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EX-10.2 - EX-10.2 - US ECOLOGY, INC.a17-8891_1ex10d2.htm
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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 March 31, 2017

 

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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

Emerging growth company o

(Do not check if a smaller reporting company)

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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 April 26, 2017 there were 21,822,522 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 March 31, 2017 and December 31, 2016

3

 

 

 

 

Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016

4

 

 

 

 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016

5

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

Report of Independent Registered Public Accounting Firm

20

 

 

 

2.

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

21

3.

Quantitative and Qualitative Disclosures About Market Risk

29

4.

Controls and Procedures

30

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

Cautionary Statement

31

1.

Legal Proceedings

32

1A.

Risk Factors

32

2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

3.

Defaults Upon Senior Securities

32

4.

Mine Safety Disclosures

32

5.

Other Information

32

6.

Exhibits

33

 

SIGNATURE

34

 

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)

 

 

 

March 31, 2017

 

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

10,309

 

$

7,015

 

Receivables, net

 

93,387

 

96,819

 

Prepaid expenses and other current assets

 

7,892

 

7,458

 

Income taxes receivable

 

2,039

 

4,076

 

Total current assets

 

113,627

 

115,368

 

 

 

 

 

 

 

Property and equipment, net

 

225,760

 

226,237

 

Restricted cash and investments

 

5,794

 

5,787

 

Intangible assets, net

 

231,905

 

234,356

 

Goodwill

 

193,765

 

193,621

 

Other assets

 

875

 

1,031

 

Total assets

 

$

771,726

 

$

776,400

 

 

 

 

 

 

 

Liabilities And Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

12,529

 

$

13,948

 

Deferred revenue

 

9,867

 

7,820

 

Accrued liabilities

 

19,903

 

22,605

 

Accrued salaries and benefits

 

10,605

 

10,720

 

Income taxes payable

 

105

 

165

 

Current portion of closure and post-closure obligations

 

2,257

 

2,256

 

Revolving credit facility

 

 

2,177

 

Current portion of long-term debt

 

2,862

 

2,903

 

Total current liabilities

 

58,128

 

62,594

 

 

 

 

 

 

 

Long-term closure and post-closure obligations

 

73,642

 

72,826

 

Long-term debt

 

270,171

 

274,459

 

Other long-term liabilities

 

4,399

 

5,164

 

Deferred income taxes

 

81,870

 

81,333

 

Total liabilities

 

488,210

 

496,376

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Common stock $0.01 par value, 50,000 authorized; 21,823 and 21,780 shares issued, respectively

 

218

 

218

 

Additional paid-in capital

 

174,044

 

172,704

 

Retained earnings

 

123,141

 

121,879

 

Treasury stock, at cost, 9 and 7 shares, respectively

 

(135

)

(52

)

Accumulated other comprehensive loss

 

(13,752

)

(14,725

)

Total stockholders’ equity

 

283,516

 

280,024

 

Total liabilities and stockholders’ equity

 

$

771,726

 

$

776,400

 

 

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 March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Revenue

 

$

110,234

 

$

113,318

 

Direct operating costs

 

78,361

 

78,110

 

 

 

 

 

 

 

Gross profit

 

31,873

 

35,208

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

19,714

 

19,425

 

 

 

 

 

 

 

Operating income

 

12,159

 

15,783

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

10

 

49

 

Interest expense

 

(4,130

)

(4,559

)

Foreign currency gain

 

88

 

759

 

Other

 

137

 

169

 

 

 

 

 

 

 

Total other expense

 

(3,895

)

(3,582

)

 

 

 

 

 

 

Income before income taxes

 

8,264

 

12,201

 

Income tax expense

 

3,079

 

4,684

 

 

 

 

 

 

 

Net income

 

$

5,185

 

$

7,517

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.24

 

$

0.35

 

Diluted

 

$

0.24

 

$

0.35

 

 

 

 

 

 

 

Shares used in earnings per share calculation:

 

 

 

 

 

Basic

 

21,725

 

21,684

 

Diluted

 

21,845

 

21,745

 

 

 

 

 

 

 

Dividends paid per share

 

$

0.18

 

$

0.18

 

 

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 March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Net income

 

$

5,185

 

$

7,517

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation gain

 

439

 

3,253

 

Net changes in interest rate hedge, net of taxes of $288 and ($1,019), respectively

 

534

 

(1,894

)

 

 

 

 

 

 

Comprehensive income, net of tax

 

$

6,158

 

$

8,876

 

 

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)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

5,185

 

$

7,517

 

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

 

 

 

 

 

Depreciation and amortization of property and equipment

 

6,633

 

5,904

 

Amortization of intangible assets

 

2,670

 

2,610

 

Accretion of closure and post-closure obligations

 

1,073

 

1,024

 

Unrealized foreign currency gain

 

(168

)

(846

)

Deferred income taxes

 

179

 

(699

)

Share-based compensation expense

 

918

 

795

 

Net loss (gain) on disposition of assets

 

219

 

(17

)

Amortization of debt issuance costs

 

504

 

638

 

Amortization of debt discount

 

37

 

37

 

Changes in assets and liabilities:

 

 

 

 

 

Receivables

 

2,991

 

12,222

 

Income taxes receivable

 

2,045

 

943

 

Other assets

 

(417

)

365

 

Accounts payable and accrued liabilities

 

(2,577

)

571

 

Deferred revenue

 

2,037

 

(1,461

)

Accrued salaries and benefits

 

(124

)

(2,122

)

Income taxes payable

 

(61

)

3,243

 

Closure and post-closure obligations

 

(271

)

(472

)

Net cash provided by operating activities

 

20,873

 

30,252

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(7,151

)

(7,219

)

Purchases of restricted cash and investments

 

(13

)

(53

)

Proceeds from sale of restricted cash and investments

 

6

 

6

 

Proceeds from sale of property and equipment

 

40

 

56

 

Net cash used in investing activities

 

(7,118

)

(7,210

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on long-term debt

 

(4,726

)

(10,764

)

Dividends paid

 

(3,923

)

(3,918

)

Proceeds from revolving credity facility

 

11,260

 

6,934

 

Payments on revolving credit facility

 

(13,438

)

(6,934

)

Proceeds from exercise of stock options

 

496

 

 

Payment of equipment financing obligations

 

(85

)

 

Other

 

(74

)

(225

)

Net cash used in financing activities

 

(10,490

)

(14,907

)

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash

 

29

 

158

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

3,294

 

8,293

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

7,015

 

5,989

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

10,309

 

$

14,282

 

 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

Income taxes paid, net of receipts

 

$

886

 

$

1,230

 

Interest paid

 

$

3,618

 

$

3,880

 

Non-cash investing and financing activities:

 

 

 

 

 

Capital expenditures in accounts payable

 

$

1,766

 

$

2,511

 

Restricted stock issued from treasury shares

 

$

 

$

155

 

 

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, 2016. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2017.

 

The Company’s consolidated balance sheet as of December 31, 2016 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 consolidated 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 January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350). This ASU removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, “an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.” The guidance is effective prospectively for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company early adopted ASU 2017-04 on January 1, 2017 and the standard is not expected to have a material impact on its consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (Topic 230). This ASU amends the guidance in Accounting Standards Codification (“ASC”) 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The classification of restricted cash in the statement of cash flows, along with eight other cash flow-related issues, was initially addressed by the Emerging Issues Task Force (“EITF”) in Issue 15-F. However, after deliberation of those issues, the EITF decided to address the diversity in practice related to the cash flow classification of restricted cash separately, in Issue 16-A. ASU 2016-18 is based on the EITF’s consensuses reached on Issue 16-A. 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 2016-18 may have on our consolidated cash flows.

 

In August 2016, the FASB issued 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.

 

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Table of Contents

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718). This ASU requires excess tax benefits and tax deficiencies, which arise due to differences between the measure of compensation expense and the amount deductible for tax purposes, to be recorded directly through earnings as a component of income tax expense. Previously, these differences were generally recorded in additional paid-in capital and thus had no impact on net income. The change in treatment of excess tax benefits and tax deficiencies also impacts the computation of diluted earnings per share, and the cash flows associated with those items are classified as operating activities on the consolidated statements of cash flows. Additionally, ASU 2016-09 permits entities to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as allowed under previous standards, or recognized when they occur. The amendments in this ASU became effective in the first quarter of 2017. The Company adopted this ASU on January 1, 2017 and the standard did not have a material impact on its consolidated financial statements. Adoption of the ASU did not result in any cumulative effect adjustments to retained earnings or other components of stockholders’ equity as of the date of adoption, as well as there were no retrospective adjustments to our consolidated 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 guidance is effective for annual and interim periods beginning after December 15, 2018. The guidance must be applied using the modified retrospective approach. 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. The Company is in the process of evaluating the impact of adopting ASU 2014-19 on its consolidated financial statements.  The Company is currently reviewing customer contracts in each of its operating segments for all services provided, assessing the impact of applying ASU 2014-19, and comparing this to the Company’s historical revenue recognition criteria.  Based upon the preliminary review of customer contracts, the Company believes that the Company’s revenue recognition policies are consistent with the requirements of ASU 2014-19.  While the Company continues to assess all potential impacts of adopting ASU 2014-19, based upon information available to date, the Company does not expect the adoption of ASU 2014-19 to have a significant impact either on the timing or recognition of revenues.

 

NOTE 2.                    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, 2016

 

$

(12,649

)

$

(2,076

)

$

(14,725

)

Other comprehensive income before reclassifications, net of tax

 

439

 

53

 

492

 

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

 

 

481

 

481

 

Other comprehensive income

 

439

 

534

 

973

 

Balance at March 31, 2017

 

$

(12,210

)

$

(1,542

)

$

(13,752

)

 


(1)         Before-tax reclassifications of $740,000 ($481,000 after-tax) and $826,000 ($536,000 after-tax) for the three months ended March 31, 2017 and 2016, respectively, were included in Interest expense in the Company’s consolidated statements of operations. Amounts relate to the Company’s 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 long-term debt are made. Amounts in AOCI expected to be recognized in interest expense over the next 12 months total approximately $3.0 million ($1.9 million after-tax).

 

8



Table of Contents

 

NOTE 3.                                              CONCENTRATIONS AND CREDIT RISK

 

Major Customers

 

No customer accounted for more than 10% of total revenue for the three months ended March 31, 2017 or 2016. No customer accounted for more than 10% of total trade receivables as of March 31, 2017 or December 31, 2016.

 

Credit Risk Concentration

 

We maintain most of our cash and cash equivalents with nationally recognized financial institutions. 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 4.                    RECEIVABLES

 

Receivables consisted of the following:

 

 

 

March 31,

 

December 31,

 

$s in thousands

 

2017

 

2016

 

 

 

 

 

 

 

Trade

 

$

80,867

 

$

84,487

 

Unbilled revenue

 

12,105

 

13,835

 

Other

 

2,578

 

831

 

Total receivables

 

95,550

 

99,153

 

Allowance for doubtful accounts

 

(2,163

)

(2,334

)

Receivables, net

 

$

93,387

 

$

96,819

 

 

NOTE 5.                    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 March 31, 2017, the fair value of the Company’s variable-rate debt was estimated to be $280.4 million.

 

9



Table of Contents

 

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

 

 

 

March 31, 2017

 

 

 

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)

 

$

606

 

$

3,476

 

$

 

$

4,082

 

Money market funds (2)

 

1,712

 

 

 

1,712

 

Total

 

$

2,318

 

$

3,476

 

$

 

$

5,794

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap agreement (3)

 

$

 

$

2,376

 

$

 

$

2,376

 

Total

 

$

 

$

2,376

 

$

 

$

2,376

 

 

 

 

December 31, 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)

 

$

607

 

$

3,473

 

$

 

$

4,080

 

Money market funds (2)

 

1,707

 

 

 

1,707

 

Total

 

$

2,314

 

$

3,473

 

$

 

$

5,787

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap agreement (3)

 

$

 

$

3,198

 

$

 

$

3,198

 

Total

 

$

 

$

3,198

 

$

 

$

3,198

 

 


(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 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 March 31, 2017 and December 31, 2016.

 

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NOTE 6.                    PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

 

 

March 31,

 

December 31,

 

$s in thousands

 

2017

 

2016

 

 

 

 

 

 

 

Cell development costs

 

$

128,927

 

$

128,821

 

Land and improvements

 

34,343

 

34,285

 

Buildings and improvements

 

78,108

 

78,081

 

Railcars

 

17,299

 

17,299

 

Vehicles and other equipment

 

111,962

 

110,267

 

Construction in progress

 

28,572

 

24,392

 

Total property and equipment

 

399,211

 

393,145

 

Accumulated depreciation and amortization

 

(173,451

)

(166,908

)

Property and equipment, net

 

$

225,760

 

$

226,237

 

 

Depreciation and amortization expense for the three months ended March 31, 2017 and 2016 was $6.6 million and $5.9 million, respectively.

 

NOTE 7.                    GOODWILL AND INTANGIBLE ASSETS

 

Changes in goodwill for the three months ended March 31, 2017 consisted of the following:

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Total

 

Balance at December 31, 2016

 

$

149,490

 

$

44,131

 

$

193,621

 

Foreign currency translation

 

144

 

 

144

 

Balance at March 31, 2017

 

$

149,634

 

$

44,131

 

$

193,765

 

 

Intangible assets, net consisted of the following:

 

 

 

March 31, 2017

 

December 31, 2016

 

$s in thousands

 

Cost

 

Accumulated
Amortization

 

Net

 

Cost

 

Accumulated
Amortization

 

Net

 

Amortizing intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Permits, licenses and lease

 

$

110,517

 

$

(10,170

)

$

100,347

 

$

110,341

 

$

(9,462

)

$

100,879

 

Customer relationships

 

84,740

 

(15,920

)

68,820

 

84,711

 

(14,519

)

70,192

 

Technology - formulae and processes

 

6,827

 

(1,371

)

5,456

 

6,770

 

(1,305

)

5,465

 

Customer backlog

 

3,652

 

(1,017

)

2,635

 

3,652

 

(926

)

2,726

 

Tradename

 

4,318

 

(4,009

)

309

 

4,318

 

(3,650

)

668

 

Developed software

 

2,910

 

(1,073

)

1,837

 

2,907

 

(994

)

1,913

 

Non-compete agreements

 

747

 

(746

)

1

 

747

 

(742

)

5

 

Internet domain and website

 

540

 

(79

)

461

 

540

 

(72

)

468

 

Database

 

388

 

(127

)

261

 

387

 

(118

)

269

 

Total amortizing intangible assets

 

214,639

 

(34,512

)

180,127

 

214,373

 

(31,788

)

182,585

 

Nonamortizing intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Permits and licenses

 

51,650

 

 

51,650

 

51,645

 

 

51,645

 

Tradename

 

128

 

 

128

 

126

 

 

126

 

Total intangible assets, net

 

$

266,417

 

$

(34,512

)

$

231,905

 

$

266,144

 

$

(31,788

)

$

234,356

 

 

Amortization expense for the three months ended March 31, 2017 and 2016 was $2.7 million and $2.6 million, respectively. Foreign intangible asset carrying amounts are affected by foreign currency translation.

 

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NOTE 8.                    DEBT

 

Long-term debt consisted of the following:

 

 

 

March 31,

 

December 31,

 

$s in thousands

 

2017

 

2016

 

 

 

 

 

 

 

Term loan

 

$

278,314

 

$

283,040

 

Unamortized discount and debt issuance costs

 

(5,281

)

(5,678

)

Total debt

 

273,033

 

277,362

 

Current portion of long-term debt

 

(2,862

)

(2,903

)

Long-term debt

 

$

270,171

 

$

274,459

 

 

On June 17, 2014, the Company entered into a new $540.0 million senior secured credit agreement (the “Former Credit Agreement”) with a syndicate of banks comprised of a $415.0 million term loan (the “Former Term Loan”) with a maturity date of June 17, 2021 and a $125.0 million revolving line of credit (the “Former Revolving Credit Facility”) with a maturity date of June 17, 2019.

 

Former Term Loan

 

The Former Term Loan provided an initial commitment amount of $415.0 million and bore interest at a base rate (as defined in the Former Credit Agreement) plus 2.00% or LIBOR plus 3.00%, at the Company’s option. At March 31, 2017, the effective interest rate on the Former Term Loan, including the impact of our interest rate swap, was 4.75%. In October 2014, the Company entered into an interest rate swap agreement, effectively fixing the interest rate on $205.0 million, or 74%, of the Former Term Loan principal outstanding as of March 31, 2017.

 

Former Revolving Credit Facility

 

The Former Revolving Credit Facility provided 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 Former Revolving Credit Facility, revolving loans were available based on a base rate (as defined in the Former Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which was determined according to a pricing grid under which the interest rate decreased or increased based on our ratio of funded debt to consolidated earnings before interest, taxes, depreciation and amortization (as defined in the Former Credit Agreement). The maximum letter of credit capacity under the Former Revolving Credit Facility was $50.0 million and the Former Credit Agreement provided for a letter of credit fee equal to the applicable margin for LIBOR loans under the Former Revolving Credit Facility. At March 31, 2017, there were no borrowings outstanding on the Former Revolving Credit Facility and we were in compliance with all of the financial covenants in the Former Credit Agreement.

 

On April 18, 2017, the Company entered into a senior secured credit agreement (the “New Credit Agreement”), which provides for a $500.0 million, five-year revolving credit facility (the “Revolving Credit Facility”), including a $75.0 million sublimit for the issuance of standby letters of credit. In connection with the Company’s entry into the New Credit Agreement, the Company refinanced the Former Credit Agreement. For more information about our refinancing, see Note 15 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q.

 

NOTE 9.                                              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.

 

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

 

 

 

Three Months Ended

 

$s in thousands

 

March 31, 2017

 

 

 

 

 

Closure and post-closure obligations, beginning of period

 

$

75,082

 

Accretion expense

 

1,073

 

Payments

 

(270

)

Foreign currency translation

 

14

 

Closure and post-closure obligations, end of period

 

75,899

 

Less current portion

 

(2,257

)

Long-term portion

 

$

73,642

 

 

NOTE 10.             INCOME TAXES

 

Our effective tax rate for the three months ended March 31, 2017 was 37.3%, down from 38.4% for the three months ended March 31, 2016. The decrease for the three months ended March 31, 2017 compared with the three months ended March 31, 2016 primarily reflects a higher proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate. The decrease is partially offset by a higher U.S. effective tax rate for the three months ended March 31, 2017, which is primarily driven by a higher overall effective state tax rate resulting from changes in our apportionment between the various states in which we operate. The effective tax rate for the three months ended March 31, 2017 reflects the impact of discrete events including the recognition of excess tax benefits related to employee stock compensation as a result of the adoption of ASU 2016-09.

 

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. US Ecology, Inc. is subject to examination by the IRS for tax years 2013 through 2016. EQ is also subject to examination by the IRS for tax years 2013 and 2014. We may be subject to examinations by the Canada Revenue Agency as well as various state and local taxing jurisdictions for tax years 2012 through 2016. We are currently not aware of any examinations by taxing authorities.

 

As discussed in Note 1 to the consolidated financial statements, the Company adopted ASU 2016-09 in the first quarter of 2017. The Company recorded all income tax effects of stock-based compensation awards in its provision for income taxes in the consolidated statement of operations on a prospective basis. Adoption of ASU 2016-09 resulted in net excess tax benefits in our provision for income taxes of $68,000 for the three months ended March 31, 2017. No other provisions of ASU 2016-09 had a material impact on the Company’s consolidated financial statements or disclosures.

 

NOTE 11.             EARNINGS PER SHARE

 

$s and shares in thousands, except per share

 

Three Months Ended March 31,

 

amounts

 

2017

 

2016

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net income

 

$

5,185

 

$

5,185

 

$

7,517

 

$

7,517

 

Weighted average basic shares outstanding

 

21,725

 

21,725

 

21,684

 

21,684

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock-based awards

 

 

 

120

 

 

 

61

 

Weighted average diluted shares outstanding

 

 

 

21,845

 

 

 

21,745

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.24

 

$

0.24

 

$

0.35

 

$

0.35

 

Anti-dilutive shares excluded from calculation

 

 

 

112

 

 

 

356

 

 

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NOTE 12.             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 the 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 three months ended March 31, 2017. 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”). 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 March 31, 2017, 1,159,404 shares of common stock remain available for grant under the Omnibus Plan.

 

PSUs, RSUs and Restricted Stock

 

On January 2, 2017, the Company granted 11,500 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, 2017, 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 $62.45 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 2017 are as follows:

 

 

 

2017

 

Stock price on grant date

 

$

49.15

 

Expected term (years)

 

3.0

 

Expected volatility

 

31

%

Risk-free interest rate

 

1.5

%

Expected dividend yield

 

1.5

%

 

A summary of our PSU, restricted stock and RSU activity for the three months ended March 31, 2017 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, 2016

 

19,463

 

$

48.62

 

55,201

 

$

42.78

 

19,930

 

$

39.10

 

Granted

 

11,500

 

62.45

 

19,100

 

49.15

 

34,870

 

47.93

 

Vested

 

 

 

(6,293

)

46.18

 

(6,456

)

39.10

 

Cancelled, expired or forfeited

 

 

 

(166

)

49.97

 

(640

)

39.10

 

Outstanding as of March 31, 2017

 

30,963

 

$

53.76

 

67,842

 

$

44.24

 

47,704

 

$

45.56

 

 

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Table of Contents

 

Stock Options

 

A summary of our stock option activity for the three months ended March 31, 2017 is as follows:

 

 

 

Shares

 

Weighted
Average
Exercise
Price

 

Outstanding as of December 31, 2016

 

446,498

 

$

36.49

 

Granted

 

34,600

 

49.15

 

Exercised

 

(21,327

)

28.73

 

Cancelled, expired or forfeited

 

(4,446

)

42.10

 

Outstanding as of March 31, 2017

 

455,325

 

$

37.76

 

Exercisable as of March 31, 2017

 

253,615

 

$

35.87

 

 

Treasury Stock

 

During the three months ended March 31, 2017, the Company repurchased 1,569 shares of the Company’s common stock in connection with the net share settlement of employee equity awards at an average cost of $48.50 per share. During the three months ended March 31, 2017, option holders exercised 21,327 options with a weighted-average exercise price of $28.73 per option. Option holders exercised 2,938 of these options via net share settlement.

 

NOTE 13.             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 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 14.   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.

 

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Table of Contents

 

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 March 31, 2017

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

68,703

 

$

2,637

 

$

 

$

71,340

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

12,600

 

5,320

 

 

17,920

 

Industrial Cleaning (2)

 

 

4,219

 

 

4,219

 

Technical Services (3)

 

 

15,662

 

 

15,662

 

Remediation (4)

 

 

606

 

 

606

 

Other (5)

 

 

487

 

 

487

 

Total Revenue

 

$

81,303

 

$

28,931

 

$

 

$

110,234

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

8,790

 

$

1,458

 

$

128

 

$

10,376

 

Capital expenditures

 

$

4,214

 

$

2,038

 

$

899

 

$

7,151

 

Total assets

 

$

594,310

 

$

118,995

 

$

58,421

 

$

771,726

 

 

 

 

Three Months Ended March 31, 2016

 

$s in thousands

 

Environmental
Services

 

Field &
Industrial
Services

 

Corporate

 

Total

 

Treatment & Disposal Revenue

 

$

66,724

 

$

2,752

 

$

 

$

69,476

 

Services Revenue:

 

 

 

 

 

 

 

 

 

Transportation and Logistics (1)

 

14,800

 

5,387

 

 

20,187

 

Industrial Cleaning (2)

 

 

4,271

 

 

4,271

 

Technical Services (3)

 

 

17,605

 

 

17,605

 

Remediation (4)

 

 

838

 

 

838

 

Other (5)

 

 

941

 

 

941

 

Total Revenue

 

$

81,524

 

$

31,794

 

$

 

$

113,318

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

8,079

 

$

1,337

 

$

122

 

$

9,538

 

Capital expenditures

 

$

5,839

 

$

500

 

$

880

 

$

7,219

 

Total assets

 

$

586,668

 

$

120,896

 

$

60,661

 

$

768,225

 

 


(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.

 

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Table of Contents

 

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 and other income/expense. 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.

 

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

 

 

 

Three Months Ended March 31,

 

$s in thousands

 

2017

 

2016

 

Net income

 

$

5,185

 

$

7,517

 

Income tax expense

 

3,079

 

4,684

 

Interest expense

 

4,130

 

4,559

 

Interest income

 

(10

)

(49

)

Foreign currency gain

 

(88

)

(759

)

Other income

 

(137

)

(169

)

Depreciation and amortization of plant and equipment

 

6,633

 

5,904

 

Amortization of intangibles

 

2,670

 

2,610

 

Stock-based compensation

 

918

 

795

 

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

 

1,073

 

1,024

 

Adjusted EBITDA

 

$

23,453

 

$

26,116

 

 

Adjusted EBITDA, by operating segment, is as follows:

 

 

 

Three Months Ended March 31,

 

$s in thousands

 

2017

 

2016

 

Adjusted EBITDA:

 

 

 

 

 

Environmental Services

 

$

31,856

 

$

33,052

 

Field & Industrial Services

 

2,064

 

3,678

 

Corporate

 

(10,467

)

(10,614

)

Total

 

$

23,453

 

$

26,116

 

 

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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 March 31,

 

$s in thousands

 

2017

 

2016

 

United States

 

$

96,192

 

$

103,191

 

Canada

 

14,042

 

10,127

 

Total revenue

 

$

110,234

 

$

113,318

 

 

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

 

 

 

March 31,

 

December 31,

 

$s in thousands

 

2017

 

2016

 

United States

 

$

402,668

 

405,767

 

Canada

 

54,997

 

54,826

 

Total long-lived assets

 

$

457,665

 

$

460,593

 

 

NOTE 15.             SUBSEQUENT EVENTS

 

Quarterly Dividend

 

On April 3, 2017, we declared a quarterly dividend of $0.18 per common share to stockholders of record on April 21, 2017. The dividend was paid using cash on hand on April 28, 2017 in an aggregate amount of $3.9 million.

 

Debt Refinancing

 

On April 18, 2017, the Company entered into the New Credit Agreement with Wells Fargo Bank, National Association, as administrative agent for the lenders, swingline lender and issuing lender, and Bank of America, N.A., as an issuing lender, that provides for a $500.0 million, five-year Revolving Credit Facility, including a $75.0 million sublimit for the issuance of standby letters of credit. In connection with the Company’s entry into the New Credit Agreement, the Company refinanced the Former Credit Agreement. The Company expects that certain unamortized deferred financing costs and original issue discount associated with the Former Credit Agreement that were to be amortized to interest expense in future periods will be eliminated from the balance sheet through a non-cash charge to earnings of approximately $5.4 million in the second quarter of 2017.

 

The Revolving Credit Facility provides up to $500.0 million of revolving credit loans or letters of credit with the use of proceeds restricted solely for working capital and other general corporate purposes (including acquisitions and capital expenditures). Under the Revolving Credit Facility, revolving loans are available based on a base rate (as defined in the New 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 New Credit Agreement). The Company is required to pay a commitment fee ranging from 0.175% to 0.35% on the average daily unused portion of the Revolving Credit Facility, with such commitment fee to be reduced based upon the Company’s total net leverage ratio (as defined in the New Credit Agreement). The maximum letter of credit capacity under the Revolving Credit Facility is $75.0 million.

 

The Company may at any time and from time to time prepay revolving credit loans and swingline loans, in whole or in part, without premium or penalty, subject to the obligation to indemnify each of the lenders against any actual loss or expense (including any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain a LIBOR rate loan (as defined in the New Credit Agreement) or from fees payable to terminate the deposits from which such funds were obtained) with respect to the early termination of any LIBOR rate loan. The New Credit Agreement provides for mandatory prepayment at any time if the revolving credit outstandings exceed the revolving credit commitment (as such terms are defined in the New Credit Agreement), in an amount equal to such excess. Subject to certain exceptions, the New Credit Agreement provides for mandatory prepayment upon certain asset dispositions, casualty events and issuances of indebtedness.

 

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Pursuant to (i) an unconditional guarantee agreement and (ii) a collateral agreement, each entered into by the Company and its domestic subsidiaries on April 18, 2017, the Company’s obligations under the New Credit Agreement are (or will be) 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 are secured by substantially all of the assets of the Company and the Company’s existing and certain future domestic subsidiaries (subject to certain exclusions), including 100% of the equity interests of the Company’s domestic subsidiaries and 65% of the voting equity interests of the Company’s directly owned foreign subsidiaries (and 100% of the non-voting equity interests of the Company’s directly owned foreign subsidiaries).

 

The New 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. Upon the occurrence of an event of default (as defined in the New Credit Agreement), among other things, amounts outstanding under the New Credit Agreement may be accelerated and the commitments may be terminated.

 

The New Credit Agreement also contains financial maintenance covenants, a maximum consolidated total net leverage ratio and a consolidated interest coverage ratio (as such terms are defined in the New Credit Agreement). Our Consolidated Total Net Leverage Ratio as of the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2017, may not exceed 3.50 to 1.00, subject to certain exceptions. Our Consolidated Interest Coverage Ratio as of the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2017, may not be less than 3.00 to 1.00.

 

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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 March 31, 2017, and the related consolidated statements of operations, comprehensive income, and cash flows for the three-month periods ended March 31, 2017 and 2016. 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, 2016, 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 27, 2017, 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, 2016 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

May 1, 2017

 

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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 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.

 

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.

 

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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 months ended March 31, 2017 and 2016 were as follows:

 

 

 

% of Treatment and Disposal Revenue (1) for the
Three Months Ended March 31,

 

Generator Industry

 

2017

 

2016

 

Metal Manufacturing

 

16%

 

16%

 

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

 

15%

 

15%

 

Refining

 

14%

 

12%

 

General Manufacturing

 

14%

 

11%

 

Chemical Manufacturing

 

11%

 

14%

 

Government

 

6%

 

6%

 

Utilities

 

4%

 

5%

 

Mining, Exploration & Production

 

3%

 

3%

 

Transportation

 

2%

 

3%

 

Waste Management & Remediation

 

2%

 

2%

 

Other (2)

 

13%

 

13%

 

 


(1) Excludes all transportation service revenue

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

 

We also categorize our Environmental Services T&D revenue as either “Base Business” or “Event Business” based on the underlying nature of the revenue source. We 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.

 

A significant portion of our disposal revenue is attributable to discrete Event Business projects which vary widely in size, duration and unit pricing. For the three months ended March 31, 2017, approximately 16% of our T&D revenue was derived from Event Business projects, down from 17% for the three months ended March 31, 2016. For the three months ended March 31, 2017, Event Business revenue decreased 9% compared to the three months ended March 31, 2016. The one-time nature of Event Business, diverse spectrum of waste types received and widely varying unit pricing necessarily creates variability in revenue and earnings. This variability may be influenced by general and industry-specific economic conditions, funding availability, changes in laws and regulations, government enforcement actions or court orders, public controversy, litigation, weather, commercial real estate, closed military bases and other project timing, government appropriation and funding cycles and other factors. The types and amounts of waste received from Base Business also vary from quarter to quarter. This variability can cause significant quarter-to-quarter and year-to-year differences in revenue, gross profit, gross margin, operating income and net income. Also, while we pursue many large projects months or years in advance of work performance, both large and small cleanup project opportunities routinely arise with little or no prior notice. These market dynamics are inherent to the waste disposal business and are factored into our projections and externally communicated business outlook statements. Our projections combine historical experience with identified sales pipeline opportunities, new or expanded service line projections and prevailing market conditions.

 

For the three months ended March 31, 2017, Base Business revenue increased 3% compared to the three months ended March 31, 2016. Base Business revenue was approximately 84% of total T&D revenue for the three months ended March 31, 2017, up from 83% for the three months ended March 31, 2016. Our business is highly competitive and no assurance can be given that we will maintain these revenue levels or increase our market share.

 

Depending on project-specific customer needs and competitive economics, transportation services may be offered at or near our cost to help secure new business. For waste transported by rail from the eastern United States and other locations distant from our Grand View, Idaho and Robstown, Texas facilities, transportation-related revenue can account for as much as 75% of total project revenue. While bundling transportation and disposal services reduces overall gross profit as a percentage of total revenue (“gross margin”), this value-added service has allowed us to win multiple projects that management believes we could not have otherwise competed for successfully. Our Company-owned fleet of gondola railcars, which is periodically supplemented with railcars obtained under operating leases, has reduced our transportation expenses by largely eliminating reliance on more costly short-term rentals. These Company-owned railcars also help us to win business during times of demand-driven railcar scarcity.

 

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Table of Contents

 

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

 

We serve oil refineries, chemical production plants, steel mills, waste brokers/aggregators serving small manufacturers and other industrial customers that are generally affected by the prevailing economic conditions and credit environment. Adverse conditions may cause our customers as well as those they serve to curtail operations, resulting in lower waste production and/or delayed spending on off-site waste shipments, maintenance, waste cleanup projects and other work. Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, consumer and industrial spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other global economic factors affecting spending behavior. Market forces may also induce customers to reduce or cease operations, declare bankruptcy, liquidate or relocate to other countries, any of which could adversely affect our business. To the extent business is either government funded or driven by government regulations or enforcement actions, we believe it is less susceptible to general economic conditions. Spending by government agencies may also be reduced due to declining tax revenues resulting from a weak economy or changes in policy. Disbursement of funds appropriated by Congress may also be delayed for various reasons.

 

RESULTS OF OPERATIONS

 

THREE MONTHS ENDED MARCH 31, 2017 COMPARED TO THREE MONTHS ENDED MARCH 31, 2016

 

Operating results and percentage of revenues were as follows:

 

 

 

Three Months Ended March 31,

 

2017 vs. 2016

 

$s in thousands

 

2017

 

%

 

2016

 

%

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Services

 

$

81,303

 

74%

 

$

81,524

 

72%

 

$

(221

)

0%

 

Field & Industrial Services

 

28,931

 

26%

 

31,794

 

28%

 

(2,863

)

-9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

110,234

 

100%

 

113,318

 

100%

 

(3,084

)

-3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Services

 

28,686

 

35%

 

30,454

 

37%

 

(1,768

)

-6%

 

Field & Industrial Services

 

3,187

 

11%

 

4,754

 

15%

 

(1,567

)

-33%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

31,873

 

29%

 

35,208

 

31%

 

(3,335

)

-9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, General & Administrative Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Services

 

5,731

 

7%

 

5,578

 

7%

 

153

 

3%

 

Field & Industrial Services

 

2,641

 

9%

 

2,453

 

8%

 

188

 

8%

 

Corporate

 

11,342

 

n/a

 

11,394

 

n/a

 

(52

)

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

19,714

 

18%

 

19,425

 

17%

 

289

 

1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Services

 

31,856

 

39%

 

33,052

 

41%

 

(1,196

)

-4%

 

Field & Industrial Services

 

2,064

 

7%

 

3,678

 

12%

 

(1,614

)

-44%

 

Corporate

 

(10,467

)

n/a

 

(10,614

)

n/a

 

147

 

-1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

23,453

 

21%

 

$

26,116

 

23%

 

$

(2,663

)

-10%

 

 

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Table of Contents

 

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 and other income/expense. The reconciliation of Net Income to Adjusted EBITDA is as follows:

 

 

 

Three Months Ended March 31,

 

2017 vs. 2016

 

$s in thousands

 

2017

 

2016

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

5,185

 

$

7,517

 

$

(2,332

)

-31

%

Income tax expense

 

3,079

 

4,684

 

(1,605

)

-34

%

Interest expense

 

4,130

 

4,559

 

(429

)

-9

%

Interest income

 

(10

)

(49

)

39

 

-80

%

Foreign currency gain

 

(88

)

(759

)

671

 

-88

%

Other income

 

(137

)

(169

)

32

 

-19

%

Depreciation and amortization of plant and equipment

 

6,633

 

5,904

 

729

 

12

%

Amortization of intangibles

 

2,670

 

2,610

 

60

 

2

%

Stock-based compensation

 

918

 

795

 

123

 

15

%

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

 

1,073

 

1,024

 

49

 

5

%

Adjusted EBITDA

 

$

23,453

 

$

26,116

 

$

(2,663

)

-10

%

 

Adjusted EBITDA is a complement to results provided in accordance with accounting principles generally accepted in the United States (“GAAP”) and we believe that such information provides additional useful information to analysts, stockholders and other users to understand the Company’s operating performance. Since Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity.

 

Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or a substitute for analyzing our results as reported under GAAP. Some of the limitations are:

 

·                  Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

·                  Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt;

 

·                  Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes;

 

·                  Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; and

 

·                  Although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

 

Revenue

 

Total revenue decreased 3% to $110.2 million for the first quarter of 2017 compared with $113.3 million for the first quarter of 2016.

 

Environmental Services

 

Environmental Services segment revenue decreased less than 1% to $81.3 million for the first quarter of 2017 compared to $81.5 million for the first quarter of 2016. T&D revenue increased 3% in the first quarter of 2017, primarily as a result of a 3% increase in Base Business revenue, partially offset by a 9% decrease in project-based Event Business. Transportation service revenue decreased 17% compared to the first quarter of 2016, reflecting fewer Event Business projects utilizing the Company’s transportation and logistics services. Total tons of waste disposed of or processed across all of our facilities increased 5% for the first quarter of 2017 compared to the first quarter of 2016.  Tons of waste disposed of or processed at our landfills decreased 3% for the first quarter of 2017 compared to the first quarter of 2016.

 

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Table of Contents

 

T&D revenue from recurring Base Business waste generators increased 3% for the first quarter of 2017 compared to the first quarter of 2016 and comprised 84% of total T&D revenue for the first quarter of 2017. During the first quarter of 2017, increases in Base Business T&D revenue from the refining, general manufacturing, and “Other” industry groups were partially offset by decreases in Base Business T&D revenue from the transportation and metal manufacturing industry groups.

 

T&D revenue from Event Business waste generators decreased 9% for the first quarter of 2017 compared to the first quarter of 2016 and was 16% of T&D revenue for the first quarter of 2017. The decrease in Event Business T&D revenue compared to the prior year primarily reflects lower T&D revenue from the chemical manufacturing, utilities and government industry groups, partially offset by higher T&D revenue from the general manufacturing and refining industry groups. The decrease in revenue from the chemical manufacturing industry group is primarily attributable to the completion of a nuclear fuels fabrication plant decommissioning project in the first quarter of 2016. The decrease in revenue from the utilities and government industry groups is primarily attributable to lower Event Business volumes.

 

The following table summarizes combined Base Business and Event Business T&D revenue growth, within the Environmental Services segment, by generator industry for the first quarter of 2017 as compared to the first quarter of 2016:

 

 

 

Treatment and Disposal Revenue Growth
Three Months Ended March 31, 2017 vs.
Three Months Ended March 31, 2016

 

General Manufacturing

 

23%

 

Refining

 

23%

 

Waste Management & Remediation

 

23%

 

Other

 

5%

 

Broker / TSDF

 

-2%

 

Metal Manufacturing

 

-3%

 

Government

 

-7%

 

Mining, Exploration & Production

 

-9%

 

Chemical Manufacturing

 

-15%

 

Transportation

 

-25%

 

Utilities

 

-29%

 

 

Field & Industrial Services

 

Field & Industrial Services segment revenue decreased 9% to $28.9 million for the first quarter of 2017 compared with $31.8 million for the first quarter of 2016. The decrease in segment revenue is primarily attributable to the expiration of a contract that was not renewed or replaced and softer overall market conditions.

 

Gross Profit

 

Total gross profit decreased 9% to $31.9 million for the first quarter of 2017, down from $35.2 million for the first quarter of 2016. Total gross margin was 29% for the first quarter of 2017 compared with 31% for the first quarter of 2016.

 

Environmental Services

 

Environmental Services segment gross profit decreased 6% to $28.7 million for the first quarter of 2017, down from $30.5 million for the first quarter of 2016. Total segment gross margin for the first quarter of 2017 was 35% compared with 37% for the first quarter of 2016. T&D gross margin was 38% for the first quarter of 2017 compared with 41% for the first quarter of 2016. This decrease primarily reflects a less favorable T&D service mix for the first quarter of 2017 compared to the first quarter of 2016.

 

Field & Industrial Services

 

Field & Industrial Services segment gross profit decreased 33% to $3.2 million for the first quarter of 2017, down from $4.8 million for the first quarter of 2016. Total segment gross margin was 11% for the first quarter of 2017 compared with 15% for the first quarter of 2016. The decrease in segment gross margin is primarily attributable to lower revenue and a less favorable service mix in the first quarter of 2017 compared to the first quarter of 2016, as well as lease termination charges incurred in the first quarter of 2017.

 

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Table of Contents

 

Selling, General and Administrative Expenses (“SG&A”)

 

Total SG&A increased to $19.7 million, or 18% of total revenue, for the first quarter of 2017 compared with $19.4 million, or 17% of total revenue, for the first quarter of 2016.

 

Environmental Services

 

Environmental Services segment SG&A increased 3% to $5.7 million, or 7% of segment revenue, for the first quarter of 2017 compared with $5.6 million, or 7% of segment revenue, for the first quarter of 2016, primarily reflecting higher employee labor costs and higher insurance expenses, partially offset by lower bad debt expense in the first quarter of 2017 compared to the first quarter of 2016.

 

Field & Industrial Services

 

Field & Industrial Services segment SG&A increased 8% to $2.6 million, or 9% of segment revenue, for the first quarter of 2017 compared with $2.5 million, or 8% of segment revenue, for the first quarter of 2016, primarily reflecting higher workers’ compensation costs, higher rental expenses and higher losses on sales of assets in the first quarter of 2017 compared to the first quarter of 2016.

 

Corporate

 

Corporate SG&A was $11.3 million, or 10% of total revenue, for the first quarter of 2017 compared with $11.4 million, or 10% of total revenue, for the first quarter of 2016.

 

Components of Adjusted EBITDA

 

Income tax expense

 

Our effective income tax rate for the first quarter of 2017 was 37.3% compared with 38.4% for the first quarter of 2016. The decrease primarily reflects a higher proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate, in the first quarter of 2017 compared with the first quarter of 2016. The decrease is partially offset by a higher U.S. effective tax rate for the first quarter of 2017 driven by a higher overall effective state tax rate resulting from changes in our apportionment between the various states in which we operate. The effective tax rate for the three months ended March 31, 2017 reflects the impact of discrete events including the recognition of excess tax benefits related to employee stock compensation as a result of the adoption of Accounting Standards Update 2016-09.

 

Interest expense

 

Interest expense was $4.1 million for the first quarter of 2017 compared with $4.6 million for the first quarter of 2016. The decrease is primarily due to lower debt levels in the first quarter of 2017 compared with the first quarter of 2016. First quarter 2017 interest expense includes $81,000 of incremental non-cash amortization of deferred financing fees associated with debt principal prepayments made during the first quarter of 2017.

 

Foreign currency gain

 

We recognized an $88,000 non-cash foreign currency gain for the first quarter of 2017 compared with a $759,000 non-cash foreign currency gain for the first quarter of 2016. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the United States dollar (“USD”), our functional currency. Additionally, we established intercompany loans between our Canadian subsidiaries, whose functional currency is the Canadian dollar (“CAD”), and our parent company, US Ecology, as part of a tax and treasury management strategy allowing for repayment of third-party bank debt. These intercompany loans are payable by our Canadian subsidiaries to US Ecology in CAD requiring us to revalue the outstanding loan balance through our statements of operations based on USD/CAD currency movements from period to period. At March 31, 2017, we had $21.2 million of intercompany loans subject to currency revaluation.

 

Depreciation and amortization of plant and equipment

 

Depreciation and amortization expense was $6.6 million for the first quarter of 2017 compared with $5.9 million for the first quarter of 2016.

 

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Amortization of intangibles

 

Intangible assets amortization expense was $2.7 million for the first quarter of 2017 compared with $2.6 million for the first quarter of 2016.

 

Stock-based compensation

 

Stock-based compensation expense increased 15% to $918,000 for the first quarter of 2017 compared with $795,000 for the first quarter of 2016 as a result of an increase in equity-based awards granted to employees.

 

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

 

Accretion and non-cash adjustment of closure and post-closure liabilities was $1.1 million for the first quarter of 2017 compared with $1.0 million for the first quarter of 2016.

 

CRITICAL ACCOUNTING POLICIES

 

Financial statement preparation requires management to make estimates and judgments that affect reported assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities. The accompanying unaudited consolidated financial statements are prepared using the same critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

For information about recently issued accounting standards, see Note 1 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this Form 10-Q.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of liquidity are cash and cash equivalents, cash generated from operations and borrowings under the senior secured credit agreement (the “New Credit Agreement”). At March 31, 2017, we had $10.3 million in cash and cash equivalents immediately available and $119.0 million of borrowing capacity available under our revolving line of credit (the “Former Revolving Credit Facility”).

 

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our primary ongoing cash requirements are funding operations, capital expenditures, paying interest and required principal payments on our long-term debt, and paying declared dividends pursuant to our dividend policy. We believe future operating cash flows will be sufficient to meet our future operating, investing and dividend cash needs for the foreseeable future. Furthermore, existing cash balances and availability of additional borrowings under our New Credit Agreement provide additional sources of liquidity should they be required.

 

Operating Activities

 

For the three months ended March 31, 2017, net cash provided by operating activities was $20.9 million. This primarily reflects net income of $5.2 million, non-cash depreciation, amortization and accretion of $10.4 million, a decrease in accounts receivable of $3.0 million, a decrease in income taxes receivable of $2.0 million, an increase in deferred revenue of $2.0 million and share-based compensation expense of $918,000, partially offset by a decrease in accounts payable and accrued liabilities of $2.6 million. Impacts on net income are due to the factors discussed above under “Results of Operations.” The decrease in accounts receivable is primarily attributable to the timing of customer payments. The decrease in income taxes receivable is primarily attributable to the timing of income tax payments. The decrease in accounts payable and accrued liabilities is primarily attributable to the timing of payments to vendors for products and services. The increase in deferred revenue is primarily attributable to the timing of the treatment and disposal of waste received but not yet processed.

 

Days sales outstanding were 75 days as of March 31, 2017, compared to 73 days as of December 31, 2016 and 76 days as of March 31, 2016.

 

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For the three months ended March 31, 2016, net cash provided by operating activities was $30.3 million. This primarily reflects net income of $7.5 million, non-cash depreciation, amortization and accretion of $9.5 million, a decrease in accounts receivable of $12.2 million, an increase in income taxes payable of $3.2 million, a decrease in income taxes receivable of $943,000 and share-based compensation expense of $795,000, partially offset by a decrease in accrued salaries and benefits of $2.1 million and a decrease in deferred revenue of $1.5 million. Impacts on net income are due to the factors discussed above under “Results of Operations.” The decrease in accounts receivable is primarily attributable to the timing customer payments. The changes in income taxes payable and receivable are primarily attributable to the timing of income tax payments. The decrease in accrued salaries and benefits is primarily attributable to cash payments during the first quarter of 2016 for accrued 2015 incentive compensation. The decrease in deferred revenue is primarily attributable to the timing of the treatment and disposal of waste received but not yet processed.

 

Investing Activities

 

For the three months ended March 31, 2017, net cash used in investing activities was $7.1 million, primarily related to capital expenditures. Significant capital projects included construction of additional disposal capacity at our Beatty, Nevada and Blainville, Quebec, Canada locations and equipment purchases and infrastructure upgrades at our corporate and operating facilities.

 

For the three months ended March 31, 2016, net cash used in investing activities was $7.2 million, primarily related to capital expenditures. Significant capital projects included construction of additional disposal capacity at our Blainville, Quebec, Canada and Robstown, Texas locations and equipment purchases and infrastructure upgrades at our corporate and operating facilities.

 

Financing Activities

 

For the three months ended March 31, 2017, net cash used in financing activities was $10.5 million, consisting primarily of $4.7 million of payments on the Company’s term loan, net payment activity on the Company’s revolving credit facility of $2.2 million and $3.9 million of dividend payments to our stockholders.

 

On April 18, 2017, in connection with the Company’s entry into the New Credit Agreement, the Company refinanced the Former Credit Agreement. Immediately prior to the termination of the Former Credit Agreement, there were approximately $278.3 million of term loans and no revolving loans outstanding under the Former Credit Agreement.

 

For the three months ended March 31, 2016, net cash used in financing activities was $14.9 million, consisting primarily of $10.8 million of payments on the Company’s term loan and $3.9 million of dividend payments to our stockholders.

 

Credit Facility

 

Debt Refinancing

 

On April 18, 2017, the Company entered into the New Credit Agreement with Wells Fargo Bank, National Association, as administrative agent for the lenders, swingline lender and issuing lender, and Bank of America, N.A., as an issuing lender, which provides for a $500.0 million, five-year revolving credit facility (the “Revolving Credit Facility”), including a $75.0 million sublimit for the issuance of standby letters of credit. In connection with the Company’s entry into the New Credit Agreement, the Company refinanced the Former Credit Agreement. The Company expects that certain unamortized deferred financing costs and original issue discount associated with the Former Credit Agreement that were to be amortized to interest expense in future periods will be eliminated from the balance sheet through a non-cash charge to earnings of approximately $5.4 million in the second quarter of 2017.

 

The Revolving Credit Facility provides up to $500.0 million of revolving credit loans or letters of credit with the use of proceeds restricted solely for working capital and other general corporate purposes (including acquisitions and capital expenditures). Under the Revolving Credit Facility, revolving loans are available based on a base rate (as defined in the New 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 New Credit Agreement). The Company is required to pay a commitment fee ranging from 0.175% to 0.35% on the average daily unused portion of the Revolving Credit Facility, with such commitment fee to be reduced based upon the Company’s total net leverage ratio (as defined in the New Credit Agreement). The maximum letter of credit capacity under the Revolving Credit Facility is $75.0 million.

 

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The Company may at any time and from time to time prepay revolving credit loans and swingline loans, in whole or in part, without premium or penalty, subject to the obligation to indemnify each of the lenders against any actual loss or expense (including any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain a LIBOR rate loan (as defined in the New Credit Agreement) or from fees payable to terminate the deposits from which such funds were obtained) with respect to the early termination of any LIBOR rate loan. The New Credit Agreement provides for mandatory prepayment at any time if the revolving credit outstandings exceed the revolving credit commitment (as such terms are defined in the New Credit Agreement), in an amount equal to such excess. Subject to certain exceptions, the New Credit Agreement provides for mandatory prepayment upon certain asset dispositions, casualty events and issuances of indebtedness.

 

Pursuant to (i) an unconditional guarantee agreement and (ii) a collateral agreement, each entered into by the Company and its domestic subsidiaries on April 18, 2017, the Company’s obligations under the New Credit Agreement are (or will be) 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 are secured by substantially all of the assets of the Company and the Company’s existing and certain future domestic subsidiaries (subject to certain exclusions), including 100% of the equity interests of the Company’s domestic subsidiaries and 65% of the voting equity interests of the Company’s directly owned foreign subsidiaries (and 100% of the non-voting equity interests of the Company’s directly owned foreign subsidiaries).

 

The New 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. Upon the occurrence of an event of default (as defined in the New Credit Agreement), among other things, amounts outstanding under the New Credit Agreement may be accelerated and the commitments may be terminated.

 

The New Credit Agreement also contains financial maintenance covenants, a maximum consolidated total net leverage ratio and a consolidated interest coverage ratio (as such terms are defined in the New Credit Agreement). Our Consolidated Total Net Leverage Ratio as of the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2017, may not exceed 3.50 to 1.00, subject to certain exceptions. Our Consolidated Interest Coverage Ratio as of the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2017, may not be less than 3.00 to 1.00.

 

For more information about our debt, see Note 8 and Note 15 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q.

 

CONTRACTUAL OBLIGATIONS AND GUARANTEES

 

There were no material changes in the amounts of our contractual obligations and guarantees during the three months ended March 31, 2017. For further information on our contractual obligations and guarantees, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

On April 18, 2017, the Company entered into the New Credit Agreement, which provides for a $500.0 million, five-year Revolving Credit Facility, including a $75.0 million sublimit for the issuance of standby letters of credit. In connection with the Company’s entry into the New Credit Agreement, the Company refinanced the Former Credit Agreement. For more information about our refinancing, see Note 15 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q.

 

ITEM 3.                        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

We do not maintain equities, commodities, derivatives, or any other similar instruments for trading purposes. We have minimal interest rate risk on investments or other assets due to our preservation of capital approach to investments. At March 31, 2017, $5.8 million of restricted cash was invested in fixed-income U.S. Treasury and U.S. government agency securities and money market accounts.

 

As of March 31, 2017, we were exposed to changes in interest rates as a result of our borrowings under the Former Credit Agreement. Under the Former Credit Agreement, Former Term Loan borrowings incurred interest at a base rate (as defined in the Former Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin. Revolving loans under the Former Revolving Credit Facility were available based on a base rate (as defined in the Former Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which was determined according to a pricing grid under which the interest rate decreased or increased based on our ratio of funded debt to consolidated earnings before interest, taxes, depreciation and amortization (as defined in the Former Credit Agreement). On October 29, 2014, the Company entered into an interest rate swap agreement with the intention of hedging the Company’s interest rate exposure on a portion of the Company’s outstanding LIBOR-based variable rate debt. Under the terms of the swap, the Company pays interest at the fixed effective rate of 5.17% and receives interest at the variable one-month LIBOR rate on an initial notional amount of $250.0 million.

 

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As of March 31, 2017, there were $278.3 million of term loans and no revolving loans outstanding under the Former Credit Agreement. If interest rates were to rise and outstanding balances remain unchanged, we would be subject to higher interest payments on our outstanding debt. Subsequent to the effective date of the interest rate swap on December 31, 2014, we are subject to higher interest payments on only the unhedged borrowings under the Former Credit Agreement.

 

Based on the outstanding indebtedness of $278.3 million under our Former Credit Agreement at March 31, 2017 and the impact of our interest rate hedge, if market rates used to calculate interest expense were to average 1% higher in the next twelve months, our interest expense would increase by approximately $797,000 for the corresponding period.

 

On April 18, 2017, the Company entered into the New Credit Agreement, which provides for a $500.0 million, five-year Revolving Credit Facility, including a $75.0 million sublimit for the issuance of standby letters of credit. In connection with the Company’s entry into the New Credit Agreement, the Company refinanced the Former Credit Agreement. For more information about our refinancing, see Note 15 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q.

 

Foreign Currency Risk

 

We are subject to currency exposures and volatility because of currency fluctuations. The majority of our transactions are in USD; however, our Canadian subsidiaries conduct business in both Canada and the United States. In addition, contracts for services that our Canadian subsidiaries provide to U.S. customers are generally denominated in USD. During the three months ended March 31, 2017, our Canadian subsidiaries transacted approximately 53% of their revenue in USD and at any time have cash on deposit in USD and outstanding USD trade receivables and payables related to these transactions. These USD cash, receivable and payable accounts are subject to non-cash foreign currency translation gains or losses. Exchange rate movements also affect the translation of Canadian generated profits and losses into USD.

 

We established intercompany loans between our Canadian subsidiaries and our parent company, US Ecology, as part of a tax and treasury management strategy allowing for repayment of third-party bank debt. These intercompany loans are payable using CAD and are subject to mark-to-market adjustments with movements in the CAD. At March 31, 2017, we had $21.2 million of intercompany loans outstanding between our Canadian subsidiaries and US Ecology. During the three months ended March 31, 2017, the CAD strengthened as compared to the USD resulting in a $180,000 non-cash foreign currency translation gain being recognized in the Company’s consolidated statements of operations related to the intercompany loans. Based on intercompany balances as of March 31, 2017, a $0.01 CAD increase or decrease in currency rate compared to the USD at March 31, 2017 would have generated a gain or loss of approximately $212,000 for the three months ended March 31, 2017.

 

We had a total pre-tax foreign currency gain of $88,000 for the three months ended March 31, 2017. We currently have no foreign exchange contracts, option contracts or other foreign currency hedging arrangements. Management evaluates the Company’s risk position on an ongoing basis to determine whether foreign exchange hedging strategies should be employed.

 

ITEM 4.        CONTROLS AND PROCEDURES