 

Depreciation and amortization of property and equipment

 

21,726

 

16,730

 

Amortization of intangible assets

 

9,558

 

5,233

 

Accretion of closure and post-closure obligations

 

3,208

 

1,675

 

Unrealized foreign currency loss

 

2,740

 

1,453

 

Deferred income taxes

 

(4,015

)

2,407

 

Share-based compensation expense

 

1,736

 

869

 

Unrecognized tax benefits

 

 

(424

)

Net loss on disposal of property and equipment

 

935

 

86

 

Amortization of debt discount

 

111

 

37

 

Changes in assets and liabilities (net of effect of business acquisition):

 

 

 

 

 

Receivables

 

7,221

 

(20,938

)

Income taxes receivable

 

6,560

 

(17

)

Other assets

 

1,785

 

(3,219

)

Accounts payable and accrued liabilities

 

(5,256

)

2,449

 

Deferred revenue

 

(5,371

)

391

 

Accrued salaries and benefits

 

(1,877

)

(1,949

)

Income taxes payable

 

(2,317

)

(2,281

)

Closure and post-closure obligations

 

(4,386

)

(879

)

Net cash provided by operating activities

 

56,965

 

31,181

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(25,693

)

(17,910

)

Purchases of restricted cash and investments

 

(848

)

(40

)

Proceeds from sale of restricted cash and investments

 

804

 

662

 

Proceeds from sale of property and equipment

 

404

 

120

 

Business acquisition (net of cash acquired)

 

 

(465,895

)

Net cash used in investing activities

 

(25,333

)

(483,063

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on long-term debt

 

(34,848

)

(1,038

)

Dividends paid

 

(11,700

)

(11,640

)

Proceeds from revolving credity facility

 

9,379

 

 

Payments on revolving credit facility

 

(9,379

)

 

Proceeds from exercise of stock options

 

1,664

 

1,445

 

Proceeds from issuance of long-term debt

 

 

413,962

 

Deferred financing costs paid

 

 

(14,001

)

Other

 

7

 

204

 

Net cash (used in) provided by financing activities

 

(44,877

)

388,932

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash

 

(376

)

(69

)

Decrease in cash and cash equivalents

 

(13,621

)

(63,019

)

Cash and cash equivalents at beginning of period

 

22,971

 

73,940

 

Cash and cash equivalents at end of period

 

$

9,350

 

$

10,921

 

 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

Income taxes paid, net of receipts

 

$

18,723

 

$

17,494

 

Interest paid

 

$

14,406

 

$

4,145

 

Non-cash investing and financing activities:

 

 

 

 

 

Closure and post-closure retirement asset

 

$

 

$

2,863

 

Capital expenditures in accounts payable

 

$

3,420

 

$

2,378

 

Restricted stock issued from treasury shares

 

$

292

 

$

546

 

 

The accompanying notes are an integral part of these financial statements.

 

6



Table of Contents

 

US ECOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.                    GENERAL

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements include the results of operations, financial position and cash flows of US Ecology, Inc. and its wholly-owned subsidiaries. All significant intercompany balances have been eliminated. Throughout these financial statements words such as “we,” “us,” “our,” “US Ecology” and the “Company” refer to US Ecology, Inc. and its subsidiaries.

 

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly, in all material respects, the results of the Company for the periods presented. These consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted pursuant to the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. The results for the three and nine months ended September 30, 2015 are not necessarily indicative of results to be expected for the entire fiscal year. In these consolidated financial statements, certain amounts in prior periods’ consolidated financial statements have been reclassified to conform with the current period presentation.

 

The Company’s Consolidated Balance Sheet as of December 31, 2014 has been derived from the Company’s audited Consolidated Balance Sheet as of that date and has been revised for purchase price measurement period adjustments related to the acquisition of EQ as disclosed in Note 2. Additionally, on August 4, 2015, we entered into a definitive agreement to sell our Allstate Power Vac, Inc. (“Allstate”) subsidiary to a private investor group. We completed the sale of Allstate on November 1, 2015. All September 30, 2015 carrying amounts of assets and liabilities of Allstate have been classified as held for sale in our Consolidated Balance Sheets as disclosed in Note 3.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements. As it relates to estimates and assumptions in amortization rates and environmental obligations, significant engineering, operations and accounting judgments are required. We review these estimates and assumptions no less than annually. In many circumstances, the ultimate outcome of these estimates and assumptions will not be known for decades into the future. Actual results could differ materially from these estimates and assumptions due to changes in applicable regulations, changes in future operational plans and inherent imprecision associated with estimating environmental impacts far into the future.

 

Held for Sale

 

We report a business as held for sale when management has approved or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is probable and anticipated to occur during the ensuing year and certain other specified criteria are met. A business classified as held for sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Depreciation and amortization expense are not recorded on long-lived assets of a business classified as held for sale. Assets and liabilities related to a business classified as held for sale are segregated in the September 30, 2015 unaudited Consolidated Balance Sheets and major classes are separately disclosed in the notes to the unaudited consolidated financial statements commencing in the period in which the business is classified as held for sale.

 

Recently Issued Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03 Simplifying the Presentation of Debt Issuance Costs. This ASU requires an entity to present debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. The guidance is effective for annual and interim reporting periods beginning after December 15, 2015. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

 

7



Table of Contents

 

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard permits the use of either the retrospective or cumulative effect transition method. The ASU also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. On July 9, 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted but not before annual periods beginning after December 15, 2016. We are currently assessing the impact the adoption of ASU 2014-09 may have on our consolidated financial statements.

 

NOTE 2.                    BUSINESS COMBINATION

 

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. The total purchase price was $460.9 million, net of cash acquired, and was funded through a combination of cash on hand and borrowings under a new $415.0 million term loan.

 

As of June 30, 2015, the Company finalized the purchase accounting for the acquisition of EQ. The following table summarizes the consideration paid for EQ and the fair value estimates of assets acquired and liabilities assumed recognized at the acquisition date, with purchase price allocation adjustments since the preliminary purchase price allocation as previously disclosed as of December 31, 2014:

 

 

 

Purchase Price Allocation

 

$s in thousands

 

As Reported in
Form 10-K

 

Adjustments

 

As Retrospectively
Adjusted

 

Current assets

 

$

111,982

 

$

27

 

$

112,009

 

Property and equipment

 

101,543

 

 

101,543

 

Identifiable intangible assets

 

252,874

 

 

252,874

 

Current liabilities

 

(57,585

)

(727

)

(58,312

)

Other liabilities

 

(139,331

)

263

 

(139,068

)

Total identifiable net assets

 

269,483

 

(437

)

269,046

 

Goodwill

 

197,163

 

437

 

197,600

 

Total purchase price

 

$

466,646

 

$

 

$

466,646

 

 

Purchase price allocation adjustments related primarily to the receipt of additional information regarding the fair values of income taxes payable and receivable, deferred income taxes and residual goodwill.

 

Goodwill of $197.6 million arising from the acquisition is the result of several factors. EQ has an assembled workforce that serves the U.S. industrial market utilizing state-of-the-art technology to treat a wide range of industrial and hazardous waste. The acquisition of EQ increases our geographic base providing a coast-to-coast presence and an expanded service platform to better serve key North American hazardous waste markets. In addition, the acquisition of EQ provides us with an opportunity to compete for additional waste clean-up project work; expand penetration with national accounts; improve and enhance transportation, logistics, and service offerings with existing customers and attract new customers. $132.4 million of the goodwill recognized was allocated to reporting units in our Environmental Services segment and $65.2 million of the goodwill recognized was allocated to reporting units in our Field & Industrial Services segment. None of the goodwill recognized is expected to be deductible for income tax purposes.

 

8



Table of Contents

 

The fair value estimate of identifiable intangible assets by major intangible asset class and related weighted average amortization period are as follows:

 

$s in thousands

 

Fair Value

 

Weighted Average
Amortization Period
(Years)

 

Customer relationships

 

$

98,400

 

15

 

Permits and licenses

 

89,600

 

45

 

Permits and licenses, nonamortizing

 

49,000

 

 

Tradename

 

5,481

 

3

 

Customer backlog

 

4,600

 

10

 

Developed software

 

3,443

 

9

 

Non-compete agreements

 

900

 

1

 

Internet domain and website

 

869

 

19

 

Database

 

581

 

15

 

Total identifiable intangible assets

 

$

252,874

 

 

 

 

The following unaudited pro forma financial information presents the combined results of operations as if EQ had been combined with us at the beginning of each of the periods presented. The pro forma financial information includes the accounting effects of the business combination, including the amortization of intangible assets, depreciation of property, plant and equipment, and interest expense. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the periods presented, nor should it be taken as indication of our future consolidated results of operations.

 

 

 

(unaudited)

 

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

$s in thousands, except per share amounts

 

September 30, 2014

 

September 30, 2014

 

Pro forma combined:

 

 

 

 

 

Revenue

 

$

170,894

 

$

458,091

 

Net income

 

$

13,333

 

$

24,835

 

Earnings per share

 

 

 

 

 

Basic

 

$

0.62

 

$

1.15

 

Diluted

 

$

0.61

 

$

1.15

 

 

Revenue from EQ included in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2015 was $95.0 million and $268.8 million, respectively. Operating income from EQ included in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2015 was $11.8 million and $16.1 million, respectively. Acquisition-related costs of $150,000 and $1.1 million, respectively, were included in Selling, general and administrative expenses in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2015.

 

NOTE 3.                    DISPOSITION

 

On August 4, 2015, we entered into a definitive agreement to sell Allstate to a private investor group for approximately $58.0 million cash, subject to adjustments for working capital and capital expenditures. Allstate represents the majority of the industrial services business and is included in our Field and Industrial Services segment, which we acquired with the acquisition of EQ. As a result of this agreement and management’s strategic review, we evaluated the recoverability of the assets associated with our industrial services business. Based on this analysis, we recorded a non-cash goodwill impairment charge of $6.7 million, or $0.31 per diluted share, in the second quarter of 2015. On November 1, 2015, we completed the sale of Allstate. The sale of Allstate does not meet the requirements to be reported as a discontinued operation as defined in ASU 2014-08. For additional information on the sale of Allstate, see Note 17.

 

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Income before income taxes from Allstate included in the Company’s consolidated statements of operations for the three months ended September 30, 2015 and 2014 was $1.7 million and $265,000, respectively. For the nine months ended September 30, 2015 and 2014, loss before income taxes from Allstate was $5.7 million and income before income taxes from Allstate was $301,000, respectively. Loss before income taxes for the nine months ended September 30, 2015, includes a non-cash goodwill impairment charge of $6.4 million.

 

The carrying amounts of major classes of assets and liabilities of Allstate classified as held for sale in our consolidated balance sheet are as follows:

 

 

 

September 30,

 

$s in thousands

 

2015

 

 

 

 

 

Receivables, net

 

$

22,340

 

Prepaid expenses and other current assets

 

1,555

 

Property and equipment, net

 

19,484

 

Intangible assets, net

 

21,824

 

Goodwill

 

13,572

 

Total assets held for sale

 

$

78,775

 

 

 

 

 

Accounts payable

 

6,108

 

Accrued liabilities

 

1,616

 

Accrued salaries and benefits

 

568

 

Deferred income taxes

 

11,948

 

Total liabilities held for sale

 

$

20,240

 

 

NOTE 4.                  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Changes in accumulated other comprehensive income (loss) (“AOCI”) consisted of the following:

 

 

 

Foreign
Currency
Translation

 

Unrealized Loss
on Interest Rate
Hedge

 

Total

 

Balance at December 31, 2014

 

$

(5,648

)

$

(2,038

)

$

(7,686

)

Other comprehensive loss before reclassifications, net of tax

 

(6,761

)

(3,706

)

(10,467

)

Amounts reclassified out of AOCI, net of tax (1)

 

 

1,715

 

1,715

 

Other comprehensive loss

 

(6,761

)

(1,991

)

(8,752

)

Balance at September 30, 2015

 

$

(12,409

)

$

(4,029

)

$

(16,438

)

 


(1)         Before-tax reclassifications of $871,000 ($566,000 after-tax) and $2.6 million ($1.7 million after-tax) for the three and nine months ended September 30, 2015, respectively, were included in Interest expense in the Company’s consolidated statements of operations. Amount relates to interest rate swap which is designated as a cash flow hedge. Changes in fair value of the swap recognized in AOCI are reclassified to interest expense when hedged interest payments on the underlying debt are made. Amounts in AOCI expected to be recognized in interest expense over the next 12 months total approximately $3.5 million ($2.3 million after tax).

 

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NOTE 5.                    CONCENTRATIONS AND CREDIT RISK

 

Major Customers

 

No customer accounted for more than 10% of total revenue for the three or nine months ended September 30, 2015. Revenue from a single customer accounted for approximately 12% and 10% of total revenue for the three and nine months ended September 30, 2014, respectively. No customer accounted for more than 10% of total trade receivables as of September 30, 2015 or December 31, 2014.

 

Credit Risk Concentration

 

We maintain most of our cash and cash equivalents with nationally recognized financial institutions like Wells Fargo Bank, National Association (“Wells Fargo”) and Comerica, Inc. Substantially all balances are uninsured and are not used as collateral for other obligations. Concentrations of credit risk on accounts receivable are believed to be limited due to the number, diversification and character of the obligors and our credit evaluation process.

 

NOTE 6.                    RECEIVABLES

 

Receivables consisted of the following:

 

 

 

September 30,

 

December 31,

 

$s in thousands

 

2015

 

2014

 

 

 

 

 

 

 

Trade

 

$

77,593

 

$

116,218

 

Unbilled revenue

 

27,703

 

17,857

 

Other

 

2,059

 

1,890

 

Total receivables

 

107,355

 

135,965

 

Allowance for doubtful accounts

 

(3,072

)

(704

)

Receivables, net

 

$

104,283

 

$

135,261

 

 

NOTE 7.                    FAIR VALUE MEASUREMENTS

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities;

 

Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;

 

Level 3 - Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions that market participants would use to value the asset or liability.

 

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, restricted cash and investments, accounts payable, accrued liabilities, debt and interest rate swap agreements. The estimated fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying value due to the short-term nature of these instruments.

 

The Company estimates the fair value of its variable-rate debt using Level 2 inputs, such as interest rates, related terms and maturities of similar obligations. The fair value of the Company’s debt approximated its carrying amount as of September 30, 2015.

 

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The Company’s assets and liabilities measured at fair value on a recurring basis consisted of the following:

 

 

 

September 30, 2015

 

 

 

Quoted Prices in
Active Markets

 

Other Observable
Inputs

 

Unobservable
Inputs

 

 

 

$s in thousands

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Fixed-income securities (1)

 

$

401

 

$

3,614

 

$

 

$

4,015

 

Money market funds (2)

 

1,758

 

 

 

1,758

 

Total

 

$

2,159

 

$

3,614

 

$

 

$

5,773

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap agreement (3)

 

$

 

$

6,199

 

$

 

$

6,199

 

Total

 

$

 

$

6,199

 

$

 

$

6,199

 

 

 

 

December 31, 2014

 

 

 

Quoted Prices in
Active Markets

 

Other Observable
Inputs

 

Unobservable
Inputs

 

 

 

$s in thousands

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Fixed-income securities (1)

 

$

400

 

$

3,590

 

$

 

$

3,990

 

Money market funds (2)

 

1,739

 

 

 

1,739

 

Total

 

$

2,139

 

$

3,590

 

$

 

$

5,729

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap agreement (3)

 

$

 

$

3,136

 

$

 

$

3,136

 

Total

 

$

 

$

3,136

 

$

 

$

3,136

 

 


(1)         We invest a portion of our Restricted cash and investments in fixed-income securities, including U.S. Treasury and U.S. agency securities. We measure the fair value of U.S. Treasury securities using quoted prices for identical assets in active markets. We measure the fair value of U.S. agency securities using observable market activity for similar assets. The fair value of our fixed-income securities approximates our cost basis in the investments.

 

(2)         We invest a portion of our Restricted cash and investments in money market funds. We measure the fair value of these money market fund investments using quoted prices for identical assets in active markets.

 

(3)         In order to manage interest rate exposure, we entered into an interest rate swap agreement in October 2014 that effectively converts a portion of our variable-rate debt to a fixed interest rate. The swap is designated as a cash flow hedge, with gains and losses deferred in other comprehensive income to be recognized as an adjustment to interest expense in the same period that the hedged interest payments affect earnings. The interest rate swap has an effective date of December 31, 2014 with an initial notional amount of $250.0 million. The fair value of the interest rate swap agreement represents the difference in the present value of cash flows calculated (i) at the contracted interest rates and (ii) at current market interest rates at the end of the period. We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments. The fair value of the interest rate swap agreement is included in Other long-term liabilities in the Company’s consolidated balance sheet.

 

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NOTE 8.                    PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

 

 

September 30,

 

December 31,

 

$s in thousands

 

2015

 

2014

 

 

 

 

 

 

 

Cell development costs

 

$

120,032

 

$

120,878

 

Land and improvements

 

31,811

 

33,002

 

Buildings and improvements

 

69,883

 

74,518

 

Railcars

 

17,375

 

17,375

 

Vehicles and other equipment

 

86,527

 

98,877

 

Construction in progress

 

18,879

 

10,831

 

Total property and equipment

 

344,507

 

355,481

 

Accumulated depreciation and amortization

 

(140,120

)

(127,797

)

Property and equipment, net

 

$

204,387

 

$

227,684

 

 

Depreciation and amortization expense for the three months ended September 30, 2015 and 2014 was $6.6 million and $8.3 million, respectively. Depreciation and amortization expense for the nine months ended September 30, 2015 and 2014 was $21.7 million and $16.7 million, respectively.

 

NOTE 9.                    GOODWILL AND INTANGIBLE ASSETS

 

Changes in goodwill for the nine months ended September 30, 2015 consisted of the following:

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Total

 

Balance at December 31, 2014 (1)

 

$

152,396

 

$

65,213

 

$

217,609

 

Impairment charges (2)

 

 

(6,700

)

(6,700

)

Classified as held for sale (3)

 

 

(13,572

)

(13,572

)

Foreign currency translation

 

(2,512

)

 

(2,512

)

Balance at September 30, 2015

 

$

149,884

 

$

44,941

 

$

194,825

 

 


(1)         Balances have been revised to reflect purchase accounting measurement period adjustments related to the acquisition of EQ as disclosed in Note 2.

 

(2)         As disclosed in Notes 3, on August 4, 2015, we entered into a definitive agreement to sell Allstate to a private investor group for approximately $58.0 million cash, subject to adjustments for working capital and capital expenditures. Allstate represents the majority of the industrial services business we acquired with the acquisition of EQ. As a result of this agreement and management’s strategic review, we evaluated the recoverability of the assets associated with our industrial services business. Based on this analysis, we recorded a non-cash goodwill impairment charge of $6.7 million, or $0.31 per diluted share, in the second quarter of 2015. We calculated the estimated fair value of the industrial services business using a combination of quoted market prices and discounted cash flows.

 

(3)         Amounts relate to sale of Allstate as disclosed in Note 3.

 

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Table of Contents

 

Intangible assets, net consisted of the following:

 

 

 

September 30, 2015

 

December 31, 2014

 

$s in thousands

 

Cost

 

Accumulated
Amortization

 

Net

 

Cost

 

Accumulated
Amortization

 

Net

 

Amortizing intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Permits, licenses and lease

 

$

110,357

 

$

(6,085

)

$

104,272

 

$

113,693

 

$

(4,427

)

$

109,266

 

Customer relationships

 

82,124

 

(7,728

)

74,396

 

103,086

 

(4,488

)

98,598

 

Technology - formulae and processes

 

6,790

 

(1,037

)

5,753

 

7,844

 

(1,009

)

6,835

 

Customer backlog

 

3,652

 

(469

)

3,183

 

4,600

 

(246

)

4,354

 

Tradename

 

4,318

 

(1,850

)

2,468

 

5,481

 

(979

)

4,502

 

Developed software

 

2,908

 

(605

)

2,303

 

3,745

 

(428

)

3,317

 

Non-compete agreements

 

732

 

(610

)

122

 

920

 

(462

)

458

 

Internet domain and website

 

540

 

(36

)

504

 

869

 

(24

)

845

 

Database

 

388

 

(79

)

309

 

667

 

(72

)

595

 

Total amortizing intangible assets

 

211,809

 

(18,499

)

193,310

 

240,905

 

(12,135

)

228,770

 

Nonamortizing intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Permits and licenses

 

49,750

 

 

49,750

 

49,750

 

 

49,750

 

Tradename

 

127

 

 

127

 

147

 

 

147

 

Total intangible assets, net

 

$

261,686

 

$

(18,499

)

$

243,187

 

$

290,802

 

$

(12,135

)

$

278,667

 

 

Amortization expense for the three months ended September 30, 2015 and 2014 was $3.0 million and $4.0 million, respectively. Amortization expense for the nine months ended September 30, 2015 and 2014 was $9.6 million and $5.2 million, respectively. Foreign intangible asset carrying amounts are affected by foreign currency translation.

 

NOTE 10.             DEBT

 

Long-term debt consisted of the following:

 

 

 

September 30,

 

December 31,

 

$s in thousands

 

2015

 

2014

 

 

 

 

 

 

 

Term loan

 

$

360,767

 

$

395,616

 

Net discount on term loan

 

(852

)

(963

)

Total debt

 

359,915

 

394,653

 

Current portion of long-term debt

 

(3,505

)

(3,828

)

Long-term debt

 

$

356,410

 

$

390,825

 

 

On June 17, 2014, in connection with the acquisition of EQ, the Company entered into a new $540.0 million senior secured credit agreement (the “Credit Agreement”) with a syndicate of banks comprised of a $415.0 million term loan (the “Term Loan”) with a maturity date of June 17, 2021 and a $125.0 million revolving line of credit (the “Revolving Credit Facility”) with a maturity date of June 17, 2019. Upon entering into the Credit Agreement, the Company terminated its existing credit agreement with Wells Fargo, dated October, 29, 2010, as amended (the “Former Agreement”). Immediately prior to the termination of the Former Agreement, there were no outstanding borrowings under the Former Agreement. No early termination penalties were incurred as a result of the termination of the Former Agreement.

 

Term Loan

 

The Term Loan provides an initial commitment amount of $415.0 million, the proceeds of which were used to acquire 100% of the outstanding shares of EQ and pay related transaction fees and expenses. The Term Loan bears interest at a base rate (as defined in the Credit Agreement) plus 2.00% or LIBOR plus 3.00%, at the Company’s option. The Term Loan is subject to amortization in equal quarterly installments in an aggregate annual amount equal to 1.00% of the original principal amount of the Term Loan. At September 30, 2015, the effective interest rate on the Term Loan, including the impact of our interest rate swap, was 4.67%. Interest only payments

 

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are due either monthly or on the last day of any interest period, as applicable. As set forth in the Credit Agreement, the Company is required to enter into one or more interest rate hedge agreements in amounts sufficient to fix the interest rate on at least 50% of the principal amount of the $415.0 million Term Loan. In October 2014, the Company entered into an interest rate swap agreement with Wells Fargo, effectively fixing the interest rate on $240.0 million, or 67%, of the Term Loan principal outstanding as of September 30, 2015.

 

Revolving Credit Facility

 

The Revolving Credit Facility provides up to $125.0 million of revolving credit loans or letters of credit with the use of proceeds restricted solely for working capital and other general corporate purposes. Under the Revolving Credit Facility, revolving loans are available based on a base rate (as defined in the Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). The Company is required to pay a commitment fee of 0.50% per annum on the unused portion of the Revolving Credit Facility, with such commitment fee to be reduced based upon the Company’s total leverage ratio as defined in the Credit Agreement. The maximum letter of credit capacity under the new revolving credit facility is $50.0 million and the Credit Agreement provides for a letter of credit fee equal to the applicable margin for LIBOR loans under the Revolving Credit Facility. Interest only payments are due either monthly or on the last day of any interest period, as applicable. At September 30, 2015, there were no borrowings outstanding on the Revolving Credit Facility. The availability under the Revolving Credit Facility was $118.2 million with $6.8 million of the Revolving Credit Facility issued in the form of standby letters of credit utilized as collateral for closure and post-closure financial assurance and other assurance obligations.

 

Except as set forth below, the Company may prepay the Term Loan or permanently reduce the Revolving Credit Facility commitment under the Credit Agreement at any time without premium or penalty (other than customary “breakage” costs with respect to the early termination of LIBOR loans). On or prior to six months after the closing of the Credit Agreement, if we prepay the initial term loans or amend the pricing terms of the initial term loans, in each case in connection with a reduction of the effective yield, we are required to pay a 1% prepayment premium (unless in connection with a change of control, sale or permitted acquisition). Subject to certain exceptions, the Credit Agreement provides for mandatory prepayment upon certain asset dispositions, casualty events and issuances of indebtedness. The Credit Agreement is also subject to mandatory annual prepayments commencing in December 2015 if our total leverage (defined as the ratio of our consolidated funded debt as of the last day of the applicable fiscal year to our adjusted EBITDA for such period) exceeds certain ratios as follows: 50% of our adjusted excess cash flow (as defined in the Credit Agreement and which takes into account certain adjustments) if our total leverage ratio is greater than 2.50 to 1.00, with step-downs to 0% if our total leverage ratio is equal to or less than 2.50 to 1.00.

 

Pursuant to (i) an unconditional guarantee agreement (the “Guarantee”) and (ii) a collateral agreement (the “Collateral Agreement”), each entered into by the Company and its domestic subsidiaries on June 17, 2014, the Company’s obligations under the Credit Agreement are jointly and severally and fully and unconditionally guaranteed on a senior basis by all of the Company’s existing and certain future domestic subsidiaries and the Credit Agreement is secured by substantially all of the Company’s and its domestic subsidiaries’ assets except the Company’s and its domestic subsidiaries’ real property.

 

The Credit Agreement contains customary restrictive covenants, subject to certain permitted amounts and exceptions, including covenants limiting the ability of the Company to incur additional indebtedness, pay dividends and make other restricted payments, repurchase shares of our outstanding stock and create certain liens. We may only declare quarterly or annual dividends if on the date of declaration, no event of default has occurred and no other event or condition has occurred that would constitute default due to the payment of the dividend.

 

The Credit Agreement also contains a financial maintenance covenant, which is a maximum Consolidated Senior Secured Leverage Ratio, as defined in the Credit Agreement, and is only applicable to the Revolving Credit Facility. Our Consolidated Senior Secured Leverage Ratio as of the last day of any fiscal quarter, commencing with June 30, 2014, may not exceed the ratios indicated below:

 

Fiscal Quarters Ending

 

Maximum Ratio

 

June 30, 2014 through September 30, 2015

 

4.00 to 1.00

 

December 31, 2015 through September 30, 2016

 

3.75 to 1.00

 

December 31, 2016 through September 30, 2017

 

3.50 to 1.00

 

December 31, 2017 through September 30, 2018

 

3.25 to 1.00

 

December 31, 2018 and thereafter

 

3.00 to 1.00

 

 

At September 30, 2015, we were in compliance with all of the financial covenants in the Credit Agreement.

 

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NOTE 11.             CLOSURE AND POST-CLOSURE OBLIGATIONS

 

Our accrued closure and post-closure obligations represent the expected future costs, including corrective actions, associated with closure and post-closure of our operating and non-operating disposal facilities. Liabilities are recorded when work is probable and the costs can be reasonably estimated. We perform periodic reviews of both non-operating and operating facilities and revise accruals for estimated closure and post-closure, remediation or other costs as necessary. Recorded liabilities are based on our best estimates of current costs and are updated periodically to include the effects of existing technology, presently enacted laws and regulations, inflation and other economic factors.

 

Changes to closure and post-closure obligations consisted of the following:

 

 

 

Three Months Ended

 

Nine Months Ended

 

$s in thousands

 

September 30, 2015

 

September 30, 2015

 

 

 

 

 

 

 

Closure and post-closure obligations, beginning of period

 

$

72,690

 

$

72,870

 

Accretion expense

 

1,132

 

3,208

 

Payments

 

(2,250

)

(4,386

)

Currency translation

 

(109

)

(229

)

Closure and post-closure obligations, end of period

 

71,463

 

71,463

 

Less current portion

 

(4,402

)

(4,402

)

Long-term portion

 

$

67,061

 

$

67,061

 

 

NOTE 12.             INCOME TAXES

 

Our effective tax rate for the three months ended September 30, 2015 was 40.9%, up from 38.7% for the three months ended September 30, 2014. Our effective tax rate for the nine months ended September 30, 2015 was 45.3%, up from 37.7% for the nine months ended September 30, 2014. The increase for the three months ended September 30, 2015 primarily reflects a lower proportion of earnings from our Canadian operations, which are taxed at a lower corporate rate, partially offset by lower non-tax deductible business development expenses. The increase for the nine months ended September 30, 2015 primarily reflects non-deductible impairment charges of $6.7 million, and a lower proportion of earnings from our Canadian operations, which are taxed at a lower corporate rate, partially offset by lower non-tax deductible business development expenses.

 

We file a consolidated U.S. federal income tax return with the Internal Revenue Service as well as income tax returns in various states and Canada. We may be subject to examination by taxing authorities in the U.S. and Canada for tax years 2011 through 2014. Additionally, we may be subject to examinations by various state and local taxing jurisdictions for tax years 2010 through 2014.

 

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NOTE 13.             EARNINGS PER SHARE

 

 

 

Three Months Ended September 30,

 

$s and shares in thousands, except per share

 

2015

 

2014

 

amounts

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net income

 

$

9,904

 

$

9,904

 

$

13,333

 

$

13,333

 

Weighted average basic shares outstanding

 

21,655

 

21,655

 

21,570

 

21,570

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock-based awards

 

 

 

94

 

 

 

110

 

Weighted average diluted shares outstanding

 

 

 

21,749

 

 

 

21,680

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.46

 

$

0.46

 

$

0.62

 

$

0.61

 

Anti-dilutive shares excluded from calculation

 

 

 

181

 

 

 

78

 

 

 

 

Nine Months Ended September 30,

 

$s and shares in thousands, except per share

 

2015

 

2014

 

amounts

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net income

 

$

17,907

 

$

17,907

 

$

29,558

 

$

29,558

 

Weighted average basic shares outstanding

 

21,619

 

21,619

 

21,526

 

21,526

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock-based awards

 

 

 

104

 

 

 

123

 

Weighted average diluted shares outstanding

 

 

 

21,723

 

 

 

21,649

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.83

 

$

0.82

 

$

1.37

 

$

1.37

 

Anti-dilutive shares excluded from calculation

 

 

 

192

 

 

 

50

 

 

NOTE 14.             EQUITY

 

Omnibus Incentive Plan

 

On May 27, 2015, our stockholders approved the Omnibus Incentive Plan (“Omnibus Plan”), which was approved by our Board of Directors on April 7, 2015. The Omnibus Plan provides, among other things, the ability for the Company to grant restricted stock, performance stock, options, stock appreciation rights, restricted stock units, performance stock units (“PSUs”) and other stock-based awards or cash awards to officers, employees, consultants and non-employee directors. We will cease to grant equity awards under our 2008 Stock Option Incentive Plan and our 2006 Restricted Stock Plan (“Previous Plans”), and the Previous Plans will remain in effect solely for the settlement of awards granted under the Previous Plans. No shares that are reserved but unissued under the Previous Plans or that are outstanding under the Previous Plans and reacquired by the Company for any reason will be available for issuance under the Omnibus Plan. The Omnibus Plan expires on April 7, 2025 and authorizes 1.5 million shares of common stock for grant over the life of the Omnibus Plan.

 

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Performance Stock Units

 

On May 27, 2015, the Company granted 6,929 PSUs to certain employees. Each PSU represents the right to receive, on the settlement date, one share of the Company’s common stock. The total number of PSUs each participant is eligible to earn ranges from 0% to 200% of the target number of PSUs granted. The actual number of PSUs that will vest and be settled in shares is determined at the end of a three-year performance period beginning January 1, 2015, based on total stockholder return relative to a set of peer companies. The fair value of the PSUs estimated on the grant date using a Monte Carlo simulation was $65.78 per unit. Compensation expense is recorded over the awards’ vesting period.

 

The following table presents the assumptions used in the Monte Carlo simulation to calculate the fair value of the PSUs granted on May 27, 2015:

 

Expected volatility

 

29.30

%

Stock price on grant date

 

$

46.89

 

Risk-free interest rate

 

0.86

%

Expected term (years)

 

2.6

 

Expected dividend yield

 

1.50

%

 

Stock Options and Restricted Stock

 

During the nine months ended September 30, 2015, option holders exercised 73,601 options with a weighted-average exercise price of $24.05 per option. Option holders exercised 3,334 of these options via net share settlement. During the nine months ended September 30, 2015, the Company issued 6,583 shares of restricted stock from our treasury stock at an average cost of $44.34 per share.

 

NOTE 15.             COMMITMENTS AND CONTINGENCIES

 

Litigation and Regulatory Proceedings

 

In the ordinary course of business, we are involved in judicial and administrative proceedings involving federal, state, provincial or local governmental authorities, including regulatory agencies that oversee and enforce compliance with permits. Fines or penalties may be assessed by our regulators for non-compliance. Actions may also be brought by individuals or groups in connection with permitting of planned facilities, modification or alleged violations of existing permits, or alleged damages suffered from exposure to hazardous substances purportedly released from our operated sites, as well as other litigation. We maintain insurance intended to cover property and damage claims asserted as a result of our operations. Periodically, management reviews and may establish reserves for legal and administrative matters, or other fees expected to be incurred in relation to these matters.

 

We are not currently a party to any material pending legal proceedings and are not aware of any other claims that could, individually or in the aggregate, have a materially adverse effect on our financial position, results of operations or cash flows.

 

NOTE 16.   OPERATING SEGMENTS

 

Financial Information by Segment

 

Our operations are managed in two reportable segments reflecting our internal reporting structure and nature of services offered as follows:

 

Environmental Services - This segment includes all of the legacy US Ecology operations and the legacy EQ treatment and disposal facilities. It provides a broad range of hazardous material management services including transportation, recycling, treatment and disposal of hazardous and non-hazardous waste at Company-owned landfill, wastewater and other treatment facilities.

 

Field & Industrial Services - This segment includes all of the field and industrial service business of the legacy EQ operation. It provides packaging and collection of hazardous waste and total waste management solutions at customer sites and through our 10-day transfer facilities. Services include on-site management, waste characterization, transportation and disposal of non-hazardous and hazardous waste. This segment also provides specialty services such as high-pressure and chemical cleaning, centrifuge and materials processing, tank cleaning, decontamination, remediation, transportation, spill cleanup and emergency response and other services to commercial and industrial facilities and to government entities.

 

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The operations not managed through our two reportable segments are recorded as “Corporate.” Corporate selling, general and administrative expenses include typical corporate items such as legal, accounting and other items of a general corporate nature. Income taxes are assigned to Corporate, but 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.

 

Summarized financial information of our reportable segments is as follows:

 

 

 

Three Months Ended September 30, 2015

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

76,079

 

$

 

$

 

$

76,079

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

20,191

 

5,694

 

 

25,885

 

Industrial Cleaning (2)

 

 

27,532

 

 

27,532

 

Technical Services (3)

 

 

16,584

 

 

16,584

 

Remediation (4)

 

 

1,253

 

 

1,253

 

Other (5)

 

 

1,081

 

 

1,081

 

Total Revenue

 

$

96,270

 

$

52,144

 

$

 

$

148,414

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

8,664

 

$

1,885

 

$

126

 

$

10,675

 

Capital expenditures

 

$

4,480

 

$

1,401

 

$

436

 

$

6,317

 

Total assets

 

$

599,136

 

$

201,627

 

$

62,613

 

$

863,376

 

 

 

 

Three Months Ended September 30, 2014

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

84,778

 

$

 

$

 

$

84,778

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

23,256

 

11,657

 

 

34,913

 

Industrial Cleaning (2)

 

 

22,142

 

 

22,142

 

Technical Services (3)

 

 

15,985

 

 

15,985

 

Remediation (4)

 

 

11,814

 

 

11,814

 

Other (5)

 

 

1,232

 

 

1,232

 

Total Revenue

 

$

108,034

 

$

62,830

 

$

 

$

170,864

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

9,748

 

$

3,271

 

$

276

 

$

13,295

 

Capital expenditures

 

$

4,924

 

$

3,822

 

$

506

 

$

9,252

 

Total assets

 

$

627,340

 

$

229,971

 

$

59,838

 

$

917,149

 

 

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Table of Contents

 

 

 

Nine Months Ended September 30, 2015

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

224,007

 

$

 

$

 

$

224,007

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

54,878

 

19,986

 

 

74,864

 

Industrial Cleaning (2)

 

 

69,980

 

 

69,980

 

Technical Services (3)

 

 

46,807

 

 

46,807

 

Remediation (4)

 

 

5,492

 

 

5,492

 

Other (5)

 

 

3,647

 

 

3,647

 

Total Revenue

 

$

278,885

 

$

145,912

 

$

 

$

424,797

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

26,167

 

$

7,920

 

$

405

 

$

34,492

 

Capital expenditures

 

$

17,564

 

$

6,250

 

$

1,879

 

$

25,693

 

Total assets

 

$

599,136

 

$

201,627

 

$

62,613

 

$

863,376

 

 

 

 

Nine Months Ended September 30, 2014

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

178,254

 

$

 

$

 

$

178,254

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

41,012

 

12,895

 

 

53,907

 

Industrial Cleaning (2)

 

 

25,827

 

 

25,827

 

Technical Services (3)

 

 

17,994

 

 

17,994

 

Remediation (4)

 

 

12,841

 

 

12,841

 

Other (5)

 

 

1,414

 

 

1,414

 

Total Revenue

 

$

219,266

 

$

70,971

 

$

 

$

290,237

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

19,415

 

$

3,759

 

$

464

 

$

23,638

 

Capital expenditures

 

$

12,751

 

$

4,410

 

$

749

 

$

17,910

 

Total assets

 

$

627,340

 

$

229,971

 

$

59,838

 

$

917,149

 

 


(1)         Includes such services as collection, transportation and disposal of non-hazardous and hazardous waste. Prior to the acquisition of EQ on June 17, 2014, services within Environmental Services included transportation services.

(2)         Includes such services as industrial cleaning and maintenance for utilities, refineries, chemical plants, pulp and paper mills, steel and automotive plants, and refinery services such as tank cleaning, centrifuge and temporary storage.

(3)         Includes such services as Total Waste Management (“TWM”) programs, retail services, laboratory packing, less-than-truck-load (“LTL”) service and Household Hazardous Waste (“HHW”) collection.

(4)         Includes such services as site assessment, onsite treatment, project management and remedial action planning and execution.

(5)         Includes such services as emergency response and marine.

 

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)

 

The primary financial measure used by management to assess segment performance is Adjusted EBITDA. 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, non-cash impairment charges and other income/expense, which are not considered part of usual business operations. Adjusted EBITDA is a complement to results provided in accordance with 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:

 

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·                  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.

 

A reconciliation of Adjusted EBITDA to Net Income is as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

$s in thousands

 

2015

 

2014

 

2015

 

2014

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

Environmental Services

 

$

39,244

 

$

45,483

 

$

112,859

 

$

94,966

 

Field & Industrial Services

 

5,611

 

6,136

 

13,709

 

7,256

 

Corporate

 

(11,101

)

(11,180

)

(34,161

)

(24,413

)

Total

 

33,754

 

40,439

 

92,407

 

77,809

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to Net income:

 

 

 

 

 

 

 

 

 

Income tax expense

 

(6,858

)

(8,406

)

(14,815

)

(17,880

)

Interest expense

 

(5,081

)

(4,543

)

(16,208

)

(5,488

)

Interest income

 

17

 

11

 

64

 

94

 

Foreign currency loss

 

(994

)

(830

)

(1,769

)

(1,027

)

Other income

 

387

 

301

 

1,156

 

557

 

Impairment charges

 

 

 

(6,700

)

 

Depreciation and amortization of plant and equipment

 

(6,591

)

(8,318

)

(21,726

)

(16,730

)

Amortization of intangibles

 

(2,952

)

(4,018

)

(9,558

)

(5,233

)

Stock-based compensation

 

(646

)

(344

)

(1,736

)

(869

)

Accretion and non-cash adjustment of closure & post-closure liabilities

 

(1,132

)

(959

)

(3,208

)

(1,675

)

Net income

 

$

9,904

 

$

13,333

 

$

17,907

 

$

29,558

 

 

Revenue, Property and Equipment and Intangible Assets Outside of the United States

 

We provide services in the United States and Canada. Revenues by geographic location where the underlying services were performed were as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

$s in thousands

 

2015

 

2014

 

2015

 

2014

 

United States

 

$

138,367

 

$

155,043

 

$

392,698

 

$

243,689

 

Canada

 

10,047

 

15,821

 

32,099

 

46,548

 

Total revenue

 

$

148,414

 

$

170,864

 

$

424,797

 

$

290,237

 

 

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Long-lived assets, comprised of property and equipment and intangible assets net of accumulated depreciation and amortization, by geographic location are as follows:

 

 

 

September 30,

 

December 31,

 

$s in thousands

 

2015

 

2014

 

United States

 

$

396,295

 

$

446,412

 

Canada

 

51,279

 

59,939

 

Total long-lived assets

 

$

447,574

 

$

506,351

 

 

NOTE 17.             SUBSEQUENT EVENTS

 

Quarterly Dividend

 

On October 1, 2015, we declared a quarterly dividend of $0.18 per common share to stockholders of record on October 21, 2015. The dividend was paid using cash on hand on October 28, 2015 in an aggregate amount of $3.9 million.

 

Allstate Disposition

 

On November 1, 2015, we completed the sale of Allstate for cash proceeds of $58.8 million, subject to post-closing adjustments for working capital. See Note 3 for additional information on the sale of Allstate including Income before income taxes and details on the major classes of assets and liabilities of Allstate classified as held for sale as of September 30, 2015.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

US Ecology, Inc.

Boise, Idaho

 

We have reviewed the accompanying consolidated balance sheet of US Ecology, Inc. and subsidiaries (the “Company”) as of September 30, 2015, and the related consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2015 and 2014, and the consolidated statements of cash flows for the nine-month periods ended September 30, 2015 and 2014. This interim financial information is the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial information taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of US Ecology, Inc. and subsidiaries as of December 31, 2014, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 2, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2014 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ Deloitte & Touche LLP

 

Boise, Idaho

November 4, 2015

 

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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, non-hazardous and radioactive waste, as well as a wide range of complementary field and industrial services. US Ecology’s comprehensive knowledge of the waste business, its collection of waste management facilities combined and focus on safety, environmental compliance, and customer service enables us to effectively meet the needs of our customers and to build long-lasting relationships. Headquartered in Boise, Idaho, we are one of the oldest providers of such services in North America.

 

Prior to June 17, 2014, our operations consisted primarily of our six fixed facilities located near Beatty, Nevada; Richland, Washington; Robstown, Texas; Grand View, Idaho; Detroit, Michigan and Blainville, Québec, Canada. These facilities generate revenue from fees charged to treat and dispose of waste and from fees charged to perform various field and industrial services for our customers.

 

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.

 

Our operations are managed in two reportable segments reflecting our internal management reporting structure and nature of services offered as follows:

 

Environmental Services - This segment includes all of the legacy US Ecology operations and the legacy EQ treatment and disposal facilities. It provides a broad range of hazardous material management services including transportation, recycling, treatment and disposal of hazardous and non-hazardous waste at Company-owned landfill, wastewater and other treatment facilities.

 

Field & Industrial Services - This segment includes all of the field and industrial service business of the legacy EQ operation. It provides packaging and collection of hazardous waste and total waste management solutions at customer sites and through our 10-day transfer facilities. Services include on-site management, waste characterization, transportation and disposal of non-hazardous and hazardous waste. This segment also provides specialty services such as high-pressure and chemical cleaning, centrifuge and materials processing, tank cleaning, decontamination, remediation, transportation, spill cleanup and emergency response and other services to commercial and industrial facilities and to government entities.

 

On August 4, 2015, we entered into a definitive agreement to sell our Allstate Power Vac, Inc. (“Allstate”) subsidiary to a private investor group for approximately $58.0 million cash, subject to adjustments for working capital and capital expenditures. Cash proceeds from the transaction are expected to be used to repay indebtedness. Allstate represents the majority of the industrial services business we acquired with the acquisition of EQ.  As a result of this agreement and management’s strategic review, we evaluated the recoverability of the assets associated with our industrial services business. Based on this analysis, we recorded a non-cash goodwill impairment charge of $6.7 million, or $0.31 per diluted share, in the second quarter of 2015. On November 1, 2015, we completed the sale of Allstate, for cash proceeds of $58.8 million, subject to post-closing adjustments for working capital. See Note 3 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this Form 10-Q for additional information on the sale of Allstate including Income before income taxes and details on the major classes of assets and liabilities of Allstate classified as held for sale as of September 30, 2015.

 

In conjunction with the continued integration of EQ we have changed and conformed the categories used to evaluate period-to-period changes in our treatment and disposal (“T&D”) revenue for our Environmental Services segment. Historically, legacy US Ecology divided T&D revenue into groups based on the industry of the customer. In order to provide better insight into the underlying drivers of our waste volumes and related T&D revenues, beginning with the third quarter of 2015, we will evaluate period-to-period changes in our ES segment T&D revenues based on the industry of the waste generator, based on North American Industry Classification System (“NAICS”) codes.

 

Additionally, we have changed and conformed how we define “Base Business” and “Event Business”. Previously, US Ecology defined Event Business as non-recurring waste cleanup projects regardless of size, with Base Business representing all recurring business.

 

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Beginning with the third quarter of 2015, we now define Event Business as non-recurring projects that are expected to equal or exceed 1,000 tons, with Base Business defined as all other business not meeting the definition of Event Business. We believe the new definitions are a better representation of Base and Event Business and will provide better insight into ES segment T&D revenues.  Throughout this document, and in our discussions of our results for the three and nine months ended September 30, 2015, prior periods presented have been recast based on the new definitions.

 

The composition of Environmental Services segment T&D revenues by waste generator industry for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

 

 

% of Treatment and Disposal Revenue (1) for the
Three Months Ended September 30,

 

Generator Industry