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 June 30, 2013

 

or

 

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

 

For the transition period from                        to                     .

 

Commission file number: 0000-11688

 

US ECOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-3889638

(State or other jurisdiction of incorporation or
organization)

 

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

 

 

 

251 E. Front St., Suite 400

 

 

Boise, Idaho

 

83702

(Address of principal executive offices)

 

(Zip Code)

 

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

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

At July 26, 2013, there were 18,530,085 shares of the registrant’s Common Stock outstanding.

 

 

 


 


Table of Contents

 

US ECOLOGY, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

Item

 

 

Page

 

 

 

 

 

 

PART I — FINANCIAL INFORMATION

3

 

 

 

 

1.

 

Financial Statements (Unaudited)

3

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012

3

 

 

 

 

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012

4

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012

5

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012

6

 

 

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

16

 

 

 

 

2.

 

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

17

3.

 

Quantitative and Qualitative Disclosures About Market Risk

25

4.

 

Controls and Procedures

26

 

 

 

 

 

 

PART II — OTHER INFORMATION

27

 

 

 

 

 

 

Cautionary Statement

27

1.

 

Legal Proceedings

27

1A.

 

Risk Factors

27

2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

27

3.

 

Defaults Upon Senior Securities

28

4.

 

Mine Safety Disclosures

28

5.

 

Other Information

28

6.

 

Exhibits

28

 

 

SIGNATURE

29

 

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)

 

 

 

June 30, 2013

 

December 31, 2012

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,982

 

$

2,120

 

Receivables, net

 

34,235

 

33,947

 

Prepaid expenses and other current assets

 

3,847

 

3,161

 

Income taxes receivable

 

787

 

 

Deferred income taxes

 

799

 

1,276

 

Total current assets

 

43,650

 

40,504

 

 

 

 

 

 

 

Property and equipment, net

 

113,294

 

109,792

 

Restricted cash

 

4,111

 

4,111

 

Intangible assets, net

 

37,945

 

40,771

 

Goodwill

 

21,917

 

23,105

 

Other assets

 

426

 

411

 

Total assets

 

$

221,343

 

$

218,694

 

 

 

 

 

 

 

Liabilities And Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

4,484

 

$

6,333

 

Deferred revenue

 

5,381

 

3,919

 

Accrued liabilities

 

7,506

 

7,322

 

Accrued salaries and benefits

 

5,040

 

7,570

 

Income taxes payable

 

972

 

426

 

Current portion of closure and post-closure obligations

 

937

 

1,913

 

Total current liabilities

 

24,320

 

27,483

 

 

 

 

 

 

 

Long-term closure and post-closure obligations

 

16,315

 

15,449

 

Reducing revolving line of credit

 

43,000

 

45,000

 

Other long-term liabilities

 

88

 

114

 

Unrecognized tax benefits

 

474

 

467

 

Deferred income taxes

 

15,338

 

18,159

 

Total liabilities

 

99,535

 

106,672

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Common stock $0.01 par value, 50,000 authorized; 18,530 and 18,385 shares issued, respectively

 

185

 

184

 

Additional paid-in capital

 

65,603

 

63,969

 

Retained earnings

 

57,725

 

48,424

 

Treasury stock, at cost, 24 and 71 shares, respectively

 

(404

)

(1,183

)

Accumulated other comprehensive income (loss)

 

(1,301

)

628

 

Total stockholders’ equity

 

121,808

 

112,022

 

Total liabilities and stockholders’ equity

 

$

221,343

 

$

218,694

 

 

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 June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

45,777

 

$

39,980

 

$

88,676

 

$

72,993

 

Direct operating costs

 

19,759

 

18,633

 

40,843

 

36,271

 

Transportation costs

 

7,090

 

4,021

 

13,523

 

7,320

 

Gross profit

 

18,928

 

17,326

 

34,310

 

29,402

 

Selling, general and administrative expenses

 

6,519

 

6,366

 

12,245

 

11,971

 

Operating income

 

12,409

 

10,960

 

22,065

 

17,431

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

2

 

4

 

7

 

9

 

Interest expense

 

(222

)

(204

)

(443

)

(428

)

Foreign currency gain (loss)

 

(1,193

)

(921

)

(2,131

)

170

 

Other

 

94

 

522

 

191

 

602

 

Total other income (expense)

 

(1,319

)

(599

)

(2,376

)

353

 

Income before income taxes

 

11,090

 

10,361

 

19,689

 

17,784

 

Income tax expense

 

3,880

 

3,999

 

7,073

 

6,899

 

Net income

 

$

7,210

 

$

6,362

 

$

12,616

 

$

10,885

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.39

 

$

0.35

 

$

0.69

 

$

0.60

 

Diluted

 

$

0.39

 

$

0.35

 

$

0.68

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

Shares used in earnings per share calculation:

 

 

 

 

 

 

 

 

 

Basic

 

18,401

 

18,228

 

18,362

 

18,223

 

Diluted

 

18,483

 

18,264

 

18,446

 

18,259

 

Dividends paid per share

 

$

0.18

 

$

0.18

 

$

0.18

 

$

0.36

 

 

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 June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

7,210

 

$

6,362

 

$

12,616

 

$

10,885

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

(1,179

)

(500

)

(1,929

)

135

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

6,031

 

$

5,862

 

$

10,687

 

$

11,020

 

 

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)

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

12,616

 

$

10,885

 

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

 

 

 

 

 

Depreciation and amortization of property and equipment

 

7,071

 

6,794

 

Amortization of intangible assets

 

729

 

724

 

Accretion of closure and post-closure obligations

 

613

 

670

 

Unrealized foreign currency (gain) loss

 

2,400

 

(250

)

Deferred income taxes

 

(1,665

)

(1,218

)

Share-based compensation expense

 

363

 

383

 

Unrecognized tax benefits

 

7

 

7

 

Net (gain) loss on sale of property and equipment

 

10

 

(20

)

Changes in assets and liabilities:

 

 

 

 

 

Receivables

 

(682

)

839

 

Income tax receivable

 

(787

)

191

 

Other assets

 

(563

)

(390

)

Accounts payable and accrued liabilities

 

(1,583

)

(3,699

)

Deferred revenue

 

1,594

 

412

 

Accrued salaries and benefits

 

(2,386

)

(307

)

Income tax payable

 

582

 

761

 

Closure and post-closure obligations

 

(621

)

(186

)

Net cash provided by operating activities

 

17,698

 

15,596

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(12,530

)

(5,743

)

Business acquisition, net of cash acquired

 

 

(11,228

)

Proceeds from sale of property and equipment

 

52

 

169

 

Restricted cash

 

 

5

 

Net cash used in investing activities

 

(12,478

)

(16,797

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on reducing revolving line of credit

 

(10,000

)

(12,500

)

Proceeds from reducing revolving line of credit

 

8,000

 

22,000

 

Proceeds from exercise of stock options

 

2,110

 

 

Deferred financing costs paid

 

(185

)

 

Dividends paid

 

(3,314

)

(6,565

)

Other

 

261

 

(258

)

Net cash (used in) provided by financing activities

 

(3,128

)

2,677

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash

 

(230

)

140

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

1,862

 

1,616

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

2,120

 

4,289

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

3,982

 

$

5,905

 

 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

Income taxes paid, net of receipts

 

$

8,677

 

$

7,148

 

Interest paid

 

$

367

 

$

418

 

Non-cash investing and financing activities:

 

 

 

 

 

Capital expenditures in accounts payable

 

$

504

 

$

2,446

 

Restricted stock issued from treasury shares

 

$

779

 

$

372

 

 

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

 

6



Table of Contents

 

US ECOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.                    GENERAL

 

Basis of Presentation

 

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

 

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly, in all material respects, the results of the Company for the periods presented. These consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted pursuant to the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012. The results of operations and cash flows for the six months ended June 30, 2013 are not necessarily indicative of results to be expected for the entire fiscal year.

 

The Company’s Consolidated Balance Sheet as of December 31, 2012 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 accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements. As it relates to estimates and assumptions in amortization rates and environmental obligations, significant engineering, operations and accounting judgments are required. We review these estimates and assumptions no less than annually. In many circumstances, the ultimate outcome of these estimates and assumptions will not be known for decades into the future. Actual results could differ materially from these estimates and assumptions due to changes in applicable regulations, changes in future operational plans and inherent imprecision associated with estimating environmental impacts far into the future.

 

Financial Instruments

 

Cash on deposit, accounts receivable, short-term borrowings, accounts payable and accrued liabilities as presented in the consolidated financial statements approximate fair value because of the short-term nature of these instruments.  The carrying amount of our long-term debt approximates fair value because interest rates are variable and, accordingly, approximate current market rates for instruments with similar risk and maturities. Restricted cash balances represent funds held in third-party managed trust accounts as collateral for our financial assurance obligations for post-closure activities at our non-operating facilities.  Restricted cash balances are maintained by third-party trustees and are invested in money market accounts.  The balances are adjusted monthly to fair market value based on quoted prices in active markets for identical assets.

 

7



Table of Contents

 

NOTE 2.                    ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Changes in accumulated other comprehensive income (loss), comprised entirely of foreign currency translation adjustments, consisted of the following:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

$s in thousands

 

2013

 

2012

 

2013

 

2012

 

Balance, beginning of period

 

$

(122

)

$

518

 

$

628

 

$

(117

)

Foreign currency translation gain (loss) in other comprehensive income

 

(1,179

)

(500

)

(1,929

)

135

 

Balance, end of period

 

$

(1,301

)

$

18

 

$

(1,301

)

$

18

 

 

NOTE 3.                    CONCENTRATIONS AND CREDIT RISK

 

Major Customers

 

No customer accounted for more than 10% of total revenue for the three and six months ended June 30, 2013 or 2012. No customer accounted for more than 10% of total trade receivables as of June 30, 2013 or December 31, 2012.

 

Credit Risk Concentration

 

We maintain most of our cash with nationally recognized financial institutions like Wells Fargo Bank, National Association (“Wells Fargo”). 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:

 

 

 

June 30,

 

December 31,

 

$s in thousands

 

2013

 

2012

 

Trade

 

$

33,014

 

$

32,787

 

Unbilled revenue

 

1,396

 

1,529

 

Other

 

289

 

99

 

Total receivables

 

34,699

 

34,415

 

Allowance for doubtful accounts

 

(464

)

(468

)

Receivables, net

 

$

34,235

 

$

33,947

 

 

NOTE 5.                    PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

 

 

June 30,

 

December 31,

 

$s in thousands

 

2013

 

2012

 

Cell development costs

 

$

65,239

 

$

64,994

 

Land and improvements

 

18,090

 

14,920

 

Buildings and improvements

 

55,949

 

55,177

 

Railcars

 

17,375

 

17,375

 

Vehicles and other equipment

 

42,235

 

39,689

 

Construction in progress

 

14,985

 

12,454

 

Total property and equipment

 

213,873

 

204,609

 

Accumulated depreciation and amortization

 

(100,579

)

(94,817

)

Property and equipment, net

 

$

113,294

 

$

109,792

 

 

8



Table of Contents

 

Depreciation and amortization expense for each of the three months ended June 30, 2013 and 2012 was $3.6 million. Depreciation and amortization expense for the six months ended June 30, 2013 and 2012 was $7.1 million and $6.8 million, respectively.

 

NOTE 6.                    BUSINESS COMBINATION

 

On May 31, 2012, the Company acquired 100% of the outstanding shares of US Ecology Michigan, Inc. (“US Ecology Michigan”), formerly Dynecol, Inc., a chemical and industrial byproducts treatment and reuse facility located in Detroit, Michigan. The following unaudited pro forma financial information presents the combined results of operations as if US Ecology Michigan had been combined with us beginning on January 1, 2012. The pro forma financial information includes the accounting impact of the business combination, including the amortization of intangible assets, depreciation of property, plant and equipment and interest expense. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the period presented, nor should it be taken as an indication of our future consolidated results of operations.

 

 

 

(unaudited)

 

(unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

$s in thousands, except per share amounts

 

June 30, 2012

 

June 30, 2012

 

Pro forma combined:

 

 

 

 

 

Revenue

 

$

42,011

 

$

78,494

 

Net income

 

$

6,248

 

$

10,739

 

Earnings per share

 

 

 

 

 

Basic

 

$

0.34

 

$

0.59

 

Diluted

 

$

0.34

 

$

0.59

 

 

The amounts of revenue and operating income from US Ecology Michigan included in US Ecology’s consolidated statements of operations for the three months ended June 30, 2013 were $3.4 million and $288,000, respectively. The amounts of revenue and operating income from US Ecology Michigan included in US Ecology’s consolidated statements of operations for the six months ended June 30, 2013 were $6.2 million and $193,000, respectively.

 

NOTE 7.                    GOODWILL AND INTANGIBLE ASSETS

 

The Company’s entire goodwill balance has been assigned to the Operating Disposal Facilities reporting segment.  Changes in goodwill for the six months ended June 30, 2013 consisted of the following:

 

$s in thousands

 

Goodwill

 

Balance at December 31, 2012

 

$

23,105

 

Foreign currency translation

 

(1,188

)

Balance at June 30, 2013

 

$

21,917

 

 

Intangible assets consisted of the following:

 

$s in thousands

 

June 30,
2013

 

December 31,
2012

 

Amortizing intangible assets:

 

 

 

 

 

Developed software

 

$

333

 

$

352

 

Database

 

95

 

100

 

Customer relationships

 

5,046

 

5,269

 

Technology - Formulae and processes

 

8,645

 

9,144

 

Permits, licenses and lease

 

26,553

 

28,085

 

Non-compete agreements

 

20

 

20

 

Total amortizing intangible assets

 

40,692

 

42,970

 

Accumulated amortization

 

(3,659

)

(3,120

)

 

 

 

 

 

 

Nonamortizing intangible assets:

 

 

 

 

 

Permits and licenses

 

750

 

750

 

Tradename

 

162

 

171

 

Total intangible assets, net

 

$

37,945

 

$

40,771

 

 

9



Table of Contents

 

Amortization expense for the three months ended June 30, 2013 and 2012 was $362,000 and $374,000, respectively. Amortization expense for the six months ended June 30, 2013 and 2012 was $729,000 and $724,000, respectively.

 

NOTE 8.                    DEBT

 

On October 29, 2010, we entered a credit agreement with Wells Fargo which, as amended, provides for an aggregate commitment from Wells Fargo of $95.0 million (the “Credit Agreement”). The Credit Agreement provides for a $20.0 million revolving line of credit (the “Revolving Line of Credit”) with a maturity date of November 1, 2015 and a $75.0 million reducing revolving line of credit (the “Reducing Revolving Line of Credit”) with a maturity date of November 1, 2015.

 

Revolving Line of Credit

 

The Revolving Line of Credit provides up to $20.0 million in revolving credit loans or letters of credit for working capital needs (the “Commitment Amount”).  Under the Revolving Line of Credit, revolving loans are available based on the Prime Rate or the LIBOR, at the Company’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). At June 30, 2013, the effective interest rate on the Revolving Line of Credit was 1.44%. Interest only payments are due either monthly or on the last day of any interest period, as applicable. At June 30, 2013, there were no borrowings outstanding under the Revolving Line of Credit. The availability under the Revolving Line of Credit was $16.0 million, with $4.0 million of the line of credit issued in the form of a standby letter of credit utilized as collateral for closure and post-closure financial assurance.

 

Reducing Revolving Line of Credit

 

The Reducing Revolving Line of Credit provides an initial commitment amount of $75.0 million (the “Reducing Revolving Commitment Amount”).  Proceeds from the Reducing Revolving Line of Credit were used to acquire all of the shares of Stablex in 2010 and to acquire US Ecology Michigan in 2012. Remaining borrowings are available for working capital needs. The Reducing Revolving Commitment Amount is reduced by $2.8 million on the last day of each March, June, September and December beginning March 31, 2013, continuing through November 1, 2015. Under the Reducing Revolving Line of Credit revolving loans are available based on the Prime Rate 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 EBITDA. At June 30, 2013, the effective interest rate of the Reducing Revolving Line of Credit was 1.44%.  Interest only payments are due either monthly or on the last day of any interest period, as applicable.  At June 30, 2013, $43.0 million was outstanding on the Reducing Revolving Line of Credit with $26.4 million available for additional borrowings.

 

In addition to standard fees, origination fees and commitment fees apply to the average daily unused portion of the Commitment Amount and the Reducing Revolving Commitment Amount. The Credit Agreement contains certain quarterly financial covenants, including a maximum funded debt ratio, a maximum fixed charge coverage ratio, a minimum required tangible net worth and a minimum current ratio. We may only declare quarterly or annual dividends if on the date of declaration, no event of default has occurred and no other event or condition has occurred that would constitute default due to the payment of the dividend. Obligations under the Credit Agreement are guaranteed by US Ecology and all of its subsidiaries.

 

At June 30, 2013, we were in compliance with all of the financial covenants in the Credit Agreement.

 

NOTE 9.                    CLOSURE AND POST-CLOSURE OBLIGATIONS

 

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

 

10



Table of Contents

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

$s in thousands

 

June 30, 2013

 

June 30, 2013

 

 

 

 

 

 

 

Closure and post-closure obligations, beginning of period

 

$

16,586

 

$

17,362

 

Accretion expense

 

306

 

613

 

Payments

 

(128

)

(1,171

)

Adjustments

 

550

 

550

 

Currency translation

 

(62

)

(102

)

Closure and post-closure obligations, end of period

 

17,252

 

17,252

 

Less current portion

 

(937

)

(937

)

Long-term portion

 

$

16,315

 

$

16,315

 

 

NOTE 10.             INCOME TAXES

 

During the six months ended June 30, 2013, there were no material changes to our unrecognized tax benefits disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. We do not anticipate our total unrecognized tax benefits to increase or decrease materially within the next twelve months.

 

Our effective tax rate for the three months ended June 30, 2013 was 35.0%, down from 38.6% for the three months ended June 30, 2012. Our effective tax rate for the six months ended June 30, 2013 was 35.9%, down from 38.8% for the six months ended June 30, 2012. The decrease for both the three and six months ended June 30, 2013 reflects a higher proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate, partially offset by higher U.S. state income taxes.

 

We file a consolidated U.S. federal income tax return with the Internal Revenue Service as well as income tax returns in various states and Canada. We may be subject to examination by taxing authorities in the U.S. and Canada for tax years 2009 through 2012. Additionally, we may be subject to examinations by various state and local taxing jurisdictions for tax years 2008 through 2012.

 

NOTE 11.             COMMITMENTS AND CONTINGENCIES

 

Litigation and Regulatory Proceedings

 

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

 

In 2012, we settled allegations by the United States Environment Protection Agency (“U.S. EPA”) that the thermal recycling operation at our Robstown, Texas facility did not comply with certain rules and regulations of the Resource Conservation and Recovery Act of 1976 (“RCRA”). As part of the settlement, we agreed to pay a civil penalty and to submit an application to the State of Texas for a RCRA Subpart X permit.  The Company and the thermal recycling unit’s owner-operator also agreed to a set of interim operating conditions that allow the facility to continue providing recycling services to customers until the RCRA Subpart X permit is issued.

 

In connection with this matter, in June 2013 the U.S. EPA asserted various related technical compliance and permitting violations of the Clean Air Act of 1970. Negotiations on the merits of a proposed settlement are ongoing with the U.S. EPA. We recognized a charge of $238,000 during the second quarter of 2013 in Selling, general and administrative expenses in the Consolidated Statement of Operations related to this enforcement matter.

 

Other than as disclosed above, we are not currently a party to any material pending legal proceedings and are not aware of any other claims that could have a materially adverse effect on our financial position, results of operations or cash flows.

 

11



Table of Contents

 

Operating Leases

 

In May 2013, we executed a new lease for corporate office space in Boise, Idaho.  Future minimum lease payments on this non-cancelable operating lease as of June 30, 2013 consisted of the following:

 

$s in thousands

 

Payments

 

2013

 

$

34

 

2014

 

245

 

2015

 

301

 

2016

 

310

 

2017

 

318

 

Thereafter

 

382

 

 

 

$

1,590

 

 

 

NOTE 12.             EARNINGS PER SHARE

 

 

 

Three Months Ended June 30,

 

$s and shares in thousands, except per share

 

2013

 

2012

 

amounts

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net income

 

7,210

 

$

7,210

 

$

6,362

 

$

6,362

 

Weighted average basic shares outstanding

 

18,401

 

18,401

 

18,228

 

18,228

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options and restricted stock

 

 

 

82

 

 

 

36

 

Weighted average diluted shares outstanding

 

 

 

18,483

 

 

 

18,264

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.39

 

$

0.39

 

$

0.35

 

$

0.35

 

Anti-dilutive shares excluded from calculation

 

 

 

196

 

 

 

331

 

 

 

 

Six Months Ended June 30,

 

$s and shares in thousands, except per share 

 

2013

 

2012

 

amounts

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net income

 

$

12,616

 

$

12,616

 

$

10,885

 

$

10,885

 

Weighted average basic shares outstanding

 

18,362

 

18,362

 

18,223

 

18,223

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options and restricted stock

 

 

 

84

 

 

 

36

 

Weighted average diluted shares outstanding

 

 

 

18,446

 

 

 

18,259

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.69

 

$

0.68

 

$

0.60

 

$

0.60

 

Anti-dilutive shares excluded from calculation

 

 

 

208

 

 

 

324

 

 

NOTE 13.             EQUITY

 

During the six months ended June 30, 2013, option holders exercised 238,345 options, respectively, with a weighted-average exercise price of $18.95 per option. During the six months ended June 30, 2013, the Company issued 46,700 shares of restricted stock from our treasury stock at an average cost of $16.68 per share.

 

12



Table of Contents

 

NOTE 14.    OPERATING SEGMENTS

 

We operate within two segments, Operating Disposal Facilities and Non-Operating Disposal Facilities. These segments reflect our internal reporting structure and nature of services offered. The Operating Disposal Facility segment represents disposal facilities accepting hazardous and radioactive waste. The Non-Operating Disposal Facility segment represents facilities which are not accepting hazardous and/or radioactive waste or formerly proposed new facilities.

 

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 concerning our reportable segments is shown in the following tables:

 

Three Months Ended June 30, 2013 (in thousands)

 

Operating
Disposal
Facilities

 

Non-
Operating
Disposal
Facilities

 

Corporate

 

Total

 

Revenue - Treatment and disposal

 

$

38,724

 

$

6

 

$

 

$

38,730

 

Revenue - Transportation services

 

7,047

 

 

 

7,047

 

Total revenue

 

45,771

 

6

 

 

45,777

 

Direct operating costs

 

19,705

 

54

 

 

19,759

 

Transportation costs

 

7,090

 

 

 

7,090

 

Gross profit (loss)

 

18,976

 

(48

)

 

18,928

 

Selling, general & administrative expense

 

3,267

 

 

3,252

 

6,519

 

Operating income (loss)

 

15,709

 

(48

)

(3,252

)

12,409

 

Interest income (expense), net

 

2

 

 

(222

)

(220

)

Foreign currency gain (loss)

 

320

 

 

(1,513

)

(1,193

)

Other income

 

91

 

3

 

 

94

 

Income (loss) before income taxes

 

16,122

 

(45

)

(4,987

)

11,090

 

Income tax expense

 

 

 

3,880

 

3,880

 

Net income (loss)

 

$

16,122

 

$

(45

)

$

(8,867

)

$

7,210

 

Depreciation, amortization & accretion

 

$

4,051

 

$

52

 

$

10

 

$

4,113

 

Capital expenditures

 

$

5,689

 

$

 

$

89

 

$

5,778

 

Total assets

 

$

213,197

 

$

88

 

$

8,058

 

$

221,343

 

 

Three Months Ended June 30, 2012 (in thousands)

 

Operating
Disposal
Facilities

 

Non-
Operating
Disposal
Facilities

 

Corporate

 

Total

 

Revenue - Treatment and disposal

 

$

35,963

 

$

7

 

$

 

$

35,970

 

Revenue - Transportation services

 

4,010

 

 

 

4,010

 

Total revenue

 

39,973

 

7

 

 

39,980

 

Direct operating costs

 

18,576

 

57

 

 

18,633

 

Transportation costs

 

4,020

 

1

 

 

4,021

 

Gross profit (loss)

 

17,377

 

(51

)

 

17,326

 

Selling, general & administrative expense

 

2,921

 

 

3,445

 

6,366

 

Operating income (loss)

 

14,456

 

(51

)

(3,445

)

10,960

 

Interest income (expense), net

 

4

 

 

(204

)

(200

)

Foreign currency gain (loss)

 

17

 

 

(938

)

(921

)

Other income

 

521

 

1

 

 

522

 

Income (loss) before income taxes

 

14,998

 

(50

)

(4,587

)

10,361

 

Income tax expense

 

 

 

3,999

 

3,999

 

Net income (loss)

 

$

14,998

 

$

(50

)

$

(8,586

)

$

6,362

 

Depreciation, amortization & accretion

 

$

4,215

 

$

54

 

$

11

 

$

4,280

 

Capital expenditures

 

$

3,350

 

$

 

$

7

 

$

3,357

 

Total assets

 

$

206,652

 

$

103

 

$

9,370

 

$

216,125

 

 

13



Table of Contents

 

Six Months Ended June 30, 2013 (in thousands)

 

Operating
Disposal
Facilities

 

Non-
Operating
Disposal
Facilities

 

Corporate

 

Total

 

Revenue - Treatment and disposal

 

$

75,064

 

$

10

 

$

 

$

75,074

 

Revenue - Transportation services

 

13,602

 

 

 

13,602

 

Total revenue

 

88,666

 

10

 

 

88,676

 

Direct operating costs

 

40,736

 

107

 

 

40,843

 

Transportation costs

 

13,523

 

 

 

13,523

 

Gross profit (loss)

 

34,407

 

(97

)

 

34,310

 

Selling, general & administrative expense

 

5,913

 

 

6,332

 

12,245

 

Operating income (loss)

 

28,494

 

(97

)

(6,332

)

22,065

 

Interest income (expense), net

 

6

 

 

(442

)

(436

)

Foreign currency gain (loss)

 

432

 

 

(2,563

)

(2,131

)

Other income

 

186

 

5

 

 

191

 

Income (loss) before income taxes

 

29,118

 

(92

)

(9,337

)

19,689

 

Income tax expense

 

 

 

7,073

 

7,073

 

Net income (loss)

 

$

29,118

 

$

(92

)

$

(16,410

)

$

12,616

 

Depreciation, amortization & accretion

 

$

8,291

 

$

104

 

$

18

 

$

8,413

 

Capital expenditures

 

$

12,415

 

$

 

$

115

 

$

12,530

 

Total assets

 

$

213,197

 

$

88

 

$

8,058

 

$

221,343

 

 

Six Months Ended June 30, 2012 (in thousands)

 

Operating
Disposal
Facilities

 

Non-
Operating
Disposal
 Facilities

 

Corporate

 

Total

 

Revenue - Treatment and disposal

 

$

65,908

 

$

11

 

$

 

$

65,919

 

Revenue - Transportation services

 

7,074

 

 

 

7,074

 

Total revenue

 

72,982

 

11

 

 

72,993

 

Direct operating costs

 

36,159

 

112

 

 

36,271

 

Transportation costs

 

7,319

 

1

 

 

7,320

 

Gross profit (loss)

 

29,504

 

(102

)

 

29,402

 

Selling, general & administrative expense

 

5,442

 

 

6,529

 

11,971

 

Operating income (loss)

 

24,062

 

(102

)

(6,529

)

17,431

 

Interest income (expense), net

 

9

 

 

(428

)

(419

)

Foreign currency gain (loss)

 

(82

)

 

252

 

170

 

Other income

 

601

 

1

 

 

602

 

Income (loss) before income taxes

 

24,590

 

(101

)

(6,705

)

17,784

 

Income tax expense

 

 

 

6,899

 

6,899

 

Net income (loss)

 

$

24,590

 

$

(101

)

$

(13,604

)

$

10,885

 

Depreciation, amortization & accretion

 

$

8,059

 

$

108

 

$

21

 

$

8,188

 

Capital expenditures

 

$

5,710

 

$

17

 

$

16

 

$

5,743

 

Total assets

 

$

206,652

 

$

103

 

$

9,370

 

$

216,125

 

 

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 consisted of the following:

 

Geographic disclosure

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

$s in thousands

 

2013

 

2012

 

2013

 

2012

 

United States

 

$

32,620

 

$

30,939

 

$

64,019

 

$

55,538

 

Canada

 

13,157

 

9,041

 

24,657

 

17,455

 

Total revenue

 

$

45,777

 

$

39,980

 

$

88,676

 

$

72,993

 

 

14



Table of Contents

 

Long-lived assets, comprised of property and equipment and intangible assets net of accumulated depreciation and amortization, by geographic location consisted of the following:

 

 

 

June 30,

 

December 31,

 

$s in thousands

 

2013

 

2012

 

United States

 

$

85,875

 

$

81,605

 

Canada

 

65,364

 

68,958

 

Total long-lived assets

 

$

151,239

 

$

150,563

 

 

NOTE 15.             SUBSEQUENT EVENT

 

On July 1, 2013, we declared a quarterly dividend of $0.18 per common share to stockholders of record on July 17, 2013. The dividend was paid using cash on hand on July 25, 2013 in an aggregate amount of $3.3 million.

 

15



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 June 30, 2013, and the related consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2013 and 2012, and the consolidated statements of cash flows for the six-month periods ended June 30, 2013 and 2012. These interim financial statements are 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 statements 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 statements for them 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, 2012, and the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for the year then ended (not presented herein); and in our report dated March 1, 2013, 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, 2012 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

August 1, 2013

 

16



Table of Contents

 

ITEM 2.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report words such as “we,” “us,” “our,” “US Ecology” and the “Company” refer to US Ecology, Inc. and its subsidiaries.

 

OVERVIEW

 

US Ecology is a hazardous, polychlorinated biphenyls (“PCBs”), non-hazardous and radioactive waste services company providing treatment, disposal, recycling and transportation services to commercial and government entities including, but not limited to, oil refineries, chemical production facilities, manufacturers, electric utilities, steel mills, biotechnology companies, operating and closed military installations, waste brokers/aggregators and medical and academic institutions. The majority of the waste received at our facilities is produced in the United States.

 

On May 31, 2012, the Company acquired 100% of the outstanding shares of US Ecology Michigan, Inc. (“US Ecology Michigan”), formerly Dynecol, Inc., a chemical and industrial byproducts treatment and reuse facility located in Detroit, Michigan, for a total purchase price of $10.8 million, including net working capital adjustments. The acquisition strengthens our presence in key mid-western and eastern U.S. and Canadian markets. In addition, US Ecology Michigan provides us with an opportunity to win more Event Business (as defined below) work; increase service delivery to existing customers including national accounts; expand our transportation logistics services; and attract new customers.  Management also believes that the acquisition offers meaningful synergies in combination with our Stablex facility. Revenue from US Ecology Michigan included in US Ecology’s consolidated statements of operations was $6.2 million for the six months ended June 30, 2013.

 

We generate revenue from fees charged to treat and dispose of waste at our six fixed disposal facilities located near Grand View, Idaho; Richland, Washington; Beatty, Nevada; Robstown, Texas; Detroit, Michigan and Blainville, Québec, Canada. We own and manage a dedicated fleet of gondola railcars and arrange for the transportation of waste to our facilities. Transportation services have contributed significant revenue since acquisition of our railcar fleet. We also utilize our railcar fleet to transport waste disposed at facilities operated by other companies on a less frequent basis. We or our predecessor companies have been in the waste business since 1952.

 

Our customers may be divided into categories to better evaluate period-to-period changes in treatment and disposal (“T&D”) revenue based on service mix and type of business (recurring customer “Base Business” or discrete “clean-up” project “Event Business”).  Each of these categories is described in the table below, along with information on the percentage of total treatment and disposal revenues by category for the three and six months ended June 30, 2013 and 2012.

 

17



Table of Contents

 

Customer

 

 

 

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

 

Category

 

Description

 

2013

 

2012

 

Broker

 

Companies that collect and aggregate waste from their direct customers, generally comprised of Base Business with periodic Event Business for larger projects.

 

50

%

52

%

 

 

 

 

 

 

 

 

Other industry

 

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

 

15

%

17

%

 

 

 

 

 

 

 

 

Refinery

 

Petroleum refinery customers, comprised of both Base and Event Business.

 

13

%

8

%

 

 

 

 

 

 

 

 

Private Clean-up

 

Private sector clean-up project waste, typically Event Business.

 

12

%

6

%

 

 

 

 

 

 

 

 

Government

 

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

 

6

%

13

%

 

 

 

 

 

 

 

 

Rate regulated

 

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

 

4

%

4

%

 


(1) Excludes all transportation service revenue

(2) Excludes US Ecology Michigan which was acquired on May 31, 2012

 

Customer

 

 

 

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

 

Category

 

Description

 

2013

 

2012

 

Broker

 

Companies that collect and aggregate waste from their direct customers, generally comprised of Base Business with periodic Event Business for larger projects.

 

51

%

53

%

 

 

 

 

 

 

 

 

Other industry

 

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

 

15

%

18

%

 

 

 

 

 

 

 

 

Refinery

 

Petroleum refinery customers, comprised of both Base and Event Business.

 

12

%

9

%

 

 

 

 

 

 

 

 

Private Clean-up

 

Private sector clean-up project waste, typically Event Business.

 

11

%

5

%

 

 

 

 

 

 

 

 

Government

 

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

 

7

%

11

%

 

 

 

 

 

 

 

 

Rate regulated

 

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

 

4

%

4

%

 


(1) Excludes all transportation service revenue

(2) Excludes US Ecology Michigan which was acquired on May 31, 2012    

 

18



Table of Contents

 

A significant portion of our disposal revenue is attributable to discrete Event Business projects which vary widely in size, duration and unit pricing. For each of the three and six month periods ended June 30, 2013, approximately 37% of our T&D revenue was derived from Event Business projects (excluding US Ecology Michigan). 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 controversies, litigation, weather, commercial real estate, closed military bases and other redevelopment project timing, government appropriation and funding cycles and other factors. The types and amounts of waste received from Base Business also vary from quarter to quarter.  This variability can cause significant quarter-to-quarter and year-to-year differences in revenue, gross profit, gross margin, operating income and net income. Also, while we pursue many large projects months or years in advance of work performance, both large and small clean-up project opportunities routinely arise with little or no prior notice. These market dynamics are inherent to the hazardous and radioactive waste disposal business and are factored into our projections and externally communicated business outlook statements. Our projections combine historical experience with identified sales pipeline opportunities, new or expanded service line projections and prevailing market conditions.

 

Depending on project-specific customer needs and competitive economics, transportation services may be offered at or near our cost to help secure new business. For waste transported by rail from the eastern United States and other locations distant from our Grand View, Idaho and Robstown, Texas facilities, transportation-related revenue can account for as much as three-fourths (75%) of total project revenue. While bundling transportation and disposal services reduces overall gross profit as a percentage of total revenue (“gross margin”), this value-added service has allowed us to win multiple projects that management believes we could not have otherwise competed for successfully.  Our Company-owned fleet of 234 gondola railcars, which may be supplemented with additional 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 allow us to win business during times of demand-driven railcar scarcity.

 

The increased waste volumes resulting from projects won through this bundling strategy further drive the operating leverage inherent to the disposal business and increase 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 well established strategy.

 

To maximize utilization of our railcar fleet, we periodically deploy available railcars to transport waste from clean-up sites to disposal facilities operated by other companies.  Such transportation services may be bundled with for-profit logistics and field services support work.

 

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

 

19



Table of Contents

 

RESULTS OF OPERATIONS

 

The following table summarizes our results of operations for the three and six months ended June 30, 2013 and 2012 in dollars and as a percentage of total revenue.

 

$s and shares in thousands, except per share amounts

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2013

 

%

 

2012

 

%

 

2013

 

%

 

2012

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

45,777

 

100.0

%

$

39,980

 

100.0

%

$

88,676

 

100.0

%

$

72,993

 

100.0

%

Direct operating costs

 

19,759

 

43.2

%

18,633

 

46.6

%

40,843

 

46.1

%

36,271

 

49.7

%

Transportation costs

 

7,090

 

15.5

%

4,021

 

10.1

%

13,523

 

15.2

%

7,320

 

10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

18,928

 

41.3

%

17,326

 

43.3

%

34,310

 

38.7

%

29,402

 

40.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

6,519

 

14.2

%

6,366

 

15.9

%

12,245

 

13.8

%

11,971

 

16.4

%

Operating income

 

12,409

 

27.1

%

10,960

 

27.4

%

22,065

 

24.9

%

17,431

 

23.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

2

 

0.0

%

4

 

0.0

%

7

 

0.0

%

9

 

0.0

%

Interest expense

 

(222

)

-0.5

%

(204

)

-0.5

%

(443

)

-0.5

%

(428

)

-0.6

%

Foreign currency gain (loss)

 

(1,193

)

-2.6

%

(921

)

-2.3

%

(2,131

)

-2.4

%

170

 

0.2

%

Other

 

94

 

0.2

%

522

 

1.3

%

191

 

0.2

%

602

 

0.9

%

Total other income (expense)

 

(1,319

)

-2.9

%

(599

)

-1.5

%

(2,376

)

-2.7

%

353

 

0.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

11,090

 

24.2

%

10,361

 

25.9

%

19,689

 

22.2

%

17,784

 

24.4

%

Income taxes

 

3,880

 

8.4

%

3,999

 

10.0

%

7,073

 

8.0

%

6,899

 

9.5

%

Net income

 

$

7,210

 

15.8

%

$

6,362

 

15.9

%

$

12,616

 

14.2

%

$

10,885

 

14.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.39

 

 

 

$

0.35

 

 

 

$

0.69

 

 

 

$

0.60

 

 

 

Dilutive

 

$

0.39

 

 

 

$

0.35

 

 

 

$

0.68

 

 

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in earnings per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

18,401

 

 

 

18,228

 

 

 

18,362

 

 

 

18,223

 

 

 

Dilutive

 

18,483

 

 

 

18,264

 

 

 

18,446

 

 

 

18,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid per share

 

$

0.18

 

 

 

$

0.18

 

 

 

$

0.18

 

 

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA (1)

 

$

16,927

 

 

 

$

15,420

 

 

 

$

30,841

 

 

 

$

26,002

 

 

 

 


(1)  For all periods presented, Adjusted EBITDA is defined as net income before net interest expense, income tax expense, depreciation, amortization, stock based compensation, accretion of closure and post-closure liabilities, foreign currency gain/loss and other income/expense, which are not considered part of usual business operations.  Adjusted EBITDA is a complement to results provided in accordance with accounting principles generally accepted in the United States (“GAAP”) and we believe that such information provides additional useful information to analysts, stockholders and other users to understand the Company’s operating performance. Since Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity.  Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or a substitute for analyzing our results as reported under GAAP.  Some of the limitations are:

 

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

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

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

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

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

 

20



Table of Contents

 

The following reconciliation itemizes the differences between reported Net income and Adjusted EBITDA for the three and six months ended June 30, 2013 and 2012:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

$s in thousands

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

7,210

 

$

6,362

 

$

12,616

 

$

10,885

 

Income tax expense

 

3,880

 

3,999

 

7,073

 

6,899

 

Interest expense

 

222

 

204

 

443

 

428

 

Interest income

 

(2

)

(4

)

(7

)

(9

)

Foreign currency (gain) loss

 

1,193

 

921

 

2,131

 

(170

)

Other income

 

(94

)

(522

)

(191

)

(602

)

Depreciation and amortization of plant and equipment

 

3,632

 

3,571

 

7,071

 

6,794

 

Amortization of intangibles

 

362

 

374

 

729

 

724

 

Stock-based compensation

 

218

 

180

 

363

 

383

 

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

 

306

 

335

 

613

 

670

 

Adjusted EBITDA

 

$

16,927

 

$

15,420

 

$

30,841

 

$

26,002

 

 

THREE MONTHS ENDED JUNE 30, 2013 COMPARED TO THREE MONTHS ENDED JUNE 30, 2012

 

Revenue. Revenue increased 15% to $45.8 million for the second quarter of 2013, up from $40.0 million for the second quarter of 2012.  This increase reflects an 8% increase in T&D revenue and a 76% increase in transportation service revenue compared to the second quarter of 2012. The increase in transportation service revenue reflects more Event Business projects utilizing the Company’s transportation and logistics services.

 

During the second quarter of 2013, we disposed of 253,000 tons of hazardous and radioactive waste, down 3% from 261,000 tons disposed in the second quarter of 2012. Average selling price increased 13% during the second quarter of 2013 compared to the same quarter last year, reflecting a more favorable service mix.

 

US Ecology Michigan, which was acquired on May 31, 2012, contributed $3.4 million of total revenue during the second quarter of 2013, compared with $1.1 million in the second quarter of 2012.  Revenue from US Ecology Michigan is excluded from quarterly percentages of Base and Event Business and customer category information in the following paragraphs.

 

During the second quarter of 2013, T&D revenue from recurring Base Business customers increased 5% compared to the second quarter of 2012 and comprised 63% of T&D revenue. This compared to 64% of T&D revenue in the second quarter of 2012. As discussed further below, the increase in Base Business T&D revenue compared to the prior year primarily reflects higher T&D revenue from our broker and refinery Base Business customer categories, partially offset by lower T&D revenue from our “other industry” Base Business customer category.

 

Event Business revenue in the second quarter of 2013 increased 7% as compared to the same quarter in 2012 and was 37% of T&D revenue for the second quarter of 2013. This compared to 36% of T&D revenue in the second quarter of 2012. As discussed further below, the increase in Event Business T&D revenue compared to the prior year primarily reflects higher T&D revenue from our private clean-up and refinery Event Business customer categories, partially offset by lower T&D revenue from our government and broker Event Business customer categories.

 

The following table summarizes our T&D revenue growth (both Base and Event Business) by customer category for the second quarter of 2013 compared to the second quarter of 2012.

 

 

 

Treatment and Disposal Revenue Growth
Three Months Ended June 30, 2013 vs.
Three Months Ended June 30, 2012

 

 

 

 

 

Private clean-up

 

113

%

Refinery

 

75

%

Rate regulated

 

4

%

Broker

 

2

%

Other industry

 

-7

%

Government

 

-49

%

 

21



Table of Contents

 

T&D revenue from private clean-up projects increased 113% in the second quarter of 2013 compared to the second quarter of 2012.  This increase primarily reflects revenue from a closed nuclear fuel fabrication facility decommissioning project and an east coast clean-up project.

 

T&D revenue from our refinery customers increased 75% in the second quarter of 2013 compared to the second quarter of 2012. This increase primarily reflects higher disposal volumes and improved pricing on thermal recycling projects sourced directly from refinery customers.

 

Rate-regulated business at our Richland, Washington low-level radioactive waste disposal facility increased 4% in the second quarter of 2013 compared to the second quarter of 2012. Our Richland facility operates under a State-approved annual revenue requirement. The increase reflects the timing of revenue recognition for the rate-regulated portion of the business.

 

Our broker business increased 2% in the second quarter of 2013 compared to the second quarter of 2012. This increase was the result of shipments across the broad range of government and industry waste generators directly served by multiple broker customers, partially offset by lower volumes of brokered thermal recycling projects.

 

Our other industry revenue category decreased 7% in the second quarter of 2013 compared to the second quarter of 2012 as a result of reduced shipments from this broadly diverse industrial customer category.

 

Government clean-up business revenue decreased 49% in the second quarter of 2013 compared to the second quarter of 2012 due to reduced shipments from the U.S. Army Corps of Engineers (“USACE”). Event Business under our USACE contract contributed $1.4 million, or 3%, of total revenue in the second quarter of 2013 compared to $3.6 million, or 9%, of total revenue in the second quarter of 2012. Excluding transportation service revenue, T&D revenue with the USACE decreased approximately 62% in the second quarter of 2013 compared with the second quarter of 2012. This decrease was due to project-specific timing at multiple USACE clean-up sites and ongoing federal spending reductions. No USACE projects served by the Company were cancelled or, to our knowledge, awarded to competitors during the quarter. In May 2013, the Company received notice from USACE that they intend to exercise the two-year option on our base contract originally expiring in 2013.

 

Gross Profit. Gross profit for the second quarter of 2013 increased 9% to $18.9 million, up from $17.3 million in the second quarter of 2012. This increase primarily reflects a higher average selling price in the second quarter of 2013 compared to the second quarter of 2012. Gross margin was 41% in the second quarter of 2013, down from 43% in the second quarter of 2012. T&D gross margin was 49% in the second quarter of 2013 compared to 48% in the second quarter of 2012. The increase in T&D gross margin primarily reflects a more favorable service mix in the second quarter of 2013 compared to the second quarter of 2012.

 

Selling, General and Administrative (“SG&A”). SG&A expenses increased to $6.5 million, or 14% of total revenue, in the second quarter of 2013 compared with $6.4 million, or 16% of total revenue, in the second quarter of 2012. The increase primarily reflects higher payroll expenses, a contingency accrual associated with the U.S. EPA matter at our Robstown, Texas facility (refer to Note 11) and a full quarter of SG&A expenses related to Michigan operations in 2013, partially offset by lower variable incentive compensation and business development expenses.

 

Interest expense. Interest expense in the second quarter of 2013 was $222,000, up from $204,000 in the second quarter of 2012, primarily reflecting higher average debt levels in the second quarter of 2013.

 

Foreign Currency Gain (Loss). We recognized a $1.2 million non-cash foreign currency loss in the second quarter of 2013 compared with a $921,000 non-cash foreign currency loss in the second quarter of 2012. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the United States dollar (“USD”), our functional currency. Our Stablex facility is owned by our Canadian subsidiary, whose functional currency is the Canadian dollar (“CAD”). As part of our treasury management strategy we established intercompany loans between our parent company, US Ecology, and Stablex. These intercompany loans are payable by Stablex to US Ecology in CAD requiring us to revalue the outstanding loan balance through our statements of operations based on USD/CAD currency movements from period to period. At June 30, 2013, we had $42.8 million of intercompany loans subject to currency revaluation.

 

Other income. Other income includes non-operating business activities and unusual revenue and expenses. Other income in the second quarter of 2013 was $94,000, down from $522,000 in the second quarter of 2012. The decrease primarily reflects $474,000 of other income recorded in connection with the sale of an excess water right at our Grand View, Idaho property during the second quarter of 2012.

 

Income tax expense.  Our effective tax rate for the second quarter of 2013 was 35.0%, down from 38.6% in the second quarter of 2012. This decrease reflects a higher proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate, partially offset by higher U.S. state income taxes. As of June 30, 2013 we had unrecognized tax benefits of $438,000 that, if recognized would favorably affect the effective tax rate.  As of June 30, 2013, we have recorded $36,000 of cumulative interest expense associated with this unrecognized tax benefit. We expect our full year effective income tax rate to be between 36.0% and 37.0%.

 

22



Table of Contents

 

SIX MONTHS ENDED JUNE 30, 2013 COMPARED TO SIX MONTHS ENDED JUNE 30, 2012

 

Revenue. Revenue increased 21% to $88.7 million for the first six months of 2013, up from $73.0 million for the first six months of 2012.  This increase reflects a 14% increase in T&D revenue and a 92% increase in transportation service revenue compared to the first six months of 2012. The increase in transportation service revenue reflects more Event Business projects utilizing the Company’s transportation and logistics services.

 

We disposed of 476,000 tons of hazardous and radioactive waste during both the first six months of 2013 and 2012.  Average selling price increased 15% during the first six months of 2013 compared to the first six months of 2012, reflecting a higher proportion of treated waste in the first six months of 2013.

 

US Ecology Michigan, which was acquired on May 31, 2012, contributed $6.2 million of total revenue during the first six months of 2013, compared with $1.1 million in the second quarter of 2012. Revenue from US Ecology Michigan is excluded from quarterly percentages of Base and Event Business and customer category information in the following paragraphs.

 

During the first six months of 2013, T&D revenue from recurring Base Business customers increased 1% compared to the first six months of 2012 and comprised 63% of T&D revenue. This compared to 68% of T&D revenue in the first six months of 2012. As discussed further below, the increase in Base Business T&D revenue compared to the prior year primarily reflects higher T&D revenue from our broker and refinery Base Business customer categories, partially offset by lower T&D revenue from our “other industry” and governmental Base Business customer categories.

 

Event Business revenue in the first six months of 2013 increased 25% compared to the first six months in 2012 and was 37% of T&D revenue for the first six months of 2013. This compared to 32% of T&D revenue in the first six months of 2012. As discussed further below, the increase in Event Business T&D revenue compared to the prior year primarily reflects higher T&D revenue from our private clean-up and refinery Event Business customer categories, partially offset by lower T&D revenue from our government Event Business customer category.

 

The following table summarizes our T&D revenue growth (both Base and Event Business) by customer category for the first six months of 2013 compared to the first six months of 2012.

 

 

 

Treatment and Disposal Revenue Growth
Six Months Ended June 30, 2013 vs.
Six Months Ended June 30, 2012

 

 

 

 

 

Private clean-up

 

121

%

Refinery

 

51

%

Rate regulated

 

9

%

Broker

 

5

%

Other industry

 

-9

%

Government

 

-30

%

 

T&D revenue from private clean-up projects increased 121% in the first six months of 2013 compared to the first six months of 2012.  This increase primarily reflects revenue from a closed nuclear fuel fabrication facility decommissioning project and an east coast clean-up project.

 

T&D revenue from our refinery customers increased 51% in the first six months of 2013 compared to the first six months of 2012. This increase primarily reflects higher disposal volumes and improved pricing on thermal recycling projects sourced directly from refinery customers.

 

Rate-regulated business at our Richland, Washington low-level radioactive waste disposal facility increased 9% in the first six months of 2013 compared to the first six months of 2012. Our Richland facility operates under a State-approved annual revenue requirement. The increase reflects the timing of revenue recognition for the rate-regulated portion of the business.

 

Our broker business increased 5% in the first six months of 2013 compared to the first six months of 2012. This increase was the result of shipments across the broad range of government and industry waste generators directly served by multiple broker customers, partially offset by lower volumes of brokered thermal recycling projects.

 

Our other industry revenue category decreased 9% in the first six months of 2013 compared to the first six months of 2012 as a result of reduced shipments from this broadly diverse industrial customer category.

 

Government clean-up business revenue decreased 30% in the first six months of 2013 compared to the first six months of 2012 due to reduced shipments from USACE. Event Business under our USACE contract contributed $3.1 million, or 4%, of total revenue in the first six months of 2013 compared to $5.2 million, or 7%, of total revenue in the first six months of 2012. Excluding transportation service revenue, T&D revenue with the USACE decreased approximately 40% in the first six months of 2013 compared with the first six months of 2012. This decrease was due to project-specific timing at multiple USACE clean-up sites and ongoing federal spending reductions. No USACE projects served by the Company were cancelled or, to our knowledge, awarded to competitors during the first six months of 2013.

 

23



Table of Contents

 

Gross Profit. Gross profit for the first six months of 2013 increased 17% to $34.3 million, up from $29.4 million in the first six months of 2012. This increase primarily reflects a higher average selling price in the first six months of 2013 compared to the first six months of 2012. Gross margin was 39% in the first six months of 2013, down from 40% in the first six months of 2012. T&D gross margin was 46% in the first six months of 2013 compared to 45% in the first six months of 2012. The increase in T&D gross margin primarily reflects a more favorable service mix in the first six months of 2013 compared to the first six months of 2012.

 

Selling, General and Administrative. SG&A expenses increased to $12.2 million, or 14% of total revenue, in the first six months of 2013, compared with $12.0 million, or 16% of total revenue, in the first six months of 2012. The increase primarily reflects a full six months of SG&A expenses related to Michigan operations in 2013, higher payroll expenses and a contingency accrual associated with the U.S. EPA matter at our Robstown, Texas facility (refer to Note 11), partially offset by lower variable incentive compensation and business development expenses.

 

Interest expense. Interest expense in the first six months of 2013 was $443,000, up from $428,000 in the first six months of 2012, primarily reflecting higher average debt levels in the first six months of 2013.

 

Foreign Currency Gain (Loss). We recognized $2.1 million non-cash foreign currency loss in the first six months of 2013 compared with a $170,000 non-cash foreign currency gain in the first six months of 2012. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the USD, our functional currency. Our Stablex facility is owned by our Canadian subsidiary, whose functional currency is the CAD. As part of our treasury management strategy we established intercompany loans between our parent company, US Ecology, and Stablex. These intercompany loans are payable by Stablex to US Ecology in CAD requiring us to revalue the outstanding loan balance through our statements of operations based on USD/CAD currency movements from period to period.

 

Other income. Other income includes non-operating business activities and unusual revenue and expenses. Other income in the first six months of 2013 was $191,000, down from $602,000 in the first six months of 2012. The decrease primarily reflects $474,000 of other income recorded in connection with the sale of an excess water right at our Grand View, Idaho property during the second quarter of 2012.

 

Income tax expense.  Our effective tax rate for the first six months of 2013 was 35.9%, down from 38.8% in the first six months of 2012. This decrease reflects a higher proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate, partially offset by higher U.S. state income taxes. As of June 30, 2013 we had unrecognized tax benefits of $438,000 that, if recognized would favorably affect the effective tax rate.  As of June 30, 2013, we have recorded $36,000 of cumulative interest expense associated with this unrecognized tax benefit.

 

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, 2012.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of liquidity are cash and cash equivalents, cash generated from operations and borrowings under the Credit Agreement. At June 30, 2013, we had $4.0 million in cash and cash equivalents immediately available for operations. 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, interest, and principal payments 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 Credit Agreement provide additional sources of liquidity should they be required.

 

Operating Activities. For the six months ended June 30, 2013, net cash provided by operating activities was $17.7 million. This primarily reflects net income of $12.6 million, non-cash depreciation, amortization and accretion of $8.4 million and unrealized non-cash foreign currency losses of $2.4 million, partially offset by a decrease in accrued salaries and benefits of $2.4 million, a decrease in deferred income taxes of $1.7 million and a decrease in other working capital of $2.1 million. Impacts on net income are due to the factors discussed above under Results of Operations.  The decrease in accrued salaries and benefits is primarily attributable to cash payments during 2013 for accrued fiscal year 2012 incentive compensation.

 

Days sales outstanding were 67 days as of June 30, 2013, compared to 61 days at December 31, 2012 and 68 days at June 30, 2012.

 

24



Table of Contents

 

For the six months ended June 30, 2012, net cash provided by operating activities was $15.6 million. This primarily reflects net income of $10.9 million and depreciation and amortization and accretion of $8.2 million, partially offset by a decrease in accounts payable and accrued liabilities of $3.7 million.  Impacts on net income are due to the factors discussed above under Results of Operations.  The decrease in accounts payable and accrued liabilities is primarily attributable to the payment of fiscal 2011 accrued customer refunds related to our rate-regulated business in Richland, Washington.

 

Investing Activities. For the six months ended June 30, 2013, net cash used in investing activities was $12.5 million, primarily related to capital expenditures. Significant capital projects included the purchase of land for future site development at our Robstown, Texas location, relocation of administrative offices at our Beatty, Nevada location to accommodate disposal capacity expansion, construction of additional disposal capacity at our Blainville, Quebec, Canada location and equipment purchases and infrastructure upgrades at all of our operating disposal facilities.

 

For the six months ended June 30, 2012, net cash used in investing activities was $16.8 million, primarily related to our acquisition of US Ecology Michigan for $11.2 million, net of cash acquired, and capital expenditures of $5.7 million.  Significant capital projects included construction of additional disposal capacity at our Grand View, Idaho and Blainville, Quebec, Canada locations and equipment purchases at our operating disposal facilities.

 

Financing Activities. For the six months ended June 30, 2013, net cash used in financing activities was $3.1 million, consisting primarily of $3.3 million of dividend payments to our stockholders and $2.0 million of net repayments under the Credit Agreement, partially offset by $2.1 million of proceeds from stock option exercises.

 

For the six months ended June 30, 2012, net cash provided by financing activities was $2.7 million, consisting primarily of $22.0 million of borrowings under the Credit Agreement incurred primarily to finance the US Ecology Michigan acquisition, partially offset by repayments under the Credit Agreement of $12.5 million and $6.6 million of dividend payments to our stockholders.

 

CONTRACTUAL OBLIGATIONS AND GUARANTEES

 

In May 2013, we executed a new lease for corporate office space in Boise, Idaho.  Future minimum lease payments on this non-cancelable operating lease as of June 30, 2013 consisted of the following:

 

$s in thousands

 

Payments

 

2013

 

$

34

 

2014

 

245

 

2015

 

301

 

2016

 

310

 

2017

 

318

 

Thereafter

 

382

 

 

 

$

1,590

 

 

There were no other material changes in the amounts of our contractual obligations and guarantees during the six months ended June 30, 2013. For detailed information on our contractual obligations and guarantees, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

ITEM 3.                        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to changes in interest rates as a result of our borrowings under the Credit Agreement with Wells Fargo. Under the Credit Agreement, revolving loans are available based on the Prime Rate or LIBOR, at the Company’s option, plus an applicable margin determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to EBITDA. At June 30, 2013, we had $43.0 million of borrowings on the Reducing Revolving Line of Credit bearing an interest rate of 1.44%.  If interest rates were to rise, we would be subject to higher interest payments if outstanding balances remain unchanged. Based on the outstanding indebtedness of $43.0 million under our Credit Agreement at June 30, 2013, 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 $430,000.

 

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 Stablex subsidiary conducts business in both Canada and the United States. In addition, contracts for services Stablex provides to U.S. customers are generally denominated in USD. During the six months ended June 30, 2013, Stablex transacted approximately 60% of its revenue in USD and at any time has 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.

 

25



Table of Contents

 

We established intercompany loans between Stablex and US Ecology, Inc. as part of a tax and treasury management strategy allowing for repayment of third-party bank debt used to complete the acquisition.  These intercompany loans are payable using CAD and are subject to mark-to-market adjustments with movements in the CAD. At June 30, 2013, we had $42.8 million of intercompany loans outstanding between Stablex and US Ecology. During the six months ended June 30, 2013, the CAD weakened as compared to the USD resulting in a $2.6 million non-cash foreign currency translation loss being recognized in the Company’s Consolidated Statement of Operations related to the intercompany loans.  Based on intercompany balances as of June 30, 2013, a $0.01 CAD increase or decrease in currency rate compared to the USD at June 30, 2013 would have generated a gain or loss of approximately $428,000 for the six months ended June 30, 2013.

 

We had total pre-tax foreign currency losses of $1.2 million and $2.1 million for the three and six months ended June 30, 2013, respectively.  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

 

Management of the Company, including the Chief Executive Officer and the Chief Financial Officer of the Company, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, including the accumulation and communication of disclosures to the Company’s Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure, are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the SEC.

 

There were no changes in our internal control over financial reporting that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

26



Table of Contents

 

PART II - OTHER INFORMATION

 

Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995

 

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about the Company’s beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar expressions. These statements include, among others, statements regarding our financial and operating results, strategic objectives and means to achieve those objectives, the amount and timing of capital expenditures, repurchases of its stock under approved stock repurchase plans, the amount and timing of interest expense, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

 

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions include, among others, those regarding demand for Company services, expansion of service offerings geographically or through new or expanded service lines, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include the replacement of non-recurring event clean-up projects, a loss of a major customer, our ability to permit and contract for timely construction of new or expanded disposal cells, our ability to renew our operating permits or lease agreements with regulatory bodies, loss of key personnel, compliance with and changes to applicable laws, rules, or regulations, fluctuations in foreign currency markets, access to insurance, surety bonds and other financial assurances, a deterioration in our labor relations or labor disputes, our ability to perform under required contracts, failure to realize anticipated benefits and operational performance from acquired operations, adverse economic conditions, government funding or competitive pressures, incidents or adverse weather conditions that could limit or suspend specific operations, access to cost effective transportation services, lawsuits, market conditions, our willingness or ability to pay dividends, implementation of new technologies and our ability to effectively close and  integrate future acquisitions.

 

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission (the “SEC”), we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance. Before you invest in our common stock, you should be aware that the occurrence of the events described in the “Risk Factors” section in this report could harm our business, prospects, operating results, and financial condition.

 

Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of US Ecology, Inc.

 

ITEM 1.                        LEGAL PROCEEDINGS

 

In 2012, we settled allegations by the United States Environment Protection Agency (“U.S. EPA”) that the thermal recycling operation at our Robstown, Texas facility did not comply with certain rules and regulations of the Resource Conservation and Recovery Act of 1976 (“RCRA”). As part of the settlement, we agreed to pay a civil penalty and to submit an application to the State of Texas for a RCRA subpart X permit.  The Company and the thermal recycling unit’s owner-operator also agreed to a set of interim operating conditions that allow the facility to continue providing recycling services to customers until the RCRA Subpart X permit is issued.

 

In connection with this matter, in June 2013 the U.S. EPA asserted various related technical compliance and permitting violations of the Clean Air Act of 1970. Although negotiations on the merits of a proposed settlement are ongoing with the U.S. EPA, we recognized a charge of $238,000 during the second quarter of 2013 in Selling, general and administrative expenses in the Consolidated Statement of Operations related to this matter.

 

Other than as disclosed above, we are not currently a party to any material pending legal proceedings and are not aware of any other claims that could have a materially adverse effect on our financial position, results of operations or cash flows.

 

ITEM 1A.               RISK FACTORS

 

There have been no material changes in our risk factors from those disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

ITEM 2.                        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

27



Table of Contents

 

ITEM 3.                        DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.                        MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.                        OTHER INFORMATION

 

None.

 

ITEM 6.                        EXHIBITS

 

10.63

 

Management Incentive Plan (Executive) Effective January 1, 2013*

 

 

 

10.64

 

Executive Sales Incentive Plan Effective January 1, 2013*

 

 

 

15

 

Letter re: Unaudited Interim Financial Statements

 

 

 

31.1

 

Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

The following materials from the quarterly report on Form 10-Q of US Ecology, Inc. for the quarter ended June 30, 2013 formatted in Extensible Business Reporting Language (XBRL) include: (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Cash Flows, and (v) Notes to the Unaudited Consolidated Financial Statements

 


* Identifies management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto.

 

28



Table of Contents

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

US Ecology, Inc.

 

(Registrant)

 

 

Date: August 1, 2013

/s/ Eric L. Gerratt

 

Eric L. Gerratt
Executive Vice President, Chief Financial Officer and Treasurer

 

29