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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, 2016

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 26, 2016, there were 21,779,716 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

 

 

 

 

 

 

1.

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

22

 

 

 

 

 

2.

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

 

23

3.

Quantitative and Qualitative Disclosures About Market Risk

 

36

4.

Controls and Procedures

 

37

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Cautionary Statement

 

38

1.

Legal Proceedings

 

39

1A.

Risk Factors

 

39

2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

3.

Defaults Upon Senior Securities

 

39

4.

Mine Safety Disclosures

 

39

5.

Other Information

 

39

6.

Exhibits

 

40

 

SIGNATURE

 

41

 

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, 2016

 

December 31, 2015

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

6,383

 

$

5,989

 

Receivables, net

 

98,290

 

106,380

 

Prepaid expenses and other current assets

 

13,241

 

8,484

 

Income taxes receivable

 

951

 

2,017

 

Total current assets

 

118,865

 

122,870

 

 

 

 

 

 

 

Property and equipment, net

 

219,302

 

210,334

 

Restricted cash and investments

 

5,810

 

5,748

 

Intangible assets, net

 

234,466

 

239,571

 

Goodwill

 

193,655

 

191,823

 

Other assets

 

1,212

 

1,641

 

Total assets

 

$

773,310

 

$

771,987

 

 

 

 

 

 

 

Liabilities And Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

15,489

 

$

17,169

 

Deferred revenue

 

6,184

 

8,078

 

Accrued liabilities

 

22,040

 

25,634

 

Accrued salaries and benefits

 

11,740

 

11,513

 

Income taxes payable

 

179

 

117

 

Current portion of closure and post-closure obligations

 

2,211

 

2,787

 

Revolving credit facility

 

2,303

 

 

Current portion of long-term debt

 

2,903

 

3,056

 

Total current liabilities

 

63,049

 

68,354

 

 

 

 

 

 

 

Long-term closure and post-closure obligations

 

72,055

 

68,367

 

Long-term debt

 

274,869

 

290,684

 

Other long-term liabilities

 

9,764

 

5,825

 

Deferred income taxes

 

79,818

 

82,622

 

Total liabilities

 

499,555

 

515,852

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Common stock $0.01 par value, 50,000 authorized; 21,780 and 21,744 shares issued, respectively

 

218

 

217

 

Additional paid-in capital

 

171,961

 

169,873

 

Retained earnings

 

118,115

 

103,300

 

Treasury stock, at cost, 7 and 5 shares, respectively

 

(52

)

(189

)

Accumulated other comprehensive loss

 

(16,487

)

(17,066

)

Total stockholders’ equity

 

273,755

 

256,135

 

Total liabilities and stockholders’ equity

 

$

773,310

 

$

771,987

 

 

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

124,824

 

$

148,414

 

$

360,493

 

$

424,797

 

Direct operating costs

 

85,470

 

102,474

 

249,025

 

297,543

 

Gross profit

 

39,354

 

45,940

 

111,468

 

127,254

 

Selling, general and administrative expenses

 

18,439

 

23,507

 

57,683

 

71,075

 

Impairment charges

 

 

 

 

6,700

 

Operating income

 

20,915

 

22,433

 

53,785

 

49,479

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

8

 

17

 

90

 

64

 

Interest expense

 

(4,288

)

(5,081

)

(13,150

)

(16,208

)

Foreign currency gain (loss)

 

(224

)

(994

)

192

 

(1,769

)

Other

 

(19

)

387

 

2,480

 

1,156

 

Total other expense

 

(4,523

)

(5,671

)

(10,388

)

(16,757

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

16,392

 

16,762

 

43,397

 

32,722

 

Income tax expense

 

6,278

 

6,858

 

16,828

 

14,815

 

Net income

 

$

10,114

 

$

9,904

 

$

26,569

 

$

17,907

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.47

 

$

0.46

 

$

1.22

 

$

0.83

 

Diluted

 

$

0.46

 

$

0.46

 

$

1.22

 

$

0.82

 

 

 

 

 

 

 

 

 

 

 

Shares used in earnings per share calculation:

 

 

 

 

 

 

 

 

 

Basic

 

21,714

 

21,655

 

21,700

 

21,619

 

Diluted

 

21,804

 

21,749

 

21,780

 

21,723

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,114

 

$

9,904

 

$

26,569

 

$

17,907

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

(734

)

(3,590

)

2,555

 

(6,761

)

Net changes in interest rate hedge, net of taxes of $253, ($981), ($1,063) and ($1,072), respectively

 

469

 

(1,821

)

(1,976

)

(1,991

)

Comprehensive income, net of tax

 

$

9,849

 

$

4,493

 

$

27,148

 

$

9,155

 

 

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,

 

 

 

2016

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

26,569

 

$

17,907

 

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

 

 

 

 

 

Impairment charges

 

 

6,700

 

Depreciation and amortization of property and equipment

 

18,561

 

21,726

 

Amortization of intangible assets

 

7,907

 

9,558

 

Accretion of closure and post-closure obligations

 

3,081

 

3,208

 

Gain on disposition of business

 

(2,035

)

 

Unrealized foreign currency (gain) loss

 

(381

)

2,740

 

Deferred income taxes

 

(2,832

)

(4,015

)

Share-based compensation expense

 

2,182

 

1,736

 

Net (gain) loss on disposal of property and equipment

 

(228

)

935

 

Amortization of debt issuance costs

 

1,583

 

1,501

 

Amortization of debt discount

 

111

 

111

 

Changes in assets and liabilities:

 

 

 

 

 

Receivables

 

8,713

 

7,221

 

Income taxes receivable

 

1,102

 

6,560

 

Other assets

 

395

 

284

 

Accounts payable and accrued liabilities

 

(6,560

)

(5,256

)

Deferred revenue

 

(1,942

)

(5,371

)

Accrued salaries and benefits

 

126

 

(1,877

)

Income taxes payable

 

63

 

(2,317

)

Closure and post-closure obligations

 

(32

)

(4,386

)

Net cash provided by operating activities

 

56,383

 

56,965

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(22,550

)

(25,693

)

Deposit on Vernon acquisition

 

(5,049

)

 

Business acquisition (net of cash acquired)

 

(4,934

)

 

Purchases of restricted cash and investments

 

(1,040

)

(848

)

Proceeds from divestitures (net of cash divested)

 

2,723

 

 

Proceeds from sale of restricted cash and investments

 

978

 

804

 

Proceeds from sale of property and equipment

 

524

 

404

 

Net cash used in investing activities

 

(29,348

)

(25,333

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on long-term debt and capital lease obligations

 

(17,326

)

(34,848

)

Dividends paid

 

(11,754

)

(11,700

)

Payments on revolving credit facility

 

(30,546

)

(9,379

)

Proceeds from revolving credit facility

 

32,849

 

9,379

 

Proceeds from exercise of stock options

 

229

 

1,664

 

Other

 

(188

)

7

 

Net cash used in financing activities

 

(26,736

)

(44,877

)

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash

 

95

 

(376

)

Increase (decrease) in cash and cash equivalents

 

394

 

(13,621

)

Cash and cash equivalents at beginning of period

 

5,989

 

22,971

 

Cash and cash equivalents at end of period

 

$

6,383

 

$

9,350

 

 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

Income taxes paid, net of receipts

 

$

18,600

 

$

18,723

 

Interest paid

 

$

11,430

 

$

14,406

 

Non-cash investing and financing activities:

 

 

 

 

 

Capital expenditures in accounts payable

 

$

3,855

 

$

3,420

 

Acquisition of equipment with financing arrangements

 

$

1,239

 

$

––

 

Restricted stock issued from treasury shares

 

$

415

 

$

292

 

 

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 inter-company 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 (consisting only of normal recurring 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, 2015. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2016. For comparative purposes, certain amounts in prior periods’ consolidated financial statements have been reclassified to conform to the current period presentation.

 

On November 1, 2015, we sold our Allstate Power Vac, Inc. (“Allstate”) subsidiary to a private investor group. See Note 3 for additional information.

 

The Company’s consolidated balance sheet as of December 31, 2015 has been derived from the Company’s audited consolidated balance sheet as of that date.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP 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.

 

Recently Issued Accounting Pronouncements

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statements of Cash Flows (Topic 230). This ASU amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The guidance is effective for annual and interim periods beginning after December 15, 2017. The guidance must be applied retrospectively to all periods presented. Early adoption is permitted. We are assessing the impact the adoption of ASU 2016-15 may have on our consolidated cash flows.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718). This ASU simplifies several aspects of the accounting for employee share-based transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. We are assessing the impact the adoption of ASU 2016-09 may have on our consolidated financial position, results of operations and cash flows.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU significantly changes the accounting model used by lessees to account for leases, requiring that all material leases be presented on the balance sheet. Lessees will recognize substantially all leases on the balance sheet as a right-of-use asset and a corresponding lease liability. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. The

 

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guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. We are assessing the impact the adoption of ASU 2016-02 may have on our consolidated financial position, results of operations and cash flows.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance for revenue recognition. The ASU’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 guidance 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. In August 2015, the FASB issued ASU 2015-14: Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date established in ASU 2014-09. The amendments in ASU 2014-09 are now 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 position, results of operations and cash flows.

 

NOTE 2.                    BUSINESS COMBINATION

 

On May 2, 2016, the Company acquired 100% of the outstanding shares of Environmental Services Inc., (“ESI”), an environmental services company based in Tilbury, Ontario, Canada. ESI is focused primarily on hazardous and non-hazardous transportation and disposal, hazardous and non-hazardous waste treatment, industrial services, confined space rescue and emergency response work throughout Ontario. The total purchase price was $4.9 million, net of cash acquired, and was funded with cash on hand. ESI is reported as part of our Environmental Services segment, however, revenues and total assets of ESI are not material to our consolidated financial position or results of operations.

 

We allocated the purchase price to the assets acquired and liabilities assumed based on estimates of the fair value at the date of the acquisition, resulting in $1.0 million allocated to goodwill (which is not deductible for tax purposes), $861,000 allocated to intangible assets (primarily customer relationships) to be amortized over a weighted average life of approximately 14 years, and $638,000 allocated to indefinite-lived environmental permits. The purchase price allocation is preliminary, as estimates and assumptions are subject to change as more information becomes available.

 

NOTE 3.                    DIVESTITURES

 

Divestiture of Augusta, Georgia Facility (“Augusta”)

 

On April 5, 2016, we completed the divestiture of Augusta for cash proceeds of $1.9 million. Augusta was reported as part of our Environmental Services segment. Sales, net income and total assets of Augusta are not material to our consolidated financial position or results of operations in any period presented. We recognized a $1.9 million pre-tax gain on the divestiture of Augusta, which is included in Other income (expense) in our consolidated statements of operations for the nine months ended September 30, 2016.

 

Divestiture of Allstate

 

On November 1, 2015, we completed the divestiture of Allstate for cash proceeds at closing of $58.8 million. For the year ended December 31, 2015, we recognized a pre-tax loss on the divestiture of Allstate, including transaction-related costs, of $542,000, which was included in Other income (expense) in our consolidated statements of operations. On April 25, 2016, we received additional cash proceeds of $827,000 in settlement of final post-closing adjustments. We recognized a $178,000 pre-tax gain on the divestiture of Allstate, which is included in Other income (expense) in our consolidated statements of operations for the nine months ended September 30, 2016.

 

Prior to the divesture, Allstate represented the majority of the industrial services business included in our Field & Industrial Services segment. The sale of Allstate did not meet the requirements to be reported as a discontinued operation as defined in ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. See Note 5 to the Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 for additional information.

 

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Table of Contents

 

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, 2015

 

$

(14,028

)

$

(3,038

)

$

(17,066

)

Other comprehensive income (loss) before reclassifications, net of tax

 

2,555

 

(3,556

)

(1,001

)

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

 

 

1,580

 

1,580

 

Other comprehensive income (loss)

 

2,555

 

(1,976

)

579

 

Balance at September 30, 2016

 

$

(11,473

)

$

(5,014

)

$

(16,487

)

 


(1)         Before-tax reclassifications of $798,000 ($519,000 after-tax) and $2.4 million ($1.6 million after-tax) for the three and nine months ended September 30, 2016, respectively, and 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. Amounts relate to our 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 $3.2 million ($2.1 million after tax).

 

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, 2016 or the three or nine months ended September 30, 2015. No customer accounted for more than 10% of total trade receivables as of September 30, 2016 or December 31, 2015.

 

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

 

2016

 

2015

 

 

 

 

 

 

 

Trade

 

$

84,446

 

$

95,055

 

Unbilled revenue

 

15,535

 

11,983

 

Other

 

838

 

2,568

 

Total receivables

 

100,819

 

109,606

 

Allowance for doubtful accounts

 

(2,529

)

(3,226

)

Receivables, net

 

$

98,290

 

$

106,380

 

 

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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, accrued liabilities and revolving credit facility 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. At September 30, 2016, the fair value of the Company’s variable-rate debt was estimated to be $285.2 million. The Company’s assets and liabilities measured at fair value on a recurring basis consisted of the following:

 

 

 

September 30, 2016

 

 

 

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)

 

$

818

 

$

3,206

 

$

 

$

4,024

 

Money market funds (2)

 

1,786

 

 

 

1,786

 

Total

 

$

2,604

 

$

3,206

 

$

 

$

5,810

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap agreement (3)

 

$

 

$

7,713

 

$

 

$

7,713

 

Total

 

$

 

$

7,713

 

$

 

$

7,713

 

 

 

 

December 31, 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)

 

$

403

 

$

3,573

 

$

 

$

3,976

 

Money market funds (2)

 

1,772

 

 

 

1,772

 

Total

 

$

2,175

 

$

3,573

 

$

 

$

5,748

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap agreement (3)

 

$

 

$

4,676

 

$

 

$

4,676

 

Total

 

$

 

$

4,676

 

$

 

$

4,676

 

 


(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.

 

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(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 at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of the interest rate swap agreement 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 as of September 30, 2016 and December 31, 2015.

 

NOTE 8.                                              PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

 

 

September 30,

 

December 31,

 

$s in thousands

 

2016

 

2015

 

 

 

 

 

 

 

Cell development costs

 

$

123,036

 

$

121,473

 

Land and improvements

 

33,503

 

31,606

 

Buildings and improvements

 

76,680

 

70,990

 

Railcars

 

17,299

 

17,375

 

Vehicles and other equipment

 

104,546

 

92,797

 

Construction in progress

 

26,422

 

20,067

 

Total property and equipment

 

381,486

 

354,308

 

Accumulated depreciation and amortization

 

(162,184

)

(143,974

)

Property and equipment, net

 

$

219,302

 

$

210,334

 

 

Depreciation and amortization expense for the three months ended September 30, 2016 and 2015 was $6.5 million and $6.6 million, respectively. Depreciation and amortization expense for the nine months ended September 30, 2016 and 2015 was $18.6 million and $21.7 million, respectively.

 

NOTE 9.                    GOODWILL AND INTANGIBLE ASSETS

 

Changes in goodwill for the nine months ended September 30, 2016 consisted of the following:

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Total

 

Balance at December 31, 2015

 

$

147,692

 

$

44,131

 

$

191,823

 

ESI acquisition

 

1,011

 

 

1,011

 

Foreign currency translation

 

821

 

 

821

 

Balance at September 30, 2016

 

$

149,524

 

$

44,131

 

$

193,655

 

 

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Intangible assets, net consisted of the following:

 

 

 

September 30, 2016

 

December 31, 2015

 

$s in thousands

 

Cost

 

Accumulated
Amortization

 

Net

 

Cost

 

Accumulated
Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizing intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Permits, licenses and lease

 

$

110,816

 

$

(8,877

)

$

101,939

 

$

109,652

 

$

(6,682

)

$

102,970

 

Customer relationships

 

82,945

 

(13,149

)

69,796

 

82,021

 

(9,015

)

73,006

 

Technology - formulae and processes

 

6,924

 

(1,279

)

5,645

 

6,560

 

(1,054

)

5,506

 

Customer backlog

 

3,652

 

(835

)

2,817

 

3,652

 

(561

)

3,091

 

Tradename

 

4,318

 

(3,290

)

1,028

 

4,318

 

(2,210

)

2,108

 

Developed software

 

2,914

 

(922

)

1,992

 

2,899

 

(678

)

2,221

 

Non-compete agreements

 

747

 

(738

)

9

 

732

 

(732

)

 

Internet domain and website

 

540

 

(65

)

475

 

540

 

(44

)

496

 

Database

 

389

 

(112

)

277

 

385

 

(85

)

300

 

Total amortizing intangible assets

 

213,245

 

(29,267

)

183,978

 

210,759

 

(21,061

)

189,698

 

Nonamortizing intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Permits and licenses

 

50,359

 

 

50,359

 

49,750

 

 

49,750

 

Tradename

 

129

 

 

129

 

123

 

 

123

 

Total intangible assets, net

 

$

263,733

 

$

(29,267

)

$

234,466

 

$

260,632

 

$

(21,061

)

$

239,571

 

 

Amortization expense for the three months ended September 30, 2016 and 2015 was $2.7 million and $3.0 million, respectively. Amortization expense for the nine months ended September 30, 2016 and 2015 was $7.9 million and $9.6 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

 

2016

 

2015

 

 

 

 

 

 

 

Term loan

 

$

283,765

 

$

300,994

 

Unamortized discount and debt issuance costs

 

(5,993

)

(7,254

)

Total debt

 

277,772

 

293,740

 

Current portion of long-term debt

 

(2,903

)

(3,056

)

Long-term debt

 

$

274,869

 

$

290,684

 

 

On June 17, 2014, in connection with the acquisition of EQ Holdings, Inc. and its wholly-owned subsidiaries (collectively “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 provided 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, 2016, the effective interest rate on the Term Loan, including the impact of our interest rate swap, was 4.75%. Interest only payments 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

 

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agreement with Wells Fargo, effectively fixing the interest rate on $215.0 million, or 76%, of the Term Loan principal outstanding as of September 30, 2016.

 

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 consolidated earnings before interest, taxes, depreciation and amortization (as defined in the Credit Agreement). At September 30, 2016, the effective interest rate on the Revolving Credit Facility was 5.25%. 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 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 payments are due either monthly or on the last day of any interest period, as applicable. At September 30, 2016, there were $2.3 million of working capital borrowings outstanding on the Revolving Credit Facility. These borrowings are due “on demand” and presented as short-term debt in the consolidated balance sheets. As of September 30, 2016, the availability under the Revolving Credit Facility was $115.2 million with $7.5 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). 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, 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

 

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, 2016, 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 liability represents the expected future costs, including corrective actions, associated with closure and post-closure of our operating and non-operating disposal facilities. We record the fair value of our closure and post-closure obligations as a liability in the period in which the regulatory obligation to retire a specific asset is triggered. For our individual landfill cells, the required closure and post-closure obligations under the terms of our permits and our intended operation of the landfill cell are triggered and recorded when the cell is placed into service and waste is initially disposed in the landfill cell. The fair value is based on the total estimated costs to close the landfill cell and perform post-closure activities once the landfill cell has reached capacity and is no longer accepting waste. 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, 2016

 

September 30, 2016

 

 

 

 

 

 

 

Closure and post-closure obligations, beginning of period

 

$

72,435

 

$

71,154

 

Accretion expense

 

1,031

 

3,081

 

Payments

 

(455

)

(1,304

)

Adjustments

 

1,272

 

1,272

 

Foreign currency translation

 

(17

)

63

 

Closure and post-closure obligations, end of period

 

74,266

 

74,266

 

Less current portion

 

(2,211

)

(2,211

)

Long-term portion

 

$

72,055

 

$

72,055

 

 

Adjustments to the closure and post-closure obligations represent changes in the expected timing or amount of cash expenditures based upon actual and estimated cash expenditures. Adjustments for the three and nine months ended September 30, 2016 are attributable to an increase in post-closure obligations for our non-operating facilities due to changes in estimated post-closure costs.

 

NOTE 12.    INCOME TAXES

 

Our effective tax rate for the three months ended September 30, 2016 was 38.3%, down from 40.9% for the three months ended September 30, 2015. The decrease primarily reflects a higher proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate, in the third quarter of 2016 compared with the third quarter of 2015. The decrease was partially offset by a higher U.S. effective tax rate in the third quarter of 2016 driven by a higher overall effective state tax rate resulting from changes in our apportionment between the various states in which we operate.

 

Our effective tax rate for the nine months ended September 30, 2016 was 38.8%, down from 45.3% for the nine months ended September 30, 2015. The decrease primarily reflects non-deductible goodwill impairment charges of $6.7 million recorded during the nine months ended September 30, 2015. The decrease is partially offset by a lower proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate, in the first nine months of 2016 compared with the first nine months of 2015. The decrease is also partially attributable to a higher U.S. effective tax rate in the first nine months of 2016 driven by a higher overall effective state tax rate resulting from changes in our apportionment between the various states in which we operate.

 

We file a consolidated U.S. federal income tax return with the Internal Revenue Service (“IRS”) as well as income tax returns in various states and Canada. During the nine months ended September 30, 2016, the US Ecology, Inc. IRS examination for the 2012 tax year concluded with no material changes. US Ecology, Inc. is subject to examination by the IRS for tax years 2013 through 2015. During the nine months ended September 30, 2016, the EQ IRS examination for the 2012 tax year concluded with no material changes. EQ is subject to examination by the IRS for tax years 2013 through 2015. We may be subject to examinations by the Canada Revenue Agency as well as various state and local taxing jurisdictions for tax years 2011 through 2015. We are currently not aware of any other examinations by taxing authorities.

 

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NOTE 13.             EARNINGS PER SHARE

 

 

 

Three Months Ended September 30,

 

$s and shares in thousands, except per share 

 

2016

 

2015

 

amounts

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net income

 

$

10,114

 

$

10,114

 

$

9,904

 

$

9,904

 

Weighted average basic shares outstanding

 

21,714

 

21,714

 

21,655

 

21,655

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock-based awards

 

 

 

90

 

 

 

94

 

Weighted average diluted shares outstanding

 

 

 

21,804

 

 

 

21,749

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.47

 

$

0.46

 

$

0.46

 

$

0.46

 

Anti-dilutive shares excluded from calculation

 

 

 

195

 

 

 

181

 

 

 

 

Nine Months Ended September 30,

 

$s and shares in thousands, except per share 

 

2016

 

2015

 

amounts

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net income

 

$

26,569

 

$

26,569

 

$

17,907

 

$

17,907

 

Weighted average basic shares outstanding

 

21,700

 

21,700

 

21,619

 

21,619

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock-based awards

 

 

 

80

 

 

 

104

 

Weighted average diluted shares outstanding

 

 

 

21,780

 

 

 

21,723

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

1.22

 

$

1.22

 

$

0.83

 

$

0.82

 

Anti-dilutive shares excluded from calculation

 

 

 

267

 

 

 

192

 

 

NOTE 14.             EQUITY

 

Stock Repurchase Program

 

On June 1, 2016, the Company’s Board of Directors authorized the repurchase of $25.0 million of the Company’s outstanding common stock. Repurchases may be made from time to time in open market or through privately negotiated transactions. The timing of any repurchases will be based upon prevailing market conditions and other factors. The Company did not repurchase any shares of common stock under the repurchase program during the nine months ended September 30, 2016. The repurchase program will remain in effect until June 2, 2018, unless extended by our Board of Directors.

 

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 was developed to provide additional incentives through equity ownership in US Ecology and, as a result, encourage employees and directors to contribute to our success. 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 (“RSUs”), performance stock units (“PSUs”) and other stock-based awards or cash awards to officers, employees, consultants and non-employee directors. Subsequent to the approval of the Omnibus Plan in May 2015, we stopped granting equity awards under our 2008 Stock Option Incentive Plan and our 2006 Restricted Stock Plan (collectively, the “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 1,500,000 shares of common stock for grant over the life of the Omnibus Plan. As of September 30, 2016, 1,261,484 shares of common stock remain available for grant under the Omnibus Plan.

 

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PSUs, RSUs and Restricted Stock

 

On January 4, 2016, the Company granted 16,000 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, 2016, 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 $41.22 per unit. Compensation expense is recorded over the awards’ vesting period.

 

Assumptions used in the Monte Carlo simulation to calculate the fair value of the PSUs granted in 2016 and 2015 are as follows:

 

 

 

2016

 

2015

 

Stock price on grant date

 

$35.05

 

$46.89

 

Expected term (years)

 

3.0

 

2.6

 

Expected volatility

 

29%

 

29%

 

Risk-free interest rate

 

1.3%

 

0.9%

 

Expected dividend yield

 

2.1%

 

1.5%

 

 

A summary of our PSU, restricted stock and RSU activity for the nine months ended September 30, 2016 is as follows:

 

 

 

PSUs

 

Restricted Stock

 

RSUs

 

 

 

Shares

 

Weighted
Average
Grant Date
Fair Value

 

Shares

 

Weighted
Average
Grant Date
Fair Value

 

Shares

 

Weighted
Average
Grant Date
Fair Value

 

Outstanding as of December 31, 2015

 

6,929

 

$

65.78

 

59,413

 

$

42.67

 

 

$

 

Granted

 

16,000

 

41.22

 

34,300

 

37.90

 

20,830

 

39.10

 

Vested

 

 

 

(32,279

)

37.83

 

 

 

Cancelled, expired or forfeited

 

(3,466

)

48.77

 

(6,233

)

40.51

 

(260

)

39.10

 

Outstanding as of September 30, 2016

 

19,463

 

$

48.62

 

55,201

 

$

42.78

 

20,570

 

$

39.10

 

 

Stock Options

 

A summary of our stock option activity for the nine months ended September 30, 2016 is as follows:

 

 

 

Shares

 

Weighted
Average
Exercise
Price

 

Outstanding as of December 31, 2015

 

336,417

 

$

35.83

 

Granted

 

147,660

 

37.83

 

Exercised

 

(13,939

)

23.25

 

Cancelled, expired or forfeited

 

(22,730

)

43.44

 

Outstanding as of September 30, 2016

 

447,408

 

$

36.50

 

 

 

 

 

 

 

Exercisable as of September 30, 2016

 

153,535

 

$

33.33

 

 

Treasury Stock

 

During the nine months ended September 30, 2016, the Company issued 10,412 shares of restricted stock, under the Omnibus Plan, from our treasury stock at an average cost of $39.82 per share and repurchased 6,589 shares of the Company’s common stock in connection with the net share settlement of employee equity awards at an average cost of $40.95 per share. During the nine months ended September 30, 2016, option holders exercised 13,939 options with a weighted-average exercise price of $23.25 per option. Option holders exercised 2,083 of these options via net share settlement.

 

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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 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 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 cleaning, tank cleaning, decontamination, remediation, transportation, spill cleanup and emergency response and other services to commercial and industrial facilities and to government entities.

 

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.

 

Effective January 1, 2016, we changed our internal reporting structure by moving the financial results of our Sulligent, Alabama and Tampa, Florida facilities from our Environmental Services segment to our Field & Industrial Services segment. The purpose of this change is to align our internal reporting structure with how we manage our business based on the primary service offering of each facility. Throughout this Quarterly Report on Form 10-Q, our segment results for all periods presented have been recast to reflect this change.

 

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Summarized financial information of our reportable segments is as follows:

 

 

 

Three Months Ended September 30, 2016

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

70,719

 

$

3,737

 

$

 

$

74,456

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

17,066

 

4,073

 

 

21,139

 

Industrial Cleaning (2)

 

 

5,025

 

 

5,025

 

Technical Services (3)

 

 

20,364

 

 

20,364

 

Remediation (4)

 

 

3,326

 

 

3,326

 

Other (5)

 

 

514

 

 

514

 

Total Revenue

 

$

87,785

 

$

37,039

 

$

 

$

124,824

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

8,665

 

$

1,356

 

$

115

 

$

10,136

 

Capital expenditures

 

$

1,960

 

$

450

 

$

546

 

$

2,956

 

Total assets

 

$

589,841

 

$

124,351

 

$

59,118

 

$

773,310

 

 

 

 

Three Months Ended September 30, 2015

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services (6)

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

73,487

 

$

3,504

 

$

 

$

76,991

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

18,460

 

5,840

 

 

24,300

 

Industrial Cleaning (2)

 

 

28,059

 

 

28,059

 

Technical Services (3)

 

 

17,640

 

 

17,640

 

Remediation (4)

 

 

1,253

 

 

1,253

 

Other (5)

 

 

171

 

 

171

 

Total Revenue

 

$

91,947

 

$

56,467

 

$

 

$

148,414

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

8,619

 

$

1,930

 

$

126

 

$

10,675

 

Capital expenditures

 

$

4,365

 

$

1,516

 

$

436

 

$

6,317

 

Total assets

 

$

594,421

 

$

206,341

 

$

62,614

 

$

863,376

 

 

 

 

Nine Months Ended September 30, 2016

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

204,352

 

$

9,386

 

$

 

$

213,738

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

47,754

 

14,416

 

 

62,170

 

Industrial Cleaning (2)

 

 

16,497

 

 

16,497

 

Technical Services (3)

 

 

57,136

 

 

57,136

 

Remediation (4)

 

 

8,816

 

 

8,816

 

Other (5)

 

 

2,136

 

 

2,136

 

Total Revenue

 

$

252,106

 

$

108,387

 

$

 

$

360,493

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

25,117

 

$

4,070

 

$

362

 

$

29,549

 

Capital expenditures

 

$

18,309

 

$

1,883

 

$

2,358

 

$

22,550

 

Total assets

 

$

589,841

 

$

124,351

 

$

59,118

 

$

773,310

 

 

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Table of Contents

 

 

 

Nine Months Ended September 30, 2015

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services (6)

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

217,045

 

$

9,723

 

$

 

$

226,768

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

49,269

 

20,496

 

 

69,765

 

Industrial Cleaning (2)

 

 

71,601

 

 

71,601

 

Technical Services (3)

 

 

50,243

 

 

50,243

 

Remediation (4)

 

 

5,492

 

 

5,492

 

Other (5)

 

 

928

 

 

928

 

Total Revenue

 

$

266,314

 

$

158,483

 

$

 

$

424,797

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

26,047

 

$

8,040

 

$

405

 

$

34,492

 

Capital expenditures

 

$

17,226

 

$

6,588

 

$

1,879

 

$

25,693

 

Total assets

 

$

594,421

 

$

206,341

 

$

62,614

 

$

863,376

 

 


(1)         Includes such services as collection, transportation and disposal of non-hazardous and hazardous waste.

(2)         Includes such services as industrial cleaning and maintenance for refineries, chemical plants, steel and automotive plants, and refinery services such as tank cleaning 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.

(6)         Financial data includes the operations of our Allstate business. We completed the divestiture of Allstate on November 1, 2015.

 

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 interest expense, interest income, 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:

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

$s in thousands

 

2016

 

2015

 

2016

 

2015

 

Net income

 

$

10,114

 

$

9,904

 

$

26,569

 

$

17,907

 

Income tax expense

 

6,278

 

6,858

 

16,828

 

14,815

 

Interest expense

 

4,288

 

5,081

 

13,150

 

16,208

 

Interest income

 

(8

)

(17

)

(90

)

(64

)

Foreign currency (gain) loss

 

224

 

994

 

(192

)

1,769

 

Other (income) expense

 

19

 

(387

)

(2,480

)

(1,156

)

Depreciation and amortization of plant and equipment

 

6,454

 

6,591

 

18,561

 

21,726

 

Amortization of intangibles

 

2,651

 

2,952

 

7,907

 

9,558

 

Stock-based compensation

 

605

 

646

 

2,182

 

1,736

 

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

 

1,031

 

1,132

 

3,081

 

3,208

 

Impairment charges

 

 

 

 

6,700

 

Adjusted EBITDA

 

$

31,656

 

$

33,754

 

$

85,516

 

$

92,407

 

 

Adjusted EBITDA, by operating segment, is as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

$s in thousands

 

2016

 

2015

 

2016

 

2015

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

Environmental Services

 

$

37,747

 

$

38,420

 

$

104,352

 

$

110,778

 

Field & Industrial Services

 

4,466

 

6,435

 

13,267

 

15,790

 

Corporate

 

(10,557

)

(11,101

)

(32,103

)

(34,161

)

Total

 

$

31,656

 

$

33,754

 

$

85,516

 

$

92,407

 

 

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

 

2016

 

2015

 

2016

 

2015

 

United States

 

$

111,005

 

$

138,367

 

$

325,379

 

$

392,698

 

Canada

 

13,819

 

10,047

 

35,114

 

32,099

 

Total revenue

 

$

124,824

 

$

148,414

 

$

360,493

 

$

424,797

 

 

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

 

2016

 

2015

 

United States

 

$

398,722

 

$

400,320

 

Canada

 

55,046

 

49,585

 

Total long-lived assets

 

$

453,768

 

$

449,905

 

 

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NOTE 17.             SUBSEQUENT EVENTS

 

Quarterly Dividend

 

On October 3, 2016, we declared a quarterly dividend of $0.18 per common share to stockholders of record on October 21, 2016. The dividend was paid using cash on hand on October 28, 2016 in an aggregate amount of $3.9 million.

 

Acquisition of Vernon, California Facility (“Vernon”)

 

On October 1, 2016, we acquired the assets of the Vernon, California based RCRA Part B, liquids and solids waste treatment and storage facility of Evoqua Water Technologies LLC for $5.0 million.  Revenues and total assets of Vernon are not material to our consolidated financial position or results of operations.

 

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Table of Contents

 

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, 2016, and the related consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2016 and 2015, and of cash flows for the nine-month periods ended September 30, 2016 and 2015. 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, 2015, 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 February 29, 2016, 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, 2015 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

October 31, 2016

 

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Table of Contents

 

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 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.

 

We have fixed facilities and service centers operating in the United States, Canada and Mexico. Our fixed facilities include five Resource Conservation and Recovery Act of 1976, subtitle C, hazardous waste landfills and one low-level radioactive waste landfill 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 November 1, 2015, we sold our Allstate Power Vac, Inc. (“Allstate”) subsidiary to a private investor group. See Note 3 to the Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q for additional information.

 

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 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 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 cleaning, tank cleaning, decontamination, remediation, transportation, spill cleanup and emergency response and other services to commercial and industrial facilities and to government entities.

 

Effective January 1, 2016, we changed our internal reporting structure by moving the financial results of our Sulligent, Alabama and Tampa, Florida facilities from our Environmental Services segment to our Field & Industrial Services segment. The purpose of this change is to align our internal reporting structure with how we manage our business based on the primary service offering of each facility. Throughout this Quarterly Report on Form 10-Q, our segment results for all periods presented have been recast to reflect this change.

 

In order to provide insight into the underlying drivers of our waste volumes and related treatment and disposal (“T&D”) revenues, we evaluate period-to-period changes in our T&D revenue for our Environmental Services segment based on the industry of the waste generator, based on North American Industry Classification System (“NAICS”) codes. The composition of Environmental Services segment T&D revenues by waste generator industry for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

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% of Treatment and Disposal Revenue (1)(2) for the
Three Months Ended September 30,

 

Generator Industry

 

2016

 

2015

 

Metal Manufacturing

 

16%

 

14%

 

General Manufacturing

 

16%

 

12%

 

Broker / Treatment, Storage & Disposal Facilities (“TSDF”)

 

15%

 

14%

 

Chemical Manufacturing

 

12%

 

16%

 

Refining

 

11%

 

11%

 

Government

 

5%

 

8%

 

Utilities

 

4%

 

4%

 

Mining, Exploration & Production

 

3%

 

3%

 

Transportation

 

2%

 

3%

 

Waste Management & Remediation

 

2%

 

2%

 

Other (3)

 

14%

 

13%

 

 


(1) Excludes all transportation service revenue

(2) Excludes treatment and disposal revenue from the Augusta, Georgia facility which we divested on April 5, 2016.

(3) Includes retail and wholesale trade, rate regulated, construction and other industries

 

 

 

% of Treatment and Disposal Revenue (1)(2) for the
Nine Months Ended September 30,

 

Generator Industry

 

2016

 

2015

 

Metal Manufacturing

 

16%

 

15%

 

Broker / TSDF

 

15%

 

15%

 

General Manufacturing

 

14%

 

11%

 

Chemical Manufacturing

 

13%

 

20%

 

Refining

 

11%

 

11%

 

Government

 

6%

 

7%

 

Utilities

 

4%

 

4%

 

Mining, Exploration and Production

 

3%

 

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