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EX-32 - EX-32 - US ECOLOGY, INC.ecol-20170630xex32.htm
EX-31.2 - EX-31.2 - US ECOLOGY, INC.ecol-20170630ex312533985.htm
EX-31.1 - EX-31.1 - US ECOLOGY, INC.ecol-20170630ex31115a01f.htm
EX-15 - EX-15 - US ECOLOGY, INC.ecol-20170630xex15.htm
EX-10.2 - EX-10.2 - US ECOLOGY, INC.ecol-20170630ex102d3a5fd.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2017

 

or

 

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

 

Picture 2 

US ECOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

95-3889638

(State or other jurisdiction of incorporation or

 

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

organization)

 

 

 

 

 

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 ☒  No ☐

 

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 ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth 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 ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

(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.☐

 

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

 

At July 26, 2017, there were 21,828,819 shares of the registrant’s Common Stock outstanding.

 

 

 

 

 

 


 

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 June 30, 2017 and December 31, 2016

 

3

 

 

 

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016

 

4

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

22

 

 

 

 

2. 

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

 

23

3. 

Quantitative and Qualitative Disclosures About Market Risk

 

37

4. 

Controls and Procedures

 

38

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Cautionary Statement

 

39

1. 

Legal Proceedings

 

39

1A. 

Risk Factors

 

40

2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

3. 

Defaults Upon Senior Securities

 

40

4. 

Mine Safety Disclosures

 

40

5. 

Other Information

 

40

6. 

Exhibits

 

41

 

SIGNATURE

 

42

 

 

2


 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

US ECOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value amount)

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

Assets

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,902

 

$

7,015

Receivables, net

 

 

110,394

 

 

96,819

Prepaid expenses and other current assets

 

 

8,761

 

 

7,458

Income taxes receivable

 

 

2,070

 

 

4,076

Total current assets

 

 

126,127

 

 

115,368

 

 

 

 

 

 

 

Property and equipment, net

 

 

230,117

 

 

226,237

Restricted cash and investments

 

 

5,805

 

 

5,787

Intangible assets, net

 

 

229,967

 

 

234,356

Goodwill

 

 

194,224

 

 

193,621

Other assets

 

 

3,206

 

 

1,031

Total assets

 

$

789,446

 

$

776,400

 

 

 

 

 

 

 

Liabilities And Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Accounts payable

 

$

13,513

 

$

13,948

Deferred revenue

 

 

12,712

 

 

7,820

Accrued liabilities

 

 

27,047

 

 

22,605

Accrued salaries and benefits

 

 

10,336

 

 

10,720

Income taxes payable

 

 

52

 

 

165

Current portion of closure and post-closure obligations

 

 

2,237

 

 

2,256

Short-term borrowings

 

 

 —

 

 

2,177

Current portion of long-term debt

 

 

 —

 

 

2,903

Total current liabilities

 

 

65,897

 

 

62,594

 

 

 

 

 

 

 

Long-term closure and post-closure obligations

 

 

74,374

 

 

72,826

Long-term debt

 

 

277,000

 

 

274,459

Other long-term liabilities

 

 

4,607

 

 

5,164

Deferred income taxes

 

 

80,419

 

 

81,333

Total liabilities

 

 

502,297

 

 

496,376

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

Common stock $0.01 par value, 50,000 authorized; 21,827 and 21,780 shares issued, respectively

 

 

218

 

 

218

Additional paid-in capital

 

 

175,088

 

 

172,704

Retained earnings

 

 

124,263

 

 

121,879

Treasury stock, at cost, 2 and 7 shares, respectively

 

 

(25)

 

 

(52)

Accumulated other comprehensive loss

 

 

(12,395)

 

 

(14,725)

Total stockholders’ equity

 

 

287,149

 

 

280,024

Total liabilities and stockholders’ equity

 

$

789,446

 

$

776,400

 

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

3


 

US ECOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2017

    

2016

    

2017

    

2016

Revenue

 

$

126,057

 

$

122,351

 

$

236,291

 

$

235,669

Direct operating costs

 

 

90,161

 

 

85,445

 

 

168,522

 

 

163,555

Gross profit

 

 

35,896

 

 

36,906

 

 

67,769

 

 

72,114

Selling, general and administrative expenses

 

 

20,000

 

 

19,819

 

 

39,714

 

 

39,244

Operating income

 

 

15,896

 

 

17,087

 

 

28,055

 

 

32,870

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

21

 

 

33

 

 

31

 

 

82

Interest expense

 

 

(8,474)

 

 

(4,303)

 

 

(12,604)

 

 

(8,862)

Foreign currency gain (loss)

 

 

158

 

 

(343)

 

 

246

 

 

416

Other

 

 

166

 

 

2,330

 

 

303

 

 

2,499

Total other expense

 

 

(8,129)

 

 

(2,283)

 

 

(12,024)

 

 

(5,865)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

7,767

 

 

14,804

 

 

16,031

 

 

27,005

Income tax expense

 

 

2,718

 

 

5,866

 

 

5,797

 

 

10,550

Net income

 

$

5,049

 

$

8,938

 

$

10,234

 

$

16,455

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

$

0.41

 

$

0.47

 

$

0.76

Diluted

 

$

0.23

 

$

0.41

 

$

0.47

 

$

0.76

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in earnings per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

21,751

 

 

21,700

 

 

21,738

 

 

21,692

Diluted

 

 

21,890

 

 

21,790

 

 

21,874

 

 

21,768

Dividends paid per share

 

$

0.18

 

$

0.18

 

$

0.36

 

$

0.36

 

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

4


 

US ECOLOGY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2017

    

2016

    

2017

    

2016

Net income

 

$

5,049

 

$

8,938

 

$

10,234

 

$

16,455

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain

 

 

1,552

 

 

36

 

 

1,991

 

 

3,289

Net changes in interest rate hedge, net of taxes of $(105), ($297), $182, and ($1,316), respectively

 

 

(195)

 

 

(551)

 

 

339

 

 

(2,445)

Comprehensive income, net of tax

 

$

6,406

 

$

8,423

 

$

12,564

 

$

17,299

 

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

5


 

US ECOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

    

2017

    

2016

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

10,234

 

$

16,455

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

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

13,621

 

 

12,106

Amortization of intangible assets

 

 

5,286

 

 

5,256

Accretion of closure and post-closure obligations

 

 

2,155

 

 

2,049

Gain on disposition of business

 

 

 —

 

 

(2,208)

Unrealized foreign currency gain

 

 

(425)

 

 

(685)

Deferred income taxes

 

 

(1,379)

 

 

(1,340)

Share-based compensation expense

 

 

1,959

 

 

1,578

Net loss on disposition of assets

 

 

245

 

 

22

Amortization and write-off of debt issuance costs

 

 

5,604

 

 

1,065

Amortization and write-off of debt discount

 

 

667

 

 

74

Changes in assets and liabilities:

 

 

 

 

 

 

Receivables

 

 

(14,486)

 

 

6,613

Income taxes receivable

 

 

2,020

 

 

(1,439)

Other assets

 

 

(4,038)

 

 

1,272

Accounts payable and accrued liabilities

 

 

5,819

 

 

(872)

Deferred revenue

 

 

4,770

 

 

(1,220)

Accrued salaries and benefits

 

 

(429)

 

 

787

Income taxes payable

 

 

(115)

 

 

49

Closure and post-closure obligations

 

 

(686)

 

 

(848)

Net cash provided by operating activities

 

 

30,822

 

 

38,714

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(17,552)

 

 

(14,488)

Business acquisitions (net of cash acquired)

 

 

 —

 

 

(4,934)

Purchases of restricted cash and investments

 

 

(820)

 

 

(1,043)

Proceeds from divestitures (net of cash divested)

 

 

 —

 

 

2,723

Proceeds from sale of restricted cash and investments

 

 

802

 

 

973

Proceeds from sale of property and equipment

 

 

86

 

 

96

Net cash used in investing activities

 

 

(17,484)

 

 

(16,673)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Payments on long-term debt

 

 

(287,040)

 

 

(11,502)

Proceeds from long-term debt

 

 

281,000

 

 

 —

Payments on short-term borrowings

 

 

(13,438)

 

 

(22,166)

Proceeds from short-term borrowings

 

 

11,260

 

 

26,132

Dividends paid

 

 

(7,849)

 

 

(7,835)

Proceeds from exercise of stock options

 

 

609

 

 

124

Payment of equipment financing obligations

 

 

(176)

 

 

 —

Other

 

 

(77)

 

 

(162)

Net cash used in financing activities

 

 

(15,711)

 

 

(15,409)

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash

 

 

260

 

 

168

Increase (decrease) in cash and cash equivalents

 

 

(2,113)

 

 

6,800

Cash and cash equivalents at beginning of year

 

 

7,015

 

 

5,989

Cash and cash equivalents at end of year

 

$

4,902

 

$

12,789

 

 

 

 

 

 

 

Supplemental Disclosures 

 

 

 

 

 

 

Income taxes paid, net of receipts

 

$

5,804

 

$

13,203

Interest paid

 

$

6,431

 

$

7,438

Non-cash investing and financing activities:

 

 

 

 

Capital expenditures in accounts payable

 

$

1,991

 

$

2,403

Restricted stock issued from treasury shares

 

$

113

 

$

415

 

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

6


 

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 and six months ended June 30, 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. 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

7


 

retrospectively to all periods presented. Early adoption is permitted. We are currently 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 currently assessing the impact the adoption of ASU 2016-15 may have on our consolidated cash flows.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718). This ASU 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 currently 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 currently anticipates adopting this ASU using the modified retrospective method.

 

To assess the impact of ASU 2014-09, we have read the amended guidance, attended trainings and have consulted with external accounting professionals on a regular basis to assist with the understanding and interpretation of the ASU to our revenue recognition. The Company has completed our preliminary review of customer contracts in each of its operating segments for all significant service lines. Based upon the preliminary review of customer contracts, the Company believes that the majority of our standard contracts are not impacted by ASU 2014-09 revenue recognition criteria. We are in the process of performing additional analysis over non-standard contracts that may be impacted by the adoption of ASU 2014-09, to understand whether our revenue recognition is impacted. We are also performing additional analysis on revenue recognized from our managed services line of business, as the contractual provisions within this revenue stream can vary in comparison to our more standard contracts. Under ASU 2014-09, the principal vs. agent considerations differ from the current guidance and are more focused on the control aspect of the relationship. We are currently assessing the level of

8


 

impact this guidance may have on our various revenue streams, to determine the appropriate classification under ASU 2014-09. Further, we are in the process of identifying and implementing appropriate changes to our business processes, systems and controls to support recognition and disclosure under the new standard.

 

While the Company continues to assess all potential impacts of adopting ASU 2014-09, based upon information available to date, the Company does not expect the adoption of ASU 2014-09 to have a significant impact on either the timing or recognition of revenues, however, the full extent of the impact is subject to the completion of our assessment.

 

 

NOTE 2.     ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

Unrealized Loss

 

 

 

 

 

Currency

 

on Interest Rate

 

 

 

 

    

Translation

    

Hedge

    

Total

Balance at December 31, 2016

 

$

(12,649)

 

$

(2,076)

 

$

(14,725)

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

 

 

1,991

 

 

(534)

 

 

1,457

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

 

 

 —

 

 

873

 

 

873

Other comprehensive income, net

 

 

1,991

 

 

339

 

 

2,330

Balance at June 30, 2017

 

$

(10,658)

 

$

(1,737)

 

$

(12,395)


(1)

Before-tax reclassifications of $603,000 ($392,000 after-tax) and $1.3 million ($873,000 after-tax) for the three and six months ended June 30, 2017, respectively, and before-tax reclassifications of $808,000 ($525,000 after-tax) and $1.6 million ($1.1 million after-tax) for the three and six months ended June 30, 2016, 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 $2.4 million ($1.6 million after-tax).

 

 

NOTE 3.     CONCENTRATIONS AND CREDIT RISK

 

Major Customers

 

No customer accounted for more than 10% of total revenue for the three or six months ended June 30, 2017 or the three or six months ended June 30, 2016. No customer accounted for more than 10% of total trade receivables as of June 30, 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.

 

 

9


 

NOTE 4.     RECEIVABLES

 

Receivables consisted of the following:

 

 

 

 

 

 

 

 

 

    

June 30, 

 

December 31, 

$s in thousands

 

2017

    

2016

Trade

 

$

94,358

 

$

84,487

Unbilled revenue

 

 

14,728

 

 

13,835

Other

 

 

3,694

 

 

831

Total receivables

 

 

112,780

 

 

99,153

Allowance for doubtful accounts

 

 

(2,386)

 

 

(2,334)

Receivables, net

 

$

110,394

 

$

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 and accrued liabilities approximate their carrying value due to the short-term nature of these instruments.

 

The Company estimates the fair value of its variable-rate debt using Level 2 inputs, such as interest rates, related terms and maturities of similar obligations. At June 30, 2017, the fair value of the Company’s variable-rate debt was estimated to be $277.0 million.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

Quoted Prices in

 

Other Observable

 

Unobservable

 

 

 

 

 

Active Markets

 

Inputs

 

Inputs

 

 

 

$s in thousands

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-income securities (1)

 

$

1,006

 

$

3,068

 

$

 —

 

$

4,074

Money market funds (2)

 

 

1,731

 

 

 —

 

 

 —

 

 

1,731

Total

 

$

2,737

 

$

3,068

 

$

 —

 

$

5,805

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement (3)

 

$

 —

 

$

2,677

 

$

 —

 

$

2,677

Total

 

$

 —

 

$

2,677

 

$

 —

 

$

2,677

 

 

10


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

Quoted Prices in

 

Other Observable

 

Unobservable

 

 

 

 

 

Active Markets

 

Inputs

 

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 interest rate swap continued to be effective following the termination of the Company’s senior secured credit agreement, dated June 17, 2014. 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 June 30, 2017 and December 31, 2016.

 

 

NOTE 6.     PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

 

 

 

 

 

 

 

 

    

June 30, 

 

December 31, 

$s in thousands

 

2017

    

2016

Cell development costs

 

$

130,458

 

$

128,821

Land and improvements

 

 

34,557

 

 

34,285

Buildings and improvements

 

 

81,347

 

 

78,081

Railcars

 

 

17,299

 

 

17,299

Vehicles and other equipment

 

 

114,215

 

 

110,267

Construction in progress

 

 

33,096

 

 

24,392

Total property and equipment

 

 

410,972

 

 

393,145

Accumulated depreciation and amortization

 

 

(180,855)

 

 

(166,908)

Property and equipment, net

 

$

230,117

 

$

226,237

 

Depreciation and amortization expense for the three months ended June 30, 2017 and 2016 was $7.0 million and $6.2 million, respectively. Depreciation and amortization expense for the six months ended June 30, 2017 and 2016 was $13.6 million and $12.1 million, respectively.

 

 

11


 

NOTE 7.     GOODWILL AND INTANGIBLE ASSETS

 

Changes in goodwill for the six months ended June 30, 2017 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Field &

 

 

 

 

 

Environmental

 

Industrial

 

 

 

$s in thousands

    

Services

    

Services

    

Total

Balance at December 31, 2016

 

$

149,490

 

$

44,131

 

$

193,621

Foreign currency translation

 

 

603

 

 

 —

 

 

603

Balance at June 30, 2017

 

$

150,093

 

$

44,131

 

$

194,224

 

Intangible assets, net consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Accumulated

 

 

 

$s in thousands

    

Cost

    

Amortization

    

Net

    

Cost

    

Amortization

    

Net

Amortizing intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Permits, licenses and lease

 

$

111,078

 

$

(10,966)

 

$

100,112

 

$

110,341

 

$

(9,462)

 

$

100,879

Customer relationships

 

 

84,843

 

 

(17,340)

 

 

67,503

 

 

84,711

 

 

(14,519)

 

 

70,192

Technology - formulae and processes

 

 

7,009

 

 

(1,464)

 

 

5,545

 

 

6,770

 

 

(1,305)

 

 

5,465

Customer backlog

 

 

3,652

 

 

(1,109)

 

 

2,543

 

 

3,652

 

 

(926)

 

 

2,726

Tradename

 

 

4,318

 

 

(4,318)

 

 

 —

 

 

4,318

 

 

(3,650)

 

 

668

Developed software

 

 

2,917

 

 

(1,157)

 

 

1,760

 

 

2,907

 

 

(994)

 

 

1,913

Non-compete agreements

 

 

747

 

 

(747)

 

 

 —

 

 

747

 

 

(742)

 

 

5

Internet domain and website

 

 

540

 

 

(86)

 

 

454

 

 

540

 

 

(72)

 

 

468

Database

 

 

390

 

 

(137)

 

 

253

 

 

387

 

 

(118)

 

 

269

Total amortizing intangible assets

 

 

215,494

 

 

(37,324)

 

 

178,170

 

 

214,373

 

 

(31,788)

 

 

182,585

Nonamortizing intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Permits and licenses

 

 

51,666

 

 

 —

 

 

51,666

 

 

51,645

 

 

 —

 

 

51,645

Tradename

 

 

131

 

 

 —

 

 

131

 

 

126

 

 

 —

 

 

126

Total intangible assets

 

$

267,291

 

$

(37,324)

 

$

229,967

 

$

266,144

 

$

(31,788)

 

$

234,356

 

Amortization expense for the three months ended June 30, 2017 and 2016 was $2.6 million and $2.6 million, respectively. Amortization expense for the six months ended June 30, 2017 and 2016 was $5.3 million and $5.3 million, respectively. Foreign intangible asset carrying amounts are affected by foreign currency translation.

 

 

NOTE 8.     DEBT

 

Long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

$s in thousands

    

2017

    

2016

Revolving credit facility

 

$

277,000

 

$

 —

Former term loan

 

 

 —

 

 

283,040

Unamortized discount and debt issuance costs

 

 

 —

 

 

(5,678)

Total debt

 

 

277,000

 

 

277,362

Current portion of long-term debt

 

 

 —

 

 

(2,903)

Long-term debt

 

$

277,000

 

$

274,459

 

New Credit Agreement

 

On April 18, 2017, the Company entered into a new senior secured credit agreement (the “New Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent for the lenders, swingline lender and

12


 

issuing lender, and Bank of America, N.A., as an issuing lender, that 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 and a $25.0 million sublimit for the issuance of swingline loans used to fund short-term working capital requirements. The New Credit Agreement also contains an accordion feature whereby the Company may request up to $200.0 million of additional funds through an increase to the Revolving Credit Facility, through incremental term loans, or some combination thereof. In connection with the Company’s entry into the New Credit Agreement, the Company terminated its existing credit agreement with Wells Fargo, dated June 17, 2014 (the “Former Credit Agreement”). Immediately prior to the termination of the Former Credit Agreement, there were $278.3 million of term loans and no revolving loans outstanding under the Former Credit Agreement. No early termination penalties were incurred as a result of the termination of the Former Credit Agreement. The Company wrote off 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 through a one-time non-cash charge of $5.5 million to interest expense 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 credit 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), as set forth in the table below:

 

Total Net Leverage Ratio

LIBOR Rate Loans Interest Margin

Base Rate Loans Interest Margin

Equal to or greater than 3.25 to 1.00

2.00%

1.00%

Equal to or greater than 2.50 to 1.00, but less than 3.25 to 1.00

1.75%

0.75%

Equal to or greater than 1.75 to 1.00, but less than 2.50 to 1.00

1.50%

0.50%

Equal to or greater than 1.00 to 1.00, but less than 1.75 to 1.00

1.25%

0.25%

Less than 1.00 to 1.00

1.00%

0.00%

 

At June 30, 2017, the effective interest rate on the Revolving Credit Facility, after giving effect to the impact of our interest rate swap, was 3.37%. Interest only payments are due either quarterly or on the last day of any interest period, as applicable.

 

In October 2014, the Company entered into an interest rate swap agreement, effectively fixing the interest rate on $200.0 million, or 72%, of the Revolving Credit Facility borrowings as of June 30, 2017. The interest rate swap agreement continued in place following the termination of the Company’s Former Credit Agreement. The critical terms of the interest rate swap and the forecasted transaction (periodic interest payments on the Company’s variable-rate debt) did not change as a result of the refinancing therefore the interest rate swap continues to qualify as a highly-effective 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 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 and the New Credit Agreement provides for a letter of credit fee equal to the applicable margin for LIBOR loans under the Revolving Credit Facility. At June 30, 2017, there were $277.0 million of revolving credit loans outstanding on the Revolving Credit Facility. These revolving credit loans are due upon the earliest to occur of (a) April 18, 2022 (or, with respect to any lender, such later date as requested by us and accepted by such lender), (b) the date of termination of the entire revolving credit commitment (as defined in the New Credit Agreement) by us, and (c) the date of termination of the revolving credit commitment and are presented as long-term debt in the consolidated balance sheets. 

 

The Company has entered into a sweep arrangement whereby day-to-day cash requirements in excess of available cash balances are advanced to the Company on an as-needed basis with repayments of these advances automatically made from subsequent deposits to our cash operating accounts (the “Sweep Arrangement”). Total advances outstanding under the

13


 

Sweep Arrangement are subject to the $25.0 million swingline loan sublimit under the Revolving Credit Facility.  The Company’s revolving credit loans outstanding under the Revolving Credit Agreement are not subject to repayment through the Sweep Arrangement. As of June 30, 2017, there were no amounts outstanding subject to the Sweep Arrangement.

 

As of June 30, 2017, the availability under the Revolving Credit Facility was $216.7 million with $6.3 million of the Revolving Credit Facility issued in the form of standby letters of credit utilized as collateral for closure and post-closure financial assurance and other assurance obligations.

 

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.

 

At June 30, 2017, we were in compliance with all of the financial covenants in the New Credit Agreement.

 

Former Credit Agreement

 

On June 17, 2014, the Company entered into a $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.

 

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.

 

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

14


 

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 December 31, 2016, there were $2.2 million of working capital borrowings outstanding on the Former Revolving Credit Facility. These borrowings were due “on demand” and presented as short-term borrowings in the consolidated balance sheets.

 

 

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.

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

$s in thousands

    

June 30, 2017

 

June 30, 2017

Closure and post-closure obligations, beginning of period

 

$

75,899

 

$

75,082

Accretion expense

 

 

1,082

 

 

2,155

Payments

 

 

(418)

 

 

(688)

Foreign currency translation

 

 

48

 

 

62

Closure and post-closure obligations, end of period

 

 

76,611

 

 

76,611

Less current portion

 

 

(2,237)

 

 

(2,237)

Long-term portion

 

$

74,374

 

$

74,374

 

 

 

NOTE 10.   INCOME TAXES

 

Our effective tax rate for the three months ended June 30, 2017 was 35.0%, down from 39.6% for the three months ended June 30, 2016. Our effective tax rate for the six months ended June 30, 2017 was 36.2%, down from 39.1% for the six months ended June 30, 2016. The decrease for the three and six months ended June 30, 2017 compared with the three and six months ended June 30, 2016 primarily reflects a higher proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate. The effective tax rate for the three and six months ended June 30, 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

15


 

benefits in our provision for income taxes of $9,000 and $77,000 for the three and six months ended June 30, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

 

2017

 

2016

$s and shares in thousands, except per share amounts

    

Basic

    

Diluted

    

Basic

    

Diluted

Net income

 

$

5,049

 

$

5,049

 

$

8,938

 

$

8,938

Weighted average basic shares outstanding

 

 

21,751

 

 

21,751

 

 

21,700

 

 

21,700

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options and restricted stock

 

 

 

 

 

139

 

 

 

 

 

90

Weighted average diluted shares outstanding

 

 

 

 

 

21,890

 

 

 

 

 

21,790

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.23

 

$

0.23

 

$

0.41

 

$

0.41

Anti-dilutive shares excluded from calculation

 

 

 

 

 

115

 

 

 

 

 

251